DATA RETURN CORP, S-1/A, 1999-09-22

DATA RETURN CORP
S-1/A, 1999-09-22
BUSINESS SERVICES, NEC

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<PAGE>

As filed with the Securities and Exchange Commission on September 22, 1999
Registration No. 333-84011
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------

AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
DATA RETURN CORPORATION
(Exact name of registrant as specified in its charter)
--------------
<TABLE>
<S> <C> <C>
Texas 7379 75-2725988
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

222 West Las Colinas Boulevard, Suite 450
Irving, Texas 75039
(972) 869-0770
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
Sunny C. Vanderbeck
Chairman and Chief Executive Officer
Data Return Corporation
222 West Las Colinas Boulevard, Suite 450
Irving, Texas 75039
(972) 869-0770
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
<TABLE>
<S> <C>
Stephen B. Norris Jorge del Calvo
Mark C. Gunnin Stanton D. Wong
William D. Howell Gabriella A. Lombardi
Thompson & Knight L.L.P. Christine F. Nakagawa
801 Cherry Street, Suite 1600 Pillsbury Madison & Sutro LLP
Fort Worth, Texas 76102 2550 Hanover Street
(817) 347-1700 Palo Alto, California 94304
(650) 233-4500
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Offering Amount of
Securities to be Registered Price (1)(2)(3) Registration Fee(4)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Common stock, par value $.001 per share............. $86,250,000 $23,977.50
- ----------------------------------------------------------------------------------------------
</TABLE>
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--------------

(1) In accordance with Rule 457(o) under the Securities Act of 1933, the number
of shares being registered and the proposed maximum offering price per
share are not included in this table.

(2) Estimated solely for the purpose of calculating the registration fee.

(3) Includes associated rights to purchase one one-hundredth of a share of
Series A Junior Participating Preferred Stock, par value $.001 per share.
Rights initially are attached to and trade with the common stock of the
Registrant. The value attributable to the rights, if any, is reflected in
the offering price of the common stock.

(4) The registration fee was previously paid as part of the original filing of
the Registration Statement.

The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.

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

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary 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 becomes effective. This +
+preliminary prospectus is not an offer to sell these securities nor a +
+solicitation of an offer to buy these securities in any jurisdiction where +
+the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1999

PRELIMINARY PROSPECTUS
Shares

[LOGO OF DATA RETURN APPEARS HERE]

Common Stock

-----------

This is an initial public offering of 6,250,000 shares of common stock of Data
Return Corporation. We are selling all of the shares of common stock under this
prospectus. The underwriters may, under some circumstances, purchase up to an
additional 937,500 shares of common stock from us at the initial public
offering price less the underwriting discount.

It is currently estimated that the initial public offering price will be
between $11.00 and $13.00 per share. We have applied to have our common stock
approved for listing on the Nasdaq National Market under the symbol "DRTN."

Microsoft Corporation has agreed to purchase directly from us $5.0 million of
our common stock, in a private placement that will occur on the earlier of the
day after the pricing of this offering and December 12, 1999. The price per
share which Microsoft will pay us will be the lesser of the midpoint of the
lowest filing range and the price to public.

See "Risk Factors" beginning on page 6 about the risks you should consider
before buying shares of our common stock.

Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.

-----------

<TABLE>
<CAPTION>
Per
Share Total
------ ------
<S> <C> <C>
Public offering price......................................... $ $
Underwriting discounts and commissions........................ $ $
Proceeds, before expenses, to us.............................. $ $
</TABLE>

-----------

The underwriters expect to deliver the shares against payment in New York, New
York on , 1999.

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Bear, Stearns & Co. Inc.
CIBC World Markets

Thomas Weisel Partners LLC
Wit Capital Corporation

The date of this prospectus is , 1999.
<PAGE>

Outside of gate fold

An image of half a globe with images of some of our customers' web pages
surrounding the globe above its surface is centered along the right side of the
page.

To the left of the globe is the text "A WORLD OF OPPORTUNITY" above the Data
Return logo and the slogan "Hosting The Back Office for E-Business."

Left page of inside of gate fold

The inside front cover of the prospectus has a caption centered at the top of
the page in large text that reads "Hosting the Back Office for E-Business."

An image of the other half of the globe with images of some other customers'
web pages surrounding the globe above its surface is centered along the left
side of the page.

Centered on the right hand side of the page, there is an image of a hand
plugging a phone line into a phone jack.

In the bottom right corner of the page, there are three sets of images: the
first is a screen for Microsoft Exchange with the text "Microsoft Exchange";
the second set is a series of folders with icons representing applications with
the text "Application Hosting"; and the third set is a sample web page with the
text "Advanced Web Hosting."

Right page of inside of gate fold

The top half of the page is an image of four rows of server cabinets with
servers in them.

Beneath this image are three circular frames with images inside. The left one
contains an image of clustered hosting diagram. The text "Multi-Server
Clustered Solutions" appears below the frame. The middle frame contains an
image of a portion of the world, including the United States, with a network
diagram drawn on it. The text "State-of-the-Art Infrastructure" appears below
the frame. The right frame contains an image of a man looking at file folders.
The text "Extensive Microsoft Expertise" appears below this frame.

At the bottom of the page is the Data Return logo and the slogan "Hosting The
Back Office for E-Business."
<PAGE>

Prospective investors may rely only on the information contained in this
prospectus. Neither Data Return Corporation nor any underwriter has authorized
anyone to provide prospective investors with different or additional
information. This prospectus is not an offer to sell nor is it seeking an offer
to buy these securities in any jurisdiction where the offer or sale is not
permitted. The information contained in this prospectus is correct only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of these securities.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 6
Forward-Looking Statements and
Associated Risks................... 16
Use of Proceeds..................... 17
Dividend Policy..................... 17
Capitalization...................... 18
Dilution............................ 19
Selected Financial Data............. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
</TABLE>

<TABLE>
<CAPTION>
Page
----
<S> <C>
Business............................ 31
Management.......................... 48
Principal Shareholders.............. 55
Certain Transactions................ 56
Description of Capital Stock........ 58
Shares Eligible for Future Sale..... 63
Underwriting........................ 65
Legal Matters....................... 67
Experts............................. 68
Where You Can Find More
Information........................ 68
Index to Financial Statements....... F-1
</TABLE>

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Until , 1999 (25 days after the date of this prospectus), all dealers
that buy, sell or trade these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
<PAGE>

PROSPECTUS SUMMARY

This summary highlights the key information contained in this prospectus.
Because it is a summary, it does not contain all the information you should
consider before making an investment decision. You should read the entire
prospectus carefully, including the section titled "Risk Factors" and the
financial statements and the notes relating to those statements.

Data Return

Our Company

Data Return provides advanced Internet hosting services based on technologies
developed by Microsoft Corporation. Our advanced hosting services include the
hardware, software and network technologies necessary to support complex web
sites and web-based applications. We focus primarily on customers that are
deploying sophisticated high-end web-based applications, including electronic
commerce, through which they can conduct transactions and manage information
worldwide over the Internet. We believe that hosting on the Microsoft platform
offers a greater opportunity than hosting on other platforms. According to
International Data Corp., Microsoft Windows NT will be the key engine for
growth within the worldwide server market.

We provide high quality, high performance advanced hosting services, which
are comprised of:

. advanced managed services, whereby we configure, install, operate and
maintain the hardware, software and network technologies necessary to
implement and support our customers' complex, business-critical web
sites and web-based applications.

. a scalable deployment architecture, which allows us to quickly and cost-
effectively expand and enhance our customers' web sites; and

. high performance content delivery, which improves overall performance
through increased speed and reliability.

As of August 31, 1999, we hosted over 1,600 web sites for more than 800
customers across many industries. Our customers range in size from large
Fortune 500 companies to smaller businesses, both conventional and web-based.
Our top five customers based on revenue during fiscal 1999 were Executive
Software, First USA, BlueStreak.com, Silicon Channels and Honeywell.

Level 3 Communications, Inc. and Compaq Computer Corporation are shareholders
of our company, and Microsoft has agreed to invest in our company. In addition
to their investments in our common stock, we have entered into strategic
agreements with each of these companies. We are currently Level 3's only
preferred provider of Microsoft-based advanced hosting solutions. Pursuant to
our agreement, we will train and team with Level 3's sales force to generate
new business opportunities. Further, we will be able to locate our servers and
related equipment in any of Level 3's existing or future U.S. facilities, or
gateways. In doing so, we expect to avoid the significant cost of constructing
additional data centers of our own. In addition, we will be able to utilize
Level 3's personnel to install our equipment at these gateways. Under our
agreement with Microsoft, we will license proprietary installation tools for
third-party hosted applications to Microsoft and train Microsoft's employees
and customers in the use of those tools. In exchange, Microsoft will provide us
technical consulting and marketing services. We also have a server purchase
agreement with Compaq which we believe strengthens our relationship with this
key vendor. We believe these relationships enhance our credibility with
potential customers and provide us with early access to new products, superior
technical services, training and new business development opportunities.

1
<PAGE>

We were incorporated in Texas in August 1997 by three former Microsoft
product support engineers and have achieved an average quarterly revenue growth
rate of 50% since October 1, 1997. However, we experienced net losses of
approximately $1.3 million for the year ended March 31, 1999, and we anticipate
continuing and increasing losses. We believe the following are among the key
factors that have distinguished our company and our offerings and that will
continue to drive our growth:

. a full range of hosting services pre-packaged with defined pricing and
feature sets;

. our exclusive focus and technical expertise on the Microsoft platform;

. high availability, high performance web hosting solutions which we
believe will increasingly involve the clustering of multiple web,
database and applications servers in order to securely and efficiently
distribute web site content and related data across multiple and
sometimes geographically distributed servers;

. an advanced and highly secure network architecture that, based on
network improvements implemented during the week of August 16, 1999,
since that period has delivered network performance faster on average in
the United States compared to the single fastest backbone provider as
measured by an independent third party (Keynote Systems) through its 65
United States measurement agents dispersed across various cities;

. an integrated information system which automates our work flows and our
service deployment processes;

. our exclusive focus on hosting, which allows us to avoid direct
competition with software developers and systems integrators; and

. our commitment to building and maintaining strong relationships with
members of the Microsoft developer community, many of whom have proven
to be valuable sources of customers referrals.

Our Market Opportunity

According to Forrester Research, the hosting market will grow from $0.9
billion in 1998 to $14.6 billion in 2003, a 76% compound annual growth rate. In
addition to the general expansion of the Internet, we believe that growth in e-
commerce will drive demand for outsourced advanced hosting services such as
ours because sites with e-commerce capabilities tend to be more complex.
Forrester Research projects that e-commerce will generate over $3.2 trillion in
revenue by 2003. In addition, we believe that the trend toward outsourcing the
hosting of web sites will continue as businesses increase the complexity of
their web sites and require greater reliability and interactivity for end
users. We also believe that these sites will increasingly be based on Microsoft
Internet technologies. According to IDC, Windows NT's market share will grow at
a compound annual growth rate of 25% from 1998 to 2003.

Our Strategy

Our goal is to take advantage of the growth in Internet usage, e-commerce and
the outsourcing of hosting services to become the leading provider of advanced
hosting services. Our strategy to achieve this goal contains the following key
elements:

. maintain focus on advanced hosting on the Microsoft platform;

. offer a full range of highly scalable advanced hosting services;

. maintain non-capital intensive business model;

. enhance our marketing and sales programs;

. capitalize on key relationships;

. provide superior customer service;

. expand our data center presence; and

. expand into new hosting markets.

2
<PAGE>

Our Address and Telephone Number

The address of our principal executive offices is 222 West Las Colinas
Boulevard, Suite 450, Irving, Texas 75039, and our telephone number is (972)
869-0770.

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

Data Return is our service mark. This prospectus also contains trademarks and
tradenames of other companies.

THE OFFERING

<TABLE>
<C> <S>
Common stock offered by Data Return........ 6,250,000 shares
Common stock to be outstanding after the
offering.................................. 34,422,625 shares
Use of proceeds............................ We intend to use the net proceeds
from this offering to fund our
capital expenditures, and for
working capital and other general
corporate purposes. See "Use of
Proceeds" on page 17 for a more
detailed description of our use
of proceeds.
Proposed Nasdaq National Market symbol..... DRTN
</TABLE>
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Includes an assumed 416,667 shares of common stock to be issued to Microsoft
before the closing of the offering.

Excludes 937,500 shares to be sold by Data Return if the underwriters' over-
allotment option is exercised in full, as described in "Underwriting."

The number of shares outstanding excludes:

. 6,559,296 shares of common stock issuable upon exercise of options
outstanding at a weighted average exercise price of $0.29 per share;

. 3,313,004 shares of common stock reserved for issuance under our stock
option plans; and

. a warrant to purchase an assumed 312,500 shares at the lesser of the
midpoint of the lowest filing range and the price to public.

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

Conventions That Apply to This Prospectus

All information in this prospectus reflects a 269 for one stock split
effected on September 10, 1999.

Except as otherwise indicated, the information in this prospectus assumes
that the underwriters' over-allotment option is not exercised.

3
<PAGE>

SUMMARY FINANCIAL INFORMATION

In the following table, we provide you with summary historical financial data
of Data Return. We have prepared this information using the financial
statements of Data Return for the period from September 22, 1997 (inception) to
March 31, 1998, the year ended March 31, 1999 and the three month periods ended
June 30, 1998 and 1999. The financial statements for the period from September
22, 1997 (inception) to March 31, 1998 and the year ended March 31, 1999 have
been audited by Ernst & Young LLP, independent auditors. The financial
statements for the three month periods ended June 30, 1998 and 1999 have not
been audited. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which Data Return considers necessary
for a fair presentation of its financial position and the results of its
operations for these periods.

When you read this summary historical financial data, it is important that
you read it in conjunction with the historical financial statements and related
notes contained later in this prospectus, as well as "Management's Discussion
and Analysis of Financial Condition and Results of Operations," also contained
later in this prospectus.
<TABLE>
<CAPTION>
Period from Three months ended June
September 22, 1997 30,
(inception) to Year Ended ------------------------
March 31, 1998 March 31, 1999 1998 1999
------------------ -------------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Statements of Operations
Data:
Revenues................ $ 336 $ 1,889 $ 281 $ 1,228
Costs and expenses:
Cost of revenue....... 198 1,105 205 489
General and
administrative....... 231 1,063 213 866
Marketing and sales .. 39 663 105 384
Stock based
compensation......... 61 349 85 140
----------- ----------- ----------- -----------
Total costs and
expenses............... 529 3,180 608 1,879
----------- ----------- ----------- -----------
Loss from operations.... (193) (1,291) (327) (651)
Other income (expense).. 2 7 5 16
----------- ----------- ----------- -----------
Net loss................ $ (191) $ (1,284) $ (322) $ (635)
=========== =========== =========== ===========
Net loss per common
share.................. $ (0.01) $ (0.07) $ (0.02) $ (0.03)
=========== =========== =========== ===========
Shares used in per share
computation............ 15,882,326 18,371,300 17,592,600 22,272,804
=========== =========== =========== ===========
Other Financial Data:
EBITDA(1)............... $ (118) $ (813) $ (222) $ (400)
Net cash provided by
(used in) operating
activities............. 1 (644) (243) (282)
Net cash used in
investing activities... (55) (939) (79) (696)
Net cash provided by
financing activities... 528 1,952 502 3,251
Purchases of property
and equipment.......... 55 814 79 696
</TABLE>

<TABLE>
<CAPTION>
June 30, 1999
-------------------------------
Pro Forma
Actual Pro Forma(2) As Adjusted(3)
------ ------------ -----------
(In thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Working capital............................ $2,291 $8,291 $81,901
Total assets............................... 6,011 12,011 85,569
Notes payable and capital lease
obligations--long-term.................... 140 140 --
Total shareholders' equity................. 4,024 10,024 83,774
</TABLE>

4
<PAGE>

- -------
(1) EBITDA consists of loss from operations plus depreciation and amortization,
including amortization of unearned stock based compensation. EBITDA does
not represent funds available for management's discretionary use and is not
intended to represent cash flow from operations as measured under generally
accepted accounting principles. EBITDA should not be considered as an
alternative to net loss or net cash used in operating activities, but may
be useful to investors as an indication of operating performance. Our
calculations of EBITDA may not be consistent with calculations of EBITDA
used by other companies.

(2) On a pro forma basis to reflect private sales of 4,296,468 shares of our
common stock between June 30, 1999 and the date of this prospectus.

(3) On a pro forma as adjusted basis to give effect to the sale of an assumed
416,667 shares of our common stock at an assumed price of $12.00 per share
to Microsoft and the sale of 6,250,000 shares of common stock we are
offering under this prospectus, at an assumed initial public offering price
of $12.00 per share (based upon the midpoint of the filing range), after
deducting the estimated underwriting discounts and commissions and
estimated offering expenses that we will pay and the application of the
estimated net proceeds from this offering as described under "Use of
Proceeds," including repayment of the long term portion of notes payable.

5
<PAGE>

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should
carefully consider the risks and uncertainties described below before you
purchase any of our common stock. While we have described all risks and
uncertainties that we believe are material to our business, other risks and
uncertainties that affect our business operations may arise or become material
in the future.

If we cannot address the following risks and uncertainties effectively, our
business, financial condition or results of operations could be materially and
adversely affected. In this event, the trading price of our common stock could
decline and you could lose all or a part of your investment.

This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of several factors,
including the risks and uncertainties described below and elsewhere in this
prospectus.

Our business and prospects are difficult to evaluate because we have a limited
operating history and our business model is still evolving.

We were incorporated in August 1997 and commenced operations in September of
that year with a focus on advanced hosting services. As a result, we have a
limited operating history and our business model is evolving. We may not be
able to successfully implement our business plan or adapt it to changes in the
market. If we are not able to do so, our business, results of operations and
financial condition will be adversely affected.

We have a history of substantial losses, and we anticipate continuing and
increasing losses.

We have experienced operating losses and negative cash flows from operations
in each quarterly and annual period since incorporating in 1997. We experienced
net losses of approximately $ 635,000, or 52% of revenues, for the three month
period ended June 30, 1999, and $1.3 million, or 68% of revenues, for the year
ended March 31, 1999. As of June 30, 1999, we had an accumulated deficit of
approximately $2.1 million. We expect our operating expenses to increase
significantly as we attempt to expand our business. We believe that we will
need to hire over 150 additional personnel in all areas of our business over
the next 12 months. We are also required to purchase $800,000 dollars of co-
location and bandwidth services from Level 3 during the first year of our
agreement with them. In addition, although we do not have any specific plans,
we expect to incur significant expenses to develop our distribution channel,
fund greater levels of research and development, support and improve our
operational and financial systems and broaden customer service and support. We
cannot assure you that we will ever be profitable on a quarterly or annual
basis, or that if we achieve profitability, it will be sustainable.

Our quarterly and annual results may fluctuate, resulting in fluctuations in
the price of our common stock.

Our operating results may fluctuate significantly in the future on a
quarterly and annual basis. Because of these fluctuations, comparisons of our
operating results from period to period are not necessarily meaningful and
should not be relied upon as an indicator of future performance. We expect to
continue to experience significant fluctuations as a result of a variety of
factors, many of which are outside of our control. The following factors could
affect our operating results:

. size and timing of customer installations and related payments;

. fluctuations in data and voice communications costs;

. timing and magnitude of capital expenditures;

. costs relating to the expansion of operations;

. customer discounts and credits;

6
<PAGE>

. changes in our pricing policies or those of our competitors; and

. economic conditions specific to the hosting industry, as well as general
economic conditions.

We plan to increase our operating expenses to develop our business. If our
revenues do not increase as quickly as our expenses, our operating results will
suffer.

For these and other reasons, in future periods our operating results may fall
below the expectations of securities analysts or investors, which could result
in widely varying stock prices and negatively affect the market price of our
common stock.

We rely on our strategic relationship with Level 3, and if this relationship is
terminated or deteriorates our business will suffer.

We recently entered into a strategic relationship with Level 3. Level 3 is a
communications and information services company that is building an advanced
facilities-based communications network through which it provides co-location,
Internet connectivity and other services. We are currently Level 3's only
preferred provider of Microsoft-based advanced hosting solutions. Our ability
to increase demand for our services depends in part upon Level 3's referrals of
new customers to us. This relationship is non-exclusive, and our marketing
agreement can be terminated by Level 3 if we default on our obligations under
this agreement or are acquired by a competitor of Level 3. If Level 3 fails to
refer new customers to us or refers potential customers to our competitors or
if our relationship with Level 3 deteriorates or is terminated for any reason,
we may not be able to increase our customer base and, therefore, our revenues
as rapidly as we anticipate and our business would suffer. If we fail to train
Level 3's sales personnel, or fail to train them adequately, we will not
realize some of the benefits that we believe we will receive under this
arrangement, including customer referrals. As part of our relationship, we have
committed to purchase a fixed amount of services from Level 3, including, among
other things, bandwidth, co-location space, installation and maintenance
services, over the next five years. We will incur these expenses even if
anticipated increases in sales do not materialize or, in some circumstances, if
the agreement is terminated. We have also agreed that if Level 3 is capable of
providing the services we request, and if we determine that those services meet
our then-current performance criteria, we will purchase 75% of these services
from Level 3 from July 2000 through December 2000 and 90% of these services
from Level 3 from January 2001 through the remainder of our agreement with
Level 3. We route the network traffic of our customers through multiple
backbone providers to increase network performance. We are required to purchase
these services from Level 3 even if these services are available at lower
prices from alternative vendors. To enable us to do this, we obtain Internet
connectivity through a number of providers, and Level 3 may not be able to
provide all of the connectivity services that we require. As a result, we may
purchase less than 90% of these services from Level 3.

Our relationship with Level 3 also entitles us to offer our services from all
existing and future U.S. Level 3 data centers. We currently rely on Level 3 to
provide most of the data center capacity that we need to provide our hosting
services, and in the future we will be required to purchase most of our data
center capacity from Level 3. Further, Level 3 will provide personnel at these
data centers to install equipment and assist with support as necessary for us
to deliver service in these facilities. If Level 3 fails to perform these
services in a timely or effective manner, or at all, we would be required to
make alternate arrangements, possibly including hiring additional
implementation engineers. In addition, if our relationship with Level 3 is
terminated or if Level 3 does not provide the data center capacity that we
need, we would be required to seek arrangements with other data center
providers or construct our own data centers. We cannot be certain that
alternate data center capacity will be available on commercially reasonably
terms or at all. We currently rely, and for the foreseeable future will
continue to rely, on Level 3 to provide bandwidth and other networking
services. If we are unable to obtain these services from Level 3, we would be
required to seek arrangements with other providers of these services, and we
cannot be certain that alternate services will be available on commercially
reasonable terms or at all.

7
<PAGE>

Our success depends on Microsoft's continued success, and the loss or
deterioration of our relationship with Microsoft could harm our business and
have an adverse impact on our revenues.

We focus on advanced hosting services for Microsoft-based Internet
technologies. If these technologies are not widely used building blocks for
advanced Internet sites in the future, the demand for our services would
decrease and our business would be adversely affected.

Our relationship with Microsoft is informal. We believe this relationship
provides us with access to developments in Microsoft products before they are
generally available, which allows us to maintain and enhance our technical
expertise. If our relationship with Microsoft deteriorates or if we lose some
of the status or privileges we currently enjoy, our technical expertise could
be adversely affected. Our ability to market our services as a provider of
advanced hosting services for Microsoft-based Internet technologies would also
be adversely affected if Microsoft does not continue to confer certifications
and designations on us, or changes our current certifications or designations.
We do not have a written agreement with Microsoft relating to these
certifications or designations. Some of our competitors also have received
these certifications and designations. For example, we are aware of seven other
businesses that have been designated as Microsoft Advanced Hosting Partners.
These certifications and the number of businesses holding them are described on
page 40 under the heading "Microsoft." Microsoft confers these certifications
unilaterally and in its sole discretion and could change them at any time.
Thus, we cannot be certain that we will continue to enjoy them.

If we are unable to expand our network infrastructure to meet increasing
demand, we could lose customers and our operating results could suffer.

We must continue to expand and adapt our network infrastructure to
accommodate the increasing number of customers, the amount of information they
wish to transmit and their changing requirements. We face risks related to our
network's ability to be scaled to meet increasing customer levels while
maintaining acceptable performance levels. The expansion and adaptation of our
networking and hosting facility infrastructure will require substantial
financial, operational and management resources as we negotiate bandwidth
capacity with existing and other network infrastructure suppliers. If we are
required to expand our network significantly and rapidly due to increased
usage, additional stress will be placed upon our network hardware, traffic
management systems and hosting facilities as well as our financial, operational
and management resources. Due to the limited deployment of our services to
date, the ability of our network to support a substantially larger number of
customers at high transmission speeds is unknown.

If the network providers upon which we rely fail to provide reliability,
capacity and performance for our network, we could lose customers and our
operating results could suffer.

Our success partly depends upon the capacity, reliability and security of our
network infrastructure, including the capacity leased from our network
suppliers. Our network currently delivers service through Level 3, MCI
WorldCom, Inc., including UUNET Technologies, Inc., e.spire Communications,
Inc., Sprint Corporation, Digex, Incorporated, Cable & Wireless plc and SAVVIS
Communications Enterprises, LLC. Some of these suppliers are also our
competitors. In the future, we will be required to purchase most of our network
capacity from Level 3 to the extent they meet our then-current performance and
capacity requirements. We depend on these companies to provide uninterrupted
and error-free service through their telecommunications networks. As our
customers' usage of telecommunications capacity increases, we will need to make
additional investments in our infrastructure to maintain adequate data
transmission speeds, the availability of which may be limited or the cost of
which may be significant. Our average utilization of our network capacity was
17.7% during the last year. We monitor all network links to prevent their being
utilized in excess of their recommended capacity. If capacity is not available
to us as our customers' usage increases, our network may not be able to achieve
or maintain sufficiently high data transmission capacity, reliability or
performance. In addition, our business would suffer if our network suppliers
increased the prices for their

8
<PAGE>

services and we were unable to pass along any increased costs to our customers.
Any failure on our part or the part of our third-party suppliers to achieve or
maintain high data transmission capacity, reliability or performance could
significantly reduce customer demand for our services and damage our business.

We may not be able to deliver our services and our business may suffer if our
third-party suppliers do not provide us with key components of our network
infrastructure.

We depend on other companies to supply key components of our network
infrastructure. Any failure to obtain needed products or services in a timely
fashion or at an acceptable cost could adversely affect our business. We buy
servers, routers and switches on an as-needed basis and therefore do not carry
significant inventories of them. We also have no guaranteed supply arrangements
with our vendors. We currently only use servers from Compaq and rely on Compaq
to provide us with access to Compaq technical personnel. We recently entered
into an agreement with Compaq under which we have agreed for the next three
years to purchase from Compaq the lesser of 2,000 servers or the number of
servers reasonably necessary to adequately operate our business consistent with
our business plan. Our requirement to purchase these servers is contingent upon
Compaq providing financing for the servers on competitive terms, upon the
price, performance and quality of the Compaq servers being reasonably
satisfactory to us and upon Compaq's commitment to deliver these servers on the
schedule we request. In addition, we rely on Cisco Systems, Inc. and Alteon to
supply equipment critical to our network, but we do not have a supply agreement
with either of them. If this equipment were to become unavailable on terms
acceptable to us, we would be forced to find alternative equipment. The
inability to obtain equipment or technical services from Compaq, Cisco or
Alteon on terms acceptable to us would force us to spend time and money
selecting and obtaining new equipment, training our personnel to use different
equipment and deploying alternative components needed to integrate the new
equipment, and as a result our business could be adversely affected.

Because we operate in a new and evolving market with uncertain prospects for
growth, we may be unable to sustain growth in our customer base and our
operating results may suffer.

Our market is new and rapidly evolving. Growth in demand for and acceptance
of advanced hosting services are highly uncertain. Businesses may not be aware
of the potential benefits of outsourcing or may find it cheaper, more secure or
otherwise preferable to host their web sites internally. Internet technologies,
such as e-commerce applications, which require advanced hosting, may not grow
as rapidly as we expect. If the market for advanced hosting services fails to
grow or grows more slowly than we anticipate, our business, operating results
and financial condition will be adversely affected. Growth in the demand for
our products and services may be inhibited, and we may be unable to sustain
growth in our customer base, for a number of reasons, including:

. our inability to market our products and services in a cost-effective
manner to new customers;

. the inability of customers to differentiate the products and services we
offer from those of our competitors;

. the termination of our customer contracts, which can generally be
canceled on 30 days' notice;

. our inability to strengthen awareness of our brand; and

. reliability, quality or compatibility problems with our services.

We may not be able to adapt to evolving technologies and customer demands,
which could cause our business to suffer.

Our market is characterized by rapidly changing technology, evolving industry
standards and frequent new product announcements. These characteristics are
magnified by the recent growth of the Internet and the intense competition in
our industry. We are also subject to risks from technological changes in the
way hosting solutions are marketed and delivered. To be successful, we must
adapt to our rapidly changing market by

9
<PAGE>

continually improving the performance, features and reliability of our services
and modifying our business strategies accordingly. We could also incur
substantial costs if we need to modify our services or infrastructure in order
to adapt to these changes. Our business would suffer if we fail to respond to
these changes in a timely and cost-effective manner or at all.

Our business will suffer if Internet usage does not continue to increase or if
the Internet fails to perform reliably.

Use of the Internet for retrieving, sharing and transferring information
among businesses, consumers, suppliers and partners has recently begun to
increase rapidly. Our success depends in large part on continued growth in the
use of the Internet, and we would be adversely affected if Internet usage does
not continue to grow. Internet usage and growth may be inhibited for a number
of reasons, such as:

. inadequate network infrastructure;

. security concerns;

. uncertainty of legal and regulatory issues concerning the use of the
Internet;

. inconsistent quality of service;

. lack of availability of cost-effective, reliable, high-speed service;
and

. failure of Internet use to expand internationally.

If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by this growth, or its performance and
reliability may decline. For example, web sites have experienced interruptions
in service as a result of outages and other delays occurring throughout the
Internet network infrastructure. If these outages or delays occur frequently,
use of the Internet as a commercial or business medium could in the future grow
more slowly or decline, which would adversely affect our business.

Failure of our operating and financial systems to keep pace with the
anticipated growth in our business could result in customer dissatisfaction,
operating inefficiencies and lost revenue opportunities.

The rapid growth of our business and our service offerings has placed, and is
likely to continue to place, a significant strain on our operating and
financial resources. Our future performance will partly depend on our ability
to manage our growth effectively, which will require that we further develop
our operating and financial system capabilities and controls. We are in the
process of implementing new billing and other management information systems.
If our information systems, including the systems that we are currently
implementing, and other infrastructure are unable to support the demands placed
on them by the rapid growth in our business, we may be forced to implement new
systems. If we fail to improve our operational systems or to expand our
customer service capabilities to keep pace with the growth of our business, we
could experience customer dissatisfaction, cost inefficiencies and lost revenue
opportunities, which could harm our operating results. We may not be able to
successfully implement these systems when needed or they may not perform
reliably.

We may not be able to successfully sustain our growth if we are unable to
attract and retain additional highly skilled personnel.

We are currently experiencing rapid growth and intend to continue expanding.
Since incorporating in August 1997, we had grown from five to 79 employees as
of August 31, 1999. We believe that we will need to hire over 150 additional
personnel in all areas of our business over the next 12 months. If we do not
succeed in attracting and retaining new, qualified personnel and/or retaining
our current personnel, our business could suffer.

10
<PAGE>

We must expand our direct and indirect sales operations to increase market
awareness of our products and generate increased revenues. We cannot be certain
that we will be successful in these efforts. We plan to increase our sales
force significantly in the second half of 1999. Newly-hired employees will
require training and it will take time for them to achieve full productivity.
Also, through our relationship with Level 3, we intend to begin training their
sales force to sell our products and services in October 1999. We cannot be
certain that we will be able to hire enough qualified individuals in the
future, that newly-hired employees will achieve necessary levels of
productivity or that our Level 3 relationship will result in increased sales.

We may need additional capital to fund our operations and finance our growth,
and we may not be able to obtain it on terms acceptable to us or at all.

We believe that our existing capital resources, including the anticipated
proceeds of this offering, will enable us to maintain our current and planned
operations for at least the next 12 months. However, we may require additional
funds during or after that 12-month period. Any required financing may not be
available or may be available only on terms that are not favorable to us.
Further, if additional funds are raised through the issuance of additional
equity securities, the percentage ownership of our shareholders would be
diluted. Any new equity securities may have rights, preferences or privileges
senior to those of our common stock.

We could experience system failures which could harm our business and
reputation.

To succeed, we must be able to operate our network management infrastructure
around the clock without interruption. Our operations depend upon our ability
to protect our network infrastructure, equipment and customer files against
damage from human error, fire, earthquakes, hurricanes, floods, power loss,
telecommunications failures, sabotage, intentional acts of vandalism and
similar events. Our servers and network infrastructure are located in the
Dallas and Fort Worth, Texas metropolitan area. Even though we have attempted
to minimize risk through redundant systems, we do not have a comprehensive
disaster recovery plan and the occurrence of a natural disaster or other
unanticipated problems at any of our data centers could result in interruptions
in the services we provide to our customers.

Although we have attempted to build redundancy into our network and hosting
infrastructure, we have experienced interruptions in service in the past. We
have experienced partial system failures due to routing problems, hard drive
failures, database corruption and other computer failures. Our network is
subject to various points of failure, and a problem with our routers, switches
or other equipment could cause an interruption in the services we provide to
some of our customers. Any future interruptions could:

. cause customers or end users to seek damages for losses incurred;

. require us to replace existing equipment or add redundant facilities;

. damage our reputation for reliable service;

. cause existing customers to cancel their contracts; or

. make it more difficult for us to attract new customers.

Any of these results could damage our business.

Disruption of our services caused by unknown software defects could harm our
business and reputation.

Our service offerings depend on complex software, including software licensed
from third parties and our proprietary software tools. Complex software often
contains defects, particularly when first introduced or when new versions are
released. We may not discover software defects that affect our new or current
services or enhancements until after they are deployed. Although we have not
experienced any material software defects to

11
<PAGE>

date, it is possible that defects may occur in the software. These defects
could cause service interruptions, which could damage our reputation or
increase our service costs, cause us to lose revenue, delay market acceptance
or divert our development resources.

Our business and reputation will suffer if we do not prevent security breaches.

Despite our design and implementation of a variety of network security
measures, unauthorized access, computer viruses, accidents, misconduct
resulting in disruptions and other disruptions could occur. In addition, we may
incur significant costs to prevent breaches in security or to alleviate
problems caused by breaches. We rely on third-party suppliers such as Level 3
to protect our equipment and hardware against breaches in security. We cannot
be certain that they will provide adequate security. While we have experienced
no material security breaches in the past, any breaches that may occur could
result in liability to us, loss of existing customers or the deterrence of
future customers.

Our limited ability or failure to protect our intellectual property may
adversely affect our ability to compete.

Third parties may infringe or misappropriate our technology or proprietary
rights, which could have an adverse effect on our business, results of
operations or financial condition. In addition, our competitors or potential
competitors may independently develop technologies that are equivalent or
superior to our technology. We rely on a combination of copyright, trademark,
service mark and trade secret laws to protect our intellectual property. We are
in the process of filing federal registrations for the trademark "Data Return,"
as well as other service and trademarks which incorporate the Data Return name.
We also have internally developed software and other tools that are important
to our business for which we rely on copyright protection. We have entered into
some contractual arrangements with our employees and contractors as well as
suppliers, distributors and some of our key customers in order to limit access
to, and any disclosure of, our proprietary information. The steps we have taken
to protect our intellectual property may be insufficient. We may need to take
legal action to protect our intellectual property rights, which could be costly
and divert the attention of our technical and management personnel.

We may be accused of infringing the proprietary rights of others, which could
subject us to costly and time consuming litigation.

In addition to the technologies we develop or have developed, we license
certain technologies from third parties and may license additional technologies
in the future. Although we have not been accused of infringing the proprietary
rights of others in the past, we could become subject to infringement actions
based upon our internally developed technologies or technologies licensed from
third parties. Any of these claims, with or without merit, could subject us to
costly litigation and divert the attention of our technical and management
personnel. In addition, third parties may change the terms of their license
agreements in ways that would prevent us from using technologies licensed from
them on commercially reasonable terms or that would prevent us from using them
at all. We may not be able to replace those technologies with technologies that
have the same features or functionality on commercially reasonable terms or at
all.

If we do not adequately address Year 2000 issues, we may incur significant
costs and our business could suffer.

Currently, many computer and software products are coded to accept only two-
digit entries in the date code field. These date code fields will need to
accept four-digit entries to distinguish 21st century dates from 20th century
dates. As a result, many companies' software and computer systems may need to
be upgraded or replaced in order to comply with Year 2000 requirements. We
cannot predict whether our Year 2000 compliance issues will require us to
upgrade or replace our systems and equipment. Should we be required to

12
<PAGE>

upgrade or replace our systems and equipment, it could represent a significant
cost to us. If we are not successful in identifying and planning for Year 2000
issues, our business operations could be materially and adversely affected.
Additionally, we cannot evaluate our customers' Year 2000 readiness. Some of
our customers' sites may fail due to Year 2000 issues and any failures may
affect other customers' sites or our network. Also, to the extent that a
customer's site is not functioning correctly and it is not possible to
determine that the malfunction is caused by the customer's software, the
customer may request service credits or we might otherwise have a difficult
time realizing the expected revenues from that customer. Level 3 has indicated
that they are Year 2000 compliant. However, we have not undertaken any
independent assessment of Level 3's Year 2000 compliance and any failure of
Level 3's network due to Year 2000 issues could cause a disruption in our
services, which could cause us to lose customers.

The worst-case scenario related to the Year 2000 issue would be an overall
failure of the Internet, the telecommunications infrastructure and the
electrical grid. If this happened, we would be unable to service our customers
for an uncertain period of time. Any widespread disruption to these systems
would have unpredictable and potentially severe impacts on our business and
financial condition. We currently have no contingency plan to deal with this
worst-case scenario.

See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--The Year 2000."

Regulatory and legal uncertainties could result in significant costs or
otherwise harm our business.

The success of our business depends on the growth of the Internet. Laws and
regulations directly applicable to commerce or communications over the Internet
are becoming increasingly prevalent. However, the law of the Internet remains
largely unsettled. The adoption or modification of laws or regulations relating
to the Internet could adversely affect our business if they impose a direct
cost on us or if they curtail the growth of the Internet. If liability for
materials carried on or disseminated through their systems is imposed on
service providers, we would make efforts to implement measures to reduce our
exposure to such liability. Such measures could require us to expend
substantial resources or discontinue certain product or service offerings. In
addition, increased attention to liability issues, as a result of lawsuits,
legislation and legislative proposals, could divert management attention,
result in unanticipated expenses and harm our business. If legislation that
makes transacting business over the Internet, such as e-commerce, less
favorable or otherwise curtails the growth of the Internet is adopted in the
U.S. or internationally, our business would suffer. See "Business--Government
Regulation."

The loss of key personnel including our Chairman and Chief Executive Officer or
our President and Chief Operating Officer could harm our business.

We depend on the continued service of our key technical, sales and senior
management personnel, including Sunny C. Vanderbeck, our Chairman and Chief
Executive Officer, and Michelle R. Chambers, our President and Chief Operating
Officer. We have entered into three-year employment agreements with
Mr. Vanderbeck and Ms. Chambers, but any of our officers or employees can quit
at any time. Losing one or more of our key employees could harm our business.

We operate in an extremely competitive market, and our business would suffer if
we are unable to compete effectively.

The market for hosting and Internet services is highly competitive. There are
few substantial barriers to entry to keep new competitors from entering this
market. We expect that we will face additional competition from existing
competitors and new market entrants in the future. Many of our competitors have
substantially

13
<PAGE>

greater financial, technical and marketing resources, larger customer bases,
longer operating histories, greater name recognition and more established
relationships in the industry than we do. As a result, some of these
competitors may be able to:

. develop and expand their network infrastructures and service offerings
more rapidly;

. adapt to new or emerging technologies and changes in customer
requirements more quickly;

. take advantage of acquisition and other opportunities more readily;

. devote greater resources to the marketing and sales of their services;
and

. adopt more aggressive pricing policies.

In addition, some of our competitors have entered and will likely continue to
enter into joint ventures or other arrangements to provide additional services
competitive with those provided by us. We believe that the market in which we
compete is likely to experience consolidation in the near future, which could
result in increased competition on price and other factors that could adversely
affect our business.

In an effort to gain market share, some of our competitors have offered
hosting services similar to ours at prices lower than ours or with incentives
not matched by us. In addition, some of our competitors may be able to provide
customers with additional benefits that could reduce the overall costs of their
services relative to ours. We may not be able to reduce the pricing of our
services or offer incentives in response to the actions of our competitors
without an adverse impact on our business.

See "Business--Competition."

Because we have customers internationally, our business may be adversely
affected by foreign political and economic conditions.

In fiscal 1999, approximately 8% of our revenues were derived from our
customers located in Europe and Asia. In addition, we expect to begin operating
from Level 3's data center in London, England during the second half of 1999.
Our success depends in part on expanding our customer base internationally and
our ability to successfully operate from data centers in foreign markets.
Because our international sales are denominated in U.S. dollars, currency
fluctuations may deter foreign customers from purchasing our services. In
addition, we face risks in operating and servicing customers in foreign
markets, such as:

. different Internet access fees;

. different technology standards;

. different privacy, censorship and service provider liability standards
and regulations; and

. less protective intellectual property laws.

Any of these risks could adversely affect our ability to operate or expand
internationally, which would limit the growth of our business.

Our principal shareholders, directors and executive officers will own
approximately 76% of our common stock, which may allow them to exert influence
over us or to prevent a change of control.

After this offering our shareholders who currently own over 5% of our common
stock, our directors and our executive officers will beneficially own
approximately 76% of our outstanding common stock. These shareholders will be
able to exercise significant influence over all matters requiring shareholder
approval, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may also delay or
prevent a change in control of us even if beneficial to our shareholders.

14
<PAGE>

Some provisions of our articles, bylaws and rights plan and of Texas law could
delay or prevent a change of control which could adversely affect our stock
price.

Our articles of incorporation and bylaws contain provisions that could make
it more difficult for a third party to acquire us, even if doing so would be
beneficial to our shareholders. These provisions could limit the price that
investors might be willing to pay in the future for shares of our common stock.
Some of these provisions:

. authorize the issuance of preferred stock which can be created and
issued by our board of directors without prior shareholder approval,
commonly referred to as "blank check" preferred stock, with rights
senior to those of common stock;

. prohibit certain shareholder actions by written consent;

. establish advance notice requirements for submitting nominations for
election to our board of directors and for proposing matters that can be
acted upon by shareholders at a meeting; and

. provide for a classified board of directors with staggered three-year
terms.

We are also subject to certain provisions of Texas law which could delay,
deter or prevent a change in control of us.

We intend to adopt a shareholder rights plan before this offering is
consummated. This plan will entitle our shareholders to rights to acquire
additional shares of our common stock when a third party acquires 15% of our
common stock or commences or announces its intent to commence a tender offer
for at least 15% of our common stock. This plan could delay, deter or prevent a
change in control of us.

You will suffer immediate and substantial dilution.

The initial public offering price of our common stock is expected to be
substantially higher than the net tangible book value of our common stock.
Therefore, if you purchase our common stock in this offering, you will incur
immediate dilution of approximately $9.57 in the net tangible book value per
share of common stock from the price per share that you pay for such common
stock (based upon an assumed initial public offering price of $12.00 per
share). You will also experience additional dilution upon the exercise of
outstanding stock options at prices below the initial public offering price.

Future sales of our common stock could cause our stock price to decline.

After this offering is completed, 34,422,625 shares of our common stock will
be issued and outstanding, assuming no exercise of the underwriters' over-
allotment option. All of the shares of our common stock sold in this offering
will be freely tradable unless purchased by our "affiliates." In connection
with this offering, our officers, directors and shareholders not purchasing in
the offering who together own approximately 28,172,625 shares of our common
stock agreed to refrain from selling any shares of our common stock for a
period of 180 days after the date of this prospectus. We cannot be sure what
effect, if any, future sales of our common stock or the availability of shares
for future sale will have on the market price of our common stock. The market
price of our common stock could drop due to sales of a large number of shares
of our common stock in the market after this offering or the perception that
these sales could occur. These factors could also make it more difficult to
raise funds through future offerings of our common stock. There will be
34,422,625 shares outstanding upon the completion of this offering, of which
20,551,600 shares will become available for sale to the public 180 days from
the date of this prospectus, subject in some cases to volume limitations.

15
<PAGE>

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

Some of the information in this prospectus contains forward-looking
statements. These statements include, among others, statements relating to
expenditure levels, the adequacy of capital resources and plans for expansion
of our marketing and sales efforts, risk factors, use of proceeds, liquidity,
strategy, sales and technology and network operations. These statements may be
found under Prospectus Summary, Risk Factors, Management's Discussion and
Analysis of Financial Condition and Results of Operations and Business.
Forward-looking statements are typically identified by the use of terms such as
"may," "will," "expect," "intend," "anticipate," "estimate" and similar words,
although some forward-looking statements are expressed differently. You should
be aware that our actual results could differ materially from those contained
in the forward-looking statements due to a number of factors, including without
limitation, changes in external competitive market factors, changes in our
business strategy or an inability to execute our strategy, unanticipated
changes in the hosting industry, the economy in general and changes in the use
of the Internet. We cannot guarantee future results, levels of activity,
performance or achievements. You should also consider carefully the statements
under "Risk Factors" and other sections of this prospectus, which address
additional factors that could cause our actual results to differ from those set
forth in the forward-looking statements.

16
<PAGE>

USE OF PROCEEDS

We estimate that the net proceeds from the sale of 6,250,000 shares of common
stock we are offering will be approximately $68.8 million at an assumed initial
public offering price of $12.00 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that the
net proceeds will be approximately $79.2 million.

We currently intend to use approximately $25.0 million of the net proceeds to
fund capital expenditures, consisting of the purchase of servers and other
hardware. We also intend to use $192,000 to pay off and cancel a term loan with
Bank One of Texas, N.A. that we entered into in July 1998 in connection with
the purchase of equipment. We intend to use the balance of the net proceeds, or
approximately $43.5 million, for working capital and other general corporate
purposes. In addition, we may use some of the proceeds for strategic
investments and acquisitions. However, we have no current plans, agreements or
commitments with respect to any acquisition or investments of this type. Our
management will have significant flexibility in applying the net proceeds of
this offering and may spend the proceeds from this offering in ways which the
shareholders may not deem desirable.

The timing and amount of our actual expenditures will be based on many
factors, including cash flows from operations and the growth of our business.

Until we use the net proceeds of this offering for the above purposes, we
intend to invest the funds in short-term, investment grade, interest-bearing
securities. We cannot predict whether the proceeds invested will yield a
favorable return.

DIVIDEND POLICY

We have never paid any cash dividends on our capital stock. We anticipate
that we will retain earnings to support operations and to finance the growth
and development of our business. Therefore, we do not expect to pay cash
dividends in the foreseeable future.

17
<PAGE>

CAPITALIZATION

The following table sets forth our capitalization on June 30, 1999:

. on an actual basis;

. on a pro forma basis to reflect the net proceeds from private sales of
4,296,468 shares of our common stock to Level 3, Compaq and ZeroDotNet,
Inc. between June 30, 1999 and the date of this prospectus; see "Certain
Transactions" on page 56 for a description of these transactions; and

. on a pro forma as adjusted basis to give effect to the sale of an
assumed 416,667 shares of our common stock to Microsoft at an assumed
price of $12.00 per share and the sale of the shares of common stock we
are offering, at an assumed initial public offering price of $12.00 per
share (based upon the midpoint of the filing range), after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses that we will pay and the application of the estimated net
proceeds as described under "Use of Proceeds," including repayment of
the long term portion of notes payable.

This table should be read in conjunction with the audited financial
statements and the notes relating to those statements included elsewhere in
this prospectus.

<TABLE>
<CAPTION>
June 30, 1999
-----------------------------
Pro Pro Forma
Actual Forma As Adjusted
------- ------- -----------
(In thousands, except share
and per share data)
<S> <C> <C> <C>
Cash............................................. $ 3,116 $ 9,116 $ 82,674
======= ======= ========
Notes payable and capital lease obligations--long
term............................................ $ 140 $ 140 $ --
Shareholders' equity:
Preferred stock; $.001 par value, 20,000,000
shares authorized; none issued or outstanding,
actual, pro forma and pro forma as adjusted... -- -- --
Common stock; $.001 par value; 100,000,000
shares authorized, 23,459,490 shares issued
and outstanding, actual; 27,755,958 shares
issued and outstanding, pro forma; 34,422,625
shares issued and outstanding, pro forma as
adjusted...................................... 24 28 34
Additional paid-in capital..................... 8,039 19,035 87,779
Deferred stock compensation.................... (1,930) (1,930) (1,930)
Accumulated deficit............................ (2,109) (2,109) (2,109)
------- ------- --------
Total shareholders' equity..................... 4,024 15,024 83,774
------- ------- --------
Total capitalization............................. $ 4,164 $15,164 $ 83,774
======= ======= ========
</TABLE>

The number of shares of common stock outstanding does not include:

. 5,924,725 shares of common stock issuable at June 30, 1999 upon exercise
of options outstanding at a weighted average exercise price of $0.14 per
share;

. 3,313,004 shares of common stock reserved for future issuance under our
stock option plans; and

. a warrant to purchase an assumed 312,500 shares at the lesser of the
midpoint of the lowest filing range and the price to public.

18
<PAGE>

DILUTION

Our net tangible book value on June 30, 1999, was approximately $4,024,300 or
$0.17 per share. "Net tangible book value" is total assets minus the sum of
liabilities and intangible assets. "Net tangible book value per share" is net
tangible book value divided by the total number of shares outstanding.

After giving effect to adjustments relating to the offering described below,
our pro forma net tangible book value on June 30, 1999, would have been
$83,774,300 or $2.43 per share. The adjustments made to determine pro forma net
tangible book value per share are the following:

. an increase in total assets to reflect the net proceeds from private
sales of 4,713,135 shares of our common stock, including an increase in
total assets to reflect the net proceeds from the sale of an assumed
416,667 shares to Microsoft (assuming a price to Microsoft of $12.00 per
share);

. an increase in total assets to reflect the estimated net proceeds from
the sale of 6,250,000 shares in the offering as described under "Use of
Proceeds" (assuming an initial public offering price of $12.00 per share
(based upon the midpoint of the filing range)); and

. the addition of the number of shares offered by this prospectus and by
private sales of shares to the number of shares outstanding.

The following table illustrates the pro forma increase in net tangible book
value of $1.86 per share and the dilution (the difference between the offering
price per share and net tangible book value per share) to new investors.
Dilution per share in the table below does not include dilution from the
exercise of options outstanding at June 30, 1999, to purchase 5,924,725 shares
of common stock at a weighted average exercise price of $0.14 per share. If
these options are exercised, new investors will experience additional dilution.

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $12.00
Pro forma net tangible book value per share at June 30, 1999.... $ .36
Increase in net tangible book value per share attributable to
new investors.................................................. $2.07
-----
Pro forma net tangible book value per share after offering........ $ 2.43
------
Dilution per share to new investors............................... $ 9.57
======
</TABLE>

The following table summarizes the differences between the number of shares
of common stock purchased from Data Return, the aggregate cash consideration
paid and the average price per share paid by existing shareholders and new
investors purchasing shares of common stock in this offering:

<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.......... 28,172,625 81.8% $16,641,895 18.2% $ 0.59
New investors.................. 6,250,000 18.2 75,000,000 81.8 12.00
---------- ----- ----------- -----
Total........................ 34,422,625 100.0% 91,641,895 100.0%
========== ===== =========== =====
</TABLE>

19
<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the
financial statements, related notes and other financial information contained
later in this prospectus. You should also read "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contained later in
this prospectus. The Statements of Operations data for the period from
September 22, 1997 (inception) to March 31, 1998 and the year ended March 31,
1999 and the balance sheet data as of March 31, 1998 and 1999 are derived from
the financial statements of Data Return that have been audited by Ernst & Young
LLP, independent auditors. The financial data for the three month periods ended
June 30, 1998 and 1999 are derived from unaudited financial statements. The
unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which Data Return considers necessary for a fair
presentation of its financial position and the results of its operations for
these periods. The results of operations for the three month period ended June
30, 1999 are not necessarily indicative of the results of operations to be
expected for the full year.

<TABLE>
<CAPTION>
Period from Three Months Ended June
September 22, 1997 30,
(inception) to Year Ended ------------------------
March 31, 1998 March 31, 1999 1998 1999
------------------ -------------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Statements of Operations
Data:
Revenues................ $ 336 $ 1,889 $ 281 $ 1,228
Costs and expenses:
Cost of revenue....... 198 1,105 205 489
General and
administrative....... 231 1,063 213 866
Marketing and sales... 39 663 105 384
Stock based
compensation......... 61 349 85 140
----------- ----------- ----------- -----------
Total costs and
expenses............... 529 3,180 608 1,879
----------- ----------- ----------- -----------
Loss from operations.... (193) (1,291) (327) (651)
Other income (expense).. 2 7 5 16
----------- ----------- ----------- -----------
Net loss................ $ (191) $ (1,284) $ (322) $ (635)
=========== =========== =========== ===========
Net loss per common
share.................. $ (0.01) $ (0.07) $ (0.02) $ (0.03)
=========== =========== =========== ===========
Shares used in per share
computation............ 15,882,326 18,371,300 17,592,600 22,272,804
=========== =========== =========== ===========
Other Financial Data:
EBITDA (1).............. $ (118) $ (813) $ (222) $ (400)
Net cash provided by
(used in) operating
activities............. 1 (644) (243) (282)
Net cash used in
investing activities... (55) (939) (79) (696)
Net cash provided by
financing activities... 528 1,952 502 3,251
Purchases of property
and equipment.......... 55 814 79 696
</TABLE>

<TABLE>
<CAPTION>
March 31, June 30, 1999
------------- ------------------------------
Pro Pro Forma
1998 1999 Actual Forma(2) as adjusted(3)
------ ------ ------ -------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital.................. $ 321 $ 561 $2,291 $8,291 $81,901
Total assets..................... 734 2,214 6,011 12,011 85,569
Notes payable and capital lease
obligations--long-term.......... 36 166 140 140 --
Total shareholders' equity....... 430 1,245 4,024 10,024 83,774
</TABLE>

20
<PAGE>

(1) EBITDA consists of loss from operations plus depreciation and amortization,
including amortization of unearned stock based compensation. EBITDA does
not represent funds available for management's discretionary use and is not
intended to represent cash flow from operations as measured under generally
accepted accounting principles. EBITDA should not be considered as an
alternative to net loss or net cash used in operating activities, but may
be useful to investors as an indication of operating performance. Our
calculations of EBITDA may not be consistent with calculations of EBITDA
used by other companies.

(2) On a pro forma basis to reflect the private sales of 4,296,468 shares of
our common stock between June 30, 1999 and the date of this prospectus.

21
<PAGE>

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

You should read the following discussion together with the financial
statements and other financial information included in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those projected in
the forward-looking statements. Please see "Forward-Looking Statements and
Associated Risks" elsewhere in this prospectus. Our fiscal year ends on March
31.

Overview

Data Return provides advanced Internet hosting services based on Microsoft
technologies. We provide these services to businesses seeking to outsource the
deployment, maintenance and support of their complex web sites. Our services
include providing, configuring, operating and maintaining the hardware,
software and network technologies necessary to implement and support these web
sites.

The nature of our business is rapidly evolving and we have a limited
operating history. As a result, we believe that period-to-period comparisons of
our revenue and operating results, including our cost of revenue and other
operating expenses as a percentage of total revenue, are not meaningful and
should not be relied upon as indicators of future performance. We do not
believe that our historical growth rates are indicative of future results. See
"Risk Factors beginning on page 6 for a discussion of risks related to buying
shares of our common stock.

Currently, we derive substantially all of our revenues from advanced hosting
services. We also derive a nominal amount of revenue from technical reviews and
the resale of software and other products. Currently, most of our advanced
hosting revenues are generated from recurring monthly fees. The remainder are
derived from one-time set-up fees for installation. Revenues are billed on a
monthly basis and are recognized as the service is performed. Most of our
customer agreements may be canceled on 30 days' notice.

Our expenses are comprised of:

. cost of revenue, which consists primarily of compensation and related
expenses for technical operations, bandwidth expenses, space in data
centers and depreciation of equipment;

. general and administrative, which consists primarily of compensation and
related expenses and occupancy costs;

. marketing and sales, which consists primarily of advertising and
compensation and related expenses; and

. stock based compensation, which relates to employee options granted at
prices less than fair market value.

We have incurred significant losses since our inception and, as of June 30,
1999, had an accumulated deficit of approximately $2.1 million. We intend to
invest heavily in marketing and sales and the continued development of our
network infrastructure and technology. We expect to expand our operations and
workforce, including our network operations, technical support, sales,
marketing and administrative resources. In particular, we intend to expand our
existing inside sales force and create an outside sales force to develop new
sales channels and relationships. We expect to continue to incur substantial
losses for the foreseeable future. We may not be able to successfully execute
our expansion plans.

22
<PAGE>

Results of Operations

The following table sets forth selected financial data for the period from
September 22, 1997 (inception) to March 31, 1998, the year ended March 31, 1999
and the three month periods ended June 30, 1998 and 1999.

<TABLE>
<CAPTION>
% of Revenue
------------------------------------------------
Three Months
Period from Ended
September 22, 1997 June 30,
(inception) to Year Ended --------------
March 31, 1998 March 31, 1999 1998 1999
------------------ -------------- ------ -----
<S> <C> <C> <C> <C>
Revenues.................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenue........... 58.9 58.5 73.0 39.9
General and
administrative........... 68.5 56.3 75.9 70.5
Marketing and sales....... 11.6 35.1 37.4 31.3
Stock based compensation.. 18.2 18.5 30.1 11.4
----- ----- ------ -----
Loss from operations........ (57.2) (68.4) (116.4) (53.1)
Other income (expense):
Interest income........... 0.7 1.1 2.2 1.9
Interest expense.......... (0.1) (0.7) (0.4) (0.5)
----- ----- ------ -----
Net loss.................. (56.6)% (68.0)% (114.6)% (51.7)%
===== ===== ====== =====
</TABLE>

Comparison of three month periods ended June 30, 1998 and 1999

Revenues

Our revenues increased $946,700 to $1,227,500 for the three month period
ended June 30, 1999 from $280,800 for the three month period ended June 30,
1998. The increase was primarily due to the addition of new customers that
generated higher average monthly revenues. We increased our marketing and sales
personnel from two at June 30, 1998 to 12 at June 30, 1999.

Cost of revenue

Our cost of revenue increased $284,600 to $489,500, or 39.9% of revenue,
during the three month period ended June 30, 1999 from $204,900, or 73% of
revenue, during the three month period ended June 30, 1998. The increase in
cost of revenue over the two periods was due primarily to increases in
personnel and related costs, depreciation and bandwidth. Personnel and related
expenses increased approximately $128,500 to $225,200, or 46% of cost of
revenue, for the three month period ended June 30, 1999 from $96,700 for the
three month period ended June 30, 1998, as we increased our systems and
customer support personnel from 11 at June 30, 1998 to 25 at June 30, 1999.
Depreciation expense increased approximately $70,600 to $75,300 for the three
month period ended June 30, 1999 as we added approximately $1.4 million in
computer and related equipment since June 30, 1998. Our bandwidth expenses
increased $65,100 to approximately $145,200 for the three month period ended
June 30, 1999 from $80,100 for the three month period ended June 30, 1998, to
support our increased business activities. We expect our cost of revenue to
continue to increase in conjunction with the growth of our overall business.

General and administrative

General and administrative expense increased $652,400 to $865,600, or 70.5%
of revenue, during the three month period ended June 30, 1999 from $213,200, or
75.9% of revenue, for the three month period ended June 30, 1998. The increase
is primarily due to increases in personnel and related expenses and employee
recruiting fees. Personnel and related expenses increased $355,500 to $450,700,
or 52.1% of general and administrative expenses, for the three month period
ended June 30, 1999 from $95,200 for the three month period ended June 30,
1998. We increased our number of employees in general and administrative
functions

23
<PAGE>

from five employees at June 30, 1998 to 13 employees at June 30, 1999.
Recruiting fees increased approximately $64,500 to $65,500 for the three month
period ended June 30, 1999 from $1,000 in the comparable period in 1998.

Marketing and sales

Marketing and sales expense increased $279,500 to $384,500, or 31.3% of
revenues, during the three month period ended June 30, 1999 from $105,000, or
37.4% of revenues, during the three month period ended June 30, 1998. The
increase was due primarily to an increase in marketing and sales personnel and
related expenses and increased advertising costs. Personnel and related
expenses increased $191,500 to $244,700, or 63.6% of marketing and sales
expense, from $53,200 for the three month period ended June 30, 1998.
Advertising costs increased $88,000 to $139,800 for the three month period
ended June 30, 1999 from $51,800 for the three month period ended June 30,
1998. We increased our marketing and sales personnel from two at June 30, 1998
to 12 at June 30, 1999. We intend to significantly increase our marketing and
sales expenditures during the remainder of fiscal 2000.

Stock based compensation

Deferred stock compensation was recorded in connection with the grant of
employee stock options below fair value. Amortization of stock based
compensation totaled $84,600 for the three month period ended June 30, 1998 and
$139,500 for the three month period ended June 30, 1999. The amortization of
stock based compensation is based on the vesting schedule of stock options held
by the Company's employees. We recorded deferred stock compensation of $874,100
during the three month period ended June 30, 1999.

Other income (expense)

Other income (expense) consists primarily of interest income on our cash
balances and interest expense on our outstanding notes payable and capital
lease obligations. Interest earned on our cash and cash equivalents increased
$16,700 to $22,900 for the three month period ended June 30, 1999 from $6,200
for the three month period ended June 30, 1998. This increase was due primarily
to the closing of private placements of equity securities in May 1998 and
February 1999, which resulted in larger cash balances available for investment.
During the three month period ended June 30, 1998 and 1999, we incurred
interest expense in the amount of $1,100 and $6,100, respectively.

Income taxes

No provision for federal income taxes has been recorded as we have incurred
net operating losses since our inception. We have recorded a valuation reserve
against all of our net deferred tax asset, which is primarily attributable to
net opening loss carryforwards, due to uncertainty that we will generate
sufficient taxable income during the carryforward period to realize the benefit
of our net deferred tax asset.

Net losses

Our net loss increased $313,000 to $634,800 for the three month period ended
June 30, 1999 from $321,800 for the three month period ended June 30, 1998.
This increase was due primarily to the increases in expenses described above.

Comparison of the period from September 22, 1997 (inception) to March 31, 1998
and fiscal 1999

Revenues

Our revenues increased $1,552,900 to $1,889,000 during fiscal 1999 from
$336,100 for the period from September 22, 1997 (inception) to March 31, 1998.
This increase was primarily due to our generating revenues

24
<PAGE>

for a full year during fiscal 1999 and the growth of our business activities.
Approximately 41% of our fiscal 1999 revenue was recognized in the fourth
quarter, due in part to the addition of two sales people in the third quarter.

Cost of revenue

Our cost of revenue increased $907,300 to $1,105,300, or 58.5% of revenue,
during fiscal 1999 from $198,000, or 58.9% of revenue, during the period from
September 22, 1997 (inception) to March 31, 1998. This increase was due
primarily to a full year of operations in fiscal 1999 and the growth of our
business and related expenses, including increasing our systems and customer
support personnel from six at March 31, 1998 to 20 at March 31, 1999. We expect
our cost of revenue to continue to increase in conjunction with the growth of
our overall business.

General and administrative

General and administrative expense increased $832,800 to $1,063,000, or 56.3%
of revenue, during fiscal 1999 from $230,200, or 68.5% of revenue, for the
period from September 22, 1997 (inception) to March 31, 1998. This increase was
due primarily to a full year of operations in fiscal 1999 and an increase in
the number of general and administrative personnel. We increased our number of
employees in this area from four employees at March 31, 1998 to eight employees
at March 31, 1999. We expect to significantly increase our general and
administrative expenditures. The decrease as a percentage of revenues was due
to revenues increasing at a more rapid rate than general and administrative
expenses.

Marketing and sales

Marketing and sales expense increased $623,800 to $662,800, or 35.1% of
revenues, during fiscal 1999 from $39,000, or 11.6% of revenues, during the
period from September 22, 1997 (inception) to March 31, 1998. This increase was
due primarily to a full year of operations in fiscal 1999 and an increase in
the number of marketing and sales personnel. We increased our marketing and
sales personnel from one to six in fiscal 1999. We intend to significantly
increase our marketing and sales expenditures during fiscal 2000.

Stock based compensation

Deferred stock compensation was recorded in connection with the grant of
employee stock options below fair value. Amortization of stock based
compensation totaled $61,300 for the period from September 22, 1997 (inception)
through March 31, 1998 and $348,800 for the year ended March 31, 1999. The
amortization of stock based compensation is based on the scheduled vesting of
stock options held by several employees. We recorded deferred stock
compensation of $1,277,000 in the period from September 22, 1997 (inception) to
March 31, 1998 and $328,000 during fiscal 1999.

Other income (expense)

Other income (expense) consists primarily of interest income on our cash
balances and interest expense on our outstanding notes payable and capital
lease obligations. Interest earned on our cash and cash equivalents increased
$17,700 to $19,900 during fiscal 1999 from $2,200 during the period from
September 22, 1997 (inception) to March 31, 1998. This increase was due
primarily to the closing of private placements of equity securities in May 1998
and February 1999, which resulted in cash balances available for investment.
During fiscal 1999, we incurred interest expense in the amount of $12,700.

Income taxes

No provision for federal income taxes has been recorded as we have incurred
net operating losses from inception through March 31, 1999. As of March 31,
1999, we had approximately $980,000 of federal net

25
<PAGE>

operating loss carryforwards available to offset future taxable income which
expire in varying amounts beginning in 2013. We have recorded a valuation
reserve for all of our net deferred tax benefit for the period ended March 31,
1999 due to uncertainty that we will generate sufficient taxable income during
the carryforward period to realize the benefit of our net deferred tax asset.
In addition, after this offering, we may experience a change in control under
Section 382 of the Internal Revenue Code, which would limit our use of these
net operating loss carryforwards.

Net losses

Our net loss increased $1,093,000 to $1,284,000 during fiscal 1999 from
$191,000 for the period from September 22, 1997 (inception) to March 31, 1998.
This increase was due primarily to the increases in expenses described above.

Selected Quarterly Operating Results

The following table sets forth certain unaudited statement of operations data
for each of the five quarters in the period ended June 30, 1999, as well as the
percentage of our revenue represented by each item. This data has been derived
from unaudited interim financial statements prepared on the same basis as the
audited financial statements contained in this prospectus. The interim
financial statements include all adjustments, consisting of normal recurring
adjustments, that we consider necessary for a fair presentation of such
information when read in conjunction with our financial statements and notes
thereto appearing elsewhere in this prospectus. The operating results for any
quarter should not be considered indicative of the results for any future
period.

<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------
June 30, September 30, December 31, March 31, June 30,
1998 1998 1998 1999 1999
-------------- -------------- -------------- -------------- ----------------
(Dollars in thousands)
% of % of % of % of % of
$ Revenue $ Revenue $ Revenue $ Revenue $ Revenues
----- ------- ----- ------- ----- ------- ----- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 281 100.0% $ 366 100.0% $ 467 100.0% $ 775 100.0% $1,228 100.0%
Costs and expenses:
Cost of revenue........ 205 73.0 243 66.4 280 60.0 377 48.6 490 39.9
General and
administrative........ 213 75.8 211 57.7 243 52.0 396 51.1 866 70.5
Marketing and sales.... 105 37.4 165 45.1 163 34.9 230 29.7 384 31.3
Stock based
compensation.......... 85 30.2 86 23.5 86 18.4 92 11.9 140 11.4
----- ------ ----- ----- ----- ----- ----- ----- ------ -----
Total costs and
expenses............... 608 216.4 705 192.7 772 165.3 1,095 141.3 1,880 153.1
----- ------ ----- ----- ----- ----- ----- ----- ------ -----
Loss from operations.... (327) (116.4) (339) (92.7) (305) (65.3) (320) (41.3) (652) (53.1)
Other income (expense):
Interest income........ 6 2.1 5 1.4 3 0.6 6 0.8 23 1.9
Interest expense....... (1) (0.3) (3) (0.8) (4) (0.8) (5) (0.7) (6) (0.5)
----- ------ ----- ----- ----- ----- ----- ----- ------ -----
Net loss................ $(322) (114.6)% $(337) (92.1)% $(306) (65.5)% $(319) (41.2)% $ (635) (51.7)%
===== ====== ===== ===== ===== ===== ===== ===== ====== =====
</TABLE>

Revenues increased 30.2% during the quarter ended September 30, 1998, 27.6%
during the quarter ended December 31, 1998, 66.0% during the quarter ended
March 31, 1999 and 58.5% for the quarter ended June 30, 1999, as the size and
number of new customer orders rose significantly during each quarter. Cost of
revenue increased in each quarter, but decreased as a percentage of revenue.
General and administrative expense and marketing and sales expense generally
increased quarter over quarter primarily due to the addition of personnel as
our business increased.

Liquidity and Capital Resources

We have historically financed our operations primarily through private
placements of equity. Our cash increased by approximately $2,272,900 during the
three months ended June 30, 1999 to $3,115,700. This net change is partially a
result of our raising approximately $3,275,000 from the sale of equity
securities offset by approximately $282,100 used to fund operating activities.
In addition, our investment in property and

26
<PAGE>

equipment increased approximately $696,300 during the three month period ended
June 30, 1999. Installation of network infrastructure equipment and purchases
of furniture and equipment for new employees accounted for this increase.

Total borrowings under our notes payable as of June 30, 1999 were
approximately $205,000. We intend to repay the amounts outstanding under these
agreements with a portion of the proceeds of this offering. Our credit
agreements and capital lease obligations contain no provisions that would limit
our future borrowing ability.

Since June 30, 1999, we completed additional rounds of common stock financing
through the issuance of approximately 2,343,528 shares for gross cash proceeds
of $6.0 million. In addition, in July 1999, Level 3 purchased 1,952,940 shares
of common stock in exchange for a $5.0 million credit to be used against future
purchases of bandwidth in excess of our quarterly purchase commitment. In
addition, Microsoft has agreed to purchase $5.0 million of our common stock for
a per share price equal to the lesser of the midpoint of the lowest filing
range and the price to public.

We believe that our current cash balances, proceeds from the private equity
financings closed since June 30, 1999 and the proceeds of this offering will be
sufficient to meet our working capital and capital expenditure requirements for
at least the next 12 months. If the offering is not consummated, we believe
that we could support operating and capital outlays for at least the next 12
months. However, on a long-term basis, we may require additional external
financing for working capital and capital expenditures. If additional funds are
raised through the issuance of equity or convertible securities, the percentage
ownership of our stockholders will be reduced and our stockholders may
experience additional dilution. Under our agreement with Level 3, we are
required to purchase at least $10.0 million of bandwidth and co-location
services over the next five years. Our quarterly commitment is $200,000 in the
first year, $300,000 in the second year, $400,000 in the third year, $600,000
in the fourth year and $1.0 million in the fifth year of the agreement. We
anticipate that further expansion of our operations will cause us to incur
negative cash flows on a short-term basis, and therefore require us to use our
cash and other liquid resources to support our growth. Our operating and
investing activities on a long-term basis may require us to obtain additional
equity or debt financing. We have no present understandings, commitments or
agreements with respect to any acquisition of other businesses, products,
services or technologies. However, we may evaluate potential acquisitions of
other businesses, products and technologies from time to time. In order to
consummate potential acquisitions, we may need additional equity or debt
financings in the future.

Recent Accounting Pronouncements

On March 4, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AICPA) issued Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires computer software
costs related to internal software that are incurred in the preliminary project
stage to be expensed as incurred. Once the capitalization criteria of SOP 98-1
have been met, external direct costs of materials and services consumed in
developing or obtaining internal-use computer software; payroll and payroll-
related costs for employees who are directly associated with and who devote
time to the internal-use computer software project (to the extent of the time
spent directly on the project); and interest costs incurred when developing
computer software for internal use should be capitalized. SOP 98-1 is effective
for financial statements for fiscal years beginning after December 15, 1998.
Accordingly, we will adopt SOP 98-1 in our financial statements for the year
ending March 31, 2000. We do not expect SOP 98-1 to have a material impact on
our financial statements.

In April of 1998, the AICPA issued Statement of Position No. 98-5, "Reporting
on the Costs of Start-up Activities", which requires that costs related to such
activities be expensed as incurred. SOP 98-5 is effective for financial
statements for fiscal years beginning after December 15, 1998. Accordingly, we
will adopt SOP 98-5 in our financial statements for the year ending March 31,
2000. We do not expect SOP 98-5 to have a material impact on our financial
statements.

27
<PAGE>

The Year 2000

Impact of the Year 2000

Currently, many computer and software products are coded to accept two-digit
entries in the date code field. These date code fields will need to accept
four-digit entries to distinguish 21st century dates from 20th century dates.
As a result, many companies' software and computer systems will need to be
upgraded or replaced to comply with Year 2000 requirements. Failure to make
such upgrades or replacements could result in system failure or erroneous
calculations, causing disruptions of operations, such as an inability to
process transactions, send invoices and engage in other normal business
activities. We recognize the need to ensure that our operations are not
adversely impacted by Year 2000 software and computer system failures. We are
not currently aware of any Year 2000 compliance problems relating to our
computer systems that would have a significant negative effect on our business,
operating results or financial condition.

Project Plan and State of Readiness

We have made a preliminary assessment of the Year 2000 readiness of our
computer systems and software, including the hardware and software that enable
us to provide and deliver our solutions. We plan to continue our Year 2000
readiness efforts by:

. testing our internal systems for Year 2000 compliance;

. contacting third-party suppliers, vendors and licensors of material
hardware, software and systems that are both directly and indirectly
related to the delivery of our solutions to our customers;

. assessing repair and replacement requirements;

. implementing repair and replacement requirements; and

. creating contingency plans for potential Year 2000 failures.

We have initiated a four-phase plan for addressing Year 2000 issues with the
following estimated dates of completion:

<TABLE>
<CAPTION>
Phase Estimated Date of Completion
----- ----------------------------
<C> <S> <C>
I. Preparation and Information Gathering.... April 30, 1999
II. Develop Project Plan..................... August 31, 1999
III. Execution of Project Plan................ September 30, 1999
IV. Full Compliance.......................... October 31, 1999
</TABLE>

Some elements of the project plan are not dependent upon completion of other
elements. Therefore, we may execute elements of the project plan while there
may be outstanding tasks associated with other elements of the plan.

Phase I - Preparation and Information Gathering. In this phase we determined
our Year 2000 risk. We inventoried our hardware and software and determined
what replacements and modifications were required for our systems and networks
to function properly after December 31, 1999. Upon review of hardware and
software data gathered during the inventory, we gathered Year 2000 compliance
information from our vendors via web site visits, phone calls or
correspondence. Although we have received information from the majority of our
key hardware and software component vendors that the products they supply to us
are currently Year 2000 compliant, we cannot be certain that any representation
made to us by any vendor is complete or accurate. In addition, we cannot be
sure that we have not overlooked critical systems. As we acquire new hardware
and software, we intend to use the same procedures to determine Year 2000
compliance.

We primarily rely on four key hardware and software vendors: Microsoft,
Compaq, Cisco and Alteon. We have tested the Year 2000 compliance of the
products supplied by these vendors. For Microsoft products, the software is
considered Year 2000 compliant if it will function through the end of year
2035. We have identified remedial action that we need to perform on some of our
vendors' products. These upgrades are available, and we intend to install them
by September 30, 1999.

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<PAGE>

Our internal systems are based upon the same key vendor hardware and software
product families described above. We have been advised by the vendor that our
customer relationship management package is Year 2000 compliant. In 1998, we
upgraded our internal accounting software with a package that, according to the
vendor, would make the system Year 2000 compliant. We are currently installing
a new phone system, and the vendor has informed us that it is Year 2000
compliant. We have contacted all of our significant vendors and third-party
providers to obtain assurance as to their Year 2000 compliance. All of these
vendors and providers have responded to our inquiries by directing us to their
Year 2000 compliance statements on their web sites. The web sites of our
significant vendors indicate that all software products are Year 2000 compliant
and all hardware is currently Year 2000 compliant or is being updated to become
Year 2000 compliant. We have not independently investigated these vendors' Year
2000 compliance.

Phase II - Develop Project Plan. We have a project plan that identifies the
hardware and software replacements and/or modifications discovered during Phase
I. We have assigned departments and resources for completing the project plan
during this phase. While significant achievements were made in identifying
critical Year 2000 issues regarding information technology and non-information
technology related functions, we cannot assure you that critical equipment has
not been overlooked. Some Microsoft products may require additional service
packs and/or patches to make them Year 2000 compliant. In addition, some Compaq
servers have required revisions. We expect that hardware and software
revisions, such as applying updates, service packs and patches, will be
minimal.

Phase III - Execution of Project Plan. We intend to accomplish the hardware
and software replacements and/or modifications identified in Phase I and
execute the project plan created in Phase II. During this phase we are
continuing to test and monitor Year 2000 compliance and the effect of any non-
compliance of our internal systems, vendors, service providers, clients and
their respective systems and monitor the effect of any non-compliance on our
business. We intend to re-evaluate the Year 2000 compliance of our hardware and
software components that have been replaced or modified. We intend to give
priority to those applications or processes posing the greatest threat of
failure and greatest potential impact on our business.

While we believe that we have substantially completed our plan for achieving
Year 2000 compliance, the discovery of additional systems requiring remediation
could have a negative effect on the current plan and the resources required to
implement the plan.

Phase IV - Full Compliance. We intend to be Year 2000 compliant by October
31, 1999 on all components critical to our business. However, we rely upon
hardware and software vendors and do not control the accuracy, timeliness or
completeness of their Year 2000 efforts. In addition, because our ability to
provide services depends on the networks and systems of other carriers, to the
extent that these networks and systems are adversely impacted by Year 2000
problems our ability to provide services to our customers may be adversely
impacted.

Costs

To date we have not incurred any material expenditures in connection with
identifying or evaluating Year 2000 compliance issues. We continue to collect
information and make the necessary revisions to our systems in an ongoing
effort to maintain Year 2000 compliance. We are not aware of any critical
third-party software application which requires replacement. In the event we
are required to make such a replacement, we do not anticipate that such
expenses will be substantial. However, such expenses, if higher than
anticipated, could harm our business and operating results.

Risks and Contingencies

Although we are not currently aware of any Year 2000 compliance problems
relating to our computer systems that would have a material negative impact on
our business, operating results or financial condition, we cannot assure you
that we will not discover Year 2000 compliance problems in our software and
systems that will require substantial revisions or expenditures or replacement.
In addition, we cannot be certain that we will not need to modify or replace
third-party software or hardware incorporated into our computer systems, which
could be time consuming and expensive. If an oversight were to occur by us or
one of our vendors and we or a

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<PAGE>

vendor failed to correct a material Year 2000 problem, we could experience an
interruption in or a failure of normal business activities or operations, such
as interruptions in our ability to provide services to our customers, an
inability to market our services to potential new customers and the loss of
customers. Any of these results could have a negative effect on our business.
Moreover, if we fail to adequately address Year 2000 compliance issues, it
could result in claims of mismanagement, misrepresentation or breach of
contract and related litigation, and any of these claims would likely be costly
and time-consuming to defend. In addition, we cannot assure you that government
agencies, utility companies, telecommunications companies, Internet service
providers, third-party service providers, hardware or software manufacturers
and others outside of our control will be Year 2000 compliant. The failure by
such entities to be Year 2000 compliant could result in systemic failures
beyond our control. Prolonged Internet, telecommunications, electrical or other
failures could decrease the demand for our services and the use of the Internet
or prevent users from accessing the web sites of our customers. This would
materially harm our business.

Year 2000 issues may also impact the interaction of our systems with the
software, hardware or systems of our suppliers. Furthermore, our ability to
provide services to our customers depends on the networks and systems of other
carriers. Any failures or problems experienced by the networks and systems of
those carriers may adversely impact our ability to provide services to our
customers. In addition, because we rely on our web site as a marketing and
sales tool, any failures or problems affecting the Internet or our web site
could hinder our marketing and sales efforts. We are not evaluating the Year
2000 compliance of our customers' web sites.

Each of the following events must be included in a consideration of the worst
case scenario, which is an overall failure of the Internet, the
telecommunications infrastructure and the electrical grid: widespread failure
of communications carriers, public utilities, unavailability of transit for
staff, suppliers and clients; disruption of our ability to gain access to, and
continue operating in, office buildings and other facilities; the failure of
significant portions of our critical computer systems and their respective
components, including both internal business systems and systems controlling
operational facilities such as electrical generation, transmission and
distribution systems; and the failure of outside entities' systems, including
systems related to banking and finance.

We provide our hosting services through a combination of skilled labor,
hardware and software products and services from major vendors within the
computer and telecommunications industries. Because our ability to provide our
services depends on the performance of each of these components, the Year 2000
problem has introduced many risks and uncertainties, and the Year 2000
compliance of many of these components, such as the supply chain, utility
companies and our customers' systems, is beyond our control and in some case
beyond our ability to test. Because of these uncertainties, we are unable to
determine whether the consequences of Year 2000 failures will have a material
impact on our business.

If we cannot operate effectively after December 31, 1999, we could, among
other things, face substantial claims by customers, including for lost profits,
or loss of revenue due to service interruptions, inability to fulfill
contractual obligations or bill customers accurately and on a timely basis, and
increased expenses associated with litigation, stabilization of operations
following critical system failures and the execution of contingency plans. We
could also experience an inability by customers and others to pay us on a
timely basis or at all. Under these circumstances, the adverse effects,
although not quantifiable at this time, would be material.

We are continuing to gather information and evaluate the possible impact of
the Year 2000 on our business and to develop contingency plans to implement if
any of our systems are not Year 2000 compliant.

Quantitative and Qualitative Disclosures About Market Risk

All our customer contracts are currently denominated in United States
dollars, and we do not currently invest in derivative financial instruments.
However, we invest our excess cash balances in cash equivalents and are
therefore subject to market risk related to changes in interest rates. We
believe, but cannot be certain, that the effect on our financial position,
results of operation and cash flows of any reasonably likely changes in
interest rates would not be material.

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<PAGE>

BUSINESS

Our Company

Data Return provides advanced Microsoft-based Internet hosting services to
businesses, web site developers and other organizations. Our advanced Microsoft
hosting services enable our customers to establish and maintain sophisticated
e-commerce and other applications through which they can conduct transactions
and manage information on a worldwide basis over the Internet. Our hosting
services, which are based on the Microsoft platform, provide support for
software such as Windows NT, Internet Information Server, Active Server Pages,
SQL Server and Site Server Commerce Edition. According to IDC, Microsoft
Windows NT will be the key engine for growth within the worldwide server market
and Windows NT's market share will grow at a compound annual growth rate of 25%
from 1998 to 2003.

We provide our services to companies across many industries. As of August 31,
1999, we hosted over 1,600 web sites for more than 800 customers.

Our advanced hosting services are designed for customers deploying
sophisticated, high-end Internet applications that require a professionally-
managed environment incorporating high performance network access, advanced
system monitoring and technical support in highly secure, fault-tolerant
facilities. We believe that we are well positioned to take advantage of the
rapidly growing demand for advanced hosting which is being driven by the growth
in user access to the Internet, e-commerce and the outsourcing of web services.

We were incorporated in August 1997 by three former Microsoft product support
engineers. We believe that our exclusive focus on the Microsoft platform and
our approach to offering pre-packaged hosting services have been the major
contributors to our growth. We believe the following are among the key factors
that have distinguished our company and our offerings and that will continue to
drive our growth:

. a full range of pre-packaged hosting services supported by advanced
managed services for fixed monthly prices;

. high availability and high performance clustering solutions for web
servers and database servers;

. an advanced and secure network architecture that has delivered faster
network performance compared to the single fastest backbone provider;

. automated work flows and service deployment processes;

. avoiding competition with software developers and systems integrators;
and

. a commitment to serving members of the Microsoft developer community,
who are valuable sources of customer referrals.

Level 3 and Compaq have invested in our company, and Microsoft has agreed to
purchase shares of our common stock. We believe our relationships with these
companies enhance our credibility with potential customers and provide us with
early access to new products, superior technical services, training and new
business development opportunities. In July 1999, we entered into a five-year
agreement with Level 3 under which:

. Level 3 has designated us as a preferred provider of advanced Microsoft
hosting services;

. we will train Level 3's sales personnel to identify and refer potential
customers to us on a commission basis;

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<PAGE>

. we are entitled to offer our services from the 17 existing and all
future Level 3 gateways in the U.S. enabling us, we believe, to avoid
the significant costs of building our own data centers;

. Level 3 will provide assistance as needed in the installation and
support of our equipment located in their gateways; and

. Level 3 has acquired shares of our common stock in exchange for $5.0
million in credit for future bandwidth purchases in excess of our
purchase commitment.

Also in July 1999, we entered into a three-year agreement with Compaq. Under
that agreement, Compaq has agreed to include Data Return in any program under
which it approves for recommendation to its customers a specified group of
application service providers. Although Compaq is not required to develop such
a program, it will include us in any such program that it does establish at the
highest level for which we qualify. In addition, Compaq has purchased shares of
our common stock for a purchase price of $3.0 million.

In September 1999, we entered into an agreement with Microsoft under which we
will license proprietary installation tools for third-party hosted applications
to Microsoft and train Microsoft's employees and customers in the use of those
tools. Under that agreement, Microsoft will provide technical consulting and
writing services, and we will co-market the tools with Microsoft. Microsoft has
also agreed to invest $5.0 million in our common stock.

Industry Background

Growth of the Internet and Electronic Commerce

The market for advanced hosting services has been driven by the growth of the
Internet. The Internet has emerged as a new medium for communicating,
exchanging information and transacting business. IDC projects that the number
of Internet users will grow from approximately 159 million at the end of 1998
to over 410 million at the end of 2002. Forrester Research projects that during
the next five years U.S. online business-to-business trade will exceed $1.0
trillion. Forrester Research also projects that e-commerce will generate over
$3.2 trillion in worldwide revenue by 2003. We believe businesses and other
organizations will attempt to take advantage of this growth by establishing new
web sites or upgrading existing web sites. We further believe that many of
these sites, particularly those used for electronic commerce, will be
increasingly complex and have high traffic volume requirements.

Outsourcing of Web Hosting

As businesses attempt to take advantage of the revenue potential presented by
the growth of the Internet and e-commerce by establishing web sites that
interact with customers, vendors and employees, we believe that they will
increasingly outsource the hosting of their web sites. To support e-commerce
applications, these sites must be capable of reliably and securely completing
financial transactions. The process of establishing a web site includes:

. specification of site requirements, including the associated business
work flows and processes;

. development and testing of software consistent with the specifications;

. acquisition and installation of hardware, software and network access in
a controlled environment; and

. physical implementation of the web site onto the Internet.

Once a web site is implemented, it requires monitoring, maintenance and
management provided by knowledgeable personnel. While some businesses currently
choose to operate and maintain their web sites in-house, we believe that many
businesses, even those with relatively large and sophisticated information
technology departments, will find outsourcing the hosting of their web sites
attractive due to the following factors:

. rapid changes in the various complex technologies involved;

. difficulty of deploying highly sophisticated web applications;

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<PAGE>

. challenge of hiring and retaining experienced and qualified personnel;

. lack of the infrastructure needed to deploy, expand, upgrade and
maintain essential applications on the Internet around the clock; and

. potential cost savings associated with personnel and system
infrastructure requirements.

We believe that the trend toward outsourcing the hosting of web sites will
continue as businesses increase the complexity of their web sites and require
greater interactivity for end users. We believe that these web sites will
increasingly be based on Microsoft Internet technologies. IDC projects that
Windows NT will be the key engine for growth within the worldwide server market
and Windows NT's market share will grow at a compound annual growth rate of 25%
from 1998 to 2003.

The Outsourcing of Packaged Application Hosting

For many of the above reasons, companies are seeking to outsource the
management of important software applications that can be accessed over the
Internet. We believe that many of these applications will also be based on
Microsoft Internet technologies. These applications govern business processes
such as e-mail, sales force automation, human resource management, decision
support, supply chain management, core financials and overall enterprise
resource management. We believe that the potential benefits of outsourcing
these applications include significant improvements in application availability
and reduced ongoing management costs. According to IDC, information systems
outsourcing, which includes data center, client/server and help desk
applications, is the fastest growing segment of the market, and spending in
this area will increase at a 12.2% compound annual growth rate through 2003.
Further, IDC projects that spending on worldwide outsourcing services will
increase from $99.0 billion in 1998 to more than $151.0 billion by 2003.

Our Market Opportunity

The Advanced Hosting Opportunity

Advanced hosting is distinguished from basic hosting by requirements for:

. more bandwidth;

. more complex system architectures, including support for extranets and
intranets;

. more complex software technologies;

. a higher level of technical expertise to support these complex systems;
and

. higher system performance and reliability.

Advanced hosting is used to support highly interactive web sites on which
real-time transactions and full-featured e-commerce applications are
implemented. These sites provide users with the ability to interact with
databases and require a high level of expertise for implementation and
maintenance support. For higher volumes of user traffic and transactions,
multiple servers may be required.

As e-commerce becomes increasingly important to businesses worldwide, we
believe that many businesses will outsource the hosting and maintenance of
their high-volume, transactional web sites. Further, beyond e-commerce, we
believe that the hosting market will be driven by a demand for the outsourcing
of other enterprise-wide, business unit and information technology department
functions. According to Forrester Research, the hosting market will grow from
$0.9 billion in 1998 to $14.6 billion in 2003, a 76% compound annual growth
rate.

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Hosting on the Microsoft Platform

We believe that the market for advanced hosting on the Microsoft platform
offers a greater opportunity than the market for hosting on other platforms,
such as Unix. Microsoft is the dominant provider of operating systems for
personal computers. We believe that many developers are writing web
applications for the Microsoft platform because of previous experience gained
in the Microsoft architecture, including experience with Basic, Visual Basic
and Active Server Pages. According to Microsoft, more than two million
developers participate in Microsoft's Developer Network and Site Builder
Network programs. We believe that, as businesses demand applications that are
capable of operating on the Internet, developers are increasingly responding by
producing Microsoft-based solutions that require hosting on Microsoft
platforms. For example, IDC reports that Microsoft 32-bit Windows offerings
have the leading position in terms of operating environment license revenues
and license shipments for client operating environments. Additionally, we
believe the momentum toward the Microsoft platform is driven by market demand
for shortened development cycles, lower development costs and lower operating
costs.

Our Solution

Data Return is an advanced hosting provider dedicated to delivering scalable,
reliable and high performance hosting services on the Microsoft platform. By
combining our expertise in managing Microsoft-based Internet technologies, a
scalable deployment architecture and high performance content delivery, we have
developed a family of services that addresses a wide range of customer needs.

Advanced Managed Services

Managing the deployment of business-critical web applications requires an in-
depth understanding of all underlying software, hardware and network
technologies. We use our expertise in Microsoft technologies to provide
management services for our customers' hosting needs which include:

. consultation and recommendations on standardized system architecture;

. installation, configuration and stress testing of hardware and software;

. ongoing maintenance of hardware and software including content back-ups
and system upgrades;

. a broad array of system and network monitoring and reporting services
provided 24 hours a day; and

. advanced technical support designed to respond to both simple and
complex system issues.

Scalable Deployment Architecture

Our customers require system architecture that is flexible and can be
expanded over time to meet increasing demand. Data Return has developed a
scalable deployment architecture for the Microsoft platform that enables
customers to begin with cost effective shared solutions and then migrate to
dedicated services and high-end multi-server clustered solutions as their site
traffic grows. The flexibility of this architecture allows us to offer a wide
range of hosting solutions to our customers.

High Performance Content Delivery

Overall application performance is an essential component to deploying an
Internet-based application successfully. There are many factors that contribute
to overall performance including the configuration and architecture for
hardware, software and Internet access. Our private networking architecture
bypasses the congested public exchange points, such as the Metropolitan Area
Exchanges and Network Access Points, increasing speed and reliability. By
taking a comprehensive approach to optimizing application performance, we
delivered network performance faster on average, during the period from August
16, 1999 through the date of this prospectus in the United States compared to
the single fastest backbone provider as measured by Keynote Systems.

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Pre-Packaged Solutions for Advanced Hosting

We have standardized our services into packages with defined pricing and
feature sets. We believe these pre-packaged solutions simplify the sales
process and customer support compared to co-location. Co-location arrangements
typically involve a vendor supplying space for the server and Internet
connections and the customer being responsible for defining and implementing
the deployment architecture. Our pre-packaged solutions enable our customers to
outsource these responsibilities to us for their Internet, extranet or intranet
applications.

Our Strategy

Our goal is to take advantage of the growth in Internet usage, e-commerce and
the outsourcing of hosting services to become the leading provider of advanced
hosting services. Our strategy for accomplishing this goal contains the
following key elements:

Maintain Focus on Advanced Hosting on the Microsoft Platform. We intend to
maintain our exclusive focus on Microsoft-based advanced hosting, which enables
us to concentrate our expertise. We believe that we are better able to attract
customers because we have targeted the Microsoft platform, which we believe is
significantly underserved. By focusing on one platform, we are not required to
duplicate systems and operations costs which would be necessary to support
multiple platforms. In addition, by focusing exclusively on advanced hosting
and not engaging in web site development or systems integration services
ourselves, we are able to maintain close relationships with developers and
systems integrators, who serve as a valuable source of referrals.

Offer a Full Range of Highly Scalable Advanced Hosting Services. We attract
customers by offering a full range of Microsoft-based hosting services from
shared and dedicated services to complex, clustered solutions. We intend to
continue working with Microsoft and other technology partners to remain at the
forefront of packaging new technologies into advanced hosting services. We
believe that our advanced hosting customers view their web applications as an
important part of their business strategy and are seeking a growing number of
services. We target larger customers with substantial and complex requirements.
However, our broad range of service offerings also attracts customers with
lower volume requirements who can migrate to more powerful service offerings as
their needs evolve. We believe that our broad range of service offerings
attracts customers who are likely to be long-term customers.

Maintain Non-Capital Intensive Business Model. We deploy our hosting services
within third-party data centers to avoid the high capital expenditures
associated with building our own data centers. Rather than investing in data
centers and other capital intensive assets, we invest in internally developed
and third-party software and other tools. We believe this increases our
financial flexibility by reducing fixed costs. We also believe this allows us
to increase customer satisfaction because we believe the internally developed
and third-party software and other tools in which we invest increase network
performance and reliability. Specifically, we are able to add value and
generate a competitive advantage by continuing to develop best practices,
standardized service offerings and automated processes that improve operational
efficiency.

Enhance Our Marketing and Sales Programs. Through the packaging of our
offerings, we believe we have substantially reduced the complexity of
purchasing advanced hosting services. We intend to substantially increase our
advertising efforts to further promote awareness of the Data Return brand and
our advanced Microsoft-based hosting offerings. To date, our sales have been
made through our inside sales force, which has focused on responding to leads
and other inquiries generated from advertising and referrals. In parallel with
the expansion of our inside sales force, we intend to establish an outside
sales force to proactively seek larger

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<PAGE>

opportunities. Additionally, we intend to train Level 3's sales force, as
contemplated by our agreement with Level 3, and to further formalize our
partner programs with developers and systems integrators to identify and refer
their leads for advanced Microsoft-based hosting services to Data Return.

Capitalize on Key Relationships. We have relationships with Level 3, Compaq,
Microsoft and Alteon that we believe provide us with early access to new
products, superior technical services, training and new business development
opportunities. In some cases, these partners have provided us with direct and
indirect funding. We believe that our association with industry leaders
enhances our credibility with potential customers. We intend to strengthen our
existing relationships and to seek additional strategic arrangements when
appropriate.

Provide Superior Customer Service. We intend to continue to provide high-
quality customer service by maintaining a high level of technological expertise
in our customer support and sales organizations and by proactively monitoring
the performance of our customers' web sites. We believe that our
standardization of hardware and software solutions, which results in efficient
training, documentation and overall logistics and operations, allows us to
deliver high-quality customer service. We intend to continue leveraging our
relationships with Compaq, Microsoft and Alteon to receive the technical
training and support necessary to provide high levels of customer support
during both installation and ongoing maintenance.

Expand Our Data Center Presence. The servers we use in offering our hosting
services are located in data centers, which are secure facilities with multiple
Internet connections, multiple power sources and other features designed to
minimize the possibility of service interruptions. We currently operate from
data centers in Fort Worth and Dallas, and our agreement with Level 3 allows us
to establish data centers in the 17 current and all future Level 3 gateways
located in the U.S. We intend to offer services from Level 3's data centers in
San Francisco and London in the second half of 1999. We also intend to provide
services through Level 3's network, which is currently planned to be composed
of local networks in approximately 50 cities, over the next five years.
Additionally, our relationship with Level 3 will provide us with access to
bandwidth and personnel to assist in the installation and implementation of our
equipment in their gateways. These capabilities position us to offer nationwide
points of presence for shared, dedicated, clustered and geographically
dispersed clustered hosting services.

Expand into New Hosting Markets. We believe that the execution of the above
elements of our strategy will enable us to address new hosting markets as they
develop. In particular, we believe that we are positioned to expand into the
emerging application service provider market without significant changes to our
operations or business model. We believe that our Microsoft-based hosting
services will be a desirable platform for electronic distribution in the
emerging software rental market. Additionally, we believe that software
companies whose products either draw upon Microsoft technologies or whose
products typically interface to the large installed base of Microsoft systems
will find our hosting services attractive. We have recently begun offering
hosting services for Microsoft Exchange, which is an advanced messaging
service.

Our Services

We have made an extensive effort to package our hosting services into
standardized, definable product offerings. Our services are designed to be
comprehensive in terms of feature sets and to address customers' outsourcing
needs for a wide variety of requirements, including:

. customers accessing public web sites on the Internet;

. employees accessing private web sites through intranets; and

. partners and other designated user groups accessing private or public
web sites through extranets.

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Offerings

Our advanced Microsoft hosting platform allows us to support the Internet,
intranets and extranets for both commercially developed applications and custom
developed applications. To address this wide variety of customer requirements,
Data Return has developed three distinct categories within our service family.
During the three month period ended June 30, 1999, excluding set-up fees, 50.6%
of our revenues was derived from our shared services, 38.2% was derived from
dedicated services and 11.2% was from clustered hosting services.

Shared Hosting Services. Shared hosting services are entry level service
plans designed for customers with complex requirements but relatively low
volumes of traffic. We have designed our shared hosting packages to
minimize the cost for customers by providing these services on a server
shared by multiple customers. Our service plans include many standard
features and options for database support, commerce support, media services
and extensive e-mail support.

Dedicated Hosting Services. Dedicated hosting services are designed for
customers with more complex requirements, high traffic volumes and who are
seeking greater control over management of their servers. Our dedicated
service plans provide each customer with its own server. These service
plans offer a number of advantages to our customers in addition to those
received in our shared hosting packages, including:

. improved service reliability and content delivery by limiting each
server to a single developer environment;

. greater flexibility in configuration of the specific server
environment; and

. complete server control by providing customers with console-level
server access.

We offer several dedicated service options that range from entry-level web
servers to high performance, multi-processor database servers.

Clustered Hosting Services. For customers that deploy e-commerce enabled
or other business-critical applications or expect very high user traffic
volumes, we have developed a family of clustered hosting services,
including geographically dispersed clusters. Our clustered service plans
distribute content and functionality across multiple servers, which allows
our customers' applications to scale beyond a single server. Additionally,
our clustering services are designed to allow our customers' business-
critical applications to continue operating in the event a server fails.
These services are designed to provide significantly enhanced system
performance and system reliability for application and database services.
These services require specialized hardware and software which we include
in our pre-packaged solutions. We believe that customers will increasingly
require the type of services supported by clustered solutions and therefore
our sales volumes in this category will increase.

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<PAGE>

Pricing

We bill for our services on a monthly basis and for a one-time initial setup
fee at the time the server is configured. In addition to our pre-packaged
product offerings, we also work with customers to develop custom configurations
that are based on our standard hosting architecture. Our product offerings and
prices for new installations as of August 31, 1999 are generally described in
the table below.

<TABLE>
<CAPTION>
Service Type Service Level Set-up Fee Monthly Fee
------------ ------------- ---------- -----------
<S> <C> <C> <C>
Shared Hosting Services Shared Level 1.............. $ 100 $ 100
Shared Level 2.............. 150 200
Shared Level 3.............. 200 400
Dedicated Hosting Services Enterprise Dedicated I...... 2,000 1,500
Enterprise Dedicated II..... 2,500 2,000
Enterprise Dedicated III.... 5,000 3,500
Clustered Hosting Services Level I--Configuration 1.... 6,000 5,100
Configuration 2.......... 6,500 6,100
Configuration 3.......... 10,000 8,100
Level II--Configuration 1... 14,000 8,800
Configuration 2......... 20,000 12,800
Configuration 3......... 22,500 17,000
</TABLE>

To further simplify the purchasing process for our customers, all service
plans, including features and pricing, are described on our web site. This
enables our customers to evaluate the various service offerings before
contacting one of our sales representatives, which in turn can shorten our
selling cycle, reduce our customer acquisition costs and ultimately enhance
customer satisfaction by making readily available the necessary technical and
business information for choosing the appropriate service level. We intend to
continually upgrade our web site to provide more product information and
enhanced purchasing capabilities for our existing and prospective customers.

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Customers

We provide hosting services to end user businesses, web site development
firms and other organizations. Our customers are located primarily in North
America and Europe. As of August 31, 1999, we hosted over 1,600 web sites for
more than 800 customers ranging from small- and medium-sized businesses to
Fortune 500 companies. Our top customers based on revenue in fiscal 1999
include:

<TABLE>
<S> <C>
Executive Software Crazy Protocol Communications
First USA Bank DSS Research
Blue Streak.com Financial Profiles, Inc.
Silicon Channels Corporation Headliner Entertainment Group
Honeywell Inc. Delta-V
Telezoo.com Winsoft Corporation
Microsoft Webidia Design, Inc.
Secure Link, Inc. PrimaPath
Ericsson Inc. Kinetic Corporation
The Financial Ad Trader Third Coast Media
The Trane Company Esmerk Limited
Palo Alto Software, Inc. Kidspeace Corporation
Dynamic Net, Inc. Classic Car Source, Inc.
Web for Success I2 Technologies
Tudor Publishing Company CartoonBank
</TABLE>

Key Relationships

Level 3

We entered into a five-year relationship with Level 3 in July 1999 and are
currently Level 3's only preferred provider of advanced hosting services for
the Microsoft platform. Our strategic relationship with Level 3 allows us to
leverage our advanced hosting and managed application services with their sales
force and U.S. data center infrastructure. Level 3 provides us with segregated
rack space capacity and environment controls for up to 6,000 servers in its
Dallas gateway and access to the 17 existing and all future U.S. Level 3
gateways. In addition, Level 3 will provide personnel at these data centers to
install equipment and assist with support as necessary for us to deliver
service in these facilities. This reduces the number of implementation
engineers we require to deploy and support solutions for our customers in these
locations. We believe that these benefits, coupled with geographic and network
proximity to our customers, will become a marketing and technological advantage
in the immediate future. We have also agreed that if Level 3 is capable of
providing the services we request, and if we determine that those services meet
our then-current performance criteria, we will purchase 75% of these services
from Level 3 from July 2000 through December 2000 and 90% of these services
from Level 3 from January 2001 through the remainder of our agreement with
Level 3. We route the network traffic of our customers through multiple
backbone providers to increase network performance. To enable us to do this, we
obtain Internet connectivity through a number of providers, and Level 3 may not
be able to provide all of the connectivity services that we require. As a
result, we may purchase less than 90% of these services from Level 3. We have
also made a purchase commitment to Level 3 of $800,000 in the first year, $1.2
million in the second year, $1.6 million in the third year, $2.4 million in the
fourth year and $4.0 million in the fifth year for a total minimum commitment
for the term of the contract of $10.0 million. The prices which we will pay
Level 3 for the services over the term of our agreement are based upon Level
3's then-current prices to other companies purchasing similar quantities. Level
3 can terminate this agreement for a default by us which is not cured within 30
days of notice or a change of control that results in Data Return being owned
by a competitor of Level 3.

We will train Level 3's sales personnel to identify potential customers for
our advanced hosting services and refer them to us. Level 3 will be paid a
commission equal to 30% of the first month's monthly recurring revenue on all
leads that become our customers. As we train Level 3's sales force at a
particular data center, we intend to deploy our own outside sales force in that
region to work with Level 3 to develop and close joint

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<PAGE>

sales leads. To date, our growth has been driven primarily by our inside sales
force. We believe that the lead generation of Level 3's sales force, combined
with our future outside sales force, positions us to substantially increase our
rate of growth. Level 3 has acquired shares of our common stock in exchange for
$5.0 million in credit for future bandwidth purchases in excess of our
quarterly purchase commitment.

Compaq

We use Compaq servers exclusively to provide the hardware platform for our
advanced hosting services. Our relationship provides direct contact with
product development engineers and marketing management at multiple levels
within the Compaq organization. We recently entered into a three-year agreement
with Compaq under which we will purchase from Compaq the lesser of 2,000
servers or the number of servers reasonably necessary to adequately operate our
business consistent with our business plan. We are required to purchase these
servers only if Compaq provides financing for the servers on competitive terms,
if the price, performance and quality of the Compaq servers is reasonably
satisfactory to us and if Compaq commits to deliver these servers on the
schedule we request. Also as part of our strategic relationship with Compaq,
Compaq has agreed to include Data Return in any program under which it approves
for recommendation to its customers a specified group of application service
providers. Although Compaq is not required to develop such a program, it will
include us in any such program that it does establish at the highest level for
which we qualify. Compaq has also purchased $3.0 million of our common stock.

We work collaboratively with the Compaq engineering and product marketing
teams on the Distributed Internet Server Array (DISA) architecture to develop
enhanced offerings for multiple server configurations (clustered web and SQL
server solutions). We are also currently working on a Compaq co-funded print
campaign featuring our use of Compaq servers in a clustered environment. We are
also a Compaq Solutions Alliance SELECT Partner. The SELECT Partner designation
is the highest attainable level in this program and provides us with a wide
variety of information, tools, services and networking opportunities.

Microsoft

We recently entered into a licensing agreement with Microsoft. Under this
agreement we will license proprietary installation tools for third-party hosted
applications to Microsoft. We will also train Microsoft's employees and
customers in the use of those tools. Microsoft will, in return, provide us with
technical consulting and writing services during the development of the tools.
Microsoft has also agreed to co-market the tools with us in a manner that is
mutually acceptable to both parties. Microsoft has also agreed to purchase $5.0
million of our common stock.

We are recognized by Microsoft as one of the leading providers of advanced
hosting services on the Microsoft platform. We have received the Microsoft
Advanced Hosting Partner and Application Service Provider Partner designations
and have achieved a high level of integration at all levels within Microsoft.
We believe that one of our key competitive advantages is the level of customer
service and support that we can provide as a result of this enhanced
relationship. However, we do not have an agreement with Microsoft to provide
this level of support and integration or to continue to confer these
certifications and designations. Microsoft could discontinue its relationship
with us at any time. Our expertise in deploying and managing the Microsoft
Internet platform is also an important factor in our business relationship with
Microsoft. Our status with Microsoft provides us with the following:

. access to a local, field-based Microsoft representative;

. a corporate-based business development manager;

. designated points of contact in the customer units and product groups;

. escalated technical support;

. advance product notification;

. advance product releases;

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<PAGE>

. participation in beta programs;

. joint marketing programs; and

. leads and new business development opportunities generated by Microsoft.

Following are some of the Microsoft designations, certifications and related
agreements that Data Return currently has:

. We are one of eight Microsoft Advanced Hosting Partners. This status
signifies our ability to provide database integration, full back-end
transaction processing and advanced content management.

. We are one of ten designated Microsoft Application Service Providers,
defined by Microsoft as being able to provide superior infrastructure,
service and performance for hosted applications on the Microsoft
platform.

. We are one of 11 Microsoft Commerce Hosting Services providers. This
signifies our ability to provide customers with an advanced e-commerce
hosting infrastructure.

. We are a Microsoft Windows Media Service Provider. This status signifies
our ability to deploy and maintain audio and video streaming media
solutions.

. We participate in rapid deployment programs for various Microsoft
products. As such, we are responsible for providing feedback on
Microsoft products in the advanced hosting and managed application
markets prior to release, and by doing so we are able to provide
services and gain expertise on these products before the general market.

. We are a Microsoft Certified Solution Provider at the Partner level. The
Partner designation is the highest attainable level in this program. We
believe this designation provides us with preferred access to a broad
range of Microsoft resources and is a distinguishing factor for
development firms and systems integrators looking to identify sources
for advanced hosting.

. We have acquired Microsoft Premier Support, which provides the most
direct, fastest and highest formal escalation path for resolution of
product-related problems within Microsoft, including a technical account
manager at Microsoft who is responsible for ensuring that Microsoft
product support provides timely and accurate resolutions to problems we
or our customers may encounter.

Alteon

Alteon manufactures state-of-the-art switching products capable of supporting
millions of concurrent connections with load balancing and fail-over for
clustered server configurations. We believe we were the first commercial
installation of the Alteon server switching platform for the Microsoft Internet
platform. Our Chairman and Chief Executive Officer, Sunny Vanderbeck, is an
advisory board member of Alteon. The advisory board assists management in
product, marketing and distribution planning. Additionally, we are using the
Alteon WebOS application programming interface to enhance clustered solutions.
These enhanced clustered solutions deliver real-time performance data to the
hardware platforms, providing increased functionality, reliability and
scalability in high-volume and complex deployments.

Marketing and Sales

Our marketing strategy has initially been focused on our product packaging.
We have made an extensive effort to package our hosting services in
standardized, definable product offerings that are competitive in terms of
features, functions and prices. We have made our services easy to purchase by
presenting these packages in detail on our web site, including all set-up and
monthly charges. We believe that this packaging and standardization shortens
our selling cycle and enhances customer satisfaction by making available to
decision makers the technical and business information necessary to choose a
service level.

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<PAGE>

We intend to substantially increase our marketing expenditures to help build
awareness of our brand and to further generate sales. We have a customer
tracking system that provides us with timely reports as to which marketing
activities are producing the greatest return, which enables us to better
allocate our marketing resources. We currently have a diversified marketing
effort for demand generation. Primarily we market through advertising in
magazines targeted at developers and information service professionals. We also
advertise online, through direct mail and at trade shows and conferences.
Additionally, many web sites of our customers and partners have direct links to
our web site. We intend to increase our spending in all of these areas, and in
particular focus on direct mail because we believe it will significantly help
our outside sales force in their business generation efforts.

Our sales have predominantly been generated by developer and customer
referrals. We believe that a distinguishing characteristic of our company is
that we do not provide application development services and, therefore, do not
compete with any of our development focused customers. We believe that as more
development companies make the decision to outsource the hosting of their
clients' applications, Data Return will be an attractive alternative to hosting
providers that also offer development services.

Our inside sales force responds to inquiries, which typically have been
generated by advertising and referrals from customers, strategic partners and
developers. We intend to significantly increase our inside sales force during
the second half of 1999 to respond to the inquiries that we believe will be
generated by our increased marketing efforts. Concurrently, we are developing
an outside sales force to proactively seek potential customers. Each outside
salesperson's territory will include one or more Level 3 U.S. gateways. The
outside sales force will work in conjunction with Level 3's sales force to
provide training and ongoing sales support. Both our inside and outside sales
force will be responsible for following up on leads generated by Level 3's
sales force. We intend to continue to add outside salespeople as Level 3 builds
out its U.S. gateways.

We have recently implemented a sales incentive program that we believe has
increased sales productivity and enhanced pre-sales customer service. Our sales
force is paid a commission for each sale that they complete based upon the
customer's first month of recurring revenue. To encourage our sales force to
pursue long-term revenue generating business, we adjust the commission paid to
the sales person if the customer does not use our service for a minimum period
of time. In addition to paying commissions to our inside and outside sales
personnel, we will pay commissions to Level 3's sales force for all sales based
on leads they refer to us. We believe this commission structure will create a
high level of cooperation in the field between Data Return's and Level 3's
sales forces.

Customer Support

We believe a critical element of our customer service is providing a high
level of technical expertise within both our customer support and systems
organizations. Our technical support engineers are expected to be proficient in
at least:

. one major network operating system;

. two applications from our supported product list; and

. either one programming language or one database application.

Further, we require all of our support and systems technicians to become
Microsoft Certified Systems Engineers or Microsoft Certified Professionals.

All systems are monitored and maintained on a 24 hours a day, seven days a
week, or 24x7, basis. We provide standard customer support from 9AM-8PM Central
time Monday through Friday and 12PM-5PM Saturday via both telephone and
electronic request forms. We provide business-critical customer support on a
24x7 basis. We strive to respond within 15 minutes or less for business-
critical problems. Response times for all severity levels are published on our
support web site and are prioritized according to our customers' assessment of
severity levels.

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Our customer care system provides support personnel with timely online
information regarding the status of all set-up and support incidents.
Additionally, support personnel have access to information regarding the sales
history and current sales activities for each customer account. This
integration of support and sales systems enables us to allocate resources with
a full knowledge of both new business opportunities and any customer support
issues. We believe that this system will support substantially greater
economies of scale and quality of service.

Infrastructure

We use a platform which is comprised mostly of Internet-related software
products running on Microsoft's Windows NT operating system and Compaq servers.
We use Alteon clustering switches along with Cisco switches and routers to
connect our servers to the Internet. Using our standard platform, we have
gained efficiency and effectiveness in terms of training, documentation, spare
parts, overall support and system performance. We also maintain some legacy
hosting services running on the Unix platform. In addition, our customers
benefit from our ability to support application level services such as SQL
Server, Active Server Pages and Site Server Commerce Edition. Specifically, our
infrastructure consists of the following key elements:

. highly secure, carrier-class data centers;

. a scalable server platform;

. automated deployment processes;

. comprehensive and centralized monitoring and systems management;

. fault-tolerant clustered servers; and

. an advanced, high performance network.

Highly Secure, Carrier-Class Data Centers

Our first data center is located in a facility in downtown Fort Worth. The
facility is a Bellcore standard Class A facility, which is an industry term
indicating that the facility has redundant systems to prevent down-time caused
by system failures at the facility. Security for the data center is provided
with a 24x7 armed guard and entry restriction via card key access. Power to the
building is provided by redundant connections from separate transformers. The
data center is also equipped with FM200 gas fire suppressant systems,
environmental control systems and redundant networking hardware.

In January 1999, we established our second data center within Level 3's
Dallas gateway. The Level 3 facility, which is also a Bellcore standard Class A
facility, provides us with environmental resources similar to the Fort Worth
data center, but on a much larger scale. In addition to providing greater
capacity for server racks and associated environmental support, the Level 3
facility provides us with access to Level 3's worldwide IP network. The Level 3
relationship provides us with access to the 17 current and all future gateways
in the U.S. This provides us with the ability to expand not only bandwidth
resources, but also the ability to open new data centers in major cities across
the U.S. on relatively short notice and with relatively little investment by
us. All of Level 3's highly secure, carrier-class facilities are designed for
scalability and include advanced security features that may include biometric
palm readers, video monitoring and card key access, and fault-tolerant power
systems, such as multiple power grids, facilities-based AC/DC battery back-up
and diesel generators. We intend to offer services from Level 3's London,
England and San Francisco data centers in the second half of 1999.

A Scalable Server Platform

Our standard platform for service delivery uses Compaq servers. These servers
generally run the Windows NT or Windows 2000 operating system, along with
various application software such as Microsoft SQL Server

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or Microsoft Internet Information server. Compaq's Distributed Internet Server
Array (DISA) architecture leverages the clustering and load balancing features
of Windows NT Server, Enterprise Edition with Internet Information Server. This
architecture enables us to support scalable, highly-available Internet-enabled
applications. In addition, our standard hardware configuration allows us to
maintain standby hardware for use in the event of hardware failure. While these
servers use a standard hardware and software platform, we apply our expertise
in their configuration and tuning.

Automated Deployment Processes

We configure and test our hardware and software through the use of both
commercially available and internally built tools. The software installation
process consists of a series of unattended scripts and batch files providing a
fast, consistent and repeatable configuration. As the server is provisioned
with user accounts, web sites and file transfer protocol sites, the automated
script also tests each step to verify that the server is functioning correctly.
We also manually test the installation process to further evaluate the quality
and integrity of the installation.

Comprehensive and Centralized Monitoring and Systems Management

We combine commercial tools and internally built applications to provide
comprehensive and centralized monitoring, analysis and reporting of
application, service and hardware performance on a 24x7 basis. Proactive
hardware and application monitoring maximizes service performance levels and
reliability. Systems administration and management is remotely performed using
an interface which encrypts all client-server communication with a 64-bit
encryption algorithm for added security. Additionally, we offer a customer
control panel, which provides a standard user interface that allows them to
perform the most commonly performed web site administrative tasks. The customer
control panel also allows the customer to electronically submit support
requests to our service and support group for the more advanced administrative
tasks and support issues. This approach to monitoring and systems management
allows us to use the same methodologies and processes across all of our data
centers regardless of geographic location.

Fault-Tolerant Clusters

We currently offer two levels of clustered solutions: level one clustered
application services and level two clustered application and database services.
Level one clustered solutions utilize products from Alteon to provide high
availability and traffic load balancing for application resources, such as web
servers and application servers. In the event of an application server failure,
all traffic is redirected from the failed server to the remaining available
application servers to protect against service outage. Level two clustered
solutions provide enhanced application availability by adding clustered
database services, which are well suited for the clustering of transactional
data resources including Microsoft SQL Server. These solutions are based on
Fibre Channel storage systems from Compaq and the Microsoft Cluster Service. We
also offer geographically dispersed solutions which allows us to load balance
and fail-over applications between data centers.

Advanced High Performance Network

We have based our network hardware on Cisco and Alteon technologies. Our
highly secure network consists of multiple, diverse connections to the Internet
which currently provide us with local access to seven leading backbone
providers. These multiple connections allow us to increase both performance and
reliability by routing traffic over private connections, bypassing congested
public exchange points such as the Metropolitan Area Exchanges and Network
Access Points. By taking a comprehensive approach to optimizing application
performance, we have delivered network performance faster in the United States
on average compared to the single fastest backbone provider as measured by
Keynote Systems over the period from August 16, 1999 through the date of this
prospectus. In addition to increased performance, our network

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<PAGE>

architecture reduces our dependency on any one network provider, increasing
network availability for our customers. Further, we have our own IP addresses,
which reduces our dependence on specific network providers or other third
parties. Our network security solutions include firewalls, encryption
techniques, virtual private networks and other security technologies and
techniques. To date in 1999, we are one of the top three issuers of Verisign
certificates, which enable secure e-commerce.

Competition

The markets in which we operate are highly competitive, and competition is
increasing because few apparent substantial barriers to entry exist in the
Internet hosting market. Although it is impossible to quantify our relative
competitive position in our market, many of our competitors have substantially
greater financial, technical and marketing resources, larger customer bases,
longer operating histories, greater name recognition and more established
relationships in the industry than we have. We expect that we will face
competition from existing competitors as well as new market entrants in the
future. The primary competitive factors in our market are:

.technical expertise in developing advanced web hosting solutions;

.quality of service, including network capability, scalability, reliability
and functionality;

.customer service and support;

.variety of services and products offered;

.price;

.brand name recognition;

.Internet system engineering and technical expertise;

.timing of introductions of value-added services and products;

.network security;

.financial resources; and

.conformity with industry standards.

Our current and potential competitors vary by size, product offering and by
geographic region and may elect to partner with each other or with focused
companies like us to deliver service on the Microsoft platform. They include:

. Microsoft advanced hosting providers, such as Digex, MCI WorldCom
(including UUNET), GTE Internetworking and USWeb/CKS Group;

. web and application hosting service providers, such as Interliant,
Navisite and USinternetworking;

. application-specific hosting service providers, such as Critical Path;

. co-location providers, such as AboveNet, Exodus, Digital Island and
Frontier GlobalCenter;

. local, regional and international Internet service providers, such as
AppliedTheory, Concentric, Globix, MindSpring, Verio and PSINet;

. local, regional and international telecommunications companies, such as
AT&T, British Telecommunications, Cable & Wireless, Telecom Italia,
Nippon Telegraph and Telephone, Qwest and the regional Bell operating
companies such as Bell Atlantic and U S WEST;

. systems integrators and large information technology outsourcing
companies, such as IBM, EDS, Oracle, Andersen Consulting,
PricewaterhouseCoopers and others;

.multimedia hosting companies, such as broadcast.com; and

.other hardware, software and technology companies.

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We believe that our expertise and exclusive focus on the advanced hosting
segment of the Internet services market enables us to differentiate ourselves
from our competitors. We also believe that our expertise and focus on
Microsoft-based Internet technologies, our customer support and our ability to
maintain a service delivery infrastructure that is designed to parallel or
surpass the performance provided by Internet backbone providers and other
telecommunications carriers will further differentiate us from our competitors.
Additionally, our marketing and sales methodologies are focused on enabling
customers to easily select and deploy solutions based on packaged service
offerings, which can shorten our selling cycle, reduce our customer acquisition
costs and ultimately enhance customer satisfaction.

Intellectual Property Rights

We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect certain
proprietary rights in our data, applications and services. We are in the
process of filing Federal registrations for the trademark "Data Return," as
well as other service and trademarks which incorporate the Data Return name.

Government Regulation

We are not currently subject to direct federal, state or local government
regulation, other than regulations applicable to businesses generally. There is
currently only a small body of laws and regulations directly applicable to
access to e-commerce on the Internet.

Congress recently enacted the "Digital Millennium Copyright Act," which
became effective in October 1998. The Digital Millennium Copyright Act provides
a limitation on liability of online service providers for copyright
infringement for transmitting, routing or providing connections, transient
storage, caching or storage at the direction of a user, if the service provider
had no knowledge or awareness that the transmitted or stored material was
infringing and meets certain other conditions. Since this law is new and does
not apply outside of the United States, we are unsure of how it will be applied
to limit any liability we may face in the future for any possible copyright
infringement or copyright-related issues. This new law also requires service
providers to follow "notice and take-down" procedures and to meet other
conditions in order to be able to take advantage of the limitation on
liability. We have not yet implemented such procedures, met such conditions or
evaluated the cost of complying with them. However, our customers are subject
to an acceptable use policy which prohibits them from transmitting, storing or
distributing material on or through any of our services which, in our sole
judgment is (1) in violation of any United States local, state or federal law
or regulation, (2) fraudulent online marketing or sales practices or (3)
fraudulent customer information, including identification and payment
information. Although this policy is designed to promote the security,
reliability and privacy of our systems and network, we cannot be certain that
our policy will accomplish this goal or effectively limit our liability.

Despite enactment of the Digital Millennium Copyright Act, the law relating
to the liability of online services companies and Internet access providers for
information carried on or disseminated through their networks remains largely
unsettled. It is possible claims could be made against online services
companies and Internet access providers under both United States and foreign
law for defamation, obscenity, negligence, copyright or trademark infringement,
or other theories based on the nature and content of the materials disseminated
through their networks. Several private lawsuits seeking to impose such
liability upon online services companies and Internet access providers are
currently pending.

Although sections of the Communications Decency Act of 1996 that proposed to
impose criminal penalties on anyone distributing indecent material to minors
over the Internet were held to be unconstitutional by the U.S. Supreme Court,
similar laws may be proposed, adopted and upheld. The nature of future
legislation and the manner in which it may be interpreted and enforced cannot
be fully determined and, therefore, legislation similar to the Communications
Decency Act could subject us and/or our customers to potential liability, which

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in turn could harm our business. The adoption of any of these types of laws or
regulations might decrease the growth of the Internet, which in turn could
decrease the demand for our services or increase our cost of doing business or
in some other manner harm our business.

Due to the increasing popularity and use of the Internet, it is likely that a
number of additional laws and regulations may be adopted at the federal, state
and local levels with respect to the Internet, covering issues, such as user
privacy, freedom of expression, pricing, characteristics and quality of
products and services, taxation, advertising, intellectual property rights,
information security, access fees and the convergence of traditional
telecommunications services with Internet communications. The adoption of any
of these laws or regulations might decrease the growth of the Internet, which
in turn could decrease the demand for our services or increase the cost of
doing business or in some other manner harm our business, results of operations
or financial condition. In addition, applicability to the Internet of existing
laws governing issues such as property ownership, copyrights and other
intellectual property issues, taxation, libel, obscenity and personal privacy
is uncertain. The vast majority of such laws were adopted prior to the advent
of the Internet and related technologies and, as a result, do not contemplate
or address the unique issues of the Internet and related technologies.

Employees

As of August 31, 1999, we had 79 employees. None of our employees are covered
by collective bargaining agreements. We believe that our relations with our
employees are good.

Facilities

Our corporate headquarters are currently located in Irving, Texas and consist
of approximately 23,000 square feet of office space that is leased until
October 31, 2001. We also have an office in Arlington, Texas, consisting of
5,000 square feet of office space that is leased until March 31, 2000.

Legal Proceedings

We do not believe that we are subject to any pending or threatened legal
proceedings.

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MANAGEMENT

Executive Officers and Directors

The following sets forth, as of August 31, 1999, the name, age and position
of our executive officers and directors and nominees to our board:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Sunny C. Vanderbeck..................... 26 Chairman of the Board and Chief Executive
Officer

Michelle R. Chambers.................... 31 President, Chief Operating Officer and
Director

Michael S. Shiff........................ 45 Senior Vice President - Marketing, Sales
and Business Development

Mark A. Bowles.......................... 38 Vice President - Advanced Technology
Deployment

Scott W. Brewer......................... 35 Vice President - Technical Services

Kenneth S. Garber....................... 46 Vice President - Sales

Jason A. Lochhead....................... 26 Vice President - Research and Product
Development and Director

J. Todd Steitle......................... 34 Vice President - Marketing

Stuart A. Walker........................ 34 Vice President - Chief Financial Officer,
Treasurer and Secretary

Nathan Landow........................... 67 Director

T. Geir Ramleth......................... 40 Nominee for Director
</TABLE>

Sunny C. Vanderbeck, a co-founder of our company, has served as Chairman and
Chief Executive Officer since our incorporation in August 1997. Before founding
Data Return, from July 1996 to January 1997, Mr. Vanderbeck was a technical
product manager and Lead Internet/Intranet Consultant for Software Spectrum, a
reseller of Microsoft products. From May 1995 to June 1996, while employed by
Software Spectrum, Mr. Vanderbeck served as an independent consultant to
Microsoft where he served as a team leader for Microsoft Messaging products and
as a product support engineer. From July 1994 to May 1995, Mr. Vanderbeck was
an independent consultant. From 1990 to 1994, Mr. Vanderbeck served as a
Section Leader in the 2nd Ranger Battalion, a U.S. Army Special Operations
unit. Mr. Vanderbeck is a regional finalist for the Ernst & Young Entrepreneur
of the Year award and is a Microsoft Certified Systems Engineer.

Michelle R. Chambers, a co-founder of our company, has served as President
and a director since our inception and was appointed Chief Operating Officer in
April 1998. Before founding Data Return, from October 1996 to March 1997, Ms.
Chambers was a Consultant at Microsoft, where she was a member of the Microsoft
Consulting team responsible for the design and development of the migration
plan for Audionet's (now broadcast.com) platform conversion from Unix to
Windows NT. Prior thereto, Ms. Chambers served as a product support engineer at
Microsoft from February 1995 to October 1996, and was the Corporate E-mail
Coordinator for Arco Exploration and Production Technology from August 1993 to
February 1995. Ms. Chambers is a Microsoft Certified Systems Engineer. Ms.
Chambers graduated magna cum laude from the University of North Texas with a
Bachelor in Business Administration in Business Computer Information Systems.

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Michael S. Shiff has served as Senior Vice President - Marketing, Sales and
Business Development since June 1999 and previously served as Vice President -
Marketing, Sales and Business Development since March 1998. Mr. Shiff served as
President of MicroVision Medical Systems, a manufacturer of medical imaging
systems, from April 1996 to December 1996. From April 1993 to November 1995,
Mr. Shiff was Vice President of Sales for Kodak Health Imaging Systems, a
manufacturer of medical imaging systems. He also served as Vice President of
Marketing and Sales for Vortech Data, a manufacturer of medical imaging
systems, from March 1989 until Vortech's acquisition by Eastman Kodak in March
1993. Prior thereto, Mr. Shiff was Director of Strategic Sales Development for
Hughes Network Systems, a manufacturer of telecommunications systems, and was
Domestic Marketing Manager for the Satellite Communications Group of M/A-COM
Telecommunications, a manufacturer of telecommunications systems, which was
acquired by Hughes Aircraft. Mr. Shiff graduated with distinction from the
University of Wisconsin with a Bachelor of Science in Education.

Mark A. Bowles has served as Vice President - Advanced Technology Deployment
since June 1999. For the period from March 1998 to May 1999, Mr. Bowles served
as our Director of Service and Support and Executive Director of Technical
Services. Prior to joining Data Return, from February 1997 to March 1998, Mr.
Bowles was a manager of the Advanced Technologies Group at Arthur Andersen LLP,
a public accounting firm. Mr. Bowles also served as a Project Manager at
Interface Teknologies, a systems integration firm, from April 1995 through
February 1997. Mr. Bowles graduated from the University of Texas at Arlington
with a Bachelor of Business Administration.

Scott W. Brewer has served as Vice President - Technical Services since June
1999. Before joining Data Return, Mr. Brewer was with CompuCom Systems, a
technology services company, where he served as Director, Professional Services
from October 1998 to April 1999, General Manager of Houston Sales from May 1998
through October 1998, and Manager, Technical Services, Dallas Sales from
October 1997 through May 1998. Mr. Brewer also served as Manager, Systems
Engineering, Dallas Sales from April 1996 to October 1997 and Consulting
Systems Engineer, Dallas Sales from January 1991 to April 1996 at CompuCom
Systems.

Kenneth S. Garber has served as Vice President - Sales since June 1999. From
March 1996 to May 1999, Mr. Garber was Vice President of Sales and Business
Development for Chroma Vision Medical Systems, Inc., a manufacturer of medical
imaging systems. Prior to that, Mr. Garber served as Vice President and General
Manager of the Imagelink Business Unit for Kodak Health Imaging Systems from
1994 to March 1996. Previously, Mr. Garber held various marketing and sales
positions with Vortech Data, Hughes Network Systems, Satellite Business Systems
and Federal Data Corporation. Mr. Garber graduated from George Washington
University with a Bachelor of Science in Environmental Science.

Jason A. Lochhead, a co-founder of our company, has served as Vice President
- - Research and Product Development and as a director since our inception. From
September 1996 until August 1997, Mr. Lochhead was an independent consultant.
Previously, from September 1995 to September 1996, while employed by Software
Spectrum, Mr. Lochhead served as an independent consultant to Microsoft where
he served as a product support engineer for Microsoft Mail and Microsoft
Exchange. While at Software Spectrum, Mr. Lochhead also served as the Microsoft
Mail Gateway team lead for the period from March 1996 to September 1996. From
July 1993 to September 1995, Mr. Lochhead was a System Administrator at Hughes
Training, a division of Hughes Aircraft. Mr. Lochhead is a Microsoft Certified
Systems Engineer.

J. Todd Steitle has served as Vice President - Marketing since June 1999.
Previously, he served as our Director of Marketing from May 1998 to June 1999.
Before joining Data Return, Mr. Steitle was a sales representative for the
Tools Division of Sybase Corporation, formerly Powersoft Corporation, a
software company, from May 1996 to May 1998. From September 1994 to May 1996,
Mr. Steitle served as Manager of Business Development for Kodak Health Imaging
Systems. Previously, Mr. Steitle held various marketing and sales positions for
Apple Computer Corporation. Mr. Steitle graduated from the University of Texas
in Austin with a Bachelor of Business Administration in Marketing.

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<PAGE>

Stuart A. Walker has served as our Chief Financial Officer since March 1999
and as Vice President - Chief Financial Officer, Treasurer and Secretary since
June 1999. Prior to joining Data Return, Mr. Walker was a consultant with
Eubank, Wofford and Nichols, LLP, a public accounting firm, from June 1998. Mr.
Walker served as Vice President and Chief Financial Officer of Aviation Group,
Inc., an aviation services company, from September 1997 to April 1998. He
served as Corporate Controller of Precept Business Products, Inc., a business
products distribution company, from August 1996 to August 1997. He was Vice
President Finance and Controller of DirectNet Corporation, an educational
technology company, from March 1995 to August 1996. Mr. Walker served in
various capacities at Price Waterhouse LLP in the audit, bankruptcy, consulting
and litigation support areas from September 1988 to March 1995. Mr. Walker is a
Certified Public Accountant and graduate from California Polytechnic State
University, San Luis Obispo with a Bachelor of Science in Business
Administration.

Nathan Landow has served as one of our directors since April 1998. Mr. Landow
has been President of Landow Company, a real estate development company, since
1959.

T. Geir Ramleth has agreed to serve as a director of our company upon
completion of this offering. Mr. Ramleth is currently a private investor.
Mr. Ramleth served as the Chief Executive Officer and a director of ZeroDotNet,
Inc., a private equity firm, from April 1999 to August 1999. Mr. Ramleth was
the President and Chief Executive Officer of Genuity, Inc., an Internet service
provider, from December 1995 to November 1998. Prior to that, Mr. Ramleth was
the Manager of Commercial Systems at Bechtel Group, Inc., an engineering firm,
from February 1995 to December 1995, where he was responsible for consolidating
all commercial systems activities. From February 1993 to February 1995, Mr.
Ramleth was the Practice Director at Oracle Corporation, a software company.
Since January 1998, Mr. Ramleth has served as director at UWI.com.

Director Compensation

Our directors receive no remuneration for serving on our board of directors.

Board Composition

We currently have five authorized directors. In accordance with the terms of
our restated articles of incorporation, the terms of office of the directors
are divided into three classes:

. Class I, whose term will expire at the annual meeting of shareholders to
be held in 2000;

. Class II, whose term will expire at the annual meeting of shareholders
to be held in 2001; and

. Class III, whose term will expire at the annual meeting of shareholders
to be held in 2002.

Currently, the Class I directors are Jason A. Lochhead and Nathan Landow, the
Class II director is Michelle R. Chambers and the Class III director is Sunny
C. Vanderbeck. T. Geir Ramleth will serve as a Class II director upon
completion of this offering. As part of an agreement with Level 3, they are
entitled to nominate one of their employees to serve on our board of directors.
Mr. Vanderbeck, Ms. Chambers and Mr. Lochhead have agreed to vote for Level 3's
nominee. This agreement terminates upon a public offering of our common stock.
Level 3 has not exercised its right to nominate a person to serve on our board
of directors. At each annual meeting of shareholders after the initial
classification or special meeting in lieu thereof, the successors to directors
whose terms will then expire will be elected to serve from the time of election
and qualification until the third annual meeting following election or special
meeting held in lieu thereof. The authorized number of directors may be changed
only by resolution of the board of directors or a super-majority vote of the
shareholders. Any additional directorships resulting from an increase in the
number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one third of the directors. This
classification of the board of directors may have the effect of delaying or
preventing changes in control or management of Data Return.

50
<PAGE>

Board Committees

Within 90 days of the closing of this offering, the board will create an
audit committee that will consist of two independent directors and Ms.
Chambers. The audit committee will review, act on and report to the board of
directors on various auditing and accounting matters, including the
recommendation of our independent auditors, the scope of the annual audits,
fees to be paid to the independent auditors, the performance of our independent
auditors and our accounting practices.

Within 90 days of the closing of this offering, the board will create a
compensation committee that will consist of two independent directors and Ms.
Chambers. The compensation committee will determine the salaries and benefits
for our employees, consultants, directors and other individuals compensated by
our company. The compensation committee will also administer our stock option
plans, including determining the stock option grants for our employees,
consultants, directors and other individuals.

Summary Compensation Table

The following table sets forth the total compensation of our Chief Executive
Officer and each other executive officer whose total salary and bonus for
fiscal 1999 exceeded $100,000 (each a named executive officer, and
collectively, the named executive officers).

<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
--------------------------- ------------
Other Shares
Fiscal Annual Underlying
Name and Principal Position Year Salary Bonus Compensation Options
- --------------------------- ------ ------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sunny C. Vanderbeck............ 1999 $95,000 $5,000 -- --
Chairman and Chief Executive
Officer

Michelle R. Chambers........... 1999 95,000 5,000 -- --
President and Chief Operating
Officer

Michael S. Shiff............... 1999 150,000 8,610 $40,000(1) 3,308,700
Senior Vice President -
Marketing, Sales and
Business Development
</TABLE>
- --------
(1) Other annual compensation for Mr. Shiff consists of deferred salary.

Fiscal 1999 Exercises and Year-End Option Values

The following table sets forth information concerning the value realized upon
exercise of options during fiscal 1999 and the number and value of unexercised
options held by each of the named executive officers at March 31, 1999. The
values set forth in the table have been calculated assuming an initial public
offering price of $12.00 per share, less the per share exercise price,
multiplied by the number of shares underlying the option.

<TABLE>
<CAPTION>
Value of Unexercised
Number of In-the-Money
Shares Unexercised Options Options at
Acquired at March 31, 1999 March 31, 1999
on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sunny C. Vanderbeck..... -- -- -- -- -- --
Michelle R. Chambers.... -- -- -- -- -- --
Michael S. Shiff........ -- -- 827,175 2,481,525 $9,908,000 $29,725,000
</TABLE>

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<PAGE>

Stock Option Plans

1998 Stock Option Plan. Our 1998 Stock Option Plan authorizes the issuance of
up to 3,308,700 shares of our common stock. As of September 1, 1999, we had
granted options to purchase an aggregate of 3,223,696 shares of our common
stock to employees and directors under this plan with a weighted average
exercise price of $0.56 per share. After the completion of this offering, no
further options will be granted under this plan.

The board of directors, or a board committee, has the power to determine the
terms of the options, including the exercise price of the options, the number
of shares subject to each option, the exercisability thereof, and the form of
consideration payable on such exercise, provided that the exercise price must
be at least 100% of fair market value. Incentive stock options granted to any
holder of 10% or more of the combined voting power of all classes of stock must
have an exercise price of not less than 110% of fair market value and be
exercisable for a term of no more than five years.

1999 Long-Term Incentive Plan. Our 1999 Long-Term Incentive Plan was adopted
by our board of directors and shareholders and became effective in July 1999 as
a successor plan to our 1998 Plan. Up to 3,228,000 shares of common stock may
be issued under the 1999 Plan.

The 1999 Plan provides for the discretionary grant of incentive stock
options, within the meaning of Section 422 of the Internal Revenue Code of
1986, to employees and for the grant of nonstatutory stock options, stock
appreciation rights, performance awards, dividend equivalents, stock payments
and restricted stock to employees and consultants. The 1999 Plan provides that
we cannot issue incentive stock options after June 2009.

The 1999 Plan may be administered by the board or a board committee. The
administrator has the power to determine the terms of the options or other
awards granted, including the exercise price of the options or other awards,
the number of shares subject to each option or other award (up to 269,000
shares per year per participant), the exercisability thereof and the form of
consideration payable upon exercise. In addition, the administrator has the
authority to amend, suspend or terminate the 1999 Plan, provided that no such
action may affect any share of common stock previously issued and sold or any
option previously granted under the 1999 Plan without the consent of the
holder.

The exercise price of all incentive stock options granted under the 1999 Plan
must be at least equal to the fair market value of the common stock on the date
of grant. The exercise price of nonstatutory stock options and other awards
granted under the 1999 Plan is determined by the administrator, but the
exercise price of nonstatutory stock options must be at least 50% of the fair
market value of the common stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of our outstanding capital stock, the exercise price of any incentive
stock option granted must be at least equal to 110% of the fair market value on
the grant date and the term of such incentive stock option must not exceed five
years. The term of all other options granted under the 1999 Plan may not exceed
ten years.

Options and other awards granted under the 1999 Plan are generally not
transferable by the optionee. Options granted under the 1999 Plan must
generally be exercised within three months after the end of the optionee's
status as an employee, director or consultant, or within one year after such
optionee's termination by disability or death, respectively, but in no event
later than the expiration of the option's term.

The 1999 Plan provides that in the event of a change of control of Data
Return all options and other awards shall be assumed or a substitute option or
award issued by the acquiring company unless the board determines in its sole
discretion to accelerate vesting or remove any restrictions.

Compensation Committee Interlocks and Insider Participation

We currently have no separate compensation or stock option committee or other
board committee performing equivalent functions to determine compensation for
executive officers. These functions are

52
<PAGE>

performed by our board of directors, which includes Mr. Vanderbeck and Ms.
Chambers. Within 90 days after we complete this offering, we intend to
establish a compensation committee that will be composed of Ms. Chambers and
two independent directors. No interlocking relationship exists between any
member of our board or our compensation committee and any member of the board
of directors or compensation committee of any other company, and no such
interlocking relationship has existed in the past.

Employment Agreements

Mr. Vanderbeck, Ms. Chambers, Mr. Bowles, Mr. Brewer, Mr. Lochhead and Mr.
Walker have employment agreements expiring on June 30, 2002. These agreements
provide for:

. set base salaries; and

. incentive bonuses determined by the compensation committee or board of
directors.

Each of these executives has agreed not to compete with us during the term of
the agreement and for two years after resignation or termination for cause or
for one year after a termination without cause or any resignation or
termination following a change of control. The employment agreements define
"cause" as an employee committing an immoral crime, materially breaching the
employment agreement or failing to obey written directions of a senior
corporate executive. A "change of control" will be deemed to occur if a
substantial portion of our ownership changes or the constitution of the board
changes during any 15-month period without the approval of our board of
directors or shareholders. If there has not been a change in control, the
agreements provide for the payment of salary for 12 months after any
termination by Data Return other than for cause. Further, if the termination
follows a change of control and is not voluntary, it will be made in a lump sum
equal to the following items, or in the case of Mr. Vanderbeck and Mr. Chambers
three times the following items:

. the highest annualized base salary earned during the employee's
employment with us;

. two times the employee's largest bonus during the last two years;

. any unpaid expense, reimbursement or accrued but unpaid salary or
benefit; and

. the estimated cost of insurance coverage for the next 12 months.

If the termination is following a change of control and is voluntary, the base
salary component of these severance payments will, in the case of Mr.
Vanderbeck, Ms. Chambers and Mr. Walker, equal 75% and, in the case of Mr.
Bowles, Mr. Brewer and Mr. Lochhead equal 25%, of the highest annualized base
salary earned during the employee's employment with us.

In addition, upon a change of control, all outstanding options of Mr.
Vanderbeck, Ms. Chambers and Mr. Walker will vest. That number of the
outstanding options of Mr. Bowles, Mr. Brewer and Mr. Lochhead that would have
vested upon their next annual vesting date will immediately vest upon a change
of control, and, if they are terminated within 24 months of a change of
control, all of their options will immediately vest.

We also have employment agreements with Mr. Shiff, Mr. Garber and Mr.
Steitle. Mr. Shiff's agreement expires on December 31, 2002. His agreement
provides for a set base salary plus deferred salary and a fixed performance
bonus. Mr. Shiff's agreement provides for the payment of all accrued salary and
bonus upon his termination by Data Return. Upon a change of control or an
initial public offering, all of Mr. Shiff's outstanding options will vest
immediately. Mr. Shiff has agreed not to compete with us during the term of his
agreement and for one year after his termination.

Mr. Garber's agreement expires on March 31, 2004. His agreement provides for
a set base salary plus commissions. Upon a termination of his employment by
Data Return without cause, Mr. Garber is entitled to the payment of salary for
12 months and the right to participate in benefit plans and exercise his
outstanding

53
<PAGE>

options for 12 months. Upon a public offering or change of control, 50% of Mr.
Garber's outstanding options vest immediately and the remaining 50% vest one
year later. If Mr. Garber is terminated following a change of control, he is
entitled to 12 months of salary and all of his outstanding options immediately
vest. Mr Garber has agreed not to compete with us during the term of the
agreement and for one year after resignation or termination for cause.

Mr. Steitle's agreement expired on May 3, 1999 and was automatically renewed
for a one year period. His agreement will continue to be renewed automatically
for one year periods unless terminated by either party upon notice at least 15
days prior to a renewal date. Mr. Steitle is entitled to a set base salary.
Upon termination other than for cause, Mr. Steitle is entitled to his accrued
salary. Upon a change of control, or upon an initial public offering or if Mr.
Vanderbeck and Ms. Chambers cease to be executive officers, all of Mr.
Steitle's options immediately vest. Mr. Steitle has agreed not to compete with
us during the term of his agreement and for one year after his agreement.

54
<PAGE>

PRINCIPAL SHAREHOLDERS

The following table sets forth information regarding the beneficial ownership
of our common stock as of September 1, 1999, based on 27,755,958 shares
outstanding on that date, and as adjusted to reflect the issuance of additional
shares of common stock in this offering, by the following individuals or
groups:

. each person or entity who is known by us to own beneficially more than
5% of our common stock;

. each director;

. each named executive officer; and

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

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In general, a person who has voting power
and/or investment power with respect to securities is treated as a beneficial
owner of those securities. Shares subject to options, warrants or rights
currently exercisable or exercisable within 60 days of the date of this
prospectus are considered beneficially owned by the person holding such
options, warrants or rights. Unless indicated otherwise, we believe that the
persons named in the table below have sole voting and investment power with
respect to the shares shown.

Unless otherwise indicated, the address for each 5% shareholder listed in the
table is c/o Data Return Corporation, 222 West Las Colinas Boulevard, Suite
450, Irving, Texas 75039. Except as otherwise indicated, and subject to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock held by
them.

To the extent that any shares are issued upon exercise of options or other
rights to acquire capital stock that are presently outstanding or granted in
the future or reserved for future issuance under stock plans, there will be
further dilution to new public investors.
<TABLE>
<CAPTION>
Percentage of
Number of Ownership
Shares -----------------
Beneficially Before After
Beneficial Owner Owned Offering Offering
- ---------------- ------------ -------- --------
<S> <C> <C> <C>
Sunny C. Vanderbeck (1)........................ 8,106,315 29.2% 23.5%
Michelle R. Chambers (2)....................... 6,562,255 23.6 19.1
Nathan Landow (3).............................. 5,135,210 18.5 14.9
Michael S. Shiff (4)........................... 827,175 2.9 8.9
Jason A. Lochhead.............................. 772,030 2.8 2.3
T. Geir Ramleth................................ 96,571 * *
Level 3 Communications, Inc. (5)............... 1,952,940 7.0 5.7
DCR Technology Fund I, Ltd (1)................. 8,106,315 29.2 23.5
OHG Technology, Ltd (2)........................ 6,562,255 23.6 19.1
Nathan Landow Family Limited Partnership (3)... 4,788,200 17.2 13.9
All directors and executive officers as a group
(10 persons)(6)............................... 21,542,148 75.3 65.4
</TABLE>
- --------
* Less than 1%.
(1) Consists of 8,106,315 shares of our common stock owned by DCR Technology
Fund I, Ltd., which is controlled by Mr. Vanderbeck.
(2) Consists of 6,562,255 shares of our common stock owned by OHG Technology,
Ltd., which is controlled by Ms. Chambers.
(3) Includes 4,788,200 shares of our common stock owned by the Nathan Landow
Family Limited Partnership, which is controlled by Mr. Landow and 347,010
shares of our common stock owned by Mr. Landow. The address for the Nathan
Landow Family Limited Partnership is 4710 Bethesda Avenue, Bethesda,
Maryland 20814.

(4) Consists of 827,175 shares of our common stock issuable pursuant to options
that are exercisable within 60 days of , 1999. Assumes beneficial
ownership after the offering of 2,481,525 shares issuable pursuant to
options that will be exercisable upon the completion of this offering.
(5) The address of Level 3 Communications, Inc. is 3555 Farnam Street, Omaha,
Nebraska 68131.

(6) Includes 887,700 shares of common stock issuable pursuant to options that
are exercisable within 60 days of September 1, 1999. Assumes beneficial
ownership after the offering of 3,611,325 shares issuable pursuant to
options that will be exercisable upon the completion of this offering.

55
<PAGE>

CERTAIN TRANSACTIONS

On February 20, 1998, we issued 2,152,000 shares of our common stock to the
Nathan Landow Family Limited Partnership in exchange for $500,000 cash and a
$500,000 promissory note that has been repaid. On December 24, 1998, we issued
2,690,000 shares of our common stock to the Nathan Landow Family Limited
Partnership for $1,000,000. On April 23, 1999, we issued 351,852 shares of our
common stock to the Nathan Landow Family Limited Partnership for $250,000. Mr.
Landow, one of our directors, controls the Nathan Landow Family Limited
Partnership.

On May 14, 1999, we issued 96,571 shares of our common stock to Mr. Ramleth,
one of our nominees for director, for $125,000.

On May 18, 1999, we issued 1,202,968 shares of our common stock to ZeroDotNet
for $2,000,000. Also, on July 26, 1999 we sold 1,171,764 shares of common stock
to ZeroDotNet, Inc. for a purchase price of $3.0 million.

On July 1, 1999, we entered into a Strategic Marketing and Sales Agreement
with Level 3 that contemplates our committing to purchase $10.0 million of
services over the next five years. As part of this agreement, we have agreed to
train Level 3 sales personnel to identify and refer potential customers to us
and to pay those sales personnel a commission on sales resulting from their
referrals. On July 26 1999, Level 3 acquired 1,952,940 shares of our common
stock in exchange for a $5.0 million credit to be applied to the purchase of
future bandwidth services. Pursuant to our Service Credit Agreement dated July
23, 1999 with Level 3, the credit can be applied to bandwidth services in
excess of the minimum purchase under the Strategic Marketing and Sales
Agreement beginning in 2001. We have a right to repurchase the stock in the
event that Level 3 fails to fulfill its obligations under the Service Credit
Agreement or Level 3 does not honor orders submitted by us under the Strategic
Marketing and Sales Agreement. The number of shares subject to this repurchase
right will be reduced pro rata in each quarter of calendar year 2001 by the
greater of the credit applied or 25% of the total shares. In the event that
Level 3 defaults under the Service Credit Agreement and fails to cure within 30
days, Level 3 is required to pay us $750,000 ratably reduced based on the
amount of bandwidth credit used. Level 3 is entitled to one demand and
unlimited "piggyback" registration rights.

Also on July 23, 1999, Data Return, Sunny C. Vanderbeck, Michelle R. Chambers
and Jason A. Lochhead entered into a Voting Agreement with Level 3. Under that
agreement, Level 3 is entitled to nominate one of its employees to serve on our
board of directors. Mr. Vanderbeck, Ms. Chambers and Mr. Lochhead have agreed
to vote for Level 3's nominee. The Voting Agreement terminates upon the
completion of a public offering of our common stock.

On July 29, 1999, we sold 1,171,764 shares of our common stock to Compaq for
an aggregate purchase price of $3.0 million. Compaq is entitled to one demand
and unlimited "piggyback" registration rights. Compaq also has a right of first
refusal that does not include this offering and that terminates upon completion
of this offering. Also on July 23, 1999, we entered into an ASP and Server
Agreement with Compaq. Under that agreement, we have agreed for a three-year
period to purchase from Compaq the lesser of 2,000 servers or the number of
servers reasonably necessary to adequately operate our business plan. Our
requirement to purchase these servers is contingent upon Compaq providing
financing for the servers on competitive terms, upon the price, performance and
quality of the Compaq servers being reasonably satisfactory to us and upon
Compaq's commitment to deliver these servers on the schedule we request. Under
the ASP and Server Agreement, Compaq has agreed to include Data Return in any
program under which it approves for recommendation to its customers a specified
group of application service providers. Although Compaq is not required to
develop such a program, it will include us in any such program that it does
establish at the highest level for which we qualify.

On September 3, 1999, we agreed to sell $5.0 million of our common stock for
a per share purchase price equal to the lesser of the midpoint of the lowest
filing range and the price to public. Microsoft will also acquire a warrant to
purchase $3.75 million of our common stock at the same per share purchase
price. Based on the

56
<PAGE>

current filing range, Microsoft would acquire 416,667 shares under the stock
purchase agreement and the warrant would entitle Microsoft to acquire an
additional 312,500 shares at an exercise price of $12.00 per share. Microsoft
is entitled to one demand and unlimited "piggyback" registration rights.
Microsoft also has a right of first refusal that does not include this offering
and that terminates upon completion of this offering. This transaction will
close the earlier of the day after the pricing of this offering and December
12, 1999. In addition, on September 3, 1999, we entered into a five-year
Development, License and Co-Marketing Agreement with Microsoft to grant a non-
exclusive perpetual license to proprietary installation tools for third-party
hosted applications to Microsoft. We will also train Microsoft's employees and
customers in the use of those tools. Microsoft has the sole right to terminate
the agreement if we fail to deliver the tools on a timely basis or if we fail
to correct any errors in the tools on a timely basis. Also as part of the
agreement, Microsoft will provide up to one hundred hours of technical
consulting and writing services during the development of the tools.

57
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The following summaries highlight the material provisions of our articles of
incorporation and bylaws, as amended. Copies of our articles and bylaws are
available from us upon request. See "Where You Can Find More Information."

Authorized Capital Stock

Our authorized capital stock consists of 100,000,000 shares of common stock,
par value $.001 per share, and 20,000,000 shares of preferred stock, par value
$.001 per share. As of September 1, 1999, there were 27,755,958 shares of
common stock issued and outstanding, and no shares of preferred stock issued
and outstanding. No holder of any shares of our stock has any preemptive or
preferential right to acquire or subscribe for any unissued shares of any class
of stock or any authorized securities convertible into or carrying any right,
option or warrant to subscribe for or acquire shares of any class of stock.

Common Stock

Each share of common stock has identical rights and privileges in every
respect. The holders of our common stock are entitled to vote upon all matters
submitted to a vote of our shareholders and are entitled to one vote for each
share of common stock held.

Subject to the prior rights and preferences, if any, applicable to shares of
preferred stock, the holders of common stock are entitled to receive such
dividends, payable in cash, stock or otherwise, as may be declared by our board
out of any funds legally available for the payment of dividends.

If we voluntarily or involuntarily liquidate, dissolve or wind-up, the
holders of common stock will be entitled to receive after distribution in full
of the preferential amounts, if any, to be distributed to the holders of
preferred stock, all of the remaining assets available for distribution ratably
in proportion to the number of shares of common stock held by them. Holders of
common stock have no preferences or any preemptive, conversion or exchange
rights.

Preferred Stock

Our board is authorized to provide for the issuance of shares of preferred
stock in one or more series, and to fix for each series voting rights, if any,
designations, preferences and relative, participating, optional or other
special rights and such qualifications, limitations or restrictions as provided
in a resolution or resolutions adopted by the board. The board may authorize
the issuance of shares of preferred stock with terms and conditions which could
discourage a takeover or other transaction that holders of some or a majority
of shares of common stock might believe to be in their best interests or in
which holders of common stock might receive a premium for their shares over the
then market price.

Warrants

Upon the earlier of the day after the pricing of this offering and December
12, 1999, we will have outstanding a warrant to purchase $3.75 million of our
common stock at a per share exercise price equal to the lesser of the midpoint
of the lowest filing range and the price to public. This warrant will expire
five years after the date of its issuance. Based on the current filing range,
this warrant would entitle Microsoft to acquire an assumed 312,500 shares at an
exercise price of $12.00 per share.

Shareholder Rights Plan

On September , 1999, our board of directors approved a rights agreement
with ChaseMellon Shareholder Services, LLC, as rights agent. This summary is
not a full description of the rights agreement or the terms of the rights. For
a more complete description, you should read the rights agreement, dated as of

58
<PAGE>

September , 1999, between Data Return and ChaseMellon Shareholder Service,
LLC.

Rights and Rights Certificates

On September , 1999, our board of directors declared a dividend of one
preferred stock purchase right for each share of common stock. Each right
entitles its registered holder to purchase one one-hundredth of a share of
newly designated series A junior participating preferred stock at a purchase
price of $ . The terms of the series A junior participating preferred stock
are contained in a statement of resolution filed with the Secretary of State of
Texas on September , 1999.

The rights are attached to and trade with shares of our common stock.
Currently, the rights are not exercisable and there are no separate
certificates representing the rights. If the rights become exercisable, we will
distribute separate rights certificates. Until that time, as long as the rights
remain outstanding, any transfer of shares of our common stock will also
constitute the transfer of the rights associated with those shares of common
stock. The rights will expire on September , 2009, unless we redeem or
exchange the rights before that date.

The rights will become exercisable upon the earlier to occur of:

. the public announcement that a person or group of persons has acquired
15% or more of our common stock, except in connection with an offer
approved by the board of directors; or

. the close of business on the tenth business day, or a later date
determined by the board of directors, after the commencement of, or
announcement of an intention to commence, a tender or exchange offer
that would result in a person or group of persons acquiring 15% or more
of our common stock.

Flip-In Right

If any person or group of persons acquires 15% or more of our common stock,
each holder of a right, except the acquiring person, will have the right to
receive the number of shares of our common stock having a market value of two
times the exercise price of the right. For example, if the rights are
triggered, each holder of a right may purchase shares of our common stock worth
$ for $ , which is the exercise price of the rights.

The rights agreement excepts Data Return, any subsidiary of Data Return, any
employee benefit plan of Data Return or any of its subsidiaries and some
principal shareholders of Data Return from triggering the flip-in rights.

Flip-Over Right

In the event the flip-in rights are triggered and we merge or engage in other
business combinations with an acquiring person or 50% or more of our
consolidated assets or earning power are sold to an acquiring person, then each
holder of a right, except the acquiring person, may purchase, upon the exercise
of each right at the exercise price, that number of shares of common stock of
the acquiring or surviving company with a market value equal to two times the
exercise price.

Exchange of Rights

After a person or group of persons acquires 15% of our common stock but
before that person or person beneficially owns 50% or more of our common stock,
we may, at our option, exchange the rights

59
<PAGE>

at an exchange ratio of one share of common stock per right, adjusted to
reflect any stock split, stock dividend or similar transaction involving either
our common stock or preferred stock. Rights held by an acquiring person are not
entitled to these exchange rights. We may only exchange rights if a majority of
the members of our board of directors authorizes the exchange.

Redemption of Rights

We may redeem the rights at any time before the earlier of the date that the
flip-in rights are triggered and the expiration of the rights. We may also
redeem the rights under some circumstances after the flip-in right has been
triggered but before the expiration of any period during which the flip-in
right may be exercised.

The redemption price is $.001 per right. Upon the effective date of the
redemption of the rights, the rights will terminate and rights holders will
only be entitled to receive the redemption price. We may only redeem rights if
a majority of the members of our board of directors authorizes the redemption.

Amendment of Rights Agreement

Our board of directors may amend the terms of the rights agreement without
the consent of the holders of the rights, except that after a person or group
acquires 15% or more of our common stock, no amendment may adversely affect the
interests of the holders of the rights, other than the acquiring person.

Adjustments

If, at any time before the rights are triggered, we split, subdivide, combine
or consolidate our common stock, or declare a dividend on our common stock
payable in common stock, then, to prevent dilution of the rights, we will
adjust either:

. the number of rights associated with each share of common stock
outstanding; or

. the fraction of a share of preferred stock issuable upon exercise of
each right.

In addition, the purchase price payable and the number of shares of preferred
stock or other securities issuable upon exercise of the rights may be adjusted
to prevent dilution upon:

. stock splits, stock dividends, subdivisions, combinations or
reclassifications of the preferred stock;

. below market issuances of preferred stock or rights or warrants to
subscribe for or convert into preferred stock; or

. distributions to holders of the preferred stock of evidence of
indebtedness or assets (excluding regular quarterly cash dividends or
dividends payable in preferred stock) or of subscription rights or
warrants, with some exceptions.

The series A junior participating preferred stock has been structured so that
each preferred share has dividend, liquidation and voting rights equal to those
of 100 shares of our common stock. Because of this, the value of the one one-
hundredth interest in a preferred share purchasable upon exercise of each right
should approximate the value of one share of common stock. The preferred shares
are not redeemable.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, LLC.

60
<PAGE>

Anti-Takeover Effects of Provisions of our Articles of Incorporation and Texas
Law

Restated Articles of Incorporation and Bylaws

Pursuant to our articles, the board may issue additional shares of common
stock or establish one or more series of preferred stock having the number of
shares, designations, relative voting rights, dividend rates,
liquidation and other rights, preferences and limitations that the board may
decide without shareholder approval. Any additional issuance of common stock or
designation of rights, preferences, privileges and limitations with respect to
preferred stock could have the effect of impeding or discouraging the
acquisition of control of Data Return by means of a merger, tender offer, proxy
contest or otherwise (including a transaction in which the shareholders would
receive a premium over the market price for their shares) and thereby protects
the continuity of our management. Specifically, if in the due exercise of its
fiduciary obligations, the board were to determine that a takeover proposal was
not in our best interest, shares could be issued by the board without
shareholder approval in one or more transactions that might prevent or render
more difficult or costly the completion of the takeover by:

. diluting the voting or other rights of the proposed acquiror or
insurgent shareholder group;

. putting a substantial voting block in institutional or other hands that
might undertake to support the incumbent board; or

. effecting an acquisition that might complicate or preclude the takeover.

Our bylaws provide that the board is divided into three classes of one or two
directors each, with each class elected for three-year terms expiring in
successive years. Our articles also allow the board to set the number of
directors in the bylaws with no minimum or maximum number of directors
required. The articles specifically deny cumulative voting in the election of
directors. This could delay or prevent a tender offer or takeover attempt that
a shareholder might consider to be in his or her best interest, including
attempts that might result in a premium over the market price for the shares
held by the shareholders.

Our articles and bylaws provide that special meetings of shareholders
generally can be called only by the president or the board or by holders of at
least 50% of our voting stock and provide for an advance notice procedure for
the nomination, other than by or at the direction of the board or a committee
of the board, of candidates for election as directors as well as for other
shareholder proposals to be considered at annual meetings of shareholders. In
general, we must receive notice of intent to nominate a director or make a
proposal at such meetings no less than 90 days before the meeting. The notice
must contain certain information concerning the person to be nominated or the
matters to be brought before the meeting and concerning the shareholder
submitting the proposal. These provisions of the bylaws:

. may preclude a nomination for the election of directors or preclude the
conduct of business at a particular meeting if the proper procedures are
not followed; and

. may discourage or deter a third party from conducting a solicitation of
proxies to elect its own directors or otherwise attempting to obtain
control of Data Return, even if the conduct of such solicitation or
attempt might be beneficial to us and our shareholders.

Texas Takeover Statute

Subsequent to this offering, we will be subject to Part Thirteen of the Texas
Business Corporation Act. Subject to certain exceptions, Part Thirteen
prohibits a Texas corporation which is an issuing public corporation from
engaging in any business combination with any affiliated shareholder for a
period of three years following the date that such shareholder became an
affiliated shareholder, unless:

. prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
shareholder becoming an affiliated shareholder; or

61
<PAGE>

. the business combination is approved by at least two-thirds of the
outstanding voting shares that are not beneficially owned by the
affiliated shareholder or an affiliate or associate of the affiliated
shareholder at a meeting of shareholders called not less than six months
after the affiliated shareholder's share acquisition date.

In general, Part Thirteen defines an affiliated shareholder as any entity or
person beneficially owning 20% or more of the outstanding voting stock of the
issuing public corporation and any entity or person affiliated with or
controlling or controlled by such entity or person. Part Thirteen defines a
business combination to include, among other similar types of transactions, any
merger, share exchange or conversion of an issuing public corporation involving
an affiliated shareholder.

Part Thirteen may have the effect of inhibiting a non-negotiated merger or
other business combination involving Data Return.

62
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common stock.
We cannot predict what effect, if any, market sales of shares or the
availability of shares for sale will have on the market price of our common
stock prevailing from time to time. Nevertheless, sales of substantial amounts
of common stock in the public market, or the perception that such sales could
occur, could adversely affect the market price of the common stock and could
impair our future ability to raise capital through the sale of our equity
securities. Upon the closing of this offering, we will have a total of
34,422,625 shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option and no exercise of any other stock options.
Of the outstanding 34,422,625 shares, the 6,250,000 shares being sold in this
offering will be freely tradable, except that any shares held by our
"affiliates" may only be sold in compliance with the limitations described
below. The remaining 28,172,625 shares of common stock will be "restricted
securities" that may be sold in the public market only if they are registered
under the Securities Act or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act. Subject to
the lock-up agreements described below and the provisions of Rules 144, 144(k)
and 701, additional shares will become available for sale in the public market
as follows:

<TABLE>
<S> <C>
Number of Shares Date
---------------- ----
Upon the date of this prospectus. These
shares are eligible for resale under Rule
144(k) and are not subject to lock-up
-- agreements.

After 90 days from the date of this
prospectus. These additional shares are
eligible for resale under Rules 144 and 701
-- and are not subject to lock-up agreements.

After 180 days from the date of this
prospectus. These additional shares are
eligible for resale under Rules 144 and 701
20,551,600 upon release of lock-up agreements.
</TABLE>

Rule 144

In general, under Rule 144, a person, or persons whose shares are required to
be aggregated, including an affiliate, who has beneficially owned shares for at
least one year is entitled to sell, within any three-month period commencing 90
days after the date of this prospectus, a number of shares that does not exceed
the greater of (i) 1% of the then-outstanding shares of common stock, which
will be approximately 344,227 shares immediately after this offering, or (ii)
the average weekly trading volume of the common stock during the four calendar
weeks preceding the date on which notice of that sale is filed.

Rule 144(k)

Under Rule 144(k), a person who is not considered an affiliate at any time
during the 90 days preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years is entitled to sell such shares
under Rule 144(k) without regard to the volume limitations described above.

Stock Options

Following the closing of this offering, we intend to file a registration
statement to register for resale the shares of common stock available for
issuance under our stock option plans. Accordingly, shares issued under those
plans will become eligible for resale in the public market from time to time,
subject to the lock-up agreements described below and, in the case of
affiliates, the volume limitations of Rule 144 described above.
As of the date of this prospectus, options to purchase a total of 6,532,396
shares of common stock are outstanding under our stock option plans.

63
<PAGE>

Lock-Up Agreements

Directors, officers and shareholders holding an aggregate of 28,172,625
shares of common stock have agreed that they will not sell, directly or
indirectly, or otherwise dispose of any shares of common stock without the
prior written consent of Bear, Stearns & Co. Inc. for a period of 180 days
after the date of this prospectus. Please refer to our discussion in
"Underwriting" for further discussion of these agreements. We have agreed not
to sell, directly or indirectly, or otherwise dispose of any shares of common
stock during the 180-day period following the date of this prospectus, other
than the grant of options under our stock option plans and the issuance of
common stock pursuant thereto, provided the holders of such shares or options
agree to the 180-day lock-up agreement.

64
<PAGE>

UNDERWRITING

Subject to the terms and conditions of the underwriting agreement between us
and the underwriters named below, who are represented by Bear, Stearns & Co.
Inc., CIBC World Markets Corp., Thomas Weisel Partners LLC and Wit Capital
Corporation, the underwriters have severally agreed to purchase from us the
following respective numbers of shares of common stock at the public offering
price less the underwriting discounts and commissions set forth on the cover of
this prospectus.

<TABLE>
<CAPTION>
Number of
Underwriter: Shares
------------ ---------
<S> <C>
Bear, Stearns & Co. Inc. ........................................
CIBC World Markets Corp..........................................
Thomas Weisel Partners LLC.......................................
Wit Capital Corporation..........................................
---------
Total.......................................................... 6,250,000
=========
</TABLE>

The underwriting agreement provides that the obligations of the underwriters
to purchase and accept delivery of the shares included in this offering are
subject to approval of legal matters by their counsel and to customary
conditions, including the effectiveness of the registration statement, the
continuing correctness of our representations to them, the receipt of a
"comfort letter" from our accountants, the listing of the common stock on the
Nasdaq National Market and no occurrence of an event that would have a material
adverse effect on our business. The underwriters are obligated to purchase and
accept delivery of all the shares, other than those covered by the over-
allotment option described below, if they purchase any of the shares.

We have granted to the underwriters an option, exercisable for 30 days from
the date of the underwriting agreement, to purchase up to 937,500 additional
shares at the public offering price less the underwriting fees. The
underwriters may exercise the over-allotment option solely to cover over-
allotments, if any, made in connection with this offering. To the extent that
the underwriters exercise the over-allotment option, each underwriter will
become obligated, subject to conditions, to purchase a number of additional
shares approximately proportionate to that underwriter's initial purchase
commitment.

The underwriters propose to initially offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to dealers at the public offering price less
a concession not in excess of $ per share. The underwriters may allow, and
the dealers may re-allow, a concession not in excess of $ per share on sales
to other dealers. After the initial offering of the shares to the public, the
representatives of the underwriters may change the public offering price and
the amount of the concessions.

The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. The underwriting fee is
equal to the public offering price per share of common stock, less the amount
paid by the underwriters to us per share of common stock. The underwriting fee
will be approximately percent of the public offering price. The underwriting
fee amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares of the common stock.

65
<PAGE>

<TABLE>
<CAPTION>
No
Underwriting Fees Exercise Full Exercise
----------------- -------- -------------
<S> <C> <C>
Per share......................................... $ $
Total............................................. $ $
</TABLE>

We estimate that the expenses of this offering, excluding underwriting fees,
will be as indicated in the table below.

<TABLE>
<S> <C>
Registration Fee-Securities and Exchange Commission........... $ 23,977.50
NASD Filing Fee............................................... 9,125.00
Nasdaq National Market listing fee............................ 90,000.00
Blue Sky fees and expenses.................................... 10,000.00
Accountants' fees and expenses................................ 200,000.00
Legal fees and expenses....................................... 200,000.00
Printing and engraving expenses............................... 300,000.00
Transfer agent and registrar fees............................. 30,000.00
Miscellaneous................................................. 136,897.50
-------------
Total......................................................... $1,000,000.00
=============
</TABLE>

In order to facilitate the offering of the common stock, the underwriters may
engage in transactions that stabilize, maintain or otherwise affect the market
price of the common stock. Specifically, the underwriters may over-allot shares
of the common stock in connection with this offering, thereby creating a short
position in the common stock for their own account. Additionally, to cover
these over-allotments or to stabilize the market price of the common stock, the
underwriters may bid for, and purchase, shares of the common stock in the open
market. Finally, the representatives, on behalf of the underwriters, also may
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of our common
stock at a level above that which might otherwise prevail in the open market.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.

At our request, the underwriters have reserved for sale at the initial public
offering price up to of the shares, or percent, of our common stock
to be sold in this offering for sale to our employees and directors, friends
and family of our directors, officers and employees and some persons affiliated
with our vendors and service providers. The number of shares available for sale
to the general public will be reduced to the extent that any reserved shares
are purchased. Any reserved shares not purchased will be offered by the
underwriters on the same basis as the other shares offered hereby.

Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has been named as a lead or co-manager on
66 filed public offerings of equity securities, of which 35 have been
completed, and has acted as a syndicate member in an additional 32 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us pursuant to the underwriting agreement entered into in connection with this
offering.

A prospectus in electronic format is being made available on a web site
maintained by Wit Capital Corporation. Purchases of shares from Wit Capital are
to be made through an account at Wit Capital in accordance with Wit Capital's
procedure for purchasing new issues. In addition, pursuant to an e-Dealer
Agreement, all registered broker-dealers purchasing shares from Wit Capital in
the offering, the e-Dealers, similarly have agreed to make a prospectus in
electronic format available on the web sites that they maintain and to resell
the shares in compliance with procedures required by Wit Capital. Other than
the prospectus in electronic format, any information on those web sites that is
not part of this prospectus or the registration

66
<PAGE>

statement of which this prospectus forms a part, has not been approved or
endorsed by Data Return or any underwriter and should not be relied on by
prospective investors.

Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in the offering as one of the underwriters. The National
Association of Securities Dealers, Inc. approved the membership of Wit Capital
on September 4, 1997. Since that time, Wit Capital has acted as an underwriter,
e-manager or selected dealer in over 130 public offerings. Except for its
participation as a manager in this offering, Wit Capital has no relationship
with Data Return or any of its founders or significant shareholders.

We have agreed to indemnify the underwriters against liabilities specified in
the underwriting agreement, including civil liabilities under the Securities
Act and liabilities arising from breaches of representations and warranties
contained in the underwriting agreement. These indemnity provisions as they
relate to liabilities under the Securities Act may not be enforced by a court
in some circumstances due to public policy concerns.

The representatives of the underwriters have advised us that the underwriters
do not intend to confirm sales to any account over which they exercise
discretionary authority.

We have applied to list our common stock on the Nasdaq National Market under
the symbol "DRTN."

Data Return and our directors, officers and substantially all of our current
shareholders have agreed that we, and they, respectively, will not sell,
directly or indirectly, or otherwise dispose of any shares of common stock
without the prior written consent of Bear, Stearns & Co. Inc. for a period of
180 days from the date of this prospectus. However, Bear, Stearns & Co. Inc.
may, in its sole discretion and at any time or from time to time, without
notice to our shareholders or Nasdaq, release all or any portion of the shares
subject to lock-up agreements. We have agreed that for a period of 180 days
after the date of this prospectus we will not, without the prior written
consent of Bear, Stearns & Co. Inc., sell or otherwise dispose of any shares of
common stock.

Prior to this offering, there has been no public market for our common stock.
Consequently, the initial public offering price for our common stock will be
determined by negotiation among Data Return and the representatives of the
underwriters. The material factors to be considered in determining the public
offering price will be:

. prevailing market conditions;

. our results of operations in recent periods;

. the present stage of our development;

. the market capitalizations and stages of development of generally
comparably companies; and

. estimates of our business potential.

CIBC World Markets Corp. acted as the placement agent for the sale of shares
of Data Return's common stock in May and July 1999. In compensation for its
services, CIBC World Markets Corp. received a fee. In addition, individuals
affiliated with CIBC World Markets Corp. purchased shares of common stock on
terms substantially similar to the terms under which other investors purchased
shares of common stock at approximately the same time.

LEGAL MATTERS

The validity of the shares of common stock offered hereby will be passed upon
for Data Return by Thompson & Knight L.L.P., Fort Worth, Texas. Pillsbury
Madison & Sutro LLP, Palo Alto, California, is acting as counsel for the
underwriters in connection with various legal matters relating to the shares of
common stock offered by this prospectus.

67
<PAGE>

EXPERTS

Ernst & Young LLP, independent auditors, have audited our financial
statements at March 31, 1998 and 1999 and for the period from September 22,
1997 (inception) through March 31, 1998 and for fiscal 1999 as set forth in
their report. We have included our financial statements in this prospectus in
reliance on Ernst & Young LLP's report given on their authority as experts in
auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1, including
exhibits, schedules and amendments, under the Securities Act with respect to
the shares of common stock to be sold in this offering. This prospectus does
not contain all the information set forth in the registration statement. For
further information with respect to us and the shares of common stock to be
sold in this offering, reference is made to the registration statement.
Statements contained in this prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. In each
instance reference is made to the copy of that contract, agreement or other
document filed as an exhibit to the registration statement.

You may read and copy all or any portion of the registration statement or any
other information Data Return files at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these
documents, upon payment of a duplicating fee, by writing to the SEC. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
public reference rooms. Our SEC filings, including the registration statement,
are also available to you on the SEC's web site, which may be found at
http://www.sec.gov.

As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act, and, in accordance with
those requirements, will file periodic reports, proxy statements and other
information with the SEC.

This prospectus is part of the registration statement and does not contain
all of the information included in the registration statement. Whenever a
reference is made in this prospectus to any contract or other document of ours,
the reference may not be complete, and you should refer to the exhibits that
are a part of the registration statement for a copy of the contract or
document.

68
<PAGE>

DATA RETURN CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................ F-2

Balance Sheets as of March 31, 1998 and 1999 and June 30, 1999
(unaudited).............................................................. F-3

Statements of Operations for the period from September 22, 1997
(inception) to March 31, 1998, the Year Ended March 31, 1999 and the
Three Months Ended June 30, 1998 and 1999 (unaudited).................... F-4

Statements of Changes in Shareholders' Equity for the period from
September 22, 1997 (inception)
to March 31, 1998, the Year Ended March 31, 1999 and the Three Months
Ended June 30, 1999 (unaudited).......................................... F-5

Statements of Cash Flows for the period from September 22, 1997
(inception) to March 31, 1998,
the Year Ended March 31, 1999 and the Three Months Ended June 30, 1998
and 1999 (unaudited)..................................................... F-6

Notes to Financial Statements............................................. F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Data Return Corporation

We have audited the accompanying balance sheets of Data Return Corporation as
of March 31, 1998 and 1999, and the related statements of operations, changes
in shareholders' equity and cash flows for the period from September 22, 1997
(inception) to March 31, 1998 and the year ended March 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Data Return Corporation at
March 31, 1998 and 1999, and the results of its operations and its cash flows
from September 22, 1997 (inception) to March 31, 1998 and the year ended March
31, 1999 in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

Dallas, Texas
May 18, 1999, except for Note 9,

as to which the date is September 10, 1999

F-2
<PAGE>

DATA RETURN CORPORATION

BALANCE SHEETS

<TABLE>
<CAPTION>
March 31,
------------------------ June 30,
1998 1999 1999
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash.................................. $ 473,800 $ 842,800 $ 3,115,700
Restricted cash....................... -- 125,000 125,000
Accounts receivable, net of allowance
for doubtful accounts of $6,800 and
$20,100 at March 31, 1998 and 1999,
respectively and $69,600 at June 30,
1999................................. 91,100 368,400 796,500
Prepaid and other..................... 24,800 28,200 101,100
----------- ----------- -----------
Total current assets.................... 589,700 1,364,400 4,138,300
Property and equipment, net............. 141,400 826,000 1,433,100
Other assets............................ 3,100 23,300 440,000
----------- ----------- -----------
Total assets............................ $ 734,200 $ 2,213,700 $ 6,011,400
=========== =========== ===========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable...................... $ 108,600 $ 288,900 $ 672,100
Accrued expenses...................... 60,500 132,900 561,200
Deferred revenue...................... 76,900 286,100 516,400
Notes payable and capital lease
obligations--current................. 22,500 95,200 97,400
----------- ----------- -----------
Total current liabilities............... 268,500 803,100 1,847,100
Notes payable and capital lease
obligations--long-term................. 36,200 166,000 140,000
Commitments and contingencies........... -- -- --
Shareholders' equity:
Preferred stock, $.001 par value;
20,000,000 shares authorized, none
issued or outstanding................ -- -- --
Common stock, $.001 par value;
100,000,000 shares authorized;
17,592,600, 20,551,600 and 23,459,490
issued and outstanding at March 31,
1998, 1999 and June 30, 1999
respectively......................... 17,600 20,600 23,500
Additional paid-in capital............ 2,318,100 3,893,100 8,039,300
Receivable for shares issued.......... (500,000) -- --
Deferred stock compensation........... (1,215,700) (1,194,900) (1,929,500)
Accumulated deficit................... (190,500) (1,474,200) (2,109,000)
----------- ----------- -----------
Total shareholders' equity.............. 429,500 1,244,600 4,024,300
----------- ----------- -----------
Total liabilities and shareholders'
equity................................. $ 734,200 $ 2,213,700 $ 6,011,400
=========== =========== ===========
</TABLE>

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

F-3
<PAGE>

DATA RETURN CORPORATION

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Period from Three Months
September 22, 1997 Ended June 30,
(inception) to Year Ended ------------------------
March 31, 1998 March 31, 1999 1998 1999
------------------ -------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues................ $ 336,100 $ 1,889,000 $ 280,800 $ 1,227,500
Costs and expenses:
Cost of revenue....... 198,000 1,105,300 204,900 489,500
General and
administrative....... 230,200 1,063,000 213,200 865,600
Marketing and sales... 39,000 662,800 105,000 384,500
Stock based
compensation......... 61,300 348,800 84,600 139,500
----------- ----------- ----------- -----------
Total costs and
expenses............... 528,500 3,179,900 607,700 1,879,100
----------- ----------- ----------- -----------
Loss from operations.... (192,400) (1,290,900) (326,900) (651,600)
Other income (expense):
Interest income....... 2,200 19,900 6,200 22,900
Interest expense...... (300) (12,700) (1,100) (6,100)
----------- ----------- ----------- -----------
Net loss................ $ (190,500) $(1,283,700) $ (321,800) $ (634,800)
=========== =========== =========== ===========
Net loss per common
share:
Basic and diluted..... $ (0.01) $ (0.07) $ (0.02) $ (0.03)
=========== =========== =========== ===========
Shares used in computing
basic and diluted net
loss per share......... 15,882,326 18,371,300 17,592,600 22,272,804
</TABLE>

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

F-4
<PAGE>

DATA RETURN CORPORATION

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
Common Stock Additional Receivable Deferred
------------------ Paid-In for Shares Stock Accumulated Shareholders'
Shares Amount Capital Issued Compensation (Deficit) Equity
---------- ------- ---------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--September 22,
1997 (inception)
Initial issuance of
common stock........... 15,440,600 $15,400 $ 43,300 $ -- $ -- $ -- $ 58,700
Issuance of common
stock.................. 2,152,000 2,200 997,800 (500,000) -- -- 500,000
Deferred compensation
related to stock
options................ -- -- 1,277,000 -- (1,277,000) -- --
Amortization of deferred
stock compensation..... -- -- -- -- 61,300 -- 61,300
Net loss................ -- -- -- -- -- (190,500) (190,500)
---------- ------- ---------- --------- ----------- ----------- -----------
Balance--March 31,
1998................... 17,592,600 17,600 2,318,100 (500,000) (1,215,700) (190,500) 429,500
Issuance of common
stock.................. 2,959,000 3,000 1,247,000 500,000 -- -- 1,750,000
Deferred compensation
related to stock
options................ -- -- 328,000 -- (328,000) -- --
Amortization of deferred
stock compensation..... -- -- -- -- 348,800 -- 348,800
Net loss................ -- -- -- -- -- (1,283,700) (1,283,700)
---------- ------- ---------- --------- ----------- ----------- -----------
Balance--March 31,
1999................... 20,551,600 20,600 3,893,100 -- (1,194,900) (1,474,200) 1,244,600
Issuance of common
stock (unaudited)...... 2,907,890 2,900 3,272,100 -- -- -- 3,275,000
Deferred compensation
related to stock
options (unaudited).... -- -- 874,100 -- (874,100) -- --
Amortization of deferred
stock compensation
(unaudited)............ -- -- -- -- 139,500 -- 139,500
Net loss (unaudited).... -- -- -- -- -- (634,800) (634,800)
---------- ------- ---------- --------- ----------- ----------- -----------
Balance--June 30, 1999
(unaudited)............ 23,459,490 $23,500 $8,039,300 $ -- $(1,929,500) $(2,109,000) $ 4,024,300
========== ======= ========== ========= =========== =========== ===========
</TABLE>

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

F-5
<PAGE>

DATA RETURN CORPORATION

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Three Months
Period from Ended
September 22, 1997 Year Ended June 30,
(inception) to March 31, -----------------------
March 31, 1998 1999 1998 1999
------------------ ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net loss................ $ (190,500) $(1,283,700) $(321,800) $ (634,800)
Adjustments to reconcile
net loss to net cash
flows used in operating
activities:
Depreciation and
amortization......... 12,900 129,500 14,100 89,300
Stock based
compensation
expense.............. 61,300 348,800 84,600 139,500
Provision for doubtful
accounts............. 6,800 40,400 4,100 59,900
Changes in operating
assets and
liabilities:
Accounts receivable.. (71,900) (317,700) (37,300) (488,000)
Prepaid and other.... (16,500) (3,200) 7,100 (73,000)
Other assets......... (3,100) (20,200) (4,400) (416,700)
Accounts payable and
accrued expenses.... 125,500 252,700 (8,800) 811,400
Deferred revenue..... 76,900 209,200 19,400 230,300
---------- ----------- --------- ----------
Net cash provided by
(used in) operating
activities............. 1,400 (644,200) (243,000) (282,100)
Investing activities
Purchases of property
and equipment.......... (55,400) (814,200) (79,300) (696,300)
Purchase of certificate
of deposit restricted
as to use.............. -- (125,000) -- --
---------- ----------- --------- ----------
Net cash used in
investing activities... (55,400) (939,200) (79,300) (696,300)

Financing activities
Proceeds from notes
payable................ 11,700 250,000 3,500 --
Payments on notes
payable and capital
leases................. (200) (47,600) (1,200) (23,700)
Net proceeds from
issuance of common
stock.................. 516,300 1,750,000 500,000 3,275,000
---------- ----------- --------- ----------
Net cash provided by
financing activities... 527,800 1,952,400 502,300 3,251,300
---------- ----------- --------- ----------
Net increase in cash.... 473,800 369,000 180,000 2,272,900
Cash at beginning of the
period................. -- 473,800 473,800 842,800
---------- ----------- --------- ----------
Cash at end of period... $ 473,800 $ 842,800 $ 653,800 $3,115,700
========== =========== ========= ==========

Supplemental disclosure
of cash flows
information
Noncash investing and
financing activities:
Deferred
compensation......... $1,277,000 $ 328,000 $ 52,100 $ 874,100
Equipment acquired
under capital
leases............... 38,900 -- -- --
Shares issued for note
receivable........... 500,000 -- -- --
Net assets contributed
for common stock..... 42,400 -- -- --
Cash paid for
interest............. -- 11,400 1,100 7,400
</TABLE>

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

F-6
<PAGE>

DATA RETURN CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 1999

(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)

1.Organization, Basis of Presentation and Significant Accounting Policies

Organization

Data Return Corporation (the "Company") was incorporated in August 1997 under
the laws of the State of Texas and commenced operations on September 22, 1997
(inception). The Company primarily provides advanced Microsoft Internet hosting
services to businesses, web site developers and other organizations. The
Company's advanced Microsoft hosting services enable its customers to establish
and maintain e-commerce and other applications through which they can conduct
transactions and manage information on a worldwide basis over the Internet.

The Company's computer equipment, principally servers, is primarily located
in separate facilities owned by two of its vendors. The vendors provide data
center facilities and bandwidth connectivity to the Company on a contractual
basis.

Basis of Presentation

The accompanying financial statements of the Company reflect the operations
and financial position of the Company for the period from its inception on
September 22, 1997 to March 31, 1998 and for fiscal 1999. The Company was
formed when its founders contributed net assets, principally computer
equipment, with an approximate fair market value of $42,000 and cash of
approximately $17,000 as consideration for 15,440,600 shares of the Company's
common stock.

The Company does not expect to generate positive cash flow from its
operations for several years. As a result, the Company has obtained and intends
to continue to seek funding from external sources. In addition, the Company
intends to file a registration statement for the initial public offering of the
Company's common stock. The Company contemplates using the proceeds from the
proposed public offering to fund its operations, fund its capital expenditures,
expand its marketing and sales activities, repay its credit facility and for
working capital and other general corporate purposes, including potential
acquisitions and investments and expenses associated with its anticipated move
to a new headquarters facility. Management of the Company believes that the
proceeds from the private issuance of common stock described in Note 9 as well
as the proceeds received, if any, of the proposed public offering will be
sufficient to meet the Company's projected cash needs for at least the next 12
months.

Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.

Revenue Recognition

Revenues are primarily derived from monthly recurring hosting service fees
and from set-up fees. Basic services, defined as accounts expected to generate
less than $400 monthly, do not require a contract. More

F-7
<PAGE>

DATA RETURN CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)

1.Organization, Basis of Presentation and Significant Accounting Policies--
(Continued)

complex services require a contract that is generally six months in length.
These contracts generally are cancelable by either party without penalty upon
30 days' notice. Revenues from these contracts are recognized ratably over the
contractual period as service is delivered. Payments received for billings in
advance of providing services are deferred until the period such services are
provided. Set-up fees are separately priced from hosting services and are
recognized at the time a new customer account is created. Therefore, the
customer has no expectation of any future value from set-up fees after the
account is set up and the service is activated. Set-up costs consist primarily
of labor by technical support personnel to activate the new service and are
incurred at the time of set-up. No future set-up costs are incurred. There is
no obligation of the Company to perform any future set-up services, and the
set-up fees are non-refundable. Following expiration of the initial contract
period and upon renewal of the contract by the customer, there are no
additional set-up charges and the renewal prices for hosting services are
generally unchanged from the original contract period.

The Company's accounts receivable are financial instruments that expose the
Company to credit risk, as defined by Statement of Financial Accounting
Standards No. 105, Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk. Accounts receivable are due from commercial entities to whom credit is
extended based on evaluation of the customer's financial condition, and
generally collateral is not required. Anticipated credit losses are provided
for in the financial statements and have been within management's expectations
for all periods presented.

Property and Equipment

Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over estimated useful lives of the property and equipment,
generally three years for computer equipment and up to seven years for
furniture and fixtures. Equipment acquired under capital leases is amortized
using the straight-line method over the lesser of the lease term or the
estimated useful life of the asset, generally three years. The cost of license
agreements with software vendors are amortized over the term of the agreements.

Restricted Cash

Restricted cash consists of a certificate of deposit which is pledged as
collateral for the Company's notes payable.

Impairment of Long-Lived Assets

In accordance with Statement on Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, the Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate the carrying value of such assets may not be
recoverable. This review consists of a comparison of the carrying value of the
asset with the asset's expected future undiscounted cash flows without interest
costs. Estimates of expected future cash flows represent management's best
estimate based on reasonable and supportable assumptions and projections. If
the expected future cash flow exceeds the carrying value of the asset, no
impairment indicator is considered present. If the carrying value exceeds the
future cash flow, an impairment indicator is considered present. Such
impairment would be measured and recognized using a discounted cash flow
method.

Financial Instruments

The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate their fair values.

F-8
<PAGE>

DATA RETURN CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)

1.Organization, Basis of Presentation and Significant Accounting Policies--
(Continued)

Purchase Commitments

The Company has an obligation to acquire certain minimum amounts of co-
location space, technical assistance, broadband service and private line
service. In the event the Company expects to incur a loss in fulfilling its
future obligations, the estimated loss will be accrued at the date the Company
first believes a loss is likely to be incurred.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising expense
amounted to $25,200 and $296,400 for the period from September 22, 1997
(inception) to March 31, 1998, and the year ended March 31, 1999, respectively.

Stock Based Compensation

The Company accounts for employee stock based compensation in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations, because the alternative fair value
accounting model provided under Statement of Financial Accounting Standards No.
123, Accounting for Stock Based Compensation (SFAS 123) is not required.
Accordingly, in cases where exercise prices equal or exceed fair market value
of the underlying common stock, the Company recognizes no compensation expense.
In cases where exercise prices are less than the fair value, compensation is
recognized over the lesser of the period of performance or vesting period.

Income Taxes

Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.

Comprehensive Income

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income (SFAS 130). SFAS 130 requires that total
comprehensive income (loss) be disclosed with equal prominence as net income
(loss). The Company's comprehensive loss is equal to its net losses for all
periods presented.

Segment Reporting

The Company operated during all periods in a single segment when applying the
management approach defined in Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information.

Recent Accounting Pronouncements

F-9
<PAGE>

DATA RETURN CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)

1.Organization, Basis of Presentation and Significant Accounting Policies--
(Continued)

Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires
computer software costs related to internal software that are incurred in the
preliminary project stage to be expensed as incurred. Once the capitalization
criteria of SOP 98-1 have been met, external direct costs of materials and
services consumed in developing or obtaining internal-use computer software;
payroll and payroll-related costs for employees who are directly associated
with and who devote time to the internal-use computer software project (to the
extent of the time spent directly on the project); and interest costs incurred
when developing computer software for internal use should be capitalized. SOP
98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998. Accordingly, the Company has adopted SOP 98-1 in its
financial statements for the year ending March 31, 2000.

In April of 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position No. 98-5, Reporting on the Costs of Start-up
Activities, which requires that costs related to such activities be expensed as
incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. Accordingly, the Company has adopted SOP 98-
5 in the financial statements for the year ending March 31, 2000. The adoption
of SOP 98-5 had no material impact on our financial statements.

Net Loss Per Share

Net loss per share is computed using the weighted average number of shares of
common stock outstanding during each period for basic and diluted earnings per
share. No common stock equivalents are considered in the calculation of diluted
earnings per share as the Company has incurred a loss for all periods presented
and the effect of common stock equivalents would be anti-dilutive.

Unaudited Interim Financial Statements

The unaudited interim consolidated financial statements as of June 30, 1999,
and for the three month periods ended June 30, 1998 and 1999, have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
They do reflect all adjustments (consisting only of normal recurring entries)
which, in the opinion of the Company's management, are necessary for a fair
presentation of the results for the interim periods presented.

The results of operations for the three month period ended June 30, 1999, are
not necessarily indicative of the results that may be expected for any other
interim period or for the full year.

F-10
<PAGE>

DATA RETURN CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)

2.Property and Equipment

Property and equipment consists of the following:

<TABLE>
<CAPTION>
March 31,
------------------- June 30,
1998 1999 1999
-------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Electronics and computer equipment........... $ 94,400 $ 852,600 $1,518,600
Computer software............................ -- 39,400 63,200
Furniture and office equipment............... 7,700 14,800 21,300
Leasehold improvements....................... 5,000 10,600 10,600
Capital leases--equipment.................... 47,200 51,100 51,100
-------- --------- ----------
154,300 968,500 1,664,800
Less accumulated depreciation and
amortization................................ (12,900) (142,500) (231,700)
-------- --------- ----------
$141,400 $ 826,000 $1,433,100
======== ========= ==========
</TABLE>

3.Accrued Expenses

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
March 31,
---------------- June 30,
1998 1999 1999
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Professional fees.................................. $ -- $ -- $289,700
Bonuses............................................ -- 42,800 125,000
Deferred compensation.............................. 40,000 40,000 40,000
Commissions........................................ -- 20,800 47,400
Other.............................................. 20,500 29,300 59,100
------- -------- --------
$60,500 $132,900 $561,200
======= ======== ========
</TABLE>

4.Notes Payable

The Company entered into two separate note agreements for $125,000 each with
a commercial bank. The notes are cross collateralized by a $125,000 certificate
of deposit at the bank and all computer equipment acquired with the loan
proceeds. The notes bear interest at 9.25 percent and 6.9 percent. The notes
are due in equal monthly installments of principal and interest of $3,990 and
$3,871, respectively. Future principal payments at March 31, 1999 are as
follows:

F-11
<PAGE>

DATA RETURN CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)

5.Shareholders' Equity

Common Stock

Pursuant to a Stock Sales Agreement (the Agreement) dated February 20, 1998,
between the Company and a private investor, the Company sold 2,152,000 shares
of its common stock for $0.46 per share. The Agreement provided for the
issuance of the shares in return for $500,000 cash and a promissory note in the
amount of $500,000 that has been repaid. The Agreement provided the investor
the right to acquire an additional 2,690,000 shares of the Company's common
stock during a specified period in 2001 for $0.37 per share and provided the
Company the right to require the investor to purchase the shares for a period
beginning in February 1999 through August 2001. In February of 1999, the
Company exercised its rights under the Agreement and sold 2,690,000 shares of
its common stock to the investor for $0.37 per share.

The Agreement also provides the investor additional rights including: a right
of first refusal to participate in any future equity offerings up to the total
amount of such offerings and on the same terms as those offered to other
investors, a right to designate two members of the Company's five member Board
of Directors and a requirement for unanimous approval by the Board of Directors
for certain transactions.

The investor's rights terminate upon the earlier to occur of: the mutual
agreement of the Company and the investor, events the result of which are such
that the investor owns less than 5 percent of the issued and outstanding common
stock of the Company, consummation of a public offering of the Company's
capital stock or a breach by the investor of his obligations.

Stock Based Compensation Arrangements

The Company's 1998 Stock Option Plan (the Plan) provides for the issuance to
employees of options to acquire 3,308,700 shares of common stock. The options
are to be issued at fair market value, as defined, and vest as approved by the
Board of Directors. Options generally expire 10 years from the date of grant
and automatically expire at termination of employment. The vesting period for
options to acquire 901,150 shares of common stock accelerates to the effective
date of any registration statement filed by the Company or in the event of a
merger or acquisition of the Company.

Subsequent to March 31, 1999, the Company adopted the 1999 Long-Term
Incentive Plan. See Note 9.

The following table summarizes the stock option activity related to the
Company:

<TABLE>
<CAPTION>
Per Share
Number of Exercise Weighted Average
Shares Price Exercise Price
--------- ----------- ----------------
<S> <C> <C> <C>
Outstanding options--September 22,
1997................................. -- $ -- $ --
Granted............................. 3,577,700 0.02 0.02
--------- ----------- -----
Outstanding options--March 31, 1998... 3,577,700 0.02 0.02
Granted............................. 1,069,275 0.08- 0.17 0.15
--------- ----------- -----
Outstanding options--March 31, 1999... 4,646,975 0.02- 0.17 0.05
Granted............................. 1,304,650 0.23- 1.66 0.44
Expired............................. (26,900) 0.23 0.23
--------- ----------- -----
Outstanding options--June 30, 1999.... 5,924,725 $0.02-$1.66 $0.14
========= =========== =====
Options exercisable--March 31, 1999... 916,752 $ 0.02 $0.02
========= =========== =====
</TABLE>

F-12
<PAGE>

DATA RETURN CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)

5.Shareholders' Equity--(Continued)

Outstanding options as of March 31, 1999, had a weighted average remaining
contractual life of approximately nine years and a weighted average fair value
at issuance of $0.36 based on the minimum value method.

Certain employees of the Company have been granted options under the Plan to
purchase shares of the Company's common stock at less than fair market value.
Prior to the adoption of the Plan, an employee was granted 3,308,700 options at
a price below fair market value which vest over 4 years. The vesting period for
the 3,308,700 options accelerates to the effective date of any registration
statement filed by the Company. The Company recorded deferred stock
compensation of $1,277,000, $328,000 and $874,100 for the period from
September 22, 1997 (inception) through March 31, 1998, the year ended March 31,
1999 and the three month period ended June 30, 1999, respectively, for the
difference between the exercise price and the deemed fair value of the
Company's common stock underlying certain options granted. These amounts are
being amortized over the vesting period of the individual options, generally
four years. The stock compensation expense charged to income amounted to
$61,300 and $348,800 for the period from September 22, 1997 (inception) to
March 31, 1998 and the year ended March 31, 1999, respectively. The stock
compensation expense charged to income amounted to $84,600 and $139,500 for the
three month periods ended June 30, 1998 and 1999, respectively.

As discussed in Note 1, the Company accounts for its stock based awards to
employees using the intrinsic value method in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees," and its related
interpretations.

SFAS No. 123 requires the disclosure of pro forma net income (loss) and net
income (loss) per share as if the Company had adopted the fair value method
since September 22, 1997 (inception). Under SFAS No. 123, the fair value of
stock based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future price volatility and expected
time to exercise, which greatly affect the calculated values.

The Company's calculations for employee grants were made using the minimum
value method using the following weighted average assumption: expected life,
four years; risk free interest rate of 6 percent; no dividends during the
expected term; and a volatility of zero as the Company is private and has no
trading history. If the computed values of the Company's stock based awards
were amortized to expense over the vesting period of the awards as specified
under SFAS No. 123, net loss would have been $191,320 ($0.01 per basic and
diluted share) and $1,289,160 ($0.07 per basic and diluted share) for the
period from September 22, 1997 (inception) to March 31, 1998 and the year ended
March 31, 1999, respectively.

F-13
<PAGE>

DATA RETURN CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)

6.Income Tax Information

At March 31, 1998 and 1999, the Company had temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws. Significant components of the Company's
deferred tax assets and liabilities were as follows:

<TABLE>
<CAPTION>
March 31,
-------------------
1998 1999
-------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 26,000 $ 333,000
Stock based compensation................................. 21,000 139,000
Accrued expenses......................................... 16,000 22,000
Allowance for bad debts.................................. 2,000 7,000
-------- ---------
Total deferred tax assets.................................. 65,000 501,000
Less: valuation allowance................................ (65,000) (501,000)
-------- ---------
Net deferred tax asset..................................... $ -- $ --
======== =========
</TABLE>

At March 31, 1999, the Company's net operating loss carryforward for federal
income tax purposes is approximately $980,000, expiring in 2013 and 2014. The
Company has recorded a valuation reserve for its net deferred tax benefit for
the period ended March 31, 1998 and the year ended March 31, 1999 due to
uncertainty that the Company will generate sufficient taxable income during the
carryforward period to realize the benefit of its deferred tax asset. In
addition, in connection with the equity transactions that have taken place
since its inception and the proposed initial public offering, the Company may
experience a change in control pursuant to Internal Revenue Code Section 382.
As such, the net operating loss carryforward may be limited as to its possible
use in future periods.

7.Commitments

Leases

The Company leases office space and office equipment under operating leases.
Future noncancelable lease payments under the Company's lease commitments at
March 31, 1999 are as follows:

<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
Year Ended March 31:
2000.......................................... $20,500 $102,100
2001.......................................... 20,200 56,500
2002.......................................... 3,300 11,100
------- --------
44,000 $169,700
========
Less amount representing interest............... (7,600)
-------
Present value of lease payments................. 36,400
Current portion of capital leases............... 15,200
-------
Noncurrent portion of capital leases............ $21,200
=======
</TABLE>

The Company recorded rent expense of $13,300 for the period from September
22, 1997 (inception) to March 31, 1998, and $60,500 for the year ended March
31, 1999.

F-14
<PAGE>

DATA RETURN CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)

7.Commitments--(Continued)

Bandwidth and Co-Location Agreements

The Company has entered into agreements for bandwidth, co-location space and
dedicated Internet access with multiple vendors. The agreements are generally
three year commitments and require penalties for early termination. The
agreements are generally subject to a master contract which allows for service
order upgrades at the Company's request. Following are the Company's minimum
commitments at March 31, 1999.

<TABLE>
<S> <C>
Year Ended March 31:
2000............................................................... $ 525,000
2001............................................................... 475,000
2002............................................................... 175,000
----------
$1,175,000
==========
</TABLE>

Subsequent to year end, the Company entered into an agreement with a vendor
which requires the Company to acquire an additional $10.0 million of services
over the next five years (See Note 9).

8.International Operations

International revenues were approximately $43,500 and $189,000 for the period
from September 22, 1997 (inception) to March 31, 1998 and fiscal 1999,
respectively. The Company's international revenues were primarily generated
from customers located in Europe and Asia. In fiscal 1999, revenues from
customers located in Europe and Asia accounted for approximately 6% and 2% of
total revenues, respectively. Total assets from international operations,
comprised of accounts receivable, were $16,700 and $32,700 of total assets as
of March 31, 1998 and 1999, respectively.

9.Subsequent Events

Proposed Public Offering of Common Stock (Unaudited)

The Board of Directors of the Company has authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission for the initial public offering of the Company's common stock. The
Company contemplates using the proceeds from the proposed public offering to
fund its operations, fund its capital expenditures, expand its marketing and
sales activities, repay its credit facility and for working capital and other
general corporate purposes, including potential acquisitions and investments
and expenses associated with its anticipated move to a new headquarters
facility.

Adoption of the 1999 Long-Term Incentive Plan

In July 1999, the Company adopted the 1999 Long-Term Incentive Plan. The Plan
provides for the issuance of up to 3,228,000 options to acquire its common
stock.

Issuance of Common Stock

Subsequent to year end, the Company issued 5,251,418 shares of common stock
to private investors for total cash consideration of $9.375 million through
July 29, 1999.

F-15
<PAGE>

DATA RETURN CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)

9.Subsequent Events--(Continued)

In addition, on July 26, 1999, Level 3 Communications, Inc. (Level 3)
acquired 1,952,940 shares of the Company's common stock in exchange for a $5.0
million credit to be applied to the purchase of future bandwidth services. Use
of the credit is as allowed by the Service Credit Agreement. The credit can be
applied as payment for services in excess of the minimum purchases required
under the Strategic Marketing and Sales Agreement (see below) beginning on
January 1, 2001. The Company has a limited right to reacquire the stock in the
event that Level 3 fails to fulfill its obligations under the Service Credit
Agreement or fails to deliver the bandwidth pursuant to the terms of the
Service Credit Agreement. The number of shares subject to the Company's right
to reacquire the stock will be reduced pro rata in each quarter of calendar
year 2001 by the greater of the credit applied to future purchases of bandwidth
or 25% of the total shares. The stock can be reacquired by the Company at the
original purchase price by the Company's forgiveness of the remaining balance
of the credit. In the event the Company's right to reacquire the stock is
exercised, Level 3 is required to pay the Company $750,000, reduced ratably,
based on the amount of bandwidth credit used by the Company.

Strategic Marketing and Sales Agreement

The Company entered into a Strategic Marketing and Sales Agreement with Level
3 on July 1, 1999. The Strategic Marketing and Sales Agreement provides that
the Company will acquire most of its requirements for co-location space,
technical assistance, broadband service and private line service (collectively
the "Services") over a five year period commencing with the date of the
agreement, which are substantially similar or perform substantially the same
function as the Services from Level 3. The prices the Company will pay Level 3
for the Services over the term of the Agreement are based upon Level 3's then-
current prices to other companies purchasing similar quantities. The Agreement
also provides for joint sales and marketing efforts between the Company and
Level 3, including cross training of personnel, and provides that Level 3 will
designate the Company as a preferred provider for Advanced Microsoft Hosting
Service. The Company will pay commission to Level 3 personnel for new customers
generated by their leads.

The Company's annual commitment for the Services is as follows for its year
ended March 31:

Payments for the minimum annual purchase commitments will be required
regardless of whether the Company uses the Services. The Company can apply the
$5.0 million credit described above beginning on January 1, 2001 to purchases
in excess of the minimum annual commitments required by the Strategic Marketing
and Sales Agreement. Pricing of the Services will be based on Level 3's
established market prices at the time the service is provided.

F-16
<PAGE>

DATA RETURN CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

(Information as of June 30, 1999 and for the three month
periods ended June 30, 1998 and 1999 is unaudited)

9.Subsequent Events--(Continued)

ASP and Server Agreement

The Company entered into an agreement with Compaq to purchase the lesser of
2,000 servers or the number of servers reasonably necessary to operate the
Company's business. The requirement to purchase the servers is contingent upon
Compaq providing financing for the servers on competitive terms, upon the
price, performance and quality of the servers being reasonably satisfactory to
the Company and upon Compaq's commitment to deliver these servers on the
schedule we request.

Microsoft Agreements (unaudited)

On September 3, 1999, the Company agreed to sell $5.0 million of its common
stock for a per share purchase price equal to the lesser of the midpoint of the
lowest filing range and the price to public. Microsoft will also acquire a
warrant to purchase $3.75 million of the Company's common stock at the same per
share purchase price. Microsoft is entitled to one demand and unlimited
"piggyback" registration rights. Microsoft also has a right of first refusal
that does not include this offering and that terminates upon completion of the
initial public offering. This transaction will close the earlier of the day
after the pricing of this offering and December 12, 1999.

In addition, on September 3, 1999, the Company entered into a five-year
Development, License and Co-Marketing Agreement with Microsoft to grant a non-
exclusive perpetual license to proprietary installation tools for third-party
hosted applications to Microsoft. The Company will also train Microsoft's
employees and customers in the use of those tools. Microsoft has the sole right
to terminate the agreement if the Company fails to deliver the tools on a
timely basis or if the Company fails to correct any errors in the tools on a
timely basis. Also as part of the agreement, Microsoft will provide up to one
hundred hours of technical consulting and writing services during the
development of the tools.

Stock Split

On September 10, 1999, the Board of Directors approved a 269 for 1 split of
the Company's common stock. All share and per share amounts have been
retroactively restated to reflect the effect of the stock split.

F-17
<PAGE>

Inside back cover

The inside back cover of the prospectus has a caption centered at the top of
the page in large text that reads "Hosting the Back Office for E-Business."

An image a globe with images of customers' web pages surrounding the globe
above its surface is centered in the middle of the page.

Centered at the bottom of the page is the Data Return logo and the slogan
"Hosting The Back Office for E-Business."

<PAGE>

Centered on the page is the Data Return logo and the slogan "Hosting The Back
Office for E-Business."
<PAGE>

Part II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. Other Expenses of Issuance and Distribution

The following is an itemized statement of the amounts of all expenses payable
by the Registrant in connection with the registration of the common stock
offered hereby (estimated except for the Registration Fee, NASD Filing Fee and
Nasdaq National Market listing fee), other than underwriting discounts and
commissions:

ITEM 14. Indemnification of Directors and Officers

We have authority under Article 2.02A.(16) and 2.02-1 of the Texas Business
Corporation Act (the "TBCA") to indemnify our directors and officers to the
extent provided for in the TBCA. Our Restated Articles of Incorporation permit
indemnification of directors and officers to the fullest extent permitted by
law.

The TBCA provides in part that a corporation may indemnify a director or
officer or other person who was, is, or is threatened to be made a named
defendant or respondent in a proceeding because the person is or was a
director, officer, employee or agent of the corporation, if it is determined
that such person (i) conducted himself in good faith; (ii) reasonably believed,
in the case of conduct in his official capacity as a director or officer of the
corporation, that his conduct was in the corporation's best interests, and, in
all other cases, that his conduct was at least not opposed to the corporation's
best interests; and (iii) in the case of any criminal proceeding, had no
reasonable cause to believe that this conduct was unlawful.

A corporation may indemnify a person under the TBCA against judgments,
penalties, (including excise and similar taxes), fines, settlement, and
reasonable expenses actually incurred by the person in connection with the
proceeding. If the person is found liable to the corporation or is found liable
on the basis that personal benefit was improperly received by the person, the
indemnification is limited to reasonable expenses actually incurred by the
person in connection with the proceeding, and shall not be made in respect of
any proceeding in which the person shall have been found liable for willful or
intentional misconduct in the performance of his duty to the corporation.

A corporation may also pay or reimburse expenses incurred by a person in
connection with his appearance as a witness or other participation in a
proceeding at a time when he is not a named defendant or respondent in the
proceeding.

Article Eight of our Restated Articles of Incorporation provides that, to the
fullest extent permitted by the TBCA as it exists or as it may be amended, no
director shall be personally liable to Data Return or our shareholders for
monetary damages for breach of fiduciary duty as a director.

Prior to consummation of this offering, we intend to obtain directors and
officers liability insurance.

II-1
<PAGE>

Reference is made to Section of the underwriting agreement filed as
Exhibit 1.1 hereto, indemnifying the officers and directors of the registrant
against certain liabilities.

ITEM 15. Recent Sales of Unregistered Securities

Set forth in chronological order is information regarding all securities sold
and employee stock options granted by the Registrant since August 17, 1997 (the
date of incorporation).

(1) Since August 17, 1997, the Registrant has granted to employees
options to purchase an aggregate of 6,532,396 shares of Common Stock at a
weighted average exercise price of $0.29.

(2) On August 17, 1997, the Registrant issued 8,106,315 shares to Sunny
Vanderbeck, 6,562,255 shares to Michelle Chambers and 772,030 to Jason
Lochhead, the founders of the Registrant, in exchange for assets,
principally computer equipment, with a value of $42,000 and cash of $17,000
contributed to the Registrant.

(3) On February 20, 1998, the Registrant issued 2,152,000 shares of
Common Stock to Nathan Landow Family Limited Partnership for a purchase
price of $1,000,000.

(4) On December 22, 1998, the Registrant issued 215,200 shares of Common
Stock to Dexter Stewart RIRA for a purchase price of $100,000.

(5) On December 24, 1998, the Registrant issued 2,690,000 shares of
Common Stock to Nathan Landow Family Limited Partnership for a purchase
price of $1,000,000.

(6) On February 1, 1999, the Registrant issued 53,800 shares of Common
Stock to Nathan Landow Family Limited Partnership for a purchase price of
$25,000.

(7) On April 23, 1999, the Registrant issued 351,852 shares of Common
Stock to Nathan Landow for an aggregate purchase price of $250,000.

(8) On April 26, 1999, the Registrant issued 659,050 shares of Common
Stock to two investors for an aggregate purchase price of $500,000. The
distribution of such shares was as follows: 329,525 shares to David Slagel
for a purchase price of $250,000; 329,525 shares to Steve Loftus for a
purchase price of $250,000.

(9) On May 5, 1999, the Registrant issued 500,878 shares of Common Stock
to four investors for an aggregate purchase price of $500,000. The
distribution of such shares was as follows: 290,789 shares to Tom O'Shea
for a purchase price of $290,000; 110,021 shares to Bob Nolan for a
purchase price of $110,000; 75,051 shares to Bruce Eatroff for a purchase
price of $75,000; 25,017 shares to Tim Brown for a purchase price of
$25,000.

(10) On May 14, 1999, the Registrant issued 193,142 shares of Common
Stock to two investors for an aggregate purchase price of $250,000. The
distribution of such shares was as follows: 96,571 shares to Andrew Evans
for a purchase price of $125,000; 96,571 shares to T. Geir Ramleth for a
purchase price of $125,000.

(11) On May 18, 1999, the Registrant issued 1,202,968 shares of Common
Stock to ZeroDotNet, Inc. for a purchase price of $2,000,000.

(12) On July 26, 1999, the Registrant issued 1,952,940 shares of Common
Stock to Level 3 Communications, Inc. for $5,000,000 in credit for future
bandwidth purchases.

(13) On July 26, 1999, the Registrant issued 1,171,764 shares of Common
Stock to ZeroDotNet, Inc. for a purchase price of $3,000,000.

(14) On July 29, 1999, the Registrant issued 1,171,764 shares of Common
Stock to Compaq Computer Corporation for a purchase price of $3,000,000.

II-2
<PAGE>

The sales described in (2) through (14) were deemed to be exempt from
registration under the Securities Act in reliance on section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering.
The grants of options described in (1) were deemed to be exempt from
registration under the Securities Act in reliance on Rule 701 promulgated under
Section 3(b) of the Securities Act as transactions pursuant to compensatory
benefit plans and contracts relating to compensation as provided under such
Rule 701. All such transactions were completed on the dates given.

ITEM 16. Exhibits and Financial Statement Schedules

(a)Exhibits

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1** Form of Underwriting Agreement
3.1* Form of Amended and Restated Articles of Incorporation of the
Registrant to be filed just prior to effectiveness of this
Registration Statement.
3.2* Amended and Restated Bylaws of the Registrant
4.1** Form of Common Stock Certificate
4.2* Form of Common Stock Warrant dated September 3, 1999, between Data
Return Corporation and Microsoft Corporation.
5.1 Opinion of Thompson & Knight L.L.P.
10.1+ Strategic Marketing and Sales Agreement dated July 1, 1999, by and
between Data Return Corporation and Level 3 Communications, LLC.
10.2* Restricted Stock Purchase Agreement dated July 23, 1999, by and
between Data Return Corporation and Level 3 Communications, LLC.
10.3* Service Credit Agreement dated July 23, 1999, by and between Data
Return Corporation and Level 3 Communications, LLC.
10.4*+ Customer Order dated April 28, 1999, executed by Data Return
Corporation and Level 3 Communications, LLC
10.5*+ Managed Services Proposal for Data Return dated March 6, 1997, by and
between Data Return Corporation and American Communications Services,
Inc.
10.6* Basic Internet Services Agreement dated December 12, 1997, between
Data Return Corporation and Savvis Communications Enterprises, L.L.C.
10.7* Commercial Lease Agreement dated April 1, 1998, between Data Return
Corporation and DSW Property Management, for approximately 5,088
square feet situated at 801 Stadium Drive, Suite 120, Arlington, Texas
76011.
10.8* Commercial Lease Agreement dated July 14, 1997, between Data Return
Corporation and DSW Property Management, for approximately 2,713
square feet situated at 801 Stadium Drive, Suite 117, Arlington, Texas
76011.
10.9* 1999 Long-Term Incentive Plan
10.10* 1998 Stock Option Plan
10.11* Employment Agreement effective as of May 3, 1998, between Data Return
Corporation and Todd Steitle.
10.12* Employment Agreement dated March 18, 1999, between Data Return
Corporation and Kenneth S. Garber.
10.13* Employment Agreement effective as of January 15, 1998, between Data
Return Corporation and Michael S. Shiff.
10.14* Form of Employment Agreement dated July 1, 1999 between Data Return
Corporation and each of Sunny C. Vanderbeck, Michelle R. Chambers,
Jason A. Lochhead, Stuart A. Walker, Mark A. Bowles and Scott W.
Brewer.
10.15* Sublease dated June 28, 1999, between Data Return Corporation and
Eastman Kodak Company, for approximately 22,663 square feet situated
at 222 Las Colinas Boulevard in Irving, Texas.
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.16* Investor's Rights Agreement dated as of July 29, 1999, between Data
Return Corporation and CPQ Holdings, Inc.
10.17* ASP and Server Agreement dated June 29, 1999, between Data Return
Corporation and Compaq Computer Corporation.
10.18*+ Development, License and Co-Marketing Agreement dated September 3,
1999, between Data Return Corporation and Microsoft Corporation.
10.19* Stock Purchase Agreement dated September 2, 1999, between Data
Return Corporation and Microsoft Corporation.
23.1 Consent of Thompson & Knight L.L.P. (included in Exhibit 5.1 above)
23.2 Consent of Ernst & Young LLP
24.1* Power of Attorney (included in Page II-5)
27.1* Financial Data Schedule
99.1* Consent of International Data Corp. dated July 9, 1999.
99.2* Consent of T. Geir Ramleth to being nominated to the Board of
Directors of Data Return Corporation.
</TABLE>
- --------
+ Confidential treatment has been requested with respect to certain portions
of these agreements.
* Previously filed.
** To be filed by amendment.

(b)Financial Statement Schedules

None.

ITEM 17. Undertakings

The undersigned Registrant hereby undertakes to provide to the underwriters,
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

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 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 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.

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 the time
shall be deemed to be the initial bona fide offering thereof.

II-4
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Irving, State of Texas, on September 22, 1999.

Data Return Corporation

/s/ Sunny C. Vanderbeck
By: _________________________________
Sunny C. Vanderbeck
Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons on September
22, 1999 in the capacities indicated:

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Sunny C. Vanderbeck Chairman of the Board, September 22, 1999
______________________________________ Chief Executive Officer
Sunny C. Vanderbeck and Director (Principal
Executive Officer)

* President, Chief Operating
______________________________________ Officer and Director
Michelle R. Chambers

* Vice President--Research
______________________________________ and Product Development
Jason A. Lochhead and Director

/s/ Stuart A. Walker Vice President--Chief September 22, 1999
______________________________________ Financial Officer,
Stuart A. Walker Treasurer and Secretary
(Principal Financial and
Accounting Officer)

* Director
______________________________________
Nathan Landow

/s/ Sunny C. Vanderbeck September 22, 1999
*By: _________________________________
Sunny C. Vanderbeck
Attorney-in-fact

/s/ Stuart A. Walker September 22, 1999
*By: _________________________________
Stuart A. Walker, as
Attorney-in-fact
</TABLE>

II-5

<PAGE>

EXHIBIT 5.1

[THOMPSON & KNIGHT LETTERHEAD]

(817) 347-1700

September 2, 1999

Data Return Corporation
801 Stadium Drive, Suite 117
Arlington, Texas 76011

Dear Sirs:

We have acted as counsel for Data Return Corporation, a Texas corporation
(the "Company"), in connection with the offering and sale by the Company (the
"Offering") of shares (the "Shares") of Common Stock, par value $0.001 per share
("Common Stock"), of the Company having a value (based on aggregate offering
price) of $86,250,000, consisting of (i) shares (the "Firm Shares") of Common
Stock to be sold to the underwriters (the "Underwriters") that will be named in
the Underwriting Agreement to be entered into between the Company and Bear,
Stearns & Co. Inc., CIBC World Markets and Wit Capital Corporation, as
representatives of the Underwriters (the "Underwriting Agreement"), and (ii)
additional shares (the "Over-Allotment Shares") of Common Stock that will be
purchasable by the Underwriters pursuant to an over-allotment option contained
in the Underwriting Agreement. The Firm Shares and, if the over-allotment
option is exercised by the Underwriters, the Over-Allotment Shares are to be
offered to the public by the Underwriters pursuant to the Underwriting
Agreement.

We have participated in and are familiar with the corporate proceedings of
the Company relating to the preparation of the Company's Registration Statement
on Form S-1 (the "Registration Statement") filed with the Securities and
Exchange Commission on this date with respect to the registration of the Shares
under the Securities Act of 1933, as amended (the "1933 Act").

In connection with the foregoing, we have examined the originals or copies
certified or otherwise authenticated to our satisfaction of the Registration
Statement, and such corporate records of the Company, certificates of public
officials, and other agreements, instruments and documents as we have deemed
necessary to require as a basis for the opinion hereinafter expressed.

<PAGE>

Exhibit 10.1
July 1, 1999
Page 1

STRATEGIC MARKETING AND SALES AGREEMENT

THIS STRATEGIC MARKETING AND SALES AGREEMENT ("Agreement") is made and
entered into this 1st day of July, 1999, by and between LEVEL 3 COMMUNICATIONS,
LLC, a Delaware limited liability company ("Level 3") and DATA RETURN
CORPORATION, a Texas corporation ("Customer"). This Agreement modifies that
certain Customer Order (including the Standard Terms and Conditions for Delivery
of Services, a copy of which is attached hereto as Exhibit D) executed by Level
3 and Customer dated April 28, 1999; the Customer Order, and the Standard Terms
and Conditions, are hereby incorporated into this Agreement. The terms and
provisions contained in this Agreement modify the terms contained in the
Customer Order as set forth herein. To the extent that the terms of this
Agreement are inconsistent with the terms in any Customer Order (including the
Standard Terms and Conditions), the terms set forth in this Agreement shall
control.

ARTICLE 1
DEFINED TERMS

1.1 Advanced Microsoft Hosting Service. "Advanced Microsoft Hosting
----------------------------------
Service" shall mean hosting services delivered by Customer on the Microsoft
platform and which has a Monthly Recurring Charge of one hundred dollars
($100.00) or more per customer.

1.2 Broadband Services. "Broadband Services" shall mean the services
------------------
provided by Level 3 to Customer originating in the United States hereunder.
Broadband Services shall include (a) a local ethernet connection for
distribution of content to other networks on the local ethernet in a Gateway
Facility, (b) InterGateway transport, with traffic terminating to any customer
on the Level 3 Network or any Level 3 peer through non-paid peering points, and
(c) transit services, with traffic terminating to Level 3 transit connections.

1.3 Capacity Forecasts. "Capacity Forecasts" shall mean forecasts of
------------------
Customer's reasonably anticipated needs for Broadband Services, Colocation
Space, Private Line Service and other associated services and products which
Level 3 can provide.

1.4 Colocation Space. "Colocation Space" shall mean space within Level
----------------
3's Gateway Facilities in the United States which is used by Customer for the
placement of electronic communications equipment and connection of such
equipment to other parties or networks (including, but not limited to, the Level
3 Network).

1.5 Technical Assistance: "Technical Assistance" shall mean technical
--------------------
support provided by Level 3 personnel within the Gateway Facility. Technical
Assistance services shall be purchased in blocks of hourly time, and will cover
basic hardware and operational functions such as: Power Cycling Equipment;
Securing Cables; Setting Switches; Hot Swapping Components; Swapping Backup
Tapes; and physical equipment Installs (but excluding configuration of such
equipment).

1.6 Gateway Facility. "Gateway Facility" shall mean Level 3's leased or
----------------
owned facility in various cities in the United States where connections to the
Level 3 Network can be accomplished.

1.7 Level 3 Network. "Level 3 Network" shall mean Level 3's leased or
---------------
owned Internet Protocol network, including the bandwidth capacity and
connections to other networks and
<PAGE>

July 1, 1999
Page 2

providers, and such future network capacity, connections and technologies as
Level 3 shall hereafter acquire, lease or develop.

1.8 Monthly Recurring Charges. "Monthly Recurring Charges" shall mean the
-------------------------
monthly charges for the various services delivered hereunder, as set forth in
Exhibit A.

1.9 Nonrecurring Charges. "Nonrecurring Charges" shall mean the charges
--------------------
for the installation and reconfiguration of the various services delivered to
each party hereunder, as set forth in Exhibit A.

1.10 Off-Net Services. "Off-Net Service" shall mean Broadband Services
----------------
that are not delivered through direct non-paid transit or peering connections to
the Level 3 Network (i.e., those Broadband Services that are delivered through
paid transit connections provided by other carriers).

1.11 On-Net Service. "On-Net Service" shall mean Broadband Services that
--------------
are delivered through direct connections to the Level 3 Network (i.e., those
Broadband Services that are not delivered through paid transit connections
provided by other carriers).

1.12 Preferred Provider. "Preferred Provider" refers to a designation by
------------------
Level 3 under Level 3's "Value Added Partner" program where Level 3 recommends
(with appropriate disclaimers of any liability resulting from a customer's
reliance on such recommendation) the services and/or products provided by a
Preferred Provider based on the unique capabilities of the designated company.

1.13 Private Line Service. "Private Line Service" shall mean point to
--------------------
point dedicated transport service connecting two locations, one of which is
located within the continental United States.

1.14 Term. "Term" shall mean the period of time that commences upon
----
execution of this Agreement and ends five (5) years thereafter, unless sooner
terminated in accordance with the requirements of the Standard Terms and
Conditions.

ARTICLE 2
PURCHASE COMMITMENT

2.1 Services Included. Level 3 agrees to sell to Customer, and Customer
-----------------
agrees to purchase from Level 3, the following Services: Colocation Space
(including Technical Assistance); Broadband Services; Private Line Services
(collectively the "Services").

2.2 Revenue Commitment. Provided Level 3 is delivering Services in
------------------
accordance with the requirements of this Agreement, Customer shall, on a monthly
basis during the Term order and pay for the following volumes of Services (the
"Revenue Commitment"):

Contract Year* Cumulative Monthly Recurring Charges Per Quarter
-------------- ------------------------------------------------

1 $ 200,000
2 $ 300,000
3 $ 400,000
4 $ 600,000
<PAGE>

July 1, 1999
Page 3

5 $1,000,000

* Each "Contract Year" shall be measured as each full year after execution of
this Agreement (so that Contract Year 1 ends one year from execution hereof).

The Revenue Commitment is a "take-or-pay" commitment; on a quarterly basis
Customer will be billed for the greater of (a) its actual usage of Services, or
(b) the billing amount that would have been charged if the Revenue Commitment
had been satisfied.

2.3 Requirements Commitment. Commencing twelve (12) months after
-----------------------
execution hereof, Customer shall satisfy no less than seventy five percent (75%)
of its requirements for all services which are substantially similar to and
perform substantially the same function as the Services (including Colocation
Space) through purchases from Level 3. Commencing eighteen (18) months after
execution hereof and continuing for the remainder of the Term, Customer shall
satisfy no less than ninety percent (90%) of its requirements for all services
which are substantially similar to and perform substantially the same function
as the Services through purchases from Level 3. Satisfaction of the foregoing
percentage requirements will be determined by measuring Customer's use of (a)
total Mbps of Broadband Services, and (b) total square feet of Colocation Space.

2.4 Price for Broadband Service. In the event that, during the Term of
---------------------------
this Agreement, Level 3's standard prices for Broadband Services are (taken as a
whole and for customers making a dollar volume commitment which, on a monthly
basis, is equal to or greater than the Revenue Commitment made by Customer
herein) less than the prices for Broadband Services as set forth in Exhibit A,
then the Monthly Recurring Charges for Broadband Services delivered to Customer
hereunder shall, from and after such date, be reduced so that such Monthly
Recurring Charges are no greater than the standard discounted prices offered for
such other customers.

ARTICLE 3
PURCHASE AND DELIVERY OF BROADBAND SERVICES

3.1 The Broadband Services. Level 3 shall, except as otherwise provided
----------------------
herein and upon request of Customer, deliver and provide Broadband Services to
Customer. The Monthly Recurring Charges and Nonrecurring Charges applicable to
the ordering and delivery of the Broadband Services are set forth in Exhibit A
attached hereto. Customer hereby requests, and Level 3 hereby agrees to
provide, the Broadband Services described in Exhibit B attached hereto, which
Broadband Services shall be delivered to Customer at the locations identified in
Exhibit B.

3.2 Terms and Conditions. Except as modified by the terms of this
--------------------
Agreement, the terms and conditions applicable to Level 3's delivery of, and
Customer's purchase of, the Broadband Services shall be as set forth in Level
3's Terms and Conditions for Delivery of Services attached hereto as Exhibit D.
The Broadband Services shall be considered to be "Services" as defined in Level
3's Terms and Conditions.

3.3 Forecasts and Capacity Management. Customer will submit Capacity
---------------------------------
Forecasts to Level 3 on a quarterly basis during the Term. Level 3 will, on a
periodic basis throughout the Term, evaluate Customer's consumption and use of
Services and consult with Customer regarding the ordering and provisioning of
sufficient capacity to meet Customer's needs.

<PAGE>

July 1, 1999
Page 4

ARTICLE 4
ADDITIONAL TERMS RELATING TO COLOCATION SPACE

4.1 Agreement to Service Order. The terms set forth in this Article 4
--------------------------
shall supplement and, to the extent inconsistent therewith, supersede, the terms
and conditions set forth in the Customer Order.

4.2 Colocation Space. Subject to availability, Level 3 shall, upon
----------------
request of Customer, deliver and provide Colocation Space to Customer in Level
3's Gateway Facilities (only those located in the United States) for the Term
hereof. The Monthly Recurring Charges and Nonrecurring Charges applicable to
the ordering and delivery of the Colocation Space (including charges for
consumption of power) are set forth in Exhibit A attached hereto. The minimum
term for Customer's use of Colocation Space (the "Colocation Term") shall be
five (5) years from the date upon which the Colocation Space was delivered to
Customer (regardless of whether the Term of this Agreement expires prior to such
time).

4.3 Order for Colocation Space. Customer hereby orders, and Level 3
--------------------------
hereby agrees to provide, the Colocation Space within the Gateway Facilities
identified and set forth in Exhibit B attached hereto. Level 3 shall complete
the build-out of the Space and shall make such Space available to Customer on or
before February 1, 1999. Level 3 agrees to make individual Colocation Space
available within 60 days of Customer's request.

ARTICLE 5
PREFERRED PROVIDER STATUS AND COOPERATIVE MARKETING

5.1 Designation as Preferred Provider. Upon execution of this Agreement
---------------------------------
and subject to execution Level 3's standard agreement "Value Added Partners",
Level 3 will designate Customer as a Preferred Provider for Advanced Microsoft
Hosting Service. Such designation is non-exclusive, and shall continue and
remain in place only for so long as Level 3 determines. Level 3 may, in its
discretion, cease such designation at any time; provided, however, that in the
event that Level 3 ceases such designation other than "For Cause" (as defined
below), and Level 3 has designated or subsequently designates another entity as
its Preferred Provider for Advanced Microsoft Hosting Service, or discontinues
the entire Preferred Provider and Value Added Partner Programs, then Customer
may terminate its purchase commitments contained in Sections 2.3 hereof, and all
other obligations shall continue in full force and effect. For purposes of the
foregoing, "For Cause" termination by Level 3 shall mean a termination which
results from Level 3's reasonable determination that the quality of service or
the breadth and usefulness of service offerings provided by Customer are
materially changed, so that such service offerings are (in Level 3's judgement)
inadequate to support continued designation of Customer as a Preferred Provider
(which shall occur only after Level 3 has given Customer thirty (30) days
advance written notice and Customer has failed to take such steps as Level 3
reasonably determines are necessary to continue Customer's designation as a
Preferred Provider). Notwithstanding the foregoing, the following procedure
shall apply to a termination "For Cause" during the first year after execution
of this Agreement. In the event that, during such time, Level 3 becomes aware
of demonstrable and material deficiencies in Customer's delivery or service
offerings, Level 3 may, on thirty (30) days' written notice to Customer and
provided Customer has not within such time taken steps to cure the deficiencies
specified by Level 3, suspend Customer's designation as a Preferred Provider.
Upon such suspension, Customer shall have a period of one hundred twenty (120)
days within which to cure the deficiencies specified by Level 3. In the event
Customer fails to do so, then Level 3 may
<PAGE>

July 1, 1999
Page 5

terminate the designation as a Preferred Provider and such termination shall be
deemed to be "For Cause" hereunder.

5.2 Sales Training. No later than September 30, 1999, Customer and Level
--------------
3 will develop a mutually agreed schedule for Customer to provide sales training
to the Level 3 sales staff at operational Gateway Facilities during 2000, and as
required through the length of this contract. The sales training will be
sufficient to provide the Level 3 sales staff with a basic working knowledge of
the Advanced Microsoft Hosting Service offered by Customer so that the sales
staff can identify Prospects which might be able to use the Advanced Microsoft
Hosting Service in their business applications. Sales training will be provided
at Customer's expense (except that Level 3 will be responsible for the payment
of compensation of such personnel and travel and lodging expenses incurred by
its personnel in connection therewith), and will be prioritized according to a
mutually agreed upon schedule to coincide, to the extent feasible, with the
opening of each new Gateway Facility.

5.3 Prospect Contacts. Each party will cause its employed and independent
-----------------
sales force to assist the other party's employed and independent sales force in
the sale of the other party's services (so that Level 3 shall provide leads to
Customer for the sale of Advanced Microsoft Hosting Services, and Customer shall
provide Level 3 with leads for the sale of Service) as set forth herein. Such
assistance shall include providing customers who may have an interest in or need
for the other party's services ("Prospects") with the name and marketing
materials for the services of the other party, providing the other party with
names of Prospects and (where such party determines appropriate) introducing the
other party's professional sales staff to Prospects. The referral of Prospects
contemplated hereby is non-exclusive; either party may provide referrals to
other suppliers of services competitive with the services provided by the other
party. Notwithstanding the foregoing, both parties agree that they will inform
the other of all Prospect leads of which they become aware during the Term (but
either party may also refer or provide such Prospect leads to other companies).
A failure or alleged failure of either party to refer a Prospect to the other,
to provide marketing material respecting the other's service to such Prospect,
or to otherwise perform the cooperative marketing envisioned by this Article 4
shall not constitute a default in the performance of this Agreement.

5.4 Managers. Each party shall identify management personnel to supervise
--------
and monitor the performance of the cooperative marketing contemplated by this
Article 4. Level 3 will identify a "Channel Manager" for the management of this
Agreement to oversee all activities in connection with such cooperative
marketing and to supervise and monitor local cooperative marketing activities.
The Channel Manager's general responsibilities are delineated in Exhibit C. The
Channel Manager will schedule and moderate a day-long seminar for regional sales
groups, which seminars shall be conducted by Customer at its sole cost and
expense, and which will cover the following general topics:

a. overview of Customer and the Advanced Microsoft Hosting Services, as
well as an overview of web hosting services generally;

b. an overview of Level 3 incentive programs for the sales personnel will
be presented by the Channel Manager; and

c. processes for qualification and referral of Prospects.
<PAGE>

July 1, 1999
Page 6

The marketing managers for each party shall use good faith efforts to assure
that the seminars are attended by all relevant and required personnel (it being
Level 3's goal to assure that at least ninety percent (90%) of its sales staff
attends such seminar). The marketing managers of each party will work together
to jointly develop sales support materials, including an overview of the
Customer/Level 3 service package, comprehensive sales kit for distribution to
Prospects and development of a web site (or development of additional pages to
the Level 3 and Customer web sites) to promote the services of each party.
Level 3 shall, within forty five (45) days after execution of this Agreement,
generate a written plan for implementation of the foregoing activities. While
no sales quota or other objective performance criteria is applicable to either
party's performance of this Article 4, the parties agree to define specific
strategic goals of the relationship, periodically evaluate the performance of
both parties hereunder, and work together in good faith to take steps designed
to ensure that the specific strategic goals of the parties are met. The parties
agree that a failure or alleged failure of a party to perform any obligation
imposed by this Article 4 shall not constitute a material default in the
performance of this Agreement.

5.5 Value Added Partner Program. Level 3 will make Customer a
---------------------------
participant in Level 3's "Value Added Partner" program (which is generally
described in Exhibit C) and will provide Customer with all of the benefits
associated with such program (including participation in the web-enabled
customer support system ("WECSS") when such system is implemented by Level 3).
Level 3 reserves the right to change the terms of its "Value Added Partners"
program at any time; provided, however, that in the event that Level 3
materially alters the Value Added Partners program during the Term of this
Agreement, Level 3 and Customer shall meet and discuss measures to preserve the
benefits associated with the program.

5.6 Vendor Relationships. Customer acknowledges that Level 3 has
--------------------
established relationships and high level contacts with certain vendors
(including Microsoft and Compaq) and this Agreement and the relationship created
hereby will not give Customer any right to participate in or otherwise influence
or affect Level 3's business dealings and relationships with such vendors.
Customer also has independent business relationships with certain vendors
(including Microsoft and Compaq) and intends and commits to use those business
relationships in connection with a good faith effort to generate increased
platform demand for Level 3's Services. Further, it is Level 3's intention to
feature Customer's Advanced Microsoft Hosting Services as part of Level 3's
relationship with Microsoft and Compaq. Toward this objective, Customer and
Level 3 will work cooperatively together to address Microsoft initiatives such
Microsoft's Business to Consumer and Business to Business E-Commerce programs in
a manner that features Level 3's Services and Customer's Advanced Microsoft
Hosting Services. Likewise, Data Return and Level 3 will work cooperatively
together to address Compaq market development initiatives in a manner that
features Level 3's Services and Customer's Advanced Microsoft Hosting Services.

5.7 Product Development. Customer and Level 3 will work together to
-------------------
develop new products and services to grow the Advanced Microsoft Hosting
Services. To the extent allowed by Customer's contractual commitments and non-
disclosure agreements with Microsoft, Customer will involve Level 3 in the
"Windows 2000" readiness deployment partners task force.

5.8 Commissions. A sale to a Prospect shall only generate Commission, as
-----------
defined below, if a sale is closed within 120 days of initial introduction of
the Prospect to the selling party. Each party will pay to the other the
commission ("Commission") set forth in this Section. The Commission payable by
Customer hereunder shall be equal to thirty percent (30%) of the gross recurring
revenue (not including any set-up fees) received by Customer in the first full
billing
<PAGE>

July 1, 1999
Page 7

month after initiation of delivery of service to the Prospect received by
Customer as a result of a sale of services to a Prospect introduced to Customer
by Level 3. The Commission payable by Level 3 shall be determined in accordance
with Exhibit D. Only the party which initiated a sales call to a Prospect shall
be entitled to a Commission; any dispute respecting which party is entitled to a
Commission on the sale of services to a Prospect shall be resolved by designated
sales management for each party. A party's failure to pay a Commission allegedly
owing as a result of a good faith dispute shall not constitute a material
default of this Agreement.

5.9 Prospect Terms and Conditions. Each party shall have the sole and
-----------------------------
absolute discretion respecting the terms and conditions for such party's
agreement for the sale of services to Prospects. Nothing in this Agreement
shall be construed to be a binding commitment on the part of either party to
sell services to Prospects. Each party shall be solely responsible for the
performance of any agreements it enters into with any Prospects. Neither party
shall have (or represent to any Prospects that it has) the authority to act as
agent for the other, enter into contracts for, or otherwise commit the other
party to, the delivery of services to any Prospect. Each party shall use its
best efforts to preserve the goodwill and business reputation of the other party
in connection with the cooperative marketing of services contemplated hereby.

ARTICLE 6
DEFAULT AND TERMINATION

In the event that, other than as may be caused by an event of force majeure or
by the wrongful actions or omissions of the other party, a party fails to timely
observe or perform any material covenant, agreement, obligation, term or
condition required to be observed or performed hereunder, which failure is not
cured within thirty (30) days after receipt of written notice thereof (a
"Default"), then the other party may, in addition to any other remedies which it
has hereunder (including but not limited to the remedies set forth in Exhibit D,
which remedies would be applicable for a Default hereunder), terminate this
Agreement by providing written notice of termination to the defaulting party.
In the event that this Agreement is terminated as a result of a Default by
Customer (other than a Default in the payment of money due), then Customer may,
notwithstanding such termination, continue to use the Colocation Space ordered
by Customer hereunder for a period of not longer than 150 days after the
effective date of termination; PROVIDED, however, that (a) Customer timely pays
any charges due for the use of such Colocation Space during such period, and (b)
Customer abides by all other terms and conditions applicable to the use of such
Colocation Space during such period.

ARTICLE 7
GENERAL PROVISIONS

7.1 Press Releases.
--------------

(a) Neither party shall, without the advance written consent of the other
party (which may be granted or withheld in the sole discretion of such party),
issue any press release respecting this Agreement or the terms hereof or
otherwise disclose this Agreement or the terms hereof to any other party.

(b) In the event either party shall be required to disclose all or any
part of this Agreement in, or attach all or any part of this Agreement to, any
regulatory filing or statement, each party agrees to discuss and work
cooperatively, in good faith, with the other party, to protect, to the
<PAGE>

July 1, 1999
Page 8

extent possible, those items or matters which the other party deems confidential
and which may, in accordance with applicable laws, be deleted therefrom.

7.2 No Agency. This Agreement does not constitute either party as the
---------
agent or legal representative of the other party and does not create a
partnership or joint venture between the parties. Neither party shall have any
authority to agree for or bind the other party in any manner whatsoever, unless
otherwise authorized to do so in writing during the Term. This Agreement
confers no rights of any kind upon any third party.

7.3 Entire Agreement; Amendment. This Agreement (including the Customer
---------------------------
Order) sets forth the entire understanding of the parties and supersedes any and
all prior agreements, arrangements or understandings relating to the subject
matter hereof. No subsequent amendment to this Agreement shall be effective or
binding unless it is made in writing by authorized representatives of the
parties.

7.4 Enforceability. If any part of any provision of this Agreement or any
--------------
other Agreement, document or writing given pursuant to or in connection with
this Agreement shall be invalid or unenforceable under applicable law, said part
shall be ineffective to the extent of such invalidity only, without in any way
affecting the remaining parts of said provision or the remaining provisions of
this Agreement.

7.5 Governing Law. This Agreement is made pursuant to and shall be
-------------
construed and enforced in accordance with the laws in force in the State of
Colorado.

7.6 Non-Exclusive. This Agreement is non-exclusive. Except as might result
-------------
from Section 2.3, nothing in this Agreement shall prevent either party from
entering into similar arrangements with, or otherwise providing services to, any
other person or entity.

7.7 Notices. All notices or other communications which are required or
-------
permitted herein shall be in writing and sufficient if delivered personally,
sent by prepaid overnight air courier, or sent by registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:

IF TO LEVEL 3
LEVEL 3 COMMUNICATIONS, LLC
1025 Eldorado Blvd.
Broomfield, Colorado 80021
Attn: General Counsel

IF TO CUSTOMER:
DATA RETURN CORPORATION
801 Stadium Drive
Suite 117
Arlington, Texas 76011
Attn: President

or at such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. Any such
communication shall be deemed to have been given when delivered if delivered
personally, on the business day after dispatch if sent by overnight air courier,
or on the third business day after posting if sent by mail
<PAGE>

July 1, 1999
Page 9

7.8 Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties hereto and their respective successors and
assigns.

7.9 Change of Control. In the event that there is a Change of Control (as
-----------------
defined below) which results in either party owing or being owned by a Direct
Competitor (as defined below) of the other party, then the other party shall (if
it is not then in Default hereunder) have the rights and alternatives specified
herein. If a Change of Control which results in Level 3 owning or being owned by
or being under common ownership with a Direct Competitor of Customer occurs,
then Customer shall have the right, by written notice delivered to Level 3
within thirty (30) days after Customer learns of such event, to elect to:

(a) terminate the obligations of both parties under Article 5 of this
Agreement; and/or

(b) terminate its obligations under Section 2.3 of this Agreement, in which
event Customer would remain obligated to satisfy the purchase commitment
contained in Section 2.2 hereof.

If a Change of Control which results in Customer owning or being owned by or
being under common ownership with a Direct Competitor of Level 3 occurs, then
Level 3 shall have the right, by written notice delivered to Customer within
thirty (30) days after Level 3 learns of such event, to elect to:

(y) terminate the obligations of both parties under Article 5 of the
Agreement; and/or

(z) terminate this Agreement (including the provision of Service to
Customer) in its entirety, in which event Customer would be responsible for
payment of a termination charge equal to the Revenue Commitment for the
balance of the Term hereof (so that if the Agreement was terminated on the
fourth anniversary of the date of this Agreement, for example, Customer
would pay a termination charge of $4 million ($1 million multiplied by the
remaining quarters in the Term).

Provided Customer is not then in default of any other material terms, Customer
shall be permitted a reasonable period of time (not to exceed ninety (90) days)
within which to terminate consumption of Service delivered hereunder (except
that any obligation to vacate the Colocation Space shall occur within the time
frames set forth in Article 6 hereof). For purposes of the foregoing, "Change
of Control" shall mean the act, by any person or entity, of obtaining "control",
meaning ownership (direct or indirect), of more than twenty five percent (25%)
of the equity, or the ability to direct more than twenty five percent (25%) of
voting power, or ability to direct management policies, of an entity. With
respect to Customer, a "Direct Competitor" is any entity that derives revenue
that is greater than or equal to Customer from the sale or delivery of Advanced
NT Hosting Services. With respect to Level 3, a "Direct Competitor" is any
entity that derives more than eighty percent (80%) of its revenue from the sale
or delivery of Services.

7.10 International Negotiations. Promptly following the date hereof, the
--------------
parties agree to negotiate in good faith to enter into an agreement or
agreements for Services on a world-wide basis upon substantially the same terms
and conditions as provided in this Agreement, with appropriate changes to
address (a) non-United States legal issues with respect to the countries in
which such services are to be performed, and (b) different pricing terms to be
agreed by the parties to take into
<PAGE>

July 1, 1999
Page 10

account different costs to Level 3 of providing such services outside of the
United States. Neither party shall be obligated to execute any such agreement or
agreements, and the failure or alleged failure of either party to negotiate in
good faith shall not constitute a Default under Article 6 hereof.

7.11 Multiple Counterparts. This Agreement may be executed in one or more
---------------------
counterparts, which when taken together, shall constitute one and the same
document. The parties hereby agree that facsimile signatures are valid and
binding on the parties.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.

LEVEL 3 COMMUNICATIONS, LLC

By: /s/ Michael C. Knaisch
------------------------------
Its: V.P. WEBBUSINESS
-----------------------------
Dated: JULY 1, 1999
---------------------------

DATA RETURN, INC.

By: /s/ Sunny C. Vanderbeck
------------------------------
Its: Chairman & CEO
-----------------------------
Dated: July 1, 1999
---------------------------

Exhibit A - Pricing
Exhibit B - Colocation Space Ordered by Customer
Exhibit C - Level 3 Value Added Partner Program
Exhibit D - Standard Terms and Conditions for Delivery of Services
<PAGE>

July 1, 1999
Page 11

Exhibit A
Pricing for Broadband Services and Colocation Space

A. Broadband Services Monthly Recurring Charges:
- ---------------------------------------------------

<TABLE>
<CAPTION>
Intra-Gateway Exchange
- -----------------------------------------------------------------------------------------------------
Ethernet Port Speed Year 1* Year 2* Year 3*
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
100 Mbps $ $ $
- -----------------------------------------------------------------------------------------------------
1000 Mbps $ $ $
- -----------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
On-Net Transport
- -----------------------------------------------------------------------------------------------------
Monthly Mbps Year 1* Year 2* Year 3*
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
000-500 Mbps/mo $ $ $
- -----------------------------------------------------------------------------------------------------
500-999 Mbps/mo $ $ $
- -----------------------------------------------------------------------------------------------------
$1,000+ Mbps/mo $ $ $
- -----------------------------------------------------------------------------------------------------

- -----------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Off-Net Transit
- -----------------------------------------------------------------------------------------------------
Monthly Mbps Year 1* Year 2* Year 3*
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
100+ Mbps/mo $ $ $
- -----------------------------------------------------------------------------------------------------
</TABLE>

The foregoing prices for Broadband Services shall be applicable if and only if
Customer is satisfying the Revenue Commitment for Broadband Services set forth
in the Agreement.

B. Broadband Services--Nonrecurring Charges*:
- -----------------------------------------------

Intra-Gateway Exchange Ports: $

C. Colocation Space--Monthly Recurring Charges*:
- --------------------------------------------------

D. Colocation Space--Nonrecurring Charges*:
- ---------------------------------------------

E. Technical Service Package (applies only to use during business hours. After
hours rates apply per hour for service after hours

Charges* Non-Recurring
1 hour $ N/A
3 hour $ N/A
5 hour $ N/A
<PAGE>

July 1, 1999
Page 12

10 hour $ N/A
On-Demand $ N/A
$ N/A

* CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SEC.

Exhibit B
Customer's Colocation Space Order

[To be completed by Customer]
<PAGE>

July 1, 1999
Page 13

Exhibit C
The Level 3 Value Added Partner Program

The Level 3 Value Added Partner Program was developed with the understanding
that our Partner relationships are truly interdependent and are an important
component in positioning Level 3 for success in the telecommunications market.
We have developed a Partner program that is committed to giving our Partners the
products, services, and support they need to meet and exceed their business
objectives while meeting customers' demands.

Level 3 takes pride in carefully selecting Partners that share the idea of
interdependent relationships, quality service and technologically advanced
solutions. The Level 3 Partner Alliance Program is your opportunity to become
part of a highly innovative, industry-leading team experienced in building
powerful relationships.

The Program Philosophy

The Value Added Partner Program was developed to build strategic relationships
that enable Level 3 and its Partners to offer customers one complete solution
for their business and telecommunication needs. As a Level 3 Value Added
Partner, you can expect to work closely with our direct sales teams to offer
Level 3 services alongside their existing value added services. Level 3
acknowledges the value that our Partners bring and has put processes in place to
promote interaction between you and our direct sales team. We strive to ensure
that you have access to, and maximize the use of unique Level 3 resources
designed to help you exceed your business objectives.

Our Value Added Partner Program offers:

. A dedicated support team with proven experience in supporting
successful Partner relationships
. A team sales approach with Level 3 sales organization
. A comprehensive product and service mix that allows you to offer
integrated solutions to your customers
. Innovative management tools
. An aggressive Partner compensation plan
. A unique training certification program

Partner Support

Level 3 realizes that you are dependent on us to be able to service your
customers' needs timely and efficiently. Our Partner support begins with a
dedicated account support and customer care team that has been built by
management well experienced in the Partner industry. Our Partner program also
ensures superior provisioning processes and is in the process of implementing
industry first support tools that will empower you to proactively manage your
customers and proactively respond to their needs.

Each Partner's account team consists of the Channel Sales Manager (CSM), Partner
Account Consultant, Sales Engineer, and Program Coordinator. The Channel Sales
Manager serves as the single point of contact and works with our Partners
through the contracting process and on a day-to-day basis to coordinate and
support sales and retention opportunities. The other members of the
<PAGE>

July 1, 1999
Page 14

Partner's dedicated support team play a critical role in ensuring that the
Partner's orders are implemented in an effective and timely manner.

Finally, the Level 3 Partner Help Desk makes it easy for our Partners by
providing a one-stop shop for Partner inquiries on products, programs, pricing,
or order status and escalations. The Partner Help Desk is unique in that it is
managed by real-time support and is dedicated to serve our Partners only.

Products

As a Level 3 Value Added Partner you will have access to a host of products that
will complete your portfolio and enable you to meet your customers' evolving
needs. Between the value add services our Partners offer, and Level 3 products
and services, customers are provided with one solution.

Our entire product suite will include:

. Dedicated Internet Access
. Private Line
. Managed Modem
. Colocation
. Voice services

Tools

Level 3's superior products and support team are backed by quality back office
systems and innovative support tools. We know that as a Value Added Partner, you
are dependent on the information we provide and timeliness in which we provide
that information. Level 3 is committed to providing advanced on-line systems
that empower you to proactively manage your business.

Access to our On-Line Customer Service Center will ultimately include:

. On-line network performance monitoring
. On-line repair ticket submitting and tracking
. On-line order entry and status inquiry
. On-line access to customer invoices
. On-line communications and training

Compensation

Our highly competitive compensation plan has been designed to reinforce the
relationship between Level 3 and our Value Added Partners. Our compensation plan
provides you with commissions based on net aggregated billed revenues. You will
receive timely monthly payments as well as product specific one-time payments.

Our compensation structure has been designed to avoid channel conflict and
promote interaction between you and our Direct Sales force. Whether the
interaction to complete a sale is initiated by a Level 3 Sales Representative or
Level 3 Value Added Partner, both the VAP and Level 3 Sales
<PAGE>

July 1, 1999
Page 15

Representative receive 100% compensation and 100% of quota relief. This industry
unique plan promotes Partner interaction and drives both Level 3 sales and your
sales.

Training and Certification

The Level 3 Partner Alliance Program consists of a select group of Partners, and
therefore offers a thorough contracting and certification process. We recognize
the value in selecting our Partners carefully and providing you with the
knowledge base they need to succeed. Our Partner certification program has been
customized to meet your needs as a Partner and ensures that you are well
prepared to sell and represent Level 3 today and in the future as each of our
companies grow.
<PAGE>

July 1, 1999
Page 16

[LOGO OF LEVEL(3) COMMUNICATIONS
APPEARS HERE]

General Terms and Conditions
For Delivery of Service

These Terms and Conditions for Delivery of Service are applicable to Customer
Orders executed by Customer for Services delivered by Level 3 Communications,
LLC ("Level 3"), and are incorporated into each Customer Order. The Terms and
Conditions include these General Terms and Conditions for Delivery of Service
and all terms and conditions attached hereto which relate to any Service
provided by Level 3 to Customer. These Terms and Conditions are applicable to
sales of Services originating or terminating in the United States.

DEFINITIONS
-----------

Confidential Information: Licensed Software, and all source code, source
documentation, inventions, know-how, and ideas, updates and any documentation
and information related to the Licensed Software, and any non-public information
regarding the business of a party provided to either party by the other party
where such information is marked or otherwise communicated as being
"proprietary" or "confidential" or the like, or where such information is, by
its nature, confidential.

Committed Data Rate: A commitment made by Customer (where applicable)
obligating it to order and pay for a minimum amount of a Level 3 Service
expressed in Megabits per second (Mbps).

Customer: The person, firm or corporation so named on the Customer Order.

Customer Order: A request for Level 3 Service submitted by the Customer for
acceptance by Level 3.

Facilities: Any and all devices supplied by Level 3 used to deliver Services,
including but not limited to all terminal and other equipment, wires, lines,
circuits, ports, routers, switches, channel service units, data service units,
cabinets, racks, private rooms and the like. Facilities shall not include any
such devices sold to Customer by Level 3 and paid for by Customer or owned by
Customer or any third party.

Licensed Software: Computer software, in object code format only, the use of
which is required for use of Service ordered by Customer.

Premises: The location(s) occupied by Customer or its end users to which Service
will be delivered by Level 3. Premises does not include Space as defined below.

Revenue Commitment: A commitment made by Customer obligating it to order and
pay for a minimum volume of Services during an agreed term.

Service: A service offered by Level 3 pursuant to a Customer Order.

Space: The location(s) within Level 3 gateways into which Customer is permitted
to colocate telecommunications or internet equipment pursuant to a colocation
Customer Order accepted by Level 3.

Target Install Date: A written communication from Level 3 to Customer
indicating the date upon which it is anticipated that Services will be available
to Customer.

SECTION 1. CUSTOMER ORDERS

1.1 Submission of Customer Orders. To order any Service, Customer may submit to
-----------------------------
Level 3 an order form for Services, completed with Level 3's assistance
("Customer Order") requesting the provision of Service. Level 3's delivery of a
Target Install Date respecting such Service shall constitute Level 3's
acceptance of the Customer Order. The Customer Order and its backup detail shall
set forth the Service, the Premises and/or Space, the prices to be charged for
Services and any applicable term and/or Revenue Commitment.

1.2 Undertaking of Level 3. If Level 3 issues a Target Install Date respecting
----------------------
Services, Level 3 will furnish such Services in accordance with the Terms and
Conditions and any Customer Orders.

SECTION 2. BILLING AND PAYMENT

2.1 Payment of Bills. Level 3 bills all charges incurred by Customer on a
----------------
monthly basis. Level 3 bills in advance for all Services to be provided during
the ensuing month, except for charges which are dependent upon usage of Service,
which are billed in arrears. Billing for partial months will be prorated based
on a Calendar month. All bills are due upon receipt, and become past due thirty
(30) days later. The unpaid balance of any past due bills shall bear interest at
a rate of 1.5% per month (prorated on a daily basis beginning on the past due
date), or the highest rate allowed by law, whichever is less.

To the extent Customer orders any service designated as "Burstable," the
following billing method shall apply: Customer will be billed as set forth
above for its Committed Data Rate. In addition, over each month, Customer's
usage of the Service will be sampled by Level 3 in five minute inbound and
outbound averages.
<PAGE>

July 1, 1999
Page 17

At the end of the month, the top ten percent of the inbound and outbound
averages shall be discarded. The highest of the resulting ninetieth percentile
for inbound and outbound traffic will be compared to the Committed Data Rate. If
the ninetieth percentile of either inbound or outbound traffic is higher than
the Committed Data Rate, Customer will, in addition to being billed for its
Committed Data Rate, be billed for its utilization of the Service that exceeds
their Committed Data Rate, which shall be billed at the contracted-for price per
Mbps.

2.2 Taxes and Fees. Except for taxes based on Level 3's net income and ad
--------------
valorem, personal and real property taxes imposed on Level 3's property,
Customer shall be responsible for payment of all sales, use, gross receipts,
excise, access, bypass, franchise or other local, state and federal taxes, fees,
charges, or surcharges, however designated, imposed on or based upon the
provision, sale or use of the Services.

2.3 Regulatory and Legal Changes. In the event of any change in applicable law,
----------------------------
regulation, decision, rule or order that materially increases the costs or other
terms of delivery of Service, Level 3 and Customer agree to negotiate regarding
the rates to be charged to Customer to reflect such increase in cost and, in the
event that the parties are unable to reach agreement respecting new rates within
thirty (30) days after Level 3's delivery of written notice requesting
renegotiation, then (a) Level 3 may pass such increased costs through to
Customer, and (b) Customer may terminate the affected Customer Order without
termination liability upon sixty (60) days' prior written notice.

2.4 Disputed Bills. In the event that Customer disputes any portion of a Level
--------------
3 bill, Customer must pay the undisputed portion of the bill and submit a
written claim for the disputed amount. All claims must be submitted to Level 3
within sixty (60) days of receipt of billing for those Services. Customer
acknowledges that it is able to and that it is reasonable to require Customer to
dispute bills within that time, and Customer therefore waives the right to
dispute charges not disputed within the time frame set forth above.

2.5 Credit Approval and Deposits. Customer shall provide Level 3 with credit
----------------------------
information as requested, and delivery of Service is subject to credit approval.
Level 3 may require Customer to make a deposit (which will not exceed Customer's
estimated charges for two months' Service) as a condition to Level 3's
acceptance of any Customer Order, or as a condition to Level 3's continuation of
Service, which deposit shall be held by Level 3 as security for payment of
Customer's charges. At such time as the provision of Service to Customer is
terminated, the amount of the deposit will be credited to Customer's account and
any credit balance which may remain will be refunded.

2.6 Fraudulent Use of Services. Customer is responsible for all charges
--------------------------
attributable to Customer incurred respecting the Services, even if incurred as
the result of fraudulent or unauthorized use of the Services, unless Level 3 has
actual knowledge of the same and fails to notify Customer thereof. Level 3 may,
but is not obligated to, detect or report unauthorized or fraudulent use of
Services.

SECTION 3. DISCONTINUANCE OF CUSTOMER ORDERS

3.1 Discontinuance of Customer Order by Level 3. Level 3 may terminate any
-------------------------------------------
Customer Order and discontinue Service without liability:
A. If Customer fails to pay a past due balance for Services within thirty (30)
days of written notice thereof provided by Level 3;
B. If Customer violates any law, rule, regulation or policy of any government
authority having jurisdiction over the Services; if Customer makes a material
misrepresentation in any submission of information in a Customer Order or other
submission of information to Level 3; if Customer engages in any fraudulent use
of the Services; or if a court or other government authority having jurisdiction
over the Services prohibits Level 3 from furnishing the Services;
C. If Customer fails to cure its breach of any provision of these Terms and
Conditions or any Customer Order within thirty (30) days written notice thereof
provided by Level 3;
D. If Customer files bankruptcy, for reorganization, or fails to discharge an
involuntary petition therefore within sixty (60) days;
E. If Customer's use of the Services materially exceeds Customer's credit
limit, unless within fourteen (14) days written notice thereof by Level 3,
Customer provides adequate security for payment for the Services.

3.2 Effect of Discontinuance. Upon Level 3's discontinuance of Service to
------------------------
Customer, Level 3 may, in addition to all other remedies that may be available
to Level 3 at law or in equity, assess and collect from Customer any applicable
termination charge.

3.3 Resumption of Service. If Service has been discontinued by Level 3 and
---------------------
Customer requests that Service be restored, Level 3 shall have the sole and
absolute discretion to restore such Service. Nonrecurring charges, with the
exception of any charges for the build-out of Colocation Space already paid by
Customer, may apply to restoration of Service.

3.4 Discontinuance of Customer Order by Customer. Customer shall have the
--------------------------------------------
right to terminate any Customer Order and discontinue Service prior to the end
of the agreed term with respect to which a Customer Order has been executed
without payment of any
<PAGE>

July 1, 1999
Page 18

applicable termination charge if: (i) such Service is Unavailable (as defined
below) on two or more separate occasions of more than eight (8) hours each in
any 30 day period, and (ii) following written notice thereof from Customer to
Level 3, Level 3 has an Unavailability event of more than 12 hours at any time
within the 12 month period immediately following said notice. For purposes of
the foregoing, Unavailability shall mean the period of time beginning when
Customer reports an outage in its Service to the Level 3 Customer Service and
Support Organization (1-877-4LEVEL3) and shall end when the Service is
operative. Unavailability shall not apply to any outage which is caused by
Customer, Customer's end users or any third party, which results from failure of
power or equipment provided by Customer or others, which occurs or continues
during any period in which Level 3 is not given access to the Premises or the
Space, or which results from maintenance events. Customer must exercise its
right to terminate under this Section, in writing, no later than thirty (30)
days after the Unavailability event giving rise to a right of termination
hereunder.

SECTION 4. DELIVERY OF SERVICES

4.1 Level 3 Access to Premises and Space. Customer shall allow Level 3 access
------------------------------------
to the Premises to the extent reasonably determined by Level 3 for the
installation, inspection and scheduled or emergency maintenance of Facilities
relating to the Service. Level 3 shall notify Customer two (2) business days in
advance of any regularly scheduled maintenance that will require access to the
Premises. Level 3 retains the right to access any Space for any legitimate
business purpose.

4.2 Level 3 Facilities. Level 3 will use reasonable efforts to provide and
------------------
maintain the Facilities in good working order. Customer shall not and shall not
permit others to rearrange, disconnect, remove, attempt to repair, or otherwise
tamper with any of the Facilities. If the same occurs without first obtaining
Level 3's written approval, in addition to being a breach by Customer of
Customer's obligations hereunder, Customer shall (1) pay Level 3 the cost to
repair any damage to the Facilities caused thereby; and (2) be responsible for
the payment of service charges in the event that maintenance or inspection of
the Facilities is required as a result of Customer's breach of this Section. In
no event shall Level 3 be liable to Customer or any other person for
interruption of Service or for any other loss, cost or damage caused or related
to improper use or maintenance of the Facilities, unless the same is caused by
the negligence of Level 3, and then only to the extent of Section 5.2

4.3 Title and Power. Title to all Facilities (except as otherwise agreed)
---------------
shall remain with Level 3. The electric power consumed by such Facilities on the
Premises shall be provided by and maintained at the expense of Customer.
Electric power to the Space shall be provided by Level 3.

4.4 Customer-Provided Equipment. Level 3 may install certain Customer provided
---------------------------
communications equipment upon installation of Service and the Facilities, but
unless otherwise agreed by Level 3 in writing, Level 3 shall not thereafter be
responsible for the operation or maintenance of any Customer provided
communication equipment. Level 3 shall not be responsible for the transmission
or reception of signals by Customer-provided equipment or for the quality of, or
defects in, such transmission.

4.5 Removal of Facilities. Customer agrees to allow Level 3 to remove all
---------------------
Facilities from the Premises:
A. after termination of the Service in connection with which the Facilities
were used; and
B. for repair, replacement or otherwise as Level 3 may determine is necessary,
but Level 3 shall use reasonable efforts to minimize disruptions to the Service
caused thereby.

At the time of such removal, the Facilities shall be in the same condition as
when installed, normal wear and tear excepted. Customer shall reimburse Level 3
for the depreciated cost of any Facilities not in such condition.

4.6 Service Subject to Availability. The furnishing of Service is subject to
-------------------------------
the availability thereof, on a continuing basis, and is limited to the capacity
of Level 3 to provide the Service as well as the capacity which Level 3 may
obtain from other carriers to furnish Service from time to time as required at
the sole discretion of Level 3. Nothing in these Terms and Conditions shall be
construed to obligate Customer to submit, or Level 3 to accept, Customer Orders.
In the event Service becomes unavailable pursuant to this paragraph 4.6,
Customer shall have the rights set forth in Section 3.4 of these Terms and
Conditions.

SECTION 5. OBLIGATIONS AND LIABILITY LIMITATION

5.1 Obligations of the Customer. Customer shall be responsible for:
---------------------------
A. The payment of all charges applicable to the Service;
B. Damage or loss of the Facilities installed on the Premises or in the Space
(unless caused by the negligence or willful misconduct of the employees or
agents of Level 3);
C. Providing the level of power, heating and air conditioning necessary to
maintain the proper environment on the Premises for the provision of Service;
D. Providing a safe place to work and complying with all laws and regulations
regarding the working conditions on the Premises;
<PAGE>

July 1, 1999
Page 19

E. Granting Level 3 or its employees access to the Premises as set forth in
Section 4.1 of these Terms and Conditions; and
F. Keeping Level 3's Facilities located on Premises free and clear of any liens
or encumbrances.

5.2 Liability. Except as provided in Section 8.4, the liability of Level 3 for
---------
damages arising out of the furnishing of or the failure to furnish Service,
including but not limited to mistakes, omissions, interruptions, delays,
tortious conduct, representations, errors, or other defects, whether caused by
acts of commission or omission, shall be limited to the extension of credit
allowances or refunds due under any applicable Service Level Agreement. Except
as provided in Section 8.4, the extension of such credit allowances or refunds
shall be the sole remedy of Customer and the sole liability of Level 3.

5.3 No Special Damages. Notwithstanding any other provision hereof, neither
------------------
party shall be liable for any indirect, incidental, special, consequential,
exemplary or punitive damages (including but not limited to damages for lost
profits or lost revenues), whether or not caused by the acts or omissions or
negligence of its employees or agents, and regardless of whether such party has
been informed of the possibility or likelihood of such damages.

5.4 Disclaimer of Warranties. LEVEL 3 MAKES NO WARRANTIES OR REPRESENTATIONS,
------------------------
EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, STATUTORY OR
OTHERWISE, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
USE, EXCEPT THOSE EXPRESSLY SET FORTH IN ANY APPLICABLE SERVICE LEVEL AGREEMENT.

SECTION 6. SOFTWARE TERMS

6.1 License. If and to the extent that Customer requires the use of Licensed
-------
Software in order to use the Service supplied under any Customer Order, Customer
shall have a nonexclusive, nontransferable (except pursuant to paragraph 8.2
hereof) license to use such Licensed Software only and solely to the extent
required to permit delivery of the Service. Customer may not claim title to or
any ownership interest in any Licensed Software (or any derivations or
improvements thereto), and Customer shall execute any documentation reasonably
required by Level 3 to memorialize Level 3's existing and continued ownership of
the Licensed Software.

6.2 Restrictions. Customer agrees that it shall not:
------------
A. copy the Licensed Software except for emergency backup purposes or as
permitted by the express written consent of Level 3;
B. reverse engineer, decompile or disassemble the Licensed Software;
C. sell, lease, license or sublicense the Licensed Software; or
D. create, write or develop any derivative software or any other software
program based on the Licensed Software.

SECTION 7. CONFIDENTIAL INFORMATION

7.1 Disclosure and Use. Any Confidential Information disclosed by either party
------------------
shall be kept by the receiving party in strict confidence and not disclose to
any third party (except as authorized by these Terms and Conditions) without
the disclosing party's express written consent. Each party agrees to treat all
Confidential Information of the other in the same manner as it treats its own
proprietary information, but in no case will the degree of care be less than
reasonable care.

7.2 Restricted Use. Each party agrees:
--------------
A. to use Confidential Information only for the purposes of performance of any
Customer Order or as otherwise expressly permitted by these Terms and
Conditions;
B. not to make copies of Confidential Information or any part thereof except for
purposes consistent with these Terms and Conditions; and
C. to reproduce and maintain on any copies of any Confidential Information such
proprietary legends or notices (whether of disclosing party or a third party) as
are contained in or on the original or as the disclosing party may otherwise
reasonably request.

7.3 Exceptions. Notwithstanding the foregoing, each party's confidentiality
----------
obligations hereunder shall not apply to information which:
A. is already known to the receiving party;
B. becomes publicly available without fault of the receiving party;
C. is rightfully obtained by the receiving party from a third party without
restriction as to disclosure, or is approved for release by written
authorization of the disclosing party;
D. is developed independently by the receiving party without use of the
disclosing party's Confidential Information;
E. is required to be disclosed by law.

7.4 Publicity. This agreement grants no right to use any party's or its
---------
affiliates' trademarks, service marks or trade names or to otherwise refer to
the other party in any marketing, promotional or advertising materials or
activities. Neither party shall issue any publication or press release relating
to, or otherwise disclose the existence of, or the terms and conditions of any
contractual relationship between Level 3 and Customer, except as may be required
by law.
<PAGE>

July 1, 1999
Page 20

7.5 Remedies. Notwithstanding any other section of these Terms and Conditions,
--------
the non-breaching party shall be entitled to seek equitable relief to protect
its interests, including but not limited to preliminary and permanent injunctive
relief. Nothing stated herein shall be construed to limit any other remedies
available to the parties.

7.6 Survival. The obligations of confidentiality and limitation of use shall
--------
survive the termination of any applicable Customer Order.

SECTION 8. GENERAL TERMS

8.1 Force Majeure. Neither party shall be liable, nor shall any credit
-------------
allowance or other remedy be extended, for any failure of performance or
equipment due to causes beyond such party's reasonable control, including but
not limited to: acts of God, fire, flood or other catastrophes; any law, order,
regulation, direction, action, or request of any governmental entity or agency,
or any civil or military authority; national emergencies, insurrections, riots,
wars; unavailability of rights-of-way or materials; or strikes, lock-outs, work
stoppages, or other labor difficulties. In the event any of the foregoing occur
and Level 3 is unable to deliver the Service for fourteen (14) consecutive days,
Customer shall not be obligated to pay Level 3 for the affected Service for so
long as Level 3 is unable to deliver them, provided, however, that the term of
the Customer Order respecting those Services shall be extended for a period of
time equal to the period of time for which Level 3 was unable to provide and
Customer was not required to pay for the affected Service.

8.2 Assignment or Transfer. Except with respect to a merger or sale of
----------------------
substantially all of Customer's assets, Customer may not transfer, sublease or
assign the use of Service without the express prior written consent of Level 3,
and then only when such transfer or assignment can be accomplished without
interruption of the use or location of Service. Level 3 will not unreasonably
withhold its consent. These Terms and Conditions shall apply to any transferees
or assignees. Customer shall remain liable for the payment of all charges due
under each Customer Order.

8.3 Notices. Notices hereunder shall be deemed properly given when delivered,
-------
if delivered in person, or when sent via facsimile, overnight courier,
electronic mail or when deposited with the U.S. Postal Service, (a) with respect
to Customer, the address listed on any Customer Order, or (b) with respect to
Level 3, to: Contracts Administration, Level 3 Communications, LLC, 1450
Infinite Drive, Louisville, CO 80027. Customer shall notify Level 3 of any
changes to its addresses listed on any Customer Order.

8.4 Indemnification by Level 3. Level 3 shall indemnify, defend and hold
--------------------------
Customer harmless from any claim, loss, damage, expense or liability (including
attorney's fees and court costs) (hereinafter "Claims") made against Customer
for property damage, patent infringement or personal injury caused by Level 3's
negligence or willful misconduct.

8.5 Indemnification by Customer. Customer shall indemnify, defend and hold
---------------------------
Level 3 harmless from Claims (including Claims for patent infringement) (i) made
against Level 3 by any end user of Customer in connection with the delivery or
consumption of Service, (ii) made against Level 3 arising out of any commission
or negligent omission by Customer in connection with the Service, or (iii)
arising from Customer's negligence or willful misconduct.

8.6 Application of Tariffs. Level 3 may elect or be required to file with the
-----------------------
appropriate regulatory agency tariffs respecting the delivery of certain
Service. In the event that such tariffs are filed respecting Service ordered by
Customer, then (to the extent such provisions are not inconsistent with the
terms of a Customer Order) the terms set forth in the applicable tariff shall
govern Level 3's delivery of, and Customer's consumption or use of, such
Service.

8.7 Contents of Communications Level 3 does not monitor and shall have no
--------------------------
liability or responsibility for the content of any communications transmitted
via the Service, and Customer shall hold Level 3 harmless from any and all
claims (including claims by governmental entities seeking to impose penal
sanctions) related to such content attributable to Customer or its agents,
employees or end users.

8.8 Entire Understanding These Terms and Conditions, including any Customer
--------------------
Orders executed hereunder, constitute the entire understanding of the parties
related to the subject matter hereof. In the event of any conflict between these
Terms and Conditions and the terms and conditions of any Customer Order, these
Terms and Conditions shall control. These Terms and Conditions shall be
governed and construed in accordance with the laws of the state of Colorado.

8.9 No Waiver. No failure by either party to enforce any rights hereunder shall
---------
constitute a waiver of such right(s).
<PAGE>

July 1, 1999
Page 21

ADDITIONAL TERMS AND CONDITIONS
FOR PRIVATE LINE SERVICE

The following additional terms and conditions are applicable where, pursuant to
a Customer Order, Customer orders metropolitan (local), city to city (within the
United States) and international (from the United States to another country)
private line, non-switchable circuits (the "Private Line Services").

1. Any state or federal tariffs applicable to the Private Line Services to be
delivered under any Customer Order are incorporated into the terms thereof.
Level 3's pricing to Customer for Private Line Services may, if required, be
subject to PUC or other regulatory approval.

2. The nonrecurring charges and monthly recurring rates for the Private Line
Services provided by Level 3 are shall be set forth in each Customer Order.

3. The rates and other charges set forth in each Customer Order are established
in reliance on the term commitment made therein, and Customer shall pay the same
in accordance therewith. In the event that Customer terminates Services ordered
in any Customer Order which is accepted by Level 3 or in the event that the
delivery of Services is terminated due to a failure of Customer to satisfy the
requirements set forth in these Terms and Conditions prior to the end of the
agreed term, Customer shall (unless Customer has made a Revenue Commitment) pay
a termination charge equal to the percentage of the monthly recurring charges
for the terminated Private Line Services calculated as follows:

A. 100% of the monthly recurring charge that would have been incurred for the
Private Line Service for months 1-12 of the agreed term; plus

B. 75% of the monthly recurring charge that would have been incurred for the
Private Line Service for months 13-24 of the agreed term; plus

C. 50% of the monthly recurring charge that would have been incurred for the
Private Line Service for months 25 through the end of the agreed term.

In the event that a Revenue Commitment is made and is then being satisfied by
Customer, Customer may terminate, rearrange or reconfigure the Private Line
Services ordered under a Customer Order without payment of the termination
charge specified above; PROVIDED, HOWEVER, that Customer shall be responsible
for payment of Level 3's then-current standard nonrecurring charges applicable
to such termination, rearrangement or reconfiguration.

4. Level 3 makes the Service Level Agreements in the attached Exhibit "A"
respecting Private Line Service.

<PAGE>

July 1, 1999
Page 22

Standard Service Level Agreement (SLA)
--------------------------------------
International / US National Private Line

International/National Private Line service will be backed by a Standard Service
Level Agreement that has two components: a Service Delivery SLA and a Network
Performance SLA.

NOTE: The total number of credits per month for both Service Delivery is limited
to four days.

Service Delivery SLA
- --------------------
<TABLE>
<CAPTION>
============================================================================================
US On-net City Standard Service Delivery Intervals
(US NPLS and IPL)
============================================================================================
Nx64K, DS1, E1* DS3 0C3/0C12
- --------------------------------------------------------------------------------------------
US NPLS IPL US NPLS IPL US NPLS IPL
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
On-Net 20 20 30 30 40 30
working working working working working
days days days days days
- --------------------------------------------------------------------------------------------
Off-Net building 30 60 45 60 60 ICB
within SSA working working working working working
(either end) days days days days days
- --------------------------------------------------------------------------------------------
Off-net building 30 60 45 60 70 ICB
outside SSA (within working working working working working
50 miles) days days days days days
(either end)
============================================================================================
<CAPTION>
============================================================================================
US Domestic Served Standard Service Delivery Intervals
Off-net City1
============================================================================================
DS1 DS3 0C3
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
One side of the 30 working days 45 working days 60 working days (70 days
circuit is served by would apply if the
an off-net city POP customer location served
by the gateway city is
outside of the SSA)
============================================================================================
</TABLE>

* Off-net building must have DS3 local service availability in order to
support

** E1 delivery is available in NYC only and is dependant upon local
availability of E1 delivery

. Single toll-free number to reach Level 3 Customer Service for all customer
issues, including technical, billing, and product inquiries.

. Mean Time to Respond - Within 30 minutes

. 2 hour calendar month Average Time To Repair (ATTR)

If Level 3 fails to meet any of the guarantees above, Level 3 will review all
reported failures at the end of the month, and calculate the applicable credits:

. Any customer inquiry to the Level 3 Customer Service Center that results in
a Time to Respond of Greater than 30 minutes will result in a one day
service credit when the customer notifies Level 3 of the failure.

. ATTR is calculated as a monthly average. All reported customer trouble
tickets will be totaled over the month, then the average time to close each
ticket will be calculated. If the ATTR is greater than 2 hours, the
customer will receive a one day service credit.
<PAGE>

July 1, 1999
Page 23

. Credits will only be applied to events where the Customer reports a failure
to the Level 3 Customer Care organization. Customers must report any
Service Delivery failures within five business days of the event

Network Performance SLA

. 99.99 % Service Availability

. Target Bit Error Rate 1

End-to-end link (Level 3 on-net) Less than 1 x 10-11 at T1 Rate
(equivalent rate for DS0 1x10-6)
End-to-end link (Non-Level 3 access) Less than 1 x 10-7 (Dependent
on local supplier)

. Target Severely Errored Seconds 2

End-to-end link (Level 3 fiber access) Less than 0.008%
End-to-end link (Non-Level 3 access) Less than 0.013% (Dependent on
local supplier)

. Availability refers to customer's access point to the Level 3 Backbone
Network, including their Level 3 provided local access circuit.

. Availability does not include regularly scheduled or emergency maintenance
events, or customer caused outages or disruptions.

. Customers may report service unavailability events of longer than 15
consecutive minutes to Level 3 customer service within 48 hours of the
event. If the event is confirmed by Level 3 customer service, the customer
will receive a pro-rated service credit that equals the time of the
unavailability.

NOTES:

. All measurements are based on monthly averages.

. These guarantees only apply to the Level 3 Network (including the Local
Access to the customer). They do not apply to off-net city circuits which
do not transit the Level 3 Backbone Network (or the portion the circuit
which does not transit the Level 3 Backbone)

. This SLA does not apply to periods of regularly scheduled or emergency
maintenance that Level 3 performs on its network or associated hardware and
software.

. Credits will only be applied to events where the Customer reports a network
performance failure to the Level 3 Customer Care organization.

. Customers must report any Network Performance failures (unavailability or
delay) within 48 hours (two business days) of the service affecting event
in order to receive a credit. Customers must report any Service Delivery
failures within five business days of the event.

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

1 Bit Error Rate Figure excludes periods of more than 10 seconds having error
rates equal to, or worse than 1x10-3

2 Severely Errored Seconds have bit error rates, to, or worse than 1x10-3
<PAGE>

July 1, 1999
Page 24

ADDITIONAL TERMS AND CONDITIONS
FOR TELEPHONY AND IP COLOCATION

The following additional terms and conditions are applicable where, pursuant to
a Customer Order, Customer orders the use of space within Level 3 gateways to be
used for the purpose of colocating telecommunications equipment or equipment
used for connection to the internet (the "Space").

1. Customer is granted the right to occupy the Space identified in a Customer
Order. Customer shall be permitted reasonable access to the Space subject to any
and all rules, regulations and access requirements imposed by Level 3 governing
such access. Customer may submit multiple Customer Orders requesting use of
different Space, each of which shall be governed by the terms hereof.

2. Customer shall be permitted to use the Space only for placement and
maintenance of communications equipment. The nonrecurring and monthly recurring
charges for the Space and any Services ordered by Customer shall be set forth in
each Customer Order. Customer hereby agrees, within six (6) months of ordering
such Space, to use the Space for placement and maintenance of telecommunications
or internet access equipment. In the event Customer fails to fill said Space as
set forth herein, Level 3 has the right to reclaim the proportion of Space not
being used exclusively as indicated above, if the same is not cured within
forty-five (45) days' prior notice thereof to Customer. Customer agrees to
immediately vacate such recaptured Space and Level 3 shall reduce the Colocation
fees allocated to such recaptured Space. Customer further agrees that no refunds
shall be made to Customer regarding such recaptured Space.

3. Level 3 shall perform such janitorial services, environmental systems
maintenance, power plant maintenance and other actions as are reasonably
required to maintain the gateway in which the Space is located in a condition
which is suitable for the placement of telecommunications and internet access
equipment. Customer shall maintain the Space in an orderly and safe condition,
and shall return the Space to Level 3 at the conclusion of the term set forth in
the Customer Order in the same condition (reasonable wear and tear excepted) as
when such Space was delivered to Customer. EXCEPT AS EXPRESSLY STATED HEREIN OR
IN ANY CUSTOMER ORDER, THE SPACE SHALL BE DELIVERED AND ACCEPTED "AS IS" BY
CUSTOMER, AND NO REPRESENTATION HAS BEEN MADE BY LEVEL 3 AS TO THE FITNESS OF
THE SPACE FOR CUSTOMER'S INTENDED PURPOSE.

4. The term of use of the Space shall begin on the later to occur of the date
requested by Customer or the date that Level 3 completes the build-out of the
Space. Customer's use of the Space beyond the initial term shall be on a
month-to-month basis, unless Customer and Level 3 have agreed in writing to a
renewal of the right to use such Space. Customer hereby agrees to pay for the
Space and any related Services for the term of this Agreement. The rates and
other charges set forth in each Customer Order are established in reliance on
the term commitment made therein. In the event that Customer terminates a
Customer Order for Space which is accepted by Level 3 or in the event that the
Customer Order is terminated due to a failure of Customer to satisfy the
requirements set forth herein or in the Customer Order prior to the end of the
agreed term, Customer shall pay a termination charge equal to the costs incurred
by Level 3 in returning the Space to a condition suitable for use by other
parties, plus the percentage of the monthly recurring fees for the terminated
Space calculated as follows:

a. 100% of the monthly recurring fees that would have been charged for the Space
for months 1-12 of the agreed term; plus

b. 75% of the monthly recurring fees that would have been charged for the Space
for months 13-24 of the agreed term; plus

c. 50% of the monthly recurring fees that would have been charged for the Space
for months 25 through the end of the agreed term.

In the event that a Revenue Commitment is made and is then being satisfied by
Customer, Customer may terminate the Space ordered pursuant to a Customer Order
without payment of the termination charge specified above; PROVIDED, HOWEVER,
that Customer shall be responsible for payment of Level 3's then-current
standard nonrecurring charges applicable to such termination.

5. Level 3 shall use reasonable efforts to complete the build-out and make the
Space available to Customer on or before the date requested by Customer. In the
event that Level 3 fails to complete the build-out within sixty (60) days of the
date requested by Customer, then Customer may terminate its rights to use such
Space and receive a refund of any fees paid for the use or build-out of such
Space.

6. Customer shall abide by any posted or otherwise communicated rules relating
to use of, access to, or
<PAGE>

July 1, 1999
Page 25

security measures respecting the Space. Customers use of the Space will be
immediately terminated in the event Customer or any of its agents or employees
is found in Level 3's gateway with any firearms, drugs, alcohol or is found
engaging in any criminal activity, eavesdropping, foreign intelligence, card
selling or slamming. Persons found engaging in any such activity or in
possession of the aforementioned prohibited items will be immediately escorted
from the gateway. In the event that unauthorized parties gain access to the
Space through access cards, keys or other access devices provided to Customer,
Customer shall be responsible for any damages incurred as a result thereof.
Customer shall be responsible for the cost of replacing any security devices
lost or stolen after delivery thereof to Customer. In addition, Level 3 shall
have the right to terminate Customer's use of the Space or the Services in the
event that: (a) Level 3's rights to use the facility within which the Space is
located terminates or expires for any reason; (b) Customer has violated the
terms hereof or of any Customer Order submitted hereunder; (c) Customer makes
any material alterations to the Space without first obtaining the written
consent of Level 3; (d) Customer allows personnel or contractors to enter the
Space who have not been approved by Level 3 in advance; or (e) Customer violates
any posted or otherwise communicated rules relating to use of or access to the
Space. With respect to items (b), (c), (d) and (e) immediately above, unless the
same interferes or has the potential to interfere with other Level 3 Colocation
customers, Level 3 shall provide Customer a written notice of the foregoing and
a 10-day opportunity to cure the same before terminating Customer's rights to
the Space.

7. Customer may sublease the Space under the following conditions: i) all
proposed sublessees must be approved, in writing, by Level 3 in Level 3's sole
discretion; ii) Customer hereby guarantees that all Sublessees shall abide by
all terms and conditions set forth between Customer and Level 3; iii) Customer
shall indemnify, defend and hold Level 3 harmless from all claims brought
against Level 3 arising from any act or omission of any subcontractor and iv)
any sublessee shall be considered customer's agent and all of sublessees' acts
and omissions and usage of the Space or Services hereunder shall be attributable
to Customer for the purposes of these Terms and Conditions.

8. Level 3 reserves the right to change the location or configuration of the
Space, provided, however, that Level 3 shall not arbitrarily or discriminatorily
require such changes. Level 3 and Customer shall work in good faith to minimize
any disruption in Customer's services that may be caused by such changes in
location or configuration of the Space.

9. Prior to occupancy and during the term of use of any Space, Customer shall
procure and maintain the following minimum insurance coverage: (a) Workers'
Compensation in compliance with all applicable statutes of appropriate
jurisdiction. Employer's Liability with limits of $500,000 each accident; (b)
Commercial General Liability with combined single limits of $1,000,000 each
occurrence; and (c) "All Risk" Property insurance covering all of Customers
personal property located in the Space. Customer's Commercial General Liability
policy shall be endorsed to show Level 3 (and any underlying property owner, as
requested by Level 3) as an additional insured. All policies shall provide that
Customer's insurers waive all rights of subrogation against Level 3. Customer
shall furnish Level 3 with certificates of insurance demonstrating that Customer
has obtained the required insurance coverages prior to occupancy of the Space.
Such certificates shall contain a statement that the insurance coverage shall
not be materially changed or cancelled without at least thirty (30) days prior
written notice to Level 3. Customer shall require any contractor entering the
Space on its behalf to procure and maintain the same types, amounts and coverage
extensions as required of Customer above.

10. Customer may order and pay for Level 3 to perform certain limited ("remote
hands") maintenance services on Customer's equipment within the space, which
shall be performed in accordance with Customer's directions. "Remote hands"
maintenance services includes power cycling equipment. Level 3 shall in no event
be responsible for the repair, configuration or tuning of equipment, or for
installation of Customer's equipment (although Level 3 will provide reasonable
assistance to Customer in such installation).
<PAGE>

July 1, 1999
Page 26

ADDITIONAL TERMS AND CONDITIONS
FOR DEDICATED, RAPID ACCESS AND DIAL UP
INTERNET ACCESS

The following additional terms and conditions are applicable where, pursuant to
a Customer Order, Customer orders dedicated, rapid access and/or dial-up
Internet Access Service (the "Internet Access Services").

1. Any state or federal tariffs applicable to the Internet Access Services to be
delivered under any Customer Order are incorporated into the terms thereof. The
Internet Access Services shall at all times be used in compliance with Level 3's
then-current Acceptable Use Policy and Privacy Policy, as amended by Level 3
from time to time and which are available through Level 3's web site.

2. The nonrecurring charges and monthly recurring rates for the Internet Access
Services provided by Level 3 to Customer are set forth in each Customer Order.

3. The rates and other charges set forth in each Customer Order are established
in reliance on the term and/or volume commitment made therein, and Customer
agrees to pay the same. In the event that Customer terminates Internet Access
Services ordered in any Customer Order which is accepted by Level 3 or in the
event that the delivery of Internet Access Services is terminated due to a
failure of Customer to satisfy the requirements set forth herein or in the
Customer Order prior to the end of the agreed term, Customer shall (unless
Customer has made a Revenue Commitment) pay a termination charge equal to the
percentage of the monthly recurring charges for the terminated Internet Access
Services calculated as follows:

a. 100% of the monthly recurring charge that would have been incurred for the
Internet Access Service for months 1-12 of the agreed term; plus

b. 75% of the monthly recurring charge that would have been incurred for the
Internet Access Service for months 13-24 of the agreed term; plus

c. 50% of the monthly recurring charge that would have been incurred for the
Internet Access Service for months 25 through the end of the agreed term.

Customer may, in the event that a Revenue Commitment is made and is then being
satisfied by Customer, terminate, rearrange or reconfigure the Internet Access
Services ordered under a Customer Order without payment of the termination
charge specified above; PROVIDED, HOWEVER, that Customer shall be responsible
for payment of Level 3's then-current standard nonrecurring charges applicable
to such termination, rearrangement or reconfiguration.

4. Level 3 provides only access to the Internet; Level 3 does not operate or
control the information, services, opinions or other content of the Internet.
Customer agrees that it shall make no claim whatsoever against Level 3 relating
to the content of the Internet or respecting any information, product, service
or software ordered through or provided by virtue of the Internet.

5. This Section 5 applies only to Customers who order Dial-Up Internet Access
Services. The Dial-Up Internet Access Services shall be used only by an officer,
director, employee or agent ("Employee") of Customer. Customer shall assure that
each Employee accessing the Dial-Up Internet Access Service abides by these
Terms and Conditions. Prior to any Employee accessing Dial-Up Internet Access
Services, such Employee will be required to accurately complete an on-line
registration process. During this registration process, each Employee will be
required to identify himself/herself through some means satisfactory to Level 3.
Pursuant to the registration process, by clicking an "ACCEPT" icon, each
Employee will (i) agree to accurately complete the registration; (ii) agree to
abide by all of the provisions, terms, limitations, conditions and restrictions
of these Terms and Conditions; and (iii) agree to use the Dial-Up Internet
Access Services in accordance with any requirements set forth in the online
registration process and for the legitimate business purposes of Customer only.
Each Employee will also receive a password which such Employee will agree to
keep in strict confidence and which will be required whenever accessing the
Dial-Up Internet Access Services.

6. If Customer orders Burstable Dedicated Internet Access Services pursuant to a
Customer Order, the Customer shall be permitted to make two (2) changes to its
Committed Data Rate each contract year, provided that such change be to a higher
Committed Data Rate.

7. This Section 7 applies only to Customers who order Dedicated Internet Access
and Rapid Access Services. Level 3 makes the following Service Level Agreements
attached as Exhibit "A" respecting Dedicated Internet Access and Rapid Access
Service.
<PAGE>

July 1, 1999
Page 27

Standard Service Level Agreement (SLA)
--------------------------------------
Release 1
---------
Internet Dedicated Access

Dedicated Internet Access service will be backed by a Standard Service Level
Agreement that has two components: a Service Delivery SLA and a Network
Performance SLA.

NOTE: The total number of credits per month for both Service Delivery and
Network Performance is limited to four days.

Service Delivery SLA

. 30 Calendar Day Installation Guarantee for Customers buying Dedicated
Internet Access in speeds from 64 Kbps - 1.544 Kbps within the Standard
Service Area.

. 45 Calendar Day Installation Guarantee for Customers buying Dedicated
Internet Access in speeds from 3 Mbps - 45 Mbps within the Standard Service
Area.

. Single toll-free number to reach Level 3 Customer Service for all customer
issues, including technical, billing, and product inquiries.

. Time to Respond - Within 30 minutes

. 2 hour calendar month Average Time To Repair (ATTR)

If Level 3 fails to meet any of the guarantees above, Level 3 will review all
reported failures at the end of the month, and calculate the applicable credits:

Network Performance SLA
Service Availability

. Availability refers to customer's access point to the Level 3 Internet
network, including their Level 3 provided local access circuit, and the
customer's port.

. Unavailability Events are defined as any outage of the Level 3 provided
local access circuit and the customer's port of longer than 15 consecutive
minutes.

. The Availability Guarantee does not extend to the performance of Internet
networks controlled by other companies, or traffic exchange points
(including NAPs and MAEs) which are controlled by other companies.

. Availability does not include regularly scheduled or emergency maintenance
events, or customer caused outages or disruptions.

July 1, 1999
Page 28

. 40 ms One-Way Delay Guarantee

. The Delay guarantee refers to the average delay parameters among the Level
3 Gateway sites in the United States. It does not extend to the customer's
local access circuit, transit or peering connections, or to circuits to the
traffic exchange points, including NAPs and MAEs.

. Delay is measured as the average delay, over a calendar month, of traffic
between all major Gateways on the Level 3 U.S. Internet network.

. Level 3 will publicly report the Average Monthly Delay measurement for the
Level 3 U.S. Internet Network at the end of every month.

. If the customer reports that Level 3 has failed to meet the Delay
guarantee, and this is confirmed by Level 3 customer service, the customer
will be issued one day service credit.

NOTES:

. All measurements are based on monthly averages.

. These guarantees only apply to the Level 3 Internet Network. They do not
apply to NAP or transit connections, or to any traffic once it leaves the
Level 3 network.

. This SLA does not apply to periods of regularly scheduled or emergency
maintenance that Level 3 performs on its network or associated hardware and
software.

. Credits will only be applied to events where the Customer reports a network
performance failure to the Level 3 Customer Care organization.

July 1, 1999
Page 29

ADDITIONAL TERMS AND CONDITIONS
FOR MANAGED MODEM - DEDICATED AND QUICKSTART
TRANSIT SERVICES

The following additional terms and conditions are applicable where, pursuant to
a Customer Order Customer orders services required to allow access to "Dedicated
Services," "Dedicated Service with QuickStart" and "Transit Services" as offered
by Level 3 (the "Managed Modem Services") ordered by Customer under any Customer
Order.

1. Any state or federal tariffs applicable to the Managed Modem Services to be
delivered under any Customer Order are incorporated into the terms thereof. The
Managed Modem Services shall at all times be used in compliance with Level 3's
then-current Acceptable Use Policy and Privacy Policy, as amended by Level 3
from time to time and which are available through Level 3's web site.

2. In the event Customer orders "Dedicated Service," end user traffic will be
routed through and aggregated in Level 3's facility, sent to the Customer's
Premises via a dedicated circuit, and then routed to its final destination by
Customer. In the event that Customer orders "Transit Services," End User traffic
will be routed to Level 3's facility and then routed to its final destination by
Level 3 via the Internet. Dedicated Service with "QuickStart" will initially be
provisioned to the Customer in the same fashion as Transit Services, until such
time as Level 3 has provisioned the dedicated circuit to send end user traffic
from Level 3's facility to the Customer's Premises. QuickStart will then be
migrated to standard Dedicated Service. Customers ordering Dedicated Services
will be required to make a portion of the Premises available to Level 3 for the
placement of equipment necessary to provide such Dedicated Services. For
Dedicated Service, all Customer CPE as well as the private line necessary to
support this service will be ordered, installed and managed by Level 3. Any
telephone numbers assigned to Customer for the purpose of providing Managed
Modem Services hereunder shall be property of Level 3; PROVIDED, however, that
Level 3 shall be obligated to release such numbers to Customer upon expiration
or termination hereof if and only if Customer is then in compliance with all of
the terms contained herein or in the General Terms and Conditions.

3. Section 1.1 of the General Terms and Conditions for Delivery of Service
notwithstanding, a Customer order for Managed Modem Service shall be accepted by
Level 3 once Level 3 has provisioned and tested the ports. Customer's billing
respecting said ports shall commence once tested and found to be functioning
properly by Level 3 notwithstanding Customer's: i) refusal to accept the ports
or ii) Customer's refusal to acknowledge communications by Level 3 to Customer
respecting the ports. Termination liability shall apply once a Customer Order
for these Services is accepted by Level 3.

4. Customer shall have the option to purchase twenty percent (20%) port overage
from Level 3. If ordered, Level 3 shall provision an additional twenty percent
(20%) of ports over the number of ports actually ordered by Customer to accept
Customer traffic in the event Customer's traffic bursts and its usage exceeds
the capacity of the ports actually ordered. In the event Customer chooses not to
purchase twenty percent (20%) port overage from Level 3, if the Customer's
traffic bursts as set forth above, Customer will get a busy signal in the event
its ordered capacity is exceeded.

5. Customer must utilize all Managed Modem ports provisioned hereunder at no
less than fifty percent (50%) of the capacity of such port. Customer agrees to
allow Level 3 to monitor Customer's utilization of the ports provisioned herein.
In the event Customer is Under-Utilizing (as defined below) such ports, Level 3
retains the right to reclaim such ports after which Customer shall have no
further right to use the ports Under-Utilized. Termination liability shall apply
to any ports reclaimed pursuant to this paragraph.

For the purpose of this Section, "Under-Utilization" shall mean the use of less
than fifty percent (50%) of the capacity of any given port for any sixty (60)
day period as determined by Level 3. Under-Utilization shall not be applicable
to the first sixty (60) day period immediately following the provisioning of any
Managed Modem port.

6. The nonrecurring charges and monthly recurring rates for the Managed Modem
Services provided by Level 3 to Customer shall be set forth in each Customer
Order. Level 3 will dedicate the specified number of ports to Customer in the
Level 3 facilities as identified in each Customer Order. Customer may be
responsible for additional monthly charges if Customer's use of the Managed
Modem Services requires and utilizes more ports than the number committed to and
ordered by Customer.

7. The rates and other charges set forth in each Customer Order are established
in reliance on the term commitment made therein, and Customer agrees to pay the
same. In the event that Customer terminates Managed Modem Services ordered in
any Customer Order which is accepted by Level 3 or in the event that the
delivery of Managed Modem Services is terminated due to a failure of Customer to
satisfy the requirements
<PAGE>

July 1, 1999
Page 30

set forth herein or in the Customer Order prior to the end of the agreed term,
Customer shall (unless Customer has made a Revenue Commitment) pay a termination
charge equal to the percentage of the monthly recurring charges for the
terminated Managed Modem Services calculated as follows:

a. 100% of the monthly recurring charge that would have been incurred for the
Managed Modem Service for months 1-12 of the agreed term; plus

b. 75% of the monthly recurring charge that would have been incurred for the
Managed Modem Service for months 13-24 of the agreed term; plus

c. 50% of the monthly recurring charge that would have been incurred for the
Managed Modem Service for months 25 through the end of the agreed term.

Customer may, in the event that a Revenue Commitment is made and is then being
satisfied by Customer, terminate, rearrange or reconfigure the Managed Modem
Services ordered under a Customer Order without payment of the termination
charge specified above; PROVIDED, HOWEVER, that Customer shall be responsible
for payment of Level 3's then-current standard nonrecurring charges for such
termination, rearrangement or reconfiguration.

8. Level 3 provides only access to the Internet; Level 3 does not operate or
control the information, services, opinions or other content of the Internet.
Customer agrees that it shall make no claim whatsoever against Level 3 relating
to the content of the Internet or respecting any information, product, service
or software ordered through or provided by virtue of the Internet.

9. Level 3 makes the Service Level Agreement attached as Exhibit "A" respecting
Managed Modem Services.
<PAGE>

July 1, 1999
Page 31

Standard Service Level Agreement (SLA)
--------------------------------------
Release 1
---------
Managed Modem

Managed Modem service will be backed by a Service Delivery SLA.

NOTE: The total number of credits per month is limited to four days.

Service Delivery SLA

. 30 Calendar Day Installation Guarantee for Customers buying Managed Modem
service in speeds from 64 Kbps - 1.544 Kbps within
the Standard Service Area.

. 45 Calendar Day Installation Guarantee for Customers buying Managed Modem
service in speeds from 3 Mbps - 45 Mbps within the Standard Service Area.

. Single toll-free number to reach Level 3 Customer Service for all customer
issues, including technical, billing, and product inquiries.

. Time to Respond - Within 30 minutes

. 2 hour calendar month Average Time To Repair (ATTR)

If Level 3 fails to meet any of the guarantees above, Level 3 will review all
reported failures at the end of the month, and calculate the applicable credits:

July 1, 1999
Page 32

ADDITIONAL TERMS AND CONDITIONS
FOR IP CROSSROADS

The following additional terms and conditions are applicable where, pursuant to
a Customer Order, Customer orders IP CrossRoads.

1. Any state or federal tariffs applicable to the IP CrossRoads Services to be
delivered under any Customer Order are incorporated into the terms thereof. The
IP CrossRoads Services shall at all times be used in compliance with Level 3's
then-current Acceptable Use Policy and Privacy Policy, as amended by Level 3
from time to time and which are available through Level 3's web site.

2. The nonrecurring charges and monthly recurring rates for the IP CrossRoads
Services provided by Level 3 to Customer are set forth in each Customer Order.

3. The rates and other charges set forth in each Customer Order are established
in reliance on the term and/or volume commitment made therein, and Customer
agrees to pay the same. In the event that Customer terminates IP CrossRoads
Services ordered in any Customer Order which is accepted by Level 3 or in the
event that the delivery of IP CrossRoads Services is terminated due to a failure
of Customer to satisfy the requirements set forth herein or in the Customer
Order prior to the end of the agreed term, Customer shall (unless Customer has
made a Revenue Commitment) pay a termination charge equal to the percentage of
the monthly recurring charges for the terminated IP CrossRoads Services
calculated as follows:

a. 100% of the monthly recurring charge that would have been incurred for the IP
CrossRoads Service for months 1-12 of the agreed term; plus

b. 75% of the monthly recurring charge that would have been incurred for the IP
CrossRoads Service for months 13-24 of the agreed term; plus

c. 50% of the monthly recurring charge that would have been incurred for the IP
CrossRoads Service for months 25 through the end of the agreed term.

Customer may, in the event that a Revenue Commitment is made and is then being
satisfied by Customer, terminate, rearrange or reconfigure the IP CrossRoads
Services ordered under a Customer Order without payment of the termination
charge specified above; PROVIDED, HOWEVER, that Customer shall be responsible
for payment of Level 3's then-current standard nonrecurring charges applicable
to such termination, rearrangement or reconfiguration.

5. If Customer orders IP CrossRoads Services pursuant to a Customer Order, the
Customer shall be permitted to make two (2) changes to its Committed Data Rate
each contract year, provided that such change be to a higher Committed Data
Rate.

6. Level 3 reserves the right, but does not undertake the obligation, to provide
any Customer or potential customer bound by a Nondisclosure Agreement access to
a list of (i) Level 3's Customers which are connected to the IP Crossroads
Intra-Gateway Exchange Network Platform; and/or (ii) Autonomous Systems Internet
Networks connected to the IP Crossroads On-Net Transport Network Platform.
By this Agreement, Customer consents to such disclosures.

Level 3 makes no guarantee of any Customer's willingness to exchange Internet
traffic with any other customer. Level 3 will, however, use reasonable efforts
to arrange an introduction between customers or prospective customers bound by a
Nondisclosure Agreement to facilitate an agreement between them respecting the
exchange of Internet traffic.

Level 3 undertakes no obligations and accepts no liability for the
configuration, management, performance or any other issue relating to Customer's
routers or other customer provided equipment used for access to or the exchange
of traffic in connection with Level 3's IP Crossroads Service.

7. Level 3 makes the Service Level Agreement attached as Exhibit "A" respecting
IP Crossroads Service.
<PAGE>

July 1, 1999
Page 33

[LOGO OF LEVEL(3) COMMUNICATIONS APPEARS HERE]
- ---------------------------------
IP CrossRoads
- ---------------------------------

Service Level Agreement

Level 3 IP CrossRoads Service is backed by the following Service Level
Agreement. If the Level 3 Obligation is missed, the credit set forth below will
be issued to the Customer when requested.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Level 3 Obligation Credit
- --------------------------------------------------------------------------------------------
<S> <C>
Installation - Level 3 guarantees installation of IP CrossRoads Service in Level 1 day
3's standard service area, within the following time frames upon Level 3's
acceptance of a Customer order: 20 business days or less for Ethernet port
speeds of 10Mbps, 100Mbps, or 1000Mbps terminating in Level 3 Colocation

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

Response Time - Level 3's response time to any issue reported to and confirmed 1 day
by Level 3 Customer Service will be 30 minutes or less. As soon as an issue is
reported, Level 3 will open a trouble ticket.

Resolution Time - Level 3's mean time to resolve ("MTTR") Customer issues 1 day
relating to the technical performance or nonperformance of Level 3's IP
CrossRoads Service will be 2 hours or less, on a monthly average basis. MTTR is
calculated by taking the monthly aggregate of time to close all trouble tickets
relating to the technical performance of Level 3's IP CrossRoads Service,
divided by the number of trouble tickets opened that month.

The Response Time and Resolution Time Obligations are depicted on the timeline
below:

[TIMELINE APPEARS HERE]

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

100% Service Availability - Service Unavailability means an IP CrossRoads outage 1 day
was confirmed by Level 3 Customer Service. This outage is reported by a Customer
within 48 hours of the outage, which relates to the Customer's access point on
the Level 3 Internet Network, including the Customer's Level 3-provided port and
local access circuit. Service Unavailability does not include outages associated
with maintenance events, customer-caused outages or disruptions, the performance
of Internet networks controlled by other companies, or traffic exchange points
that are controlled by other companies. Customers will receive credits,
calculated monthly as an aggregate of all Service Unavailability events in
15-minute increments.

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

Delay Guarantee - 40 ms one-way. Delay refers to the one-way average delay over 1 day
a calendar month of traffic between all major gateways on the Level 3 U.S.
Internet Network. Delay does not apply to Customer's local access circuit,
transit or peering connections, circuits to the traffic exchange points,
maintenance events, or to customer-caused outages or disruptions. Customer may
obtain a report from Level 3 if there is a question whether a delay has
occurred. This request must be made within five (5) days from the last day of
the month in question.

- --------------------------------------------------------------------------------------------
</TABLE>

Contact Level 3 Customer Service toll-free at: 1-877-4LEVEL3 (877-453-8353) for
all issues, including technical, billing, and product inquiries.

The total number of credits per month is limited to five (5) days. Customer must
request credits within five days of the end of any month to receive credits.

<PAGE>

Exhibit 23.2

We consent to the reference to our firm under the captions "Summary Financial
Information", "Selected Financial Data" and "Experts" and to the use of our
report dated May 18, 1999, except for Note 9, as to which the date is September
10, 1999, in Amendment No. 3 to the Registration Statement (Form S-1 No.
333-84011) and related Prospectus of Data Return Corporation dated September
22, 1999.

/s/ Ernst & Young LLP

Dallas, Texas

September 22, 1999