ALLIED RISER COMMUNICATIONS CORP, S-1/A, 1999-10-12

ALLIED RISER COMMUNICATIONS CORP
S-1/A, 1999-10-12
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 12, 1999

REGISTRATION NO. 333-85597
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------

AMENDMENT NO. 2 TO

FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------
ALLIED RISER COMMUNICATIONS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

<TABLE>
<S> <C> <C>
DELAWARE 4813 75-2789492
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>

1700 PACIFIC AVENUE
DALLAS, TEXAS 75201
(214) 210-3000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
-------------------------
MICHAEL R. CARPER
SENIOR VICE PRESIDENT
AND GENERAL COUNSEL
1700 PACIFIC AVENUE

SUITE 400

DALLAS, TEXAS 75201
(214) 210-3000
(Name, Address Including Zip Code, and Telephone Number, Including Area Code, of
Agent for Service)

COPIES TO:

<TABLE>
<S> <C>
PHYLLIS G. KORFF JAMES S. SCOTT, SR.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP SHEARMAN & STERLING
919 THIRD AVENUE 599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10022
(212) 735-3000 (212) 848-4000
</TABLE>

-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]

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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

EXPLANATORY NOTE

This registration statement contains two forms of prospectus: one to be
used in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and one to be used in a concurrent offering outside the United
States and Canada (the "International Prospectus" and, together with the U.S.
Prospectus, the "Prospectuses"). The Prospectuses are identical in all material
respects except for the front cover page. The U.S. Prospectus is included herein
and is followed by the alternate front cover page to be used in the
International Prospectus. The alternate page for the International Prospectus
included herein is labeled "Alternate Page for International Prospectus." Final
forms of each Prospectus will be filed with the Securities and Exchange
Commission under Rule 424(b).
<PAGE> 3

THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK TO OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION. DATED OCTOBER 12, 1999.

14,750,000 Shares

LOGO

ALLIED RISER COMMUNICATIONS CORPORATION

Common Stock
---------------------

This is an initial public offering of shares of common stock of Allied
Riser Communications Corporation. This prospectus relates to an offering of
11,800,000 shares in the United States. In addition, 2,950,000 shares are being
offered outside the United States in an international offering.

It is currently estimated that the initial public offering price per share
will be between $16 and $18. Application has been made for quotation of the
common stock on the Nasdaq National Market under the symbol "ARCC".

See "Risk Factors" on page 8 to read about factors you should consider
before buying shares of the 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>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Allied Riser.................. $ $
</TABLE>

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

To the extent that the underwriters sell more than 14,750,000 shares of
common stock, the underwriters have the option to purchase up to an additional
2,212,500 shares from Allied Riser at the initial public offering price less the
underwriting discount.

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

GOLDMAN, SACHS & CO.

MERRILL LYNCH & CO.

DONALDSON, LUFKIN & JENRETTE

THOMAS WEISEL PARTNERS LLC

---------------------
Prospectus dated , 1999.
<PAGE> 4
[EDGAR front cover description for ARC Prospectus]

Map of the Continental United States. Sixteen (16) small red dots representing
market cities in which the Company has completed buildings. Each market city has
an accompanying photograph of a building in that city representing the Company's
real estate portfolio, with accompanying text next to the respective
photographs:

Boston, 4 buildings completed, 79 buildings under contract
New York, 1 building completed, 52 buildings under contract
Philadelphia, 2 buildings completed, 16 buildings under contract
Washington, D.C., 6 buildings completed, 139 buildings under contract
Atlanta, 6 buildings completed, 32 buildings under contract
Houston, 2 buildings completed, 61 buildings under contract
Dallas, 7 buildings completed, 32 buildings under contract
Austin, 3 buildings completed, 4 buildings under contract
Orange County, 2 buildings completed, 5 buildings under contract
Los Angeles, 2 buildings completed, 63 buildings under contract
San Francisco, 3 buildings completed, 69 buildings under contract
Denver, 3 buildings completed, 34 buildings under contract
Seattle, 4 buildings completed, 12 buildings under contract
Chicago, 11 buildings completed, 73 buildings under contract
Cleveland, 1 building completed, 1 building under contract
Stamford, 4 buildings completed, 12 buildings under contract

Thirty-five (35) additional locations are denoted by small yellow dots,
representing markets in which the Company has buildings under contract; no
market is specifically identified, and yellow dots are distributed in the
following states:

New Jersey: 1 market
Maryland: 1 market
Virginia: 1 market
North Carolina: 1 market
South Carolina: 1 market
Florida: 3 markets
Alabama: 1 market
Louisiana: 1 market
Texas: 2 markets
Oklahoma: 2 markets
Missouri: 2 markets
Tennessee: 2 markets
Kentucky: 1 markets
Indiana: 1 market
Ohio: 2 markets
Pennsylvania: 1 market
Michigan: 1 market
Wisconsin: 1 market
Minnesota: 1 market
Oregon: 1 market
Utah: 1 market
New Mexico: 1 market
Arizona: 1 market
Nevada: 1 market
California: 4 markets

The Company logo is in the lower right corner.

<PAGE> 5

PROSPECTUS SUMMARY

<TABLE>
<S> <C>
We are a facilities-based provider of broadband data, video and voice communications services to
small- and medium-sized businesses in 16 major metropolitan areas in the United States. We typically
deliver our services over fiber-optic networks that we design, construct, own and operate inside
large- and medium-sized office buildings. Today, over this infrastructure, we
offer ultra high-speed Internet access, business-oriented
television for display on computer desktops, enhanced
conference calling services and other broadband data
services. We own and operate in-building fiber-optic BROADBAND DATA SERVICES
networks inside 61 office buildings with more than 33.6 ------------------------------
million rentable square feet. We have agreements with Broadband data services, such as
building owners to install and operate fiber-optic networks fast Internet access, are services
in more than 1,000 office buildings with more than 325 that are enabled by high-speed
million rentable square feet. dedicated data transmission.
</TABLE>

Our Internet access services provide a direct connection to the Internet at
speeds up to 175 times faster than standard dial-up service and are always-on.
We believe that our service offers a combination of price and performance to our
target customers that is superior to competing offerings. Our business-oriented
television is the first of many additional connectivity services and
broadband-enabled applications and content that we intend to offer using our in-
building broadband infrastructure. We intend to take advantage of our growing
market presence and brand by also offering similar broadband services to our
customers' branch offices and other businesses located in buildings in which we
have not installed our fiber-optic networks.

We use our in-building fiber-optic networks to transmit data to and from
each of our customers at speeds of ten million bits of data per second. Using
commercially available equipment, we can increase this transmission speed to one
billion bits of data per second. We connect each of our in-building networks to
a central facility in each metropolitan area, usually over fiber-optic lines we
lease from other carriers. At this metropolitan hub, we aggregate and
disseminate network traffic for Internet connectivity and our other broadband
services.

We have entered into agreements to obtain access to buildings owned or
managed by some of the largest commercial property companies in the United
States, including affiliates of Hines, Equity Office Properties, Trizec Hahn,
Whitehall and others. Upon completion of the offering, these real estate
companies and their affiliates will own more than 20% of our equity. These
entities, and our financial sponsors, including affiliates of Telecom Partners,
Crescendo Ventures, Norwest Venture Partners and Goldman Sachs, have invested
over $117 million in our equity.

THE MARKET OPPORTUNITY AND OUR SOLUTION

Dedicated, high-speed Internet access and other broadband data services
offer new commercial opportunities to and can substantially improve the
productivity of small- and medium-sized businesses. Today, most of these
businesses obtain access to the Internet through dial-up connections. These
standard connections are slow, expensive and require the user to wait before a
connection is established.

We own and operate advanced communications networks inside office
buildings, enabling us to provide a broad range of advanced data, video and
voice communications services that are tailored to meet the needs of all
business customers, especially those of small- and medium-sized businesses.

3
<PAGE> 6

BUSINESS STRATEGY

- - PARTNER WITH REAL ESTATE OWNERS. We provide real estate owners with a new
amenity to assist their leasing and tenant retention efforts and share with
them a modest portion of the revenue that we generate from tenants in their
buildings.

- - SELL BROADBAND CONNECTIONS AND BANDWIDTH-ENABLED APPLICATIONS. We seek to
provide solutions to end users that include both a broadband connection and
productivity enhancing data services that use that connection, such as
industry-specific Web pages and business-oriented television service to the
computer desktop.

- - OWN THE KEY ELEMENTS OF THE LOCAL BROADBAND NETWORK. We usually operate the
only fiber-optic network inside the buildings in which we provide services,
providing the critical first mile connection between local fiber networks and
end-users.

- - CAPITALIZE ON OUR FIRST MOVER ADVANTAGE. We have already installed fiber-optic
networks, established metropolitan hubs and hired sales personnel in 16
metropolitan areas, which enables us to deploy networks rapidly and
efficiently in additional buildings in those areas.

- - DESIGN NETWORKS FOR THE FUTURE. We designed our networks using fiber-optic
technology to ensure they are easily upgradeable.

- - TARGET SMALL- AND MEDIUM-SIZED BUSINESSES. Although we service businesses of
all sizes, our product offerings are targeted at underserved small- and
medium-sized businesses.

- - FOCUS SALES AND MARKETING EFFORTS. Our sales and marketing efforts are focused
on tenants in buildings in which we own and operate a network, which should
result in lower customer acquisition costs than our competitors.

- - EXPAND OUR SERVICE OFFERINGS. We intend to expand our service offerings and
more fully use our networks' capacity and capabilities.

- - OFFER SERVICES TO CUSTOMERS IN SELECTED OTHER BUILDINGS. We seek to increase
revenue with relatively modest incremental sales and marketing costs by
offering services to our core customers' remote offices located in buildings
where we do not own a fiber-optic network.

- - PROVIDE EXCELLENT CUSTOMER CARE. We operate an around-the-clock customer care
center and have technical personnel in each metropolitan area where we provide
services.

- - BUILD OUR BRAND. We seek to build our brand to enhance our ability to gain
access to additional buildings, add new customers, reduce customer churn and
attract employees.

4
<PAGE> 7

THE OFFERING

Common stock offered................ 14,750,000 shares

Common stock to be outstanding after
the offering........................ 61,357,060 shares

Proposed Nasdaq National Market
symbol.............................. "ARCC"

Use of proceeds..................... For the construction of in-building
networks, working capital, general
corporate purposes, business
acquisitions and investments.

In the above table and throughout this prospectus, unless otherwise
indicated, the number of shares of common stock that will be outstanding after
this offering is based on the number of shares of common stock outstanding as of
September 15, 1999, plus:

- the number of shares of common stock to be sold by us in this offering;

- 6,882,353 shares of common stock, assuming an initial public offering
price of $17 per share, to be issued at the completion of this offering
upon the conversion of all of our outstanding convertible preferred
stock; and

- 6,530,242 shares of common stock issuable upon the exercise of warrants
with no exercise price.

The number of shares of common stock outstanding as of September 15, 1999
excludes:

- 73,332 shares of common stock issuable upon the exercise of stock
options. These options have an exercise price of $.336 per share.

Unless we indicate otherwise, the information in this prospectus assumes
that the underwriters will not exercise their over-allotment option. See
"Description of Capital Stock."
---------------------

Our principal executive offices are located at 1700 Pacific Avenue, Suite
400, Dallas, Texas 75201 and our phone number is (214) 210-3000.

The ARC Lightspeed Network, OpticNet and ARC Connected are some of our
trademarks. Each trademark, trade name or service mark of any other company
appearing in this prospectus belongs to its holder.

5
<PAGE> 8

SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
INCEPTION JUNE 30,
(DECEMBER 19, 1996) YEAR ENDED ------------------
TO DECEMBER 31, DECEMBER 31, (UNAUDITED)
1997 1998 1998 1999
------------------- ------------ ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Network services revenue.............. $ -- $ 212 $ 27 $ 547
Operating expenses.................... 1,438 14,216 4,205 20,464
------- -------- ------- --------
Operating income (loss)............... (1,438) (14,004) (4,178) (19,917)
Other income (expense)................ (59) (606) (204) 368
------- -------- ------- --------
Net income (loss)..................... $(1,497) $(14,610) $(4,382) $(19,549)
======= ======== ======= ========
Net income (loss) applicable to common
stock............................... $(1,497) $(15,062) $(4,382) $(22,849)
======= ======== ======= ========
</TABLE>

The pro forma balance sheet information below reflects:

- the sale and issuance of 17 shares of series B preferred stock and
2,019,766 shares of common stock in a financing transaction consummated
in August 1999; and

- the sale and issuance of 34 shares of series B preferred stock and
4,039,531 shares of common stock to our real estate partners and their
affiliates consummated in August 1999.

The pro forma as adjusted balance sheet information reflects all of these
adjustments and:

- the receipt of estimated net proceeds of $233,455,000 from this offering,
assuming an initial public offering price of $17 per share; and

- the conversion upon the completion of this offering of all preferred
stock into common stock, assuming an initial public offering price of $17
per share.

<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
----------------------------------
(UNAUDITED)
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 24,307 $ 74,316 $307,771
Property and equipment, net............................... 20,765 20,765 20,765
Total assets.............................................. 47,220 97,229 330,684
Total liabilities......................................... 11,311 11,311 11,311
Convertible redeemable preferred stock.................... 69,751 120,751 --
Stockholders' equity (deficit)............................ (33,842) (34,833) 319,373
</TABLE>

6
<PAGE> 9

As used in the table below, EBITDA consists of net loss excluding net
interest, income taxes, depreciation and amortization. EBITDA does not reflect
our non-cash expenses, which we expect will increase considerably as we deploy
our infrastructure. We believe that because EBITDA is a measure of financial
performance that it is useful to investors as an indicator of a company's
ability to fund its operations and to service or incur debt. EBITDA is not a
measure calculated under generally accepted accounting principles. Other
companies may calculate EBITDA differently from us. It is not an alternative to
operating income as an indicator of our operating performance or an alternative
to cash flows from operating activities as a measure of liquidity and investors
should consider these measures as well. We do not expect to generate positive
EBITDA in the near term. We anticipate that our discretionary use of EBITDA, if
any, generated from our operations in the foreseeable future will be restricted
by our need to build our infrastructure and expand our business. To the extent
that EBITDA is available for these purposes, our requirements for outside
financing will be reduced.

The last three line items of other operating data below reflect data as of
the last day of each period and do not include our work-in-progress or under
contract as of those dates.

<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
INCEPTION JUNE 30,
(DECEMBER 19, 1996) YEAR ENDED ------------------------
TO DECEMBER 31, DECEMBER 31, (UNAUDITED)
1997 1998 1998 1999
------------------- ------------ ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
OTHER OPERATING DATA:
Net cash provided by (used in)
operating activities.......... $(1,229) $ (14,420) $ (3,615) $ (10,380)
Net cash provided by (used in)
investing activities.......... $(1,088) $ (8,115) $ (1,931) $ (4,528)
Net cash provided by (used in)
financing activities.......... $ 2,504 $ 63,719 $ 6,538 $ (2,157)
EBITDA.......................... $(1,401) $ (13,504) $ (4,111) $ (13,890)
Capital expenditures............ $ 1,220 $ 12,032 $ 2,972 $ 8,650
Metropolitan markets served..... -- 2 1 9
Buildings in operation.......... -- 4 3 30
Rentable square feet in
buildings in operation........ -- 2,900,000 1,900,000 22,000,000
</TABLE>

7
<PAGE> 10

RISK FACTORS

This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus before
deciding to invest in the shares of common stock.

WE HAVE EXPERIENCED INCREASING NEGATIVE EBITDA, OPERATING LOSSES AND NET LOSSES,
WHICH WILL CONTINUE

There is a risk that we may not achieve or sustain positive EBITDA,
operating income or net income in the future. Since our formation we have
generated increasing negative EBITDA, and larger operating losses and net losses
each quarter. We have not achieved profitability and expect to continue to incur
increasing negative EBITDA, operating losses and net losses in 1999 and for the
foreseeable future. For 1998, we had negative EBITDA of $13,504,000, an
operating loss of $14,004,000 and a net loss of $14,610,000 on revenues of
$212,000. For the first six months of 1999, we had negative EBITDA of
$13,890,000, an operating loss of $19,917,000 and a net loss of $19,549,000 on
revenues of $547,000.

In addition, we expect to continue to incur significant development costs
and, as a result, we will need to generate significant revenue to achieve
profitability, which may not occur. If we do not eventually become profitable,
there will likely be a material adverse effect on the price of our common stock.

WE HAVE AN UNPROVEN BUSINESS MODEL WHICH COULD FAIL

We do not know if our business plan can be successfully executed. We are
not aware of any company that has achieved positive EBITDA, operating income or
net income by executing a business plan like ours. We will make substantial
capital expenditures in deploying our networks before we know whether our
business plan can be successfully executed. As a result, there is a risk that
the price of our common stock may fluctuate and may substantially decrease.

WE ARE A START-UP COMPANY AND IF WE DO NOT GROW VERY RAPIDLY WE WILL NOT SUCCEED

We began operating our first fiber-optic network in January 1998. An
investor in our common stock must consider the risks, expenses and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets, including providers of Internet access and other Internet related
services. These risks are increased by the fact that we must grow very rapidly
to succeed. The growth we must achieve will put a significant strain on all our
resources. In particular, we will require substantial additional capital to
finance our operations in the future according to our current business plan. If
we fail to grow rapidly or obtain additional capital there will likely be a
material adverse effect on our growth and the price of our common stock.

OUR BUSINESS WILL BE HARMED IF OUR BILLING, CUSTOMER SERVICE AND INFORMATION
SUPPORT SYSTEMS ARE NOT REPLACED OR FURTHER DEVELOPED

Sophisticated information processing systems are vital to our growth and
our ability to achieve operating efficiencies. Systems we have identified as
being presently inadequate to meet the increased demands of our anticipated
growth include billing and collections, work-flow and customer priority
management, financial and accounting, human resources, sales and customer
support and fixed asset management.

We estimate that modifying or replacing these systems will cost
approximately $16 million in the second half of the current fiscal year. Our
plans for the development and implementation of these systems rely, for the most
part, on acquiring products and services offered by third-party vendors and
integrating those products and services. However, we do not know if we have
correctly identified all of our information processing needs or if our cost
estimates are accurate.

8
<PAGE> 11

In addition, we may be unable to implement these systems on a timely basis or at
all, and these systems may not perform as expected. We may also be unable to
maintain and upgrade our operational support systems as necessary. These factors
could have a material adverse effect on our ability to provide services, send
invoices, and monitor our operations and on the price of our common stock.

We are also dependent on the systems of our network capacity providers,
and, in some cases, on the interface between our systems and those of our
providers. Therefore, any systems failures experienced by our suppliers could
also have similar adverse effects on our systems.

THE SECTOR IN WHICH WE OPERATE IS HIGHLY COMPETITIVE, AND WE MAY NOT BE ABLE TO
COMPETE EFFECTIVELY

We face competition from many entities with significantly greater financial
resources, well-established brand names and larger customer bases. The numerous
companies that may seek to enter our niche may expose us to severe price
competition for our services or for building access rights. We expect
competition to intensify in the future. We expect significant competition from
traditional and new telecommunications companies, including local, long
distance, cable modem, Internet, digital subscriber line, microwave, mobile and
satellite data service providers. If these potential competitors successfully
focus on our niche, there may be intense price competition which could have a
material adverse effect on the price of our common stock.

IN-BUILDING COMPETITORS. Some competitors, such as Cypress Communications,
OnSite Access, Broadband Office, Intermedia Communications, SiteLine, RCN
Telecom Services, NextLink, Winstar, Teligent and Advanced Radio Telecom are
attempting to gain access to office buildings in our target markets. Some of
these competitors have sought to develop exclusive relationships with building
owners. To the extent these competitors are successful, we may face difficulties
in building our networks and marketing our services within some of our target
buildings. Our agreements to use utility shaft space within buildings are not
exclusive. An owner of any of the buildings we have rights to install a network
in could also give similar rights to one of our competitors. Certain competitors
already have rights to install networks in some of the buildings that we have
rights in. It will take a substantial amount of time for us to build networks in
all the buildings where we obtain rights to do so. Each building in which we
have not built a network is particularly vulnerable to competitors. It is not
clear whether it will be profitable for two or more different companies to
operate broadband networks within the same building. Therefore, it is critical
that we build our networks in additional buildings quickly. Once we have done
so, if a competitor installs a network in the same building, it is likely that
there will be substantial price competition.

LOCAL TELEPHONE COMPANIES. Incumbent local telephone companies, including
GTE and the Bell Operating Companies, have several competitive strengths which
may place us at a competitive disadvantage. These competitive strengths include:

- an established brand name and reputation;

- significant capital to deploy fiber-optic equipment rapidly;

- ability to offer higher-speed data services through digital subscriber
line technology;

- their own inter-building connections; and

- ability to bundle digital data services with their voice services to
achieve economies of scale in servicing customers.

Competitive local telephone companies often have broadband inter-building
connections, market their services to tenants of large- and medium-sized
buildings and selectively build in-building facilities.

9
<PAGE> 12

LONG DISTANCE COMPANIES. Many of the leading long distance carriers,
including AT&T, MCI WorldCom, and Sprint, are expanding their capabilities to
support high-speed, end-to-end data networking services, and could begin to
build their own in-building networks. AT&T has deployed high-speed cable modems.
The newer national long distance carriers, such as Qwest, Level 3, Williams
Communications and IXC Communications, which has agreed to be acquired by
Cincinnati Bell, are building and managing high-speed fiber-based national data
networks, partnering with Internet service providers, and may extend their
networks by installing in-building fiber-optic cables.

FIXED WIRELESS SERVICE PROVIDERS. Fixed wireless service providers can
provide high speed inter-building communications services using microwave or
other facilities or satellite earth stations on building rooftops that send and
receive signals over various radio frequency bands. Some of these providers have
targeted small- and medium-sized-business customers and have a business strategy
that is similar to ours. These providers include Winstar, Teligent, Advanced
Radio Telecom, Sprint and MCI WorldCom.

INTERNET, DIGITAL SUBSCRIBER LINE, AND CABLE MODEM SERVICE PROVIDERS. The
services provided by Internet service providers and cable modem service
providers can be used by our potential customers instead of our services.
Internet service providers, such as GTE Internetworking, UUNET, a subsidiary of
MCI WorldCom, Sprint, Concentric Networks, MindSpring, Prodigy, EarthLink, Verio
and PSINet, provide Internet access to residential and business customers,
generally using the existing communications infrastructure. Digital subscriber
line companies and/or their Internet service provider customers, such as Covad,
Rhythms NetConnections, NorthPoint, Network Access Solutions typically provide
broadband Internet access. Cable modem service providers, such as Excite@Home
and its @Work subsidiary, Road Runner, RCN Telecom Services and High Speed
Access also provide broadband Internet access. On-line service providers, such
as America Online, Compuserve, Microsoft Network, and WebTV, provide Internet
connectivity, ease-of-use and a stable environment for modem connections.

WE MUST OBTAIN ADDITIONAL AGREEMENTS WITH BUILDING OWNERS OR OUR GROWTH WILL BE
CONSTRAINED

Our business depends upon our ability to install in-building networks. The
failure of building owners to grant or renew access rights on acceptable terms
could have a material adverse effect on the price of our common stock. Current
federal and state regulations do not require building owners to make space
available to us, or to do so on terms that are reasonable or nondiscriminatory.
Building owners may decide not to permit us to install our networks in their
buildings. In addition, building owners may elect not to renew our access
agreements which typically have terms of ten years. Non-renewal of these
agreements would cause losses resulting from the removal or sale of our
infrastructure in these buildings and would reduce our revenues.

WE MUST INSTALL NETWORKS IN ADDITIONAL BUILDINGS BEFORE OUR COMPETITORS DO OR WE
MAY FACE A COMPETITIVE DISADVANTAGE

Our success will depend upon our ability to quickly install our in-building
networks in many more buildings. This is crucial in order to establish a
first-mover advantage. We may not be able to accomplish this. Each building in
which we have not built a network is particularly vulnerable to competitors.
Future expansions and adaptations of our network infrastructure may be necessary
to respond to growth in the number of customers served, increased capacity
demands and changes to our services. The expansion and adaptation of our
in-building networks will require substantial financial, operational and
managerial resources. We do not know whether we will be able to expand or adapt
our networks to meet the increasing demands of customers or evolving industry
standards. Our failure to rapidly deploy, expand and adapt our networks to
changing conditions could make it difficult to increase and retain our customer
base, which would have a material adverse effect on the price of our common
stock.

10
<PAGE> 13

THERE MIGHT NOT BE SUFFICIENT DEMAND FOR OUR SERVICES

Demand for broadband services has grown rapidly, and this market is
characterized by rapidly changing technology, evolving industry standards and
frequent new service introductions.

If the commercial market for Internet access and other broadband services
develops more slowly than expected or if the Internet services that we offer are
not broadly accepted, our revenues will not grow as quickly as we need, which
would likely have a material adverse effect on the price of our common stock.

Demand and market acceptance for recently introduced services in this
industry are subject to a high level of uncertainty.

In addition, critical issues concerning the commercial use of services
requiring broadband capabilities remain unresolved and may impact the growth of
these services. Historically, some businesses have been reluctant to purchase
broadband services, such as high-speed Internet access, for a number of reasons,
including:

- resistance to the use of the Internet in business applications;

- inconsistent quality of service;

- lack of available cost-effective, high-speed options;

- the need to deal with multiple and frequently incompatible vendors;

- inadequate security for stored or transmitted data;

- lack of networking tools to simplify Internet access and use; and

- lack of high-speed application requirements.

Capacity constraints caused by heavy use of the Internet may impede further
development to the extent that users experience delays, transmission errors and
other difficulties. Further, enterprises that have already invested substantial
resources in other methods may be particularly reluctant or slow to adopt a new
strategy.

ALTERNATIVE TECHNOLOGIES POSE COMPETITIVE THREATS

In addition to fiber-optic technology, there are other technologies that
provide more capacity and speed than traditional copper wire transmission
technology and can be used instead of our services. Furthermore, these
technologies may be improved and other new technologies may develop that provide
more capacity and speed than the fiber-optic technology we employ. These new
technologies may replace existing switch technology, the need for fiber-optic
cables or other network components. Existing alternative technologies include:

- DIGITAL SUBSCRIBER LINE TECHNOLOGY. Digital subscriber line technology
was developed to produce higher data transfer rates over the existing
copper-based telephone network. The data transfer rates for digital
subscriber lines are reported to range between 144 thousand bits of data
per second and six million bits of data per second. Improvements in
digital subscriber line data transfer rates would make it more
competitive. Digital subscriber line technology has been substantially
improved in recent years.

- CABLE MODEMS. Cable modems can allow users to send and receive data using
cable television distribution systems. According to industry sources,
cable modem users typically experience download speeds of 1.5 million
bits of data per second.

- WIRELESS TECHNOLOGIES. Wireless technologies, such as satellite and
microwave communications systems, can provide high-speed data
communications. Satellite systems, such as

11
<PAGE> 14

DirecPC, can offer high download speeds that are advertised at 400
thousand bits of data per second.

- INTEGRATED SERVICES DIGITAL NETWORKS. Integrated services digital
networks have been offered by the incumbent local telephone companies
over the existing copper-based telephone network for some time. These
services offer data transfer speeds of 128 thousand bits of data per
second.

The development of new technologies or the significant penetration of
alternative technologies into our target market may reduce the demand for our
services and consequently could have a material adverse effect on our revenues
and net income (loss), which may be reflected in the price of our common stock.

WE MUST PURCHASE CAPACITY FROM THIRD PARTIES WHO MAY BE UNABLE OR UNWILLING TO
MEET OUR REQUIREMENTS

We construct in-building networks and generally rely on other
communications carriers to provide transmission capacity outside the buildings.
Until a connection is provided by another telecommunications carrier from our
in-building network to the public networks, we typically cannot provide services
to a building.

We have experienced, and expect to continue to experience, delays in
obtaining this transmission capacity. In addition, in some of our target markets
there is only one established carrier available to provide the necessary
connection. This increases our cost and makes it extremely difficult, if not
impossible, to obtain redundant connections. We do not know whether sufficient
capacity or redundant capacity will be readily available from third parties at
commercially reasonable rates, if at all. Our failure to obtain adequate
connections on a timely basis could delay or impede our ability to provide
services and generate revenue. Our failure to obtain sufficient redundant
connectivity could result in an inability to provide service in certain
buildings and service interruptions, which could in time lead to loss of
customers and damage to our reputation.

As of June 30, 1999, we have committed to pay for approximately $1,874,000
of services from other carriers and we expect to sign additional similar
contracts. We will have to pay those carriers even if we do not use their
services.

WE MUST MAKE SIGNIFICANT CAPITAL EXPENDITURES BEFORE GENERATING REVENUE, WHICH
MAY PROVE INSUFFICIENT TO JUSTIFY THOSE EXPENDITURES

When we install an in-building network, we incur significant initial
expenditures. These expenditures vary depending on the size of the building and
whether we encounter any construction-related difficulties. In addition, we
typically install an in-building network before we have any customers in that
building. Since we generally do not solicit customers within a building until
our network is in place, and since our costs can vary, we do not know whether we
will be able to recoup our expenditures within any building. If we fail to
attract enough customers within each office building, our capital expenditures
in that building will be wasted, which could have a material adverse effect on
the price of our common stock.

OUR NETWORKS ARE SUBJECT TO SECURITY RISKS WHICH MAY INTERFERE WITH THE
PROVISION OF OUR SERVICES

Our networks may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Remediating the effects of computer viruses and
alleviating other security problems may require interruptions, incurrence of
costs and delays or cessation of service to our customers. Other companies have
experienced interruptions in service as a result of the accidental or
intentional actions of Internet users, current and former employees or others.
12
<PAGE> 15

Unauthorized access could jeopardize the security of confidential information
stored in our computer systems or those of our customers. Although we intend to
continue to implement industry-standard and other security measures, such
measures at other companies have been circumvented in the past and may be
circumvented on our systems in the future. These risks could have a material
adverse effect on our ability to provide services and the price of our common
stock.

YEAR 2000 RISKS MAY HARM OUR BUSINESS

The risks posed by Year 2000 issues could adversely affect our business in
a number of significant ways. We are evaluating our internal information
technology systems and contacting our information technology and other third
party suppliers to ascertain their Year 2000 status. However, until the year
2000 we will not know whether our own systems will be Year 2000 compliant,
whether our third party suppliers will be Year 2000 compliant, or whether there
will not be significant operational problems among information technology
systems. In addition, customers may spend less on our service in the second half
of 1999 as customers focus on Year 2000 readiness and systems rather than invest
in new products. As a result of these risks there could be a material adverse
effect on virtually every aspect of our operations and may cause a decline in
the price of our common stock.

WE MUST ATTRACT AND RETAIN KEY PERSONNEL IN A TIGHT LABOR MARKET OR WE WILL BE
UNABLE TO MANAGE OUR GROWTH

There currently is intense competition for personnel with the
qualifications we require. The loss of the services of key personnel or the
failure to attract additional personnel as required could have a material
adverse effect on our ability to grow and on the price of our common stock. We
are highly dependent upon the efforts of our existing senior management team.
Although we have entered into employment agreements with members of our senior
management team, these agreements do not obligate the employees to remain with
us for any length of time. We believe that our future success will depend in
large part on our ability to attract and retain qualified technical and sales
personnel.

LEGISLATION AND GOVERNMENT REGULATION COULD ADVERSELY AFFECT US

Changes in the regulatory environment could affect our operating results by
increasing competition, decreasing revenue, increasing costs or impairing our
ability to offer services. The provision of basic telecommunications services is
subject to significant regulation at the federal and state level. The Federal
Communications Commission regulates telecommunications carriers providing
interstate and international common carrier services. State public utilities
commissions exercise jurisdiction over intrastate basic telecommunications
services but do not regulate most enhanced services, which involve more than the
pure transmission of customer provided information. Many of our competitors and
vendors, especially incumbent local telephone companies, are subject to federal
and state regulations. These regulations change from time to time in ways that
are difficult for us to predict. Although we believe the services we provide
today are not subject to substantial regulation by the FCC or the state public
utilities commissions, changes in regulation or new legislation may increase the
regulation of our current services. In addition, a regulatory body may seek to
apply telecommunications regulations to our enhanced services. Significant
regulation of our current services could have a material adverse effect on the
price of our common stock.

13
<PAGE> 16

IF WE DECIDE TO PROVIDE VOICE AND OTHER BASIC TELECOMMUNICATIONS SERVICES
WE MAY BE UNABLE TO SUCCESSFULLY RESPOND TO REGULATORY CHANGES. We will become
subject to regulation by the FCC and state agencies in the event we decide to
offer non-enhanced voice and other basic telecommunications services. Complying
with these regulatory requirements may be costly. Through subsidiaries, we are
in the process of applying for, and in some states have received, authority from
state regulatory commissions and the FCC to provide basic telecommunications
services, such as voice telephony service. These subsidiaries will be subject to
direct federal and state regulation upon approval of their respective
applications. The regulations that apply to basic telecommunications services
change from time to time and we do not know the effect that such changes may
have on our business and the price of our common stock.

REGULATION OF ACCESS TO OFFICE BUILDINGS COULD NEGATIVELY AFFECT OUR
BUSINESS. There have been proposals to require that commercial office buildings
give access to competitive providers of telecommunications services. If these
proposals are adopted, they will facilitate our competitors' entry into
buildings where we have access rights and diminish the value of our access
rights. Recently, the FCC initiated a regulatory proceeding relating to utility
shaft access in multiple tenant buildings, and a bill was introduced in Congress
regarding the same topic. Some of the issues being considered in these
developments include requiring building owners to provide utility shaft access
to telecommunications carriers, and requiring some telecommunications providers
to provide access to other telecommunications providers. We do not know whether
or in what form these proposals will be adopted. If they are adopted and
regulatory or legal requirements change access rights to our target buildings or
our networks, these requirements could have a material adverse effect on the
price of our common stock.

AS AN INTERNET ACCESS PROVIDER, WE MAY INCUR LIABILITY FOR INFORMATION
DISSEMINATED THROUGH OUR NETWORK. The law relating to the liability of Internet
access providers and on-line services companies for information carried on or
disseminated through their networks is unsettled. Although we have not been sued
for information carried on our network, it is possible that we could be. Federal
and state statutes have been directed at imposing liability on Internet service
providers for aspects of content carried on their networks. There may be new
legislation and court decisions that may affect our services and expose us to
potential liability.

As the law in this area develops, the potential imposition of liability
upon us for information carried on and disseminated through our network could
require us to implement measures to reduce our exposure to such liability, which
may require the expenditure of substantial resources or the discontinuation of
certain products or service offerings. Any costs that are incurred as a result
of such measures or the imposition of liability could have a material adverse
effect on our operating expenses, our liquidity and the price of our common
stock.

RETAINED CONTROL OF ALLIED RISER BY OUR PRINCIPAL STOCKHOLDERS MAY CREATE
CONFLICTS OF INTEREST

The concentration of ownership of our stock may have the effect of
delaying, deferring or preventing a change in control, merger, consolidation, or
a tender offer which could involve a premium over the price of our common stock.
Upon completion of this offering, our officers, directors and
greater-than-five-percent stockholders and their affiliates will, in the
aggregate, beneficially own approximately 25% or 24% if the underwriters'
over-allotment option is exercised in full, of the outstanding common stock,
assuming an offering price of $17 per share.

MEMBERS OF OUR BOARD SERVE ON THE BOARDS OF OUR POTENTIAL COMPETITORS, WHICH MAY
CREATE CONFLICTS OF INTEREST

Members of our board of directors also serve as officers or directors of
other telecommunications or Internet services companies. To the extent that any
of these companies presently offer, or at some future point begin to offer,
services having characteristics similar to those offered by us, there may be
conflicts of interest between the fiduciary duties owed by these

14
<PAGE> 17

individuals to us and the duties owed to these other companies. We have not
adopted specific policy guidelines to address these potential conflicts of
interest and if these conflicts of interest arise, they may be resolved on terms
that are not in the best interests of our other stockholders. Failure to resolve
conflicts of interest in a manner that is consistent with the interests of all
of our stockholders could have a material adverse effect on the price of our
common stock.

ANTI-TAKEOVER PROVISIONS COULD PREVENT OR DELAY A CHANGE OF CONTROL

Provisions of our amended and restated certificate of incorporation and
amended and restated by-laws and Delaware law could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
stockholders. These provisions include:

- the ability of our board of directors to issue preferred stock without
any further approval being required from our stockholders;

- the "staggered" nature of our board of directors which results in
directors being elected for terms of three years; and

- the requirement that stockholders provide us with advance notice of
proposed actions.

These provisions may have the effect of delaying, deferring or preventing a
change in our control, impeding a merger, consolidation, takeover or other
business combination, which in turn could have a material adverse effect on the
price of our common stock.

IMPAIRMENT OF OUR INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR BUSINESS

While we are seeking federal registration of ARC and certain other
trademarks, we have not been awarded any trademark registrations, and are
relying upon our common law rights. It is possible that other entities may
challenge our registration and use of these trademarks based on a claim of
superior rights, dilution or otherwise. Such challenges, if successful, could
preclude us from registering and even using our trademarks, in which case the
expense of developing new trademarks and resulting loss of product
identification and goodwill could have a material adverse effect on our brand
awareness and the price of our common stock.

FORWARD-LOOKING STATEMENTS

Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," and elsewhere in this prospectus are
"forward-looking statements." These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations, intentions
and assumptions and other statements that are not historical facts. When used in
this prospectus, the words "expect," "anticipate," "intend," "plan," "believe,"
"seek," "estimate" and similar expressions are generally intended to identify
forward-looking statements. Because these forward-looking statements involve
risks and uncertainties, actual results may differ materially from those
expressed or implied by these forward-looking statements. We do not intend to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.

15
<PAGE> 18

USE OF PROCEEDS

We estimate that our net proceeds from the sale of common stock in this
offering will be approximately $233,455,000, or $268,811,000 if the underwriters
exercise their over-allotment option in full, after deducting estimated
underwriting discounts and commissions and estimated offering expenses.

We intend to use more than $175,000,000 of the net proceeds from this
offering for the construction of in-building networks, and the remainder for
working capital and general corporate purposes, including to fund operating
losses. We may also use a portion of the net proceeds to acquire or invest in
complementary businesses, technologies, services or products. However, we
currently have no material commitments or agreements with respect to any of
these types of transactions.

Prior to the application of the net proceeds from the offering as described
above, the net proceeds from the offering will be invested in marketable,
investment-grade securities.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock and
do not anticipate paying any cash dividends on our common stock for the
foreseeable future.

16
<PAGE> 19

CAPITALIZATION

You should read this table in conjunction with the sections entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Use of Proceeds" and our consolidated financial statements and
the related notes included elsewhere in this prospectus. The cash and
capitalization table below excludes 6,530,242 shares of common stock issuable
upon the exercise of warrants with no exercise price. These warrants are
exercisable upon our real estate partners meeting certain performance
obligations as outlined in the warrant agreements.

The following cash and capitalization table sets forth:

-- Our actual cash and capitalization as of June 30, 1999.

-- Our pro forma cash and capitalization after giving effect to:

- the sale and issuance of 17 shares of series B preferred stock and
2,019,766 shares of common stock in a financing transaction
consummated in August 1999; and

- the sale and issuance of 34 shares of series B preferred stock and
4,039,531 shares of common stock to our real estate partners and their
affiliates consummated in August 1999.

-- Our pro forma as adjusted cash and capitalization to reflect, in
addition:

- the receipt of estimated net proceeds of $233,455,000 from this
offering, assuming an initial public offering price of $17 per share;
and

- the conversion upon the completion of this offering of all preferred
stock into common stock, assuming an initial public offering price of
$17 per share.

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------
JUNE 30, 1999
---------------------------------------------
(UNAUDITED) PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
---------- ----------- --------------
<S> <C> <C> <C>
Cash and cash equivalents........................... $ 24,307 $ 74,316 $307,771
======== ======== ========
Capital lease obligations, including current
portion........................................... $ 5,376 $ 5,376 $ 5,376
Convertible redeemable preferred stock, par value
$.0001 per share, 1,000 shares authorized, 66
shares issued and outstanding (actual) and 117
shares issued and outstanding (pro forma) and zero
shares issued and outstanding (pro forma as
adjusted)......................................... 69,751 120,751 --
Stockholders' equity (deficit):
Common stock, par value $.0001 per share,
66,666,667 shares authorized, 26,787,726 shares
issued and outstanding (actual) and 32,847,023
shares issued and outstanding (pro forma) and
54,479,376 shares issued and outstanding (pro
forma as adjusted)............................. 3 3 5
Additional paid-in capital........................ 18,446 17,455 371,659
Deferred compensation............................. (16,228) (16,228) (16,228)
Accumulated deficit............................... (36,063) (36,063) (36,063)
-------- -------- --------
Total stockholders' equity (deficit).............. (33,842) (34,833) 319,373
-------- -------- --------
Total capitalization...................... $ 41,285 $ 91,294 $324,749
======== ======== ========
</TABLE>

17
<PAGE> 20

DILUTION

Our pro forma net tangible book value as of June 30, 1999 was $85,918,000
or $2.61 per share of outstanding common stock, after giving effect to the
adjustments shown in the pro forma column under "Capitalization." The pro forma
net tangible book value per share represents our total tangible assets less
total liabilities, divided by 32,847,023 shares of common stock outstanding on a
pro forma basis before the offering. Dilution per share represents the
difference between the amount per share paid by investors in this offering and
the pro forma net tangible book value per share after the offering. After giving
effect to this offering, the as adjusted pro forma net tangible book value at
June 30, 1999 would have been $319,373,000 or $5.86 per share. This represents
an immediate increase in the net tangible book value of $3.25 per share to
existing stockholders and an immediate dilution in net tangible book value of
$11.14 per share to new investors purchasing shares at the initial public
offering price. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public price per share.............................. $17.00
Pro forma net tangible book value per share as of June 30,
1999...................................................... $2.61
Increase per share attributable to new investors............ $3.25
Pro forma as adjusted net tangible book value per share
after the offering........................................ $ 5.86
------
Dilution per share to new investors......................... $11.14
======
</TABLE>

The following table summarizes, on a pro forma basis as of June 30, 1999,
the difference between the existing stockholders and new investors with respect
to the number of shares purchased from Allied Riser, the total consideration
paid and the average price per share paid. These amounts do not include
estimated underwriting discounts and commissions and offering expenses payable
by Allied Riser.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 39,729,401 72.9% $117,049,271 31.8% $ 2.95
New investors................... 14,750,000 27.1 250,750,000 68.2 $17.00
---------- ---- ------------ ----
Total........................... 54,479,401 100% $367,799,271 100%
========== ==== ============ ====
</TABLE>

The foregoing table assumes no exercise of stock options or warrants. As of
June 30, 1999, there were options outstanding to purchase 347,442 shares of
common stock at an exercise price of $.0015 per share. Between July 1, 1999 and
September 15, 1999 additional options were granted to purchase 73,332 shares of
common stock at an exercise price of $.336 per share. In October 1999, warrants
were issued to acquire 6,530,242 shares of common stock to owners and managers
of commercial office buildings with no exercise price. These warrants are
exercisable upon our real estate partners meeting certain performance
obligations as outlined in the warrant acquisition agreements. To the extent
outstanding options and warrants are exercised, there will be further dilution
to new investors. In addition, we may agree to issue additional warrants to
acquire common stock to owners and managers of commercial office buildings. In
addition, we may issue common stock to pay for acquisitions.

18
<PAGE> 21

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

You should read the following consolidated summary financial data together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the related notes, all
of which appear elsewhere in this prospectus. The following selected
consolidated statement of operations data for the period from inception
(December 19, 1996) to December 31, 1997 and for the year ended December 31,
1998, and the balance sheet data as of December 31, 1997 and 1998 have been
derived from our audited financial statements and the related notes. The
selected statement of operations data for the six months ended June 30, 1998 and
1999, and the selected balance sheet data as of June 30, 1999 are derived from
our unaudited condensed consolidated financial statements. Operating results for
the six months ended June 30, 1999 are not necessarily indicative of the results
that may be expected for the entire year.

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION SIX MONTHS ENDED
(DECEMBER 19, JUNE 30,
1996) TO YEAR ENDED --------------------
DECEMBER 31, DECEMBER 31, (UNAUDITED)
1997 1998 1998 1999
-------------- ------------- -------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Network services revenue................... $ -- $ 212 $ 27 $ 547
Operating expenses:
Network operations....................... 80 2,358 718 2,819
Selling expense.......................... -- 1,623 599 2,406
General and administrative expenses...... 1,348 9,736 2,822 9,207
Amortization of deferred compensation.... -- -- -- 5,142
Depreciation and amortization............ 10 499 66 890
------- -------- ------- --------
Total operating expenses......... 1,438 14,216 4,205 20,464
------- -------- ------- --------
Operating income (loss).................... (1,438) (14,004) (4,178) (19,917)
Other income (expense)..................... (59) (606) (204) 368
Provision for income taxes................. -- -- -- --
------- -------- ------- --------
Net income (loss).......................... (1,497) (14,610) (4,382) (19,549)
Accrued dividends on preferred stock....... -- (452) -- (3,300)
------- -------- ------- --------
Net income (loss) applicable to common
stock.................................... $(1,497) $(15,062) $(4,382) $(22,849)
======= ======== ======= ========
Net income (loss) per common share......... $ (7.45) $ (8.09) $(18.15) $ (1.01)
======= ======== ======= ========
Weighted average number of shares
outstanding.............................. 201 1,862 241 22,686
======= ======== ======= ========
</TABLE>

19
<PAGE> 22

The pro forma balance sheet information below reflects:

- the sale and issuance of 17 shares of series B preferred stock and
2,019,766 shares of common stock in a financing transaction consummated
in August 1999; and

- the sale and issuance of 34 shares of series B preferred stock and
4,039,531 shares of common stock to our real estate partners and their
affiliates consummated in August 1999.

The pro forma as adjusted balance sheet information reflects all of these
adjustments and:

- the receipt of estimated net proceeds of $233,455,000 from this offering,
assuming an initial public offering price of $17 per share; and

- the conversion upon the completion of this offering of all preferred
stock into common stock, assuming an initial public offering price of $17
per share.

<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-----------------------------------
AS OF DECEMBER 31, (UNAUDITED)
------------------ PRO FORMA AS
1997 1998 ACTUAL PRO FORMA ADJUSTED
------- -------- -------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 188 $ 41,371 $ 24,307 $ 74,316 $307,771
Property and equipment, net........ 1,250 13,005 20,765 20,765 20,765
Total assets....................... 1,487 55,572 47,220 97,229 330,684
Total liabilities.................. 3,228 5,257 11,311 11,311 11,311
Convertible redeemable preferred
stock............................ -- 66,452 69,751 120,751 --
Additional paid-in capital......... 163 375 18,446 17,455 371,659
Stockholders' equity (deficit)..... (1,741) (16,137) (33,842) (34,833) 319,373
</TABLE>

20
<PAGE> 23

The last three line items of other operating data below reflect data as of
the last day of each period and do not include our work-in-progress or under
contract as of those dates.

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(DECEMBER 19, SIX MONTHS ENDED JUNE 30,
1996) TO YEAR ENDED -------------------------
DECEMBER 31, DECEMBER 31, (UNAUDITED)
1997 1998 1998 1999
------------- ------------ ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
OTHER OPERATING DATA:
Net cash provided by (used in)
operating activities............... $(1,229) $ (14,420) $ (3,615) $ (10,380)
Net cash provided by (used in)
investing activities............... $(1,088) $ (8,115) $ (1,931) $ (4,528)
Net cash provided by (used in)
financing activities............... $ 2,504 $ 63,719 $ 6,538 $ (2,157)
EBITDA............................... $(1,401) $ (13,504) $ (4,111) $ (13,890)
Capital expenditures................. $ 1,220 $ 12,032 $ 2,972 $ 8,650
Metropolitan markets served.......... -- 2 1 9
Buildings in operation............... -- 4 3 30
Rentable square feet in buildings in
operation.......................... -- 2,900,000 1,900,000 22,000,000
</TABLE>

21
<PAGE> 24

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

The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the summary and
selected consolidated financial and other data, and the consolidated financial
statements and the related notes contained elsewhere in this prospectus. See
"Risk Factors" for a discussion of important factors that could cause actual
results to differ materially from the results described in or implied by the
forward-looking statements contained in this prospectus.

OVERVIEW

Since our inception in December 1996, our principal activities have
included developing our business plan, raising capital, hiring management and
other key personnel, designing and developing our fiber-optic networks inside
buildings, acquiring equipment and facilities, entering into agreements with
building owners and real estate managers and beginning the initial deployment of
our fiber-optic networks. In June 1997, we began installing our networks, and we
began operating our first in-building network in January 1998. We provide
services in 16 metropolitan areas. We currently own and operate fiber-optic
networks inside 61 office buildings with more than 33.6 million rentable square
feet. In addition, we have recently entered into agreements to install and
operate our fiber-optic networks in more than 1,000 office buildings with more
than 325 million rentable square feet.

To rapidly establish a strong position in the markets we target, we are
heavily investing in our fiber-optic networks. We incur costs in the design and
installation of our in-building infrastructure, which is typically installed
within a secure conduit located in the building's riser, which is the building's
vertical utility shaft. We also invest in electronic equipment that is needed to
connect our networks to the Internet. We expect to incur significant additional
costs building and refining our operational support systems; this includes the
purchase and implementation of software to facilitate customer acquisition,
billing, collections, and network management.

As a result of our development activities and the deployment of our
networks, from inception to date we have incurred significant operating losses,
net losses and negative EBITDA. We expect that the continued expansion of our
operations will result in increasing operating losses, net losses and negative
EBITDA. As a result of our limited operating history, prospective investors have
limited operating and financial data upon which to base an evaluation of our
performance and an investment in our common stock. See "Risk Factors -- We are a
start-up company and if we do not grow very rapidly we will not succeed."

FACTORS AFFECTING FUTURE OPERATIONS

NETWORK SERVICES REVENUE. We generate revenue from selling broadband data,
video and voice services primarily to tenants in buildings in which we own and
operate our fiber-optic networks. We generally enter into long-term,
non-exclusive contracts with the owners and managers of portfolios of office
buildings to permit us to construct and operate these networks within their
buildings. In return for the right to deploy and maintain our networks, building
owners receive a modest portion of the gross revenue we generate from tenants
inside their buildings. Upon completion of an in-building network, our direct
sales personnel market our services to the tenants of the building. Once a
customer orders our services, we generally initiate service within one to ten
business days. Our customers are not generally required to purchase or maintain
any equipment beyond their existing local area network.

We currently offer:

- ultra high-speed Internet access;

- business-oriented television for display on the computer desktop;
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<PAGE> 25

- enhanced conference calling services; and

- other broadband data services.

We generate the majority of our recurring revenue from subscription fees,
which vary depending upon a number of factors, including the services provided,
the number of desktops connected to our network and bandwidth usage volume. We
generally offer services on a month-to-month contractual basis. We do not
require our customers to purchase any equipment from us. We price our
combination of services competitively compared to existing providers of Internet
connectivity and broadband data services, such as local telephone companies and
Internet service providers. Although competitive pricing is an important part of
our strategy, we believe that the speed and performance of our fiber-optic
networks, combined with a high level of customer care, are the keys to
successfully attracting and retaining small- and medium-sized business
customers.

We expect that in the short term the majority of our revenue will be
derived from our Internet connectivity services. We intend to take advantage of
our presence in buildings in which we operate a network and our customer
relationships to market additional services to our customers. We expect these
services to include bandwidth-enabled services, such as enhanced Internet voice
services; full-motion, interactive, desktop-delivered video conferencing; direct
access to both on-line content and business applications through industry
specific portals; e-commerce and network management services. We also intend to
take advantage of our growing market presence and brand by offering similar
broadband services to our customers' branch offices and other businesses located
in buildings in which we have not installed our fiber-optic networks. We believe
that these additional services may generate significant incremental revenue.

NETWORK OPERATIONS. Our network operations expenses include payments to
providers of transmission capacity, costs associated with customer connections
to our in-building fiber-optic networks, customer care, equipment maintenance,
payments to building owners, and content licensing costs. In order to provide
our services, we must connect each in-building network to a metropolitan hub via
a local network and each metropolitan hub to a national network. These local and
national networks are owned by unaffiliated parties. We have contracts with
terms ranging from one month to five years for connections to these networks.
Under these agreements, we incur fixed monthly charges for local connectivity.
For national connectivity, we incur fixed monthly charges plus incremental
charges based upon customer usage. In addition, if we fail to meet our minimum
volume commitments for national connectivity, we may be obligated to pay
penalties. In the future, we may contract for volume discounts based on the
volume purchased from national connectivity providers. In the event we
underestimate our need for transmission capacity, we may be required to obtain
capacity through more expensive means. We expect that our connectivity costs
will increase as we enter new markets and provide services for new customers. In
addition, we pay usage-based calling fees in connection with our enhanced
conference calling services.

We incur expenses related to ongoing operations for customer support. We
provide customer care through our Dallas-based customer care center, which is
augmented by field support personnel and contracts with outside support
providers for on-site customer service. Because our strategy emphasizes the
importance of customer care, we expect that initially customer service will
become a larger part of our ongoing expenses. Equipment maintenance costs
include expenses for equipment repair and periodic servicing. Maintenance
services are provided by our field operations personnel, third-party contractors
and equipment vendors. In exchange for access rights from building owners, we
pay building owners a modest portion of the revenue that we generate from
tenants inside their buildings. The fee we pay building owners varies
proportionally with revenues generated in the respective buildings. We incur
both fixed and variable costs in connection with licenses related to the
provisioning of enhanced communications services, such as business-oriented
desktop television.
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<PAGE> 26

SELLING EXPENSE. Selling expense includes costs of employee salaries and
commissions, marketing, advertising and promotional expenses and costs
associated with leasing and operating sales demonstration centers. To attract
and retain a qualified sales force, we offer our sales personnel a compensation
package emphasizing commissions and stock options. We expect to incur
significant selling and marketing costs as we continue to expand our sales force
and penetrate our targeted markets.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include costs associated with corporate administration and infrastructure,
billing and personnel. We are currently in the process of building and refining
our new operational support systems. These systems are necessary to enter,
schedule, provision and track a customer order from the point of sale to
installation, testing, and service initiation. In addition, these systems will
interface with our billing, collection and customer care service systems. We
believe that because most of our services are currently billed on a flat-rate
basis, the cost and complexity of generating and reconciling our billings is
less than that with usage-based pricing models. However, as we add customers and
provide more services that require usage-based billing, such as our enhanced
conference calling services, we expect that billing costs will increase.
Accordingly, customer billing is expected to be a significant part of our
ongoing administrative expenses. We have selected a group of vendors to provide
automated billing systems and other operational support systems that will either
replace or be integrated with our existing systems. See "Risk Factors -- Our
business will be harmed if our billing, customer service and information support
systems are not successfully replaced or further developed."

We expect that costs will increase significantly as we expand our
operations and that general and administrative expenses will be a larger portion
of these costs during the early stages of our business. However, we expect that
our general and administrative expenses will represent a smaller percentage of
our revenue as we build our customer base.

AMORTIZATION OF DEFERRED COMPENSATION. Amortization of deferred
compensation is a result of granting stock options and issuing restricted shares
to our employees with exercise prices per share treated for accounting purposes
as below the fair value of our common stock at the dates of grant. We are
amortizing the deferred compensation over the vesting period of the applicable
option and the lapsing of the restrictions on the applicable shares.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
include depreciation of system infrastructure, system equipment, furniture and
fixtures and the amortization of leasehold improvements. We expect depreciation
and amortization expenses to increase significantly as we install our
fiber-optic networks in more buildings. While construction is in progress and we
have outstanding debt, we capitalize related interest and we amortize the
related capitalized interest over the useful life of the constructed assets.

In October 1999, we issued warrants to our real estate partners. We expect
that we will do similar issuances in the future. The current warrant agreements
impose certain performance requirements on the real estate partners for
exercisability and retention of the warrants. The measurement date for valuing
the warrants will be the date(s) on which the real estate partners effectively
complete their performance requirements. Because the terms of the warrant allow
the holder to acquire the shares of common stock without any additional
consideration, the fair value of the warrant is equivalent to the fair value of
the common stock.

Based upon the current structure of the agreements governing the warrants,
we expect that the fair value of the warrants will be capitalized and amortized
over the 10 year term of our current agreements with our real estate partners.
However, we are evaluating whether possible changes to the agreements would
require treating the fair value of the warrants as an expense in the fiscal
quarter in which the warrants are issued. Under the asset approach, there will
be a recurring charge over the 10 year agreement term. If expense treatment is
required there will be a substantial charge in the period when the warrants were
issued.

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<PAGE> 27

OTHER INCOME (EXPENSE). Other income (expense) consists primarily of net
interest income and expense. We expect interest income to increase over the
short term as a result of receiving the proceeds of this offering.

PROVISION FOR INCOME TAXES. Provision for income taxes consists of federal,
state and local taxes, when applicable. We have not generated any taxable income
to date and therefore have not paid any federal income taxes since inception. A
full valuation allowance has been recorded on the deferred tax asset, consisting
primarily of start-up costs and net operating loss carry forwards, because of
the uncertainty of future operating results. We expect to generate significant
net losses for the foreseeable future which should generate net operating loss
carry forwards.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998

NETWORK SERVICES REVENUE. Network services revenue for the six months ended
June 30, 1999 increased to $547,000 as compared to $27,000 for the corresponding
period of the prior year. Network services revenue for the six months ended June
30, 1999 includes the recognition in April 1999 of $123,000 of previously fully
reserved revenue which was earned upon the successful deployment of a virtual
private network. The remaining increase is attributable to growth in the number
of customers resulting from increased sales and marketing efforts concentrated
in our networked properties and the increased penetration of our fiber-optic
network into new buildings compared to the corresponding period in 1998. As of
June 30, 1999, our fiber-optic network was installed inside 30 buildings with
more than 22.0 million rentable square feet as compared to June 30, 1998 when
our networks were installed inside 3 buildings, with 1.9 million rentable square
feet.

NETWORK OPERATIONS. Network operations expenses were $2,819,000 for the six
months ended June 30, 1999 and $718,000 for the six months ended June 30, 1998.
This increase is consistent with expansion of our fiber-optic network and
resulting increase in transport, licensing and customer support costs.

SELLING EXPENSE. Selling expense increased from $599,000 for the six months
ended June 30, 1998 to $2,406,000 for the six months ended June 30, 1999. This
increase is attributable to the continued expansion of sales and marketing
efforts including commissions, development of corporate identification,
promotional and advertising materials, the establishment of sales demonstration
centers, market launch events and hiring sales personnel.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $9,207,000 for the six months ended June 30, 1999 and $2,822,000 for the
six months ended June 30, 1998. This increase is consistent with our development
activities and is attributable to the rapid growth in number of employees we
incurred in connection with building our operating infrastructure. Our number of
general and administrative employees increased to 122 as of June 30, 1999 as
compared to 43 at June 30, 1998.

AMORTIZATION OF DEFERRED COMPENSATION. Amortization of deferred
compensation was $5,142,000 for the six months ended June 30, 1999.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the six
months ended June 30, 1999 increased to $890,000 as compared to $66,000 for the
corresponding period of the prior year. This increase was primarily due to the
increase in system infrastructure and system equipment placed in service.

OTHER INCOME (EXPENSE). Other income (expense) was $368,000 for the six
months ended June 30, 1999 and $(204,000) for the six months ended June 30,
1998. The change in other

25
<PAGE> 28

income (expense) is primarily due to a reduction in interest expense and an
increase in interest income as a result of the recapitalization and
reorganization. See "-- Liquidity and capital resources."

PROVISION FOR INCOME TAXES. For the six months ended June 30, 1999 and June
30, 1998 no provision for taxes was recognized as we operated at a loss
throughout both periods.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO PERIOD FROM INCEPTION
(DECEMBER 19, 1996) TO DECEMBER 31, 1997

NETWORK SERVICES REVENUE. Network services revenue for the year ended
December 31, 1998 was $212,000. Our first fiber-optic network began operation in
January of 1998. Accordingly, no revenue was recognized for the period from
inception to December 31, 1997. As of December 31, 1998, our fiber-optic network
was installed in 4 buildings, with more than 2.9 million rentable square feet.

NETWORK OPERATIONS. Network operations expenses were $2,358,000 for the
year ended December 31, 1998 and $80,000 for the period from inception to
December 31, 1997. This increase is consistent with the expansion of our
fiber-optic network and resulting increase in related costs.

SELLING EXPENSE. Our selling expense for the year ended December 31, 1998
was $1,623,000. This expense was attributable to the initial deployment of our
fiber-optic network and the related sales and marketing efforts, including
development of our brand and logo, establishment of sales demonstration centers,
promotional and advertising materials and hiring sales personnel. Consistent
with the initial deployment of our network in January of 1998, we had no selling
expense in the period from inception to December 31, 1997.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $9,736,000 for the year ended December 31, 1998 and $1,348,000 for the
period from inception to December 31, 1997. This increase is consistent with our
development activities and is attributable to growth in number of employees we
incurred in connection with building our operating infrastructure. Our number of
general and administrative employees increased to 85 as of December 31, 1998 as
compared to 13 at December 31, 1997.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the year
ended December 31, 1998 was $499,000 as compared to $10,000 for the
corresponding period of the prior year. This increase was attributable to the
deployment of our system infrastructure and system equipment which commenced in
January 1998.

OTHER INCOME (EXPENSE). Other income (expense) was $(606,000) for the year
ended December 31, 1998 and $(59,000) for the period from inception to December
31, 1997. The change in other income (expense) is primarily due to an increase
in interest expense as a result of increased borrowings throughout 1998.

PROVISION FOR INCOME TAXES. For the year ended December 31, 1998 and the
period from inception to December 31, 1997 no provision for taxes was recognized
as we operated at a loss throughout both periods.

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<PAGE> 29

QUARTERLY FINANCIAL INFORMATION

The following table sets forth certain quarterly statement of operations
data for each full fiscal quarter since our inception. This information has been
derived from our unaudited financial statements. In the opinion of management,
this unaudited information has been prepared on the same basis as the annual
financial statements and includes all adjustments consisting only of normal
recurring adjustments necessary for a fair presentation of the information for
the quarters presented. This information should be read in conjunction with the
financial statements and related notes included elsewhere in the prospectus. The
operating results for any quarter are not necessarily indicative of results for
any future period.

<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------------------------------
(UNAUDITED)
PERIOD FROM
INCEPTION
(DECEMBER 19, THREE MONTHS ENDED
1996) TO -----------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1997 1997 1998 1998
------------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Network services revenues.. $ -- $ -- $ -- $ -- $ 5 $ 22
Operating expenses:
Network operations........ -- 3 14 63 220 498
Selling expense........... -- -- -- -- 205 394
General and administration
expenses................ 94 260 235 759 1,057 1,765
Amortization of deferred
compensation............ -- -- -- -- -- --
Depreciation and
amortization............ -- -- 1 9 21 45
----- ------ ------ ------ ------- -------
Total operating expenses... 94 263 250 831 1,503 2,702
----- ------ ------ ------ ------- -------
Operating income (loss).... (94) (263) (250) (831) (1,498) (2,680)
Other income (expense)..... 3 1 (17) (46) (61) (143)
Provision for income
taxes..................... -- -- -- -- -- --
----- ------ ------ ------ ------- -------
Net income (loss).......... (91) (262) (267) (877) (1,559) (2,823)
Accrued dividends on
preferred stock........... -- -- -- -- -- --
----- ------ ------ ------ ------- -------
Net income (loss)
applicable to common
stock..................... $ (91) $ (262) $ (267) $ (877) $(1,559) $(2,823)
===== ====== ====== ====== ======= =======
Net income (loss) per
common share.............. $(.89) $(1.20) $(1.11) $(3.64) $ (6.46) $(11.69)
===== ====== ====== ====== ======= =======
Weighted average number of
shares outstanding........ 102 219 241 241 241 241
===== ====== ====== ====== ======= =======

<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------
(UNAUDITED)

THREE MONTHS ENDED
------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1998 1998 1999 1999
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Network services revenues.. $ 77 $ 108 $ 146 $ 401
Operating expenses:
Network operations........ 775 865 1,168 1,651
Selling expense........... 522 502 605 1,801
General and administration
expenses................ 2,840 4,074 3,608 5,599
Amortization of deferred
compensation............ -- -- 112 5,030
Depreciation and
amortization............ 159 274 386 504
------- ------- ------- --------
Total operating expenses... 4,296 5,715 5,879 14,585
------- ------- ------- --------
Operating income (loss).... (4,219) (5,607) (5,733) (14,184)
Other income (expense)..... (253) (149) 415 (47)
Provision for income
taxes..................... -- -- -- --
------- ------- ------- --------
Net income (loss).......... (4,472) (5,756) (5,318) (14,231)
Accrued dividends on
preferred stock........... -- (452) (1,650) (1,650)
------- ------- ------- --------
Net income (loss)
applicable to common
stock..................... $(4,472) $(6,208) $(6,968) $(15,881)
======= ======= ======= ========
Net income (loss) per
common share.............. $(18.56) $ (.93) $ (.31) $ (.69)
======= ======= ======= ========
Weighted average number of
shares outstanding........ 241 6,671 22,396 22,886
======= ======= ======= ========
</TABLE>

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<PAGE> 30

We have generated greater revenue in each successive quarter in the last
six quarters, reflecting increases in the number of customers and buildings
served. Network operating expenses have increased in every quarter, reflecting
costs associated with deploying our fiber-optic networks in existing and new
markets and payments to providers of transmission capacity. Selling expenses
have increased with the acquisition of customers. General and administrative
expenses have generally increased in connection with the development of our
corporate infrastructure. Depreciation and amortization expenses have increased
in each quarter, reflecting the purchase of system infrastructure and system
equipment associated with the deployment of our fiber-optic networks.
Accordingly, our net losses have increased in each successive quarter.

LIQUIDITY AND CAPITAL RESOURCES

We have required significant capital to fund the construction and
installation of our fiber-optic networks within buildings and to purchase
electronic equipment for installation in building and metropolitan points of
presence. As of June 30, 1999, we had made capital expenditures of $21,902,000
since inception. We expect that our capital expenditures will increase
substantially in future periods as we construct our networks and purchase more
equipment. We will continue to seek access to additional buildings. If we are
successful in gaining access to additional buildings, we will have substantial
needs for additional capital for an indefinite period. We also expect to have
substantial and increasing operating losses and net losses.

Since our formation in December 1996 until November 1998, we funded our
capital expenditures and operating losses through $17,600,000 in loans and
advances. In November 1998, we consummated a series of reorganization and
recapitalization transactions, pursuant to which we issued shares of our common
and preferred stock for approximately $41,000,000 and used a portion of the
proceeds to repay the loans and advances. In December 1998, we sold additional
shares of common and preferred stock for aggregate proceeds of approximately
$25,000,000.

Since June 1998, we have received $10,500,000 in vendor commitments for
lease financing, subject to certain conditions. As of June 30, 1999, we have
financed approximately $6,557,000 of equipment additions through these lease
facilities and have outstanding capital lease obligations of approximately
$5,376,000.

As of June 30, 1999, we had committed to pay approximately $1,874,000 to
carriers under our existing connectivity contracts.

In March 1999, we entered into a credit facility with Chase Manhattan Bank
under which we can borrow up to $45,000,000, subject to certain conditions
including having less than $12,500,000 cash available at the time of initial
borrowing. We have not borrowed against the facility as of June 30, 1999 and
currently do not intend to. The facility will accrue interest at one of the
following or a combination of the following, at our option: the bank's prime
rate plus 3.5%, a base certificate of deposit rate plus 4.5%, Federal funds rate
plus 4%, or an Eurodollar rate plus 4.5%. The credit facility is secured by all
of our assets, except for the assets pledged in connection with our capital
lease obligations. We will pay a commitment fee of 1.5% on the unused portion of
the credit facility if we borrow against the facility. The facility, which
extends through October 2000, contains various restrictive covenants, including
the maintenance of certain financial ratios, the achievement of certain
operational targets and restrictions on certain activities.

As of June 30, 1999, we had cash and cash equivalents of $24,307,000.

In August 1999, we issued shares of common and preferred stock to a group
of financial sponsors for approximately $17,000,000.

Additionally, in August 1999, we issued shares of common and preferred
stock to our real estate partners for approximately $34,000,000. In October
1999, we issued warrants to acquire

28
<PAGE> 31

6,530,242 additional shares of our common stock to our real estate partners.
These warrants are exercisable upon our real estate partners meeting certain
performance obligations as outlined in the warrant acquisition agreements.

In addition, we may issue shares of common stock to pay for acquisitions.

Prior to the offering, we will have received irrevocable elections from all
preferred stockholders, whereby these parties will agree to convert all of their
preferred stock for 6,882,353 shares of common stock. Had the conversion of
preferred stock occurred at the beginning of each period, net income (loss) per
common share would have been $(.21), $(1.67), $(.62), and $(.66) for the period
from inception to December 31, 1997, the year ended December 31, 1998, and the
six months ended June 30, 1998 and 1999, respectively.

We estimate that our net proceeds from the sale of common stock in this
offering will be approximately $233,455,000, or $268,811,000 if the underwriters
exercise their overallotment option in full, after deducting estimated
underwriting discount and commissions, and offering expenses, based upon the
mid-point of our estimated offering price. We intend to use more than
$175,000,000 of the net proceeds from this offering for construction of
in-building fiber-optic networks and the remainder for working capital and
general corporate purposes, including to fund operating losses. We may also use
a portion of the net proceeds to acquire or invest in complementary businesses,
technologies, services or products. However, we currently have no material
commitments or agreements with respect to any of these types of transactions.

We estimate that the net proceeds of this offering in addition to our cash
on hand will be sufficient to fund our operations and the projected deployment
of our network through approximately the middle of 2001. We do, however, expect
to continue our growth, expansion and the further development of our network and
services beyond that point. Accordingly, we expect that we will eventually need
to arrange for additional sources of capital through the issuance of debt or
equity or additional bank borrowings. We have no commitments other than those
described above for any such additional financing, and we cannot be sure that we
will be able to obtain any such additional financing at the times required and
on terms and conditions acceptable to us. In such event, our growth could slow
and operations could be adversely affected.

The actual amount and timing of our future capital requirements may differ
materially from our estimates as a result of many factors. These factors
include:

- our ability to meet our construction schedules;

- obtaining favorable prices for purchases of equipment;

- our ability to develop, acquire and integrate the necessary operational
support systems;

- the cost of network development in each of our markets;

- demand for our services;

- the nature and penetration of new services that may be offered by us;

- regulatory changes; and

- changes in technology and competitive developments beyond our control.

We also expect that we will require additional financing or require
financing sooner than anticipated if our current business plans change, the
assumptions underlying those plans are inaccurate, if we engage in any material
acquisitions or we are not successful with this offering. We believe that our
current cash position and the net proceeds of this offering are adequate to fund
our current level of operations although this would require modification of our
business plan to reduce our network development plans. If we require additional
capital, we may raise such capital with proceeds from public or private sales of
equity and debt securities, credit facilities and other borrowings. There can be
no assurance that such financing will be available on a timely basis, on terms
acceptable to us or at all.

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<PAGE> 32

RECENT ACCOUNTING PRONOUNCEMENTS

We do not believe that any recent accounting pronouncements will have a
material impact on our financial statements.

YEAR 2000 READINESS DISCLOSURE

We view Year 2000 readiness as the ability to:

- correctly handle date information before, on and after December 31, 1999;

- function properly without material changes in operation resulting from
the advent of a new century; and

- recognize the Year 2000 as a leap year.

PROCESS. Our Year 2000 project is composed of four phases:

(1) INVENTORY. In the inventory phase, we identified all of the
systems and equipment that could be impacted by the Year 2000 problem. The
inventory phase is complete for all systems and equipment.

(2) ASSESSMENT. In the assessment phase, we assessed whether the
systems and equipment identified in the inventory are Year 2000 ready. The
assessment phase is complete for all systems and equipment.

(3) REMEDIATION. In the remediation phase, we seek to remedy any Year
2000 problems in systems or equipment we identified in the assessment
phase. Where the source of a Year 2000 problem is software or equipment
provided by a third party, we either obtain a Year 2000 ready upgrade from
the third party or obtain equivalent software or equipment from another
source. The remediation phase has been finished.

(4) TESTING. In the testing phase, we test the systems and equipment
that were the subject of remediation efforts to verify that they are Year
2000 ready. The testing phase has been completed.

THIRD PARTY PRODUCTS. We acquired our material systems and equipment
from third party vendors, and we have received assurances from our major
third party vendors either that the products we use are Year 2000 ready, or
that their recommended upgrades, which we have installed, are Year 2000
ready. In addition to these assurances, with the exception of our telephone
and security systems, we test all third party products to determine whether
they are Year 2000 ready. With the exception of one product from one
vendor, which we have not assessed and for which we have not received any
assurances from the vendor, we are not currently aware of any material
operational issues associated with preparing our systems for the Year 2000.
With respect to the one product for which we have not received assurances,
we have replaced the product with one that is Year 2000 ready. Since May
1999, we have required, as part of our quality testing process, that all
new products and services are tested for Year 2000 readiness before they
are introduced. Despite the assurances we receive and the testing we
perform, we may experience material unanticipated problems, both
operational and other, as a result of the Year 2000. In addition, there can
be no guarantee that we identified and remediated all of our material
systems that could potentially be impacted by the Year 2000. We may also
experience material unexpected costs or business interruption caused by
undetected errors or defects in the technology used in our systems. This
could have a material adverse effect on our business, financial condition,
results of operations and the price of our common stock.

SERVICES. We rely on telecommunications providers, building managers
and other service providers to deliver services to our customers. Our
ability to provide our Internet access and other services is dependent on
the Year 2000 readiness of these third parties.
30
<PAGE> 33

We have sought and received assurances from the major telecommunications
carriers we use that they are Year 2000 ready, and we have received such
assurances from the majority of such building managers. Nevertheless, we
cannot test the Year 2000 readiness of such carriers, managers and
providers, and failure of any of these third parties to be Year 2000 ready
by January 1, 2000 could result in a deterioration in the performance of
our network or other systems, or a complete system failure, which could
have a material adverse effect on our business, financial condition,
results of operations and the price of our common stock. Additionally, the
Internet could face serious disruptions arising from the Year 2000 problem.

We are also subject to external forces that might generally affect
industry and commerce, such as utility Year 2000 compliance failures and
related service interruptions. All of these factors could have a material
adverse effect on our business, financial condition, results of operations
and the price of our common stock.

CUSTOMERS. The ability of our customers to receive our services
depends on the readiness of their personal computer equipment and the
equipment and services of telecommunications and other third party vendors.
We do not currently have any information concerning the Year 2000 readiness
status of our customers. As is the case with other similarly-situated
companies, if our current or future customers fail to achieve Year 2000
readiness, it could have a material adverse effect on our business,
financial condition, results of operations and the price of our common
stock.

COSTS/CONTINGENCY PLANS. The total budget for our Year 2000 project is
approximately $500,000 and is being expensed as incurred and funded through
operating cash flows. We do not expect to exceed the estimated budget.

We have not developed a contingency plan to address situations that
may result if either we or third parties upon which we rely are unable to
achieve Year 2000 readiness. We intend to perform a risk analysis for our
key services and develop a contingency plan where appropriate. We expect to
conclude this planning effort by November 1999. In addition, in order to
mitigate the effects of Year 2000 readiness problems from
telecommunications carriers, which are beyond our control, we utilize
multiple carriers in key locations. The cost of developing and implementing
a comprehensive contingency plan, if necessary, could be material.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our exposure to financial market risk, including changes in interest rates
and marketable equity security prices, relates primarily to our investment
portfolio and to a lesser extent to our outstanding debt obligations. We
typically do not attempt to reduce or hedge our market exposure on our
investment securities because a substantial majority of our investments are in
fixed-rate, short-term securities. We do not have any derivative instruments.
The fair value of our investment portfolio or related income would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the fixed-rate, short-term nature of the
substantial majority of our investment portfolio. In addition, substantially all
of our outstanding indebtedness at June 30, 1999 is fixed-rate debt.

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<PAGE> 34

BUSINESS

HISTORY

Our company was formed in 1996. In 1998, we sold equity to several
financial sponsors and began implementing our business plan. By the end of 1998,
we had designed, constructed and were operating fiber optic networks inside 4
office buildings with more than 2.9 million rentable square feet in 2
metropolitan areas. In 1999, we completed another round of private equity
financing and signed agreements with more than a dozen owners and managers of
significant commercial real estate portfolios. These agreements with real estate
owners and managers give us the right to install and operate fiber-optic
networks in more than 1,000 office buildings with more than 325 million rentable
square feet. Today, we own and operate our fiber-optic networks inside 61
buildings with more than 33.6 million rentable square feet in 16 metropolitan
areas.

OUR MARKET OPPORTUNITY

Demand for connectivity to the Internet is growing as businesses are
realizing that the Internet can significantly enhance communications among
offices and employees as well as with customers and suppliers. In addition, more
and more businesses use the Internet to conduct business and more effectively
manage their human resources, allocate capital, reduce operating costs, access
valuable information and reach new markets. According to International Data
Corporation, business-to-business commerce over the Internet amounted to $24.8
billion in 1998 and is expected to be $632.9 billion in 2003.

While most large enterprises build or lease expensive, dedicated high-speed
networks, most small- and medium-sized businesses are using comparatively slow
dial-up connections. Forrester Research estimates that in 1998 approximately 93%
of enterprises accessed the Internet through dial-up connections. We believe
that faster, always-on connections enhance the productivity of employees of
small- and medium-sized businesses. International Data Corporation forecasts
that dedicated connections to the Internet for small- and medium-sized
businesses will grow from approximately 240,000 in 1998 to approximately 771,000
in 2000, representing a 83% compounded annual growth rate. Forrester Research
projects that the worldwide market for dedicated Internet access spending among
businesses will grow from $1.4 billion in 1998 to approximately $33.5 billion by
2003.

In addition to Internet connectivity, small- and medium-sized businesses
already demand enhanced services such as web hosting, network security,
e-commerce, video conferencing, data storage and retrieval, conference calling,
branch office connectivity and business television. However, most small- and
medium-sized business do not have full access to these services because the
existing in-building infrastructure is unable to provide broadband services to
small tenants. According to International Data Corporation, value-added services
is one of the fastest growing segments of the Internet services market and is
expected to grow from $3.0 million in 1998 to over $12.9 billion in 2003. In
addition, International Data Corporation estimates that Web hosting revenue from
small- and medium-sized businesses will grow from $658 million in 1998 to over
$3.4 billion in 2000, representing 96% of the total web hosting market.
Businesses of moderate size also do not usually have the resources to fully
analyze the choice between evolving service options on their own.

OUR SOLUTION

We provide small- and medium-sized businesses ultra high-speed Internet
access, business-oriented television for display on computer desktops, enhanced
conference calling services as well as other broadband services. We market these
services directly to our target customers with

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<PAGE> 35

a consultative approach to facilitate our customers' selection of appropriate
services. Our solution offers small- and medium-sized businesses a number of
important advantages, including:

- ULTRA HIGH-SPEED INTERNET ACCESS. Our Internet access products are able
to operate at speeds that are otherwise typically unavailable or
unaffordable to small- and medium-sized businesses. Our standard service
operates at ten megabits of data per second, which is substantially
greater than those usually available with digital subscriber lines, cable
modems, dial-up modems, integrated services digital network lines and T-1
circuits, the later of which transmits at 1.54 million bits of data per
second.

- ALWAYS-ON CONNECTIVITY. While dial-up connections require a user to dial
a phone number and wait while the modem connects to the Internet, our
service is always-on, providing an instantaneous connection and the
capability to send and receive data continuously.

- EASY BANDWIDTH UPGRADES. As our customers' needs evolve, our network
architecture enables us to provide our customers with higher bandwidth
and new broadband services. Using commercially available equipment, we
can increase the transmission speed of our infrastructure by 100 times,
to one billion bits of data per second.

- BROAD RANGE OF VALUE-ADDED SERVICES. In addition to providing ultra
high-speed Internet service, we offer business-oriented television and
other broadband data services to our customers. We intend to expand the
services we provide in the future to include other enhanced services such
as web hosting, network security, e-commerce, video conferencing and data
storage and retrieval, thereby increasing the value of a connection to
our network.

- AFFORDABLE DESKTOP-BASED MONTHLY RATE. We typically price our services on
a per desktop basis at a cost that makes our solutions affordable and
scaleable for our customers. This approach permits our customers to
initiate a relationship with us for a low monthly cost and increase the
number of employees with access to our network once our products
demonstrate their ability to enhance productivity.

- RAPID, EASY INSTALLATION. Unlike other providers of bandwidth-enabled
services who rely on local telephone companies to complete each customer
installation, we are able to independently provision a customer within a
few days. We connect each customer's local area network directly to our
fiber-based network so that our customers usually do not need to purchase
or install any new equipment.

- RELIABILITY. We provide support for our services through a national
customer care center and a national operations control center, both
located in Dallas. The national centers continuously monitor the network
for disruptions in service, remotely resolve problems, configure networks
and compile data on customer service levels. In addition, field
operations personnel augment our customer care center by providing local
support in each metropolitan market that we serve.

STRATEGY

Our objective is to be the primary provider of broadband communications
services to our target market. To achieve this objective we will employ the
following strategies:

- PARTNER WITH REAL ESTATE OWNERS. We seek to gain a competitive advantage
by partnering with large-scale building owners and securing the right to
install our fiber-optic networks inside office buildings that meet our
strategic criteria. We believe that having our services available in a
building assists the building owner in its tenant leasing and retention
efforts. We generally target buildings with more than 100,000 rentable
square feet and 10 or more tenants. We have already secured access to
more than 1,000 office buildings with

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<PAGE> 36

aggregate rentable space of more than 325 million square feet. We provide real
estate owners a modest portion of the revenue we generate from tenants in their
buildings.

- SELL BROADBAND CONNECTIONS AND BANDWIDTH-ENABLED APPLICATIONS. We provide
extremely fast data transport to our customers and augment their ability
to use those connections productively by providing sophisticated
communications applications. For example, we are designing
industry-specific Web pages, such as Web pages for law firms, that will
enable our customers to use the power of a broadband connection to the
Internet to enhance their productivity. These advanced applications help
us generate demand for connections to our network and improve the
usefulness of those broadband connections.

- OWN THE KEY ELEMENTS OF THE LOCAL BROADBAND NETWORK. We strive to be the
first broadband communications provider that owns the critical first mile
fiber-optic connection in the buildings we target. While local and long
distance broadband capacity has recently become readily available from a
wide variety of providers, in-building fiber-based broadband capacity is
typically not available. We believe that our in-building broadband
networks are highly valuable because they allow us to provide scalable,
ultra-high speed communications services to the businesses we target.

- CAPITALIZE ON OUR FIRST MOVER ADVANTAGE. We have already established a
national presence by installing hubs and in-building networks in 16
metropolitan areas. Once we have established a local presence in a
metropolitan area, we are able to expand our network into additional
buildings quickly and economically.

- DESIGN NETWORKS FOR THE FUTURE. We have designed our network architecture
to be robust enough to handle the predicted expansion of demand for
broadband capacity and services. Our fiber-based networks are easily
upgradeable with the use of commercially available equipment and software
and we expect further technological developments to continue to improve
the data transmission capacity of our facilities.

- TARGET SMALL- AND MEDIUM-SIZED BUSINESSES. We believe that small- and
medium-sized businesses are underserved by Internet, data and voice
communications service providers. Our in-building infrastructure
positions us to provision rapidly and provide superior broadband
communications products and services directly to these target customers.

- FOCUS SALES AND MARKETING EFFORTS. We focus our sales and marketing
efforts on the tenants of buildings in which we own and operate a
fiber-optic network. We have developed building-specific marketing and
promotional techniques, such as lobby events and advertising in landlord
newsletters. This focused approach should enable us to have lower per
customer sales and marketing costs than our competitors.

- EXPAND OUR SERVICE OFFERINGS. We seek to widen our array of advanced
broadband communications service offerings. Because we own in-building
fiber-optic networks, we are able to provide these broadband services
reliably and directly to our customers.

- OFFER SERVICES TO CUSTOMERS IN SELECTED OTHER BUILDINGS. Although we
focus our sales and marketing efforts on buildings in which we have
installed our broadband fiber-based networks, by also offering our
services outside these buildings we are better able to serve the
communications needs of our customers. For example, we can offer our
customers wide-area network services to reach their branch offices
located in buildings in which we have not installed a fiber-optic
network. We believe that by selectively offering our services outside
buildings in which we own fiber-based facilities, we can generate
additional revenue with only modest incremental sales and marketing
costs.

- PROVIDE EXCELLENT CUSTOMER CARE. We are dedicated to providing our
customers with the highest levels of customer service and satisfaction in
the industry. We believe we enjoy a competitive advantage because our
network and electronic equipment are located inside

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<PAGE> 37

buildings occupied by our customers. We have technical staff present in each of
our markets, who focus their efforts on buildings in which we provide service.
We also operate a national customer care center in Dallas that is staffed 24
hours a day, 365 days per year.

- BUILD OUR BRAND. We seek to build our brand to assist us in becoming a
leading provider of broadband communications services. We believe that
our brand will, over time, enhance our ability to gain access to
additional buildings. Because our services provide significant value to
small- and medium-sized businesses, we believe that by branding buildings
as ARC connected, we will assist owners in marketing office space. In
addition, developing a strong, lasting brand should help us in our
efforts to add new customers, reduce customer churn and attract
employees.

PRODUCTS AND SERVICES

Our products and services are designed for small- and medium-sized
businesses and today include ultra high-speed Internet access, business-oriented
television, enhanced conference calling services and other broadband data
services. These products and services and the additional products and services
that we intend to offer in the future fall into three categories and are
summarized as follows:

<TABLE>
<CAPTION>
CONNECTIVITY PRODUCTS BANDWIDTH-ENABLED APPLICATIONS MANAGED DATA SERVICES
--------------------- ------------------------------ ---------------------
<S> <C> <C>
- Internet Access - Business Television - Enhanced Conference Calling
- Virtual Private Networks - Messaging - Design
- Remote Access - Web Hosting - Implementation
- Voice - Content Services - Monitoring/Management
- Collaboration Applications - Support
- Video Conferencing - Backup
- eBusiness Toolkit
- Industry-Focused Web Pages
</TABLE>

CONNECTIVITY PRODUCTS. We use our in-building fiber-optic infrastructure
and networks to provide ultra high speed, always-on Internet access. Our
Internet access service is up to 175 times faster than standard dial-up modems
and operates at speeds substantially faster than a T-1 circuit, which transmits
data at 1.54 million bits of data per second. In addition, because our
infrastructure provides a dedicated fiber-optic connection for each customer,
our customer's Internet traffic is secure from other customers in the building.
We believe our connectivity services offer a combination of price and
performance that is substantially better than alternative service offerings that
are currently available to our target customers. We also offer branch office
connections to enable our customers to exchange data with their remote offices.

Our connectivity pricing varies by market, building and customer size. For
Internet access, we charge an initial installation service fee and a minimum
monthly fee for the first desktop connected. The installation service fee is
generally a fixed amount independent of the types of services provided to our
customers and the number of desktops connected to our network. We charge an
incremental monthly fee for each additional desktop, which typically ranges from
$50 to $5. These services are provided under month-to-month contracts. This
enables the typical small- to medium-sized business customer to connect its
desktops to our services for as little as several hundred dollars per month. Our
pricing is competitive with other broadband Internet access services while
generally providing substantially more bandwidth. We believe our customers
benefit from our desktop-by-desktop pricing policy because they only incur
expense for the actual number of desktops connected to our networks and they
therefore are able to add users at a pace that matches their resources and
requirements.

BANDWIDTH-ENABLED APPLICATIONS AND CONTENT. We currently offer our
customers a business-oriented television service that provides a high-quality
video feed from CNN and Bloomberg

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<PAGE> 38

Television directly to computer desktops over our in-building networks. Many
office buildings do not have cable or satellite television service, so tenants
are unable to receive these business-oriented information services through
traditional means. We charge our customers on a per-desktop basis for this
service. We are developing additional bandwidth-enabled products with a focus on
providing value-added information services to our customers. We expect to offer
a number of new services, including industry-focused web pages known as portals,
over the next several years. In addition to developing new services, we may seek
to acquire businesses that have developed services which would enhance the value
of our networks. We might pay for these acquisitions with common stock.

MANAGED DATA SERVICES. Many of our current and targeted customers require
assistance in managing their data and data networks. We provide systems design
services and offer support and assistance with the implementation of our
customers' data networks. In addition, we offer enhanced conference calling
services that use the Internet to enable efficient scheduling and operation of
conference calls.

NETWORK ARCHITECTURE

We design, install, own, and operate Internet-protocol-based data networks
that provide broadband capacity to our customers. Our networks are a combination
of:

- fiber-optic infrastructure that we design, install, own and manage inside
an office building;

- electronic equipment at a building point of presence, usually located in
the basement of the building;

- electronic equipment at a metropolitan hub, which is where we aggregate
and disseminate traffic, which we call a metropolitan point of presence;
and

- leased facilities connecting our networked building to our metropolitan
point of presence and our metropolitan point of presence to a national
service provider, such as GTE Internetworking, Qwest or Level 3.

FIBER-OPTIC FACILITIES INSIDE BUILDINGS. Inside of our network buildings,
we design, install, own and manage a fiber-optic infrastructure that typically
runs from the basement of the building to the top floor inside the building's
vertical utility shaft. This fiber-optic infrastructure is designed to be
capable of carrying data and voice traffic for all the building's tenants for
the foreseeable future. We initiate service for our customers by connecting a
fiber-optic cable from a customer's local area network to the fiber in the
vertical utility shaft. Our customer then has dedicated and secure access to our
network using a link known as an Ethernet connection. Ethernet connections
generally permit the transmission of ten million bits of data per second, and
can transmit as much as one billion bits of data per second.

OUR BUILDING POINTS-OF-PRESENCE. Inside the building, usually in the
basement, we also establish a building point of presence. In each building point
of presence, we connect the fiber-optic cable to Cisco routers and other
electronic equipment that enables the transmission of data and video traffic and
aggregates and disseminates traffic to and from those cables. We typically
obtain the right to use a small amount of space in the basement of our buildings
to establish the building point of presence.

LEASED FIBER-OPTIC FACILITIES OUTSIDE OUR BUILDINGS. Within each
metropolitan area that we serve, we have a metropolitan point of presence, at
which we aggregate and disseminate traffic to and from all of our network
buildings in a city. We typically connect each of our buildings to the
metropolitan point of presence using fiber-optic cables. These fiber-optic lines
are leased from carriers that have previously installed fiber in the local
market. In our experience to date, there are generally several providers in the
local market who are able to provide us with local connectivity for traffic
between our buildings and the metropolitan point of presence.

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<PAGE> 39

OUR METROPOLITAN POINTS OF PRESENCE. At our metropolitan point of presence,
we install the electronic equipment necessary to provide our services in the
metropolitan area. This equipment includes network computer servers, traffic
routers and other items. We generally connect each metropolitan point of
presence to multiple major Internet service providers that provide Internet
connectivity to our network. Each metropolitan point of presence is connected to
at least one other metropolitan point of presence in a different city over a
dedicated circuit to increase redundancy in our network. We also connect each
metropolitan point of presence to our national operating center in Dallas, Texas
where we manage and monitor our network traffic.

The architecture of our network provides us with significant competitive
advantages, including the ability to:

- rapidly connect customers without requiring complex provisioning of local
phone lines and circuits from phone companies;

- capitalize on advanced Internet-protocol-based technology to construct a
more efficient and lower cost network;

- provide low cost, high performance services;

- offer always-on, secure connections to our network and the Internet; and

- provide a flexible platform for bandwidth upgrades and new service
offerings as data communications technology and applications continue to
develop.

CONSTRUCTION

We have assembled an in-house centralized construction group with
experience in office building construction and electrical engineering. We
believe that our construction capabilities are a key competitive advantage, as
they allow us to rapidly and efficiently deploy our network within the markets
we penetrate.

STANDARD CONSTRUCTION PRACTICES. Our construction group has developed
standardized installation drawings and details that can be applied to most of
our construction projects and result in high quality construction processes. Our
construction practices are focused on ensuring compliance with applicable
building and industry codes and standards. Our expertise in designing and
constructing in-building advanced data networks allows us to reduce the space
and resources needed to support our fiber-optic infrastructure and associated
electronic systems in buildings.

DESIGN AND IMPLEMENTATION OF OUR IN-BUILDING NETWORK. Prior to commencement
of construction of a fiber-optic network inside an office building, our
construction management staff conducts a formal, detailed, building site survey.
Our construction team then develops a site-specific fiber and cable system
design using our standardized practices, and prepares a formal installation
contract. We utilize computer assisted design and drawing systems to design,
draw and document our system installations. We generally engage the specialty
electrical contractor who is most familiar with the building to perform the
installation under the supervision of our own construction management personnel.
We typically purchase construction services on a fixed price basis.

CONSTRUCTION TIME AND COST ASSOCIATED WITH OUR IN-BUILDING NETWORKS. The
total construction time for the completion of our in-building fiber-optic
infrastructure and related equipment room facility is typically between 60 and
90 days for a major metropolitan office-building complex. We typically spend
several hundred thousand dollars per building for the construction of the
vertical fiber-based infrastructure and electronic equipment. This cost has
fallen considerably as we have gained experience and standardized our
construction processes. These construction costs vary considerably with building
size, location, complexity of the construction project and other factors.

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<PAGE> 40

We believe that our current cost structure, together with our technical
expertise and our rapid construction process, provide us with a competitive
advantage.

CONSTRUCTING CONNECTIONS TO OUR CUSTOMERS. Once we have completed the
construction and installation of our in-building fiber-optic network and have
received an order for service from a customer, we connect the customer's local
area network to our in-building network. Typically, this connection can be
completed within a few days by one of our employees or an independent contractor
hired for this purpose. The connection requires the installation of a piece of
electronic equipment to enable the connection of a strand of fiber-optic cable
from the vertical riser to the customer's local area network. Once this
connection is made, our installation representative will help the customer test
the network connection to verify that the intended desktops are receiving our
service. This approach to provisioning service to our customers is intended to
establish a relationship with the customer that will encourage future use of our
technical support and data management services.

OUR COMPETITIVE ADVANTAGE

Small- and medium-sized businesses currently face a limited choice of
alternatives for high-speed Internet access. Over the last few years, digital
subscriber line technologies, cable modems, T-1-based solutions and
fixed-wireless connections have emerged as alternative technologies for
high-speed, always-on service.

We believe that our fiber-optic-based solution is generally superior for
most of our target customers because our network provides:

- consistent speed and quality of signal that does not vary with distance
of the building from our metropolitan hub or environmental factors such
as rain;

- rapid, relatively uncomplicated provisioning of new customers that is not
dependent on the provider of local connectivity;

- symmetrical broadband capacity that will allow us to offer enhanced
business communication services such as full motion video conferencing;

- scaleable, competitive pricing schemes which are based on the number of
desktops connected to the network; and

- substantially higher speeds and an easy path to increased bandwidth.

For more information about the highly competitive market in which we
operate and the competitive risks we face, see "Risk Factors -- The sector in
which we operate is highly competitive, and we may not be able to compete
effectively."

MARKETING AND SALES

MARKETING STRATEGY. We directly market our services to the tenants in
buildings in which we have a fiber-optic infrastructure. To reach tenants, we
use a combination of direct marketing, public relations, event marketing, and
personal selling. Prior to marketing in a building, we conduct a detailed
customer analysis with the help of the building owner. We generally launch
service in each of our buildings with a promotional event, typically in the
lobby, at which we demonstrate our services and generate leads. Based on tenant
data provided by the building owner and other sources, we often use approaches
that are tailored to specific businesses, such as law firms, accounting firms,
consulting firms and other business segments. We also use promotional materials
and employ public relations firms to raise awareness of our services before an
official sales launch within a building or market, and later follow up with
event marketing and personal selling to launch and increase tenant sales in each
building. We also
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<PAGE> 41

attempt to work closely with the building owners, management and leasing
representatives in both our initial and ongoing marketing efforts.

SALES FORCE ORGANIZATIONAL STRUCTURE. We have a sales organization, which
is managed by regional sales managers. These regional sales managers usually
have multiple account teams reporting to them. These regional account teams
consist of an account manager, supported by a sales engineer and a project
administrator and are typically responsible for two to four buildings. The sales
engineer provides our customers with very specific technical consulting on local
area and wide area networking and other application implementation and
integration issues. This is generally important to small- and medium-sized
businesses that typically have limited information technology staffs and
expertise. Our sales team typically jointly markets our services with the local
building management or leasing organization.

SALES STRATEGY. Our experienced sales team tailors the right broadband data
solutions for our customers using a consultative sales approach. We also market
to tenants of buildings that are not yet connected to our network through
similarly targeted tactics, including the use of local market and on-line
advertising. We believe that this approach is part of our competitive advantage
because this level of service was previously available only to very large
enterprises either through in-house expertise or through expensive consulting
contracts.

SALES CENTERS. We build and operate sales centers in each of our markets
where sales people and real estate leasing agents can bring customers or
prospects to obtain hands-on experience with our products and customer service.
These centers are also used to stage marketing events and seminars.

SALES SYSTEMS SUPPORT. To support our sales and customer service processes,
we employ a sales and customer service automation application. The system is
based around a database that enables all sales and service personnel to have
instantaneous access to current and historical customer information. We are also
currently implementing an Internet-based customer interface known as an extranet
that will allow registered customers to purchase additional services, modify or
otherwise customize their service profiles.

REAL ESTATE SELECTION AND MARKETING

To build our fiber-optic infrastructure inside of office buildings and
offer our services to the tenants of those buildings, we must first secure the
right to install fiber-optic cable in the utility shaft of the building. We
carefully target the buildings in our markets that we wish to secure rights in
and then work with the owners of those buildings to negotiate a partnership that
will benefit both the property owner and us.

PROPERTY SELECTION. We consider a number of criteria in selecting buildings
we target for installation of our fiber-based networks. These criteria include
building location, building size, number of tenants, tenant mix, proximity to
local fiber-optic systems, relationship to other network buildings and
suitability for installation of our network infrastructure. In addition, we
consider the presence of any existing broadband communications network systems
in the building. We have a team of real estate professionals who conduct the
assessment necessary to identify candidate buildings prior to the signing of
lease or license agreements with the owners of the buildings selected.

ARRANGEMENTS WITH REAL ESTATE OWNERS. Once we have selected an office
building or collection of office buildings in which we would like to offer our
services, we contact the property

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<PAGE> 42

owner to secure the right to access the building and install our network. When
we contact building owners, we emphasize the following benefits of partnering
with us:

- we install and manage the in-building fiber-optic communications
infrastructure at no cost to the building owner or manager;

- our fiber-optic infrastructure and service offerings provide building
owners with a significant competitive advantage in attracting and
retaining tenants;

- we pay building owners either a fixed rental fee or a modest percentage
of the revenue we generate in the building; and

- our real estate services and construction groups are staffed with
experienced property management and construction management personnel who
reduce the disruption to the property owner and the customer.

Our typical lease or license agreement with a building owner is for a total
term of ten or more years. The agreement provides for the development of the
network installation design and the approval of the construction plans and
arrangements by the building owner. The agreement provides for ongoing reporting
to the building owner of our network expansion as we add customers and provides
for revenue sharing or fixed monthly rent.

MAJOR REAL ESTATE RELATIONSHIPS. We have agreements with more than a dozen
large commercial property owners and managers to obtain access to and the right
to install and operate networks in more than 1,000 buildings in major
metropolitan areas in the United States and selected international markets. Our
relationships include the following:

<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF
PROPERTY OWNER OR MANAGER BUILDINGS PRINCIPAL CITIES
- ------------------------- ----------- --------------------------------------------
<S> <C> <C>
Whitehall 195 Boston, Dallas, Denver, Houston, Los
Angeles, Northern NJ and Washington, DC
Transwestern 115 Houston, Los Angeles, Phoenix and Salt Lake
City
Trizec Hahn 110 Atlanta, Chicago, Dallas, Houston, Los
Angeles, New York City and Washington, DC
Cornerstone 105 Los Angeles, Oakland, Phoenix and San
Francisco
Equity Office Properties 105 Boston, Philadelphia and Washington, DC
Hines 95 Chicago, Houston, Los Angeles, New York
City, San Francisco and Washington, DC
Vornado 70 New York City and Washington, DC
Boston Properties 70 Boston, Central NJ, New York City, San
Francisco and Washington, DC
Shorenstein 30 Boston, Chicago, Miami, New York City and
San Francisco
Hamilton 30 Chicago
Met Life 20 Chicago, Dallas, Houston and New York City
</TABLE>

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PENETRATION. The table below summarizes our success at selecting property
and negotiating license arrangements in the ten largest United States real
estate markets covered by Torto Wheaton data. Target buildings are generally
those designated by Torto Wheaton as Class A, Class B or Class C commercial
office buildings with more than 100,000 rentable square feet. The data below
concerning the total number and approximate square feet of target buildings is
from Torto Wheaton. Data for buildings and square feet that we have in operation
or under contract includes only those buildings with more than 100,000 square
feet.

<TABLE>
<CAPTION>
TARGET BUILDINGS TARGET BUILDINGS SQUARE FEET
--------------------------------- ---------------------------------
IN OPERATION OR IN OPERATION OR
MARKET UNDER CONTRACT TOTAL IN MARKET UNDER CONTRACT TOTAL IN MARKET
- ------ --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
New York City 49 749 40,643,000 352,000,000
Washington, D.C. 126 821 30,660,000 168,000,000
Chicago 70 501 34,362,000 156,000,000
Los Angeles 45 477 15,044,000 122,000,000
Dallas 36 397 15,246,000 108,000,000
Houston 58 359 25,440,000 100,000,000
Boston 67 400 20,078,000 92,000,000
Atlanta 37 322 14,811,000 80,000,000
Northern New Jersey 22 361 5,607,000 76,000,000
San Francisco 49 204 21,196,000 53,000,000
</TABLE>

NETWORK OPERATIONS

Our operations and customer care facilities are located in Dallas, Texas.
The operations center is staffed with skilled technicians and engineers and is
equipped with computerized network management tools.

PROVISIONING A CUSTOMER. We believe that rapid activation of services is
one of our key competitive advantages. We generally provide our customers with a
conservative estimate for provisioning time that ranges between one to several
days from receipt of contract.

PROVIDING CUSTOMER SERVICE. We believe that a high level of customer
service is required for us to build our brand and develop a strong reputation
among the tenants in our buildings. All of our customer service is managed
in-house and is available 24 hours a day, 365 days a year. Our customer service
representatives are equipped to handle requests for all of our services. We
strive to answer all calls quickly, provide rapid resolution and follow up with
customers to ensure satisfactory resolution. We use a computerized relationship
management system to capture, track and save customer call details. Information
is stored in a database that provides a valuable source of feedback about our
customer satisfaction and service quality.

MANAGING THE NETWORK. The network operations center is staffed 24 hours a
day, 365 days a year. All of our network assets are continuously monitored for
events that may interrupt or degrade service. Traffic and service-level
statistics are gathered to report performance, plan additional capacity and
communicate with our customers. Our technical staff is trained in provisioning,
activation, maintenance and troubleshooting. Service-affecting events are
automatically detected and communicated to our technical managers. Our system
assigns network events to network operations engineers for resolution.

PERFORMING FIELD SUPPORT. Field operations engineers are deployed in each
of the metropolitan markets we serve. Our field operations engineers are on call
24 hours a day. They perform on-site customer support, service activation, field
troubleshooting and equipment repair. We support our field personnel with a
computerized spare parts management system that provides delivery of spare parts
within each city served.

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<PAGE> 44

REGULATION

We are subject to numerous local regulations such as building and
electrical codes, licensing requirements and construction requirements. These
regulations vary on a city-by-city and county-by-county basis. There is no
current legal requirement in a large majority of states that owners or managers
of commercial office buildings give access to competitive providers of
telecommunications services, but such laws and regulations have been proposed in
the past and may be adopted in the future. On June 10, 1999, the FCC initiated a
regulatory proceeding on a number of issues related to utility shaft access in
multiple tenant environments, including the following:

- the FCC's tentative conclusion that utilities must allow
telecommunications and cable service providers access to rooftop and
other rights-of-way and utility shaft conduit in multiple tenant
environments on just, reasonable and nondiscriminatory rates, terms and
conditions;

- whether incumbent local telephone companies should make available
unbundled access to riser cable and wiring within multiple tenant
environments; and

- whether building owners offering access to any telecommunications
provider should be required to make comparable access available to all
such providers on a nondiscriminatory basis, and whether the FCC has the
authority to impose such a requirement.

In addition, legislation has been introduced in the U.S. Congress that addresses
issues relating to telecommunications access to buildings owned or used by the
federal government. We cannot predict the outcome of the FCC's proceeding or of
any legislation, nor what effect, if any, it may have on our business.

The FCC regulates common carriers' interstate services. State public
utilities commissions exercise jurisdiction over intrastate basic
telecommunications services, but we believe do not regulate most enhanced
services, which involve more than the pure transmission of customer-provided
information. The FCC has preempted certain inconsistent state regulation of, and
does not itself regulate, enhanced services. We believe that all of the
communications services that we currently provide are enhanced services and
therefore not subject to direct regulation. The offerings of many of our
competitors and vendors, especially incumbent local telephone companies, are
subject to direct federal and state regulations. These regulations change from
time to time in ways that are difficult for us to predict.

Through subsidiaries, we are in the process of applying for, and have
received in some states, authority from various state regulatory commissions and
the FCC to provide basic telecommunications services, such as voice telephony
service. These subsidiaries will be subject to direct state and federal
regulation upon approval of their applications. We do not expect to encounter
substantial legal barriers to entry into regulated telecommunications services.
We also do not expect to face regulatory restrictions on the pricing or terms of
any regulated telecommunications service offerings we might choose to offer that
would have a material adverse effect on our business. Changes in the regulatory
environment, however, could have a material adverse effect on our business.

The Telecommunications Act of 1996 substantially altered the federal and
state regulatory environment for telecommunications services. Among its more
significant provisions, this act:

- removed most of the significant legal barriers to entry into
telecommunications service, including local exchange service markets;

- required incumbent local telephone companies to interconnect with
competitors through unbundled network elements and with provision of
operations support systems, reciprocal compensation, local number
portability, dialing parity and collocation;

42
<PAGE> 45

- required incumbent local telephone companies to offer their retail
services at wholesale discounts for resale by competitors;

- required incumbent local telephone companies and utilities to grant
access to their rights-of-way, conduit and ducts;

- established criteria and procedures for entry of Bell Operating Companies
into long distance service in their local service areas; and

- directed the FCC to establish an explicit subsidy mechanism for the
preservation of universal service.

We anticipate that, eventually, the Bell companies' applications to provide
in-region long distance service will be granted, at which time the Bell
companies will be able to compete more effectively in various markets, including
against us. Bell Atlantic has an application pending at the FCC to provide long
distance service in New York State. Legislation has been introduced to allow the
Bell companies to provide long distance Internet and high speed data services.
We do not know what the outcome or effects of these proceedings and legislation
will be.

In September 1999, the FCC declined to require incumbent telephone
companies to make their facilities used to provide high-speed data offerings,
such as digital subscriber line equipment, available to competitors as an
unbundled network element. The FCC has a pending regulatory proceeding regarding
steps to spur the deployment of broadband transmission capabilities and advanced
services, by both incumbent telephone companies and their competitors. The rules
adopted by the FCC in this area could have a material effect on our competitive
position with regard to incumbent telephone companies and other
telecommunications companies.

The FCC and state commissions may act in the near future to change the
charges for Internet traffic handled in part by incumbent local telephone
companies and Internet service providers' obligation to contribute to universal
service funds.

There have been various statutes, regulations and court cases relating to
liability of Internet service providers and other on-line service providers for
information carried on or through their services or equipment, including in the
areas of copyright, indecency/obscenity, defamation and fraud. The laws in this
area are unsettled and there may be new legislation and court decisions that may
affect our services and expose us to liability. See "Risk Factors -- Legislation
and government regulation could adversely affect us."

EMPLOYEES

As of September 15, 1999, we had 261 employees. None of our employees are
represented by a labor union, and we consider our relations with our employees
to be good. See "Risk Factors -- We must attract and retain key personnel in a
tight labor market or we will be unable to manage our growth."

FACILITIES

We are headquartered in facilities consisting of approximately 43,000
square feet in Dallas, Texas which we occupy under a lease that expires in
December 2003. In addition, our engineering department occupies approximately
19,000 square feet in Richardson, Texas under a lease which expires in December
2003. We also lease space under varying terms from three to five years in each
of our metropolitan areas served for sales demonstration centers. We consider
this space adequate for our current operations.

LEGAL PROCEEDINGS

We are not currently engaged in any material legal proceedings.

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<PAGE> 46

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND OTHER SENIOR MANAGEMENT

The following table sets forth certain information with respect to our
executive officers, directors, and other senior management as of October 6,
1999.

<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
David H. Crawford........... 42 Chief executive officer and director (class I)
John M. Todd................ 49 Chief operating officer, president and director (class
I)
John H. Davis............... 60 Chief technology officer and director (class II)
Todd C. Doshier............. 37 Senior vice president and chief financial officer
Michael R. Carper........... 38 Senior vice president and general counsel
Stephen W. Schovee.......... 40 Director and chairman of the board (class III)
Rod F. Dammeyer............. 58 Director (class II)
William J. Elsner........... 47 Director (class II)
R. David Spreng............. 38 Director (class II)
Jeffrey Weitzen............. 42 Director (class III)
Blair P. Whitaker........... 38 Director (class I)
William T. White............ 38 Director (class III)
Mary A. Wilderotter......... 44 Director (class III)
OTHER SENIOR MANAGEMENT
Elizabeth Carey Billante.... 38 Vice president -- real estate services
Thomas A. Blake............. 52 Vice president -- accounting
James P. Breen.............. 37 Vice president -- corporate development
John R. Bukowsky............ 43 Vice president -- product management
John A. Crooks.............. 52 Vice president -- sales
Thomas A. Eppes............. 51 Vice president -- technical operations
William T. Guthrie.......... 37 Vice president -- engineering
Brenda L. Hardesty.......... 41 Vice president -- human resources and administration
John D. Keys................ 67 Vice president -- construction
Douglas J. Morgan........... 46 Vice president -- strategic national initiative
Steve L. Reichert........... 42 Vice president -- information technology
Charles W. Yeargain......... 38 Vice president -- finance and treasurer
</TABLE>

DAVID H. CRAWFORD has served as our chief executive officer since July
1998, was elected to our board of directors in July 1998, and from July 1998 to
May 1999 also served as our president. From March 1997 until July 1998, Mr.
Crawford was senior vice president -- administration, general
counsel -- property operations and assistant secretary at Equity Office
Properties Trust. From February 1991 until March 1997, Mr. Crawford held senior
vice president, general counsel and other senior management positions at Equity
Office Properties and their affiliates and was of counsel to Rosenberg &
Liebentritt. Mr. Crawford was an associate at Kirkland & Ellis, a national law
firm based in Chicago, Illinois from June 1988 until February 1991.

JOHN M. TODD has served as our president and chief operating officer since
May 1999 and was elected to our board of directors in May 1999. From February
1996 to May 1999, Mr. Todd was vice president -- sales support services for
Sprint Business and vice president -- technology integration for Sprint
Business. From February 1986 until February 1996, Mr. Todd held various officer
and senior management positions at MCI, including vice president for
professional services, product management and marketing.

JOHN H. DAVIS, PH.D. has served as our chief technology officer since July
1999 and was elected to our board of directors in December 1998. Since September
1997 to June 1999, Dr. Davis was a principal of GeoPartners Research. Prior to
September 1997, Dr. Davis held senior management positions at Bell Labs and
AT&T, culminating in his role as the chief

44
<PAGE> 47

technology officer for AT&T Communications Services from 1993 until September
1997. Dr. Davis presently serves on the board of directors of Acoustics
Technologies, a startup company in Phoenix, AZ.

TODD C. DOSHIER has served as our chief financial officer since December
1996 and served as our chief operating officer from December 1996 to May 1999.
From May 1991 until December 1996, Mr. Doshier was a principal in Doshier & Co.,
later Perry, Nestman & Doshier, which provided corporate consulting, financial
advisory and management services.

MICHAEL R. CARPER has served as our senior vice president and general
counsel since June 1999. From August 1995 to June 1999, Mr. Carper was assistant
general counsel and assistant secretary of Nextel Communications. From August
1993 until July 1995, Mr. Carper was vice president and general counsel of
OneComm Communications, which merged with Nextel. Prior to August 1993, Mr.
Carper worked for Jones, Day, Reavis and Pogue, an international law firm, in
their communications practice area.

STEPHEN W. SCHOVEE was elected to our board of directors in December 1998
and currently serves as its chairman. Since August 1995, Mr. Schovee has been a
managing member of Telecom Management L.L.C. Since October 1997 Mr. Schovee has
been a managing member of Telecom Management II, L.L.C., the general Partner of
Telecom Partners II, L.P. From August 1992 until August 1995, Mr. Schovee was
the chief executive officer of OneComm, when it merged with Nextel. Mr. Schovee
was a founding director of Verio and is currently a director of Centennial
Communications, Advanced Telecom Group, Gabriel Communications and VeloCom.

ROD F. DAMMEYER was elected to our board of directors in December 1998.
Since January 1998, Mr. Dammeyer has been the managing director of Equity Group
Corporate Investments, an affiliate of EGI-ARC. Mr. Dammeyer is a director and
vice chairman of Anixter International where he has been employed since 1985 and
is also a director of Antec, CNA Surety, Grupo Azucarero Mexico, IMC Global,
Matria Healthcare, Stericycle, TeleTech Holdings and Transmedia Network. He is a
trustee of the Van Kampen Closed-End Funds.

WILLIAM J. ELSNER was elected to our board of directors in December 1998.
Since October 1997, Mr. Elsner has been a managing member of Telecom Management
II, L.L.C., the general partner of Telecom Partners II, L.P. From November 1995
until October 1997, Mr. Elsner was a private investor. From July 1991 until
September 1995, Mr. Elsner was the chief executive officer of United
International Holdings, an international cable operator he co-founded. Mr.
Elsner is currently the chairman of the board of directors of Formus
Communications and a director of Via Net.Works and VeloCom.

R. DAVID SPRENG was elected to our board of directors in December 1998.
Since September 1998, Mr. Spreng has been the managing general partner of
Crescendo Ventures. From March 1993 until September 1998, Mr. Spreng was
president of IAI Ventures, Crescendo's predecessor which he founded. Mr. Spreng
serves on the boards of CoSine Communications, Digital Island, Fujant
Technologies, Innuity, Novalux, Red Creek Communications and Tut Systems.

JEFFREY WEITZEN was elected to our board of directors in October 1999.
Since January 1998, Mr. Weitzen has been a director, president and chief
operating officer of Gateway 2000. From January 1997 to January 1998, Mr.
Weitzen was the executive vice president, business markets division at AT&T.
From 1994 to 1996, he was vice president and general manager, global services
and from 1992 to 1994, he was president, business and consumer lines of
business -- Asia-Pacific region at AT&T.

BLAIR P. WHITAKER was elected to our board of directors in December 1998.
Since October 1997, Mr. Whitaker has been a general partner at Norwest Venture
Partners. From January 1996 until October 1997 Mr. Whitaker was chief financial
officer and vice president for business development of Exactis.Com. From August
1990 until December 1995 he was a vice

45
<PAGE> 48

president at the Centennial Funds, Language Technology and Massachusetts
Institute of Technology. Mr. Whitaker is a director of Advanced Telecom Group,
Diginet Americas, CO Space and Pangea.

WILLIAM T. WHITE was elected to our board of directors in December 1998.
Since 1991, Mr. White has held senior management positions at various Equity
Group Investment companies. Equity Group Investments is an affiliate of EGI-ARC.
Prior to 1991, Mr. White was an officer at Manufacturer's Hanover Trust Company.

MARY A. WILDEROTTER was elected to our board of directors in October 1999.
Since January 1997, Ms. Wilderotter has been president and chief executive
officer of Wink Communications. From August 1995 to January 1997, Ms.
Wilderotter was the executive vice president of national operations and chief
executive officer of the Aviation Communications Division of AT&T Wireless
Services. From October 1991 to August 1995, she was senior vice president and
regional president of the California/Nevada Region of McCaw Cellular
Communications. McCaw became AT&T Wireless upon McCaw's acquisition by AT&T. Ms.
Wilderotter serves as a director on the boards of Airborne Freight, Gaylord
Entertainment, American Tower Association, California Community College
Foundation and Electric Lightwave. She also serves as a member of the board of
trustees of the College of Holy Cross.

ELIZABETH CAREY BILLANTE has served as our vice president -- real estate
services since August 1998. Since 1990, Ms. Billante has held senior management
positions at Equity Office Properties and Wiggins Properties in the areas of
portfolio management and property management.

THOMAS A. BLAKE has served as our vice president -- accounting since
September 1998. Prior to joining us in November 1997 and since 1974, Mr. Blake
founded an independent CPA firm and served as the chief financial officer for
four international construction and real estate firms.

JAMES P. BREEN has served as our vice president -- corporate development
since July 1998. Since 1990, Mr. Breen has held officer and senior management
positions at Equity Office, Equity Group Investments and Barclays Bank in the
areas of finance and investments for the real estate and communications
industries.

JOHN R. BUKOWSKY has served as our vice president -- product management
since April 1999. Since 1996, Mr. Bukowsky has held officer and senior
management positions at Sanga International and GTE in the areas of business
strategy, business development, marketing, product development and sales.

JOHN A. CROOKS has served as our vice president -- sales since September
1999. Prior to joining us in August 1999 and since 1988, Mr. Crooks has held
officer and senior management positions with Evercom and MCI in the areas of
sales and marketing, including enterprise services marketing and national
accounts sales.

THOMAS A. EPPES, PH.D., has served as our vice president -- operations
since August 1998. Since June 1979, Dr. Eppes has held officer and senior
management positions at VTX and Frito-Lay in the areas of network design and
deployment, process engineering and operations.

WILLIAM T. GUTHRIE has served as our vice president -- engineering since
July 1998. Prior to joining us in February 1998 and since April 1992, Mr.
Guthrie held officer and senior management positions at MCI and US West in the
areas of wireless engineering and network systems.

BRENDA L. HARDESTY has served as our vice president -- human resources and
administration since March 1999. Prior to joining us in August 1998 and since
1984, Ms. Hardesty held senior management positions at Accugraph
Corporation/Architel Systems in the areas of human resources, customer support
and customer services.

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<PAGE> 49

JOHN D. KEYS has served as our vice president -- construction since
November 1997. Prior to joining us as a consultant in March 1997 and since 1968,
Mr. Keys founded two international electrical construction firms and has served
as a senior officer of Blount, Foley Enterprises and Fishbach & Moore.

DOUGLAS J. MORGAN has served as our vice president -- strategic national
initiative since July 1999. Since 1991, Mr. Morgan has held officer and senior
management positions at Winstar and Unisys in the areas of enhanced services,
sales, business development, marketing, product management, training, strategic
initiatives and media relations.

STEVE L. REICHERT has served as our vice president -- information
technology since June 1999. Since 1994, Mr. Reichert has held officer and senior
management positions at Pagenet and Pro Staff in the areas of business systems
development, IT consulting services, customer systems development, network
systems development and technical architecture planning.

CHARLES W. YEARGAIN has served as our vice president -- finance and
treasurer since December 1996. Since 1984, Mr. Yeargain has founded an
investment and consulting firm, and has held officer positions at AMRESCO
Management and Texas American Bank.

ELECTION OF DIRECTORS AND OFFICERS

According to our by-laws, our stockholders shall elect the members of our
board of directors at the annual meeting of the stockholders to be held each
year at a time specified by our board of directors. The by-laws also provide
that the directors shall be elected by a plurality of the votes cast at the
annual meeting. Each director elected shall hold office until his or her
successor is duly elected and qualified or until his or her earlier death,
resignation or removal.

Our board of directors will appoint officers at the annual board meeting or
at other times throughout the year, as may be required. Each officer appointed
will hold office until his or her successor is duly chosen and qualified or
until his or her earlier death, resignation or removal.

CLASSIFIED BOARD OF DIRECTORS

Our board of directors is divided into three classes of directors serving
staggered three-year terms. Messrs. Crawford, Todd and Whitaker will serve as
class I directors whose terms expire at the 2000 annual meeting of stockholders.
Messrs. Dammeyer, Davis, Elsner and Spreng will serve as class II directors
whose terms expire at the 2001 annual meeting of stockholders. Messrs. Schovee,
Weitzen, White and Ms. Wilderotter will serve as class III directors whose terms
expire at the 2002 annual meeting of stockholders.

BOARD COMMITTEES

Our by-laws provide that our board of directors may designate one or more
board committees. We currently have an audit committee and a compensation
committee.

Our audit committee, currently comprised of Messrs. Elsner, Spreng and
Weitzen:

- monitors our financial reporting and our internal and third-party audits;

- reviews and approves material accounting policy changes;

- monitors our internal accounting controls;

- recommends the engagement of independent auditors;

- reviews transactions between Allied Riser and our officers and directors;
and

- performs other duties upon the request of our board.

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<PAGE> 50

Our compensation committee, currently comprised of Messrs. Schovee, White
and Ms. Wilderotter:

- reviews and approves compensation and benefits paid to our executive
officers; and

- administers our 1999 stock option plan.

COMPENSATION OF DIRECTORS

Directors who are not our employees do not receive cash fees for serving as
directors. Our outside directors are compensated $1,000 for each meeting they
attend in person and $500 for each telephonic meeting. In addition, we reimburse
directors for out-of-pocket expenses incurred in connection with attendance at
meetings. Directors may also be granted options to purchase shares of our common
stock pursuant to our 1999 stock option and equity incentive plan.

EMPLOYMENT AGREEMENTS

We have employment agreements with each of Messrs. Crawford, Todd, Doshier,
Davis and Carper. These employment agreements do not set salary or bonus
compensation but provide for full accelerated vesting of restricted shares and
stock options in the event of a qualifying business combination transaction. The
agreements also provide for severance payments equal to six months salary and
partial accelerated vesting of restricted shares and stock options upon
termination of the employee's employment without cause. The agreements also
impose non-competition and nonsolicitation obligations on these employees for a
period of two years following their employment.

We have employment agreements with our employees at the vice president
level. These employment agreements do not set salary or bonus compensation but
provide for full accelerated vesting of restricted shares and stock options in
the event of both a qualifying business combination transaction and termination
of the employee's employment under certain circumstances. The agreements also
provide for severance payments equal to three months salary and partial
accelerated vesting of restricted shares and stock options upon termination of
the employee's employment without cause. The agreements also impose
non-competition and nonsolicitation obligations on these employees for a period
of one year following their employment.

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<PAGE> 51

EXECUTIVE COMPENSATION

The Summary Compensation Table below sets forth certain information
concerning the compensation paid or accrued for services rendered in all
capacities by the chief executive officer and our other executive officers whose
combined salary and other annual compensation exceeded $100,000 during 1998. The
columns for "Other Annual Compensation" and "All Other Compensation" have been
omitted from the table because there is no compensation required to be reported
in those columns. The aggregate amount of perquisites and other personal
benefits provided to each officer listed above is less than 10% of the total
annual salary and bonus of that officer.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION RESTRICTED
FISCAL ------------------ STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY $ BONUS $ AWARDS
- --------------------------- ------ -------- ------- ----------
<S> <C> <C> <C> <C>
David H. Crawford, chief executive officer.............. 1998(1) $104,077 $50,000 623,737
John M. Todd, chief operating officer................... 1998(2) -- -- --
John H. Davis, chief technology officer................. 1998(3) -- -- --
Todd C. Doshier, senior vice president and chief
financial officer..................................... 1998 $168,115 $45,000 577,485
Michael R. Carper, senior vice president and general
counsel............................................... 1998(4) -- -- --
</TABLE>

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

(1) Represents payments made from July 1998, the date on which Mr. Crawford
began his employment with Allied Riser.
(2) Mr. Todd commenced his employment in May 1999.
(3) Mr. Davis commenced his employment in July 1999.
(4) Mr. Carper commenced his employment in June 1999.

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<PAGE> 52

PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding beneficial ownership
of our common stock as of September 15, 1999, as adjusted to reflect the
conversion of outstanding preferred stock into common stock immediately prior to
the completion of this offering, assuming an offering price of $17, by:

- each stockholder who is known by us to beneficially own 5% or more of any
class of our capital stock;

- each of the executive officers named in the "Summary Compensation Table"
and each of our directors; and

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

Unless otherwise indicated in the footnotes to this table, each of the
stockholders named in this table has sole voting and investment power with
respect to the shares shown as beneficially owned. In accordance with Rule 13d-3
under the Exchange Act, a person is deemed to be a beneficial owner of a
security if he or she has or shares the power to dispose or direct the
disposition of such security. A person also is deemed to be a beneficial owner
of any securities of which that person has the right to acquire beneficial
ownership within 60 days. The percentage of beneficial ownership at September
15, 1999 is based on 54,826,818 shares of our common stock outstanding as of
such date.

<TABLE>
<CAPTION>
AS OF SEPTEMBER 15, 1999
---------------------------------------------------------------------------------
NUMBER OF TOTAL ALL
SHARES PERCENT OF TOTAL PERCENT OF SHARES PERCENT OF
BENEFICIALLY OUTSTANDING VESTED OUTSTANDING (VESTED AND OUTSTANDING
NAME OWNED SHARES SHARES SHARES UNVESTED) SHARES
- ---- ------------ ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
EGI-ARC Investors(1)
Two North Riverside Plaza,
Chicago, Illinois 60606................. 6,446,674 11.8%
Telecom Partners II
6400 South Fiddlers Green Circle, Suite
720
Englewood, Colorado 80111............... 5,906,950 10.8
Crescendo(2)
c/o Crescendo Venture Management
800 LaSalle Avenue, Suite 2250
Minneapolis, Minnesota 55402............ 5,212,015 9.5
Norwest Venture Partners VII
40 William Street, Suite 305
Wellesley, Massachusetts 02481.......... 5,212,015 9.5
The Goldman Sachs Group, Inc.(3)
85 Broad Street
New York, New York 10004................ 3,552,666 6.5
David H. Crawford(4)...................... 623,737 1.1 285,879 0.5% 623,737 1.1%
John M. Todd(4)........................... 466,666 0.9 124,444 0.2 466,666 0.9
John H. Davis............................. 333,334 0.6 39,167 0.1 333,334 0.6
Todd C. Doshier(4)........................ 617,094 1.1 372,039 0.7 617,094 1.1
Michael R. Carper......................... 266,667 0.5 47,916 0.1 266,667 0.5
Stephen W. Schovee(5)..................... 5,906,950 10.8 5,906,950 10.8 5,906,950 10.8
Rod F. Dammeyer(6)........................ -- -- -- -- -- --
William J. Elsner(5)...................... 5,906,950 10.8 5,906,950 10.8 5,906,950 10.8
R. David Spreng(7)........................ 5,212,015 9.5 5,212,015 9.5 5,212,015 9.5
Jeffrey Weitzen(8)........................ -- -- -- -- -- --
Blair P. Whitaker(9)...................... -- -- -- -- -- --
William T. White(6)....................... -- -- -- -- -- --
Mary A. Wilderotter(8).................... -- -- -- -- -- --
All executive officers and directors as a
group (13 persons)...................... 13,426,463 24.5% 11,988,410 21.9% 13,426,463 24.5%
</TABLE>

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<PAGE> 53

(1) EGI-ARC Investors is controlled by Samuel Zell, a Chicago-based investor who
is chairman of Equity Group Investors, L.L.C.

(2) The shares beneficially owned by the Crescendo affiliates are held as
follows: Crescendo World Fund, 994,766; Eagle Venture WF, 47,638; Crescendo
III, 3,969,887; Crescendo III Executive Fund, 118,000; and Crescendo III
GbR, 81,724.

(3) Represents 3,552,666 shares of Common Stock owned by certain investment
partnerships, of which affiliates of The Goldman Sachs Group, Inc. are the
general partner, managing general partner or investment manager. Includes
1,344,634 shares held of record by GS Capital Partners III, L.P., 369,652
shares held of record by GS Capital Partners III Offshore, L.P., 62,047
shares held of record by Goldman, Sachs & Co. Verwaltungs, GmbH, and
1,776,333 shares held of record by Whitehall Street Limited Partnership XI.
The Goldman Sachs Group disclaims beneficial ownership of the shares owned
by such investment partnerships to the extent attributable to partnership
interests therein held by persons other than The Goldman Sachs Group and its
affiliates. Each of such investment partnerships shares voting and
investment power with certain of its respective affiliates.

(4) On September 16, 1999, a stock option grant in the amount of 200,000,
133,334 and 66,667 shares of common stock with an exercise price of $18.00
was granted to each Messrs. Crawford, Todd and Doshier, respectively.

(5) Includes 5,906,950 shares of our common stock beneficially owned by Telecom
Partners II. Messrs. Schovee and Elsner are managing members of Telcom
Management II, the general partner of Telcom Partners II. On October 6,
1999, a stock option grant in the amount of 6,250 shares of common stock
with an exercise price of $18.00 was granted to each Messrs. Schovee and
Elsner.

(6) Excludes 6,446,674 shares of common stock beneficially owned by EGI-ARC, as
to which each of Messrs. Dammeyer and White disclaim beneficial ownership
because neither individual has or shares control over the voting or
disposition of such shares. Messrs. Dammeyer and White have interests in
EGI-ARC not to exceed 1.5% in the case of Mr. Dammeyer and 1.0% in the case
of Mr. White. On October 6, 1999, a stock option grant in the amount of
6,250 shares of common stock with an exercise price of $18.00 was granted to
each Messrs. Dammeyer and White.

(7) Includes 5,559,484 shares of our common stock beneficially owned by
Crescendo of which Mr. Spreng is the managing partner. On October 6, 1999, a
stock option grant in the amount of 6,250 shares of common stock with an
exercise price of $18.00 was granted to Mr. Spreng.

(8) On October 6, 1999, a stock option grant in the amount of 66,667 shares of
common stock with an exercise price of $4.50 was granted to each of Mr.
Weitzen and Ms. Wilderotter, who were elected to the Board of Directors on
that day.

(9) Excludes 5,212,015 shares of our common stock beneficially owned by Norwest
of which Mr. Whitaker is the general partner. Mr. Whitaker disclaims
beneficial ownership of these shares. On October 6, 1999, a stock option
grant in the amount of 6,250 shares of common stock with an exercise price
of $18.00 was granted to Mr. Whitaker.

STOCK OPTION PLAN

We have adopted, effective June 1, 1999, a stock option and equity
incentive plan. The option and incentive plan authorizes the issuance of up to
2,703,116 shares of common stock subject to equitable adjustment upon the
occurrence of any stock dividend or other distribution, stock split, merger,
consolidation, combination, share repurchase or exchange, or other similar
corporate transaction or event.

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In accordance with the option and incentive plan, our board of directors or
a board committee may grant incentive stock options as that term is defined in
Section 422 of the Internal Revenue Code and nonstatutory stock options, stock
appreciation rights, restricted shares, deferred shares and certain tax offset
payments. The terms of any particular grant, including any performance-based
requirements, vesting terms and other restrictions are determined by the board
or by the compensation committee of the board. Certain limited authority to
effect grants may also be delegated to specified executive officers. Grants may
be made to employees, officers, directors or consultants. A member of the board
of directors will be eligible for a nonstatutory stock option grant of 66,667
shares at the time he or she becomes a member of the board.

The option and incentive plan is administered by the compensation committee
consisting of no less than two members of the board, each of whom is a
nonemployee director within the meaning of Rule 16 b-3(b)(3)(i) under Section 16
of the Exchange Act.

The exercise price of nonstatutory options may be above, at or below fair
market value of the common stock on the date of grant the exercise price of an
incentive stock option must not be less than the fair market value of the common
stock on the date of grant. The exercise period may be set by the board or the
committee but may not exceed ten years for incentive stock options. Stock
appreciation rights may be granted alone or in tandem with stock options. A
stock appreciation right that is granted without stock options, is a right to be
paid an amount equal to the excess of the fair market value of a share of common
stock on the date the stock appreciation right is exercised over the fair market
value of a share of common stock on the date of grant. A stock appreciation
right that is granted with stock options is a right to be paid an amount equal
to the exercise price of the related stock option. Payment on stock appreciation
rights may be made in cash, common stock or both, as specified in the grant or
determined by the committee.

Stock options and stock appreciation rights will be exercisable at such
times and upon such conditions as the committee may determine, as reflected in
the applicable grant.

A restricted stock award is an award of common stock that is subject to
such vesting, performance criteria, restrictions on transferability and other
restrictions, if any, as the committee may impose at the date of grant, which
restrictions may lapse separately or in combination at such times, under such
circumstances, in such installments or otherwise, as the committee may
determine. Except to the extent restricted under the grant relating to the
restricted stock, a participant granted restricted stock shall have all of the
rights of a stockholder, including without limitation the right to vote and the
right to receive dividends thereon. The committee has the authority to cancel
all or any portion of any outstanding restrictions.

Except as otherwise determined by the committee, options, restricted shares
and other rights granted under the option and incentive plan may not be
transferred other than by will, or by the laws of descent and distribution.

The option and incentive plan may, at any time and from time to time, be
altered, amended, suspended or terminated by the board of directors, in whole or
in part, except that no amendment that requires stockholder approval in order
for the option and incentive plan to comply with state law, stock exchange
requirements or other applicable law will be effective, except as otherwise
determined by the committee, unless such amendment has received the requisite
approval of stockholders. In addition, no amendment may be made which adversely
affects any of the rights of a participant under any grant previously granted,
without that participant's consent.

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CERTAIN TRANSACTIONS

REORGANIZATION AND RECAPITALIZATION, AND RELATED TRANSACTIONS

We were formed in Texas on December 19, 1996 as RCH Holdings. In November
1998, we consummated a reorganization and recapitalization transaction in which
our operations were merged into Allied Riser Communications Corporation,
formerly known as Allied Riser Communications Holdings, a Delaware corporation.
In connection with the reorganization and recapitalization, in November and
December of 1998, we sold 20,560,831 shares of our common stock and 66 shares of
our preferred stock in private transactions. In connection with this offering
all of these shares of outstanding preferred stock will be converted into
3,882,353 shares of common stock, assuming an initial public offering price of
$17 per share.

We had previously agreed to grant to Advest a warrant and certain future
co-management rights and fees in consideration of investment banking services
received from Advest. William Lundquist, a former director of RCH, is a managing
director of Advest. In connection with the reorganization and recapitalization,
this warrant and these rights were canceled in consideration for the issuance of
125,407 shares of our common stock to Advest in April 1999.

In February 1996, each of Messrs. Yeargain and Doshier and a former
employee of RCH acquired warrants to purchase, at a purchase price of $.15 per
share, a number of shares of our common stock representing two percent of the
total number of shares of our common stock outstanding, determined on a fully
diluted basis, on the earlier of the date of exercise of the warrant or April
30, 1998. As of April 30, 1998, there were 241,433 shares of our common stock
outstanding. As a result, each of these warrants evidenced the right to purchase
approximately 4,800 shares of our common stock. These warrants were terminated
in 1998 and early 1999 in connection with the consummation of the reorganization
and recapitalization.

INVESTOR RELATIONSHIPS

Samuel Zell and affiliates of Samuel Zell own an interest in and or control
a number of entities with which we have entered into contractual or other
relationships. EGI-ARC Investors is a limited liability company whose managing
member is controlled by Samuel Zell. Affiliates of Mr. Zell have substantial
economic interests in EGI-ARC. As an investor, EGI-ARC has a substantial equity
interest in us. Through a stockholders' agreement, which has been terminated
prior to this offering, EGI-ARC, and therefore Mr. Zell, exercised a substantial
degree of control over us during 1998. Through EGI-ARC, Mr. Zell may be deemed
to beneficially own 6,446,674 shares of our common stock as of September 15,
1999, which amount includes the conversion of all preferred stock held by
EGI-ARC. Mr. Zell is the chairman of the board of trustees of Equity Office
Properties which, as of September 15, 1999 owned 630,929 shares of our common
stock, including the conversion of all preferred stock held by Equity Office
Properties. Mr. Zell disclaims beneficial ownership of these shares.

Samuel Zell has a significant economic interest in and controls S Z
Investments, which provided the majority of our debt financing prior to the
consummation of the reorganization and recapitalization transactions. During
1998, we incurred $14,000,000 of indebtedness to S Z Investments, all of which
was paid off in November 1998.

Samuel Zell is chairman of the board of trustees of Equity Office
Properties Trust, a publicly held real estate investment trust. As of December
31, 1998 and June 30, 1999 we had license agreements with Equity Office
Properties covering the installation of our fiber-optic networks in 57
buildings. In addition, we have negotiated an agreement with Equity Office
Properties which would cover these and additional buildings. Total license fees
paid to Equity Office Properties under the existing license agreements were less
than $1,000 in 1998 and approximately $36,000 for the six months ended June 30,
1999.

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We currently lease approximately 36,000 feet of office space from Equity
Office. Rent payments to Equity Office for this space during 1998 were
approximately $156,000 and $487,000 for the six months ended June 30, 1999. In
addition, Equity Office advanced us $3,600,000 for infrastructure in buildings
during 1998. This advance was repaid in November 1998.

Affiliates of Mr. Zell are significant stockholders of Anixter
International. In addition, Mr. Dammeyer, a director of Allied Riser, is also a
director and vice chairman of Anixter. Mr. Dammeyer may be deemed to be the
beneficial owner of 818,936 shares, which represents less than 3% of Anixter's
outstanding common stock. Anixter is a supplier of wiring systems, networking,
and Internet working products for voice, data, and video networks. Mr. Zell also
serves as chairman of Anixter. Anixter supplies us with a portion of our
fiber-optic cable requirements and other materials used in the installation of
our networks. For the year ended December 31, 1998 and for the six months ended
June 30, 1999, we paid Anixter approximately $2,319,000 and $1,408,000,
respectively for such supplies.

In addition, we purchased commercial general liability and other insurance
policies through EGI Risk Services, an insurance brokerage firm affiliated with
Samuel Zell. For the year ended December 31, 1998 and for the six months ended
June 30, 1999, we paid approximately $64,000 and $55,000, respectively, to EGI
Risk Services.

In addition, we engaged Rosenberg & Liebentritt for certain legal services
during 1998 and the first six months of 1999. Rosenberg & Liebentritt was a law
firm that provided legal services almost exclusively to Samuel Zell and his
affiliates. For the year ended December 31, 1998 and the six months ended June
30, 1999, we paid approximately $323,000 and $108,000 for such legal services.
We are not currently using Rosenberg & Liebentritt to provide any material
amount of legal services.

We believe that these transactions were negotiated on market-based terms
and all material transactions with Mr. Zell have been approved by our board of
directors. Our current policy is to obtain the approval of our board of
directors with respect to any transaction involving our affiliates.

DIRECTOR AND STOCKHOLDER RELATIONSHIPS

In addition to serving as members of our board, Messrs. Elsner, Schovee and
Spreng each serve as directors of other communications companies and other
private companies. As a result of these additional directorships, Messrs.
Elsner, Schovee and Spreng may be subject to conflicts of interest during their
tenure as our directors. Because of these potential conflicts, Messrs. Elsner,
Schovee and Spreng may be required, from time to time, to disclose certain
financial or business opportunities to us and to the other companies to which
they owe fiduciary duties. However, we do not believe these conflicts of
interest will be a detriment to our growth or ability to operate our business.
Currently, we do not have any standard procedures for resolving potential
conflicts of interest relating to corporate opportunities or otherwise.

Certain of our directors are affiliated with our principal stockholders.
Mr. Whitaker is a general partner of Norwest Venture Partners VII. Mr. Spreng is
a managing partner of Crescendo Ventures. Messrs. Dammeyer and White have
interests in EGI-ARC not to exceed 1.5% in the case of Mr. Dammeyer and 1.0% in
the case of Mr. White. Mr. Dammeyer also serves as the managing director of
Equity Group Corporate Investments, an affiliate of EGI-ARC and Mr. White is
employed by Equity Group Investments, an affiliate of EGI-ARC. Each of Messrs.
Elsner and Schovee is a managing member of Telecom Management II, the general
partner of Telecom Partners II, L.P.

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RELATIONSHIP WITH OUR PRINCIPAL UNDERWRITER

Goldman Sachs is a representative of the underwriters in this offering and
provides financial advisory and consulting services to us.

In August 1999, we issued 17 shares of series B preferred stock and
2,019,766 shares of common stock to a group of financial sponsors, including GS
Capital Partners III, an affiliate of Goldman Sachs. We received approximately
$10.0 million in gross proceeds from GS Capital Partners III in this financing
transaction.

Also in August 1999, we issued 34 shares of series B preferred stock and
4,039,531 shares of common stock to our real estate partners and their
affiliates, including Whitehall Street Real Estate Limited Partnership XI, an
affiliate of Goldman Sachs. We received approximately $10.0 million in gross
proceeds from Whitehall in connection with this transaction. In addition, in
October 1999 we issued warrants to acquire 6,530,242 shares of common stock to
our real estate partners and their affiliates, including warrants to acquire
590,035 shares of common stock to Whitehall. These warrants have no exercise
price. These warrants are exercisable upon our real estate partners meeting
certain performance obligations as outlined in the warrant agreements.

Each of the transactions with affiliates of Goldman Sachs has been approved
by our board of directors and each of these transactions was completed on
substantially the same terms as with several unaffiliated third-parties
participating in the same transactions.

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DESCRIPTION OF CAPITAL STOCK

The following summary describes the material terms of our capital stock.
However, you should refer to the actual terms of the capital stock contained in
our certificate of incorporation. The following summary gives effect to the
conversion of all outstanding shares of preferred stock and warrants into common
stock upon the completion of this offering.

Our authorized capital stock of 66,667,667 consists of 33,194,465 shares of
common stock and 117 shares of preferred stock issued and outstanding, as of
September 15, 1999. There were 173 holders of record of common stock on that
date. The common stock has a par value of $.0001 and the preferred stock has a
par value of $.0001 per share. After the offering, there will be 54,826,818
shares outstanding. No shares of our capital stock are subject to sinking fund
provisions. As of September 15, 1999, options to purchase 73,332 shares of
common stock were outstanding. Upon the completion of this offering, no shares
of preferred stock will be outstanding.

COMMON STOCK

Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available for this purpose
at the times and in the amounts as the board of directors may from time to time
determine. Each stockholder is entitled to one vote for each share of common
stock held on all matters submitted to a vote of stockholders. Cumulative voting
for the election of directors is not provided for in our amended and restated
certificate of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election. At the
time of the offering, the common stock will not be entitled to preemptive
rights. The common stock is not subject to conversion or redemption. Upon the
occurrence of a liquidation, dissolution or winding-up of Allied Riser, the
holders of shares of common stock would be entitled to share ratably in the
distribution of all of our assets remaining available for distribution after
satisfaction of all its liabilities and the payment of the liquidation
preference of any outstanding preferred stock.

PREFERRED STOCK

The board of directors has the authority, within the limitations and
restrictions stated in our certificate of incorporation, as amended, to provide
by resolution for the issuance of up to 1,000 shares of preferred stock, in one
or more classes or series, and to fix the rights, preferences, privileges and
restrictions of this preferred stock, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund provisions, if any, and the number of shares constituting any series or the
designation of such series. The issuance of preferred stock could have the
effect of decreasing the market price of the common stock and could adversely
affect the voting and other rights of the holders of common stock.

WARRANTS

In October 1999, we issued warrants to acquire 6,530,242 shares of common
stock to property owners and managers. The warrants have no exercise price and
are exercisable for a period of ten years from the date of grant. The warrants
are exercisable upon our real estate partners meeting certain performance
obligations as outlined in the warrant agreements.

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OPTIONS

As of September 15, 1999:

- options to purchase a total of 73,332 shares of common stock at an
exercise price of $.336 per share were outstanding, of which 1,530 shares
underlying these options have vested; and

- up to 2,282,342 additional shares of common stock may be subject to
options granted in the future.

Outstanding options expire on July 26, 2009.

See "Management -- Executive compensation -- stock option plan."

REGISTRATION RIGHTS

In November and December 1998, we issued 20,560,831 shares of common stock
and 66 shares of series A preferred stock in private transactions which will be
converted into 3,882,353 shares of common stock at the consummation of this
offering, assuming an initial offering price of $17 per share. In connection
with these transactions, these parties entered into a registration rights
agreement with us. This agreement grants contractual rights to these holders
which require us to register their shares under the Securities Act. Prior to the
offering, all of these holders will have delivered to us written waivers, which
will effectively waive their registration rights with respect to this offering.
These waivers will not affect the rights of these holders with respect to any
future offerings.

In August 1999, we issued 51 shares of series B preferred stock and
6,059,297 shares of common stock in a series of transactions. The preferred
shares will be converted into 3,000,000 shares of common stock at the
consummation of this offering, assuming an initial offering price of $17 per
share. The holders of these shares were made a party to the registration rights
agreement mentioned above.

As a result, the holders of these securities have the ability, upon the
request of holders of at least 33% of these securities, to require us to
register their shares of common stock. They may also include the common shares
in a piggy-back registration when we file another registration statement
covering the sale of common stock.

In October 1999, we issued warrants to acquire 6,530,242 shares of common
stock. The warrants are exercisable upon our real estate partners meeting
certain performance obligations as outlined in the warrant agreements. These
warrant holders may include the common shares underlying these warrants in a
piggy-back registration when we file another registration statement covering the
sale of common stock.

ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND OUR AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS

Some provisions of our amended and restated certificate of incorporation
and amended and restated by-laws, which provisions are summarized in the
following paragraphs, may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a stockholder
might consider it its best interest, including those attempts that might result
in a premium over the market price for the shares held by stockholders. See
"Risk Factors -- Anti-takeover provisions could prevent or delay a change in
control."

CLASSIFIED BOARD OF DIRECTORS

Because our board of directors is divided into three classes of directors
serving staggered three-year terms, approximately one-third of the board of
directors will be elected each year. Our
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classified board, coupled with the provision of our amended and restated
certificate of incorporation authorizing the board of directors to fill vacant
directorships or increase the size of the board of directors, may deter a
stockholder from removing incumbent directors and simultaneously gaining control
of the board of directors by filling the vacancies created by such removal with
its own nominees.

CUMULATIVE VOTING

Our amended and restated certificate of incorporation expressly denies
stockholders the right to cumulate votes in the election of directors.

STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS

Our amended and restated certificate of incorporation eliminates the
ability of stockholders to act by written consent. It further provides that
special meetings of our stockholders may be called only by the chairman of the
board of directors, the president or a majority of the board of directors.

ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTORS NOMINATIONS

Our amended and restated by-laws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must provide timely
notice in writing. To be timely, a stockholder's notice must be delivered to or
mailed and received at our principal executive offices not less than 90 days
prior to the anniversary date of the immediately preceding annual meeting of
stockholders. If the annual meeting is called for a date that is not within
thirty (30) days before or after such anniversary date, notice by the
stockholder in order to be timely must be received not later than the close of
business on the 15th day following the date on which notice of the date of the
annual meeting was mailed to stockholders or made public, whichever first
occurs. In the case of a special meeting of stockholders called for the purpose
of electing directors, notice by the stockholder in order to be timely must be
received not later than the close of business on the fifteenth (15th) day
following the day on which notice of the date of the special meeting was mailed
or public disclosure of the date of the special meeting was made, whichever
first occurs. Our amended and restated by-laws also specify certain requirements
as to the form and content of a stockholder's notice. These provisions may
preclude stockholders from bringing matters before an annual meeting of
stockholders or from making nominations for directors at an annual meeting of
stockholders.

AUTHORIZED BUT UNISSUED SHARES

The authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of
common stock and preferred stock could render more difficult or discourage an
attempt to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.

AMENDMENTS; SUPERMAJORITY VOTE REQUIREMENTS

The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. Our amended and restated certificate of
incorporation imposes supermajority vote requirements in connection with
business combination transactions and the amendment of provisions of our amended
and restated certificate of

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incorporation and amended and restated by-laws, including those provisions
relating to the classified board of directors, action by written consent and the
ability of stockholders to call special meetings.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services. Its address is 85 Challenger, Ridgefield, New Jersey
07660, and its telephone number at this location is 201-296-4000.

LISTING

We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the trading symbol "ARCC."

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SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of our common stock in the public market could
adversely affect prevailing market prices of our common stock. Furthermore,
since no shares will be available for sale shortly after this offering because
of contractual and legal restrictions on resale described below, sales of
substantial amounts of common stock in the public market after these
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future. In addition, it is possible that
we might issue additional shares of common stock to pay for acquisitions.

Upon completion of this offering, we will have outstanding an aggregate of
54,826,818 shares of our common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding warrants and options. Of
these shares, all of the shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
such shares are purchased by affiliates as that term is defined in Rule 144
under the Securities Act. The remaining shares of common stock held by existing
stockholders are restricted securities as that term is defined in Rule 144 under
the Securities Act. Restricted securities may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rule
144 promulgated under the Securities Act, which rules are summarized below.

As a result of the contractual restrictions described below and the
provisions of Rule 144, the restricted securities will be available for sale in
the public market subject to the volume limitations and other conditions of Rule
144. The shares could be available for resale immediately upon the expiration of
the 180-day lock-up period.

LOCK-UP AGREEMENTS

The Company, all of our executive officers and directors, certain of our
stockholders and certain of our employees holding shares of common stock or
options exercisable in the six months following this offering have signed
agreements under which they have agreed not to transfer, dispose of or hedge,
any shares of common stock or any securities convertible into, exercisable or
exchangeable for shares of common stock, for a period of 180 days after the date
of this prospectus without the prior consent of the representatives of the
underwriters. The lock-up agreements by these persons cover approximately 95% of
the vested outstanding shares including shares issued upon conversion of
preferred stock outstanding prior to this offering.

RULE 144

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares of our common stock, which are subject to Rule 144, for at least one year
would be entitled to sell within any three-month period a number of those shares
that does not exceed the greater of:

- 1% of the number of shares of common stock then outstanding, which will
equal approximately 548,000 shares immediately after this offering; or

- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.

Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.

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RULE 144(k)

Under Rule 144(k), a person who is not deemed to have been one of our
affiliates 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,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.

STOCK OPTIONS AND WARRANTS

Following the completion of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act of 1933 covering 2,703,116 shares
of common stock reserved for issuance under our 1999 stock option and equity
incentive plan. The registration statement will become effective automatically
upon filing. As of September 15, 1999, options to purchase 73,332 shares of
common stock were issued and outstanding, of which 1,530 shares underlying these
options have vested. Accordingly, shares registered under the registration
statement will, subject to vesting provisions and Rule 144 volume limitations
applicable to our affiliates, be available for sale in the open market
immediately after the 180-day lock-up agreements expire. See "Description of
Capital Stock -- Registration rights."

In addition, in October 1999 we issued warrants to acquire 6,530,242 shares
of our common stock to owners and managers of commercial office buildings, which
have no purchase price or exercise price. The warrants are exercisable upon our
real estate partners meeting certain performance obligations as outlined in the
warrant agreements.

REGISTRATION RIGHTS

Upon completion of this offering, the holders of approximately 33,500,000
shares of our common stock outstanding at that date, including the shares to be
issued upon conversion of all of our outstanding preferred stock, or their
transferees, are entitled to request that we register their shares under the
Securities Act or have their shares included in a future registration statement,
which we may file. After these shares are registered, they will become freely
tradable without restriction under the Securities Act. Any sales of securities
by these stockholders could have a material adverse effect on the trading price
of our common stock. See "Description of Capital Stock -- Registration rights."

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MATERIAL UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK

The following is a general summary of the material United States federal
income and estate tax consequences of the purchase, ownership, and sale or other
taxable disposition of the common stock by any person or entity other than:

- a citizen or resident of the United States;

- a partnership, corporation or other entity created or organized in or
under the laws of the United States or of any political subdivision
thereof;

- a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of
the trust or the trust has a valid election in effect under applicable
U.S. Treasury regulations to be treated as a U.S. person; and

- an estate, the income of which is includible in gross income for United
States income tax purposes regardless of its source.

This summary does not address all tax considerations that may be relevant
to non-U.S. holders in light of their particular circumstances or to certain
non-U.S. holders that may be subject to special treatment under United States
federal income or estate tax laws. This summary is based upon the Internal
Revenue Code of 1986, existing, temporary and proposed regulations promulgated
thereunder and administrative and judicial decisions, all of which are subject
to change, possibly with retroactive effect. In addition, this summary does not
address the effect of any state, local or foreign tax laws. Each prospective
purchaser of common stock should consult its tax advisor with respect to the tax
consequences of purchasing, owning and disposing of the common stock.

DIVIDENDS

Dividends paid to a non-U.S. holder of common stock generally will be
subject to a withholding of United States federal income tax at a 30 percent
rate or such lower rate as may be specified by an applicable income tax treaty,
unless:

- the dividend is effectively connected with the conduct of a trade or
business of the non-U.S. holder within the United States; or

- if a tax treaty applies, it is attributable to a United States permanent
establishment of the non-U.S. holder.

In these cases, the dividend will be taxed at ordinary federal income tax
rates. If the non-U.S. holder is a corporation, such effectively connected
income may also be subject to an additional branch profits tax. A non-U.S.
holder may be required to satisfy certain certification requirements in order to
claim treaty benefits or otherwise claim a reduction of, or exemption from, the
withholding described above.

SALE OR OTHER DISPOSITION OF COMMON STOCK

A non-U.S. holder generally will not be subject to United States federal
income tax in respect of any gain recognized on the sale or other taxable
disposition of common stock, unless:

- the gain is effectively connected with the conduct of a trade or business
of the non-U.S. holder within the United States;

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<PAGE> 65

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

- the non-U.S. holder is subject to tax under the provisions of United
States federal income tax law applicable to certain United States
expatriates; or

- we are or have been during certain periods preceding the disposition a
United States real property holding corporation for United States federal
income tax purposes and certain other requirements are met. We currently
believe that we not a real property holding corporation and we do not
anticipate that we will become one.

ESTATE TAX

Common stock owned or treated as owned by an individual non-U.S. holder at
the time of death will be includible in the individual's gross estate for United
States federal estate tax purposes, unless an applicable treaty provides
otherwise, and may be subject to United States federal estate tax.

BACKUP WITHHOLDING AND INFORMATION REPORTING

Dividends. United States backup withholding tax generally will not apply to
dividends paid on the common stock that are subject to the 30 percent or reduced
treaty rate of United States withholding tax previously discussed. We must
report annually to the Internal Revenue Service and to each non-U.S. holder the
amount of dividends paid to, and the tax withheld with respect to, such holder,
regardless of whether any tax was withheld. This information may also be made
available to the tax authorities in the non-U.S. holder's country of residence.

Sale or Other Disposition of Common Stock. Upon the sale or other taxable
disposition of common stock by a non-U.S. holder to or through a United States
office of a broker, the broker must backup withhold at a rate of 31 percent and
report the sale to the Internal Revenue Service, unless the holder certifies its
non-U.S. holder status under penalties of perjury or otherwise establishes an
exemption. Upon the sale or other taxable disposition of common stock by a
non-U.S. holder to or through the foreign office of a United States broker, or a
foreign broker with a certain relationship to the United States, the broker must
report the sale to the Internal Revenue Service, but not backup withhold, unless
the broker has documentary evidence in its files that the seller is a non-U.S.
holder and certain other conditions are met or the holder otherwise establishes
an exemption.

Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules generally are allowable as a refund or credit against a
non-U.S. holder's United States federal income tax liability, if any, provided
that the required information is furnished to the Internal Revenue Service on a
timely basis.

The U.S. Treasury Department has issued regulations generally effective for
payments made after December 31, 2000 that will affect the procedures to be
followed by a non-U.S. holder in establishing such holder's status as a non-U.S.
holder for purposes of the withholding, backup withholding and information
reporting rules described herein. In general, such regulations do not
significantly alter the substantive withholding and information reporting
requirements, but unify current certification procedures and forms and clarify
reliance standards. Prospective investors should consult their tax advisors
concerning the effect of such regulations on an investment in the common stock.

63
<PAGE> 66

LEGAL MATTERS

The validity of the shares of common stock offered by this prospectus will
be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York. Certain legal matters in connection with this offering will be passed upon
for the underwriters by Shearman & Sterling, New York, New York.

EXPERTS

The consolidated financial statements of Allied Riser Communications
Corporation as of December 31, 1997 and 1998 and for the period from inception
(December 19, 1996) through December 31, 1997 and for the year ended December
31, 1998 included in this prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving such reports.

ADDITIONAL INFORMATION

We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered by this prospectus. This prospectus does not contain all of
the information set forth in the registration statement and the exhibits and
schedules filed with the registration statement. For additional information
about us and the common stock offered by this prospectus, reference is made to
the registration statement and the exhibits and schedule filed with the
registration statement, with respect to statements contained in this prospectus
regarding the contents of any contract or any other document, reference is made
to the copy of such contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference. A copy of the registration statement and the exhibits and
schedules filed with the registration statement may be inspected without charge
at the public reference facilities maintained by the Commission in Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at the Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor,
New York, New York 10048, and copies of all or any part of the Registration
Statement may be obtained from such offices upon the payment of the fees
prescribed by the Commission. Information on the operation of the Public
Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. The
Commission maintains a World Wide web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
http://www.sec.gov.

Upon the effectiveness of the Registration Statement, we will become
subject to the information requirement of the Exchange Act. We will then file
reports, proxy statements and other information under the Exchange Act with the
Commission. You will be able to inspect and copy these reports and other
information about our company at the locations set forth above or download these
reports from the Commission's web site.

64
<PAGE> 67

ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Operations for the Period from
Inception (December 19, 1996) to December 31, 1997 and the
Year Ended December 31, 1998.............................. F-4
Consolidated Statements of Stockholders' Deficit for the
Period from Inception (December 19, 1996) to December 31,
1997 and the Year Ended December 31, 1998................. F-5
Consolidated Statements of Cash Flows for the Period from
Inception (December 19, 1996) to December 31, 1997 and the
Year Ended December 31, 1998.............................. F-6
Notes to Consolidated Financial Statements.................. F-7
Unaudited Condensed Consolidated Balance Sheet as of June
30, 1999.................................................. F-21
Unaudited Condensed Consolidated Statement of Operations for
the Three Months Ended June 30, 1998 and 1999............. F-22
Unaudited Condensed Consolidated Statement of Operations for
the Six Months Ended June 30, 1998 and 1999............... F-23
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1998 and 1999........... F-24
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-25
</TABLE>

F-1
<PAGE> 68

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Allied Riser Communications Corporation:

We have audited the accompanying consolidated balance sheets of Allied
Riser Communications Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the period from inception
(December 19, 1996) to December 31, 1997 and the year ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with 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 Allied Riser Communications
Corporation and subsidiaries as of December 31, 1997 and 1998, and the results
of their operations and their cash flows for the period from inception (December
19, 1996) to December 31, 1997 and the year ended December 31, 1998, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Dallas, Texas,
January 11, 1999 (except with
respect to Note 12, as to which
the dates are April 29, 1999 for
the matters discussed in the
first two paragraphs, and

September 18, 1999 for the

matter discussed in the third
paragraph.)

F-2
<PAGE> 69

ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1997 AND 1998

ASSETS

<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 187,919 $ 41,371,453
Accounts receivable, net of reserve of $2,123 in 1998..... -- 19,979
Stock subscription receivable............................. -- 7,371
Prepaid expenses and other current assets................. 3,390 131,023
----------- ------------
Total current assets.............................. 191,309 41,529,826
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization of $10,477 and $509,674 in 1997 and 1998,
respectively.............................................. 1,250,353 13,004,626
OTHER ASSETS................................................ 44,951 1,037,065
----------- ------------
Total assets...................................... $ 1,486,613 $ 55,571,517
=========== ============

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
Accounts payable.......................................... $ 341,641 $ 271,756
Accrued liabilities....................................... 318,694 2,842,503
Current maturities of debt................................ 2,517,715 --
Current maturities of capital lease obligations........... -- 722,338
----------- ------------
Total current liabilities......................... 3,178,050 3,836,597
DEBT, net of current maturities............................. 50,107 --
CAPITAL LEASE OBLIGATIONS, net of current maturities........ -- 1,420,385
----------- ------------
Total liabilities................................. 3,228,157 5,256,982

COMMITMENTS AND CONTINGENCIES
CONVERTIBLE REDEEMABLE PREFERRED STOCK, $.0001 par value,
1,000 shares authorized, Series A, 66 shares issued and
outstanding in 1998 (aggregate redemption of
$66,451,781).............................................. -- 66,451,781

STOCKHOLDERS' DEFICIT:
Common stock, $.0001 par value, 66,666,667 shares
authorized, 241,433 and 25,716,396 shares issued and
outstanding in 1997 and 1998, respectively............. 24 2,572
Additional paid-in capital................................ 162,671 374,755
Accumulated deficit....................................... (1,904,239) (16,514,573)
----------- ------------
Total stockholders' deficit....................... (1,741,544) (16,137,246)
----------- ------------
Total liabilities and stockholders' deficit....... $ 1,486,613 $ 55,571,517
=========== ============
</TABLE>

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

F-3
<PAGE> 70

ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (DECEMBER 19, 1996) TO
DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
FOR THE
PERIOD FROM FOR THE
INCEPTION TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
NETWORK SERVICES REVENUE.................................... $ -- $ 212,285
OPERATING EXPENSES:
Network operations........................................ 79,624 2,358,196
Selling expense........................................... -- 1,623,292
General and administrative expenses....................... 1,348,451 9,735,336
Depreciation and amortization............................. 10,477 499,197
----------- ------------
Total operating expenses.......................... 1,438,552 14,216,021
----------- ------------
OPERATING INCOME (LOSS)..................................... (1,438,552) (14,003,736)
----------- ------------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (123,196) (724,777)
Interest income........................................... 37,421 117,179
Other income, net......................................... 27,116 1,000
----------- ------------
Total other income (expense)...................... (58,659) (606,598)
----------- ------------
NET INCOME (LOSS) BEFORE INCOME TAXES....................... (1,497,211) (14,610,334)
PROVISION FOR INCOME TAXES.................................. -- --
----------- ------------
NET INCOME (LOSS)........................................... (1,497,211) (14,610,334)
ACCRUED DIVIDENDS ON PREFERRED STOCK........................ -- (451,781)
----------- ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK................ $(1,497,211) $(15,062,115)
=========== ============
NET INCOME (LOSS) PER COMMON SHARE.......................... $ (7.45) $ (8.09)
=========== ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 200,883 1,862,066
=========== ============
</TABLE>

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

F-4
<PAGE> 71

ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (DECEMBER 19, 1996) TO DECEMBER 31, 1997
AND THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
COMMON STOCK
-------------------
NUMBER ADDITIONAL
OF PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 19, 1996 (date of
inception).......................... -- $ -- $ -- $ -- $ --
Issuance of common stock in
conjunction with the DPI Tech and
DPI merger (see Note 1)........... 200,000 20 156,460 (407,028) (250,548)
Issuance of common stock............ 41,433 4 6,211 -- 6,215
Net income (loss)................... -- -- -- (1,497,211) (1,497,211)
---------- ------ --------- ------------ ------------
BALANCE, December 31, 1997............ 241,433 24 162,671 (1,904,239) (1,741,544)
Issuance of common stock............ 25,474,963 2,548 35,665 -- 38,213
Stock issuance costs................ -- -- (351,580) -- (351,580)
Capital contribution by SZI and
EOP............................... -- -- 979,780 -- 979,780
Accrued cumulative dividends on
preferred stock................... -- -- (451,781) -- (451,781)
Net income (loss)................... -- -- -- (14,610,334) (14,610,334)
---------- ------ --------- ------------ ------------
BALANCE, December 31, 1998............ 25,716,396 $2,572 $ 374,755 $(16,514,573) $(16,137,246)
========== ====== ========= ============ ============
</TABLE>

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

F-5
<PAGE> 72

ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (DECEMBER 19, 1996) TO DECEMBER 31, 1997
AND THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
FOR THE
PERIOD FROM FOR THE
INCEPTION TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(1,497,211) $(14,610,334)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... 10,477 499,197
Changes in assets and liabilities --
Increase in accounts receivable, net................. -- (19,979)
Increase in prepaid expenses and other current
assets............................................ (3,390) (127,633)
Increase in other assets............................. (44,062) (992,114)
Increase in accounts payable and accrued
liabilities....................................... 305,556 830,567
----------- ------------
Net cash used in operating activities............. (1,228,630) (14,420,296)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (1,260,830) (8,115,325)
Cash received in the merger and liquidation in the net
assets of DPI and DPI Tech (see Note 1)................ 173,059 --
----------- ------------
Net cash used in investing activities............. (1,087,771) (8,115,325)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt........................................ 2,505,803 15,100,000
Payments of debt.......................................... (7,698) (17,667,822)
Payments on capital lease obligations..................... -- (372,065)
Proceeds from related party loans......................... 160,000 --
Payments on related party loans........................... (160,000) --
Capital contribution by SZI and EOP....................... -- 979,780
Proceeds from issuance of common stock.................... 6,215 30,842
Proceeds from issuance of preferred stock................. -- 66,000,000
Stock issuance costs...................................... -- (351,580)
----------- ------------
Net cash provided by financing activities......... 2,504,320 63,719,155
----------- ------------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 187,919 41,183,534
CASH AND CASH EQUIVALENTS, beginning of period.............. -- 187,919
----------- ------------
CASH AND CASH EQUIVALENTS, end of period.................... $ 187,919 $ 41,371,453
=========== ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest.................................... $ 11,602 $ 113,457
Noncash investing and financing activities --
Equipment acquired under capital leases................ -- 2,514,788
Accrued dividends on preferred stock................... -- 451,781
Accrued property and equipment additions............... -- 1,623,357
</TABLE>

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

F-6
<PAGE> 73

ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998

1. ORGANIZATION:

Allied Riser Communications Corporation ("ARC Corporation") (collectively
including all predecessors, the "Company") was incorporated on November 2, 1998,
as a Delaware corporation. Immediately following its incorporation, a
reorganization of its predecessor, RCH Holdings, Inc. ("RCH"), occurred. The
wholly owned subsidiaries of RCH, Allied Riser Communications, Inc. ("ARC"), a
Texas corporation, and Carrier Direct, Inc.("Carrier Direct"), a Texas
corporation, distributed their assets and liabilities to RCH in a complete
liquidation and dissolution. Thereafter, RCH transferred all of its assets and
liabilities to ARC Corporation in exchange for shares of ARC Corporation common
stock. ARC Corporation then contributed the assets and liabilities acquired to
its wholly owned subsidiary, Allied Riser Communications, Inc., a Delaware
corporation.

RCH was incorporated on December 19, 1996, as a Texas corporation.
Concurrent with its formation, RCH purchased 100% of the outstanding common
stock of two newly formed corporations, ARC (formerly RiserCorp, Inc.) and
Carrier Direct. For the period from December 19, 1996 through December 31, 1996,
RCH had no operations.

On February 14, 1997, DPI Technology Resources, Inc. ("DPI Tech") and
Digital Packet Interface Solutions, Inc. ("DPI"), two affiliates under common
control, merged with and into RCH. The stockholders of DPI Tech and DPI
exchanged all the outstanding stock for stock of RCH. DPI Tech and DPI had no
significant operations before the merger with RCH and concurrent with the
merger, the Company made a decision to discontinue the operations and business
activities of DPI Tech and DPI. Accordingly, substantially all of the net assets
of DPI Tech and DPI were liquidated subsequent to the merger. Due to the merger
and subsequent liquidation and as the DPI Tech and DPI operations were separate
and distinctly different from RCH's business plan, historical financial results
of DPI Tech and DPI for 1996 have not been presented. In 1996, DPI Tech and DPI
incurred a combined loss of $363,653. The merger of the companies was accounted
for as an exchange between companies under common control, as such, the assets
and liabilities were recorded on a historical cost basis at the date of
inception of RCH.

The Company is a facilities-based provider of broadband data, video, and
voice communications services to small-and-medium-sized businesses in major
metropolitan areas in the United States. The Company's services, which today
include ultra high-speed Internet access, business-oriented television for
display on the computer desktop, and Internet-enhanced voice conferencing
calling services, among others, are typically delivered to the Company's
customers over its own fiber optic network built inside multi-tenant commercial
office buildings. In addition to selling services to the commercial tenants of
buildings in which the Company owns and operates these advanced communications
networks, the Company leverages its market presence and brand by offering
end-to-end connectivity on a resold basis to businesses located outside these
buildings.

Until April 29, 1999, the Company was in the development stage (see Note
12). Since its inception on December 19, 1996, the Company's principal
activities have included developing its business plans, procuring governmental
authorizations, raising capital, hiring management and other key personnel,
working on the design and development of its high capacity fiber-optic networks,
acquiring equipment and facilities, and negotiating interconnection agreements.
Accordingly, the Company has incurred operating losses and operating cash flow
deficits.

The Company's success will be affected by the problems, expenses and delays
encountered by early stage companies and the competitive environment in which
the Company intends to

F-7
<PAGE> 74
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

operate. Certain key risk factors which may impact the Company include: the
Company's ability to successfully market its products and services and to
generate profitable results, the availability of adequate financial and capital
resources to finance the execution of the Company's business plan, the Company's
industry is highly competitive and competitive threats are expected to increase,
the Company operates in an industry subject to rapid technological changes and
future changes may negatively impact the Company's ability to successfully
market its products and services, the availability of adequate network capacity
from other communication carriers and the Company's ability to manage its
anticipated growth. The Company's failure to mitigate these significant risk
factors will have a material adverse effect on the Company's business, financial
condition and results of operations. Although management believes that the
Company will be able to successfully mitigate these risks, management cannot
give assurances that it will be able to do so or that the Company will ever
operate profitably.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CONSOLIDATION

The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash and marketable securities with
original maturities of three months or less.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and depreciated once placed in
service using the straight-line method. Interest is capitalized during the
construction period of system infrastructure based on the rates applicable to
borrowings outstanding during the period. Equipment held under capital lease
obligations is amortized over the estimated useful life of the asset. Equipment
held under capital lease obligations amounted to approximately $2,453,000, net
of accumulated amortization of approximately $62,000, as of December 31, 1998.
No equipment was held under capital leases as of December 31, 1997.

The Company periodically evaluates its long-lived assets, including
property and equipment, to determine whether events or changes in circumstances
have occurred that indicate the remaining asset balances may not be recoverable
and an impairment loss should be recorded. Recoverability of assets is measured
by comparing the carrying amount of an asset to the undiscounted future cash
flows estimated to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Repair
and maintenance costs are expensed as incurred.

REVENUE RECOGNITION

Network services revenue includes broadband data, video, voice
communication and installation services. Broadband data and video are
subscription based services provided to customers under month-to-month
contracts. Voice communications and installation services are usage based
services. Installation service fees are nonrecurring fees for access to our
network. To date, such installation revenues have not exceeded the direct costs
of installation. Revenues are recognized in the month in which the services are
provided. All expenses related to services provided are recognized as incurred.

F-8
<PAGE> 75
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NETWORK OPERATIONS

Network operations include payments to providers of transmission capacity,
costs associated with customer care, customer installations, equipment
maintenance, payments to building owners, and content licensing costs. Costs are
expensed as incurred.

SELLING EXPENSE

Selling expense includes employee salaries and commissions, marketing,
advertising, and promotional expenses and costs associated with leasing and
operating sales demonstration centers.

INCOME TAXES

Deferred income tax assets and liabilities are recorded for the differences
between the tax and financial reporting basis of the assets and liabilities and
are based on the enacted income tax rates which are expected to be in effect in
the period in which the difference is expected to be settled or realized. A
change in tax laws would result in adjustments to the deferred tax assets and
liabilities.

USE OF ESTIMATES IN FINANCIAL STATEMENTS

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

NEW ACCOUNTING STANDARDS

The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities," in April
1998. Effective for financial statements for fiscal years beginning after
December 15, 1998, SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. Start-up activities are defined
as those one-time activities related to opening a new facility, introducing a
new product or service, conducting business in a new territory, conducting
business with a new class of customer or beneficiary, initiating a new process
in an existing facility, or commencing some new operation. The Company has not
capitalized any expenses with such characteristics for financial reporting
purposes. Therefore, the Company believes adoption of this SOP will not
materially impact the consolidated financial statements.

NET INCOME (LOSS) PER SHARE

Net income (loss) per share is presented in accordance with the provisions
of Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
(SFAS 128). SFAS 128 requires a presentation of basic EPS and diluted EPS. Basic
EPS excludes dilution for common stock equivalents and is computed by dividing
income or loss available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock and resulted in the issuance of
common stock.

Shares issued to employees subject to repurchase by the Company are not
included in the weighted average number of common shares outstanding for the
period. Convertible redeemable

F-9
<PAGE> 76
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

preferred stock was outstanding at December 31, 1998. These securities were not
considered in a computation of diluted EPS at December 31, 1998 as the
conversion is dependent upon a qualifying public offering or qualifying
recapitalization, as defined in the articles of incorporation.

Diluted EPS is not presented as all potentially dilutive securities would
be antidilutive.

3. PROPERTY AND EQUIPMENT:

Property and equipment as of December 31, consist of the following:

<TABLE>
<CAPTION>
AVERAGE
ESTIMATED
USEFUL
LIVES
(YEARS) 1997 1998
--------- ---------- -----------
<S> <C> <C> <C>
Office equipment................................... 4 $ 156,587 $ 1,944,527
Furniture and fixtures............................. 7 892 71,770
Leasehold improvements............................. 5 639 450,818
System infrastructure.............................. 10 -- 2,420,834
System equipment................................... 5 -- 2,240,357
Construction-in-progress........................... 1,102,712 6,385,994
---------- -----------
1,260,830 13,514,300
Less --
Accumulated depreciation and amortization........ (10,477) (509,674)
---------- -----------
Property and equipment, net........................ $1,250,353 $13,004,626
========== ===========
</TABLE>

Capitalized interest for the period from inception (December 19, 1996) to
December 31, 1997 and the year ended December 31, 1998 was approximately $41,000
and $221,000, respectively.

4. OTHER ASSETS:

Other assets as of December 31, consist of the following:

<TABLE>
<CAPTION>
1997 1998
------- ----------
<S> <C> <C>
Restricted cash............................................. $ -- $ 550,000
Deposits.................................................... 44,951 487,065
------- ----------
$44,951 $1,037,065
======= ==========
</TABLE>

Restricted cash represents cash securing a letter of credit issued by a
bank in accordance with an operating lease for office space.

F-10
<PAGE> 77
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. ACCRUED LIABILITIES:

Accrued liabilities as of December 31, consist of the following:

<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Property and equipment additions............................ $ -- $1,751,779
Legal fees.................................................. -- 50,000
General operating expenses.................................. -- 285,000
Rent........................................................ -- 264,333
Interest.................................................... 151,240 --
Property taxes.............................................. -- 145,795
Other taxes................................................. -- 100,192
Other....................................................... 167,454 245,404
-------- ----------
$318,694 $2,842,503
======== ==========
</TABLE>

6. DEBT:

Debt as of December 31, consist of the following:

<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Credit agreement due August 10, 1998, bearing interest
at prime plus 2%, secured by all property of the
Company............................................... $ 2,500,000 $ --
Bank loan agreement due April 28, 2001, bearing interest
at prime plus 2%, secured by property of the
Company............................................... 67,822 --
----------- -----------
2,567,822
Current maturities...................................... (2,517,715) --
----------- -----------
Debt, net of current maturities......................... $ 50,107 $ --
=========== ===========
</TABLE>

On May 16, 1997, the Company entered into a credit agreement with S Z
Investments, L.L.C. ("SZI") to finance the initial network installation and
other general corporate purposes (see Notes 8, 9 and 11). Between January 15,
1998 and November 18, 1998, the Company and SZI executed several amendments to
the credit agreement, which effectively increased the original principal amount
of $2,500,000 to a total aggregate amount of $14,000,000. As part of the
agreement, SZI received a security interest in all of the Company's assets and
outstanding common shares. On November 23, 1998, the Company repaid the entire
outstanding balance of $14,000,000 under the credit agreement. In May 1998, EOP
Operating Limited Partnership ("EOP") advanced the Company $3,600,000 for the
construction of certain infrastructure in Equity Office Properties Trust
("EOPT") buildings. The Company repaid the entire $3,600,000 advance on November
23, 1998 (see Notes 8, 9 and 11).

Accrued interest totaling $979,780 was contributed by SZI and EOP. As both
SZI and EOP are related parties, the contribution has been accounted for as a
capital transaction and included in the accompanying consolidated statements of
stockholders' deficit (see Notes 8, 9 and 11).

On May 29, 1997, the Company issued a $75,520 promissory note to a bank.
The note was paid off in November 1998 in conjunction with the Company's equity
funding (see Notes 8 and 9).

F-11
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ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. COMMITMENTS AND CONTINGENCIES:

OPERATING LEASES

The Company has entered into various operating lease agreements, with
expirations through 2004, for leased space and equipment. Future minimum lease
obligations as of December 31, 1998, related to the Company's operating leases
are as follows:

<TABLE>
<S> <C>
1999........................................................ $1,312,219
2000........................................................ 1,319,126
2001........................................................ 1,288,708
2002........................................................ 1,152,993
2003........................................................ 1,207,270
Thereafter.................................................. 24,098
----------
Total minimum lease obligations................... $6,304,414
==========
</TABLE>

Total rent expense for the period from inception (December 19, 1996) to
December 31, 1997, and for the year ended December 31, 1998, was approximately
$94,000 and $586,000, respectively.

CAPITAL LEASES

The Company has entered into various capital leases for equipment. Future
minimum lease obligations as of December 31, 1998, related to the Company's
capital leases are as follows:

<TABLE>
<S> <C>
1999........................................................ $ 918,493
2000........................................................ 987,805
2001........................................................ 571,596
Thereafter.................................................. --
----------
Total minimum lease obligations................... 2,477,894
Less -- Amounts representing interest....................... (335,171)
----------
Present value of minimum lease obligations.................. 2,142,723
Current maturities.......................................... (722,338)
----------
Capital lease obligations, net of current maturities........ $1,420,385
==========
</TABLE>

CONNECTIVITY CONTRACTS

In order to provide its services, the Company must connect each
intra-building network to a local network and each metropolitan point of
presence to a national fiber optic connection. The Company has secured contracts
that range from monthly to five years for local transport and up to three years
for national inter-city transport. The Company incurs fixed monthly charges for
local connectivity. For national connectivity, the Company incurs fixed monthly
charges plus incremental charges for customer usage above a certain volume. In
addition, in the event the Company fails to meet its minimum volume commitments
for national connectivity, it may be obligated to pay underutilization charges.

F-12
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ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum obligations as of December 31, 1998, related to the
Company's connectivity contracts are as follows:

<TABLE>
<S> <C>
1999........................................................ $328,679
2000........................................................ 49,800
2001........................................................ 34,950
2002........................................................ 30,000
2003........................................................ 25,000
--------
Total minimum lease obligations............................. $468,429
========
</TABLE>

LITIGATION

The Company is involved in certain litigation arising in the ordinary
course of business. Management believes that such litigation will be resolved
without material effect on the Company's financial position or results of
operations.

8. CONVERTIBLE REDEEMABLE PREFERRED STOCK:

Pursuant to the Investment Agreement dated November 23, 1998, in November
and December 1998, the Company issued to a group of investors 41 and 25 shares
of Series A convertible redeemable preferred stock (the "Preferred Stock"),
respectively, for $41,000,000 and $25,000,000 in cash, respectively. Proceeds
from the issuance were used to repay all outstanding indebtedness (see Note 6).

The shareholders of the Preferred Stock are entitled to certain rights as
described below:

-Redemption -- Upon the occurrence of a qualifying public offering or
qualifying recapitalization as defined in the Articles of Incorporation,
the holders of at least a majority of the outstanding shares of Preferred
Stock may elect to redeem all or any part of the Preferred Stock at a price
per share equal to the liquidation value ($1,000,000 per share) plus
accrued and unpaid dividends ($451,781 for all preferred shares as of
December 31, 1998).

-Conversion Rights -- Upon the occurrence of a qualifying public
offering or qualifying recapitalization as defined in the Articles of
Incorporation, the holders of at least a majority of the outstanding shares
of Preferred Stock may elect to convert all or any portion of their
Preferred Stock into shares of common stock computed by dividing the
liquidation value of the Preferred Stock by the applicable market value of
the common stock. Regardless of the foregoing, all issued and outstanding
shares of Preferred Stock not redeemed shall be automatically converted
into shares of common stock upon a qualifying public offering.

-Dividends -- Dividends shall accrue on a daily basis at a rate of 10%
per annum on the liquidation value ($1,000,000 per share). The dividends
shall be cumulative such that all accrued and unpaid dividends shall be
fully paid or declared before any dividend may be made with respect to any
common shares. Additionally, in certain situations upon occurrence of a
qualifying initial public offering or qualifying recapitalization (1) no
further dividends shall accrue on the Series A Preferred Stock (2) any
accrued but unpaid dividends on the Series A Preferred Stock shall be
waived and (3) each holder of shares of Series A Preferred Stock shall
return all previous paid dividends to the Company.

F-13
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ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

-Liquidation Preference -- Each share of Preferred Stock outstanding
at the time of a "liquidating event," as defined in the Articles of
Incorporation, shall be paid $1,000,000 per share, plus any accrued and
unpaid dividends.

As a result of the redemption provision, the Preferred Stock has been
presented outside of stockholders' deficit.

9. COMMON STOCK:

On February 14, 1997, DPI Tech and DPI, two affiliates under common
control, merged with and into RCH. The stockholders of DPI Tech exchanged 75,000
shares, and the stockholders of DPI exchanged 151,266 shares, which represented
the total outstanding shares of both entities, respectively, for 200,000 shares
of RCH (see Note 1).

In early 1997, after the formation of RCH and the merger with DPI Tech and
DPI, RCH sold 41,433 shares at par, $.15, to executives and various other
related parties. As discussed in Note 6, all shares were pledged as security for
the loan from SZI.

On November 16, 1998, the stockholders of RCH approved an amendment to the
Articles of Incorporation increasing authorized shares to 3,666,667 shares from
666,667 shares and reducing the par value to no par from $.15.

In November 1998, ARC Corporation, the successor to RCH, authorized the
issuance of up to 66,667,667 shares of capital stock of which 66,666,667 shares
were designated as common stock, par value $.0001 per share, and 1,000 shares
were designated as Series A convertible redeemable preferred stock, par value
$.0001 per share. The consolidated financial statements and the notes thereto
have been adjusted to reflect the change in par value on a retroactive basis.

In conjunction with the reorganization, RCH transferred all of its assets
and liabilities to ARC Corporation in exchange for 3,495,786 shares of ARC
Corporation common stock, which represented the 200,000 shares issued in the DPI
Tech and DPI mergers, the 41,433 shares issued to executives and various other
related parties during 1997, and 3,254,353 shares to be issued to management,
current and former employees, and non-employee stockholders for $.0015 per share
during 1999. Certain of these shares are subject to vesting as described below
in the stockholders' agreement.

Pursuant to an investment agreement dated November 23, 1998, the Company
issued to a group of investors 13,269,756 shares of common stock for $.0015 per
share, which management believes represented the fair value of the shares.
Subject to a subscription agreement, 927,466 additional shares of common stock
were reserved by the Company in connection with this transaction. Subscription
agreements entered into by the former RCH stockholders granted protection
against dilution, in the event of certain issuances of ARC Corporation common
stock. Certain of these shares are subject to vesting as described below in the
stockholders' agreement. The subscribers were entitled to purchase common stock
in an amount equal to 25% of the total common stock outstanding up to
$60,000,000 of cash equity investments in ARC Corporation (including the capital
invested by the group of investors upon their purchase of ARC Corporation
preferred stock in connection with the reorganization and recapitalization).

On December 30, 1998, the Company issued to a second group of investors
7,291,075 shares of common stock for $.0015 per share. In accordance with the
subscription agreement described above, 1,659,778 shares of common stock were
issued to RCH for distribution to management, current and former employees, and
non-employee stockholders for
F-14
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ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$.0015 per share, and an additional 387,294 shares of common stock were reserved
by the Company. As a result of this transaction, ARC Corporation equity
investment exceeded $60,000,000, effectively terminating all anti-dilution
rights. Including the 3,495,786 shares exchanged for the RCH common stock to be
issued to management, current and former employees, and non-employee
stockholders, and the 13,269,756 shares issued to a group of investors in
November 1998, the aggregate common shares issued by the Company during 1998
totaled 25,716,389. Of the 25,716,389 shares issued during 1998, 4,914,131
shares were issued to RCH for subsequent issuance to management, current and
former employees and non-employee stockholders subject to subscription
agreements. The subscription agreements were ratified and the shares were
distributed by RCH on January 11, 1999. Reserved shares totaling 1,314,760 will
be used by management for issuance to new employees and potentially for issuance
under a stock option agreement. Issuance costs of approximately $351,580 were
offset against additional paid-in capital.

STOCKHOLDERS' AGREEMENT

As a condition of the investment agreement discussed above, on November 5,
1998, a stockholders' agreement was established which stipulates the terms under
which the Company's shares can be sold or transferred. Among other things, the
agreement states that any stockholder wishing to sell his shares must first
allow the Company and certain other stockholders the option to purchase the
shares. The agreement shall terminate at the election of all the Series A
Preferred stockholders and at least 50% of the common stockholders.

The Company accounts for restricted stock awards under the provisions of
Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees."
The Company believes the restricted stock issuances reflect fair value. With
respect to stockholders who are employees of the Company or its successors, the
subscription agreements provide that the shares of ARC Corporation common stock
held by such subscribers shall be restricted, non-transferable, and subject to
repurchase by the Company, or its successors, until vested. Upon issuance of the
shares to the employees in 1998, certain shares were vested based on employees'
prior service with the Company. Unvested shares vest over four years in equal
monthly installments commencing upon their issuance. Pursuant to contractual
arrangements, vesting of shares may accelerate upon the occurrence of a
qualifying business combination or a combination of a qualifying business
combination and termination of employment without cause. The accelerated vesting
provisions differ based upon the employee's position within the Company. There
are no accelerated vesting provisions related to performance criteria. Upon the
resignation or termination of an employee subscriber for any reason, all
unvested shares will be subject to repurchase by the Company, or its successors,
at the price paid by the employee.

The vesting schedule for the shares that have been issued or subscribed
through December 31, 1998, for the years ending December 31 is:

Prior to the reorganization, the Company had both outstanding warrants to
purchase common stock and outstanding stock rights. At November 23, 1998, all
outstanding warrants and stock rights were extinguished, except for warrants to
purchase approximately 4,800 shares of

F-15
<PAGE> 82
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

common stock held by one individual. It is management's opinion that these
warrants are currently not exercisable.

10. INCOME TAXES:

The provision (benefit) for income taxes for the year ended December 31
consist of the following:

<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Current..................................................... $-- $--
Deferred.................................................... -- --
--- ---
Total....................................................... $-- $--
=== ===
</TABLE>

The differences between the statutory federal income tax rates and the
Company's effective income tax rate for the year ended December 31, are as
follows:

<TABLE>
<CAPTION>
1997 1998
----- -----
<S> <C> <C>
Computed statutory tax expense.............................. (34.0)% (34.0)%
Non-deductible expenses and non-book income................. 0.3% 2.4%
Valuation allowance......................................... 33.7% 31.6%
----- -----
-- --
===== =====
</TABLE>

Deferred taxes reflect the impact of temporary differences between the
amount of assets and liabilities for financial reporting purposes and such
amounts as incurred by tax laws and regulations.

]The following table discloses the components of the deferred tax amounts at
December 31:

<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Deferred tax assets --
Temporary difference for basis in and depreciation of
property and equipment................................ $ 5,698 $ 157,754
Start-up costs........................................... 406,246 3,896,352
Net operating loss....................................... 92,895 811,920
Other.................................................... -- 76,090
--------- -----------
Total deferred tax assets........................ 504,839 4,942,116
Deferred tax liability..................................... -- --
--------- -----------
Net deferred tax asset..................................... 504,839 4,942,116
Less -- Valuation allowance................................ (504,839) (4,942,116)
--------- -----------
Net deferred tax amount.......................... $ -- $ --
========= ===========
</TABLE>

The Company had approximately $2,388,000 of net operating loss carryforward
for federal income tax purposes at December 31, 1998. The net operating loss
carryforward will expire in the year 2018 if not previously utilized. Under
existing income tax law, all operating expenses incurred prior to a company
commencing its principal operations are capitalized and amortized over a
five-year period for tax purposes. On November 23, 1998, the Company commenced
its principal operations for tax purposes and no longer capitalizes operating
expenses as start-up costs.

F-16
<PAGE> 83
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A valuation allowance must be provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. Management has
decided to record this allowance due to the uncertainty of future operating
results. In subsequent periods, the Company may reduce the valuation allowance,
provided that utilization of the deferred tax asset is more likely than not, as
defined by SFAS No. 109.

11. RELATED PARTIES:

One member of the group of investors that purchased common stock and
Preferred Stock on November 23, 1998, was EGI-ARC Investors, L.L.C. ("EGI-ARC").
The managing member of EGI-ARC is indirectly controlled by Samuel Zell. EGI-ARC
purchased 5,687,038 shares of common stock and 15 shares of Series A Preferred
Stock. Further, an affiliate of Samuel Zell is a passive investor in Telecom
Partners, L.P. ("TP"). TP purchased 4,957,931 shares of common stock and 17
shares of Series A Preferred Stock.

Samuel Zell owns and controls SZI, a lender who had provided the majority
of the Company's debt prior to November 23, 1998 (see Note 6). Affiliates of
Samuel Zell own an interest in and/or control a number of entities with which
the Company has entered into contractual or other relationships. Samuel Zell is
Chairman of the Board of Trustees of EOPT, a publicly held Real Estate
Investment Trust. The Company has telecommunications license agreements with 40
EOPT properties. In certain of these properties, the Company paid approximately
$155,900 to EOPT for rent and other related costs during the year ended December
31, 1998. In addition, EOP advanced the Company $3,600,000 for infrastructure in
EOPT buildings (see Note 6).

Samuel Zell is Chairman of Anixter International, Inc., ("Anixter") a
supplier of wiring systems, networking, and internetworking products for voice,
data, and video networks. Anixter supplies the Company with certain of its
requirements for fiber optic cable and other materials used in the installation
of the ARC Network. For the period from inception (December 19, 1996) to
December 31, 1997 and the year ended December 31, 1998, the Company paid Anixter
approximately $195,000 and $2,319,000, respectively, for such supplies.

In addition, the Company purchases its commercial general liability and
other insurance policies through EGI Risk Services, Inc., an insurance brokerage
affiliated with Samuel Zell. For the year ended December 31, 1998, the Company
remitted approximately $64,000 to EGI Risk Services, Inc. Moreover, the Company
engaged Rosenberg & Liebentritt, P.C. for certain legal services. Rosenberg &
Liebentritt, P.C. was a law firm that provided legal services almost exclusively
to Samuel Zell and his affiliates. For the year ended December 31, 1998, the
Company paid approximately $323,000 for such legal services.

In April 1997, Mrs. O.W. Koberg, a related party of William Koberg, a
shareholder, lent the Company $100,000, at 10% annual interest, for the purpose
of funding continuing operations. This loan was paid shortly after the Company
received the funding from SZI in June 1997 (see Note 6).

In December 1996, Todd Doshier, the CFO and shareholder, and Steve Polizzi,
a shareholder, lent the Company $60,000, for the purpose of funding continuing
operations. The loan was repaid on February 20, 1997.

12. SUBSEQUENT EVENTS (AUDITED):

In March 1999, the Company entered into a credit facility under which the
Company can borrow up to $45,000,000, subject to certain conditions. The
facility will accrue interest at one of
F-17
<PAGE> 84
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the following or a combination of the following, at the Company's option: the
bank's prime rate plus 3.5%, a base CD rate plus 4.5%, Federal funds rate plus
4.0%, or an Eurodollar rate plus 4.5%. The credit facility is secured by all of
the Company's assets, except for the assets pledged in connection with the
Company's capital lease obligations. The Company paid an origination fee of
$1,350,000 in conjunction with the agreement. This amount is being amortized to
interest expense over the term of the agreement. The Company pays a commitment
fee of 1.5% on the unused portion of the credit facility once the facility is
initially borrowed against. The facility, which extends through October 2000,
contains various restrictive covenants, including the maintenance of certain
financial ratios, the achievement of certain operation targets and restrictions
on certain activities.

On April 29, 1999, the Company successfully deployed a significant product
and emerged from the development stage.

On September 18, 1999 the Company's Board of Directors declared a 1:15
reverse stock split applicable to its outstanding common stock. The number of
common shares and net income (loss) per share have been retroactively adjusted
to reflect the stock split for all periods presented.

13. SUBSEQUENT EVENTS (UNAUDITED):

STOCK OPTIONS

Effective June 1, 1999, the Company adopted the 1999 Stock Option and
Equity Incentive Plan (the "Plan") under which 2,703,116 shares of common stock,
subject to adjustment, are available for award to employees, officers,
directors, or consultants. Pursuant to the Plan, the Company's board of
directors may grant stock options, stock appreciation rights, restricted shares,
deferred shares and certain tax offset payments. The terms of any particular
grant, including any performance-based requirements, vesting terms and other
restrictions are determined by the Board or by the Compensation Committee of the
Board.

The exercise price of nonstatutory options may be above, at or below fair
market value of the common stock on the grant date. The exercise price of
incentive stock options must not be less than the fair market value. The
exercise period of options may be set by the Board or the Committee but may not
exceed ten years for incentive stock options.

The Company accounts for stock options and other employee awards under the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." During June 1999, the Company granted 347,442 stock
options to employees. Each of the options granted has an exercise price of
$.0015 per share and a term of 10 years. Each of the options granted includes a
provision for exercise through July 26, 1999. Any options which are not
exercised by July 26, 1999 will vest ratably over four years based upon the
employee's anniversary date. Shares issued upon the exercise of the stock
options are restricted. Restricted shares vest on a monthly basis over a four
year period.

The Company believes the exercise price of the stock options granted
reflect fair value. Management determined the exercise price based on a
valuation of the Company's common stock and stock transactions with independent
third parties in late 1998 and considering business activities through mid June
1999.

F-18
<PAGE> 85
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company from mid-June is the result of the Company executing a letter of intent
on June 22, 1999 with an investor to purchase an interest in the Company.

On July 27, 1999 the Company granted 73,332 stock options to employees.
Each of the options granted has an exercise price of $.336 per share.

COMPENSATION CHARGE

The Company is in the process of filing for an initial public offering of
its securities. Based on the ultimate valuation of the Company determined by
this offering and business activities and transactions which have occurred prior
to the completion of the offering, the Company will be required to record
compensation expense and deferred compensation to the extent the Company cannot
reconcile the value determined in the offering to the exercise prices of options
granted and issuance prices of restricted stock issued.

Based on the midpoint of the estimated range of the per share price of the
initial public offering, the Company is unable to reconcile the $12.50 per share
difference between the offering price and management's determination of fair
value prior to this offering. Accordingly, the Company will record a
compensation charge of $12.50 per share for each restricted stock issuance or
option grant to employees related to the period subsequent to January 1, 1999.
The total compensation charge as of June 30, 1999 is approximately $21,370,000
of which approximately $16,228,000 will be deferred and amortized over the
employee service period. An additional compensation charge of approximately
$917,000 will be recorded for options granted to employees for the period July
1, 1999 through September 15, 1999.

COMMON, PREFERRED STOCK AND WARRANTS

In August 1999, the Company issued 17 shares of Series B Preferred Stock
and 2,019,766 shares of common stock to a group of financial sponsors for
approximately $17,000,000 in cash.

Also in August 1999, the Company issued 34 shares of Series B Preferred
Stock and 4,039,531 shares of common stock for approximately $34,000,000 in
cash. In October 1999, the Company issued warrants to acquire 6,530,242 shares
of its common stock to real estate partners and their affiliates. The warrants
are exercisable upon the occurrence of certain events, as defined in the warrant
acquisition agreements and will have no exercise price.

The warrants and the rights associated with the warrants may be adjusted if
certain telecommunication license agreements are not executed in accordance with
the parameters outlined in the warrant acquisition agreements. Accordingly, the
measurement date for the warrants will be the date(s) on which the
telecommunications license agreements are signed and the real estate partners
effectively complete their performance element of the agreement.

At the measurement date, the Company will measure the fair value of the
warrants based on the fair value of the underlying common stock. As the terms of
the warrant allow the holder to acquire shares of common stock without any
additional consideration, the fair value of the warrant is equivalent to the
fair value of the common stock. Based upon the current structure of the
agreements, the fair value of the warrants will be capitalized as an intangible
asset in accordance with APB No. 17, Intangible Assets, and amortized over the
term of the telecommunications license agreement; however the Company is
evaluating whether possible changes to the agreements would require a change in
this treatment. Assuming a $17.00 per share common stock value on the
measurement date, the fair value of the warrants would be approximately
$111,000,000 and would result in approximately $11,100,000 of amortization on an

F-19
<PAGE> 86
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

annual basis, if capitalized as an asset, or conversely would result in an
expense if capitalization was not allowed. Additionally, depending upon timing
of the measurement dates related to the issuance of the warrants, the total fair
value may vary. For every 10% change in our stock price, the fair value of the
warrants would increase or decrease approximately $11,100,000.

Simultaneous with the Company's initial public offering and pursuant to
contractual agreements with the preferred shareholders, all shares of preferred
stock will be converted into shares of common stock (see Note 8). Accrued
dividends on the preferred stock will be waived as of the initial public
offering and recorded as a contribution to capital. Assuming the offering price
at the midpoint of the estimated price range of the initial public offering of
$17 per share, the 117 shares of preferred stock outstanding will be converted
into 6,882,353 shares of common stock. Had the conversion of preferred stock
occurred at the beginning of each year presented, net income (loss) per common
share would have been $(.21) and $(1.67), respectively, for the period from
inception (December 16, 1996) to December 31, 1997 and for the year ended
December 31, 1998.

F-20
<PAGE> 87

ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET -- JUNE 30, 1999

ASSETS

<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 24,307,103
Accounts receivable, net of reserve of $6,378............. 113,666
Stock subscription receivable............................. 762
Prepaid expenses and other current assets................. 269,110
------------
Total current assets.............................. 24,690,641
PROPERTY AND EQUIPMENT, net................................. 20,764,738
OTHER ASSETS................................................ 1,764,889
------------
Total assets...................................... $ 47,220,268
============

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
Accounts payable.......................................... $ 789,905
Accrued liabilities....................................... 5,145,063
Current maturities of capital lease obligations........... 1,882,444
------------
Total current liabilities......................... 7,817,412
CAPITAL LEASE OBLIGATIONS, net of current maturities........ 3,493,405
------------
Total liabilities................................. 11,310,817

COMMITMENTS AND CONTINGENCIES

CONVERTIBLE REDEEMABLE PREFERRED STOCK, $.0001 par value,
1,000 shares authorized, Series A, 66 shares issued and
outstanding (aggregate redemption of $69,751,781)......... 69,751,781

STOCKHOLDERS DEFICIT:
Common Stock, $.0001 par value, 66,666,667 shares
authorized, 26,787,726 shares issued and outstanding... 2,679
Additional paid-in capital................................ 18,445,796
Deferred compensation..................................... (16,227,696)
Accumulated deficit....................................... (36,063,109)
------------
Total stockholders' deficit....................... (33,842,330)
------------
Total liabilities and stockholders' deficit....... $ 47,220,268
============
</TABLE>

The accompanying notes are an integral part of this
condensed consolidated balance sheet.

F-21
<PAGE> 88

ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998, AND 1999

<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
NETWORK SERVICES REVENUE.................................... $ 22,325 $ 401,466
OPERATING EXPENSES:
Network operations........................................ 497,913 1,651,634
Selling expense........................................... 394,007 1,800,590
General and administrative expenses....................... 1,764,938 5,598,985
Amortization of deferred compensation..................... -- 5,029,966
Depreciation and amortization............................. 45,172 504,292
----------- ------------
Total operating expenses.......................... 2,702,030 14,585,467
----------- ------------
OPERATING INCOME (LOSS)..................................... (2,679,705) (14,184,001)
OTHER INCOME (EXPENSE):
Interest expense.......................................... (151,994) (390,806)
Interest income........................................... 8,061 349,092
Other income (expense), net............................... 1,000 (4,926)
----------- ------------
Total other income (expense)...................... (142,933) (46,640)
----------- ------------
NET INCOME (LOSS) BEFORE INCOME TAXES....................... (2,822,638) (14,230,641)
----------- ------------
PROVISION FOR INCOME TAXES.................................. -- --
----------- ------------
NET INCOME (LOSS)........................................... (2,822,638) (14,230,641)
ACCRUED DIVIDENDS ON PREFERRED STOCK........................ -- (1,650,000)
----------- ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK................ $(2,822,638) $(15,880,641)
=========== ============
NET INCOME (LOSS) PER COMMON SHARE.......................... $ (11.69) $ (.69)
=========== ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 241,433 22,885,629
=========== ============
</TABLE>

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

F-22
<PAGE> 89

ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998, AND 1999

<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
NETWORK SERVICES REVENUE:................................... $ 26,992 $ 547,463
OPERATING EXPENSES:
Network operations........................................ 717,686 2,819,162
Selling expense........................................... 599,501 2,406,302
General and administrative expenses....................... 2,821,605 9,207,479
Amortization of deferred compensation..................... -- 5,141,846
Depreciation and amortization............................. 65,741 889,650
----------- ------------
Total operating expenses.......................... 4,204,533 20,464,439
----------- ------------
OPERATING INCOME (LOSS)..................................... (4,177,541) (19,916,976)
OTHER INCOME (EXPENSE):
Interest expense.......................................... (220,407) (461,627)
Interest income........................................... 15,057 834,993
Other income (expense), net............................... 1,000 (4,926)
----------- ------------
Total other income (expense)...................... (204,350) 368,440
----------- ------------
NET INCOME (LOSS) BEFORE INCOME TAXES....................... (4,381,891) (19,548,536)
----------- ------------
PROVISION FOR INCOME TAXES.................................. -- --
----------- ------------
NET INCOME (LOSS)........................................... (4,381,891) (19,548,536)
ACCRUED DIVIDENDS ON PREFERRED STOCK........................ -- (3,300,000)
----------- ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK................ $(4,381,891) $(22,848,536)
=========== ============
NET INCOME (LOSS) PER COMMON SHARE.......................... $ (18.15) $ (1.01)
=========== ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 241,433 22,686,398
=========== ============
</TABLE>

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

F-23
<PAGE> 90

ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998, AND 1999

<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(4,381,891) $(19,548,536)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... 65,741 889,650
Amortization of deferred compensation.................. -- 5,141,846
Changes in assets and liabilities --
Increase in accounts receivable, net................. (9,379) (87,078)
Increase in prepaid expenses......................... (52,345) (138,087)
(Increase) decrease in other assets.................. (37,583) 622,176
Increase in accounts payable and accrued
liabilities....................................... 800,032 2,740,460
----------- ------------
Net cash used in operating activities............. (3,615,425) (10,379,569)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (1,930,650) (4,527,800)
----------- ------------
Net cash used in investing activities............. (1,930,650) (4,527,800)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt........................................ 6,585,252 --
Payments on capital lease obligations..................... (47,533) (808,587)
Proceeds from issuance of common stock.................... -- 1,606
Credit facility origination fee........................... -- (1,350,000)
----------- ------------
Net cash provided by (used in) financing
activities...................................... 6,537,719 (2,156,981)
----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 991,644 (17,064,350)
CASH AND CASH EQUIVALENTS, beginning of period.............. 187,919 41,371,453
----------- ------------
CASH AND CASH EQUIVALENTS, end of period.................... $ 1,179,563 $ 24,307,103
=========== ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest.................................... $ 1,495 $ 236,627
Noncash investing and financing activities --
Equipment acquired under capital leases................ 213,109 4,041,713
Accrued property and equipment additions............... 900,000 80,249
Accrued dividends on preferred stock................... -- 3,300,000
</TABLE>

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

F-24
<PAGE> 91

ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999

1. ORGANIZATION:

The Company is a facilities-based provider of broadband data, video and
voice communications services to small-and-medium-sized businesses in major
metropolitan areas in the United States. The Company's services, which today
include ultra high-speed Internet access, business-oriented television for
display on the computer desktop, and Internet-enhanced voice conferencing
calling services, among other things, are typically delivered to the Company's
customers over its own fiber optic network built inside multi-tenant commercial
office buildings. In addition to selling services to the commercial tenants of
buildings in which the Company owns and operates these advanced communications
networks, the Company leverages its market presence and brand by offering
end-to-end connectivity on a resold basis to businesses located outside these
buildings.

On April 29, 1999, the Company successfully deployed a significant product
and emerged from the development stage. Since its inception on December 19,
1996, the Company's principal activities have included developing its business
plans, procuring governmental authorizations, raising capital, hiring
management, and other key personnel, working on the design and development of
its high capacity fiber-optic networks, acquiring equipment and facilities, and
negotiating interconnection agreements. Accordingly, the Company has incurred
operating losses and operating cash flow deficits.

2. PRESENTATION:

In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements contain all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the Company's
consolidated financial position as of June 30, 1999 (see Note 7). The results of
operations for the three and six months ended June 30, 1999 and cash flows for
the six months ended June 30, 1998 and 1999, are not necessarily indicative of
the results of operations or cash flows to be expected for the full year. The
accompanying unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and disclosures normally included
in notes to consolidated financial statements have been condensed or omitted
pursuant to such rules and regulations, but resultant disclosures are in
accordance with generally accepted accounting principles as they apply to
interim reporting. The unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto.

3. NET INCOME (LOSS) PER COMMON SHARE:

Net income (loss) per common share is presented in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." Shares issued to employees subject to repurchase by the Company are
included in the weighted average number of common shares outstanding for the
period. Convertible redeemable preferred stock was outstanding at June 30, 1999.
These securities were not considered in a computation of diluted EPS for the
periods ended June 30, 1999 as the conversion is dependent upon a qualifying
public offering or qualifying recapitalization, as defined in the articles of
incorporation and due to the net loss incurred for both the three and six month
period ended June 30, 1999, as the impact would be antidilutive.

Options to purchase 347,442 shares of common stock at $.0015 per share were
outstanding at June 30, 1999. In management's opinion, the exercise price was
equal to the fair value of the

F-25
<PAGE> 92
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)

common stock at the date of grant. These securities were not considered in a
computation of diluted EPS due to the net loss incurred for both the three and
six month period ended June 30, 1999, as the impact would be antidilutive.

4. PROPERTY AND EQUIPMENT:

Property and equipment as of June 30, 1999, consist of the following:

<TABLE>
<CAPTION>
AVERAGE
ESTIMATED
USEFUL LIVES
(YEARS)
-------------
<S> <C> <C>
Office equipment.......................................... 4 $ 4,272,137
Furniture and fixtures.................................... 7 198,160
Leasehold improvements.................................... 5 712,649
System infrastructure..................................... 10 3,434,929
System equipment.......................................... 5 3,288,823
Construction-in-progress.................................. 10,256,321
-----------
22,163,019
Less -- Accumulated depreciation and amortization......... (1,398,281)
-----------
Property and equipment, net............................... $20,764,738
===========
</TABLE>

No interest was capitalized for the six months ended June 30, 1999.

5. CREDIT FACILITY:

In March 1999, the Company entered into a credit facility under which the
Company can borrow up to $45,000,000, subject to certain conditions. The Company
has not borrowed against the facility as of June 30, 1999. The facility will
accrue interest at one of the following or a combination of the following, at
the Company's option: the bank's prime rate plus 3.5%, a base CD rate plus 4.5%,
Federal funds rate plus 4.0%, or an Eurodollar base rate plus 4.5%. The credit
facility is secured by all of the Company's assets, except for the assets
pledged in connection with the Company's capital lease obligations. The Company
pays a commitment fee of 1.5% on the unused portion of the credit facility once
the facility is initially borrowed against. The facility, which extends through
October 2000, contains various restrictive covenants, including the maintenance
of certain financial ratios, the achievement of certain operation targets and
restrictions on certain activities.

The Company paid an origination fee of $1,350,000 in conjunction with the
facility. This amount has been included in other assets and is being amortized
to interest expense over the term of the facility.

F-26
<PAGE> 93
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)

6. COMMITMENTS AND CONTINGENCIES:

OPERATING LEASES

The Company has entered into various operating lease agreements, with
expirations through 2005, for lease space and equipment. Future minimum lease
obligations as of June 30, 1999, related to the Company's operating leases are
as follows:

<TABLE>
<S> <C>
2000........................................................ $2,018,766
2001........................................................ 2,021,051
2002........................................................ 2,004,498
2003........................................................ 2,000,463
2004........................................................ 1,134,285
Thereafter.................................................. 8,507
----------
Total minimum lease obligations................... $9,187,570
==========
</TABLE>

Total rent expense for the three months ended June 30, 1998 and 1999, was
approximately $64,597 and $495,995, respectively. Total rent expense for the six
months ended June 30, 1998 and 1999, was approximately $100,303 and $851,389,
respectively.

CAPITAL LEASES

The Company has entered into various capital leases for equipment. Future
minimum lease obligations as of June 30, 1999, related to the Company's capital
leases are as follows:

<TABLE>
<S> <C>
2000........................................................ $ 2,351,772
2001........................................................ 2,478,865
2002........................................................ 1,348,714
Thereafter.................................................. --
-----------
Total minimum lease obligations................... 6,179,351
Less -- Amounts representing interest....................... (803,502)
-----------
Present value of minimum lease obligations.................. 5,375,849
Current maturities.......................................... (1,882,444)
-----------
Capital lease obligations, net of current maturities........ $ 3,493,405
===========
</TABLE>

CONNECTIVITY CONTRACTS

F-27
<PAGE> 94
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum obligations as of June 30, 1999, related to the Company's
connectivity contracts are as follows:

<TABLE>
<S> <C>
2000........................................................ $1,323,506
2001........................................................ 279,855
2002........................................................ 152,624
2003........................................................ 75,019
2004........................................................ 42,511
----------
Total minimum lease obligations................... $1,873,515
==========
</TABLE>

7. EQUITY TRANSACTIONS:

The Company accounts for stock options and other employee awards under the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." For the six month period ended June 30, 1999, the Company
granted approximately 347,000 stock options to employees. Each of the options
granted has an exercise price of $.0015 per share and a term of 10 years.
Options granted during the six month period ended June 30, 1999 vest over a four
year period and include a provision for exercise through July 26, 1999. Any
options which are not exercised by July 26, 1999 will vest ratably over four
years based upon the employee's anniversary date. Shares issued upon the
exercise of the stock options are restricted. Restricted shares vest on a
monthly basis over a four year period.

Also during the six month period ended June 30, 1999, the Company issued,
net of repurchases, 945,923 shares of restricted stock to certain employees.
These issuances were pursuant to subscription agreements and vest on a monthly
basis over four years. The restricted stock was issued at $.0015 per share.
Unvested shares will be subject to repurchase by the Company at the price paid
by the employee. The Company believes the exercise price of the stock options
issued and the restricted stock issuances during the six month period ended June
30, 1999 reflects fair value. Management determined the exercise and issuance
price based on a valuation of the Company's common stock and stock transactions
with independent third parties in late 1998 and considering business activities
through mid June 1999.

In April 1999, the Company issued 125,407 shares of common stock to Advest
at $.0015 per share as settlement of certain rights held by Advest and for
consulting and investment banking services.

F-28
<PAGE> 95
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)

8. SUBSEQUENT EVENTS:

STOCK OPTIONS

In late June 1999, the Company engaged an independent third party to
perform another valuation of the Company. The valuation, received in late July,
indicated a stock valuation of $.336 per share as of June 29, 1999. Management
believes that the increase in the value of the Company from mid June is the
result of the Company executing a letter of intent on June 22, 1999 with an
investor to purchase an interest in the Company.

On July 27, 1999, the Company granted 73,332 stock options to employees.
Each of the options granted has an exercise price of $.336 per share.

COMPENSATION CHARGE

COMMON, PREFERRED STOCK AND WARRANTS

In August 1999, the Company issued 17 shares of Series B Preferred Stock
and 2,019,766 shares of common stock to a group of financial sponsors for
approximately $17,000,000 in cash.

Also in August 1999, the Company issued 34 shares of Series B Preferred
Stock and 4,039,531 shares of common stock for approximately $34,000,000 in
cash. In October 1999, the Company issued warrants to acquire 6,530,242 shares
of common stock to real estate partners and their affiliates. The warrants are
exercisable upon the occurrence of certain events, as defined in the warrant
acquisition agreements and will have no exercise price.

F-29
<PAGE> 96
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)

the agreements, the fair value of the warrants will be capitalized as an
intangible asset and amortized over the term of the telecommunication license
agreements. In accordance with APB No. 17, Intangible Assets, however, the
Company is evaluating whether possible changes to the agreements would require a
change in this treatment. Assuming a $17 per share common stock value on the
measurement date, the fair value of the warrants would be approximately
$111,000,000 and would result in approximately $11,100,000 of amortization on an
annual basis, if capitalized as an asset, or conversely would result in an
expense if capitalization was not allowed. Additionally, depending upon timing
of the measurement dates related to the issuance of the warrants, the total fair
value may vary. For every 10% change in our stock price, the fair value of the
warrants would increase or decrease approximately $11,100,000.

Simultaneous with the Company's initial public offering and pursuant to
contractual agreements with the preferred shareholders, all shares of preferred
stock will be converted into shares of common stock (see Note 8 to the December
31, 1998 financial statements). Accrued dividends on the preferred stock will be
waived as of the initial public offering and recorded as a contribution to
capital. Assuming the offering is priced at the midpoint of the estimated price
range of the initial public offering of $17 per share, the 117 shares of
preferred stock outstanding, will be converted into 6,882,353 shares of common
stock. Had the conversion of preferred stock occurred at the beginning of each
period presented, net income (loss) per common share would have been $(.62) and
$(.66), respectively, for the six months ended June 30, 1998 and 1999.

Stock Split

On September 18, 1999, the Company's Board of Directors declared a 1:15
reverse stock split applicable to its outstanding common stock. The number of
common shares and net income (loss) per common share have been retroactively
adjusted to reflect the stock split for all periods presented.

F-30
<PAGE> 97

UNDERWRITING

Allied Riser and the underwriters for the U.S. offering named below have
entered into an underwriting agreement with respect to the shares being offered
in the United States. Subject to certain conditions, each U.S. underwriter has
severally agreed to purchase the number of shares indicated in the following
table. Goldman, Sachs, & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, and Thomas
Weisel Partners LLC are the representatives of the U.S. underwriters.

<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co.........................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Donaldson, Lufkin & Jenrette Securities Corporation.........
Thomas Weisel Partners LLC..................................
----------
Total..........................................
==========
</TABLE>

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

If the U.S. underwriters sell more shares than the total number set forth
in the table above, the U.S. underwriters have an option to buy up to an
additional 1,770,000 shares from Allied Riser to cover such sales. They may
exercise this option for 30 days. If any shares are purchased pursuant to this
option, the U.S. underwriters will severally purchase shares in approximately
the same proportion as set forth in the table above.

The following table shows the per share and total underwriting discounts
and commissions to be paid to the U.S. underwriters by Allied Riser. Such
amounts are shown assuming both no exercise and full exercise of the U.S.
underwriters' option to purchase additional shares.

<TABLE>
<CAPTION>
Paid by Allied Riser
--------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share.............................................. $ $
Total.................................................. $ $
</TABLE>

Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
offering price, the representatives may change the offering price and the other
selling terms.

Allied Riser has entered into an underwriting agreement with the
underwriters for the sale of 2,950,000 shares outside of the United States. The
terms and conditions of both offerings are the same and the sale of shares in
both offerings are conditioned on each other. Goldman Sachs International,
Merrill Lynch International, Donaldson, Lufkin & Jenrette International, and
Thomas Weisel Partners LLC are representatives of the underwriters for the
international offering outside the United States. Allied Riser has granted the
international underwriters a similar option to purchase up to an aggregate of an
additional 442,500 shares.

The underwriters for both of the offerings have entered into an agreement
in which they agree to restrictions on where and to whom they and any dealer
purchasing from them may offer

U-1
<PAGE> 98

shares as a part of the distribution of the shares. The underwriters also have
agreed that they may sell shares among each of the underwriting groups.

Allied Riser and its executive officers and directors, certain of its
stockholders, and certain of its employees holding shares or options exercisable
in the six months following this offering have agreed with the underwriters not
to dispose of or hedge any of its common stock or securities convertible into or
exchangeable for shares of common stock during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of the representatives. This
agreement does not apply to any existing employee benefit plans. The lock-up
agreements by persons other than Allied Riser cover approximately 95% of the
vested outstanding shares issued upon conversion of preferred stock and prior to
the shares issued in this offering. See "Shares Available for Future Sale" for a
discussion of certain transfer restrictions.

Prior to the offerings, there has been no public market for the shares. The
initial public offering price will be negotiated among Allied Riser and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Allied Riser's historical performance, estimates of the
business potential and ARC's earnings prospects, an assessment of Allied Riser's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.

Application has been made for quotation of the common stock on the Nasdaq
National Market under the symbol "ARCC."

In connection with the offerings, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offerings.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offerings are in progress.

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

These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.

The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.

Allied Riser estimates that its share of the total expenses of the
offerings, excluding underwriting discounts and commissions, will be
approximately $2,250,000.

Allied Riser has agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.

This prospectus may be used by the underwriters and other dealers in
connection with offers and sales of the shares, including sales of shares
initially sold by the underwriters in the offering being made outside of the
United States, to persons located in the United States.

U-2
<PAGE> 99

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 70 filed
public offerings of equity securities, of which 39 have been completed, and has
acted as a syndicate member in an additional 34 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.

In August 1999, Allied Riser issued 17 shares of series B preferred stock
and 2,019,766 shares of common stock to a group of financial sponsors, including
GS Capital Partners III, L.P., an affiliate of Goldman, Sachs & Co. Allied Riser
received $16,703,000 in net proceeds from this financing transaction. The shares
issued to GS Capital Partners III, L.P. have been deemed to be underwriting
compensation by the National Association of Securities Dealers, Inc.

Also in August 1999, Allied Riser issued 34 shares of series B preferred
stock and 4,039,531 shares of common stock. Allied Riser received $33,306,000 in
net proceeds from the sale of the preferred and common stock. In October 1999,
Allied Riser issued warrants to acquire 6,530,242 additional shares of its
common stock to 13 real estate partners and their affiliates, including
Whitehall Street Real Estate Limited Partnership XI, an affiliate of Goldman,
Sachs & Co. These warrants are exercisable upon our real estate partners meeting
certain performance obligations as outlined in the warrant agreements.

U-3
<PAGE> 100

[EDGAR back cover description for ARC Prospectus]

Graphic consisting of a group of eleven buildings connected in a fiber-optic
network ring over which Internet, video, data and voice communications are
provided to the Company's customers. One building is enlarged and is partially
cut away to show the building riser containing a fiber-optic cable, to which a
cluster of desktop computers is linked at the middle of the riser. Each building
has a small box at its base representing a "point of presence", through which
Network services are routed. Emanating from the "point of presence" of the
enlarged building is a sphere with the word Internet. Company logo in lower
right corner and Allied Riser Communications Network in lower left corner.

<PAGE> 101

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

No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................... 3
Summary Consolidated Financial and
Other Data......................... 6
Risk Factors......................... 8
Forward-looking Statements........... 15
Use of Proceeds...................... 16
Dividend Policy...................... 16
Capitalization....................... 17
Dilution............................. 18
Selected Consolidated Financial and
Other Data......................... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
Business............................. 32
Management........................... 44
Summary Compensation Table........... 49
Principal Stockholders............... 50
Certain Transactions................. 53
Description of Capital Stock......... 56
Shares Eligible for Future Sale...... 60
Material United States Federal Tax
Considerations for Non-U.S. Holders
of Common Stock.................... 62
Legal Matters........................ 64
Experts.............................. 64
Additional Information............... 64
Index to Financial Statements........ F-1
Underwriting......................... U-1
</TABLE>

---------------------------
Through and including , 1999 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold allotment
or subscription.

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

14,750,000 Shares

ALLIED RISER
COMMUNICATIONS
CORPORATION

Common Stock

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

LOGO

---------------------------
GOLDMAN, SACHS & CO.

MERRILL LYNCH & CO.

DONALDSON, LUFKIN & JENRETTE

THOMAS WEISEL PARTNERS LLC

Representatives of the Underwriters

- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 102

SUBJECT TO COMPLETION. DATED OCTOBER 12, 1999.

14,750,000 Shares

LOGO

ALLIED RISER COMMUNICATIONS CORPORATION

Common Stock
---------------------

This is an initial public offering of shares of common stock of Allied
Riser Communications Corporation. This prospectus relates to an offering of
2,950,000 shares in an international offering outside the United States. In
addition, 11,800,000 shares are being offered in United States offering.

See "Risk Factors" on page 8 to read about factors you should consider
before buying shares of the 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.

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

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

GOLDMAN SACHS INTERNATIONAL

MERRILL LYNCH INTERNATIONAL

DONALDSON, LUFKIN & JENRETTE

THOMAS WEISEL PARTNERS LLC

---------------------
Prospectus dated , 1999.
<PAGE> 103

UNDERWRITING

Allied Riser and the underwriters for the international offering named
below have entered into an underwriting agreement with respect to the shares
being offered outside the United States. Subject to certain conditions, each
international underwriter has severally agreed to purchase the number of shares
indicated in the following table. Goldman Sachs International, Merrill Lynch
International, Donaldson, Lufkin & Jenrette International and Thomas Weisel
Partners LLC are the representatives of the international underwriters.

<TABLE>
<CAPTION>
International Underwriters Number of Shares
-------------------------- ----------------
<S> <C>
Goldman Sachs International.............................
Merrill Lynch International.............................
Donaldson, Lufkin & Jenrette International..............
Thomas Weisel Partners LLC..............................
-----------
Total.........................................
===========
</TABLE>

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

If the international underwriters sell more shares than the total number
set forth in the table above, the International underwriters have an option to
buy up to an additional 442,500 shares from Allied Riser to cover such sales.
They may exercise this option for 30 days. If any shares are purchased pursuant
to this option, the international underwriters will severally purchase shares in
approximately the same proportion as set forth in the table above.

The following table shows the per share and total underwriting discounts
and commissions to be paid to the international underwriters by Allied Riser.
Such amounts are shown assuming both no exercise and full exercise of the
international underwriters' option to purchase additional shares.

<TABLE>
<CAPTION>
Paid by Allied Riser
--------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share...................................... $ $
Total.......................................... $ $
</TABLE>

Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from
the initial public offering price. If all the shares are not sold at the initial
offering price, the representatives may change the offering price and the other
selling terms.

Allied Riser has entered into an underwriting agreement with the
underwriters for the sale of 11,800,000 shares in the United States. The terms
and conditions of both offerings are the same and the sale of shares in both
offerings are conditioned on each other. Goldman, Sachs & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation and Thomas Weisel Partners LLC are representatives of the
underwriters for the offering in the United States. Allied Riser has granted the
U.S. Underwriters a similar option to purchase up to an aggregate of an
additional 1,770,000 shares.

The underwriters for both of the offerings have entered into an agreement
in which they agree to restrictions on where and to whom they and any dealer
purchasing from them may offer shares as a part of the distribution of the
shares. The underwriters also have agreed that they may sell shares among each
of the underwriting groups.

U-1
<PAGE> 104

Allied Riser and its executive officers and directors, certain of its
stockholders, and certain of its employees holding shares or options exercisable
in the six months following this offering have agreed with the underwriters not
to dispose of or hedge any of its common stock or securities convertible into or
exchangeable for shares of common stock during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of the representatives. This
agreement does not apply to any existing employee benefit plans. The lock-up
agreements by persons other than Allied Riser cover approximately 95% of the
vested outstanding shares including shares issued upon conversion of preferred
stock and prior to the shares issued in this offering. See "Shares Available for
Future Sale" for a discussion of certain transfer restrictions.

Prior to the offerings, there has been no public market for the shares. The
initial public offering price will be negotiated among Allied Riser and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Allied Riser's historical performance, estimates of the
business potential and Allied Riser's earnings prospects, an assessment of
Allied Riser's management and the consideration of the above factors in relation
to market valuation of companies in related businesses.

Application has been made for quotation of the common stock on the Nasdaq
National Market under the symbol "ARCC."

In connection with the offerings, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offerings.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or recording a decline in the market price of the common
stock while the offerings are in progress.

Each underwriter has also represented and agreed that (i) it has not
offered or sold and prior to the date six months after the date of issue of the
shares of common stock will not offer or sell any shares of common stock to
persons in the United Kingdom, except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances that have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied, and will comply with, all
applicable provisions of the Financial Services Act 1986 of Great Britain with
respect to anything done by it in relation to the shares of common stock in,
from or otherwise involving the United Kingdom; and (iii) it has only issued or
passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issuance of the international shares to a
person who is of a kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1986 (as amended) of Great
Britain or is a person to whom the document may otherwise lawfully be issued or
passed on.

U-2
<PAGE> 105

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 70 filed
public offerings of equity securities, of which 39 have been completed, and has
acted as a syndicate member in an additional 34 public offerings of equity
securities. Thomas Weisel Partners LLC 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.

The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.

Allied Riser estimates that its share of the total expenses of the
offerings, excluding underwriting discounts and commissions, will be
approximately $2,250,000.

Allied Riser has agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.

Also in August 1999, Allied Riser issued 34 shares of series B preferred
stock, and 4,039,531 shares of common stock. Allied Riser received $33,306,000
in net proceeds from the sale of the preferred and common stock. In October
1999, Allied Riser issued warrants to acquire 6,530,242 additional shares of its
common stock to 13 real estate partners and their affiliates, including
Whitehall Street Real Estate Limited Partnership XI, an affiliate of Goldman,
Sachs & Co. These warrants are exercisable upon our real estate partners meeting
certain performance obligations as outlined in the warrant agreements.

U-3
<PAGE> 106

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

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................... 3
Summary Consolidated Financial and
Other Data......................... 6
Risk Factors......................... 8
Forward-looking Statements........... 15
Use of Proceeds...................... 16
Dividend Policy...................... 16
Capitalization....................... 17
Dilution............................. 18
Selected Consolidated Financial and
Other Data......................... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
Business............................. 32
Management........................... 44
Summary Compensation Table........... 49
Principal Stockholders............... 50
Certain Transactions................. 53
Description of Capital Stock......... 56
Shares Eligible For Future Sale...... 60
Material United States Federal Tax
Considerations for Non-U.S. Holders
of Common Stock.................... 62
Legal Matters........................ 64
Experts.............................. 64
Additional Information............... 64
Underwriting......................... U-1
Index to Financial Statements........ F-1
</TABLE>

---------------------------
Through and including , 1999 (the 25th day after the date of
this international prospectus), all dealers effecting transactions in these
securities in the United States, whether or not participating in this offering,
may be required to deliver the U.S. prospectus. This is in addition to the
dealers' obligation to deliver a U.S. prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions in transactions in the
United States.

14,750,000 Shares

ALLIED RISER
COMMUNICATIONS
CORPORATION

Common Stock
---------------------------

LOGO

---------------------------
GOLDMAN SACHS INTERNATIONAL

MERRILL LYNCH INTERNATIONAL

DONALDSON, LUFKIN & JENRETTE

THOMAS WEISEL PARTNERS LLC

Representatives of the Underwriters

- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 107

PART II

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table indicates the expenses to be incurred in connection
with the offering described in this Registration Statement, all of which will be
paid by Allied Riser. All amounts are estimates, other than the Securities and
Exchange Commission registration fee, the NASD fee and the Nasdaq listing fee.

<TABLE>
<S> <C>
Securities Exchange Commission Registration fee............. $ 85,000
National Association of Securities Dealers, Inc. fee Nasdaq
listing fee............................................... 31,000
Accounting fees and expenses................................ 400,000
Legal fees and expenses..................................... 1,000,000
Director and officer insurance expenses..................... 375,000
Printing and engraving...................................... 250,000
Transfer agent fees and expenses............................ 5,000
Miscellaneous expenses...................................... 104,000
----------
Total............................................. $2,250,000
==========
</TABLE>

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

* To be completed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 102 of the Delaware General Corporation Law, as amended ("DGCL"),
allows a corporation to eliminate the personal liability of directors of a
corporation to the corporation or its stockholders for monetary damages for a
breach of fiduciary duty as a director, except where the director breached his
duty of loyalty, failed to act in good faith, engaged in intentional misconduct
or knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law or obtained an improper
personal benefit.

Section 145 of the DGCL provides, among other things, that we may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of Allied Riser) by reason of the fact that the person
is or was a director, officer, agent or employee of Allied Riser or is or was
serving at our request as a director, officer, agent, or employee of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding. The power to indemnify applies (a) if such
person is successful on the merits or otherwise in defense of any action, suit
or proceeding, or (b) if such person acted in good faith and in a manner he or
she reasonably believed to be in the best interest, or not opposed to the best
interest, of Allied Riser, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of Allied
Riser as well, but only to the extent of defense expenses (including attorneys'
fees but excluding amounts paid in settlement) actually and reasonably incurred
and not to any satisfaction of judgment or settlement of the claim itself, and
with the further limitation that in such actions no indemnification shall be
made in the event of any adjudication of negligence or misconduct in the
performance of his or her duties to Allied Riser, unless the court believes that
in the light of all the circumstances indemnification should apply.

Section 174 of the DGCL provides, among other things, that a director, who
willfully or negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be held liable for such actions. A
director who was either absent when the unlawful actions were approved or
dissented at the time may avoid liability by causing his or her

II-1
<PAGE> 108

dissent to such actions to be entered in the books containing the minutes of the
meetings of the board of directors at the time such action occurred or
immediately after such absent director receives notice of the unlawful acts.

Our certificate of incorporation includes a provision that eliminates the
personal liability of our directors for monetary damages for breach of fiduciary
duty as a director, except for liability:

- for any breach of the directors's duty of loyalty to Allied Riser or its
stockholders;

- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;

- under the section 174 of the DGCL regarding unlawful dividends and stock
purchases; or

- for any transaction from which the director derived an improper personal
benefit.

These provisions are permitted under Delaware law.

Our by-laws provide that:

- we must indemnify our directors and officers to the fullest extent
permitted by Delaware law;

- we may indemnify our other employees and agents to the same extent that
we indemnified our officers and directors, unless otherwise determined by
our board of directors; and

- we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law.

The indemnification provisions contained in Allied Riser's certificate of
incorporation and by-laws are not exclusive of any other rights to which a
person may be entitled by law, agreement, vote of stockholders or disinterested
directors or otherwise. In addition, Allied Riser maintains insurance on behalf
of its directors and executive officers insuring them against any liability
asserted against them in their capacities as directors or officers or arising
out of such status.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Common Stock

(1) On February 14, 1997, Allied Riser issued 200,000 shares in connection
with a business combination whereby DPI and DPI Tech were merged into Allied
Riser in consideration for all of the issued and outstanding shares of DPI and
DPI Tech.

(2) In early 1997, Allied Riser sold 41,433 shares for an aggregate
offering price of $6,215, to a group of current and former employees and other
individuals, the majority of whom are related to our current and former
employees.

(3) On November 23, 1998, Allied Riser consummated a private placement
pursuant to which ARC issued to a group of private investors 13,269,756 shares
of common stock for an aggregate offering price of $19,905.

(4) On December 30, 1998, Allied Riser issued to a second group of private
investors 7,291,075 shares of common stock for an aggregate offering price of
$10,937.

(5) On November 23, 1998, Allied Riser consummated a private placement
pursuant to which Allied Riser issued 41 and 25 shares of Series A convertible
redeemable preferred stock to a group of individual investors, respectively, for
$41,000,000 and $25,000,000 in cash, respectively.

(6) On November 23, 1998 and December 30, 1998, Allied Riser issued an
aggregate of 5,985,368 shares of common stock to employees and directors in
connection with subscription

II-2
<PAGE> 109

agreements for an aggregate consideration of $8,978. On November 23, 1998 shares
were reserved for subsequent issuing to management and new employees. As of June
30, 1999, 110,191 shares were still reserved.

(7) From June 1, 1999 to June 30, 1999, Allied Riser issued stock options
to purchase an aggregate of 347,442 shares of common stock to employees, with an
exercise price of $0.0015 per share pursuant to Allied Riser's 1999 Stock Option
and Equity Incentive Plan.

(8) In August 1999, Allied Riser issued 51 shares of Series B Preferred
Stock and 6,059,297 shares of common stock to a group of private investors and
real estate owners, for an aggregate consideration of approximately $51,000,000.

(9) In October 1999, Allied Riser issued warrants to acquire 6,530,242
shares of common stock to a group of real estate owners. The warrants had no
purchase price and no exercise price. These warrants are exercisable upon the
real estate owners meeting certain performance obligations as outlined in the
warrant agreements.

No underwriters were used in connection with these sales and issuances. The
sales and issuances of these securities were exempt from registration under the
Securities Act pursuant to (1) Rule 701 promulgated thereunder on the basis that
these options were offered and sold either pursuant to a written compensatory
benefit plan or pursuant to written contracts relating to consideration, as
provided by Rule 701, or (2) Section 4(2) thereof, on the basis that the
transactions did not involve a public offering.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits:

II-3
<PAGE> 110

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.4.4* -- Amendment No. 4 and Joinder to Stockholders' Agreement,
dated August 18, 1999
10.5+ -- Subscription Agreement, dated as of November 13, 1998, by
and among Allied Riser and the investors listed on the
signature pages thereof
10.5.1+ -- Amendment No. 1 to Subscription Agreement, dated as of
November , 1998
10.6* -- Indemnification Agreement, dated as of November 23, 1998,
by and among Allied Riser and the investors listed on the
signature pages thereof
10.6.1* -- Joinder to Indemnification Agreement, dated December 30,
1998
10.7* -- Stockholders' Pledge Agreement, dated as of November 23,
1998, by and among Allied Riser and the investors listed
on the signature pages thereof
10.8* -- Series A-1 Preferred Stock and Common Stock Investment
Agreement, dated December 30, 1998, by and between Allied
Riser and Norwest Venture Partners VII, L.P. (includes
schedule of other 1998 Investment Agreements)
10.9* -- Waiver and Consent, dated as of December 30, 1998, by and
among Allied Riser and the investors listed on the
signature pages thereof
10.10* -- Allied Riser 1999 Stock Option Plan, as amended
10.11+ -- Credit Facility, dated March 25, 1999, by and among
Allied Riser and The Chase Manhattan Bank, as
Administrative Agent, and Chase Securities Inc., as Lead
Arranger and Book Manager
10.12* -- Waiver and Consent, dated as of August 18, 1999, by and
among Allied Riser and the investors listed on the
signature pages thereof
10.13* -- Waiver and Consent, dated as of , 1999, by
and among Allied Riser and the investors listed on the
signature pages thereof
21.1 -- Subsidiaries of Allied Riser
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1)
24.1 -- Power of Attorney (contained on the signature page of
this Registration Statement)
27.1* -- Financial Data Schedule
99.1* -- Agreement and Plan of Merger, dated January , 1997, by
and among RCH Holdings, Digital Packet Interface
Solutions and DPI Technology
</TABLE>

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

* To be filed by amendment

+ Previously filed.

(b) Financial Statement Schedules:

No financial statement schedules are provided, because the information
called for is not required or is shown either in the financial statements or the
notes thereto.

ITEM 17. UNDERTAKINGS.

(a) The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.

(b) 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 provisions described in Item 14, or otherwise,
the registrant has been informed that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is therefore unenforceable. In the event that
a

II-4
<PAGE> 111

claim for indemnification by the registrant against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

(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 of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-5
<PAGE> 112

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on October 12, 1999.

ALLIED RISER COMMUNICATIONS
CORPORATION

/s/ DAVID H. CRAWFORD
------------------------------------
By: David H. Crawford
Title: Chief executive officer

Each person whose signature appears below hereby constitutes and appoints
David H. Crawford and Todd C. Doshier, and each of them, his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all (i) amendments (including post-effective amendments) and additions to
this Registration Statement and (ii) Registration Statements, and any and all
amendments thereto (including post-effective amendments), relating to the
offering contemplated pursuant to Rule 462(b) under the Securities Act of 1933,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, and hereby
grants to such attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or his
substitutes may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated below.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ DAVID H. CRAWFORD Chief executive officer October 12, 1999
- ----------------------------------------------------- and director (principal
David H. Crawford executive officer)

/s/ TODD C. DOSHIER Senior vice president and October 12, 1999
- ----------------------------------------------------- chief financial officer
Todd C. Doshier (principal financial and
accounting officer)

/s/ JOHN M. TODD Chief operating officer, October 12, 1999
- ----------------------------------------------------- president and director
John M. Todd

/s/ JOHN H. DAVIS Chief technology officer October 12, 1999
- ----------------------------------------------------- and director
John H. Davis

/s/ STEPHEN W. SCHOVEE Director and chairman of October 12, 1999
- ----------------------------------------------------- the board
Stephen W. Schovee

/s/ ROD F. DAMMEYER Director October 12, 1999
- -----------------------------------------------------
Rod F. Dammeyer
</TABLE>

II-6
<PAGE> 113

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM J. ELSNER Director October 12, 1999
- -----------------------------------------------------
William J. Elsner

/s/ R. DAVID SPRENG Director October 12, 1999
- -----------------------------------------------------
R. David Spreng

/s/ JEFFREY WEITZEN Director October 12, 1999
- -----------------------------------------------------
Jeffrey Weitzen

/s/ BLAIR P. WHITAKER Director October 12, 1999
- -----------------------------------------------------
Blair P. Whitaker

/s/ MARY A. WILDEROTTER Director October 12, 1999
- -----------------------------------------------------
Mary A. Wilderotter

/s/ WILLIAM T. WHITE Director October 12, 1999
- -----------------------------------------------------
William T. White
</TABLE>

II-7
<PAGE> 114

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1* -- Form of Underwriting Agreement
2.1* -- Plan of Complete Liquidation and Reorganization, dated
November , 1998
3.1* -- Certificate of Incorporation of Allied Riser, as amended
and restated
3.2* -- By-laws of Allied Riser, as amended and restated
4.1* -- Specimen Certificate for Allied Riser's common stock
4.2* -- Specimen Certificate for Allied Riser's warrants
4.3+ -- Registration Rights Agreement, dated as of November 23,
1998, among Allied Riser and the stockholders named
therein
4.3.1+ -- First Amendment to Registration Rights Agreement, dated
as of December 30, 1998
4.3.2+ -- Second Amendment to Registration Rights Agreement, dated
as of
4.3.3+ -- Third Amendment to Registration Rights Agreement, dated
as of August 18, 1999
5.1 -- Form of Opinion of Skadden, Arps, Slate, Meagher & Flom
LLP
10.1* -- Form of Employment Agreement
10.2* -- Form of Lock-Up Agreement
10.3+ -- Lease Facility, dated October 23, 1997, by and between
Allied Riser and Cisco Systems Capital Corporation, as
amended
10.4+ -- Stockholders' Agreement, dated as of November 5, 1998,
among the stockholders listed on the signature pages
thereof
10.4.1+ -- Amendment No. 1 and Joinder to Stockholders' Agreement,
dated November , 1998
10.4.2* -- Amendment No. 2 and Joinder to Stockholders' Agreement,
dated November 23, 1998
10.4.3* -- Amendment No. 3 and Joinder to Stockholders' Agreement,
dated
10.4.4* -- Amendment No. 4 and Joinder to Stockholders' Agreement,
dated August 18, 1999
10.5+ -- Subscription Agreement, dated as of November 13, 1998, by
and among Allied Riser and the investors listed on the
signature pages thereof
10.5.1+ -- Amendment No. 1 to Subscription Agreement, dated as of
November , 1998
10.6* -- Indemnification Agreement, dated as of November 23, 1998,
by and among Allied Riser and the investors listed on the
signature pages thereof
10.6.1* -- Joinder to Indemnification Agreement, dated December 30,
1998
10.7* -- Stockholders' Pledge Agreement, dated as of November 23,
1998, by and among Allied Riser and the investors listed
on the signature pages thereof
10.8* -- Series A-1 Preferred Stock and Common Stock Investment
Agreement, dated December 30, 1998, by and between Allied
Riser and Norwest Venture Partners VII, L.P. (includes
schedule of other 1998 Investment Agreements)
10.9* -- Waiver and Consent, dated as of December 30, 1998, by and
among Allied Riser and the investors listed on the
signature pages thereof
10.10* -- Allied Riser 1999 Stock Option Plan, as amended
10.11+ -- Credit Facility, dated March 25, 1999, by and among
Allied Riser and The Chase Manhattan Bank, as
Administrative Agent, and Chase Securities Inc., as Lead
Arranger and Book Manager
10.12* -- Waiver and Consent, dated as of August 18, 1999, by and
among Allied Riser and the investors listed on the
signature pages thereof
</TABLE>

<PAGE> 115

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.13* -- Waiver and Consent, dated as of , 1999, by
and among Allied Riser and the investors listed on the
signature pages thereof
21.1 -- Subsidiaries of Allied Riser
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1)
24.1 -- Power of Attorney (contained on the signature page of
this Registration Statement)
27.1* -- Financial Data Schedule
99.1* -- Agreement and Plan of Merger, dated January , 1997, by
and among RCH Holdings, Digital Packet Interface
Solutions and DPI Technology
</TABLE>

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

* To be filed by amendment

+ Previously filed.

<PAGE> 1

EXHIBIT 5.1

[FORM OF SASM&F OPINION]

Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022

October __, 1999

Allied Riser Communications Corporation
1700 Pacific Avenue
Dallas, Texas 75201

Re: Allied Riser Communications Corporation
Registration Statement on Form S-1
(File No. 333-85597)

Ladies and Gentlemen:

We have acted as special counsel to Allied Riser Communications
Corporation, a Delaware corporation (the "Company"), in relation to the initial
public offering by the Company of up to 14,750,000 shares (including 2,212,500
shares subject to an over-allotment option) (the "Shares") of the Company's
common stock, par value $0.0001 per share (the "Common Stock").

This opinion is being furnished in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended
(the "Act").

In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Registration
Statement on Form S-1 (File No. 333-85597) as filed with the Securities and
Exchange Commission (the "Commission") on August 19, 1999 under the Act; (ii)

<PAGE> 2

Allied Riser Communications Corporation
October __, 1999
Page 2

Amendment No. 1 to the Registration Statement as filed with the Commission on
September 23, 1999 under the Act; (iii) Amendment No. 2 to the Registration
Statement as filed with the Commission on October 8, 1999 under the Act, (iv)
Amendment No. 3 to the Registration Statement as filed with the Commission on
October __, 1999 under the Act (such Registration Statement, as so amended,
being hereinafter referred to as the "Registration Statement"); (iv) the form of
Underwriting Agreement (the "Underwriting Agreement") proposed to be entered
into by and among the Company, as issuer, and Goldman, Sachs & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation and Thomas Weisel Partners LLC, as representatives of the
several underwriters named therein (the "Underwriters") filed as an exhibit to
the Registration Statement; (v) a specimen certificate representing the Common
Stock; (vi) the Amended and Restated Certificate of Incorporation of the
Company, as currently in effect; (vii) the Amended and Restated By-Laws of the
Company, as currently in effect; and (viii) certain resolutions of the Board of
Directors of the Company, dated June 24, 1999, August 11, 1999, September 16,
1999, September 18, 1999 and October 6, 1999, and drafts of certain resolutions
(the "Draft Resolutions") of the Finance Committee of the Board of Directors of
the Company (the "Finance Committee"), relating to the issuance and sale of the
Shares and related matters. We also have examined originals or copies, certified
or otherwise identified to our satisfaction, of such records of the Company and
such agreements, certificates of public officials, certificates of officers or
other representatives of the Company and others, and such other documents,
certificates and records as we have deemed necessary or appropriate as a basis
for the opinions set forth herein.

In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such latter documents. In making our
examination of executed documents, we have assumed that the parties thereto,
other than the Company, had the power, corporate or other, to enter into and
perform all obligations thereunder and have also assumed the due authorization
by all requisite action, corporate or other, and execution and delivery by such
parties of such documents and the validity and binding effect thereof on such
parties. As to any facts material to the opinions expressed herein which we have
not independently established or verified, we have relied upon statements and
representations of officers and other representatives of the Company and others.

<PAGE> 3

Allied Riser Communications Corporation
October __, 1999
Page 3

Members of our firm are admitted to the bar in the State of New York
and we do not express any opinion as to the laws of any jurisdiction other than
the General Corporation Law of the State of Delaware, and we do not express any
opinion as to the effect of any other laws on the opinion stated herein.

Based upon and subject to the foregoing, we are of the opinion that
when (i) the Registration Statement becomes effective under the Act; (ii) the
Draft Resolutions have been adopted by the Finance Committee; (iii) the price at
which the Shares are to be sold to the Underwriters pursuant to the Underwriting
Agreement and other matters relating to the issuance and sale of the Shares have
been approved by the Finance Committee in accordance with the Draft Resolutions;
(iv) the Underwriting Agreement has been duly executed and delivered; (v) the
Amended and Restated Certificate of Incorporation is executed and filed with the
Secretary of State of the State of Delaware; and (vi) certificates representing
the Shares in the form of the specimen certificate examined by us have been
manually signed by an authorized officer of the transfer agent and registrar for
the Common Stock and registered by such transfer agent and registrar, and have
been delivered to and paid for by the Underwriters at a price per share not less
than the per share par value of the Common Stock as contemplated by the
Underwriting Agreement, the issuance and sale of the Shares will have been duly
authorized, and the Shares will be validly issued, fully paid and nonassessable.

We hereby consent to the filing of this opinion with the Commission as
Exhibit 5.1 to the Registration Statement. We also consent to the reference to
us under the caption "Legal Matters" in the Registration Statement. In giving
this consent, we do not thereby admit that we are included in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission.

Very truly yours,

<PAGE> 1
EXHIBIT 21.1

Allied Riser Communications Corporation

Subsidiaries

<TABLE>
<S> <C>
Allied Riser of Alabama, Inc. DE
Allied Riser of Arizona, Inc. DE
Allied Riser of California, Inc. DE
Allied Riser of Colorado, Inc. DE
Allied Riser of Connecticut, Inc. DE
Allied Riser of D.C., Inc. DE
Allied Riser of Florida, Inc. DE
Allied Riser of Georgia, Inc. DE
Allied Riser of Illinois, Inc. DE
Allied Riser of Indiana, Inc. DE
Allied Riser of Kentucky, Inc. DE
Allied Riser of Louisiana, Inc. DE
Allied Riser of Maryland, Inc. DE
Allied Riser of Massachusetts, Inc. DE
Allied Riser of Michigan, Inc. DE
Allied Riser of Minnesota, Inc. DE
Allied Riser of Missouri, Inc. DE
Allied Riser of Nevada, Inc. DE
Allied Riser of New Jersey, Inc. DE
Allied Riser of New Mexico, Inc. DE
Allied Riser of New York, Inc. DE
Allied Riser of North Carolina, Inc. DE
Allied Riser of Ohio, Inc. DE
Allied Riser of Oklahoma, Inc. DE
Allied Riser of Pennsylvania, Inc. DE
Allied Riser of Rhode Island, Inc. DE
Allied Riser of South Carolina, Inc. DE
Allied Riser of Tennessee, Inc. DE
Allied Riser of Texas, Inc. DE
Allied Riser of Utah, Inc. DE
Allied Riser of Virginia, Inc. DE
Allied Riser of Washington, Inc. DE
Allied Riser of Wisconsin, Inc. DE
Allied Riser Operations Corporation DE
ARC Long Distance, Inc. DE
</TABLE>

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our report
dated January 11, 1999 (except with respect to Note 12 as to which the dates are
April 29, 1999 for the matters discussed in the first two paragraphs, and
September 18, 1999 for the matter discussed in the third paragraph), on the
consolidated financial statements of Allied Riser Communications Corporation as
of December 31, 1997 and 1998 and for the period from inception (December 19,
1996) through December 31, 1997 and for the year ended December 31, 1998 (and to
all references to our Firm), included in or made a part of this Amendment No. 2
to this Registration Statement on Form S-1.

/S/ ARTHUR ANDERSEN LLP

Dallas, Texas
October 12, 1999