ALLIED RISER COMMUNICATIONS CORP, S-1, 1999-08-19

ALLIED RISER COMMUNICATIONS CORP
S-1, 1999-08-19

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 19, 1999

REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
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)
-------------------------
DAVID H. CRAWFORD
CHIEF EXECUTIVE OFFICER
1700 PACIFIC AVENUE
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. [ ]

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1)(3) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common stock (par value $.0001 per share)(2).............. $250,000,000 $69,500
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</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended (the
"Securities Act").
(2) In accordance with Rule 457(o) under the Securities Act, the number of
shares being registered and the proposed maximum offering price per share
are not included in this table.
(3) Includes $ attributable to shares issuable upon the exercise of the
underwriters' over-allotment option.

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 , 1999.

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
shares in the United States. In addition, shares are being offered outside the
United States in an international offering. All of the shares of
common stock are being sold by ARC.

Prior to this offering, there has been no public market for the common
stock. It is currently estimated that an initial public offering price per share
will be between $ and $ . 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 ARC........................... $ $
</TABLE>

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

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

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

Prospectus dated , 1999.
<PAGE> 4

[GRAPHICS]
<PAGE> 5

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus.

OVERVIEW OF OUR COMPANY

We are 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. 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 networks inside office
buildings with more than million rentable square feet. In addition, we have
recently entered into agreements with building owners to install and
operate fiber-optic networks in office buildings with more than
million rentable square feet.

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 per second. Using
commercially available equipment, we can increase this transmission speed to one
billion bits 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.

Our management team has extensive experience in the telecommunications,
data communications and real estate industries and includes individuals who
served as executive officers of Sprint, MCI, AT&T-Bell Labs, Nextel and Equity
Office Properties Trust. We have entered into agreements to obtain access to
some or all of the buildings owned or managed by some of the largest commercial
property companies in the United States, including affiliates of Hines, Trizec
Hahn, Office Properties Equity Office Properties Trust, Shorenstein, Boston
Properties, Cornerstone, Metropolitan Life, Whitehall Real Estate Funds, Vornado
Realty Trust, Transwestern, Fisher Brothers and Hamilton Partners. Our financial
sponsors have invested over $ million in our business and include affiliates
of Telecom Partners, Crescendo Ventures, Norwest Venture Partners and Equity
Group Investments.

THE GROWING NEED FOR ADVANCED COMMUNICATIONS SOLUTIONS

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. Forrester Research projects that the market for data networking
services and Internet access will grow from $9.6 billion in 1998 to
approximately $49.7 billion by 2002, of which approximately $27.9 billion will
be generated from services provided to business customers. In addition to
high-speed and "always on" Internet access, many small- and medium-sized
businesses can benefit from having ready access to business-oriented television
programming, such as CNBC, CNN and Bloomberg Television, as well as enhanced
conference calling services and other advanced communications solutions. These
services are unavailable to

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many small- and medium-sized businesses today because the communications
infrastructure inside the buildings in which their offices are located is
inadequate.

OUR SOLUTION

We own and operate advanced communications networks inside office
buildings, enabling us to provide communications services that are tailored to
meet the needs of all business customers, especially those small- and
medium-sized businesses. Our Internet access services provide dedicated
connectivity at speeds that are otherwise typically unavailable or unaffordable
to our target customers. In addition, once our network is operational in an
office building, we can provide service to new customers within a few days and
have the capacity to offer, over that same connection to our network, a broad
range of advanced data, video and voice services.

BUSINESS STRATEGY

- - PARTNER WITH REAL ESTATE OWNERS. In exchange for the right to install our
fiber-optic networks, 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.

- - OWN THE KEY ELEMENTS OF THE LOCAL BROADBAND NETWORK. Although there are
typically multiple fiber-optic networks capable of carrying data and voice
traffic outside office buildings, we usually operate the only fiber-optic
network inside the buildings in which we provide services, providing the
critical first-mile connection to the end user.

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

- - DESIGN NETWORKS FOR THE FUTURE. We designed our networks using fiber-optic
technology which makes them easily upgradeable to meet the rapidly growing
demand for broadband data, connectivity, applications, and content.

- - TARGET SMALL- AND MEDIUM-SIZED BUSINESSES. Although we service businesses of
all sizes, our product offerings are targeted at small- and medium-sized
businesses, which have traditionally been underserved by Internet, data and
voice communications service providers.

- - 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.

- - CAPTURE ADDITIONAL REVENUE STREAMS. We intend to capture additional revenue
from our customers by expanding our service offerings and using our networks'
full capacity and capabilities.

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

- - 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 the ARC brand to enhance our ability to gain
access to additional buildings, add new customers, reduce customer churn and
attract employees.

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<PAGE> 7

THE OFFERING

<TABLE>
<S> <C>
Common stock offered......................... shares
Common stock to be outstanding after the
offering................................... shares
Proposed Nasdaq National Market symbol....... "ARCC"
Use of proceeds.............................. For the construction of in-building networks,
general corporate purposes, working capital,
and business acquisitions and investments.
</TABLE>

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
, 1999, plus:

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

- million shares of common stock, assuming an initial public
offering price of $ per share, to be issued at the completion of
this offering upon the conversion of all of our outstanding convertible
preferred stock.

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

- shares of common stock issuable upon the exercise of stock
options. These options have a weighted average exercise price of $
per share and individual exercise prices ranging from $ to
$ per share; and

- shares of common stock issuable upon the exercise of warrants
with a weighted average exercise price of $ per share and
individual exercise prices ranging from $ to $ 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."

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<PAGE> 8

SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

As used in the table below, EBITDA consists of net loss excluding net
interest, income taxes, depreciation and amortization. We have provided EBITDA
because it is a measure of financial performance commonly used in our industry,
but it is not a measure calculated under generally accepted accounting
principles. Other companies may calculate EBITDA differently from us. We have
presented EBITDA to enhance your understanding of our operating results. You
should not construe it as an alternative to operating income, as an indicator of
our operating performance or as an alternative to cash flows from operating
activities as a measure of liquidity.

Except for the EBITDA and capital expenditure data presented below, which
is related to the periods presented, other operating data reflects data as of
the last day of each period and does not include our work-in-progress or under
contract as of those dates.

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
--------------------------------------------------------
PERIOD FROM SIX MONTHS ENDED
INCEPTION JUNE 30,
(DECEMBER 19, 1996) YEAR ENDED -------------------
TO DECEMBER 31, DECEMBER 31, (UNAUDITED)
1997 1998 1998 1999
------------------- ------------ -------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Network services revenue............. $ -- $ 212 $ 27 $ 547
Operating expenses................... 1,438 14,216 4,205 15,322
------- -------- -------- --------
Operating income (loss).............. (1,438) (14,004) (4,178) (14,775)
Other income (expense)............... (59) (606) (204) 368
------- -------- -------- --------
Net income (loss).................... $(1,497) $(14,610) $ (4,382) $(14,407)
======= ======== ======== ========
Net income (loss) applicable to
common stock....................... $(1,497) $(15,062) $ (4,382) $(17,707)
======= ======== ======== ========
OTHER OPERATING DATA:
EBITDA............................... $(1,401) $(13,504) $ (4,111) $(13,890)
Capital expenditures................. $ 1,220 $ 12,032 $ 2,972 $ 8,650
Net cash provided by (used in)
operating activities............... $(1,229) $(14,420) $ (3,615) $(10,380)
Metropolitan markets served..........
Buildings in operation...............
Rentable square feet in buildings in
operation..........................
</TABLE>

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<PAGE> 9

The pro forma balance sheet information below reflects:

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

- the sale and issuance of shares of series B preferred stock,
shares of common stock and warrants to purchase additional
shares of our 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 $ from this offering,
assuming an initial public offering price of $ 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
$ per share.

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

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<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.

OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT

We began operating our first fiber-optic network in January 1998.
Accordingly, we have only a limited operating history upon which you can
evaluate our business and prospects. 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 include:

- undercapitalization;

- cash shortages;

- high capital expenditures;

- difficulties in managing rapid growth;

- our ability to develop our operational support systems and other back
office systems;

- our ability to attract and retain qualified personnel;

- our ability to continue to upgrade our technologies and enhance our
product features; and

- our ability to respond to technological changes and competitive market
conditions.

Our failure to address any of the risks described above could have a
material adverse effect on our business, financial condition, results of
operations and the price of our common stock.

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

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 $14,775,000
and a net loss of $14,407,000 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. We cannot assure you that we will achieve or
sustain positive EBITDA, operating income or net income in the future. If we
cannot, eventually it could have a material adverse effect on our business,
financial condition, results of operations and the price of our common stock.

WE HAVE AN UNPROVEN BUSINESS MODEL

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 cannot
assure you that our business plan can be successfully executed, that there will
be adequate demand for our services, that we will be able to achieve or maintain
profitability or that we will foresee all of the future difficulties in
executing our business plan. 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.

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WE DEPEND ON BILLING, CUSTOMER SERVICE AND INFORMATION SUPPORT SYSTEMS, WHICH
NEED FURTHER DEVELOPMENT OR REPLACEMENT

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 $ in the current fiscal year. Our plans for the development
and implementation of these operational support systems rely, for the most part,
on acquiring products and services offered by third-party vendors and
integrating those products and services. However, we cannot assure you that we
have successfully identified all of our information processing needs or that our
cost estimates are accurate. 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
business, financial condition, results of operations and 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 a material adverse effect on our business, financial condition,
results of operations and the price of our common stock.

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. 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 (DSL), microwave,
mobile and satellite data service providers. If we fail to compete effectively
or if we experience unexpected price competition for our services or the right
to install our networks, there could be a material adverse effect on our
business, financial condition, results of operations and the price of our common
stock. This competition could also pressure us to reduce the prices of our
services which would negatively affect our earnings.

IN-BUILDING COMPETITORS. Some competitors, such as Cypress Communications,
OnSite Access, Intermedia Communications, SiteLine, RCN, 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 those 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 riser space within buildings are not exclusive. An owner of any of the
buildings we have rights to install a network could also give similar rights to
one of our competitors. 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 telephone companies, including GTE and
the Bell Operating Companies, have an established brand name and reputation,
possess significant capital to deploy fiber-optic equipment rapidly, are
deploying digital subscriber line (DSL)
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technologies to offer higher-speed data services, have their own inter-building
connections and can 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.

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. 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. Some
digital subscriber line (DSL) companies and/or their Internet service provider
customers, such as Covad, Rhythms NetConnections, NorthPoint, Network Access
Solutions, and cable modem service providers, such as Excite@Home (and its @Work
subsidiary), Road Runner, RCN and High Speed Access provide broadband Internet
access. On-line service providers, such as America Online, Compuserve (a
subsidiary of America Online), Microsoft Network, and WebTV (a subsidiary of
Microsoft), provide Internet connectivity, ease-of-use and a stable environment
for modem connections. The services provided by all of these Internet service
providers and cable modem service providers are competitive with our Internet
access services. In addition, if these service providers were to extend their
owned access networks to in-building fiber-optic networks, they would be
competitors for many of our services.

THE SUCCESS OF OUR BUSINESS DEPENDS UPON OUR ABILITY TO REACH AGREEMENTS WITH
BUILDING OWNERS

Our business depends upon our ability to install in-building networks.
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. Our business plan calls for us to obtain the right to install
our networks in buildings with million rentable square feet by the middle
of 2001. However, to date we have rights to install our networks in buildings
with only million rentable square feet. 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. The failure of building owners to grant or renew access rights on
acceptable terms could have a material adverse effect on our business, financial
condition, results of operations and the price of our common stock.

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WE WILL NEED TO DEVELOP NUMEROUS ADDITIONAL SERVICES

Our business plan calls for us to develop and offer numerous additional
services in order to maximize the value of our in-building networks. Developing
and offering new services will require significant financial and personnel
resources. In the course of developing and offering additional services, we may
spend money on services that prove to be unfeasible or unattractive to our
customers. Our expenditure of resources on such services could negatively affect
our network operating expenses and our brand reputation. We cannot be sure that
we will successfully develop additional services. This risk could have a
material adverse effect on our business, financial condition, results of
operations and the price of our common stock.

DEMAND FOR BROADBAND SERVICES, SUCH AS THOSE OFFERED BY ARC, IS UNCERTAIN

Customer demand for broadband services has experienced rapid growth, and
this market is characterized by rapidly changing technology, evolving industry
standards and frequent new service introductions. In addition, demand and market
acceptance for recently introduced services in this industry are subject to a
high level of uncertainty. Some small- and medium-sized businesses may not need
the broadband services that we offer. New technologies or standards could
replace or provide lower cost alternatives to our services and could render our
services obsolete and unmarketable.

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, adopting the Internet for commerce and
communications requires the understanding and acceptance of a new way of
conducting business and exchanging information. In particular, enterprises that
have already invested substantial resources in other methods may be particularly
reluctant or slow to adopt a new strategy. If the commercial market for Internet
access and other broadband services develops more slowly than expected or
becomes overly saturated with competitors, or if the Internet access and
services that we offer are not broadly accepted, there could be a material
adverse effect on our business, financial condition, results of operations and
the price of our common stock.

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. Many commercial users of broadband services have already made
capital investments or entered into contracts to obtain access to these existing
alternative technologies. Furthermore, other new technologies may develop that
provide more capacity and speed than the fiber-optic technology we employ. These

11
<PAGE> 14

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. DSL technology was developed to
produce higher data transfer rates over the existing copper-based
telephone network. The data transfer rates achievable by DSL technology
are dependent on the length and condition of the copper line, as well as
the variant of DSL technology being used. The data transfer rates for DSL
are reported to range between 144 thousand bits per second and six
million bits per second. Improvements in DSL data transfer rates would
make it more competitive. DSL 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 per second.

- WIRELESS TECHNOLOGIES. Wireless technologies, such as satellite and
microwave communications systems, can provide high-speed data
communications. Satellite systems, such as DirecPC, can offer high
download speeds that are advertised at 400 thousand bits per second. The
data transfer rates of microwave systems are dependent upon the number of
users sharing the radio spectrum.

- 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 per second.

Any of these technologies might be improved relative to our in-building
fiber-optic networks. 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 business, financial condition, results of operations and the price of our
common stock.

WE MAY FAIL TO MANAGE OUR GROWTH

Our anticipated growth will place a significant strain on our resources.
Our future performance will depend upon our ability to manage our growth
effectively, which includes our ability to:

- sign access agreements with building owners;

- quickly and efficiently install our in-building networks and metropolitan
hubs;

- implement administrative systems and capabilities;

- develop our operating, financial and accounting systems and internal
controls;

- coordinate functions, including engineering, accounting, finance,
marketing and operations;

- hire and train additional personnel and retain third-party service
providers;

- design, implement, maintain and sell new products and services;

- identify, complete and integrate suitable acquisitions;

- obtain any required governmental authorizations, franchises and permits;

- access potential markets; and

- develop new customer relationships and achieve a sufficient customer
base.

12
<PAGE> 15

If we fail to manage our growth effectively there could be a material
adverse effect on our business, financial condition, results of operations and
the price of our common stock.

OUR BUSINESS DEPENDS UPON OUR ABILITY TO INSTALL OUR NETWORKS IN ADDITIONAL
BUILDINGS

Our success will depend upon our ability to install our in-building
networks in additional buildings. Quickly installing our in-building networks in
additional buildings is crucial in order to establish a first-mover advantage.
We may not be able to accomplish this. We also anticipate that 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 product and services. The expansion and adaptation of our in-building
networks will require substantial financial, operational and managerial
resources. Each building in which we have not built our network is particularly
vulnerable to competitors. We cannot assure you that 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 have a material adverse effect on our business,
financial condition, results of operations and the price of our common stock.

OUR SUCCESS DEPENDS ON OBTAINING SUFFICIENT NETWORK CAPACITY ON FAVORABLE TERMS

We construct in-building networks and generally rely on other
communications carriers to provide transmission capacity outside the buildings
in which we operate. 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 the areas we
provide services and intend to provide services, there is only one established
carrier available to provide the necessary connection, making it extremely
difficult, if not impossible, to obtain redundant connectivity in these areas.
We cannot assure you that 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 service interruptions,
which could in time lead to loss of customers and damage to our reputation.

We contract with other carriers to carry our customer's traffic. These
contracts provide for "underutilization charges" if we do not use as much
capacity as expected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and capital resources."

WE WILL REQUIRE ADDITIONAL CAPITAL TO EXECUTE OUR BUSINESS PLAN

We will require additional capital to finance our operations in the future
according to our current business plan. In addition, we also may need more
capital to respond to unforeseen industry or economic developments. We may seek
debt or equity financing. We may not be able to raise additional capital on a
timely basis or on acceptable terms, or at all. The failure to obtain enough
capital may require us to delay or abandon some of our plans, sell our assets or
default in the payment of our loans and could have a material adverse effect on
our business, financial condition, results of operations and the price of our
common stock.

WE MUST MAKE SIGNIFICANT CAPITAL EXPENDITURES BEFORE GENERATING REVENUE

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

13
<PAGE> 16

until our network is in place, and since our costs can vary, we cannot assure
you that we will be able to recoup our expenditures within any building. If we
fail to attract enough customers within each office building, there could be a
material adverse effect on our business, financial condition, results of
operations and the price of our common stock.

SECURITY RISKS

Our network may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. 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. 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. Remediating
the effects of particular computer viruses and alleviating other security
problems may require interruptions, incurrence of costs to remediate these
problems, delays or cessation of service to our customers, which could have a
material adverse effect on our business, financial condition, results of
operations 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, we cannot
guarantee that our own systems will be Year 2000 compliant in a timely manner,
that any of our third party suppliers will be Year 2000 compliant in a timely
manner, or that there will not be significant interoperability 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,
decreased revenues from the sale of our services could have a material adverse
effect on our business, financial condition, results of operations and the price
of our common stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Year 2000 readiness disclosure" for a
detailed discussion of these risks.

WE ARE DEPENDENT ON OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL

We are highly dependent upon the efforts of our existing senior management
team. Although we have entered into employment agreements with certain 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. There currently is intense competition for qualified
persons in these fields. 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 business, financial condition, results of operations and
the price of our common stock. See "Management -- Employment agreements."

IMPACT OF LEGISLATION AND GOVERNMENT REGULATION ON OUR OPERATIONS COULD AFFECT
PERFORMANCE

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 (including international) common carrier services. State public
utilities commissions exercise jurisdiction over intrastate basic
telecommunications services. 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. Changes in the regulatory environment
14
<PAGE> 17

relating to the telecommunications market, however, could affect our operating
results by increasing competition, decreasing revenue, increasing costs or
impairing our ability to offer certain services. In addition, although we
believe the services we provide today are not subject to substantial direct
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 our business, financial
condition, results of operations and the price of our common stock.

WE MAY BE NEGATIVELY AFFECTED BY REGULATION IF WE DECIDE TO PROVIDE VOICE
AND OTHER BASIC TELECOMMUNICATIONS SERVICES. We will become subject to direct
regulation by the FCC and other state agencies in the event we decide to offer
non-enhanced voice and other basic telecommunications services. Through
subsidiaries, we are in the process of applying for authority from various state
regulatory commissions and the FCC to provide basic telecommunications services,
such as voice telephony service. The regulations that apply to basic
telecommunications services change from time to time and we cannot predict the
effect that such changes may have on our business, financial condition, results
of operations and the price of our common stock.

REGULATORY AND LEGISLATIVE DEVELOPMENTS REGARDING ACCESS BY
TELECOMMUNICATIONS SERVICE PROVIDERS TO OFFICE BUILDINGS COULD NEGATIVELY EFFECT
OUR BUSINESS. There is no current national legal requirement 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. Recently, the FCC initiated a
regulatory proceeding related to riser 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 riser access to telecommunications carriers, and requiring some
telecommunications providers to provide access to other telecommunications
providers. As written, these regulatory and legislative proposals would not
apply directly to us or our in-building networks. We cannot predict 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 our
business, financial condition, results of operations and 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, there can be no assurance that such
claims will not be asserted in the future, or if asserted, will not be
successful. Federal and state statutes have been directed at imposing liability
on Internet service providers for aspects of content carried on their networks.
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 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 contesting any such claims, or the consequent imposition of
liability could have a material adverse effect on our business, financial
condition, results of operation and the price of our common stock.

15
<PAGE> 18

RETAINED CONTROL OF ARC BY OUR PRINCIPAL STOCKHOLDERS MAY CREATE CONFLICTS OF
INTEREST

Upon completion of this offering, our officers, directors and
greater-than-five-percent stockholders (and their affiliates) will, in the
aggregate, beneficially own approximately % ( % if the underwriters'
over-allotment option is exercised in full) of the outstanding common stock. In
addition, the holders of approximately % of our common stock ( % if the
underwriters' over-allotment option is exercised in full) are parties to a
stockholders' agreement which facilitates their ability to aggregate their
votes. As a result, these persons, acting together, will have the ability to
control substantially all matters submitted to our stockholders for approval
(including the election and removal of directors and any merger, consolidation
or sale of all or substantially all of our assets) and to control our management
and affairs. Accordingly, this concentration of ownership 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.
See "Management" and "Principal Stockholders."

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, including Verio, Via
Net.Works, CO Space, Centennial Communications, Gabriel Communications, VeloCom,
Tele Tech Holdings, Transmedia Network, CoSine Communications, E/O Networks,
Digital Island, Fujant Technologies, Infoscape, Novolux, Quickpage, Formus
Communications and Advanced Telecom Group. To the extent that any of these
companies presently offer, or at some future point begin to offer, products or
services having characteristics similar to those offered by us, there may be
conflicts of interest between the fiduciary duties owed by these individuals to
ARC and the duties owed to these other companies. We have not adopted specific
policy guidelines to address these potential conflicts of interest and there can
be no assurance that if these conflicts of interest arise, that they will be
resolved on terms that are in the best interests of our stockholders. Failure to
resolve conflicts of interest in a manner that is consistent with the interests
of our stockholders could have a material adverse effect on our business,
financial condition, results of operations and the price of our common stock.

THE SALE OF SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD ADVERSELY
AFFECT OUR STOCK PRICE

The market price of our common stock may fall as a result of sales of a
large number of shares in the market or the perception that such sales could
occur. After this offering, there will be outstanding shares of our common
stock. There will be shares outstanding if the underwriters' over-allotment
option is exercised in full. The shares sold in this offering will be freely
tradeable except for any shares purchased by our "affiliates" as defined in Rule
144 under the Securities Act. Of the remaining shares, approximately % are
subject to lock-up agreements discussed below. The shares not subject to lock-up
agreements will be "restricted securities," subject to the volume limitations
and other conditions of Rule 144 under the Securities Act.

Our directors, executive officers, and several of our current stockholders
and optionholders have agreed, subject to certain limited exceptions, for a
period of 180 days after the date of this prospectus, that they will not,
without the prior written consent of the representatives of the underwriters
directly or indirectly, offer to sell, sell, hedge or otherwise dispose of any
shares of common stock. After the first anniversary of this offering, some
holders of common stock will have the right to request the registration of their
shares under the Securities Act. Upon the effectiveness of that registration
statement, all shares covered by that registration statement will be freely
transferable. In addition, following the completion of this offering, we also
intend to file a registration statement on Form S-8 under the Securities Act
covering 40,546,734 shares of
16
<PAGE> 19

common stock reserved for issuance under our stock option plan. This
registration statement will automatically become effective upon filing. As of
June 30, 1999, options to purchase 5,211,632 shares of common stock were issued
and outstanding, of which 177,417 shares underlying these options have vested.
Subject to the exercise of the issued and outstanding options, shares registered
under the registration statement on Form S-8 will be available for sale in the
open market immediately after the 180-day lock-up agreements. See "Underwriting"
and "Shares Eligible for Future Sale."

We cannot predict if future sales of our common stock, or the availability
of our common stock for sale, could have a material adverse effect on the market
price for our common stock or our ability to raise capital by offering equity
securities. See "Shares Eligible for Future Sale" and "Underwriting."

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 effect the market
price of our common stock. See "Description of Capital Stock -- Anti-takeover
effects of certain provisions of Delaware law and our amended and restated
certificate of incorporation and by-laws."

IMPAIRMENT OF OUR INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR BUSINESS

In the normal course of our business activities, we use certain trademarks
including Allied Riser Communications, ARC and other designations. While we are
seeking federal registration of ARC and certain other marks, we have not been
awarded any trademark registrations, and are relying upon our common law rights.
We have not received any communications objecting to our use or registration of
any of our trademarks. However, other entities may object to 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 business, financial condition, results of
operations and the price of our common stock.

DILUTION: THE PRICE OF THE COMMON STOCK EXCEEDS ITS BOOK VALUE

The initial public offering price of our common stock is substantially
higher than the pro forma net tangible book value per share of the outstanding
common stock immediately after the offering. If you purchase common stock in
this offering, you will incur immediate and substantial dilution in the pro
forma net tangible book value per share of the common stock of $ per share
from the price you pay for common stock. We also have a large number of
outstanding stock options and warrants to purchase the common stock with
exercise prices significantly below the initial public offering price of the
common stock. To the extent these options or warrants are exercised, there will
be further dilution. See "Dilution."

17
<PAGE> 20

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 contained in the prospectus 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,
including those described in the "Risk Factors" section, 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.

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<PAGE> 21

USE OF PROCEEDS

We estimate that our net proceeds from the sale of common stock in this
offering will be approximately $ ($ 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 $ of the net proceeds from this
offering for the construction of in-building networks, and the remainder for
working capital and general corporate purposes. 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.

CORPORATE INFORMATION

References in this prospectus to "ARC," "we," "our," and "us" refer to
Allied Riser Communications Corporation and our consolidated subsidiaries.

Our principal executive offices are located at 1700 Pacific Avenue, 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.

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<PAGE> 22

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 following cash and capitalization table sets forth:

(1) Our actual cash and capitalization as of June 30, 1999

(2) Our pro forma cash and capitalization after giving effect to:

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

- the sale and issuance of shares of series B preferred
stock, shares of common stock and warrants to purchase
additional shares of our common stock to our real estate
partners and their affiliates consummated in August 1999.

(3) Our pro forma as adjusted cash and capitalization to reflect, in
addition:

- the receipt of estimated net proceeds of $ from this offering,
assuming an initial public offering price of $ 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 $ per share.

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------------
JUNE 30, 1999
----------------------------------------------
(UNAUDITED) PRO FORMA AS
ACTUAL(1) PRO FORMA(2) ADJUSTED(3)
---------- ------------- -------------
<S> <C> <C> <C>
Cash and cash equivalents......................... $ 24,307 $ $
======== ======= =======
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
shares issued and outstanding (pro forma) and
zero shares issued and outstanding (pro forma as
adjusted)....................................... 69,751 --
Stockholders' equity (deficit):
Common stock, par value $.0001 per share,
1,000,000,000 shares authorized; 401,814,487
shares issued and outstanding (actual) and
shares issued and outstanding (pro
forma) and shares issued and
outstanding (pro forma as adjusted).......... 40
Additional paid-in capital...................... (2,961)
Accumulated deficit............................. (30,921) () ()
-------- ------- -------
Total stockholders' equity (deficit)............ (33,842)
-------- ------- -------
Total capitalization.................... $ 41,285 $ $
======== ======= =======
</TABLE>

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<PAGE> 23

DILUTION

Our pro forma net tangible book value as of June 30, 1999 was $ or
$ per share of outstanding common stock, after giving effect to the
adjustments shown in item (2) under "Capitalization." The pro forma net tangible
book value per share represents our total tangible assets less total
liabilities, divided by 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 $ or $ per share. This represents an immediate
increase in the net tangible book value of $ per share to existing
stockholders and an immediate dilution in net tangible book value of $ 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.............................. $[ ]
Pro forma net tangible book value per share as of June 30,
1999...................................................... $[ ]
Increase per share attributable to new investors............ $[ ]
Pro forma as adjusted net tangible book value per share
after the offering........................................ $[ ]
Dilution per share to new investors......................... $[ ]
</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 of common stock purchased from ARC, the total
consideration paid and the average price per share paid at the initial public
offering price of $ per share (before deducting estimated underwriting
discounts and commissions and offering expenses payable by ARC):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------- ------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................... [ ] [ ]% $[ ] [ ]% $[ ]
New investors............................ [ ] [ ] [ ] [ ] $[ ]
Total.................................... [ ] 100% $[ ] 100.0%
</TABLE>

The foregoing table assumes no exercise of stock options. As of June 30,
1999, there were options outstanding to purchase 5,211,632 shares of common
stock at a weighted average exercise price of $.0001 per share. To the extent
outstanding options are exercised, there will be further dilution to new
investors.

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<PAGE> 24

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, which are
included elsewhere in this prospectus. 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 included elsewhere in this prospectus. 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>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-------------------------------------------------
PERIOD FROM
INCEPTION SIX MONTHS ENDED
(DECEMBER 19, JUNE 30,
1996) TO YEAR ENDED ------------------
DECEMBER 31, DECEMBER 31, (UNAUDITED)
1997 1998 1998 1999
------------- ------------ ------- --------
<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
Depreciation and amortization............ 10 499 66 890
------- -------- ------- --------
Total operating expenses......... 1,438 14,216 4,205 15,322
------- -------- ------- --------
Operating income (loss).................... (1,438) (14,004) (4,178) (14,775)
Other income (expense)..................... (59) (606) (204) 368
Provision for income taxes................. -- -- -- --
------- -------- ------- --------
Net income (loss).......................... (1,497) (14,610) (4,382) (14,407)
Accrued dividends on preferred stock....... -- (452) -- (3,300)
------- -------- ------- --------
Net income (loss) applicable to common
stock.................................... $(1,497) $(15,062) $(4,382) $(17,707)
======= ======== ======= ========
Net income (loss) per common share......... $ (.50) $ (.49) $ (1.21) $ (.05)
======= ======== ======= ========
Weighted average number of shares
outstanding.............................. 3,013 30,841 3,621 388,471
======= ======== ======= ========
</TABLE>

22
<PAGE> 25

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

The pro forma balance sheet information below reflects:

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

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

- the receipt of estimated net proceeds of $ from this offering,
assuming an initial public offering price of $ 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
$ per share.

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
-------------------------------------------------------
AS OF JUNE 30, 1999
----------------------------------
AS OF DECEMBER 31, (UNAUDITED)
------------------ PRO FORMA AS
1997 1998 ACTUAL PRO FORMA ADJUSTED
------- -------- ------- --------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 188 $41,371 $24,307 $ $
Property and equipment, net............ 1,250 13,005 20,765 20,765 20,765
Total assets........................... 1,487 55,572 47,220
Total liabilities...................... 3,228 5,257 11,311 11,311 11,311
Convertible redeemable preferred
stock................................ -- 66,452 69,751
Additional paid-in capital............. 162 339 (2,961)
Stockholders' equity (deficit)......... (1,741) (16,137) (33,842)
</TABLE>

23
<PAGE> 26

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 metropolitan areas. We currently own and operate fiber-optic
networks inside office buildings with more than million rentable
square feet. In addition, we have recently entered into agreements with
building owners to install and operate fiber-optic networks in office buildings
with more than 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 "riser" -- a vertical utility shaft -- of
each building. 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 -- Our
limited operating history makes evaluating our business difficult."

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;
24
<PAGE> 27

- 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. In addition, we
charge customers a one-time installation fee for most of the services we
provide. Typically, we do not require our customers to purchase any equipment.
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' other 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 care and
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 transport.
Under these agreements, we incur fixed monthly charges for local connectivity.
For national backbone 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 backbone connectivity, we may be
obligated to pay underutilization charges. In the future, we may contract for
volume discounts based on the transport dollar volume purchased from national
backbone 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. 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.
25
<PAGE> 28

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 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 are currently selecting a vendor to provide
automated billing systems and other operational support systems that will either
replace or be integrated with our existing systems. See "Risk Factors -- We
depend on billing, customer service and information support systems, which need
further development or replacement."

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

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.

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 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. This 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

26
<PAGE> 29

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 buildings, , with more than
million rentable square feet as compared to June 30, 1998 when our networks were
installed inside buildings, with more than 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, and the establishment of sales
demonstration centers.

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.

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 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 buildings, with more than 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. Consistent

27
<PAGE> 30

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.

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
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.......... $ (.06) $ (.08) $ (.07) $ (.24) $ (.43) $ (.78)
====== ====== ====== ====== ======= =======
Weighted average number of shares
outstanding................................ 1,533 3,287 3,621 3,621 3,621 3,621
====== ====== ====== ====== ======= =======

<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
Depreciation and amortization.............. 159 274 386 504
------- ------- ------- --------
Total operating expenses.................... 4,296 5,715 5,767 9,555
------- ------- ------- --------
Operating income (loss)..................... (4,219) (5,607) (5,621) (9,154)
Other income (expense)...................... (253) (149) 415 (47)
Provision for income taxes.................. -- -- -- --
------- ------- ------- --------
Net income (loss)........................... (4,472) (5,756) (5,206) (9,201)
Accrued dividends on preferred stock........ -- (452) (1,650) (1,650)
------- ------- ------- --------
Net income (loss) applicable to common
stock...................................... $(4,472) $(6,208) $(6,856) $(10,851)
======= ======= ======= ========
Net income (loss) per common share.......... $ (1.24) $ (.06) $ (.02) $ (.03)
======= ======= ======= ========
Weighted average number of shares
outstanding................................ 3,621 111,612 386,140 390,776
======= ======= ======= ========
</TABLE>

28
<PAGE> 31

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.

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 network and purchase more
equipment. 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 this indebtedness. 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 for
telecommunications transport.

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. 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 once 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.

On or before August 18, 1999, we entered into binding and irrevocable
agreements for the issuance of shares of series B preferred stock and
shares of common stock to a group of financial sponsors, including GS
Capital Partners III, L.P., an affiliate of Goldman, Sachs & Co. We received
$ million in net proceeds from this financing transaction.

Also on or before August 18, 1999, we entered into binding and irrevocable
agreements for the issuance of shares of series B preferred stock,
shares of common stock and warrants to purchase additional
shares of our common stock to our real estate partners and their affiliates,
including Whitehall Street Real Estate Limited Partnership XI. We
29
<PAGE> 32

received million in net proceeds from the sale of the preferred and
common stock to these partners. The warrants were issued as part of the
compensation for the right to install and operate our fiber-optic networks
inside buildings owned or managed by these partners.

We estimate that the net proceeds of this offering in addition to our cash
on hand and amounts available under our existing credit facility 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 networks and services
beyond that point and expect that we will 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 assure you 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, negotiate favorable prices for
purchases of equipment, and 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, 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 availability
under our credit facility 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. See "Risk Factors -- We will require additional capital to execute
our business plan."

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.

30
<PAGE> 33

(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 is in process and we expect to be finished in
September 1999.

(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 is in process and we expect to complete the
testing phase in September 1999.

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 intend to replace the product with one that is Year 2000 ready by
October 1999. 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. 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.
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<PAGE> 34

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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BUSINESS

OVERVIEW

We are 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. 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 networks inside office
buildings with more than million rentable square feet. In addition, we have
recently entered into agreements with building owners to install and
operate fiber-optic networks in office buildings with more than
million rentable square feet.

Our management team has extensive experience in the telecommunications,
data communications and real estate industries and includes individuals who
served as executive officers of Sprint, MCI, AT&T-Bell Labs, Nextel and Equity
Office Properties Trust. We have entered into agreements to obtain access to
some or all of the Buildings owned or managed by some of the largest commercial
property companies in the United States, including affiliates of Hines, Trizec
Hahn Office Properties, Equity Office Properties Trust, Shorenstein, Boston
Properties, Cornerstone, Metropolitan Life, Whitehall Real Estate Funds, Vornado
Realty Trust, Transwestern, Fisher Brothers and Hamilton Partners. Our financial
sponsors have invested over $ million in our business and include affiliates
of Telecom Partners, Crescendo Ventures, Norwest Venture Partners and Equity
Group Investments.

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. IDC reports that approximately 35% of Internet access
revenue derived from small- and medium-sized businesses in 1998 was generated
using dial-up connections. We believe that faster, "always on" connections
enhance the productivity of employees of small- and medium-sized businesses. IDC
forecasts that dedicated connections to the Internet for small- and medium-sized
businesses will

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<PAGE> 36

grow from approximately 240,000 in 1998 to approximately 700,000 in 2000,
representing a 70% compounded annual growth rate.

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
smaller clients. According to IDC, value-added services is the fastest growing
segment 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, IDC estimates that
Web hosting revenue from small- and medium-sized businesses will grow from
$217.1 million in 1998 to over $3.4 billion in 2000, representing 95% of the
total web hosting market. Businesses of moderate size often do not 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 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 service operates
at speeds substantially greater than those usually available with digital
subscriber lines, cable modems, dial-up modems, ISDN lines and T-1
digital communications links.

- "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. Our standard service currently operates at
speeds of ten million bits per second. Using commercially available
equipment, we can increase the transmission speed of our infrastructure
to one billion bits 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

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

- 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
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. We believe that we have gained a
competitive advantage by rapidly forging strong partnerships with real
estate owners in these markets and by creating close relationships with
our customers.

- 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 uniquely
positions us to rapidly provision 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.
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- CAPTURE ADDITIONAL REVENUE STREAMS. 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 buildings occupied by
our customers. We have technical staff present in each of our markets,
which focuses its 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 the ARC 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
- Broadband Portals
</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 digital communications
link. 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.
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Our connectivity pricing varies by market, building and customer size. For
Internet access, we charge an initial installation fee for these services and a
minimum fee for the first desktop connected. We charge an incremental monthly
fee for each additional desktop, which typically ranges from $50 to $5. 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 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, CNBC and Bloomberg 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 broadband portals, over the next several years.

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 network is 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, or "B-POP" 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
or "M-POP"; and

- leased facilities connecting our networked building to our M-POP and our
M-POP to a national service provider, such as GTE Internetworking, Qwest
or Level 3.

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The typical architecture is:

TO COME

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 vertical
utility shaft known as the "riser". 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 information per second,
and can transmit as much as one billion bits of information per second.

OUR BUILDING POINTS-OF-PRESENCE. Inside the building, usually in the
basement, we also establish a building point of presence, known as a B-POP. In
our B-POP, 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 B-POP.

LEASED FIBER-OPTIC FACILITIES OUTSIDE OUR BUILDINGS. Within each
metropolitan area that we serve, we have a metropolitan point of presence, known
as an M-POP, 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 M-POP 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 transport for traffic between our
buildings and the M-POP.

OUR METROPOLITAN POINTS OF PRESENCE. At our M-POP, 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 our M-POPs to multiple major Internet service
providers that provide Internet backbone connectivity to our network. Each of
our M-POPs is connected to at least one other M-POP in a different city over a
dedicated circuit to increase redundancy in our network. We also connect our
M-POPs to our national operating center in Dallas, Texas where we manage and
monitor our network traffic.

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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 minimize 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. 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

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<PAGE> 42

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 our local exchange connection;

- 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 bandwith.

For more information about the highly competitive market in which we
operate, 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 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
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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 Vantive relational 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 riser 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 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.

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- our real estate services and construction groups are staffed with
experienced property management and construction management personnel who
minimize 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.

PENETRATION. Today, we operate or have the right to operate fiber-optic
networks inside buildings in metropolitan areas in the U.S.
The table below summarizes our success at selecting property and negotiating
license arrangements with property owners.

<TABLE>
<CAPTION>
TARGET BUILDINGS(1) TARGET BUILDINGS(1) SQUARE FEET
--------------------------- -------------------------------
IN OPERATION OR TOTAL IN IN OPERATION OR TOTAL IN
MARKET UNDER CONTRACT MARKET UNDER CONTRACT MARKET
- -------- --------------- -------- --------------- --------
<S> <C> <C> <C> <C>

</TABLE>

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

(1) Target buildings include those with more than 100,000 rentable square feet.

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

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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.

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 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 riser 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 riser 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. Senate that covers
similar issues relating to access to building risers and other rights-of-way. We
cannot predict the outcome of the FCC's proceeding or of any legislation that
may be enacted into law, 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. The FCC has preempted state regulation of, and does
not directly regulate enhanced services involving more than pure transmission of
customer-provided information. 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 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. 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

43
<PAGE> 46

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 (the "Telecom Act") substantially
altered the federal and state regulatory environment for telecommunications
services. Among its more significant provisions, the Telecom 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;

- 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.

Currently, incumbent telephone companies must make their high-speed data
offerings, such as Digital Subscriber Line, or DSL, services available to
competitors on a wholesale basis and make related equipment available 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. These
steps include a proposal that would offer incumbent telephone companies the
option to provide advanced services without network unbundling and resale
obligations through a separate, largely deregulated affiliate. The final 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.

EMPLOYEES

As of June 30, 1999, we had 195 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 are dependent on our ability to attract and
retain key personnel."

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<PAGE> 47

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> 48

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 July 15, 1999.

<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
David H. Crawford........... 42 Chief executive officer and director (class )
John M. Todd................ 48 Chief operating officer, president and director (class
)
John H. Davis............... 60 Chief technology officer and director (class )
Todd C. Doshier............. 37 Chief financial officer
Michael R. Carper........... 37 Senior vice president and general counsel
Stephen W. Schovee.......... 39 Director and chairman of the board (class )
Rod F. Dammeyer............. 58 Director (class )
William J. Elsner........... 47 Director (class )
R. David Spreng............. 37 Director (class )
Blair P. Whitaker........... 38 Director (class )
William T. White............ 38 Director (class )
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
Thomas A. Eppes............. 50 Vice president -- technical operations
J. Ted Gilmore.............. 47 Vice president -- sales
William T. Guthrie.......... 36 Vice president -- engineering
Brenda L. Hardesty.......... 41 Vice president -- human resources and administration
John D. Keys................ 66 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
</TABLE>

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

(1) Member of the compensation committee

(2) Member of the audit committee

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 December 1996, 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, Dr. Davis has been a

46
<PAGE> 49

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 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 -- general counsel of
OneComm Communications, when it 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 and Telecom Management II, which are
affiliates of Telecom Partners. 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 and is a director of Antec, CNA Surety,
Grupo Azucarero Mexico (GAM), 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 November 1997, Mr. Elsner has been a managing partner of Telecom Partners
II, an affiliate of Telecom Partners. From October 1995 until November 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, E/O Networks,
Fujant Technologies, Infoscape, Novolux and Quikpage.

BLAIR P. WHITAKER was elected to our board of directors in December 1998.
Since 1997, Mr. Whitaker has been a general partner at Norwest Venture Partners.
Prior to 1997, Mr. Whitaker was chief financial officer and vice president for
business development at Infobeat, was a partner and vice president at the
Centennial Funds and held engineering positions at 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. Prior to 1991, Mr. White was an officer at
Manufacturer's Hanover Trust Company.

47
<PAGE> 50

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.

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.

J. TED GILMORE has served as our vice president -- sales since November
1998. Since 1993, Mr. Gilmore has held officer and senior management positions
at GTE, GTE Communications and GTE Professional Services in the areas of
international sales and marketing.

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.

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 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.

48
<PAGE> 51

ELECTION OF DIRECTORS AND OFFICERS

Pursuant to our by-laws, the stockholders of ARC shall elect the members of
ARC's board of directors at the annual meeting of the stockholders to be held
each year at a time specified by the board of directors of ARC. 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. As a result, approximately one-third of the board of
directors will be elected each year. These provisions, together with the
provision of our amended and restated certificate of incorporation, allow the
board of directors to fill vacancies of or increase the size of the board of
directors, and may deter a stockholder from removing incumbent directors and
filling such vacancies with its own nominees in order to gain control of the
board.

Messrs. will serve as class I directors whose
terms expire at the 2000 annual meeting of stockholders. Messrs.
will serve as class II directors whose terms expire at
the 2001 annual meeting of stockholders. Messrs. 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:

- 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 ARC and our officers and directors; and

- performs other duties upon the request of our board.

Our compensation committee:

- 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 currently receive cash fees or
option grants for serving as directors or for attending meetings. We currently
reimburse directors for out-of-pocket expenses incurred in connection with
attendance at meetings.

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<PAGE> 52

EMPLOYMENT AGREEMENTS

We have employment agreements with Messrs. and . Each
of the employment agreements has no specified term and is terminable at will by
either party, but provides for severance payments equal to three-months' salary
in the event of a termination by us without cause. These agreements provide for
accelerated vesting of employee options in the event of both, a change in
control of ARC and the termination of employment without cause. See "Risk
Factors -- We are dependent on our ability to attract and retain key personnel."

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.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION(1) RESTRICTED
FISCAL ------------------ STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS
- --------------------------- ------ -------- ------- ----------
<S> <C> <C> <C> <C>
David H. Crawford, Chief executive officer.............. 1998(2) $104,077 $50,000 9,356,044
John M. Todd, Chief operating officer................... 1998(3) -- -- --
John H. Davis, Chief technology officer................. 1998(4) -- -- --
Todd C. Doshier, Chief financial officer................ 1998 $168,115 $45,000 8,662,270
Michael R. Carper, Senior vice president and general
counsel............................................... 1998(5) -- -- --
</TABLE>

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

(1) The columns for "Other Annual Compensation" and "All Other Compensation"
have been omitted 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.
(2) Represents payments made from July 1998, the date on which Mr. Crawford
began his employment with ARC.
(3) Mr. Todd commenced his employment in May 1999.
(4) Mr. Davis commenced his employment in July 1999.
(5) Mr. Carper commenced his employment in June 1999.

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<PAGE> 53

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth information regarding beneficial ownership
of ARC common stock as of June 30, 1999 for (1) each of the executive officers
named in the "Summary Compensation Table", (2) each of our directors, and (3)
all of our executive officers and our directors as a group.

<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
---------------------------------------------------------------------------------
NUMBER OF TOTAL ALL
SHARES PERCENT OF TOTAL PERCENT OF SHARES PERCENT OF
BENEFICIALLY OUTSTANDING VESTED OUTSTANDING (VESTED AND OUTSTANDING
NAME(1) OWNED(2) SHARES(3) SHARES SHARES(3) UNVESTED) SHARES(3)
- ------- ------------ ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
David H. Crawford........ 9,356,044 2.3 4,028,296 1.0 9,356,044 2.3
John M. Todd............. 7,000,000 1.7 1,516,667 0.4 7,000,000 1.7
John H. Davis(4)......... 5,000,000 1.2 400,000 0.1 5,000,000 1.2
Todd C. Doshier.......... 9,256,405 2.3 5,392,085 1.3 9,256,405 2.3
Michael R. Carper........ 4,000,000 1.0 500,000 0.1 4,000,000 1.0
Stephen W. Schovee(5).... -- -- -- -- -- --
Rod F. Dammeyer(6)....... -- -- -- -- -- --
William J. Elsner(5)..... -- -- -- -- -- --
R. David Spreng(7)....... -- -- -- -- -- --
Blair P. Whitaker(4)..... -- -- -- -- -- --
William T. White(6)...... -- -- -- -- -- --
All executive officers
and directors as a
group (12 persons)
(4)(5)(6)(7)........... 34,612,449 8.6% 11,837,048 2.9% 34,612,449 8.6%
</TABLE>

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

* Less than 1% of the issued and outstanding shares of the ARC common stock.

(1) This table is based upon information supplied by directors and executive
officers. 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.

(2) 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 vote or direct the voting of such security or 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. More than one person may be
deemed to be a beneficial owner of the same securities.

(3) The percentage of beneficial ownership at June 30, 1999 is based on
401,814,487 shares of ARC common stock outstanding as of such date.

(4) Excludes 65,619,675 shares of ARC common stock beneficially owned by
Norwest, and as to which Messrs. Davis and Whitaker disclaim beneficial
ownership.

(5) Excludes 74,368,965 shares of ARC common stock beneficially owned by TP, and
as to which each of Messrs. Schovee and Elsner disclaim beneficial
ownership.

(6) Excludes 85,305,577 shares of ARC common stock beneficially owned by
EGI-ARC, and as to which each of Messrs. Dammeyer and White disclaim
beneficial ownership.

(7) Excludes 69,994,320 shares of ARC common stock beneficially owned by
Crescendo, and as to which Mr. Spreng disclaims beneficial ownership.

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<PAGE> 54

STOCK OPTION PLAN

We have adopted, effective June 1, 1999, the 1999 Allied Riser
Communications Corporation Stock Option and Equity Incentive Plan. The Plan
authorizes issuance of up to 40,546,734 shares of common stock subject to
equitable adjustment upon the occurrence of any stock dividend or other
distribution, recapitalization, stock split, reverse split, reorganization,
merger, consolidation, spin-off, combination, share repurchase or exchange, or
other similar corporate transaction or event.

Pursuant to the Plan, our board of directors may grant stock options
(including "incentive stock options" 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 pursuant to delegated authority 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.

The 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.

We may issue "incentive stock options" as that term is defined in Section
442 of the Internal Revenue Code or "nonstatutory options." 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
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 either the fair market value of a share of common stock on the date of
grant (in the case of a free standing stock appreciation right) or the exercise
price of the related stock option (in the case of a tandem stock appreciation
right), with payment to 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 (per customer)
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 Plan may not be transferred other than by
will, or by the laws of descent and distribution.

The 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 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 (per customer) previously granted, without that participant's
consent.
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<PAGE> 55

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 308,412,472 shares of our common stock and 66 shares
of our preferred stock in private transactions to investors in the real estate
and telecommunications industries. In connection with this offering all of these
shares of outstanding preferred stock will be converted into shares of
common stock, assuming an initial public offering price of $ 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
1,881,098 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 $.01 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 3,621,498 shares of our common stock.
As a result, each of these warrants evidenced the right to purchase
approximately 72,000 shares of our common stock. These warrants were terminated
in 1998 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 indirectly 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 and an
investment agreement, both of which have 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 and Telecom Partners II, a telecommunications
company in which Mr. Zell is a passive investor, Mr. Zell may be deemed to
beneficially own shares of our common stock as of June 30, 1999, which
amount includes the conversion of all preferred stock held by these entities.

Samuel Zell owns and controls S Z Investments (SZI), 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 SZI, 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 covering
the installation of our fiber-optic networks in and buildings,
respectively. In addition, we are currently negotiating a master license
agreement with Equity Office which would cover these buildings and an additional
buildings. Total license fees paid to Equity Office pursuant to these
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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<PAGE> 56

We currently lease approximately 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, 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 purchase 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 is a
captive law firm that provides legal services 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.

Despite Mr. Zell's control of approximately % of common stock, we believe
that these transactions were negotiated on market-based terms. 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
each serve as directors of other telecommunications companies and
other private companies. As a result of these additional directorships, Messrs.
Elsner, Schovee and may be subject to conflicts of interest during
their tenure as our directors. Because of these potential conflicts, Messrs.
Elsner, Schovee and 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 its business.
Currently, we do not have any standard procedures for resolving potential
conflicts of interest relating to corporate opportunities or otherwise.

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<PAGE> 57

PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding the beneficial
ownership of our common stock as of June 30, 1999 by each stockholder who is
known by us to beneficially own 5% or more of any class of our capital stock.

<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP(1)(2)(3)
--------------------------
NUMBER OF
NAME SHARES PERCENT(4)
---- ---------- -------------
<S> <C> <C>
EGI-ARC Investors(5)........................................ 85,305,577 %
Telecom Partners II(6)...................................... 74,368,965 %
Crescendo(7)................................................ 69,994,320 %
Norwest Venture Partners VII(8)............................. 65,619,675 %
</TABLE>

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

(1) In accordance with Rule 13d-3 under the Exchange Act (as defined herein), a
person is deemed to be a "beneficial owner" of a security if he or she has
or shares the power to vote or direct the voting of such security or 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. More than one
person may be deemed to be a beneficial owner of the same securities. The
percentage ownership of each stockholder at June 30, 1999 is calculated
based on the total number of outstanding shares of our common stock as of
such date.

(2) This table is based upon information supplied by principal stockholders.
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.

(3) The numbers in the table reflect the conversion of all of our outstanding
preferred stock assuming an offering price of $ .

(4) The percentage of beneficial ownership at June 30, 1999 is based on
401,814,487 shares of ARC common stock outstanding as of such date.

(5) The address of EGI-ARC is Two North Riverside Plaza, Chicago, Illinois
60606.

(6) The address of TP is 6400 South Fiddlers Green Circle, Suite 720, Englewood,
Colorado 80111.

(7) The shares of ARC common stock beneficially owned by the Crescendo
affiliates are held as follows: Crescendo World Fund, 12,524,171; Eagle
Venture WF, 599,764; Crescendo III, 52,495,740; and Lawrence Equity Group,
4,374,645. The address of each of Crescendo World Fund, Eagle Ventures SF,
Crescendo III, and Lawrence Equity Group, is c/o Crescendo Venture
Management, 800 LaSalle Avenue, Suite 2250, Minneapolis, Minnesota 55402.

(8) The address of Norwest is 40 William Street, Suite 305, Wellesley,
Massachusetts 02481.

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<PAGE> 58

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 1,000,001,000 consists of 401,814,487
shares of common stock and 66 shares of preferred stock issued and outstanding,
as of June 30, 1999. There were 159 holders of record of common stock on that
date. The common stock and the preferred stock each have a par value of $0.0001
per share. After the offering, there will be shares outstanding. As of June
30, 1999, options to purchase 5,211,632 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. The
common stock is not entitled to preemptive rights and is not subject to
conversion or redemption. Upon the occurrence of a liquidation, dissolution or
winding-up of ARC, 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. Each outstanding
share of common stock is, and all shares of common stock to be outstanding upon
completion of this offering will be, fully paid and non-assessable.

PREFERRED STOCK

The board of directors has the authority, within the limitations and
restrictions stated in our amended and restated certificate of incorporation, to
provide by resolution for the issuance of up to 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 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 August 1999, we issued warrants to purchase up to shares of
common stock as a fee to gain the right to install and operate our fiber-optic
networks inside buildings owned or managed by these partners. The
warrants are exercisable at a cost of $ per share to the holder upon the
occurrence of certain events, as defined in the warrant acquisition agreement.

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<PAGE> 59

OPTIONS

As of June 30, 1999:

- options to purchase a total of 5,211,632 shares of common stock at a
weighted average exercise price of $.0001 per share were outstanding, of
which 177,417 shares underlying these options have vested; and

- up to 35,335,102 additional shares of common stock may be subject to
options granted in the future.

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

REGISTRATION RIGHTS

In November and December 1998, we issued 308,412,472 shares of common stock
and 66 shares of series A preferred stock in private transactions which will be
converted into shares of common stock at the consummation of this
offering, assuming an initial offering price of $ 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. All of these
holders have signed and delivered to us written waivers, which 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 shares of series B preferred stock and
shares of common stock in a series of transactions. The preferred
shares will be converted into shares of common stock at the consummation of
this offering, assuming an initial offering price of $ 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 August 1999, we issued warrants to purchase shares of common
stock at a price of $ per share. 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

Our board of directors is divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of the board of
directors will be elected each year. These provisions, when 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

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<PAGE> 60

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 60 days nor
more 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 10th 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 tenth (10th) 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 incorporation and amended and restated by-laws,
including those provisions relating to the

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<PAGE> 61

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 American Stock
Transfer & Trust Company. Its address is 40 Wall Street, New York, New York
10005, and its telephone number at this location is (212) 936-5100.

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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<PAGE> 62

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.

Upon completion of this offering, we will have outstanding an aggregate of
shares of our common stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding 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

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 lock-up
agreements under which they have agreed not to transfer, dispose of or hedge,
directly or indirectly, 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
(other than us) cover an aggregate of approximately shares.

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 shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:

- 1% of the number of shares of common stock then outstanding, which will
equal approximately 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.

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
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<PAGE> 63

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

Following the completion of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act of 1933 covering 40,546,734
shares of common stock reserved for issuance under the 1999 Stock Option and
Equity Incentive Plan. The registration statement will become effective
automatically upon filing. As of June 30, 1999, options to purchase 5,211,632
shares of common stock were issued and outstanding, of which 177,417 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."

REGISTRATION RIGHTS

Upon completion of this offering, the holders of shares of our
common stock, or their transferees, are entitled to request that we register
their shares under the Securities Act. 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 (a "non-U.S.
holder").

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 pursuant to 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.

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LEGAL MATTERS

The validity of the shares of common stock offered hereby 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 (the "Commission") a
registration statement on Form S-1 under the Securities Act with respect to the
shares of common stock offered hereby. This prospectus does not contain all of
the information set forth in the registration statement and the exhibits and
schedules filed therewith. For further information with respect to ARC and the
common stock offered hereby, reference is made to the registration statement and
the exhibits and schedule filed with the registration statement. Statements
contained in this prospectus regarding the contents of any contract or any other
document to which reference is made are not necessarily complete, and, in each
instance, 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 schedule filed therewith 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.

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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-18
Unaudited Condensed Consolidated Statement of Operations for
the Three Months Ended June 30, 1998 and 1999............. F-19
Unaudited Condensed Consolidated Statement of Operations for
the Six Months Ended June 30, 1998 and 1999............... F-20
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1998 and 1999........... F-21
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-22
</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 the matters discussed in
Note 12, as to which the date
is April 29, 1999)

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, 1,000,000,000 shares
authorized, 3,621,498 and 385,745,936 shares issued and
outstanding in 1997 and 1998, respectively............. 362 38,575
Additional paid-in capital................................ 162,333 338,752
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.......................... $ (.50) $ (.49)
=========== ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 3,013,252 30,841,031
=========== ============
</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)..... 3,000,000 300 156,180 (407,028) (250,548)
Issuance of common stock.......... 621,498 62 6,153 -- 6,215
Net income (loss)................. -- -- -- (1,497,211) (1,497,211)
----------- ------- --------- ------------ ------------
BALANCE, December 31, 1997.......... 3,621,498 362 162,333 (1,904,239) (1,741,544)
Issuance of common stock.......... 382,124,438 38,213 -- -- 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.......... 385,745,936 $38,575 $ 338,752 $(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. Repair and maintenance costs are
expensed as incurred.

REVENUE RECOGNITION

Network services revenue is recognized in the month in which the service is
provided. All expenses related to services provided are recognized as incurred.

NETWORK OPERATIONS

Network operations includes all costs associated with service delivery, ARC
network management, and customer support.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

Convertible redeemable 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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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).

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>

F-11
<PAGE> 78
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 backbone. 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 backbone 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 backbone connectivity, it may be obligated to pay
underutilization charges.

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

F-12
<PAGE> 79
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

-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 3,000,000
shares of RCH (see Note 1).

In early 1997, after the formation of RCH and the merger with DPI Tech and
DPI, RCH sold 621,498 shares at par, $.01, 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 55,000,000 shares from
10,000,000 shares and reducing the par value to no par from $.01.

In November 1998, ARC Corporation, the successor to RCH, authorized the
issuance of up to 1,000,001,000 shares of capital stock, par value $.0001 per
share, of which 1,000,000,000 shares were designated as common stock and 1,000
shares were designated as
F-13
<PAGE> 80
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Series A convertible redeemable preferred stock. 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 52,436,790 shares of ARC
Corporation common stock, which represented the 3,000,000 shares issued in the
DPI Tech and DPI mergers, the 621,498 shares issued to executives and various
other related parties during 1997, and 48,815,292 shares to be issued to
management, current and former employees, and non-employee stockholders for
$.0001 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 199,046,347 shares of common stock for $.0001 per
share, which management believes represented the fair value of the shares.
Subject to a subscription agreement, 13,911,992 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
109,366,125 shares of common stock for $.0001 per share. In accordance with the
subscription agreement described above, 24,896,674 shares of common stock were
issued to RCH for distribution to management, current and former employees, and
non-employee stockholders for $.0001 per share, and an additional 5,809,411
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 52,436,790 shares exchanged
for the RCH common stock to be issued to management, current and former
employees, and non-employee stockholders, and the 199,046,347 shares issued to a
group of investors in November 1998, the aggregate common shares issued by the
Company during 1998 totaled 385,745,936. Of the 385,745,936 shares issued during
1998, 73,711,966 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
19,721,403 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.

F-14
<PAGE> 81
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. Unvested shares vest over four years in equal monthly installments
commencing upon their issuance. The vesting schedule may be accelerated upon the
occurrence of certain extraordinary events. 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 72,000 shares of 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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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 85,305,577 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 74,368,965 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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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
has engaged Rosenberg & Liebentritt, P.C. for certain legal services. Rosenberg
& Liebentritt, P.C. is a captive law firm that provides legal services 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

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 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.

F-17
<PAGE> 84

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, 1,000,000,000 shares
authorized, 401,814,487 shares issued and
outstanding............................................ 40,181
Additional paid-in capital................................ (2,961,248)
Accumulated deficit....................................... (30,921,263)
------------
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-18
<PAGE> 85

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
Depreciation and amortization............................. 45,172 504,292
----------- ------------
Total operating expenses.......................... 2,702,030 9,555,501
----------- ------------
OPERATING INCOME (LOSS)..................................... (2,679,705) (9,154,035)
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) (9,200,675)
----------- ------------
PROVISION FOR INCOME TAXES.................................. -- --
----------- ------------
NET INCOME (LOSS)........................................... (2,822,638) (9,200,675)
ACCRUED DIVIDENDS ON PREFERRED STOCK........................ -- (1,650,000)
----------- ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK................ $(2,822,638) $(10,850,675)
=========== ============
NET INCOME (LOSS) PER COMMON SHARE.......................... $ (.78) $ (.03)
=========== ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 3,621,498 390,776,383
=========== ============
</TABLE>

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

F-19
<PAGE> 86

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
Depreciation and amortization............................. 65,741 889,650
------------ ------------
Total operating expenses.......................... 4,204,533 15,322,593
------------ ------------
OPERATING INCOME (LOSS)..................................... (4,177,541) (14,775,130)
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) (14,406,690)
------------ ------------
PROVISION FOR INCOME TAXES.................................. -- --
------------ ------------
NET INCOME (LOSS)........................................... (4,381,891) (14,406,690)
ACCRUED DIVIDENDS ON PREFERRED STOCK........................ -- (3,300,000)
------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK................ $ (4,381,891) $(17,706,690)
============ ============
NET INCOME (LOSS) PER COMMON SHARE.......................... $ (1.21) $ (.05)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 3,621,498 388,471,017
============ ============
</TABLE>

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

F-20
<PAGE> 87

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) $(14,406,690)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... 65,741 889,650
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-21
<PAGE> 88

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." 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 5,211,632 shares of common stock at $.0001 per share
were outstanding at June 30, 1999. In management's opinion, the exercise price
was equal to the fair value of the common stock at the date of grant. These
securities were not considered in a

F-22
<PAGE> 89
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

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

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-23
<PAGE> 90
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-24
<PAGE> 91
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:

Effective June 1, 1999, the Company adopted the 1999 Stock Option and
Equity Incentive Plan (the "Plan") under which 40,546,734 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." For the six month period ended June 30, 1999, the Company
granted approximately 5,212,000 stock options to employees. Each of the options
granted has an exercise price of $.0001 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, 14,187,453 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 $.0001 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 1,881,098 shares of common stock to
Advest at $.0001 per share as settlement of certain rights held by Advest and
for consulting and investment banking services.

F-25
<PAGE> 92
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 $.0224 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. Accordingly, the Company has
not recorded compensation expense or deferred compensation for option grants or
issuances of restricted stock prior to June 22, 1999 as management believes such
grants and issuances were at fair value.

On July 27, 1999 the Company granted approximately 1,100,000 stock options
to employees. Each of the options granted has an exercise price of $.0224 per
share.

The Company is in the process of filing for an initial public offering of
its securities. Depending on the ultimate valuation of the Company determined by
this offering and business activities and transactions which have occurred or
may occur prior to the completion of the offering, the Company may be required
to record compensation expense and/or 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.

Common and Preferred Stock

In August 1999, we issued shares of Series B Preferred Stock and shares of
common stock to a group of financial sponsors, including GS Capital Partners
III, L.P., an affiliate of Goldman, Sachs & Co.

Also in August 1999, we issued shares of Series B Preferred Stock, shares
of common stock and warrants to purchase additional shares of our common stock
to real estate partners and their affiliates, including Whitehall Street Real
Estate Limited Partnership XI. The warrants were issued as part of the
compensation for the right to install and operate our fiber-optic networks
inside buildings owned or managed by these partners. The warrants are
exercisable upon the occurrence of certain events, as defined in the warrant
acquisition agreement.

F-26
<PAGE> 93

UNDERWRITING

ARC and the underwriters for the U.S. offering (The "U.S. Underwriters")
named below have entered into an underwriting agreement with respect to the
shares being offered in the United States. Subject to certain conditions, each
underwriter has severally agreed to purchase the number of shares indicated in
the following table , and are the representatives
of the underwriters.

<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
[ ].....................................................
[ ].....................................................
[ ].....................................................
Total.............................................
==========
</TABLE>

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

If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from ARC to cover such sales. They may exercise this option for
30 days. If any shares are purchased pursuant to this option, the 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 underwriters by ARC. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.

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

Shares sold by the underwriters to the public will initially be offered
within the range of 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.

ARC has entered into an underwriting agreement with the underwriters for
the sale of 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. , and are
representatives of the underwriters for the international offering outside the
United States (the "International Underwriters"). ARC has granted the
International Underwriters a similar option to purchase up to an aggregate of an
additional 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.

ARC, ARC's executive officers and directors, certain of ARC's stockholders,
and certain of ARC's 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

U-1
<PAGE> 94

not apply to any existing employee benefit plans. The lock-up agreements by
persons other than ARC cover an aggregate of approximately shares. 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 ARC 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 ARC's historical performance, estimates of the business
potential and ARC's earnings prospects, an assessment of ARC'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 offering. 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 offering is 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.

ARC estimates that its share of the total expenses of the offerings,
excluding underwriting discounts and commissions, will be approximately
$ .

ARC 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.

In August 1999, we issued shares of series B preferred stock and shares
of common stock to a group of financial sponsors, including GS Capital Partners
III, L.P., an affiliate of Goldman, Sachs & Co. We received $ million in net
proceeds from this financing transaction.

Also in August 1999, we issued shares of series B preferred stock,
shares of common stock and warrants to purchase additional shares of our
common stock to real estate partners and their affiliates, including
Whitehall Street Real Estate Limited Partnership XI, an affiliate of Goldman,
Sachs & Co. We received $ million in net proceeds from the sale of the
preferred and common stock to these partners. The warrants were issued as a fee
to gain the right to install and operate our fiber-optic networks inside
buildings owned or managed by these partners.

U-2
<PAGE> 95

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

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........... 18
Use of Proceeds...................... 19
Dividend Policy...................... 19
Corporate Information................ 19
Capitalization....................... 20
Dilution............................. 21
Selected Consolidated Financial and
Other Data......................... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 24
Business............................. 33
Management........................... 46
Summary Compensation Table........... 50
Certain Transactions................. 53
Principal Stockholders............... 55
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
</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 a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.

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

ALLIED RISER
COMMUNICATIONS
CORPORATION

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

[LOGO]

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

Representatives of the Underwriters

- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 96

SUBJECT TO COMPLETION. DATED , 1999.

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
shares in an international offering outside the United States. In
addition, shares are being offered in United States offering. All of
the shares of common stock are being sold by ARC.

Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price per
share will be between $ and $ . 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.
---------------------
THIS PROSPECTUS IS INTENDED FOR USE ONLY IN CONNECTION WITH OFFERS AND
SALES OF THESE SECURITIES OUTSIDE THE UNITED STATES AND IS NOT TO BE SENT OR
GIVEN TO ANY PERSON WITHIN THE UNITED STATES. THESE SECURITIES ARE NOT BEING
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933 FOR THE PURPOSE OF SALES
OUTSIDE THE UNITED STATES.
---------------------

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

To the extent that the underwriters sell more than shares of
common stock, the underwriters have the option to purchase up to an additional
shares from ARC at the initial public offering price less the
underwriting discount.
---------------------
The underwriters expect to deliver the shares in New York, New York on
, 1999.

[ ]
[ ]
[ ]
---------------------
Prospectus dated , 1999.
<PAGE> 97

UNDERWRITING

ARC and the underwriters for the international offering (the "International
underwriters") 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. ,
, and are the representatives of the International
underwriters.

<TABLE>
<CAPTION>
International Underwriters Number of Shares
-------------------------- ----------------
<S> <C>
[ ] .........................................
[ ] .........................................
[ ] .........................................
-----------
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 shares from ARC 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 ARC. Such
amounts are shown assuming both no exercise and full exercise of the
International underwriters' option to purchase additional shares.

<TABLE>
<CAPTION>
Paid by ARC 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.

ARC has entered into an underwriting agreement with the underwriters for
the sale of 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. , and are representatives of
the underwriters for the offering in the United States (the "U.S.
underwriters"). ARC has granted the International underwriters a similar option
to purchase up to an aggregate of an additional shares.

U-1
<PAGE> 98

not apply to any existing employee benefit plans. The lock-up agreements by
persons other than ARC cover an aggregate of approximately shares. See
"Shares available for future sale" for a discussion of certain transfer
restrictions.

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.

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

ARC estimates that its share of the total expenses of the offerings,
excluding underwriting discounts and commissions, will be approximately
$ .

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

U-2
<PAGE> 99

In August 1999, ARC issued shares of series B preferred stock and
shares of common stock to a group of financial sponsors, including GS
Capital Partners III, L.P., an affiliate of Goldman, Sachs & Co. ARC received
$ million in net proceeds from this financing transaction.

Also in August 1999, ARC issued shares of series B preferred stock,
shares of common stock and warrants to purchase additional shares of ARC's
common stock to real estate partners and their affiliates, including
Whitehall Street Real Estate Limited Partnership XI, an affiliate of Goldman,
Sachs & Co. ARC received $ million in net proceeds from the sale of the
preferred and common stock to these partners. The warrants were issued as a fee
to gain the right to install and operate our fiber-optic networks inside
buildings owned or managed by these partners.

U-3
<PAGE> 100

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 ARC. 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............. $
National Association of Securities Dealers, Inc. fee Nasdaq
listing fee............................................... *
Accounting fees and expenses................................ *
Legal fees and expenses..................................... *
Director and officer insurance expenses..................... *
Printing and engraving...................................... *
Transfer agent fees and expenses............................ *
Miscellaneous expenses...................................... *
-----
Total............................................. $ *
=====
</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 ARC) by reason of the fact that the person is or
was a director, officer, agent or employee of ARC 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 ARC, 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 ARC 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 ARC, 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> 101

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 ARC 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 ARC'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, ARC 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, ARC issued 3,000,000 shares in exchange for
75,000 shares of DPI Tech and 151,266 shares of DPI, two affiliated entities,
which represented all of the issued and outstanding shares of both entities.

(2) In early 1997, ARC sold 621,498 shares at par, $.01, to executives and
various other related parties.

(3) On November 23, 1998, ARC consummated a private placement pursuant to
which ARC issued to a group of investors 199,046,347 shares of common stock for
$.0001 per share.

(4) On December 30, 1998, ARC issued to a second group of investors
109,366,125 shares of common stock for $.0001 per share.

(5) On November 23, 1998, ARC consummated a private placement pursuant to
which ARC 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) From December 16, 1996 to June 30, 1999, ARC issued an aggregate of
89,780,517 shares of common stock to employees, consultants and directors in
connection with services provided to ARC. In connection with subscription
agreements entered into on November 23, 1998 shares were reserved for subsequent
issuing to management and new employees. As of June 30, 1999, 1,652,852 shares
were still reserved.

II-2
<PAGE> 102

(7) From June 1, 1999 to June 30, 1999, ARC issued stock options to
purchase an aggregate of 5,211,632 shares of common stock to employees, with an
exercise price of $0.0001 per share pursuant to ARC's 1999 Stock Option and
Equity Incentive Plan.

(8) In August 1999, ARC issued shares of Series B Preferred Stock
shares of common stock to a group of private investors and real estate
owners, for an aggregate consideration of $ million.

(9) In August, 1999, ARC issued warrants to purchase shares of
ARC common stock at exercise prices of $ to a group of real estate
owners.

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:

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1* -- Underwriting Agreement
2.1* -- Plan of Complete Liquidation and Reorganization
3.1* -- Certificate of Incorporation of ARC, as amended
3.2* -- By-laws of ARC, as amended
4.1* -- Specimen certificate for ARC's common stock
5.1* -- Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
10.1* -- Investment Agreement, dated as of November 23, 1998, by
and among ARC and the investors listed on the signature
pages thereof.
10.2* -- Stockholders' Agreement, dated as of November 5, 1998,
among the stockholders listed on the signature pages
thereof.
10.3* -- ARC 1999 Stock Option Plan, as amended
10.4* -- Form of Employment Agreement
10.5* -- Form of Lock-Up Agreement
10.6* -- Credit Facility, dated March 25, 1999, by and among ARC
and The Chase Manhattan Bank, as Administrative Agent,
and Chase Securities Inc., as Lead Arranger and Book
Manager.
10.7* -- Lease Facility, dated May 13, 1998, by and between ARC
and Cisco Systems Capital Corporation, as amended.
10.8* -- Subscription Agreement, dated as of November 13, 1998, by
and among ARC and the investors listed on the signature
pages thereof.
10.9* -- Investment Agreement, dated as of July , 1999, by and
among ARC and the investors listed on the signature pages
thereof.
21.1* -- Subsidiaries of ARC
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
</TABLE>

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

* To be filed by amendment.

II-3
<PAGE> 103

(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 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-4
<PAGE> 104

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 August 19, 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 and August 19, 1999
- ----------------------------------------------------- director (principal
David H. Crawford executive officer)

/s/ TODD C. DOSHIER Chief financial officer August 19, 1999
- ----------------------------------------------------- (principal financial and
Todd C. Doshier accounting officer)

/s/ JOHN M. TODD Chief operating officer, August 19, 1999
- ----------------------------------------------------- president and director
John M. Todd

/s/ JOHN H. DAVIS Chief technology officer August 19, 1999
- ----------------------------------------------------- and director
John H. Davis

/s/ STEPHEN W. SCHOVEE Director and chairman of August 19, 1999
- ----------------------------------------------------- the board
Stephen W. Schovee

/s/ ROD F. DAMMEYER Director August 19, 1999
- -----------------------------------------------------
Rod F. Dammeyer
</TABLE>

II-5
<PAGE> 105

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM J. ELSNER Director August 19, 1999
- -----------------------------------------------------
William J. Elsner

/s/ R. DAVID SPRENG Director August 19, 1999
- -----------------------------------------------------
R. David Spreng

/s/ BLAIR P. WHITAKER Director August 19, 1999
- -----------------------------------------------------
Blair P. Whitaker

/s/ WILLIAM T. WHITE Director August 19, 1999
- -----------------------------------------------------
William T. White
</TABLE>

II-6
<PAGE> 106

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1* -- Underwriting Agreement
2.1* -- [Plan of Complete Liquidation and Reorganization]
3.1* -- Certificate of Incorporation of ARC, as amended
3.2* -- By-laws of ARC, as amended
4.1* -- Specimen certificate for ARC's common stock
5.1* -- Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
10.1* -- Investment Agreement, dated as of November 23, 1998, by
and among ARC and the investors listed on the signature
pages thereof.
10.2* -- Stockholders' Agreement, dated as of November 5, 1998,
among the stockholders listed on the signature pages
thereof.
10.3* -- ARC 1999 Stock Option Plan, as amended
10.4* -- Form of Employment Agreement
10.5* -- Form of Lock-Up Agreement
10.6* -- Credit Facility, dated March 25, 1999, by and among ARC
and The Chase Manhattan Bank, as Administrative Agent,
and Chase Securities Inc., as Lead Arranger and Book
Manager.
10.7* -- Lease Facility, dated May 13, 1998, by and between ARC
and Cisco Systems Capital Corporation, as amended.
10.8* -- Subscription Agreement, dated as of November 13, 1998, by
and among ARC and the investors listed on the signature
pages thereof.
10.9* -- Investment Agreement, dated as of July , 1999, by and
among ARC and the investors listed on the signature pages
thereof.
21.1* -- Subsidiaries of ARC
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
</TABLE>

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

* To be filed by amendment.

<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 the matter discussed in Note 12
as to which the date is April 29, 1999), 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 Registration Statement on Form S-1.

/s/ ARTHUR ANDERSEN LLP

Dallas, Texas
August 19, 1999