CHOICE ONE COMMUNICATIONS INC, PRE 14C, 2000-06-26

CHOICE ONE COMMUNICATIONS INC
PRE 14C, 2000-06-26
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE>

PRELIMINARY INFORMATION STATEMENT

SCHEDULE 14C INFORMATION

Information Statement Pursuant to Section 14(c) of the Securities Exchange Act
of 1934

Check the appropriate box:

[X]Preliminary Information Statement

[_]Confidential, For Use of the Commission Only (as permitted by Rule 14c-
5(d)(2))

[_]Definitive Information Statement

CHOICE ONE COMMUNICATIONS INC.
(Name of Registrant as Specified in Its Charter)

Copies to:
John C. Partigan
William W. Barker
NIXON PEABODY LLP
401 9th Street, N.W., Suite 900
Washington, D.C. 20004-2128
Telephone: (202) 585-8000
Facsimile: (202) 585-8080
www.nixonpeabody.com

Payment of Filing Fee (Check the appropriate box):

[_]No fee required.

[_]Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.

1) Title of each class of securities to which transaction applies: Common
Stock, $0.01 par value

2) Aggregate number of securities to which transaction applies: 7,000,000

3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):

4) Proposed maximum aggregate value of the transaction: [e.g., cash and
stock of $563,000,000]

5) Total fee paid: A filing fee of $64,630 has been paid pursuant to Rule
0-11 of the Exchange Act and Rule 457(f) of the Securities Act. The
filing fee is based on a net transaction value pursuant to Rule
457(f)(1) and (3) of $185,010,000 of Choice One common stock having a
market value of $26.43 per share as of June 8, 2000 as quoted on Nasdaq,
plus net cash to be paid of $59,800,000, all multiplied by the
applicable fee (.000264.)

[X]Fee paid previously with preliminary materials

[_]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.

1) Amount Previously Paid:

2) Form, Schedule or Registration Statement No.:

3) Filing Party:

4) Date Filed:
<PAGE>

[LOGO OF CHOICE ONE]

CHOICE ONE COMMUNICATIONS INC.
100 Chestnut Street
Suite 600
Rochester, New York 14604

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

NOTICE OF ACTION BY WRITTEN CONSENT

To the Stockholders of Choice One:

The Choice One board of directors has approved an agreement and plan of
merger whereby US Xchange, Inc. will merge with and into Barter Acquisition
Corporation, a wholly-owned subsidiary of Choice One. Pursuant to Nasdaq Rule
4310 and Delaware state law, we have obtained the written consent of holders of
a majority of our outstanding common stock in order to issue 20% or more of our
outstanding common stock in the merger. We have also obtained the requisite
written consent of holders of a majority of our outstanding common stock in
order to amend our 1998 employee stock option plan to increase the number of
shares of common stock available for grants under the plan from 1,063,791 to
6,000,000 shares, to permit the Choice One board of directors to grant
restricted stock and non-qualified stock options that have an exercise price
that is at or below the fair market value of our common stock on the date of
grant and to make certain other changes to the plan.

Your consent is not required and is not being solicited in connection with
these actions. Pursuant to Section 228 of the Delaware General Corporation Law,
we are providing you with notice of approval of action by less than unanimous
consent of Choice One stockholders. The enclosed information statement is being
provided to you for your information to comply with the requirements of the
Securities and Exchange Act of 1934.

These actions will be effective 20 days after mailing this notice and
enclosed information statement to stockholders.

By Order of the Board of Directors

Steve M. Dubnik
Chairman and Chief Executive Officer

Rochester, New York
June 28, 2000
<PAGE>

SUMMARY TERM SHEET

On May 14, 2000, Choice One entered into an agreement and plan of merger
with US Xchange, Inc., a Delaware corporation, and Ronald H. VanderPol, the
sole stockholder of US Xchange. The material features of the merger are:

. US Xchange will merge with and into Barter Acquisition Corporation, a
newly formed wholly owned subsidiary of Choice One.

. As a result of the merger, the separate corporate existence of US Xchange
will cease and Barter Acquisition will continue as the surviving
corporation.

. Choice One will convert each share of US Xchange common stock into the
right to receive cash and Choice One common stock. As determined by a
formula in the merger agreement (described in detail below), Choice One
estimates that it will issue approximately 7.0 million shares of Choice
One common stock and pay approximately $311 million in net cash pursuant
to the merger, subject to adjustment. This cash payment includes
repayment of approximately $298 million in US Xchange debt, together with
associated premiums, to be paid at closing of the merger.

. Choice One also agreed to provide registration rights covering the Choice
One common stock issued in the merger.

. Consummation of the merger is subject to the satisfaction of specified
conditions, including (i) obtaining financing on satisfactory terms, (ii)
the redemption of at least 80% of the outstanding principal amount of the
US Xchange, L.L.C. 15% Senior Notes due July 1, 2008, (iii) modification
of specified agreements relating to the operations of US Xchange, (iv)
compliance with all applicable provisions of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 and expiration of all applicable
waiting periods, (v) receipt of specified regulatory approvals, and (vi)
other customary conditions. Both Choice One and US Xchange may terminate
the merger agreement if the merger has not been consummated by November
14, 2000.

. Assuming the satisfaction or waiver of such conditions, the merger will
be completed on or about July 31, 2000.
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 2
Background of the Merger................................................. 7
Action by Less Than Unanimous Consent to Issue 20% or More of Choice One
Common Stock Pursuant to Nasdaq Rule 4310............................... 9
General................................................................ 9
The Merger Agreement................................................... 9
Required Regulatory Approvals.......................................... 11
Interests of Certain Persons In The Merger............................. 11
Unaudited Pro Forma Condensed Combined Financial Information............. 13
Information About US Xchange............................................. 20
Information About Choice One............................................. 32
Voting Securities of Choice One and Principal Holders Thereof............ 47
Market Price Information................................................. 49
Amendment to 1998 Employee Stock Option Plan............................. 50
Index to Financial Statements ........................................... F-1

APPENDICES

APPENDIX A Opinions of Financial Advisor................................. A-1
</TABLE>

This information statement contains "forward-looking statements" for
purposes of Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements may involve risks and uncertainties that may
cause actual results of Choice One and US Xchange to be materially different
from future results or performance expressed or implied by such statements.
Forward-looking statements may be identified by the use of words such as
"expect," "anticipate," "project," "intend," "believe" and "plan." Factors that
could contribute to such differences are discussed under "Information About
Choice One" and "Information About US Xchange."

i
<PAGE>

WE ARE NOT ASKING FOR A PROXY
AND YOU ARE REQUESTED NOT TO
SEND US A PROXY

This information statement is furnished to common stockholders of Choice One
Communications Inc., a Delaware corporation, at the direction of the Choice One
board of directors. On May 14, 2000, Choice One entered into an agreement and
plan of merger with US Xchange, Inc., a Delaware corporation, and
Ronald H. VanderPol, the sole stockholder of US Xchange. Pursuant to the merger
agreement, US Xchange will merge with and into Barter Acquisition Corporation,
a newly formed wholly owned subsidiary of Choice One. As a result of the
merger, the separate corporate existence of US Xchange will cease and Barter
Acquisition will continue as the surviving corporation.

Choice One will not hold a meeting of the stockholders in connection with
the merger or the amendment to its 1998 employee stock option plan.
Stockholders of record as of June 12, 2000 will receive this information
statement describing the action taken by written consent. As of the record
date, the following investors accounted for approximately 55.5% of the
outstanding common stock of Choice One: Steve M. Dubnik, Morgan Stanley Capital
Partners III, L.P. (and related equity funds), Morgan Stanley Dean Witter
Capital Partners IV, L.P. (and related private equity funds), Fleet Equity
Partners IV, Fleet Venture Resources Inc., Chisolm Partners, III, L.P., and
Waller-Sutton Media Partners, L.P. Morgan Stanley and investors affiliated with
it are referred to in this information statement as "Morgan Stanley and related
entities."

Completion of the merger is conditioned upon the satisfaction or waiver of
specified conditions (described in detail below). Assuming the satisfaction or
waiver of such conditions, the merger is expected to be completed on or about
July 31, 2000.

Pursuant to the Delaware General Corporation Law, we have obtained the
requisite written consents from principal stockholders beneficially owning more
than 50% of outstanding Choice One common stock. Other than this written
consent, which has already been given, no further action by the Choice One
stockholders is necessary to complete the merger and no such approval will be
sought.

This information statement is being mailed on June 28, 2000 to record
holders of Choice One common stock. This information statement constitutes the
notice of corporate action without meeting required by Section 228(d) of the
Delaware General Corporate Law. These actions will be effective 20 days after
mailing this notice and enclosed information statement to stockholders.

This transaction has not been approved or disapproved by the Securities and
Exchange Commission nor has the Commission passed upon the fairness or merits
of such transaction nor upon the accuracy or adequacy of the information
contained in this information statement. Any representation to the contrary is
unlawful.

The date of this information statement is June 28, 2000.

1
<PAGE>

SUMMARY

This is a summary of the merger transaction and other information in this
information statement. While complete in material respects, this summary is
qualified by reference to the detailed information appearing elsewhere in this
information statement and appendixes. Please carefully read all of these
materials.

The Acquiror-Choice One Communications Inc.

The Acquired Company-US Xchange, Inc.

US Xchange is a holding company which has no assets or independent business
operations. Through its subsidiaries, US Xchange is a full service, facilities-
based competitive telephone company. US Xchange provides bundled local and long
distance telephone, data and Internet communications services over its own high
speed digital networks and switching systems. US Xchange offers customers
telecommunications services primarily in second and third tier markets in the
midwestern United States. The principal executive offices of US Xchange are
located at 44 Grandville Avenue SW, Suite 400, Grand Rapids, Michigan 49503.
Its telephone number is (616) 493-7000.

Action by Less than Unanimous Consent to Issue 20% or More of Choice One Common
Stock Pursuant to Nasdaq Rule 4310 (Page 9)

Nasdaq Stock Market Rule 4310(25)(G) requires Nasdaq-listed companies to
obtain stockholder approval before issuing 20% or more of their common stock or
securities convertible into common stock in a transaction other than a public
offering. Under Nasdaq Rule 4310, such a proposed issuance must be approved by
a majority of votes cast at a meeting of shareholders (or by a majority of
shares outstanding in the case of a less than unanimous consent of
shareholders). Pursuant to Delaware state law, the Choice One board of
directors obtained the consent of a majority of Choice One common stock issued
and outstanding. Consequently, the issuance of Choice One common stock in the
merger has been approved and Choice One is not soliciting stockholder approval
on this issue.

The Merger (Page 7)

Pursuant to Delaware state law, the Choice One board of directors has
approved the merger of US Xchange with and into Barter Acquisition, a wholly-
owned subsidiary of Choice One, in exchange for up to 7.0 million shares of
Choice One common stock and $311 million of net cash ($298 million of which
will be used to repay indebtedness of US Xchange, together with associated
premiums). The amount of cash and the number of shares of Choice One common
stock into which each share of US Xchange common stock will be converted will
be determined immediately before the merger according to the formula specified
in the merger agreement. Choice One also granted registration rights covering
Choice One common stock issued in the merger.

US Xchange operates in the same industry segment as Choice One but in
different geographical regions of the United States. Choice One operates in the
Northeast. US Xchange operates in the Midwest. The Choice One board of
directors determined that acquisition of US Xchange would be a cost-effective
means to expand its operations into the Midwest.

2
<PAGE>

The merger will be accounted for as a purchase. This means that after the
merger the combined results of operations of Choice One will be included in the
consolidated results of operations of US Xchange. For purposes of preparing
consolidated financial statements, the purchase price, including the fees and
other costs of Choice One associated with the merger at the date of completion
will be allocated to the assets and liabilities of US Xchange based on their
fair market values, with the excess allocated to goodwill to be amortized over
the estimated economic life of the assets.

Regulatory approval is being sought under the Hart-Scott-Rodino Act. For a
complete description of the merger, conditions and effects, see page 10.

Amendment to the Choice One 1998 Employee Stock Option Plan

Nasdaq Rule 4310(25)(G) requires Nasdaq-listed companies to obtain
stockholder approval when a stock option or purchase plan is established or
other arrangement made pursuant to which stock may be received by officers and
directors. The Choice One board of directors proposes to amend the Choice One
1998 employee stock option plan to increase the number of shares of common
stock available for grants under the plan from 1,063,791 to 6,000,000 shares,
to permit restricted stock grants and non-qualified stock option grants at or
below market value and to make certain other changes to the plan. Under Nasdaq
Rule 4310, such an amendment requires stockholder approval by a majority of
votes cast at a meeting of shareholders (or by a majority of shares outstanding
in the case of a less than unanimous consent of shareholders). Pursuant to
Delaware state law, the Choice One board of directors obtained the consent to
the amendment of the 1998 plan by a majority of Choice One common stock
outstanding. Consequently, the proposed amendment to the 1998 plan has been
approved and Choice One is not soliciting stockholder approval on this issue.

Record Date; Voting Rights

Choice One stockholders are not being asked to vote on any of these
proposals. On June 12, 2000, there were 31,026,357 shares of Choice One common
stock issued and outstanding held by approximately 14,100 beneficial owners.
Choice One holders of our common stock of record at the close of business on
June 12, 2000 are entitled to receive an information statement describing these
corporate actions without a formal meeting approved by consent of less than all
stockholders.

3
<PAGE>

PRO FORMA SELECTED AND HISTORICAL CONSOLIDATED
FINANCIAL AND OPERATING DATA

Selected Historical Consolidated Financial Data of Choice One

The following table sets forth our selected historical consolidated
financial data for the periods indicated. The selected historical consolidated
financial data set forth below covers the period from inception through fiscal
year ended December 31, 1998 and 1999, and the three months ended March 31,
2000. This information was derived from both the audited and unaudited
consolidated financial statements of Choice One contained elsewhere in this
information statement. Read this information in conjunction with related notes
included elsewhere in this information statement.

The unaudited condensed combined pro forma statements of operations for the
year ended December 31, 1999 and the three months ended March 31, 2000 reflect
the combination of the statement of operations of Choice One for the year ended
December 31, 1999 and for the quarter ended March 31, 2000, the statement of
operations of Atlantic Connections for the ten months ended October 31, 1999,
and the statement of operations of US Xchange for the year ended December 31,
1999 and for the quarter ended March 31, 2000, as adjusted for the acquisitions
as if the acquisitions were consummated on January 1, 1999. The unaudited pro
forma condensed combined balance sheet is presented as if the proposed
acquisition of US Xchange was consummated on March 31, 2000. The unaudited pro
forma statements do not give effect to the up to $2.1 million additional
purchase price payable in cash or, at our option, our common stock, in
connection with the acquisition of Atlantic Connections if specified
performance criteria are met in the 12 months following that acquisition. The
results of our operations for the periods indicated are not necessarily
indicative of the results of operations in the future.

Included in other financial data are EBITDA amounts, as adjusted. EBITDA, as
adjusted, represents earnings before interest, income taxes, depreciation and
amortization, non-cash deferred compensation and non-cash management allocation
charges. EBITDA, as adjusted, reflects non-cash deferred compensation and non-
cash management allocation charges of $.376 million in 1998, $2.0 million for
the year ended December 31, 1999 and $66.2 million for the three months ended
March 31, 2000. EBITDA is one financial measure used by management and some
investors as an indicator of a company's historical ability to service debt.
Management believes that an increase in EBITDA is an indicator of improved
ability to service existing debt, to sustain potential future increases in debt
and to satisfy capital requirements. However, EBITDA is not intended to
represent cash flows for the period, nor has it been presented as an
alternative to either operating income, as determined by generally accepted
accounting principles, nor is it an indicator of operating performance or cash
flows from operating, investing and financing activities, as determined by
generally accepted accounting principles, and is thus susceptible to varying
calculations. EBITDA as presented may not be comparable to other similarly
titled measures of other companies.

4
<PAGE>

Read the financial data below in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," Choice One's
audited financial statements with related notes and its unaudited pro forma
financial data with related notes contained elsewhere in this information
statement.

<TABLE>
<CAPTION>
Period from
Inception
(June 2, 1998) Year Ended Three Months Ended
through December 31, 1999 March 31, 2000
December 31, 1998 --------------------- -----------------------
Actual Actual Pro forma Actual Pro forma
----------------- -------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ -- $ 4,518 $ 38,088 $ 6,790 $ 16,511
Operating expenses
Network costs......... -- 6,979 50,146 6,990 17,962
Selling general and
administrative,
including noncash
deferred compensation
of $1,749, $2,048 and
$376 in 2000, 1999
and 1998,
respectively, and
non-cash management
ownership allocation
charge of $64,529, $0
and $0 in 2000, 1999
and 1998,
respectively......... 5,060 22,978 65,147 77,427 85,315
Depreciation and
amortization......... 36 5,153 62,048 2,992 18,035
-------- -------- --------- -------- ---------
Total operating
expenses............ 5,096 35,110 177,341 87,409 121,312
-------- -------- --------- -------- ---------
Loss from
operations.......... (5,096) (30,592) (139,253) (80,619) (104,801)
Interest income
(expense), net......... 22 (1,883) (18,796) (1,038) (5,081)
-------- -------- --------- -------- ---------
Net loss................ $ (5,074) $(32,475) $(158,049) $(81,657) $(109,882)
======== ======== ========= ======== =========
Accretion of preferred
stock.................. -- -- 6,982 -- 2,165
Accrued preferred stock
dividends.............. -- -- 29,505 -- 8,033
Net loss applicable to
common stock........... $ (5,074) $(32,475) $(194,536) $(81,657) $(120,080)
-------- -------- --------- -------- ---------
Net loss per share,
basic and diluted...... $ (0.28) $ (1.47) $ (6.70) $ (3.10) $ (3.60)
======== ======== ========= ======== =========

Balance Sheet Data:
Cash and cash
equivalents............ $ 1,491 $ 3,615 $ 65,486 $ 119,160
Working capital
(deficit).............. (9,707) (9,035) 53,919 92,830
Property and equipment,
net.................... 21,110 72,427 90,327 227,298
Total assets............ 24,472 94,512 182,380 784,348
Long term debt.......... -- 51,500 -- 150,000
Stockholders' equity.... 13,130 26,724 162,154 584,154

Other Financial Data:
Net cash provided by
(used in) operating
activities............. $ 6,587 $(24,319) $(14,781)
Net cash used in
investing activities... (21,146) (56,077) (22,274)
Net cash provided by
financing activities... 16,050 82,520 98,936
Capital expenditures.... 21,146 56,077 20,412
EBITDA, as adjusted..... (4,684) (23,391) (11,349)

Operating Data:
Lines sold.............. -- 21,683 26,646 43,234 104,081
Lines installed:
Voice lines installed... -- 19,890 70,589 32,411 90,034
Data lines installed.... -- 206 2,506 699 2,999
Total lines installed... -- 20,096 73,095 33,110 93,033
Markets in operation.... -- 9 18 12 21
Number of voice switches
deployed............... -- 8 17 8 17
Number of data switches
deployed............... -- 10 10 17 17
Voice collocations
installed.............. -- 141 189 178 226
</TABLE>

5
<PAGE>

Selected Historical Consolidated Financial Data of US Xchange

The following table sets forth the selected historical consolidated
financial data of US Xchange, L.L.C., which comprises substantially all of the
business and operations of US Xchange, for the periods indicated. The selected
historical consolidated financial data set forth below covers the fiscal years
ended December 31, 1997, 1998 and 1999, and the three months ended March 31,
2000. This information was derived from both the audited and unaudited
consolidated financial statements of US Xchange contained elsewhere in this
information statement, which, for 1999, 1998 and 1997, have been audited by BDO
Seidman, LLP, independent certified public accountants.

Read the financial data below in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," US Xchange's
audited financial statements with related notes and its unaudited pro forma
financial data with related notes contained elsewhere in this information
statement.

<TABLE>
<CAPTION>
December 31, Three months
----------------------------- ended
1997 1998 1999 March 31, 2000
-------- --------- -------- --------------
(in thousands, except per
share data) (unaudited)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues........................ $ 207 $ 7,015 $ 26,430 $ 9,721
Operating expenses:
Cost of communications
services..................... 750 16,338 37,740 10,972
Selling, general and
administrative............... 5,066 28,680 40,554 7,888
Depreciation and
amortization................. 189 3,257 13,191 4,391
-------- --------- -------- ---------
Total operating expenses.... 6,005 48,275 91,485 23,251
Loss from operations........ (5,798) (41,260) (65,055) (13,530)
Interest income (expense), net.. (30) (9,363) (25,592) (8,238)
-------- --------- -------- ---------
Net loss........................ $ (5,828) $ (50,623) $(90,647) $ (21,768)
======== ========= ======== =========

Balance Sheet Data:
Cash and cash equivalents....... $ 101 $ 40,019 $ 89 $ 1,420
Working capital (deficit)....... (5,718) 42,338 (41,399) (33,256)
Networks and equipment, net..... 27,968 100,345 136,106 136,971
Total assets.................... 28,385 234,716 210,100 198,692
Long-term debt.................. 2,189 202,533 216,547 229,267
Stockholders' equity (deficit).. (966) 3,411 (87,237) (109,005)

Other Financial Data:
Net cash used in operating
activities..................... $ (396) $ (29,088) $(82,265) $ (20,624)
Net cash (used in) provided by
investing activities........... (28,168) (158,465) (20,297) 9,528
Net cash provided by financing
activities..................... 28,664 227,471 62,733 12,327
Capital expenditures............ 28,157 75,620 48,907 5,244
EBITDA.......................... (5,608) (38,003) (51,864) (9,139)
</TABLE>

6
<PAGE>

BACKGROUND OF THE MERGER

Background of the Merger

On December 20, 1999, Choice One and US Xchange signed a mutual
confidentiality and nondisclosure agreement but did not commence any
substantive discussions at that time.

On March 2, 2000, Steve M. Dubnik met with Richard Postma to discuss the
strategic fit of the two companies.

On March 8 and March 9, 2000, Choice One and US Xchange began to conduct due
diligence. Steve M. Dubnik, Chairman and Chief Executive Officer of Choice One,
had preliminary discussions with Richard Postma, Chief Executive Officer of US
Xchange, regarding a possible transaction.

On March 30, 2000, the Choice One board of directors held its regularly
scheduled board of directors meeting. The board of directors directed
management to review acquisition opportunities and possible sources of
financing. A special committee of the board was also formed to advise
management with respect to the possible issuance of preferred stock to Morgan
Stanley Dean Witter Capital Partners or its affiliates in connection with
financing a possible transaction with US Xchange.

On April 10, 2000, the board of directors of Choice One reviewed various
financing proposals for the acquisition of US Xchange. The board of directors
voted to direct appropriate officers of Choice One to conduct further due
diligence and negotiate definitive agreements in connection with a proposed
merger based upon the financing alternatives presented.

On April 28, 2000, at a regular meeting of the Choice One board of
directors, the directors discussed the status of a proposal to acquire US
Xchange and various financing alternatives for such an acquisition. The
directors voted to form a new subsidiary to facilitate a proposed acquisition.

On May 5, 2000, the members of a special committee of the Choice One board
of directors reviewed a definitive financing proposal from Morgan Stanley Dean
Witter Capital Partners and its affiliates. The special committee voted to
approve the financing proposal pending a fairness opinion in support of the
proposal. To this end, the Choice One board of directors selected UBS Warburg
LLC and First Union Securities Inc. to act as its independent financial
advisers.

On May 14, 2000, the Choice One board of directors met to approve the
definitive merger agreement with US Xchange and related transactions, including
the proposed preferred stock financing from Morgan Stanley Dean Witter Capital
Partners. UBS Warburg LLC orally delivered its fairness opinions to the Choice
One board of directors at the meeting relating to the fairness, from a
financial point of view, of the merger consideration and the financial terms of
the preferred stock and warrants to be issued to Morgan Stanley Dean Witter
Capital Partners and its affiliates. Copies of the opinions are included in
Appendix A and are incorporated herein by reference. The merger agreement was
signed by appropriate officers on behalf of Choice One, US Xchange and Barter
Acquisition on May 14, 2000.

On May 15, 2000, a current report on Form 8-K was filed by Choice One with
the SEC reporting the signing of the definitive merger agreement.

Reasons for the Merger

In making its determination to approve the merger, the Choice One board of
directors considered the following factors material. This is not an exhaustive
list of all the factors considered by the Choice One board of directors. Each
member of the board of directors may have considered different factors or
assigned different

7
<PAGE>

weights to different factors and the Choice One board of directors evaluated
these factors as a whole and did not quantify or otherwise assign relative
weights to the factors considered. Those factors were:

. Choice One seeks to expand its operations into the Midwestern United
States where US Xchange operates. The Choice One board of directors
considered this factor important because expanding existing sales and
distribution channels is critical to future revenue growth. Choice One
does not currently operate in those regions.

. Choice One would like to add the seasoned sales team of US Xchange
operating in the Midwestern United States to its own sales and marketing
team operating in the Northeast. Acquiring US Xchange would allow it to
do so without incurring the time and expense required to establish a
channel independently. The Choice One board of directors considered this
factor important for the same reasons.

. US Xchange's operations are expected to provide valuable support for
Choice One product rollouts and solutions provided to clients. The board
of directors considered this factor important but it was not as heavily
weighted as the other factors considered.

. Although the Choice One board of directors did not commission a formal
analysis of synergies and did not attempt to quantify synergies, Choice
One expects to realize synergies from the combination of the experienced
management team and broad product offerings, which include local, long
distance, data and web hosting services, with the established Midwest
customer base of US Xchange, extensive sales staff, and experience in the
fiber business. In this case, each merger participant has particular
business operational strengths. The board of directors considered this
factor important because it tends to support the idea that each merger
participant's access to the other's operational strengths will lead to
more business advantages for each side than simply the result of adding
together the revenues generated by each party to the merger or spreading
existing operating expenses over a larger revenue base.

The determination of the Choice One board of directors involved judgment
with respect to, among other things, future economic, competitive and financial
market conditions and future business decisions which may not be realized and
are inherently subject to significant business, economic, competitive and other
uncertainties, all of which are difficult to predict and many of which are
beyond the control of Choice One.

8
<PAGE>

ACTION BY LESS THAN UNANIMOUS CONSENT TO ISSUE 20% OR MORE OF CHOICE
ONE COMMON STOCK PURSUANT TO NASDAQ RULE 4310

General

Nasdaq Stock Market Rule 4310(25)(G) requires Nasdaq-listed companies to
obtain stockholder approval before issuing 20% or more of their common stock or
securities convertible into common stock in a transaction other than a public
offering. Under Nasdaq Rule 4310, such a proposed issuance must be approved by
a majority of votes cast at a meeting of shareholders (or by a majority of
shares outstanding in the case of a less than unanimous consent of
shareholders). Pursuant to Delaware law, the Choice One board of directors
obtained the consent of a majority of Choice One common stock issued and
outstanding. Consequently, the issuance of Choice One common stock in the
merger has been approved and Choice One is not soliciting stockholder approval
on this issue. The following is provided for your information.

The Merger Agreement

The following summary of the material terms of the merger agreement, while
complete in material respects, is nonetheless a summary. This summary is
qualified in its entirety by reference to the full text of the merger
agreement, a copy of which has been filed with the SEC as required by its
rules.

Parties: Choice One, Barter Acquisition, a wholly owned
subsidiary of Choice One ("Acquisition
Subsidiary"), US Xchange and Ronald H. VanderPol,
US Xchange's stockholder.

Transaction Structure: Merger of US Xchange with and into Acquisition
Subsidiary, with the Acquisition Subsidiary being
the surviving corporation.

Consideration: Aggregate consideration of $563,000,000 comprised
of: (i) cash consideration of $339,000,000, less
the principal and interest on the 15% Senior Notes
due July 1, 2008 of US Xchange's subsidiary
("Senior Notes"), the principal on other
indebtedness of US Xchange and costs incurred by US
Xchange in connection with the transactions
contemplated by the merger agreement, and (ii) a
number of shares of Choice One common stock equal
to the quotient of (A) $224,000,000, (i) less the
value of the restricted stock to be granted to
continuing employees not involved in the fiber
business, the principal amount of all loans made by
Choice One to US Xchange to fund operating losses
and interest thereon (including any amounts spent
towards capital expenditures relating to the fiber
business, but excluding any amounts spent towards
any other capital expenditures), any Deficiency (as
defined below), (ii) plus any Surplus (as defined
below), divided by (B) $32.

Stock Consideration Adjustment;
The stock consideration is to be adjusted for any
Post Closing Cash negative difference ("Deficiency") or positive
Consideration Adjustment: difference ("Surplus") between the Net Receivables
Position reflected on the audited balance sheet as
of March 31, 2000 and the pro forma balance sheet
dated as of the closing date. After the closing,
the cash consideration is to be adjusted for any
negative difference or positive difference between
the Net Receivables Position reflected on the pro
forma balance sheet as of the closing date and the
audited balance sheet as of the closing date. "Net
Receivables Position" means the excess of accounts
receivable over all accounts payable plus accrued
expenses (excluding accrued interest) of US Xchange
and its subsidiaries shown on any specified balance
sheet of US Xchange and its subsidiaries.

9
<PAGE>

Choice One Loan: Choice One to loan up to $25,000,000 to US Xchange
to fund operating losses of US Xchange. Such loan
is secured by certain assets of US Xchange and its
subsidiaries and guaranteed by US Xchange's
stockholder.

Fiber Business: Prior to the closing, US Xchange will transfer all
of its fiber business to another entity; provided,
however, such entity will grant to Acquisition
Subsidiary indefeasible rights of use with respect
to 8 fiber strands on each route (except routes
where 8 fiber strands exceed 50% of US Xchange's
capacity, in which case Acquisition Subsidiary will
receive 4 strands).

Representation and Customary representations, warranties and covenants
Warranties; Covenants: of US Xchange and Choice One.

Conditions to Signing: The holders of a majority in aggregate principal
amount of the Senior Notes to agree (i) that the
surviving corporation may redeem the Senior Notes
at a redemption price equal to 109% (8% to be paid
by sellers) of the principal amount, plus accrued
interest, if any, to the closing date and (ii) to
an amendment to the indenture relating to the
Senior Notes, providing for deletion of certain
covenants and other provisions set forth therein.

Conditions to Closing: At least 80% of the outstanding principal amount of
the Senior Notes shall have been acquired by US
Xchange or its subsidiary at a purchase price of
not more than 109% (8% to be paid by sellers) of
the principal amount thereof together with accrued
interest thereon and the holders of the Senior
Notes and the trustee shall have authorized and
approved an amendment to the indenture relating to
the Senior Notes providing for the deletion of
certain covenants and other provisions.

Choice One shall have received the financing
necessary to consummate the transaction
contemplated by the merger agreement substantially
on the terms contemplated by Choice One financing
letters or alternative financing on terms not
materially less favorable to Choice One than those
set forth in Choice One financing letters.

Other customary closing conditions.

Termination: The merger agreement may be terminated by Choice
One if the merger shall not have been consummated
within 90 days from the signing date and Choice One
in its sole discretion elects not to fund any
further operating losses of US Xchange and its
subsidiaries, provided that Choice One may not
terminate the merger agreement if US Xchange's
stockholder agrees to fund operating losses of US
Xchange between such 90th day and the earlier of
the closing date or the termination of the merger
agreement.

Termination date is November 14, 2000.

Other customary termination provisions.

10
<PAGE>

Registration Rights; US Xchange's stockholder will be granted five
Board Representation; demand registration rights (two on Form S-1 or S-2
Transfer Restrictions: and three on Form S-3) and unlimited piggy back
registration rights with respect to the shares of
Choice One common stock that he receives as part of
the stock consideration, subject to standard
cutback provisions and blackout periods.

US Xchange's stockholder will have the right to
nominate one director to the Choice One board of
directors so long as he owns at least 4,500,000
shares of Choice One common stock.

US Xchange's stockholder may not transfer the
shares of Choice One common stock for a period of
180 days from the closing date except to a
permitted transferee.

Indemnification: US Xchange's stockholder to indemnify Choice One
for breach of representations, warranties,
covenants and agreements made by US Xchange or US
Xchange's stockholder, provided that the maximum
amount of indemnifiable damages that may be
recovered from US Xchange's stockholder shall be
$125,000,000. US Xchange's stockholder to deposit a
number of shares of Choice One common stock having
an aggregate value of $25,000,000 (based on a per
share value of $32) in escrow.

Required Regulatory Approvals

Under the merger agreement, the obligations of both Choice One and US
Xchange to complete the merger are subject to the expiration or termination of
any waiting period (including any extensions) under the Hart-Scott-Rodino Act.

The Department of Justice and the Federal Trade Commission review
transactions such as this merger to determine whether they comply with
applicable antitrust laws. Under the provisions of the Hart-Scott-Rodino Act,
the merger may not be completed until certain information has been furnished to
the Department of Justice and the Federal Trade Commission and the specified
waiting period requirements of the Hart-Scott-Rodino Act have been satisfied.
On June 16, 2000, Choice One and US Xchange each furnished notification of the
merger and provided information to the Department of Justice and the Federal
Trade Commission. There is no assurance that a challenge to the merger on
antitrust grounds will not be made by the Department of Justice, the Federal
Trade Commission, state attorney's general, or a private person or entity. If
such a challenge is made, Choice One and US Xchange may not prevail and may be
required to accept certain conditions, possibly including divestitures in order
to consummate the merger.

Interests of Certain Persons in the Merger

Morgan Stanley Dean Witter acted as lead underwriter in connection with the
February 2000 initial public offering of Choice One common stock, for which it
received customary underwriting fees and commissions. Morgan Stanley and/or
related entities beneficially own 35.61% of the Choice One common stock. In
connection with their investment, as long as it maintains a specified level of
Choice One common stock ownership, Morgan Stanley has the right to designate up
to a majority of the Choice One board of directors. Morgan Stanley has
currently filled two of the six positions on the Choice One board of directors.

Morgan Stanley Dean Witter Capital Partners or one of its affiliates acted
as placement agent in connection with the private sale pursuant to SEC Rule
144A in November 1998 to institutional investors of US Xchange, L.L.C. 15%
Senior Notes due 2008 and finance the buy-back of the notes. Morgan Stanley
Dean Witter Capital Partners or one of its affiliates received a customary fee
for its services.

11
<PAGE>

Morgan Stanley Dean Witter acted on behalf of US Xchange as an investment
adviser in connection with the merger. In addition, in connection with the
merger, Morgan Stanley Dean Witter Capital Partners, acting on its own behalf,
has entered into a commitment to purchase a new series of Choice One preferred
stock, a portion of the proceeds of which will be used to retire the US
Xchange, L.L.C. 15% Senior Notes due 2008. Morgan Stanley Dean Witter Capital
Partners will receive customary fees and warrants to purchase 4.25% of the
outstanding common stock of Choice One in connection with the preferred stock
financing and may receive additional fees in connection with future financings
by Choice One.

As the largest investor in Choice One, the interests of Morgan Stanley and
related entities are in many cases aligned with the interests of other
stockholders. Morgan Stanley and related entities may also have interests that
are in addition to other stockholders. These interests may include fees and
commissions paid in connection with financings and acquisitions.

Morgan Stanley and related entities did not advise Choice One in connection
with the merger. To deal with any potential conflict, Choice One retained UBS
Warburg LLC to advise Choice One whether the proposed merger consideration and
the financial terms of the preferred stock and warrants to be issued to Morgan
Stanley Dean Witter Capital Partners and its affiliates were fair, from a
financial point of view. Choice One also retained First Union Securities, Inc.
as a financial adviser in connection with the merger.

Except as disclosed, none of the current directors or officers of Choice One
has any substantial interest, direct or indirect, by security holdings or
otherwise, in the merger. Ronald H. VanderPol, Co-Chairman of the Board and
Chief Executive Officer of US Xchange, and Richard Postma, Co-Chairman of the
Board of US Xchange, are the sole executive officers and directors of US
Exchange. Choice One does not currently intend to enter into employment
agreements with Mr. Postma or Mr. VanderPol.

12
<PAGE>

UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial statements
combine the historical consolidated balance sheets and statements of operations
of Choice One and US Xchange, including their respective subsidiaries after
giving effect to the merger. The unaudited pro forma condensed combined balance
sheet as of March 31, 2000, set forth gives effect to the merger as if it
occurred on March 31, 2000. The unaudited pro forma condensed combined
statement of operations for the year ended December 31, 1999 gives effect to
the merger with US Xchange as well as the acquisition of Atlantic Connections,
L.L.C. as if they occurred on January 1, 1999. The unaudited pro forma
condensed combined statement of operations for the three months ended March 31,
2000 gives effect to the merger with US Xchange as if it occurred on
January 1, 1999. These statements are prepared assuming the merger will be
accounted for as a purchase and are based on the notes to these unaudited pro
forma condensed combined financial statements. In November 1999, the Company
acquired Atlantic Connections, L.L.C. The transaction was accounted for as a
purchase and is included in the Company's Consolidated Statements of Operations
since the date of acquisition.

The following unaudited pro forma financial information has been prepared
based upon, and should be read in conjunction with, the audited historical
consolidated financial statements of Choice One, US Xchange and Atlantic
Connections, L.L.C. The unaudited pro forma condensed combined financial
statements are not necessarily indicative of the financial position or
operating results that would have occurred had the merger been complete on
March 31, 2000 or at the beginning of the period for which the merger is being
given effect, nor are they necessarily indicative of any future financial
position or operating results.

US Xchange will transfer all of the fiber business (the "Fiber Business") to
another entity controlled by US Xchange's sole stockholder (the "Company
Stockholder") prior to the consummation of the merger; provided, however, such
entity will grant to Choice One indefeasible rights of use with respect to 8
fiber strands on each route (except routes where 8 fiber strands exceed 50% of
US Xchange's capacity, in which case Choice One will receive 4 strands). The
assets and liabilities comprising the Fiber Business have not yet been
specifically identified and will be identified prior to the consummation of the
acquisition. Where assets are shared in the Fiber Business and any other
business of US Xchange, such assets will be retained by Choice One except that
any such asset at least 66% used in the Fiber Business will be assigned to the
transferee of the Fiber Business. Such shared assets will be made available to
Choice One or US Xchange, as the case may be, at cost plus allocable overhead.
The pro forma condensed combined statement of operations and the pro forma
condensed combined balance sheet do not reflect the transfer of the Fiber
Business.

The unaudited pro forma statements are based upon currently available
information and upon certain assumptions that Choice One believes are
reasonable under the circumstances. The unaudited pro forma statements do not
purport to represent what Choice One's financial position or results of
operations would actually have been if the transaction in fact had occurred on
such date or at the beginning of the period indicated or to project the
Company's financial position or the results of operations at any future date or
for any future period.

13
<PAGE>

Unaudited Pro Forma Condensed Balance Sheet

(Amounts in thousands)

<TABLE>
<CAPTION>
March 31, 2000
-----------------------------------------------------
Choice One US Xchange Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Assets:
Current Assets:
Cash and cash
equivalents............ $ 65,486 $ 1,420 $ 52,254 (/3/) $119,160
Restricted investments.. -- 28,550 (28,550)(/3/) --
Accounts receivable,
net.................... 5,167 6,794 -- 11,961
Prepaid expenses and
other current assets... 1,789 1,113 -- 2,902
-------- -------- -------- --------
Total current assets.. 72,442 37,877 23,704 134,023
-------- -------- -------- --------
Property, plant and
equipment, net........... 90,327 136,971 -- 227,298
-------- -------- -------- --------
Total................. 90,327 136,971 -- 227,298
-------- -------- -------- --------
Other assets:
Other assets............ 19,611 9,140 394,276 (/1/) 423,027
Restricted investments.. -- 14,704 (14,704) --
-------- -------- -------- --------
Total other assets.... 19,611 23,844 379,572 423,027
-------- -------- -------- --------
Total Assets.......... $182,380 $198,692 $403,276 $784,348
======== ======== ======== ========
Liabilities and
Stockholders' equity:
Current liabilities:
Current portion of long-
term debt.............. $ 2,400 $ 800 $ (800)(/3/) $ 2,400
Senior secured
facility............... -- 50,000 (50,000)(/3/) --
Accounts payable........ 1,643 10,066 -- 11,709
Accrued expenses........ 14,480 10,267 2,337 (/2/)(/3/) 27,084
-------- -------- -------- --------
Total current
liabilities.......... 18,523 71,133 (48,463) 41,193
-------- -------- -------- --------
Long-term Liabilities:.... 1,703 236,564 (79,266)(/3/) 159,001
-------- -------- -------- --------
Stockholders' equity:
Preferred stock......... -- -- 145,812 (/3/) 145,812
Common stock and
additional paid in
capital................ 344,392 60,000 216,188 (/3/)(/4/) 620,580
Deferred compensation... (63,032) -- -- (63,032)
Accumulated deficit..... (119,206) (169,005) 169,005 (/4/) (119,206)
-------- -------- -------- --------
Total Stockholders'
equity............... 162,154 (109,005) 531,005 584,154
-------- -------- -------- --------
Total liabilities and
Stockholders' equity..... $182,380 $198,692 $403,276 $784,348
======== ======== ======== ========
</TABLE>

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

14
<PAGE>

Notes to the Unaudited Pro Forma Condensed Combined Balance Sheet

1.Reflects the estimated purchase accounting adjustments for the acquisition
based upon the historical book value of US Xchange's assets of March 31, 2000.
For purchase accounting, US Xchange's assets have been recorded at their
estimated fair market value. The estimated amounts of the assets and
liabilities acquired from US Xchange are not expected to differ materially from
the final assigned values. Purchase accounting adjustments were recorded to
record the estimated fair value of the customer base acquired of $25 million
and decrease the long-term debt not assumed of $287.7 million (including
accrued interest) as well as the related asset of deferred financing costs by
$6.8 million. The estimated value attached to the common stock to be issued by
Choice One to US Xchange was $32 per share which represents the closing price
on April 28, 2000. The calculation of excess purchase cost over fair value of
net assets acquired is as follows:

<TABLE>
<CAPTION>
(Amounts in thousands)
<S> <C>
Cash paid.......................................... $339,000
Common stock issued................................ 224,000
Direct acquisition costs........................... 10,000
--------
Total purchase cost................................ 573,000
Less: Net book value of US Xchange................. (109,005)
Less: Adjustments in net assets to fair value...... 280,912
--------
Excess of purchase costs over fair value of assets
acquired and liabilities assumed (goodwill)....... $401,093
========
</TABLE>

The pro forma adjustment also represents a decrease of $7.0 million for the
remaining net book value of the debt issuance costs existing on US Xchange's
balance sheet.

2. Reflects the liability for direct acquisition costs of $10.0 million.

3. Reflects issuance of 7.0 million common shares to Ronald H. VanderPol,
sole shareholder of US Xchange, borrowings of $150.0 million under an amended
senior credit facility, issuance of $200.0 million of preferred stock and the
repayment of $287.7 million of debt and accrued interest payable of US Xchange
and the removal of restrictions on invested cash.

4. Reflects the elimination of US Xchange's shareholders' equity.

15
<PAGE>

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Three Months Ended March 31, 2000

(Amounts in thousands, except share and per share data)

<TABLE>
<CAPTION>
Choice One
Pro Forma US Xchange Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue................... $ 6,790 $ 9,721 $ -- $ 16,511
Operating expenses:
Network costs............. 6,990 10,972 -- 17,962
Selling, general and
administrative........... 77,427 7,888 -- 85,315
Depreciation and
amortization............. 2,992 4,391 10,652 (/1/) 18,035
---------- -------- --------- ----------
Total operating expenses.. 87,409 23,251 10,652 121,312
---------- -------- --------- ----------
Loss from operations...... (80,619) (13,530) (10,652) (104,801)
Interest income (expense),
net...................... (1,038) (8,238) 4,196 (/2/) (5,080)
---------- -------- --------- ----------
Net Loss.................. (81,657) (21,768) (6,456) (109,881)
---------- -------- --------- ----------
Accretion of preferred
stock.................... -- -- 2,165 (/3/) 2,165
Accrued preferred stock
dividends................ -- -- 8,033 (/3/) 8,033
---------- -------- --------- ----------
Net loss applicable to
common stock............. $ (81,657) $(21,768) $ (16,654) $ (120,079)
========== ======== ========= ==========
Weighted average number of
shares outstanding, basic
and diluted.............. 26,357,233 -- 7,000,000 (/4/) 33,357,233
Net Loss per share, basic
and diluted.............. $ (3.10) $ (3.60)
========== ==========
</TABLE>

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

16
<PAGE>

Notes to the Unaudited Pro Forma Condensed Combined Statement of Operations

The unaudited 2000 condensed combined pro forma statement of operations
reflects the combination of the statement of operations of Choice One for the
three months ended March 31, 2000 and the statement of operations of US Xchange
for the three months ended March 31, 2000.

1.Reflects an increase in amortization expense of $10.7 million related to
the amortization of the acquired goodwill and customer base. The value of the
acquired goodwill is based on estimates and will be adjusted based upon the
final allocation of the purchase price and is amortized using the straight-line
method with an estimated useful life of 10 years. The value of the acquired
customer base is $25.0 million, is based on estimates, and is amortized using
the straight-line method with an estimated useful life of 5 years.

2.Reflects a decrease in interest expense, net of $8.2 million related to
the debt of US Xchange not assumed as part of the acquisition, offset by an
increase in interest expense of $4.0 million related to the new debt incurred
to finance a portion of the acquisition. The overall effective interest rate on
the new debt was 10.78% per annum.

3.Reflects the accretion of preferred stock and accrued preferred stock
dividends issued in connection with the financing of this transaction.

4.Reflects 7.0 million common shares expected to be issued in connection
with the financing of this transaction.

17
<PAGE>

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Year Ended December 31, 1999

(Amounts in thousands, except share and per share data)

<TABLE>
<CAPTION>
Atlantic
Atlantic Connections US Xchange
Choice One Connections US Xchange Pro Forma Pro Forma Pro Forma
Historical Historical Historical Adjustments Adjustments Combined
---------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 4,518 $7,140 $ 26,430 $ -- $ -- $ 38,088
Operating expenses:
Network costs......... 6,979 5,427 37,740 -- -- 50,146
Selling, general and
administrative....... 22,978 1,615 40,554 -- -- 65,147
Depreciation and
amortization......... 5,153 514 13,191 581 (/1/) 42,609 (/3/) 62,048
---------- ------ -------- ------- ----------
Total operating
expenses............. 35,110 7,556 91,485 581 42,609 177,341
---------- ------ -------- ------- --------- ----------
Loss from operations.... (30,592) (416) (65,055) (581) (42,609) (139,253)
Interest income
(expense), net......... (1,883) (283) (25,593) (463)(/2/) 9,423 (/4/) (18,799)
---------- ------ -------- ------- ----------
Net Loss................ (32,475) (699) (90,648) (1,044) (33,186) (158,052)
---------- ------ -------- ------- --------- ----------
Accretion of preferred
stock.................. -- -- -- -- 6,982 (/5/) 6,982
Accrued preferred stock
dividends.............. -- -- -- -- 29,505 (/5/) 29,505
Net loss applicable to
common stock........... $ (32,475) $ (699) $(90,648) $(1,044) $ (69,673) $ (194,539)
========== ====== ======== ======= ========= ==========
Weighted average number
of shares outstanding,
basic and diluted...... 22,022,256 -- -- -- 7,000,000 (/6/) 29,022,256
Net Loss per share,
basic and diluted...... $ (1.47) $ (6.70)
========== ==========
</TABLE>

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

18
<PAGE>

Notes to the Unaudited Pro Forma Condensed Combined Statement of Operations

The unaudited 1999 condensed combined pro forma statement of operations
reflects the combination of the statement of operations of Choice One for the
year ended December 31, 1999 and the statement of operations of Atlantic
Connections for the ten months ended October 31, 1999. The unaudited pro forma
statements do not give effect to the up to $2.1 million additional purchase
price payable in cash or, at Choice One's option, Choice One common stock in
connection with the acquisition of Atlantic Connections, if specific
performance criteria are met in the 12 months following the acquisition.

1. Reflects an adjustment to depreciation expense related to the decrease in
net tangible assets of Atlantic Connections, based on the assumptions that the
acquisition had taken place on January 1, 1999. These assets have been restated
at their estimated fair market values and depreciated over the remaining useful
lives of the assets. The decrease in depreciation expense of $76,000 as
compared to that recorded by Atlantic Connections, was included in operating
expenses as indicated.

Reflects an increase in amortization expense of $657,000 related to the
amortization of the acquired goodwill and customer base, less the amortization
expense of intangible assets recorded in Atlantic Connection's historical
statement of operations. The values of the acquired goodwill and customer base
are based on estimated values and are amortized using the straight-line method
and estimated useful lives of 10 years and 5 years, respectively.

2. Reflects the additional interest expense of $463,000 incurred on the debt
to finance the acquisition. The overall effective interest rate was 10.78% per
annum.

3. Reflects an increase in amortization expense of $42.6 million related to
the amortization of the acquired goodwill and customer base. The value of the
acquired goodwill is based on estimates and will be adjusted based upon the
final allocation of the purchase price and is amortized using the straight-line
method with an estimated useful life of 10 years. The value of the acquired
customer base is $25.0 million, is based on estimates, and is amortized using
the straight-line method with an estimated useful life of 5 years.

4. Reflects a decrease in interest expense of $25.6 million related to the
debt of US Xchange not assumed as part of the acquisition, offset by an
increase in interest expense of $16.2 million related to the new debt incurred
to finance a portion of the acquisition. The overall effective interest rate on
the new debt was 10.78% per annum.

5. Reflects the accretion of preferred stock and accrued preferred stock
dividends issued in connection with the financing of this transaction.

6. Reflects 7.0 million common shares expected to be issued in connection
with the financing of this transaction.

19
<PAGE>

INFORMATION ABOUT US XCHANGE, INC.

General

US Xchange has no assets or independent operations. Through its
subsidiaries, US Xchange is a full service, facilities-based competitive
telephone company. US Xchange provides bundled local and long distance
telephone, data and Internet communications services over its own high speed
digital networks and switching systems. US Xchange offers its
telecommunications services primarily in second and third tier in the
midwestern United States. Its target customers include small and medium-sized
businesses, Internet service providers and government and other institutional
end users, as well as residential end users. Its objective is to become the
leading competitor to the incumbent local telephone company, either Ameritech
Corp. or GTE Corporation, in each of its current markets, by offering complete,
cost-effective telecommunications solutions.

Where US Xchange Provides Telecommunications Services

US Xchange provides telecommunications services in markets in Wisconsin,
Indiana, Illinois and Michigan. Upon entering a market, US Xchange initially
resells the services of the incumbent local telephone company. As each of its
local networks and switching systems becomes commercially operational in that
market, US Xchange transitions its resale customers to its own facilities-based
services. As of December 31, 1999, US Xchange had deployed and was commercially
operating switches and local fiber optic networks in all of its initially
targeted markets, including Appleton, Green Bay, Milwaukee, Madison and
Oshkosh, Wisconsin; South Bend, Indiana; Bloomington, Ft. Wayne, Elkhart and
Evansville, Indiana; Rockford, Illinois; and Kalamazoo and Grand Rapids,
Michigan. US Xchange owns all of these switches and local fiber networks,
except for part of the network in Milwaukee, where US Xchange leases
transmission capacity and related electronic equipment connected to its own
host switch.

How US Xchange's Networks Work

US Xchange interconnects its networks with several of the central offices of
the incumbent local telephone company and the "points of presence," or "POPs,"
of the principal long distance providers in each of its markets. A central
office is a switching center, or central switching facility, of the incumbent
local telephone company. Incumbent telephone companies often collect calls from
multiple central offices at an "access tandem," which is an interconnection
point on their local networks where they then transmit calls to other central
offices or to a long distance carrier's POP. A POP is a location where a long
distance telephone company has installed transmission equipment that serves as,
or relays calls to, a network switching center of the long distance company.

US Xchange also obtains "last mile" connections to its customers primarily
through unbundled network elements that US Xchange leases from the incumbent
local telephone company. Unbundled network elements are any of a number of
facilities and equipment that an incumbent local telephone company may lease to
another telecommunications provider, which then may offer its own
telecommunications services. Unbundled network elements include features,
functions and capabilities such as subscriber numbers, databases, signaling
systems and information sufficient for billing and collection or necessary to
transmit or route traffic or otherwise provide telecommunications services. In
specific cases, if customer demand justifies the cost, US Xchange can directly
connect its networks to its customers. US Xchange can also obtain access to its
customers through the use of wireless transmission capacity that US Xchange can
lease from other providers.

Business Strategy

The principal elements of the business strategy of US Xchange include:

. focusing primarily on third tier cities in the Midwest;

. achieving early-to-market competitive and marketing advantages in each of
its markets;

20
<PAGE>

. deploying networks and switching facilities that can serve customers in
an entire commercial region;

. fully integrating its networks throughout all of its commercial regions;

. emphasizing its local presence to gain market share;

. installing high quality, flexible networks at a low cost; and

. implementing innovative, integrated and scaleable operations support,
customer care and billing systems.

Sales and Marketing Efforts

The customer base of US Xchange includes both business and residential end
users. US Xchange also offers certain of its services on a wholesale basis to
Internet service providers, utilities and other telecommunications providers.

To gain early entry into its markets, US Xchange establishes a local sales
force in each market which offers switched local, long distance and centrex
services on a resale basis until US Xchange completes construction of its
networks and switches its customers to its own facilities. By initially
reselling other carriers' services, US Xchange builds brand name recognition in
each of its markets and a customer base that US Xchange can transition to its
own networks as they become operational. Typically, US Xchange has required
approximately six to nine months from the beginning of network construction in
a market to the provisioning of its own facilities-based switched services.

In each of its markets, US Xchange engages in market-wide US Xchange brand
name advertising campaigns, including print, television and radio
advertisements, that support its marketing efforts. US Xchange also utilizes
both inbound and outbound telemarketing programs and participates in affinity
group programs and marketing partnerships with local and regional businesses,
including utilities. These programs have a local market emphasis tailored to
each particular market. US Xchange believes that its locally oriented,
personalized sales and marketing organization and programs provides it
competitive advantages over less focused incumbent local telephone companies in
terms of image, service and customer loyalty.

US Xchange focuses on providing responsive, personalized service to its
customers on a local market and regional basis. US Xchange establishes sales
offices serving, and recruits its local managers from, each of its local
markets. US Xchange also has inside sales staff located in Green Bay, Wisconsin
and at its headquarters in Grand Rapids, Michigan. As of May 26, 2000, US
Xchange had approximately 170 employees engaged full time in its sales and
marketing efforts staffing local sales offices in Wisconsin, Indiana, Illinois
and Michigan. US Xchange also has agency programs to supplement its internal
marketing efforts.

In an effort to better service its current and future customers, US Xchange
has made improvements during 1999 to its sales order management and customer
care systems that have allowed it to better manage its business and to reduce
its sales support staffing levels.

Competition

The telecommunications industry is highly competitive, and one of the
primary purposes of the U.S. Telecommunications Act of 1996 is to foster
additional competition. US Xchange believes that the principal competitive
factors affecting its business operations are competitive pricing, quality of
services and products, and innovative service and product offerings. US Xchange
expects to experience declining prices and increasing price competition. Its
ability to compete effectively will depend upon its ability to provide high
quality, market-driven products and services with excellent personalized
customer service at prices generally below those of its competitors.

21
<PAGE>

Increasing competition has led to consolidations among the regional Bell
operating companies, including the acquisition of Ameritech by SBC
Communications, Inc. and the acquisition of GTE by Bell Atlantic Corporation.
US Xchange expects that, as telecommunications providers continue to
consolidate and form additional strategic alliances, US Xchange will face
significant new competitors, including regional Bell operating companies who
seek to operate outside their current local service areas. In each of its
commercial regions, US Xchange also faces significant competition from other
facilities-based competitive local telephone companies and long distance
carriers, which further increases the pricing pressures on its business. After
the investment and expense of establishing a network and support services in a
given market, the marginal cost of carrying an additional call is negligible.

Regulation

US Xchange services are subject to varying degrees of federal, state and
local regulation. The Federal Communications Commission exercises jurisdiction
over all facilities of, and services offered by, telecommunications common
carriers to the extent those facilities are used to provide, originate or
terminate interstate or international communications. The state regulatory
commissions retain jurisdiction over the same facilities and services to the
extent they are used to originate or terminate intrastate communications. Local
governments also sometimes impose franchise or licensing requirements on
competitive local telephone companies.

22
<PAGE>

Selected Financial Data

The selected consolidated financial data set forth below for the years ended
December 31, 1999, 1998 and 1997 and for the period from August 5, 1996 (date
of inception) to December 31, 1996 were derived from the audited consolidated
financial statements of US Xchange, L.L.C. contained elsewhere in this
information statement, which have been audited by BDO Seidman, LLP, independent
certified public accountants. All of the selected consolidated financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and notes thereto included elsewhere in this information statement.

<TABLE>
<CAPTION>
Period from
Year Ended December 31, August 5, 1996(1)
----------------------------------------- to December 31,
1999 1998 1997 1996
------------ ------------- ------------ -----------------
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 26,429,789 $ 7,015,310 $ 206,682 $ --
Cost and expenses:
Cost of communication
services............. 37,739,781 16,338,583 749,662 --
Selling, general and
administrative....... 40,554,373 28,679,670 5,065,589 137,810
Depreciation and
amortization......... 13,190,549 3,257,055 189,347 --
Total costs and
expenses........... 91,484,703 48,275,308 6,004,598 137,810
Loss from operations.... (65,054,914) (41,259,998) (5,797,916) (137,810)
Interest expense,
net(2)................. (29,537,206) (13,838,996) (30,452) --
Interest income......... 3,944,625 4,476,061 -- --
Net loss................ $(90,647,495) $ (50,622,933) $ (5,828,368) $(137,810)
<CAPTION>
As of December 31,
-----------------------------------------
1999 1998 1997
------------ ------------- ------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 189,304 $ 40,018,552 $ 100,590
Restricted
investments(3)......... 57,669,199 84,731,847 --
Networks and equipment,
net.................... 136,106,432 100,344,506 27,967,741
Total assets............ 210,100,023 234,715,917 28,385,270
Advances from
affiliate.............. -- -- 21,038,789
Long-term debt, less
current maturities..... 216,546,750 202,533,333 2,189,000
Member's capital
(deficit).............. (87,236,606) 3,410,889 (966,178)
<CAPTION>
Period from
Year Ended December 31, August 5, 1996(1)
----------------------------------------- to December 31,
1999 1998 1997 1996
------------ ------------- ------------ -----------------
<S> <C> <C> <C> <C>
Other Data:
Capital expenditures.... $ 48,906,624 $ 75,619,611 $ 28,157,088 --
EBITDA(4)............... (51,864,365) (38,002,943) (5,608,569) (137,810)
Cash flows for operating
activities............. (82,264,871) (29,087,976) (395,530) (163,485)
Cash flows for investing
activities............. (20,297,716) (158,465,165) (28,168,184) --
Cash flows from
financing activities... 62,733,339 227,471,103 28,664,304 163,485
Ratio of earnings to
fixed charges(5)....... -- -- -- --
Deficiency of earnings
to cover fixed
charges(5)............. 94,621,915 52,918,654 5,830,471 137,810
</TABLE>
--------
(1) US Xchange was organized on August 5, 1996 (inception).
(2) Excludes capitalized interest of approximately $4.0 million for 1999, $2.3
million for 1998 and $2,000 for 1997. During the construction of US
Xchange's networks, interest expense related to construction expenditures
is capitalized.
(3) Represents pledged securities which were purchased to secure the first six
scheduled interest payments on the 15% Senior Notes due 2008.

23
<PAGE>

(4) EBITDA consists of earnings (loss) before net interest, income taxes,
depreciation and amortization. EBITDA is provided because we believe it is
a measure commonly used in the telecommunications industry. It is presented
to enhance an understanding of US Xchange's operating results and is not
intended to represent cash flow or results of operations in accordance with
generally accepted accounting principles, or "GAAP." The indenture
governing US Xchange's 15% Senior Notes contains (and US Xchange expects
that agreements governing any additional future indebtedness may contain)
covenants based on EBITDA that, among other things, may limit our ability
to incur additional indebtedness. EBITDA is not a measure of financial
performance under GAAP and should not be considered an alternative to
earnings (loss) from operations and net income (loss) as a measure of
performance or to cash flow as a measure of liquidity. EBITDA is not
necessarily comparable to similarly titled measures of other companies. Our
consolidated statements of cash flows used in and provided by operating,
investing and financing activities, as calculated under GAAP, are included
with US Xchange's consolidated financial statements contained elsewhere in
this Report.

(5) For purposes of calculating the ratio of earnings to fixed charges,
earnings are defined as net loss plus fixed charges. Fixed charges consist
of interest expense and amortization of debt issuance costs, whether
expensed or capitalized, and that portion of rental expense (one-third)
estimated to represent interest expense. After giving pro forma effect to
the increase in interest expense resulting from the issuance of our 15%
Senior Notes due 2008 on June 25, 1998, as of the beginning of each such
period, net interest expense would have been $23.8 million, $25.9 million
and $10.6 million, and earnings would have been insufficient to cover fixed
charges by approximately $64.0 million, $32.4 million and $11.0 million for
the years ended December 31, 1998 and 1997 and for the period from
inception (August 5, 1996) through December 31, 1996, respectively.

24
<PAGE>

Management's Discussion and Analysis of Financial Condition and Results of
Operations

Overview

From its inception on August 5, 1996 through June 30, 1997, US Xchange was
in the development stage. During that time, its principal activities included
developing its business plan, hiring management and other key personnel,
designing the architecture for its network systems and negotiating an
interconnection agreement with an incumbent local telephone company.

Operations of US Xchange have resulted in significant losses, negative cash
flows from operating and investing activities and negative EBITDA to date. US
Xchange expects that planned capital expenditures, together with the associated
operating expenses in each of its markets, will result in operating losses,
negative cash flows from operating and investing activities and negative EBITDA
for approximately 24 to 36 months after US Xchange commences facilities-based
switched operations in each market. Accordingly, US Xchange expects to
experience increasing consolidated losses as it expands its operations, deploys
its network and switching facilities and develops its customer base.

First Quarter Ended March 31, 2000 Compared to First Quarter Ended March 31,
1999

Results of Operations

Revenues for the first quarter of 2000 totaled $9.7 million, an increase of
126% over the $4.3 million in the comparable period in 1999. The increase is
attributable to the continued growth in its customer base in all of its markets
and increased usage by its current customers. Revenues derived from its
facilities-based switched operations during the first quarter of 2000 were $4.9
million, an increase of 656% over the comparable quarter of 1999 total of
$648,000. This increase was the result of continued growth in the number of
facility-based customers as well as the continued conversion of resale
customers to its own switches in all of its facilities-based markets. At March
31, 2000, US Xchange had approximately 60,100 installed local access lines in
service, of which approximately 66% were served by its own facilities.

Cost of communication services increased to $11 million for the first
quarter of 2000, or 113% of revenues, from $8.2 million, or 189% of revenues,
for the comparable period in 1999. The increase relates primarily to the costs
of leased telecommunications facilities and services in connection with the
growth of its local and long distance services.

Selling, general and administrative expenses were $7.9 million, or 81% of
revenues, for the first quarter of 2000, compared to $10.1 million, or 232% of
revenues, for the same period in 1999. The decrease was due primarily to
reduced personnel costs associated with improved processes and procedures.

Depreciation and amortization expenses increased to $4.4 million for the
first quarter of 2000 from $2.2 million for the comparable period in 1999. The
increase primarily reflects the thirteen switches and networks that were
commercially operational during the first quarter of 2000 compared to eight
switches and networks in operation for the same quarter of 1999.

Interest expense for the three months ended March 31, 2000 increased $3.0
million to $8.9 million compared to $5.9 million during the same period in
1999. The increase relates primarily to the accrual of interest on the senior
secured credit facility and the subordinated secured line of credit from the
sole member. Interest costs of $559,000 and $1.6 million were capitalized
during the three months ended March 31, 2000 and 1999, respectively, as part of
the construction costs of its networks.

Interest income of $625,000 for the first quarter of 2000 resulted primarily
from interest earnings on the short-term investment of the cash proceeds from
the issuance of the 15% Senior Notes.

For the reasons stated above, US Xchange's net loss increased to $21.8
million for the first quarter of 2000, compared with $20.8 million for the
comparable period in 1999.

25
<PAGE>

Liquidity and Capital Resources

Deficiency in net cash used in operations was $20.6 million for the three
months ended March 31, 2000, compared to $29.8 million for the comparable
period in 1999. Cash from operating activities in 2000 were used primarily to
fund US Xchange's net loss of $21.8 million. The reduction in the deficiency of
$8 million is primarily due to an increase in unearned revenues of $3.9 million
relating to sales of indefeasible rights of use on its fiber optic networks,
additional depreciation and amortization expense of $2.4 million and an
improved working capital position of $2.1 million. For the same period in 1999,
cash from operating activities was used primarily to fund its net loss of $20.8
million and a decrease in accounts payable and accrued liabilities of $9.1
million. US Xchange expects that negative operating cash flows will continue as
it expands its operations and transitions its customers from resale services to
facilities-based services.

Net cash from investing activities for the three months ended March 31, 2000
provided cash of $9.5 million primarily due to a $15 million decrease in
restricted investments for payment of interest on its Senior Notes offset by
expenditures for its switching and long haul fiber optic networks of $5.2
million. Net cash from investing activities during the same period in 1999 was
$737,100 primarily due to a $15.5 million decrease in restricted investments
for payment of interest on our 15% Notes offset by $14.5 million used to
acquire network related equipment, office equipment and information systems
software and to construct local and long haul fiber optic networks.

Financing activities provided net cash of $12.3 million during the three
months ended March 31, 2000. This relates primarily to $12.5 million of
proceeds received from borrowings under its subordinated debt arrangement with
its sole member, offset by a $200,000 repayment of principal on its bank credit
facility. For the comparable period in 1999 financing activities used cash of
$483,200 for repayment of principal on a bank credit facility and for payment
of debt issuance costs incurred to obtain the senior secured credit facility.

At March 31, 2000, US Xchange had $2.4 million of outstanding indebtedness
under its bank credit facility. The borrowings bear interest at an annual rate
equal to (1) 1/2 % under the bank's prime lending rate or (2) 2% over the
bank's costs of funds, at the bank's option. The effective annual interest rate
of the bank credit facility was 8.5% at March 31, 2000. The borrowings are
repayable in monthly installments of $66,667 through March 31, 2003 and are
secured by specific assets of US Xchange and one of its wholly owned
subsidiaries and by the guarantees of the same subsidiary and of RVP
Development Corporation.

All financial covenants under the bank credit facility apply to RVP
Development Corporation and not to US Xchange. At March 31, 2000, RVP
Development Corporation was in compliance with all of its covenant requirements
under the bank credit facility.

On April 30, 1999, US Xchange obtained a $50.0 million senior secured
revolving credit facility, pursuant to a Loan and Security Agreement among its
wholly-owned subsidiary US Xchange Finance Company, L.L.C., as borrower, US
Xchange and its operating subsidiaries, as guarantors, and General Electric
Capital Corporation, as Administrative Agent and lender. As of March 31, 2000,
US Xchange had $50 million outstanding under this facility. All outstanding
borrowings bear interest at a floating rate equal to either a defined base rate
plus 3.0% or at LIBOR plus 4.0% at its option. The effective rate was 10.1% as
of March 31, 2000.

In connection with the proposed merger with Choice One, GE Capital has
agreed to forbear from exercising its rights and remedies relating to its non-
compliance with financial performance covenants until the earlier of (i) July
31, 2000 or (ii) the occurrence of any of the following events:

. the occurrence of an event of default, or the occurrence of an event or
the happening of a condition which with the passing of time or the giving
of notice or both would constitute an event of default, under the loan
agreement, other than the events of default for the periods ending
December 31, 1999 and March 31, 2000;

. certain events of bankruptcy;

. termination of the merger.

26
<PAGE>

As of March 31, 2000, US Xchange estimated that its future capital
requirements (including requirements for capital expenditures, working capital,
debt service and operating losses) to fund the operating losses of its
networks, the expansion of certain of its local networks and the planned
installation of long-haul fiber interconnecting its networks will total
approximately $69.8 million. Of this amount, approximately $5.0 million was
committed for capital expenditures required for the completion of its long-haul
routes and the expansion of certain of its local networks through the second
quarter of 2000. US Xchange plans to finance these capital requirements with
the available borrowings under its subordinated line of credit from its sole
member (approximately $23.0 million as of March 31, 2000), cash expected to be
generated from future revenues, and interim debt financing of up to $25 million
provided by Choice One under the merger agreement, and possibly through sales
of dark fiber along our local and long-haul networks.

The actual amount and timing of its capital requirements may vary
significantly from its estimates based upon a number of factors, including,
among other things:

. the timing and success of its current development plans;

. shortfalls in its revenue and cost projections;

. demand for its services;

. regulatory, technological and competitive developments;

. any decision to expand its operations into additional commercial regions
or markets or within any of its current networks; and

. any acquisitions or joint ventures that US Xchange decides to undertake.

Actual revenues and costs may vary materially from expected amounts, and
such variations will likely affect its future cash flow requirements.
Accordingly, US Xchange cannot make assurances that its actual capital
requirements will not exceed its current estimates.

New Accounting Standards

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Among other
provisions, this standard requires that entities recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Gains and losses resulting from changes in the fair values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. This standard, as amended by
SFAS 137 issued in June 1999, is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000, though earlier adoption is
encouraged and retroactive application is prohibited. Historically, US Xchange
has not entered into, and it currently has no plans to enter into, any
derivative instruments. Accordingly, US Xchange believes that this standard
will not have a material impact on its consolidated financial position, results
of operations or cash flows.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Results of Operations

US Xchange revenues increased 377% to $26.4 million in 1999 from $7 million
in 1998. The increase is attributable to both its expansion into one additional
market, Grand Rapids, Michigan, in 1999 and to the continued growth in its
customer base and their use of its services in all of its markets. Revenues
derived from US Xchange's facilities-based switched operations grew to $10.2
million in 1999 compared to $559,000 in 1998. This increase was due to thirteen
switches being commercially operational during all or a portion of 1999
compared to only six switches being in service during 1998 and to the continued
conversion of resale customers onto its own switches in all of its facilities-
based markets. During 1999, US Xchange installed approximately 30,000 total
local access lines compared to 21,000 in 1998. At December 31, 1999, US Xchange
had approximately 53,000 installed local access lines in service, of which
approximately 60% were served by its own facilities.

27
<PAGE>

Cost of communication services increased to $37.7 million in 1999, or 143%
of revenues, from $16.3 million, or 233% of revenues, in 1998. The increase of
131% related primarily to the costs of leased telecommunications facilities and
US Xchange's own network operating costs in connection with the expansion of
its customer base in all of its markets.

Selling, general and administrative expenses grew to $40.6 million in 1999,
or 153% of revenues, compared to $28.7 million in 1998, or 409% of revenues.
This increase of 41% was primarily due to the increase in employees during the
first three quarters of 1999 and the other costs associated with the expansion
of US Xchange's services in its existing markets.

Depreciation and amortization expenses increased to $13.2 million in 1999
from $3.3 million in 1998 primarily due to the placement in service of
additional telecommunications network assets, including switches, fiber optic
networks, and related equipment. Depreciation expense is expected to increase
as a result of continuing capital expenditures related to the expansion of US
Xchange's networks and operations.

Gross interest expense increased $17.4 million to $33.5 million in 1999 from
$16.1 million in 1998 due primarily to US Xchange's increased average
outstanding indebtedness during the current year over the comparable prior
year. Interest expense will increase in future periods in conjunction with
additional borrowings under the subordinated secured line of credit from Mr.
VanderPol. Interest costs of $4 million in 1999 and $2.3 million in 1998 were
capitalized as part of the construction costs of its networks.

Interest income is derived primarily from earnings on excess cash and the
U.S. government securities that were purchased from the net proceeds on the
sale of the 15% Senior Notes and used to fund US Xchange's first six scheduled
interest payments on such Notes. The decrease in interest income for 1999 from
1998 is expected to continue in future periods as the U.S. government
securities are liquidated in conjunction with the payment of the semi-annual
interest payments on the 15% Senior Notes.

Net loss increased to $90.6 million in 1999 from $50.6 million in 1998. The
increase in the 1999 losses is attributable to the significant expenditures US
Xchange incurred before the realization of revenues, due to the expansion of
its network operations, the added depreciation expense relating to the
expansion of its networks and the increased interest expense on its
indebtedness to fund its network development and operations.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Results of Operations

Revenues for 1998 totaled $7.0 million, of which $559,000 was derived from
its facilities-based switched operations and the balance was derived from
resale services. The increase in its revenues from $207,000 in 1997 was
substantially due to its expansion into seven new markets during 1998: South
Bend, Elkhart, Bloomington, Fort Wayne and Evansville, Indiana; Rockford,
Illinois and Kalamazoo, Michigan. For those markets that US Xchange entered
during 1997, US Xchange also saw continued increases in the total number of,
and usage by, its customers during 1998. All revenues during 1997 were derived
from resold services. During 1998, US Xchange installed approximately 21,000
total access lines, compared to 2,000 during 1997. At December 31, 1998,
facilities-based lines represented 12% of its total of approximately 23,000
installed access lines in service.

Cost of communication services was $16.3 million for 1998, an increase of
$15.6 million from $750,000 in 1997. Approximately 63%, or $9.8 million, of the
increase is attributable to the growth in its customer base and the related
costs of leased telecommunications facilities and services from the incumbent
local telephone companies in connection with its resale services. Its
facilities-based network operating costs, including personnel-related costs,
have increased approximately $4.4 million, reflecting the networks that became
commercially operational during 1998.

28
<PAGE>

Selling, general and administrative expenses increased to $28.7 million for
1998 compared to $5.1 million for 1997. Of the $23.6 million increase,
approximately 67%, or $15.9 million, was due to hiring additional personnel to
support its continued growth. Its advertising and marketing costs increased
approximately $2.6 million in connection with its increased marketing efforts.

Depreciation and amortization expenses for 1998 increased to $3.6 million
from $189,000 in 1997. The increase reflected the six switches and networks
that became commercially operational during 1998 and the overall growth in
capital assets through December 31, 1998. Depreciation and amortization will
continue to increase as a result of continuing capital expenditures related to
its network expansion.

Interest expense was $13.5 million for 1998 and $30,500 for 1997. A
significant portion, approximately $13.2 million, relates to the accrual of
interest on its 15% Senior Notes, with the remainder associated with the
borrowings under its $4.0 million bank credit facility, which US Xchange
describe in detail below. Interest costs of $2.3 million and $2,103 were
capitalized during 1998 and 1997, respectively, related to network construction
projects.

Interest income of $4.5 million for 1998 resulted primarily from interest
earnings on the short-term investment of the cash proceeds of the issuance of
its 15% Senior Notes.

For the reasons stated above US Xchange's net loss increased to $50.6
million in 1998, compared with $5.8 million in 1997.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Results of Operations

Following the completion of its development stage activities, US Xchange
began its sales efforts in July 1997 and generated resale revenues of
approximately $207,000 for 1997, of which approximately $178,000 was generated
in the fourth quarter of 1997.

Total operating expenses for 1997 approximated $6.0 million, including
approximately $750,000 related to cost of communication services, approximately
$5.1 million of selling, general and administrative expenses, which primarily
consisted of payroll and legal and professional costs related to the
commencement of its operations, and depreciation and amortization on office
equipment and leaseholds of approximately $189,000. During the period from
inception through December 31, 1996, US Xchange incurred general and
administrative expenses of approximately $138,000, primarily due to payroll and
professional costs related to the commencement of its operations. Interest
expense for 1997 of approximately $30,000 was due to the borrowings under its
bank credit facility.

Liquidity and Capital Resources

US Xchange experienced a deficiency in net cash from operations of $82.3
million for 1999, $29.1 million for 1998 and $396,000 for 1997. The increase in
the deficiency is primarily due to the significant cash outlays required to
develop and operate its networks and the resulting increased operating losses
in connection with its expansion into its planned markets. With a growing
customer base, US Xchange expects that accounts receivable will increase and
negatively impact cash from operations consistent with the $4.8 million in
1999. US Xchange expects to experience continuing negative operating cash flows
as it expands its operations and transitions its customers from resale services
to its facilities-based services.

Net cash used in investing activities was $20.3 million for 1999, $158.5
million for 1998 and $28.2 million for 1997. US Xchange invested $48.9 million
in 1999, $75.6 million in 1998 and $28.2 million in 1997 to acquire network-
related equipment, information systems software and office furniture and to
construct local and long haul fiber optic networks to support the growth of its
business. In addition, during the second quarter of 1998, US Xchange set aside
$82.5 million of the proceeds from the sale of its 15% Senior Notes to purchase
U.S. government securities and accrued interest thereon to secure and fund
payment of the first six interest payments on such Notes. In 1999 US Xchange
paid $30.5 million from these funds to the holders of the Notes.

29
<PAGE>

Financing activities provided net cash totaling $62.7 million in 1999,
$227.5 million in 1998 and $28.7 million in 1997. A significant portion of the
change from 1998 relates to the approximately $193.0 million received during
the second quarter of 1998, which came from the net proceeds of the sale of its
15% Senior Notes. In 1999, US Xchange received $50 million through its senior
secured credit facility with GE Capital and $14.5 million through a
subordinated secured line of credit from Mr. Ronald VanderPol, its Co-Chairman.
Member capital contributions and advances from RVP Development Corporation, a
holding company wholly-owned by Mr. VanderPol, totaling $33.9 million and $26.1
million were received in 1998 and 1997, respectively. During the first quarter
of 1998, US Xchange also received $1.2 million of proceeds from its bank credit
facility referred to below. Repayments of the bank credit facility commenced in
the second quarter of 1998 and totaled $.7 million for both 1998 and 1999.

In August 1997, US Xchange obtained a $4.0 million bank credit facility,
which was fully utilized as of March 31, 1998.

At December 31, 1999, RVP Development Corporation was in compliance with all
of its covenant requirements under the bank credit facility.

On June 25, 1998, US Xchange issued and sold $200 million aggregate
principal amount of its 15% Senior Notes due July 1, 2008. Of the $193.0
million of net proceeds that US Xchange received for these Notes, it used
approximately $82.5 million to purchase U.S. government securities, including
accrued interest, to secure and fund its first six scheduled semi-annual
payments of interest on these Notes. The Company made interest payments of
$15.5 million and $15 million on January 1, 1999 and July 1, 1999,
respectively, to the holders of the Notes. During 1998 and the first half of
1999, US Xchange spent the entire net proceeds to fund the installation and
deployment of its networks and their associated operating losses.

The indenture governing US Xchange's 15% Senior Notes imposes certain
financial and operating restrictions on US Xchange and its restricted
subsidiaries. These restrictions limit, among other things, US Xchange's
ability to:

. incur additional indebtedness;

. create liens;

. engage in sale-leaseback transactions;

. sell assets;

. effect consolidations or mergers;

. make investments or certain other restricted payments;

. pay dividends or make distributions in respect of membership interests;

. redeem membership interests;

. issue or sell membership interests of its restricted subsidiaries; and

. enter into transactions with any of its members or affiliates.

While these limitations are subject to a number of important qualifications
and exceptions, if US Xchange was to fail to comply with these restrictions
and, in some cases, was to fail to cure its noncompliance, it would be in
default under the indenture. Under the indenture, US Xchange is also required
to file reports with the SEC and to deliver these reports to the trustee and
the holders of the 15% Senior Notes. US Xchange has not timely delivered its
annual report on Form 10-K for the year ended December 31, 1999 or its
quarterly report on Form 10-Q for the quarter ended March 31, 2000 and,
accordingly, has failed to comply with its reporting obligations under the
indenture. However, in connection with the merger discussed below,
substantially all the holders of the 15% Senior Notes have agreed that the 15%
Senior Notes may be redeemed on the merger closing date. If the merger were not
to be completed, the trustee or holders of 25% of the outstanding principal of
the 15% Senior Notes could declare the outstanding principal and accrued and
unpaid interest to be immediately due and payable. US Xchange cannot give any
assurance that it would have sufficient cash resources or be able to obtain any
additional financing to meet these payment obligations.

30
<PAGE>

New Accounting Standards

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Among other
provisions, this standard requires that entities recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Gains and losses resulting from changes in the fair values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. This standard, as amended by
SFAS 137 issued in June 1999, is effective for fiscal quarters of all fiscal
years beginning after June 15, 2000, though earlier adoption is encouraged and
retroactive application is prohibited. Historically, US Xchange has not entered
into, and it currently has no plans to enter into, any derivative instruments.
Accordingly, US Xchange believes that this standard will not have a material
impact on its consolidated financial position, results of operations or cash
flows.

Quantitative and Qualitative Disclosures About Market Risk

US Xchange is exposed to market risk related to changes in interest rates
because the interest rate on approximately $67 million of its debt is indexed
to floating interest rates. It monitors the risk associated with interest rates
on an ongoing basis, but US Xchange has not entered into any interest rate
swaps or other financial instruments to actively hedge the risk of changes in
prevailing interest rates.

In June 1998, US Xchange issued $200 million of 15% Senior Notes, which
mature on July 1, 2008 and pay interest semi-annually on January 1 and July 1
of each year, beginning January 1, 1999. The effective interest rate is 15.35%.
As of December 31, 1999, the fair market value of the 15% Senior Notes was
approximately $161 million. As a result of issuing fixed interest securities,
US Xchange is less sensitive to market rate fluctuations.

Changes and Disagreements with Accountants

None.

31
<PAGE>

INFORMATION ABOUT CHOICE ONE

General

Choice One is an integrated communications provider offering broadband data
and voice telecommunications services primarily to small and medium-sized
businesses in second and third tier markets in the northeastern United States.
Its offerings include high speed data and Internet service, principally
utilizing DSL technology, local exchange service and long distance service.
Choice One seeks to become the leading integrated communications provider in
each of its target markets by offering a single source for competitively
priced, high quality, customized telecommunications services. A key element of
its strategy is to be one of the first integrated communications providers to
provide comprehensive coverage in each of the markets it serves. Choice One is
achieving this market coverage by installing both data and voice network
equipment in multiple established telephone company central offices. Choice One
also intends to maximize utilization of its market network coverage by offering
data and voice services on a wholesale basis to Internet service and other
telecommunications providers. Through its strategy of connecting substantially
all of its clients directly to its own switches, it is able to more efficiently
route traffic, ensure quality service and control costs. As of December 31,
1999, Choice One initiated service with 3,125 clients and for 20,096 access
lines, including 206 DSL lines.

As of December 31, 1999, Choice One offered data and voice services in nine
markets and intends to expand into approximately 11 additional markets by the
end of the second quarter 2001. Following completion of its planned expansion
to these approximately 20 markets, it believes its networks will be able to
reach approximately 3.7 million business lines, which constitute more than 75%
of the estimated business lines in these markets, and 5.3 million households.
While its network expansion would allow it to reach this number of business
lines and households, the number of business lines and households that it
actually services will depend on its ability to obtain market share from its
competitors.

As of December 31, 1999, it had applications accepted to collocate its
network equipment in 277 established telephone company central offices;
completed 141 of these collocations; and had 136 additional collocations in
progress in its operational and under construction markets. Choice One has also
installed equipment to provide DSL services in 132 of its current collocations.

Choice One has developed a flexible network build-out strategy allowing it
to leverage rapidly evolving telecommunications technology. In each of its
first nine markets, it has deployed or intends to deploy both data and voice
switches. In its Allentown, Harrisburg and Scranton markets, it has employed a
"DSL first" method of market entry by installing a data switch and initially
offering only data services. Choice One will then add voice services within 12
months after entering such markets. It believes this DSL first strategy
provides for faster time to market and lower initial capital costs, while
preserving flexibility for its future development. Choice One intends to
continue entering new markets using methods tailored to meet the needs of
clients in its target markets and the technology available in those markets.
Choice One expects that its market entry strategy and network architecture will
continue to evolve in order to capitalize on advances in telecommunications
technology and to satisfy the changing needs of its clients.

Choice One has designed and is developing integrated operations support
systems and other back office systems that it believes will provide significant
competitive advantages by enhancing its efficiency and allowing it to support
rapid and sustained growth and provide exceptional client care. Choice One has
automated most of its back office systems and is in the process of integrating
them into a seamless end-to-end system that will synchronize multiple tasks,
including installation, billing and client care. In order to minimize the time
between a client order and service installation it has also established an on-
line and real-time connection of its operations support systems with Bell
Atlantic Corporation. Choice One anticipates establishing similar connections
with other established telephone companies.

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<PAGE>

In each of its markets, Choice One has a locally based sales force that
provides high quality, personalized client care. In addition to its direct
sales force, Choice One uses third party agencies to sell its services. These
agencies include telecommunications equipment vendors, consultants, systems
integrators and cellular phone retailers. Sales agents are paid a monthly
commission based on revenue generated by their client base. As of December 31,
1999, Choice One had 150 persons in its sales and sales support staff and had
sales arrangements with 17 third party agencies.

Choice One may acquire telecommunications companies in its target market
region to accelerate market penetration and growth. Once acquired, it plans to
expand the range of services offered by the acquired entities to correspond to
the full range of Choice One services. In November 1999, Choice One acquired
Atlantic Connections, LLC, a local and long distance service provider with
operations in Portsmouth, NH and Worcester, MA, for an initial cash purchase
price of approximately $8.3 million plus up to an additional $2.1 million that
would be payable in cash, or at Choice One's option, in common stock, if
specified performance criteria are met in the 12 months following the
acquisition. Choice One's strategy is to migrate the approximately 3,100 small
and medium-sized business clients of Atlantic Connections to its switch-based
network and to offer a full suite of Choice One data and voice services to
these clients. Many of these clients are located where it either currently has
or plans to provide network based voice and data services. Initially, Atlantic
Connections will maintain its identity in the Worcester, MA and Portsmouth, NH
markets as a Choice One subsidiary. Once a majority of the clients for Atlantic
Connections' services are successfully moved onto its network, Choice One will
cease using the Atlantic Connections brand name. All new sales in these markets
will consist of Choice One products and services. Atlantic Connections has
historically had excellent relationships with its clients as measured by the
rate of retention within their client base.

Choice One was founded in June 1998 by a group of telecommunications
executives led by Steve M. Dubnik, the former chief operating officer of North
American Operations of ACC Corp. In addition to Mr. Dubnik, members of its
group of founding executives include Kevin Dickens, Senior Vice President,
Operations and Engineering; Mae Squier-Dow, Senior Vice President, Sales,
Marketing and Service; and Philip Yawman, Senior Vice President, Corporate
Development, all of whom were formerly executives at ACC Corp. Mr. Dubnik and
this group of founding executives have hired a management team with extensive
experience and success in the telecommunications industry. Members of Choice
One's management team have significant experience in the northeastern markets,
having previously served at such companies as Frontier Corporation, Teleport
Communications Group, Inc., and MFS Communications Company. Choice One's 20 top
executives and managers have an average of 16 years of experience in the
telecommunications industry.

Choice One's approximately $61.8 million of initial funded equity has been
provided by experienced investors in the telecommunications industry, including
Morgan Stanley Capital Partners III, L.P., Fleet Equity Partners VI, L.P. and
Waller-Sutton Media Partners, L.P., and its management team. Choice One's
credit facility permits it to borrow up to $150.0 million for the next eight
years with maximum borrowing limits to be reduced during the eight year period,
subject to the covenants, restrictions and significant borrowing conditions
described in the credit facility. Choice One completed a $164 million initial
public offering in February 2000.

Competition

Choice One operates in a highly competitive environment and currently does
not have a significant market share in any of its markets. Most of Choice One's
actual and potential competitors have substantially greater financial,
technical, marketing and other resources, including brand name recognition,
than it does. Also, the continuing trend toward business alliances in the
telecommunications industry, and the increasingly reduced regulatory and
technological barriers to entry in the data and Internet services markets,
could give rise to significant new competition. Choice One believes that the
principal competitive factors affecting its business will be pricing levels and
clear pricing policies, client service, accurate billing and, to a lesser
extent, variety of services. The ability of Choice One to compete effectively
will depend upon its ability to provide high quality market-driven services at
prices generally equal to or below those charged by competitors of Choice One.
To maintain its competitive posture, Choice One believes that it must be in a
position to reduce its prices in order to meet reductions in rates, if any, by
others.

33
<PAGE>

Properties

Choice One is headquartered in Rochester, New York and leases offices and
space in a number of locations, primarily for sales offices and network
equipment installations. The table below lists leased facilities of Choice One
as of December 31, 1999:

<TABLE>
<CAPTION>
Lease Approximate
Location Expiration Square Footage
-------- -------------- --------------
<S> <C> <C>
Albany, NY.................................. October 2008(1) 4,500
Albany, NY.................................. October 2003(2) 3,725
Buffalo, NY................................. October 2008(3) 7,000
Manchester, NH.............................. October 2009(3) 11,413
Pittsburgh, PA.............................. February 2009(3) 12,200
Portsmouth, NH.............................. April 2000(5) 1,078
Portsmouth, NH.............................. April 2004(5) 2,520
Providence, RI.............................. March 2009(3) 9,335
Rochester, NY............................... January 2009(4) 32,000
Rochester, NY............................... December 2009(3) 11,390
Springfield, MA............................. September 2009(3) 7,450
Syracuse, NY................................ December 2008(3) 9,850
Worcester, MA............................... September 2009(3) 4,446
Worcester, MA............................... September 2001(5) 1,000
</TABLE>

(1) Lease of network equipment facilities only.
(2) Lease of office space only.
(3) Lease of both office space and network equipment facilities.
(4) Lease of our principal executive offices.
(5) Atlantic Connections lease of office space.

Choice One believes that its leased facilities are adequate to meet its
current needs and that additional facilities are available to meet its
development and expansion needs in existing and projected target markets.

Litigation

Choice One is not a party to any pending legal proceedings that it believes
would, individually or in the aggregate, have a material adverse effect on its
financial condition or results of operations.

Management's Discussion and Analysis of Financial Condition and Results of
Operations

Overview

Since its inception on June 2, 1998 through January 1999, Choice One was in
the development stage of operations and did not generate any revenue. Its
principal activities during that time consisted of the following:

. the hiring of management and other key personnel;

. the raising of capital;

. the procurement of governmental authorizations and space in central
offices;

. the acquisition of equipment and facilities;

. the development, acquisition and integration of operations support
systems and other back office systems; and

. the negotiation of interconnection agreements

34
<PAGE>

Included in the management's discussion and analysis of financial condition
and results of operations of Choice One are EBITDA, as adjusted, amounts.
EBITDA, as adjusted, represents earnings before interest, income taxes,
depreciation and amortization and non-cash deferred compensation. EBITDA, as
adjusted, is used by management and certain investors as an indicator of a
company's historical ability to service debt. Management believes that an
increase in EBITDA is an indicator of improved ability to service existing
debt, to sustain potential future increases in debt and to satisfy capital
requirements. However, EBITDA, as adjusted, is not intended to represent cash
flows for the period, nor has it been presented as an alternative to either
operating income, as determined by generally accepted accounting principles,
nor as an indicator of operating performance or cash flows from operating,
investing and financing activities, as determined by generally accepted
accounting principles, and is thus susceptible to varying calculations. EBITDA,
as adjusted, may not be comparable to other similarly titled measures of other
companies.

Therefore, its revenues during this period are not indicative of revenues
that may be attained in the future. As a result of its development activities,
Choice One has experienced significant operating losses and negative EBITDA, as
adjusted to date. Choice One does not expect to achieve positive EBITDA, as
adjusted, in any market while Choice One emphasizes development, construction
and expansion of its telecommunications services business in such market and
until Choice One establishes a sufficient revenue-generating client base.
Choice One expects to continue to experience increasing operating losses and
negative EBITDA, as adjusted, as it expands its operations.

Choice One rapidly deployed its networks since commencing service. Choice
One was operational in 12 markets across the northeastern United States as of
March 31, 2000. The table below provides selected key operational data for the
three months ended:

<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Markets served................................. 12 2
Number of switches-voice....................... 8 2
Number of switches-data........................ 17 0
Central office collocations-voice.............. 162 3
Central office collocations-data............... 178 0
Addressable market (business lines)............ 1,900,000 100,000
Lines sold in quarter-total.................... 16,588 625
Lines sold in quarter-voice.................... 15,518 600
Lines sold in quarter-data..................... 1,070 25
Lines installed in quarter-total............... 13,014 293
Lines installed in quarter-voice............... 12,543 290
Lines installed in quarter-data................ 471 3
Lines in service-total......................... 33,110 293
Lines in service-voice......................... 32,411 290
Lines in service-data.......................... 699 3
Total employees................................ 520 127
Sales employees................................ 214 38
</TABLE>

Three Months Ending March 31, 2000 Compared to Three Months Ending March 31,
1999

Choice One generated $6.8 million in revenue during the three months ended
March 31, 2000. The first quarter revenue represents a 90% increase compared to
revenue for the fourth quarter of 1999. Choice One installed 13,014 lines
during the first quarter of 2000; an increase of 60% compared with 8,140 lines
installed during the fourth quarter of 1999. At March 31, 2000, Choice One has
a total installed base of 33,110 lines, which compares with 20,096 access lines
installed as December 31, 1999. Sales are expected to increase from the level
realized in the first quarter of 2000 as new markets are opened and as sales
employees in existing markets are increased.

35
<PAGE>

The net loss (after noncash one-time management allocation charge and
amortization of deferred compensation and a portion of the deferred management
allocation charge) for the first quarter of 2000 was $81.7 million. The net
loss for the first quarter of 1999 was $4.4 million. Earnings before interest,
taxes, depreciation, amortization, non-cash deferred compensation and
management allocation charge ("EBITDA, as adjusted") was a negative $11.3
million for the first quarter of 2000 versus a negative $3.1 million for the
first quarter of 1999.

Of the 13,014 access lines installed during the first quarter of 2000, 100%
are facility based and Choice One is not currently marketing telephone company
provided service via resale. At March 31, 2000, facility-based lines represent
87% of the total installed base as compared to 75% of the total installed base
at December 31, 1999.

Network Costs

Network costs for the three months ended March 31, 2000 were $7.0 million.
The first quarter network costs represent a 58% increase compared to network
costs for the fourth quarter of 1999. This sharp increase is consistent with
the deployment of Choice One's networks and growth of its services.

Selling, General And Administrative Expenses

Selling, general and administrative expenses for the three months ended
March 31, 2000 were $77.4 million. This compares to selling, general and
administrative expenses of $9.2 million during the fourth quarter of 1999.
These increased expenses resulted primarily from the recording of a $64.5
million non-cash management allocation charge and an expansion of Choice One's
staffing and deployment of its networks. The number of employees increased to
520 as of March 31, 2000, from 390 as of December 31, 1999 and 127 as of March
31, 1999. As of March 31, 2000, sales employees (which include direct sales,
sales support and sales management) increased to 214. This compares to 161 as
of December 31, 1999 and 38 as of March 31, 1999. Choice One expects the number
of sales employees and total employees to increase significantly throughout the
remainder of 2000.

Management Ownership Allocation Charge

The magnitude of the loss for the three months ended March 31, 2000 is
principally due to the management ownership allocation charge included in
selling, general and administrative expenses.

Under generally accepted accounting principles, upon consummation of the
initial public offering, Choice One was required to record the $119.9 million
increase in the assets of Choice One Communications L.L.C. allocated to
management as an increase in additional paid-in capital, with a corresponding
increase in deferred compensation, of which Choice One was required to record
$64.5 million as a non-cash, non-recurring charge to operating expense during
the period in which this offering is consummated and $55.4 million was recorded
as deferred management ownership allocation charge. The deferred charge will be
amortized at $19.0 million, $23.9 million, $11.6 million and $.9 million during
2000, 2001, 2002 and 2003, respectively, which is based upon the period over
which Choice One has the right to repurchase the securities.

In addition to the above expenses, Choice One recognized $1.7 million during
the three months ended March 31, 2000 of amortization of deferred compensation
expense. This also is a non-cash charge. Deferred compensation was recorded in
connection with membership units of Choice One Communications LLC sold to
certain management employees and grants to employees under its 1998 Stock
Option Plan.

Depreciation and Amortization

Depreciation and amortization for the three months ended March 31, 2000 was
$3.0 million. The first quarter depreciation and amortization expense
represents a 68% increase compared to depreciation and amortization expenses
for the fourth quarter of 1999. The increase is consistent with the deployment
of its

36
<PAGE>

networks and initiation of services in 12 markets by March 31, 2000. Its
depreciation and amortization expense includes depreciation of switch related
equipment, non-recurring charges and equipment collocated in established
telephone company central offices, network infrastructure equipment,
information systems and furniture and fixtures.

It also includes amortization of goodwill and customer base. The acquisition
of Atlantic Connections was accounted for using the purchase method of
accounting. The amount of the purchase price in excess of the fair value of the
net assets acquired, $5.5 million, is being amortized over a 10-year period.
The value of the customer base acquired from Atlantic Connections, which
management estimates to be approximately $3.3 million, is being amortized over
a five-year period. The acquisition of EdgeNet Inc. was accounted for using the
purchase method of accounting. The amount of the purchase price in excess of
the fair value of the net assets acquired, $3.5 million, is being amortized
over a 10-year period. The value of the customer base acquired from EdgeNet,
which management estimates to be approximately $0.5 million, is being amortized
over a five-year period. Choice One expects that its depreciation and
amortization expense will increase as Choice One continues to make capital
expenditures, acquire long-term rights in telecommunications facilities and
acquire other businesses.

Interest Expense And Income

Interest expense for the three months ended March 31, 2000 was $1.5 million.
Interest expense includes interest payments on borrowings under its credit
facility. It also includes amortization of deferred financing costs related to
its credit facility. Interest income for the three months ended March 31, 2000
was $0.5 million. Interest income results from the investment of cash and cash
equivalents. There was no interest income during the three months ended March
31, 1999. Interest income results from the cash proceeds generated from the
initial public offering of its common stock.

Income Taxes

Choice One has not generated any taxable income to date and do not expect to
generate taxable income in the next few years. Use of its net operating loss
carryforwards, which begin to expire in 2018, may be subject to limitations
under Section 382 of the Internal Revenue Code of 1986, as amended. Choice One
has recorded a full valuation allowance on the deferred tax asset, consisting
primarily of net operating loss carryforwards, due to the uncertainty of its
reliability.

Liquidity and Capital Resources

Credit Facility. Its credit facility permits us to borrow up to $150.0
million, subject to various conditions, covenants and restrictions for the next
eight years with maximum borrowing limits to be reduced starting in 2002 by
5.0% with increasing reductions thereafter for each year. The $50.0 million
term loan portion of the credit facility will not be available for borrowing by
us after November 3, 2000 if these funds have not been borrowed before that
date. As of March 31, 2000, there were no borrowings outstanding under the
revolving portion of the credit facility. The credit facility, which is secured
by liens on substantially all of its and its subsidiaries' assets and a pledge
of its subsidiaries' common stock, contains covenants and events of default
that are customary for credit of this nature.

Cash Flows. Choice One has incurred significant operating and net losses
since its inception. Choice One expects to continue to experience increasing
operating losses and negative EBITDA as Choice One expands its operations and
builds its client base. As of March 31, 2000, Choice One has an accumulated
deficit of $119.2 million. Net cash used for operating activities was
approximately $14.8 million for the three months ended March 31, 2000 and
approximately $9.3 million for the three months ended March 31, 1999. The net
cash used for operating activities during the three months ended March 31, 2000
was primarily due to net losses and an increase in accounts receivable.

37
<PAGE>

Net cash provided by financing activities was $98.9 million for the three
months ended March 31, 2000 and $13.7 million for the three months ended March
31, 1999. Net cash provided by financing activities for the three months ended
March 31, 2000 was primarily related to the initial public offering. Net cash
provided by financing activities for the three months ended March 31, 1999 was
related to borrowings under the credit facility.

Capital Requirements. Capital expenditures were $20.4 million and $5.9
million for the three months ended March 31, 2000 and March 31, 1999,
respectively. Choice One expects that its capital expenditures will be
substantially higher in future periods in connection with the purchase of
infrastructure equipment necessary for the development and expansion of its
network, the development of new markets and potential acquisitions, investments
and strategic alliances.

At March 31, 2000, Choice One has approximately $65.5 million in cash and
cash equivalents. In addition, Choice One has a $150.0 million credit facility.
At March 31, 2000, there were no borrowings outstanding on that facility.
Choice One believes that its cash resources and available credit facilities are
sufficient to meet its requirements for at least the next twelve months.

Quantitative and Qualitative Disclosures About Market Risk

At March 31, 2000, the carrying value of its debt obligations excluding
capital lease obligations was $2.4 million and the fair value of those
obligations was $2.4 million.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Results of Operations

During the period from its inception on June 2, 1998 through December 31,
1998, Choice One incurred a net loss of $5.1 million, which was attributable to
selling, general and administrative, or SG&A, expenses of $5.1 million,
including noncash deferred compensation of $.4 million, and minimal
depreciation and amortization expense.

Choice One became operational in nine markets by the end of 1999 and
generated $4.5 million in revenue for the year ended December 31, 1999. For the
year ended December 31, 1999, after giving pro forma effect to the acquisition
of Atlantic Connections and the incurrence of debt in connection therewith,
Choice One would have had a net loss of $34.2 million. Its historical network
operating costs, selling, general and administrative expenses and depreciation
and amortization expense during this period were $7.0 million, $23.0 million,
and $5.2 million, respectively. Choice One expects these costs and expenses to
increase significantly in future periods as its expands its operations.

Atlantic Connections and Predecessors Overview

In November 1999, Choice One acquired Atlantic Connections, a local and long
distance service provider with operations in Portsmouth, New Hampshire and the
Worcester, Massachusetts metropolitan area for an initial cash purchase price
of approximately $8.3 million plus up to an additional $2.1 million that would
be payable in cash, or at its option, in common stock, if specified criteria
are met in the 12 months following the acquisition. The sellers used
approximately $3.3 million of the purchase price to repay Atlantic Connections'
long-term debt in full.

Atlantic Connections Results of Operations

Revenues

Total revenues of Atlantic Connections were $6.5 million for 1998 compared
to $5.5 million for 1997, an increase of $1.0 million, or 18.2%. This increase
was the result of growth in sales to existing customers as well as the addition
of new customers. The increase in 1998 was also due in part to the addition of
two new services.

38
<PAGE>

Total revenues were $5.5 million for 1997 compared to $5.3 million for 1996,
an increase of $196,000, or 3.8%. During this period, minutes of use increased
over 14.0%, but were offset by competitive pressure on rates.

Cost of Service

Cost of service was $5.2 million for 1998 compared to $3.7 million for 1997,
an increase of $1.5 million, or 40.5%. This increase was primarily due to the
higher cost of local exchange resale and, to a lesser extent, from
inefficiencies resulting from having two network systems while Atlantic
Connections converted traffic in phases from its old to its new network. The
upfront cost of implementing a new service also contributed to the increase in
cost of service for 1998.

Cost of service was $3.7 million for 1997 compared to $3.8 million for 1996,
a decrease of approximately $.1 million or 2.6%. The decrease was primarily
attributable to significant reductions in "wholesale" access costs. This
decrease was also in part due to the accounting treatment for various new
network costs related to the installation of new switches, which were accounted
for under general and administrative expenses rather than cost of service,
until placed into service.

Selling, General and Administrative

Selling, general and administrative expenses were $2.0 million for 1998
compared to $1.5 million for 1997, an increase of $543,000, or 35.2%. This
increase was primarily due to expenses associated with sales growth and
additional personnel.

Selling, general and administrative expenses were $1.5 million for 1997
compared to $1.2 million for 1996, an increase of $350,000, or 29.1%. This
increase was primarily attributable to increases in salary expenses associated
with management, inside sales and other personnel, consulting, accounting and
legal fees and expenses directly related to upgrades in Atlantic Connections'
office equipment and switch installation. Additionally, certain expenses
relating to the installation of new switches that would normally have been
applied under cost of service were expensed under general and administrative
for 1997 because the switches were not in service.

Liquidity and Capital Resources

Initial Equity Financing. Choice One's initial equity financing consisted of
approximately $61.8 million contributed by its institutional investors and
management. On June 30, 1999, the aggregate amount of capital committed by
certain of these members and new members was increased to a total capital
commitment of approximately $133.4 million.

Credit Facility. Choice One's credit facility permits it to borrow up to
$150.0 million, subject to various conditions, covenants and restrictions,
including those described below, for the next eight years with maximum
borrowing limits to be reduced starting in 2002 by 5.0% with increasing
reductions thereafter for each year. The $50.0 million term loan portion of the
credit facility will not be available for borrowing by Choice One after
November 3, 2000 if these funds have not been borrowed before that date. As of
December 31, 1999, $51.5 million was outstanding under the revolving portion of
the credit facility. The credit facility, which is secured by liens on
substantially all of Choice One and its subsidiaries' assets and a pledge of
our subsidiaries' common stock, contains covenants and provisions that restrict
operations of Choice One and its subsidiaries.

Events of default under the credit facility include various events of
default customary for such type of agreement, such as failure to pay scheduled
payments when due, cross-defaults with and cross-acceleration to other
indebtedness, the occurrence of a change in control, loss of material
communications licenses, and events

39
<PAGE>

of bankruptcy, insolvency and reorganization. In addition, if Mr. Dubnik ceases
to be Choice One's chief executive officer and a replacement satisfactory to
the lenders is not hired within 180 days, there will be an event of default
under its credit facility.

Cash Flows. Choice One has incurred significant operating and net losses
since its inception. Choice One expects to continue to experience increasing
operating losses and negative EBITDA as it expands its operations and build its
client base. As of December 31, 1999, Choice One had an accumulated deficit of
$37.5 million. Net cash provided by operating activities was approximately $6.6
million for the period of inception through December 31, 1998 and net cash used
in its operating activities was approximately $24.3 million for the year ended
December 31, 1999. The net cash used for operating activities during 1999 was
primarily due to net losses and a decrease in current liabilities.

Net cash provided by financing activities was $16.0 million for the period
from inception through December 31, 1998 and $82.5 million for the year ended
December 31, 1999. Net cash provided by financing activities for the period
from inception through December 31, 1998 was related to equity contributions.
Net cash provided by financing activities for the year ended December 31, 1999
was related to $43.3 million of borrowings under the credit facility, $44.0
million of equity contributions and $4.8 million of payments of financing
costs.

Capital Requirements. Capital expenditures were $21.1 million and $56.1
million from the period of inception through December 31, 1998 and during the
year ended December 31, 1999, respectively. Choice One expects that its capital
expenditures will be substantially higher in future periods in connection with
the purchase of infrastructure equipment necessary for the development and
expansion of its network, the development of new markets and potential
acquisitions and strategic alliances. Net cash used in its investing activities
was $21.1 million for the period of inception through December 31, 1998 and
$56.1 million for the year ended December 31, 1999. The net cash used for
investing activities was due to capital expenditures.

To expand and develop Choice One's business, it will need a significant
amount of cash. The actual amount and timing of its future capital requirements
may differ materially from its estimates as a result of the demand for its
services and regulatory, technological and competitive developments, including
additional market developments and new opportunities in the industry and other
factors. Choice One also expects that it may require additional financing, or
require financing sooner than anticipated, if its development plans or
projections change or prove to be inaccurate or to complete its roll-out plan
to 20 markets. Choice One may also require additional financing in order to
take advantage of unanticipated opportunities, to effect acquisitions of
businesses, to develop new services or to otherwise respond to changing
business conditions or unanticipated competitive pressures. Sources of
additional financing may include commercial bank borrowings, vendor financing
or the private or public sale of equity or debt securities. Its ability to
obtain additional financing is uncertain.

Quantitative and Qualitative Disclosures About Market Risk

At December 31, 1999, the carrying value of Choice One's debt obligations
excluding capital lease obligations was $51.5 million and the fair value of
those obligations was $51.5 million. The weighted average interest rate of its
debt obligations at December 31, 1999 was 10.78%.

Choice One has not in the past, used in any material respect financial
instruments as hedges against financial and currency risks or for trading.
However, as it expands its operations, Choice One may begin to use various
financial instruments, including derivative financial instruments, in the
ordinary course of business, for purposes other than trading. These instruments
could include letters of credit, guarantees of debt and interest rate swap
agreements. Choice One does not intend to use derivative financial instruments
for speculative purposes. Interest rate swap agreements would be used to reduce
its exposure to risks associated with interest rate fluctuations and, subject
to limitations and conditions, are required by its credit facility. By their
nature, these instruments would involve risk, including the risk of
nonperformance by counterparties, and our

40
<PAGE>

maximum potential loss may exceed the amount recognized in its balance sheet.
Choice One would attempt to control its exposure to counterparty credit risk
through monitoring procedures and by entering into multiple contracts.

Recent Accounting Pronouncements

In June 1998, the financial accounting standards board, or FASB, issued
statement of financial accounting standards, SFAS, No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which was amended by SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of FASB Statement No. 133, an amendment of FASB Statement
No. 133," and is effective on a prospective basis for interim periods and
fiscal years beginning January 1, 2001. This Statement establishes accounting
and reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging securities. To the
extent Choice One begins to enter into such transactions in the future, it will
adopt the Statement's disclosure requirements in the financial statements for
the year ending December 31, 2001.

In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position 98-1, "Accounting For the Costs of Computer
Software Developed For or Obtained For Internal-Use," which requires the
capitalization of particular costs incurred in connection with developing or
obtaining software for internal-use. Choice One adopted the provisions of SOP
98-1 in our financial statements as of January 1, 1999.

In April 1998, the AICPA issued Statement of Position 98-5, "Reporting the
Costs of Start-Up Activities," which requires that costs related to start-up
activities be expensed as incurred. Choice One adopted the provisions of SOP
98-5 in its financial statements as of January 1, 1999.

Change and Disagreements with Accountants

None.

41
<PAGE>

Management

The following sets forth information concerning its directors, executive
officers and other key personnel, including their ages, as of December 31,1999.

<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<C> <C> <S>
Steve M. Dubnik(1)............... 37 Chairman of the Board, President and
Chief Executive Officer, Director
Kevin S. Dickens................. 36 Senior Vice President, Operations and
Engineering
Ajay Sabherwal................... 33 Senior Vice President, Finance and
Chief Financial Officer
Mae H. Squier-Dow................ 38 Senior Vice President, Sales, Marketing
and Service
Philip H. Yawman................. 34 Senior Vice President, Corporate
Development
Robert Bailey.................... 53 Vice President, Convergent Network
Systems
Joseph A. Calzone................ 36 Vice President, Engineering and Network
Operations
Linda S. Chapman................. 36 Vice President, Human Resources
James R. Currie.................. 52 Vice President, Operations
Elizabeth A. Ellis............... 41 Vice President, Information Technology
Robert J. Merrill................ 43 Vice President, Business Development
Michelle C. Paroda............... 36 Vice President, Client Services
Joseph M. Schaal................. 34 Vice President, Application Services
and Strategy
Kim Robert Scovill............... 46 Vice President, Regulatory Affairs and
General Counsel
John J. Zimmer................... 41 Vice President, Finance and Controller
Paul Cissel...................... 42 Vice President, Sales, New England
Michael A. D'Angelo.............. 34 Vice President, Sales, Western Region
Daniel K. Iles................... 39 Regional Vice President of Sales,
Western Region
Eric Peterson.................... 36 Regional Vice President of Sales, New
England
John B. Ehrenkranz(1)............ 34 Director
Bruce M. Hernandez(1)............ 39 Director
Royce J. Holland................. 51 Director
Michael M. Janson................ 52 Director
Robert M. Van Degna(1)........... 55 Director
</TABLE>
--------
(1) Member of the Executive Committee.

Steve M. Dubnik, Chairman of the Board, President, Chief Executive Officer
and Founder, has worked in the telecommunications industry for 15 years. Before
founding Choice One in June 1998, Mr. Dubnik served in various capacities with
ACC Corp., including as the President and Chief Operating Officer of North
American Operations of ACC from November 1996 to April 1998 and as Chairman of
the Board of Directors of ACC TelEnterprises Ltd. from July 1994 to April 1998.
From December 1997 to April 1998, he also jointly performed the functions of
Chief Executive Officer of ACC. Prior to joining ACC, Mr. Dubnik served as
President, Mid-Atlantic Region, of RCI Long Distance (now Frontier Corporation)
from 1992 through June 1994. For more than five years prior, he held various
senior positions with Rochester Telephone Corporation (now Frontier
Corporation) in engineering, operations, information technology and sales.

Kevin S. Dickens, Senior Vice President, Operations and Engineering since
July 1998, has worked in the telecommunications industry for 11 years. Before
joining Choice One, Mr. Dickens was President and Chief Executive Officer of
ACC Corp.'s Canadian subsidiary, ACC TelEnterprises Ltd., from May 1997 to June
1998. Before that, Mr. Dickens was Vice President of Network Planning and
Optimization at Frontier Corporation, from September 1996 to May 1997, with
responsibility for Frontier's long distance network. Before that, Mr. Dickens
was a Senior Director of Advanced Technology and a Senior Director of
Engineering at Frontier Corporation since September 1994. Mr. Dickens has also
worked in various positions in engineering and technology development, business
unit management, marketing and sales.

42
<PAGE>

Ajay Sabherwal, Senior Vice President, Finance and Chief Financial Officer
since September 1999, has worked both directly in the telecommunications
industry and as an equity analyst covering the telecommunications industry for
over 10 years. Mr. Sabherwal was most recently executive director of
institutional equity research for Toronto-based CIBC World Markets from June
1996 to September 1999. Prior to joining CIBC World Markets as a senior
research analyst in June of 1996, Mr. Sabherwal was the telecommunications
analyst for BZW (Barclays de Zoete Wedd) Canada and its successor company from
November 1993 until June 1996. Mr. Sabherwal has also held management positions
at Unitel Communications (now AT&T Canada), Deloitte and Touche Management
Consultants, and CNCP Telecommunications in the areas of new product
development and launch, planning, managing vendor relationships and budgeting.

Mae H. Squier-Dow, Senior Vice President, Sales, Marketing and Service since
June 1998, has worked in the telecommunications industry for 15 years. Ms.
Squier-Dow served as President of ACC Telecom, a U.S. subsidiary of ACC Corp.,
from June 1996 to May 1998, and in several positions at ACC Long Distance U.K.
Ltd., including as Commercial Director from April 1995 to June 1996, and as
Director of Client Relations and Marketing, Vice President of International
Planning and Operations Director from October 1993 to April 1995. Ms. Squier-
Dow also served as Vice President of Client Relations at ACC Corp. from March
1992 to October 1993 and as its Director of Client Relations from January 1991
to March 1992.

Philip H. Yawman, Senior Vice President, Corporate Development since July
1998, has worked in the telecommunications industry for 11 years. Prior to
joining Choice One, Mr. Yawman was Vice President of Investor Relations and
Corporate Communications at ACC Corp. from April 1997 to January 1998. Mr.
Yawman also served in various positions at Frontier Corporation from July 1989
to April 1997, including as head of investor relations activities and in
several product management positions.

Robert Bailey, Vice President of Convergent Network Systems since September
1999, is responsible for evaluating and selecting the technology to be deployed
by Choice One in the next generation of switching systems architecture,
including the evolution from circuit switching systems to packet and ATM-based
infrastructure. Most recently, he was Vice President and Chief Technology
Officer for the Upstate Cellular Network (Frontier Cellular), a joint venture
of Bell Atlantic Mobile and Frontier Corporation, from January 1985 until April
1999, where he was responsible for engineering and operations of a cellular
network that covered 5.5 million population units in upstate New York.
Previously, Mr. Bailey held a number of key positions at Frontier Corporation,
including Vice President of Strategic Technologies, and President of Frontier
Cellular, Frontier Network Systems and Frontier's long distance network. Prior
to entering the deregulated business units in 1985, he held a number of senior
positions in operations and engineering at Frontier's predecessor regulated
company, Rochester Telephone.

Joseph A. Calzone, Vice President, Engineering and Network Operations since
July 1998, has worked in the telecommunications industry for 13 years. Prior to
joining Choice One, Mr. Calzone held various key management positions at
Citizens Communications from October 1995 to May 1998, most recently as head of
the National Sales and Services organization and as Vice President of Long
Distance Engineering and Operations. Before that, Mr. Calzone was employed by
Frontier Corporation for 10 years, where he held various positions such as
Director of Carrier Services and Sales, Director of Strategic Accounts and
Manager of Traffic Engineering and Switching.

Linda S. Chapman, Vice President, Human Resources since August 1998, was the
Director of Human Resources of ACC Corp.'s U.S. subsidiary, ACC Telecom, from
June 1997 to July 1998. Before that, Ms. Chapman held various management
positions with MCI from March 1994 to May 1997 and worked in the Lodging
division of Marriott International from October 1986 to February 1994.

James R. Currie, Vice President, Operations was at Citizens Communications
from 1994 until he came to Choice One in June 1999. At Citizens he was in a
number of executive positions including Director of Long Distance Operations,
Director of Network Provisioning, Senior Director--Business Call Centers and
Sales

43
<PAGE>

Engineering, Vice President of Eastern Region Operations and Vice President of
Carrier Access Sales. Prior to joining Citizens, Mr. Currie's experience
includes over 20 years of operations and engineering experience with New York
Telephone, CONTEL as well as with GTE.

Elizabeth A. Ellis, Vice President, Information Technology since July 1998,
has worked in the information technology field for over 18 years, including the
past five years in the telecommunications industry. Prior to joining Choice One
in July 1998, Ms. Ellis was Commercial Director for ACC Telecom's subsidiaries
in the United Kingdom and Germany from August 1994 to June 1998 where she was
responsible for all aspects of network, operations, client service,
telemarketing and information technology. Before that, Ms. Ellis was employed
at Wytecom, Inc. from March 1992 to August 1994.

Robert J. Merrill, Vice President, Product Development since September 1998,
has worked in the telecommunications industry for over 21 years. Prior to
joining Choice One, Mr. Merrill was the Vice President of Marketing and Product
Development for Frontier Communication's Carrier Services Group, from January
to September 1998 and the Director of Product Development (Wholesale) from June
1997 to January 1998. Before that, Mr. Merrill was at Rochester Telephone as
the Director of Marketing and Product Development from April 1995 to June 1997
and as the General Manager of Visions Long Distance from June 1993 to April
1995. Before that, Mr. Merrill worked in a variety of areas including marketing
and product development, regulatory affairs, engineering, network operations,
sales, finance and business development for GTE, AT&T and NECA for over 15
years.

Michelle C. Paroda, Vice President, Client Services since July 1998, has
worked in the telecommunications industry for 15 years. Prior to joining Choice
One, Ms. Paroda had been employed in a variety of positions by Frontier
Corporation since 1984, most recently as Vice President of Client Service.
Joseph M. Schaal, our Vice President, Application Services and Strategy since
July 1998, has worked in the telecommunications industry for 10 years. Prior to
joining Choice One, Mr. Schaal held various positions at Frontier Corporation
in project management, business planning, financial management, operations and
software development at Frontier Corporation from January 1995 to February
1997, most recently as its Director of Application and Product Development from
March 1997 to May 1998.

Kim Robert Scovill, Vice President, Regulatory Affairs and General Counsel
since December 1998, has worked in the telecommunications industry for over 26
years. Mr. Scovill began his career in 1972 as a founding faculty member of
Ohio University's Center of Telecommunications Management. Mr. Scovill served
as a senior administrator and Administrative Law Judge at the Public Utilities
Commission of Ohio from May 1982 to August 1986. Mr. Scovill also served as the
Manager of Corporate Issues at Cincinnati Bell Telephone from May 1986 to March
1990, where he managed the introduction of such telecommunications innovations
as cellular calling party pays and Kentucky's deaf relay service. From January
1991 to February 1998, Mr. Scovill was Vice President of Worthington Voice
Services, a telecommunications and e-commerce company. From February 1998 to
December 1998, Mr. Scovill was Vice President and General Counsel of Omnicall,
a South Carolina-based CLEC.

John J. Zimmer, Vice President, Finance and Controller since August 1998, is
a certified public accountant and has worked in the telecommunications industry
for 9 years. Prior to joining Choice One, Mr. Zimmer was employed by ACC Corp.,
as Vice President and Treasurer from January 1997 to July 1998, as Vice
President of Finance from September 1994 to January 1997, and as Controller
from March 1991 through August 1994. Before that, Mr. Zimmer was an Audit and
Accounting Manager with Arthur Andersen & Co.

Paul Cissel, Vice President, of Sales, New England Region, since November
1999, has worked in both the telecommunications and electronics industries for
over 19 years. Mr. Cissel was President of Atlantic Connections when Choice One
acquired it in November 1999. Prior to joining Atlantic Connections in
September 1998, Mr. Cissel was the Senior Vice President of Sales and Marketing
for Phoenix Network from November 1993 to November 1996.

44
<PAGE>

Michael A. D'Angelo, Vice President of Sales, Western Region, since
September 1998, has worked in the telecommunications industry for over 12
years. Prior to joining Choice One, Mr. D'Angelo was the Director of Sales,
Southeast Regional Manager at ICG Communications from November 1997 to
September 1998. Before that, Mr. D'Angelo was Regional Sales Manager for
Citizens Communications from January 1995 to November 1997, Territory Manager
for MFS Telecom Communications from August 1994 to January 1995, and Major
Account Manager and Account Executive for Rochester Telephone from March 1987
to February 1994.

Daniel K. Iles, Regional Vice President of Sales, Western Region, since July
1998, has worked in the telecommunications industry for 13 years. Prior to
joining Choice One, Mr. Iles was the Director of Sales for Intermedia
Corporation from March 1997 to July 1998. Before that, Frontier Corporation
employed Mr. Iles, as Director of Sales from October 1995 to March 1997 and as
Regional Manager-Upstate New York from November 1990 to October 1995.

Eric Peterson, Regional Vice President of Sales, New England Region, since
November 1999. Prior to joining Choice One, Mr. Peterson held a similar
position with HarvardNet from December 1998 to August 1999. He served as the
Vice President of Sales and Marketing for FaxNet, a startup company, from 1996
until 1998. From 1991 to 1996, Mr. Peterson held a series of positions with
Allnet Communications, where he helped to establish the Allnet Wholesale
Division. His telecom career began at First Phone in Boston where he was
Director of Sales from 1988 to 1991.

John B. Ehrenkranz, was elected to the board of directors in July 1998 and
is a Managing Director of Morgan Stanley & Co. Incorporated where he has been
employed since 1987. Mr. Ehrenkranz is also a Managing Director of Morgan
Stanley Capital Partners III, Inc. and of MSDW Capital Partners IV, Inc., one
of which is the managing member of the general partner of each of the Morgan
Stanley Dean Witter Capital Partners Entities. Mr. Ehrenkranz also currently
serves on the board of directors of Allegiance Telecom, Inc., as well as other
privately held companies.

Bruce M. Hernandez, was elected to the board of directors in July 1998 and
is a Principal and Chief Executive Officer of Waller Sutton Media Partners,
L.P., where he has been employed since 1997. Mr. Hernandez previously served as
Chief Financial Officer of Horizon Cellular from 1993 to 1997.

Royce J. Holland, was elected to the board of directors in January 2000 and
is the Chairman of the Board and Chief Executive Officer of Allegiance Telecom,
Inc., which he founded in April 1997. Prior to founding Allegiance, Mr. Holland
was one of several co-founders of MFS Communications, where he served as
President and Chief Operating Officer from April 1990 until September 1996 and
as Vice Chairman from September 1996 to February 1997. In January 1993, Mr.
Holland was appointed by President George Bush to the National Security
Telecommunications Advisory Committee. In December 1998, Mr. Holland was named
Chairman of the Association for Local Telecommunications Services, the industry
trade organization for the competitive local telephone sector. In November
1999, Mr. Holland was appointed by Texas Governor George W. Bush to the Texas
(Electronic) E-Government Task Force. Mr. Holland also presently serves on the
board of directors of CSG Systems, a publicly held billing services company.

Michael M. Janson, was elected to the board of directors in July 1998 and is
a Managing Director of Morgan Stanley & Co. Incorporated where he has been
employed since 1987. Mr. Janson is also a Managing Director of Morgan Stanley
Capital Partners III, Inc. and of MSDW Capital Partners IV, Inc., one of which
is the managing member of the general partner of each of the Morgan Stanley
Dean Witter Capital Partners Entities. Mr. Janson also currently serves on the
board of directors of Silgan Holdings, Inc., as well as other privately held
companies.

Robert M. Van Degna, was elected to the board of directors in July 1998 and
is a Managing Director of Fleet Equity Partners, an investment firm affiliated
with Fleet Boston Financial Corp. Mr. Van Degna joined Fleet Financial Group in
1971 and held a variety of lending and management positions until he organized
Fleet Equity Partners in 1982. Mr. Van Degna served on the board of directors
of ACC Corp. from 1995 to 1998 and he was Chairman of the Board when ACC merged
with Teleport Communications Group. Mr. Van Degna also currently serves on the
Board of Preferred Networks, Inc., as well as other privately held companies.

45
<PAGE>

Executive Compensation

The following table sets forth compensation paid during the period from June
1998 to December 31, 1998, and the year ended December 31, 1999 to the chief
executive officer of Choice One and the other four most highly paid executive
officers of Choice One whose annual salary and bonus, on a prorated basis,
exceeded $100,000 for all services rendered to Choice One during such period.

Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
-------------------------- ---------------- All Other
Name and Principal Restricted Stock Compensation
Position Year Salary($) Bonus($) Awards ($)(5) ($)(6)
------------------ ---- --------- -------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Steve M. Dubnik......... 1998(1) $75,385 $14,000 -- $1,777
Chairman and Chief 1999 142,800 15,070 -- 4,284
Executive Officer

Kevin S. Dickens........ 1998(2) 65,000 13,000 -- 1,650
Sr. Vice President, 1999 132,600 13,993 -- 3,978
Operations and
Engineering

Mae Squier-Dow.......... 1998(1) 70,000 13,000 -- 1,650
Sr. Vice President, 1999 132,600 13,993 -- 3,978
Sales, Marketing and
Service

Philip Yawman........... 1998(3) 60,000 23,000 -- 1,650
Sr. Vice President, 1999 132,200 13,993 -- 3,966
Corporate Development

Ajay Sabherwal.......... 1999(4) 36,400 41,483 39,485 1,092
Sr. Vice President-
Finance and Chief
Financial Officer
</TABLE>
--------
(1) Mr. Dubnik and Ms. Squier-Dow joined Choice One on June 15, 1998 and the
compensation disclosed is for the period from that date through December
31, 1999.
(2) Mr. Dickens joined Choice One on July 1, 1998 and the compensation
disclosed is for the period from that date through December 31, 1999.
(3) Mr. Yawman joined Choice One July 13, 1998 and the compensation disclosed
is for the period from that date through December 31, 1999.
(4) Mr. Sabherwal joined Choice One on September 20, 1999 and the compensation
disclosed is from that date through December 31, 1999.
(5) Except as noted, none of these executive officers received personal
benefits in excess of the lesser of $50,000 or 10% of such individuals
reported salary and bonus for 1999 or 1998. The amounts in this column for
1999 for Mr. Sabherwal include the following-$39,485 for value of the
Class B Units in Choice One Communications L.L.C. that exceed the amount
paid for these units.
(6) Reflects Choice One's matching contributions made under its 401(k) plan
on behalf of such executive officer.

46
<PAGE>

VOTING SECURITIES OF CHOICE ONE AND PRINCIPAL HOLDERS THEREOF

The following table sets forth information regarding the beneficial
ownership of Choice One's outstanding common stock as of March 1, 2000 by: (i)
each of its directors and the executive officers, (ii) all directors and
executive officers as a group and (iii) each owner of more than 5% of its
equity securities, referred to as the 5% owners. Except as set forth below, the
business address of each stockholder, officer or director listed below is c/o
Choice One Communications Inc., 100 Chestnut Street, Rochester, New York 14604.

<TABLE>
<CAPTION>
Shares
Beneficially Owned
------------------
Name and Address of Beneficial Owner(1) Number Percent
--------------------------------------- ---------- -------
Directors and Executive Officers
<S> <C> <C>
Steve M. Dubnik (2)(3)..................................... 2,200,253 7.09%
Kevin S. Dickens (2)(4).................................... 1,100,124 3.54
Ajay Sabherwal (2)......................................... 440,054 1.41
Mae Squier-Dow (2)......................................... 1,100,124 3.54
Philip Yawman (2)(5)....................................... 660,077 2.12
John B. Ehrenkranz (6)..................................... 11,043,826 35.61
Bruce M. Hernandez (7)..................................... 1,323,007 4.26
Michael M. Janson (8)...................................... 11,043,826 35.61
Robert M. Van Degna (9).................................... 2,646,014 8.53
Royce J. Holland (10)...................................... 66,150 *
All directors and executive officers as a group (25
persons).................................................. 22,247,427 71.73
<CAPTION>
5% Owners
<S> <C> <C>
Morgan Stanley Dean Witter Capital Partners Entities (11).. 11,043,826 35.61
Fleet Entities (12)........................................ 2,646,014 8.53
Waller-Sutton Media Partners, L.P. (13).................... 1,323,007 4.26
</TABLE>
--------
* Denotes less than one percent.
(1) The persons named in the table have sole voting and dispositive power
with respect to all shares of common stock shown as beneficially owned by
them, subject to the information contained in the notes to the table and
to community property laws, where applicable.
(2) The shares of common stock owned by Mr. Dubnik, Mr. Dickens, Ms. Squier-
Dow and Mr. Yawman are subject to vesting, with 20% of such shares of
common stock vested on July 8, 1998, and an additional 20% vesting on
each of July 8, 1999, 2000, 2001 and 2002. The shares of common stock
owned by Mr. Sabherwal are subject to vesting, with 20% of such shares
vested on August 19, 1999, and an additional 20% vesting on each of
August 19, 2000, 2001, 2002 and 2003. The shares of common stock owned by
management vest 25% on each of the first four anniversaries of the grant
date.
(3) Includes 708,485 shares of common stock held by the Dubnik Family Limited
Partnership, of which Mr. Dubnik is sole general partner. Mr. Dubnik
disclaims any beneficial ownership of these shares of common stock.
(4) Includes 354,242 shares of common stock held by the Dickens Family
Limited Partnership, of which Mr. Dickens is sole general partner. Mr.
Dickens disclaims any beneficial ownership of these shares of common
stock.
(5) Includes 236,162 shares of common stock held by P.H.Y. Associates, L.P.
of which Mr. Yawman is the sole stockholder of the sole general partner.
Mr. Yawman disclaims any beneficial ownership of these shares of common
stock.
(6) Mr. Ehrenkranz is a managing director of Morgan Stanley & Co.
Incorporated, Morgan Stanley Capital Partners III, Inc., and MSDW Capital
Partners IV, Inc., one of which is the managing member of the general
partner of each of the Morgan Stanley Dean Witter Capital Partners
Entities. The table includes 11,043,826 shares held by Morgan Stanley
Dean Witter Capital Partners Entities. Mr. Ehrenkranz

47
<PAGE>

disclaims beneficial ownership of the shares held by these entities. The
table does not include options to purchase 10,000 shares of common stock
to be granted after the offering at a price equal to the initial public
offering price, and such options will vest 25% per year over a four year
period.
(7) Mr. Hernandez is Chief Executive Officer of Waller-Sutton Media, L.L.C.,
general partner of Waller Sutton Media Partners, L.P. The table includes
1,323,007 shares held by Waller-Sutton Media Partners, L.P. Mr. Hernandez
disclaims beneficial ownership of the shares held by the entity. The
table does not include options to purchase 10,000 shares of common stock
to be granted after the offering at a price equal to the initial public
offering price and such options will be fully vested and immediately
exercisable.
(8) Mr. Janson is a managing director of Morgan Stanley & Co. Incorporated
and a director of Morgan Stanley Capital Partners III, Inc., and MSDW
Capital Partners IV, Inc., one of which is the managing member of the
general partner of each of the Morgan Stanley Dean Witter Capital
Partners Entities. The table includes 11,043,826 shares held by Morgan
Stanley Dean Witter Capital Partner Entities. Mr. Janson disclaims
beneficial ownership of the shares held by these entities. The table does
not include options to purchase 10,000 shares of common stock to be
granted after the offering at a price equal to the initial public
offering price, and such options will vest 25% per year over a four-year
period.
(9) Mr. Van Degna is Chairman & Chief Executive Officer of Fleet Growth
Resources II, Inc., the general partner of Fleet Equity Partners VI,
L.P., Chairman and CEO of Silverado III Inc., the general partner of
Silverado III, LP, the general partner of Chisholm Partners III LP;
Chairman and CEO of Fleet Venture Resources, Inc. and a general partner
of Kennedy Plaza Partners. The table includes 2,646,014 shares held by
the Fleet Entities. Mr. Van Degna disclaims beneficial ownership of the
shares held by these entities. The table does not include options to
purchase 10,000 shares of common stock to be granted after the offering
at a price equal to the initial public offering price, and such options
will vest 25% per year over a four-year period.
(10) Mr. Holland's ownership does not include options to purchase 10,000
shares of common stock to be granted after the offering at a price equal
to the initial public offering price, and such options will vest 25% per
year over a four year period.
(11) These shares are owned by Morgan Stanley Capital Partners III, L.P. and
related private equity funds, and Morgan Stanley Dean Witter Capital
Partners IV, L.P. and related a private equity fund. Their address is c/o
Morgan Stanley Dean Witter Capital Partners, 1221 Avenue of the Americas,
New York, New York 10020.
(12) These shares are owned by Fleet Equity Partners VI, L.P., Fleet Venture
Resources, Inc., Chisholm Partners III, L.P. and Kennedy Plaza Partners.
Their address is c/o Fleet Equity Partners, 50 Kennedy Plaza, 12th Floor,
Providence, Rhode Island, 02903.
(13) These shares are owned by Waller-Sutton Media Partners L.P. Its address
is One Rockefeller Plaza, Suite 3300, New York, New York 10020.

48
<PAGE>

MARKET PRICE INFORMATION

Market Information for Choice One

Choice One common stock trades on the Nasdaq Stock Market under the symbol
"CWON." The following table sets forth for the periods indicated the high and
low sale closing prices for its common stock as reported from February 20, 2000
through June 12, 2000 on the Nasdaq Stock Market. The prices do not include
retail mark ups, mark downs or commissions.

<TABLE>
<CAPTION>
Common Stock
Price
-------------
High Low
------ ------
<S> <C> <C>
$61.62 $20.87
</TABLE>

The last reported sale price of its common stock on the Nasdaq Stock Market
on June 12, 2000 was $32.00 per share. On that date there were approximately
14,100 holders of record of its common stock.

Choice One has never paid or declared any cash dividends on its common stock
and does intend to do so in the foreseeable future.

Market Information for US Xchange

US Xchange, Inc. is a privately owned company and is not listed on any
exchange or quoted on Nasdaq. The 15% Senior Notes of US Xchange, L.L.C. due
2008 are traded over the counter. The closing price for the notes on June 12,
2000 was $108.

49
<PAGE>

AMENDMENT TO 1998 EMPLOYEE STOCK OPTION PLAN

On August 12, 1998, stockholders of Choice One approved the 1998 employee
stock option plan under which it may issue stock options exercisable for shares
of its common stock to its employees and employees of its subsidiaries who did
not own Class B Units of the predecessor, Choice One Communications L.L.C. The
1998 plan is administered by a committee of the Choice One board of directors
and must consist of at least two outside directors. The committee is authorized
under the employee option plan to select employees eligible for participation
in the plan and determine the terms and conditions of the awards under the
plan. As of December 31, 1999, 390 persons were eligible to participate in the
1998 plan. The board of directors had the authority to grant options to
purchase 1,063,791 shares of common stock under the 1998 plan. As of that date,
the board of directors had granted options to purchase 605,202 shares of Choice
One common stock under the 1998 plan.

Options granted under the 1998 plan may be either incentive stock options or
such other forms of non-qualified stock options, as the committee may
determine. As originally drafted, the 1998 plan did not cover the grant of
restricted stock. Only incentive stock options have been granted under the 1998
plan as of December 31, 1999. Incentive stock options are intended to qualify
as "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986 as amended. The exercise price of an incentive stock
option granted to an individual who owns shares possessing more than 10% of the
total combined voting power of all classes of Choice One stock will be at least
110% of the fair market value of a share of common stock on the date of grant.
The exercise price of an incentive stock option granted to an individual other
than a 10% owner and of a non-qualified stock options will be at least 100% of
the fair market value of a share of common stock on the date of grant.

Options granted under the 1998 plan may be subject to time vesting and other
restrictions at the sole discretion of the committee. Subject to limitations
and exceptions, the right to exercise an option generally will terminate at the
earlier of:

. the first date on which the initial grantee of such option is not
employed by Choice One for any reason other than termination without
cause, death or permanent disability or

. the expiration date of the option.

If the holder of an option dies or suffers a permanent disability while
still employed by Choice One, any option may be exercised by the participant,
or in the event of the participant's death, by the participant's personal
representative, any time prior to the earlier of the expiration date of the
option or the expiration of three months after the date of termination, but
only if and to the extent that the employee was entitled to exercise the option
at the date of such termination. If the holder of an option is terminated
without cause, or resigns we will, upon the recommendation of the chief
executive officer, repurchase the vested shares of the participant at fair
market value, provided the participant executes and delivers a covenant not to
compete within 10 days of termination.

In the event of a change of control of Choice One, vesting will be
accelerated by one year, or an amount of options will vest immediately such
that 50% of a participant's options are vested, whichever is greater. Each
participant holding an exercisable option shall have the right, subject to
restrictions and qualifications, to exercise the option in full, or to exercise
the option for an amount of cash equal to the difference between the fair
market value on the date of surrender and the option price. A change of control
shall occur upon the happening of any of the following:

. the sale, lease, exchange or transfer of all or substantially all of its
assets;

. Choice One's consolidation or merger with another corporation in which it
is not the surviving corporation, or pursuant to which any shares of its
common stock are to be converted into cash, securities or other property;

. the consummation of a liquidation or dissolution of Choice One;

50
<PAGE>

. any person becomes the beneficial owner, directly or indirectly, of 30%
or more of Choice One's then outstanding common stock; or

. the board of directors as of August 12, 1998, which is known as the
incumbent board, ceases to constitute at least a majority of the board,
except that any person who becomes a director thereafter by the approval
of at least three quarters of the directors comprising the incumbent
board, shall be considered a member of the incumbent board.

The proposed amendment to the 1998 plan will amend the plan to:

. Increase the number of shares of common stock available for grants under
the plan from 1,063,791 to 6,000,000 shares

. Permit grants of "restricted stock";

. Permit "in the money" stock grants (i.e., grant of options at or below
fair market value on the date of grant); and

. Clarify termination and "change in control" provisions.

The board of directors believes that this will enhance its ability to
attract and retain key employees consistent with the intention of the 1998
plan.

51
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
US XCHANGE, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants........................ F-2
Consolidated Balance Sheets, as of March 31 (unaudited), December 31, 1999
and 1998................................................................. F-3
Consolidated Statements of Operations, for the three months ended March
31, 2000 (unaudited), and the Years Ended December 31, 1999, 1998 and
1997..................................................................... F-4
Consolidated Statements of Member's Capital (Deficit), Years Ended
December 31, 1999, 1998 and 1997......................................... F-5
Consolidated Statements of Cash Flows, for the three months ended March
31, 2000 (unaudited), and the Years Ended December 31, 1999, 1998 and
1997..................................................................... F-6
Notes to Consolidated Financial Statements................................ F-7

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................................. F-14
Consolidated Balance Sheets as of March 31, 2000 (Unaudited) December 31,
1999 and December 31, 1998............................................... F-15
Consolidated Statements of Operations for the quarter ended March 31, 2000
(Unaudited), the year ended December 31, 1999 and the period from
inception (June 2, 1998) through December 31, 1998....................... F-16
Consolidated Statements of Stockholder's Equity for the year ended
December 31, 1999 and the period from inception (June 2, 1998) through
December 31, 1998........................................................ F-17
Consolidated Statements of Cash Flows for the quarter ended March 31, 2000
(Unaudited), the year ended December 31, 1999 and the period from
inception (June 2, 1998) through December 31, 1998....................... F-18
Notes to Consolidated Financial Statements................................ F-19

ATLANTIC CONNECTIONS, LLC
Report of Independent Auditors............................................ F-36
Consolidated Balance Sheets as of December 31, 1998 and September 30, 1999
(Unaudited).............................................................. F-37
Consolidated Statements of Operations for the period from July 24, 1998
(date of inception) to December 31, 1998 and for the nine months ended
September 30, 1999 (Unaudited)........................................... F-38
Consolidated Statements of Unitholders' Equity (Deficit).................. F-39
Consolidated Statements of Cash Flows for the period from July 24, 1998
(date of inception) to December 31, 1998 and for the nine months ended
September 30, 1999 (Unaudited)........................................... F-40
Notes to Consolidated Financial Statements................................ F-41

ATLANTIC CONNECTIONS, INC.
Report of Independent Auditors............................................ F-47
Balance Sheets as of December 31, 1997 and August 31, 1998................ F-48
Statements of Operations for the year ended December 31, 1997 and the
eight months ended August 31, 1998....................................... F-49
Statements of Stockholders' Deficit for the year ended December 31, 1997
and the eight months ended August 31, 1998............................... F-50
Statements of Cash Flows for the year ended December 31, 1997 and the
eight months ended August 31, 1998....................................... F-51
Notes to Financial Statements............................................. F-52

ATLANTIC CONNECTIONS, LTD.
Report of Independent Auditors............................................ F-55
Balance Sheets as of December 31, 1997 and August 31, 1998................ F-56
Statements of Operations for the year ended December 31, 1997 and the
eight months ended August 31, 1998....................................... F-57
Statements of Stockholders' Deficit for the year ended December 31, 1997
and the eight months ended August 31, 1998............................... F-58
Statements of Cash Flows for the year ended December 31, 1997 and the
eight months ended August 31, 1998....................................... F-59
Notes to Financial Statements............................................. F-60
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

US Xchange, L.L.C.
Grand Rapids, Michigan

We have audited the accompanying consolidated balance sheets of US Xchange,
L.L.C. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, member's capital (deficit) and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of US Xchange,
L.L.C. and subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.

/s/ BDO SEIDMAN, LLP
Grand Rapids, Michigan

May 17, 2000

F-2
<PAGE>

US Xchange, L.L.C

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
March 31,
2000 December 31,
------------- ---------------------------
1999 1998
(unaudited) ------------- ------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and equivalents............. $ 1,419,902 $ 189,304 $ 40,018,552
Restricted investments........... 28,550,368 28,795,226 28,525,109
Accounts receivable, less
allowance for doubtful accounts
of $792,000 and $174,000........ 6,794,043 5,995,466 1,865,503
Other............................ 1,112,598 1,003,960 700,411
------------- ------------- ------------
Total current assets........... 37,876,911 35,983,956 71,109,575
------------- ------------- ------------
Networks and equipment
Networks and networks in process
(cost to complete of
$5,337,000)..................... 129,592,135 125,797,486 85,821,872
Furniture and equipment.......... 20,574,240 19,423,809 14,017,604
Leasehold improvements........... 7,740,850 7,451,545 3,937,223
------------- ------------- ------------
157,907,225 152,672,840 103,776,699
Less accumulated depreciation and
amortization.................... 20,936,107 16,566,408 3,432,193
------------- ------------- ------------
Net networks and equipment......... 136,971,118 136,106,432 100,344,506
------------- ------------- ------------
Other assets
Restricted investments........... 14,704,268 28,873,973 56,206,738
Debt issuance costs, net......... 6,817,800 7,029,423 6,793,770
Miscellaneous.................... 2,322,354 2,106,239 261,328
------------- ------------- ------------
Total other assets............. 23,844,422 38,009,635 63,261,836
------------- ------------- ------------
Total assets....................... $ 198,692,451 $ 210,100,023 $234,715,917
============= ============= ============
LIABILITIES AND MEMBER'S CAPITAL
(DEFICIT)
Current liabilities
Accounts payable................. $ 10,066,442 $ 9,286,552 $ 11,264,241
Accrued interest................. 7,663,064 15,191,526 15,521,634
Accrued other liabilities........ 2,603,126 2,105,387 1,185,820
Current maturities of long-term
debt............................ 800,000 800,000 800,000
Senior secured facility.......... 50,000,000 50,000,000 --
------------- ------------- ------------
Total current liabilities...... 71,132,632 77,383,465 28,771,695
Unearned revenues.................. 7,297,557 3,406,414 --
Long-term debt, less current
maturities:
15% Senior Notes................. 200,000,000 200,000,000 200,000,000
Member subordinated debt
(including accrued interest) .. 27,666,962 14,746,750 --
Notes payable.................... 1,600,000 1,800,000 2,533,333
------------- ------------- ------------
Total liabilities.............. 307,697,151 297,336,629 231,305,028
------------- ------------- ------------
Member's capital (deficit)
Capital contributions............ 60,000,000 60,000,000 60,000,000
Accumulated deficit.............. (169,004,700) (147,236,606) (56,589,111)
------------- ------------- ------------
Total member's capital
(deficit)..................... (109,004,700) (87,236,606) 3,410,889
------------- ------------- ------------
Total liabilities and member's
capital (deficit)................. $ 198,692,451 $ 210,100,023 $234,715,917
============= ============= ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

US Xchange, L.L.C.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Three Months
Ended Year Ended December 31,
March 31, ---------------------------------------
2000 1999 1998 1997
------------ ------------ ------------ -----------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES................ $ 9,720,601 $ 26,429,789 $ 7,015,310 $ 206,682
------------ ------------ ------------ -----------
Costs and expenses
Cost of communication
services (excluding
depreciation and
amortization, shown
separately below).... 10,971,909 37,739,781 16,338,583 749,662
Selling, general and
administrative....... 7,887,858 40,554,373 28,679,670 5,065,589
Depreciation and
amortization......... 4,391,193 13,190,549 3,257,055 189,347
------------ ------------ ------------ -----------
Total costs and
expenses........... 23,250,960 91,484,703 48,275,308 6,004,598
------------ ------------ ------------ -----------
Loss from operations.. (13,530,359) (65,054,914) (41,259,998) (5,797,916)
------------ ------------ ------------ -----------
Interest expense........ (8,862,370) (29,537,206) (13,838,996) (30,452)
------------ ------------ ------------ -----------
Interest income......... 624,635 3,944,625 4,476,061 --
------------ ------------ ------------ -----------
Net loss............ $(21,768,094) $(90,647,495) $(50,622,933) $(5,828,368)
============ ============ ============ ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

US Xchange, L.L.C.

CONSOLIDATED STATEMENTS OF MEMBER'S CAPITAL (DEFICIT)

<TABLE>
<CAPTION>
Capital Accumulated
Contributions Deficit Total
------------- ------------- ------------
<S> <C> <C> <C>
Balance, January 1, 1997............. $ -- $ (137,810) $ (137,810)
Member capital contributions....... 5,000,000 -- 5,000,000
Net loss for the year.............. -- (5,828,368) (5,828,368)
----------- ------------- ------------
Balance, December 31, 1997........... 5,000,000 (5,966,178) (966,178)
Member capital contributions....... 55,000,000 -- 55,000,000
Net loss for the year.............. -- (50,622,933) (50,622,933)
----------- ------------- ------------
Balance, December 31, 1998........... 60,000,000 (56,589,111) 3,410,889
N t loss for the year.............. -- (90,647,495) (90,647,495)
----------- ------------- ------------
Balance, December 31, 1999........... $60,000,000 $(147,236,606) $(87,236,606)
=========== ============= ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

US Xchange, L.L.C.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Three Months
Ended Year Ended December 31,
March 31, -----------------------------------------
2000 1999 1998 1997
------------ ------------ ------------- ------------
(unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............... $(21,768,094) $(90,647,495) $ (50,622,933) $ (5,828,368)
Adjustments to
reconcile net loss to
net cash used in
operating activities
Depreciation and
amortization......... 4,602,817 13,988,549 3,609,055 189,347
Provision for
uncollectible
accounts............. 284,065 698,488 227,949 2,000
Increase in unearned
revenues............. (585,437) 3,406,414 -- --
Accrued interest on
member subordinated
debt................. 393,587 246,750 -- --
Interest earned on
restricted
investments.......... 3,891,143 (3,437,351) (2,262,063) --
Changes in assets and
liabilities:
Accounts receivable.. (1,082,642) (4,828,448) (1,948,217) (147,235)
Other current
assets.............. (108,638) (303,550) (539,803) (134,933)
Accounts payable..... 779,890 (1,977,689) 5,945,748 5,318,493
Accrued liabilities.. (7,030,723) 589,461 16,502,288 205,166
------------ ------------ ------------- ------------
Net cash used in
operating
activities......... (20,624,032) (82,264,871) (29,087,976) (395,530)
------------ ------------ ------------- ------------
INVESTING ACTIVITIES
Purchase of restricted
investments........... -- -- (82,469,784) --
Decrease in restricted
investments........... 15,000,000 30,500,000 -- --
Purchase of networks
and equipment......... (5,244,335) (48,906,624) (75,619,611) (28,157,088)
Increase in other
assets................ (227,660) (1,891,092) (375,770) (11,096)
------------ ------------ ------------- ------------
Net cash used in
investing
activities......... 9,528,005 (20,297,716) (158,465,165) (28,168,184)
------------ ------------ ------------- ------------
FINANCING ACTIVITIES
Proceeds from long-term
debt.................. 12,526,625 64,500,000 201,211,000 2,789,000
Direct costs of
financing............. -- (1,033,327) (7,034,441) --
Repayment of long-term
debt.................. (200,000) (733,334) (666,667) --
Advances from
affiliated company.... -- -- 61,211 20,875,304
Member capital
contributions......... -- -- 33,900,000 5,000,000
------------ ------------ ------------- ------------
Net cash provided by
financing
activities......... 12,326,625 62,733,339 227,471,103 28,664,304
------------ ------------ ------------- ------------
Net Increase
(decrease) in cash
and equivalents.... 1,230,598 (39,829,248) 39,917,962 100,590
Cash and equivalents,
beginning of year..... 189,304 40,018,552 100,590 --
Cash and equivalents,
end of year........... $ 1,419,902 $ 189,304 $ 40,018,552 $ 100,590
============ ============ ============= ============
Supplemental disclosure
of cash flow
information Interest
paid (net of amounts
capitalized).......... $ 15,409,781 $ 28,572,890 $ 279,209 $ 12,334
============ ============ ============= ============
Supplemental disclosure
of non-cash financing
activities
Conversion of advances
to member's capital... $ -- $ -- $ 21,100,000 $ --
============ ============ ============= ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

US Xchange, L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Business

US Xchange, Inc., the parent company of US Xchange, L.L.C., has no assets or
independent business operations. US Xchange, L.L.C. and its wholly-owned
subsidiaries (Company) provide facilities-based competitive local
telecommunications services in selected cities of the north central area of the
United States. The Company operates in a single segment and its maximum
duration is until December 2030. The Company competes with incumbent local
exchange carriers (ILECs) by offering business and residential customers
innovative and customized products, superior customer service and lower costs
through the use of an advanced telecommunications systems network.

From its inception in August 1996 until June 30, 1997, the Company was in
the development stage. During that time, the Company's principal activities
included developing its business plan, hiring management and other key
personnel, designing the architecture for its network systems and negotiating
an interconnection agreement with an ILEC.

The Company's sole member and an affiliated company of the member provided
equity funding to the Company of $60 million. In August 1999, the member agreed
to provide up to $50 million in subordinated debt financing (see Note 3).

Principles of Consolidation

The consolidated financial statements include the accounts of US Xchange,
L.L.C. and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.

Fair Value of Financial Instruments

The carrying amounts for cash, accounts receivable, accounts payable and
accrued liabilities approximate their fair value. The fair value of long-term
debt, including the senior secured facility, is estimated based on quoted
market rates for similar financial instruments.

<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Long-term debt........... $267,346,750 $228,346,750 $203,333,333 $203,333,333
</TABLE>

Cash and Equivalents

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of trade accounts receivables. The risk is
limited due to the large number of entities comprising the Company's customer
base and the dispersion of those entities across many different industries and
geographical areas. Credit is extended based on evaluation of the customer's
financial condition and generally collateral is not required. Anticipated
credit losses are provided for in the consolidated financial statements and
have been within management's expectations.

F-7
<PAGE>

US Xchange, L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Networks and Equipment

Networks and equipment are stated at cost. Leasehold improvements are
amortized using the straight-line method over their useful life or lease term,
whichever is shorter. Depreciation is calculated using the straight-line method
over the estimated useful lives of the assets as follows:

<TABLE>
<CAPTION>
Years
-----
<S> <C>
Telecommunications equipment........................................... 5-8
Fiber optic cable...................................................... 20
Leasehold improvements................................................. 10-15
Office furniture and equipment......................................... 3-7
</TABLE>

Costs directly related to the construction of network systems and
facilities, including interest, are capitalized. Uncompleted portions of fiber
optic networks are reported as networks in progress. Upon completion, the
construction costs will be classified as fiber optic networks and depreciated
over their useful lives. Interest expense capitalized in connection with
construction projects amounted to approximately $4 million, $2.3 million and
$2,000 in 1999, 1998 and 1997, respectively. Repairs and maintenance costs are
expensed as incurred. The Company had firm commitments for capital expenditures
of approximately $3.8 million at December 31, 1999.

Long-Lived Assets

The Company periodically reviews long-lived assets for impairment by
comparing the carrying value of the assets to their estimated future
undiscounted cash flows. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.

Revenue Recognition

Revenues are recognized as services are provided to customers. Sales of
indefeasible rights to use fiber or capacity (IRU) are recorded as unearned
revenue at the earlier of the acceptance of the applicable portion of the
network by the customer or the receipt of cash. The revenue is recognized over
the life of the agreement as services are provided beginning on the date of
customer acceptance. There were no IRU revenues in 1999, 1998 or 1997.

Advertising Costs

Costs for advertising, which were approximately $2.1 million, $2 million and
$180,000 for the years ended December 31, 1999 and 1998, and 1997 respectively,
are expensed as incurred within the fiscal year

Income Taxes

The Company is treated as a partnership for U.S. federal income tax
purposes. Income and losses are reported on the respective tax returns of the
members, therefore, no provision for federal income taxes has been made in
these consolidated financial statements.

Use of Estimates

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

F-8
<PAGE>

US Xchange, L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Reclassifications

Certain prior year amounts have been reclassified to conform to the 1999
presentation.

New Accounting Standards

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
requires companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. This
standard, as amended by SFAS 137 issued in June 1999, is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivative contracts and,
therefore, does not expect that adoption of this standard will have a material
impact on its consolidated financial statements.

2. Restricted Investments

Restricted investments consist of U.S. government securities and money
market funds plus accrued interest thereon purchased in connection with the 15%
Notes (see Note 3) to secure the first three years' interest payments on these
notes. Interest payments are made semi-annually and commenced on January 1,
1999. All these investments are classified as held-to-maturity securities. Such
investments are stated at cost, which approximates fair value, and are reported
in both current and long-term assets, based upon the maturity dates of the
individual securities.

3. Long-Term Debt

On August 26, 1999, the Company entered into a line of credit agreement with
its sole member for up to $50 million in subordinated debt financing.
Borrowings under this arrangement totaled $14.5 million at December 31, 1999.
Under this subordinated line of credit, interest accrues on outstanding
borrowings at a floating rate equal to prime rate less 1.25% (effectively 7.25%
at December 31, 1999), and borrowings are secured by all present and future
assets of the Company and are subordinated to the indebtedness under the
Company's current and any future secured credit facilities. Repayment of
borrowings under this line of credit and all accrued interest will commence
upon the repayment of all obligations under the Company's current and future
secured credit facilities.

On April 30, 1999, the Company obtained a $50 million senior secured credit
facility pursuant to a loan and security agreement among the Company's wholly-
owned subsidiary, US Xchange Finance Company, L.L.C., as borrower, the Company
and its operating subsidiaries, as guarantors, and General Electric Capital
Corporation (GE Capital), as Administrative Agent and lender. As of December
31, 1999 the full $50 million was outstanding. Issuance costs approximating $1
million are being ratably amortized over the term of the facility. Loans under
this facility bear interest at a floating rate equal to either a defined base
rate plus 3% or at LIBOR plus 4%, at the borrower's option. The effective
interest rate was 10.45 % at December 31, 1999. Interest is payable at least on
a quarterly basis. During 1999 unused portions of this facility were subject to
a commitment fee ranging between .75% and 1.25% of the unused amount. The
aggregate outstanding principal is repayable in quarterly installments,
commencing July 31, 2002 and continuing through April 30, 2007, based upon the
following annual debt reduction formula: 10%, 15%, 20%, 25% and 30%. Borrowings
are secured by all present and future real and personal property, assets and
revenues of the borrower and its subsidiaries. The Company and the subsidiaries
of the borrower have guaranteed the repayment of all indebtedness under this
facility.

The senior secured revolving credit facility contains financial performance
covenants regarding minimum quarterly revenues, maximum quarterly EBITDA losses
and maximum annual capital expenditures, with which

F-9
<PAGE>

US Xchange, L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

the Company did not comply for the quarter and the year ended December 31,
1999. (EBITDA consists of earnings (losses) before net interest, income taxes,
depreciation and amortization.) GE Capital has agreed to forebear from
exercising any remedies against the Company as a result of the non-compliance
with these covenants through the earlier of a Termination Event, as defined in
the forbearance agreement, or July 31, 2000 (the "forbearance period"). As a
result, the Company has classified the GE Capital senior secured facility as a
current liability since there is no assurance that GE Capital will not require
repayment of this credit facility after the forbearance period expires.
However, it is anticipated that this credit facility will be settled as a
result of the impending merger of the Company's new parent (see footnote 8).

On June 25, 1998, the Company completed a sale of $200 million principal
amount of 15% Senior Notes due 2008 (15% Senior Notes). Of the total net
proceeds approximating $193 million, the Company placed approximately $82.5
million, representing funds, together with interest thereon, sufficient to pay
the first six semi-annual interest payments on the 15% Senior Notes, into an
escrow account for the benefit of the holders. Issuance costs approximating $7
million are being amortized ratably over the term of the debt. Interest on the
15% Senior Notes is payable semi-annually, on January 1 and July 1, commencing
January 1, 1999. The Company made interest payments of $15.5 million and $15
million on January 1, 1999 and July 1, 1999, respectively, to the holders of
the 15% Senior Notes. The 15% Senior Notes are non-callable and mature in full
on July 1, 2008.

The 15% Senior Notes are unsubordinated, unsecured senior indebtedness of
the Company. The Company's subsidiaries have no obligation to pay amounts due
on the 15% Senior Notes and do not guarantee the 15% Senior Notes. Therefore,
the 15% Senior Notes are effectively subordinated to all existing and future
liabilities (including trade payables) of the Company's subsidiaries.

The 15% Senior Notes are subject to certain covenants that, among other
things, restrict the ability of the Company and certain subsidiaries to incur
additional indebtedness, pay dividends or make distributions or redemptions in
respect of membership interests.

On August 28, 1997, the Company entered into a credit facility agreement
with a local bank that provided for borrowings of up to $4 million for the
acquisition of office furniture, equipment and computer software and for
construction costs related to leasehold improvements of office and switch site
locations. In March 1998, the credit facility was fully utilized and converted
into a term note payable in 60 equal monthly installments commencing April
1998. Amounts borrowed bear interest at 1/2% under the bank's prime rate or 2%
over the bank's cost of funds, at the Company's option. The effective rate was
8.0% at December 31, 1999. Specific assets and the guarantee of an affiliated
company owned by the Company's sole member secure all borrowings. The credit
facility also provides that the affiliated company maintains minimum debt to
tangible net worth and current ratio levels. At December 31, 1999, the
affiliated company was in compliance with the covenant requirements.

The aggregate principal repayments of long-term debt over the next five
years is as follows:

<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
2000.............................................................. $800,000
2001.............................................................. 800,000
2002.............................................................. 800,000
2003.............................................................. 200,000
</TABLE>

F-10
<PAGE>

US Xchange, L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

4. Related Party Transactions

In connection with the Company's issuance of the 15% Senior Notes, advances
from an affiliated company owned by the Company's sole member of $21.1 million
were converted to member's capital as of March 31, 1998. Under an expense
sharing agreement with the affiliated company, the Company incurred $318,500,
$346,200 and $257,500 relating to management and administrative services for
1999, 1998 and 1997, respectively. In October 1999, the Company entered into a
lease agreement with the affiliated company for certain office furniture in its
corporate administrative offices. Total lease costs under this agreement for
1999 was $48,750. Total lease costs under this agreement for the three months
ended March 31, 2000 was $48,750. The Company also leases its corporate
administrative offices from two companies each of which is 50% controlled by
the same affiliated company. Rents paid under these lease agreements were
$394,207 and $134,757 for the three months ended March 31, 2000 and 1999,
respectively.

The Company also leases its corporate administrative offices from two
companies each of which is 50% controlled by the same affiliated company owned
by the Company's sole member. Rents paid under these lease agreements during
1999 and 1998 were $822,200 and $198,600, respectively. There were no rents for
1997. Total costs incurred under this arrangement for the three months ended
March 31, 2000 and 1999 were $6,095 and $33,350, respectively.

In June 1997, the Company entered into a lease agreement with another
affiliated company owned by the member for aircraft transportation services.
Total travel costs incurred under this arrangement for 1999, 1998 and 1997 was
$75,200, $101,200 and $69,100, respectively.

5. Employee Benefit Plan

In May 1997, the Company established a 401(k) plan that covers substantially
all employees. Employees who are 21 years of age or older are eligible to
participate in the 401(k) plan upon completion of three months of service, at
which time they may voluntarily contribute a percentage of compensation.
Participants are eligible to receive Company matching contributions after
completion of 12 months of service. The Company will match 50% of the
participant's contribution up to a maximum of 3% of such participant's eligible
annual compensation. Matching contributions vest to the participant over a
five-year period. The cost of the plan in 1999 and 1998 was approximately
$267,000 and $51,000, respectively. The Company was not required to make a
contribution to the plan for 1997.

6. Leases

The Company leases administrative and sales office facilities, operating
sites and certain equipment under noncancelable operating leases having initial
or remaining terms of more than one year. Certain of the Company's facility
leases include renewal options, and most leases include provisions for rent
escalation to reflect increased operating costs and/or require the Company to
pay certain maintenance and utility costs. Rental expense under these operating
leases was $3.4 million, $1.7 million and $83,500 for 1999, 1998 and 1997,
respectively

F-11
<PAGE>

US Xchange, L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Future minimum lease payments under noncancelable operating leases at
December 31, 1999, were as follows:

<TABLE>
<CAPTION>
Office Operating
Year Ending December 31, facilities site facilities Equipment Total
------------------------ ---------- --------------- ---------- ----------
<S> <C> <C> <C> <C>
2000...................... $2,210,557 $631,785 $1,095,945 $3,938,287
2001...................... 2,192,213 640,750 615,439 3,448,401
2002...................... 1,980,657 634,812 307,200 2,922,669
2003...................... 1,397,028 329,964 5,378 1,732,370
2004...................... 580,073 237,739 -- 817,812
2005-2009................. -- 865,822 -- 865,822
</TABLE>

7. Quarterly Financial Data (Unaudited)

<TABLE>
<CAPTION>
1999
--------------------------------------------------------
First
Quarter Second Quarter Third Quarter Fourth Quarter
----------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues........... $ 4,339,438 $ 5,947,990 $ 7,480,351 $ 8,662,010
Operating loss..... (15,985,086) (16,429,878) (17,188,349) (15,451,601)
Net loss........... (20,808,244) (22,222,439) (24,386,946) (23,229,866)

<CAPTION>
1998
--------------------------------------------------------
First
Quarter Second Quarter Third Quarter Fourth Quarter
----------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues........... $ 565,203 $ 1,419,200 $ 2,144,552 $ 2,886,355
Operating loss..... (5,260,764) (8,569,793) (12,969,746) (14,732,695)
Net loss........... (5,321,499) (8,927,589) (16,782,717) (19,591,128)
</TABLE>

At December 31, 1999, the Company reclassified amortization of debt issuance
costs to interest expense. These costs had previously been classified as
depreciation and amortization expense. This reclassification changed the
previously reported quarterly operating losses for 1999 and 1998 as follows:

<TABLE>
<CAPTION>
First Third
Quarter Second Quarter Quarter Fourth Quarter
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
1999
As previously reported.. $(16,184,586) $(16,629,378) $(17,387,849)
Reclassification........ 199,500 199,500 199,500
------------ ------------ ------------
$(15,985,086) $(16,429,878) $(17,188,349)
============ ============ ============

1998
As previously reported.. $ (5,260,764) $ (8,569,793) $(12,872,746) $(14,908,695)
Reclassification........ -- -- 176,000 176,000
------------ ------------ ------------ ------------
$ (5,260,764) $ (8,569,793) $(12,696,746) $(14,732,695)
============ ============ ============ ============
</TABLE>

8. Subsequent Event.

On May 14, 2000, the new parent of the Company, a corporation wholly-owned
by the Company's sole member, entered into a definitive merger agreement with
Choice One Communications, Inc. (Choice One), a publicly-held company. Under
terms of the agreement, Choice One will exchange 7 million shares of its common
stock and $311 million in net cash for all of the outstanding common stock of
the Company's parent. In addition, as a condition of the merger, substantially
all of the holders of the 15% Senior Notes have agreed to a redemption price
equal to 109% of their principal amount plus accrued interest, if any, to the
closing date of the merger. Based on the price of Choice One's stock as of the
close of business on the day before the merger announcement, the merger is
valued at approximately $518 million. The merger is subject to regulatory
approvals and other customary conditions.

F-12
<PAGE>

US Xchange, L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.

Not applicable.

F-13
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Choice One Communications Inc.:

We have audited the accompanying consolidated balance sheets of Choice One
Communications Inc. (a Delaware corporation) and subsidiaries as of December
31, 1999 and 1998 and the related consolidated statements of operations,
stockholder's equity, and cash flows for the year ended December 31, 1999 and
the period from inception (June 2, 1998) through 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 Choice One Communications
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for the year ended December 31, 1999 and
the period from inception (June 2, 1998) through December 31, 1998, in
conformity with generally accepted accounting principles.

/s/ Arthur Andersen LLP

Rochester, New York
January 26, 2000

F-14
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of March 31, 2000, December 31, 1999 and December 31, 1998

(Amounts in thousands, except share and per share data)

<TABLE>
<CAPTION>
March 31, December 31, December 31,
2000 1999 1998
----------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 65,486 $ 3,615 $ 1,491
Accounts receivable, net................. 5,167 2,929 --
Prepaid expenses and other current
assets.................................. 1,789 709 144
--------- ------- -------
Total current assets..................... 72,442 7,253 1,635
--------- ------- -------
Property and equipment:
Property and equipment................... 97,816 77,318 21,146
Less--Accumulated depreciation........... (7,489) (4,891) (36)
--------- ------- -------
Total property and equipment............. 90,327 72,427 21,110
--------- ------- -------
Other assets............................. 19,611 14,832 1,727
--------- ------- -------
Total assets............................. $ 182,380 $94,512 $24,472
========= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........ $ 2,400 $ -- $ --
Accounts payable......................... 1,643 5,060 1,630
Accrued expenses......................... 14,480 11,228 9,712
--------- ------- -------
Total current liabilities................ 18,523 16,288 11,342
--------- ------- -------
Long-term debt........................... -- 51,500 --
Other long-term liabilities.............. 1,703 -- --
--------- ------- -------
Total long-term debt and other
liabilities............................. 1,703 51,500 --
Commitment and contingencies
Stockholders' equity:
Common stock, $0.01 par value,
47,730,196, 47,730,196 and 22,339,621
authorized, 31,012,570, 22,022,256 and
21,275,829 shares issued and outstanding
as of March 31, 2000, December 31, 1999
and 1998, respectively.................. 310 220 213
Additional paid-in capital............... 344,082 72,454 21,314
Deferred compensation.................... (63,032) (8,401) (3,323)
Accumulated deficit...................... (119,206) (37,549) (5,074)
--------- ------- -------
Total stockholders' equity............... 162,154 26,724 13,130
--------- ------- -------
Total liabilities and stockholders'
equity.................................. $ 182,380 $94,512 $24,472
========= ======= =======
</TABLE>

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

F-15
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For three months ended March 31, 2000, the year ended December 31, 1999 and
the period from inception (June 2, 1998) through December 31, 1998

(Amounts in thousands, except share and per share data)

<TABLE>
<CAPTION>
Period from
Inception
Three (June 2,
Months 1998)
Ended March Year Ended through
31, 2000 December 31, December 31,
(Unaudited) 1999 1998
----------- ------------ ------------
<S> <C> <C> <C>
Revenues................................. $ 6,790 $ 4,518 $ --
Operating expenses:
Network costs.......................... 6,990 6,979 --
Selling, general and administrative,
including noncash deferred
compensation of $1,749, $2,048 and
$376 in 2000, 1999 and 1998,
respectively and non-cash management
ownership allocation charge of
$64,529, $0 and $0 in 2000, 1999 and
1998, respectively.................... 77,427 22,978 5,060
Depreciation and amortization.......... 2,992 5,153 36
---------- ---------- ----------
Total operating expenses............. 87,409 35,110 5,096
---------- ---------- ----------
Loss from operations..................... (80,619) (30,592) (5,096)
---------- ---------- ----------
Interest income/(expense):
Interest income........................ 464 76 138
Interest expense....................... (1,502) (1,959) (116)
---------- ---------- ----------
Interest income/(expense), net......... (1,038) (1,883) 22
---------- ---------- ----------
Net loss................................. $ (81,657) $ (32,475) $ (5,074)
========== ========== ==========
Net loss per share, basic and diluted.... $ (3.10) $ (1.47) $ (0.28)
========== ========== ==========
Weighted average number of shares
outstanding, basic and diluted.......... 26,357,233 22,022,256 18,017,791
========== ========== ==========
</TABLE>

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

F-16
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY

For the year ended December 31, 1999 and
the period from inception (June 2, 1998) through December 31, 1998

(Amounts in thousands, except share data)

<TABLE>
<CAPTION>
Common Stock Additional
----------------- Paid-In Deferred Accumulated
Shares Amount Capital Compensation Deficit Total
---------- ------ ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 2, 1998
(date of inception)... -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock................ 21,275,829 213 17,615 -- -- 17,828
Deferred
compensation......... -- -- 3,699 (3,699) -- --
Amortization of
deferred
compensation......... -- -- -- 376 -- 376
Net loss and
comprehensive loss... -- -- -- -- (5,074) (5,074)
---------- ---- ------- ------- -------- --------
Balance, December 31,
1998................... 21,275,829 213 21,314 (3,323) (5,074) 13,130
Capital contributions
and Issuance of
common stock......... 746,427 7 44,014 -- -- 44,021
Deferred
compensation......... -- -- 7,126 (7,126) -- --
Amortization of
deferred
compensation......... -- -- -- 2,048 -- 2,048
Net loss and
comprehensive loss... -- -- -- -- (32,475) (32,475)
---------- ---- ------- ------- -------- --------
Balance, December 31,
1999................... 22,022,256 $220 $72,454 $(8,401) $(37,549) $ 26,724
========== ==== ======= ======= ======== ========
</TABLE>

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

F-17
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For three months ended March 31, 2000, the year ended December 31, 1999 and
the period from inception (June 2, 1998) through December 31, 1998

(Amounts in thousands)

<TABLE>
<CAPTION>
Period from
inception
Three (June 2,
Months 1998)
Ended March Year Ended through
31, 2000 December 31, December 31,
(Unaudited) 1999 1998
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $(81,657) $(32,475) $ (5,074)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
Activities:
Depreciation and amortization.......... 2,992 5,153 36
Amortization of deferred financing
costs................................. 159 294 51
Deferred compensation.................. 66,278 2,048 376
Changes in assets and liabilities:
Accounts receivable, net.............. (2,058) (1,771) --
Prepaid expenses and other current
assets............................... (234) (476) (144)
Accounts payable...................... (3,456) 2,107 1,630
Accrued expenses...................... 3,185 801 9,712
-------- -------- --------
Net cash (used in) provided by
operating activities................ (14,791) (24,319) 6,587
-------- -------- --------
Cash flows from investing activities:
Capital Expenditures................... (20,412) (56,077) (21,146)
Cash payments for acquisition of
business, net of cash acquired........ (1,862) -- --
-------- -------- --------
Net cash used in investing
activities.......................... (22,274) (56,077) (21,146)
Cash flows from financing activities:
Additions to long-term debt............ 12,900 71,251 --
Principal payments of long-term debt... (64,400) (28,000) --
Proceeds from capital contributions and
issuance of common stock.............. 150,838 44,021 17,828
Payments of financing costs............ (402) 4,752) (1,778)
-------- -------- --------
Net cash provided by financing
activities.......................... 98,936 82,520 16,050
-------- -------- --------
Net increase in cash and cash
equivalents............................ 61,871 2,124 1,491
Cash and cash equivalents, beginning of
period................................. 3,615 1,491 --
-------- -------- --------
Cash and cash equivalents, end of
period................................. $ 65,486 $ 3,615 $ 1,491
======== ======== ========
Supplemental disclosures of cash flow
information:
Interest paid.......................... $ 1,895 $ 1,381 $ 65
======== ======== ========
Income taxes paid...................... $ 241 $ 10 $ --
======== ======== ========
</TABLE>

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

F-18
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

Three Month Period Ended March 31, 2000
(Unaudited)

(All amounts in thousands, except share and per share data)

NOTE 1. GENERAL

The Company is an integrated communications provider offering broadband data
and voice telecommunications services primarily to small and medium- sized
businesses in second and third tier markets in the northeastern United States.
The Company's services include high-speed data and Internet service,
principally utilizing digital subscriber line technology, and local exchange
service and long distance service. The Company seeks to become the leading
integrated communications provider in each target market by offering a single
source for competitively priced, high quality, customized telecommunications
services.

Until February 1999, the Company was in the development stage, as defined by
Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and
Reporting by Development Stage Enterprises." The Company's principal activities
included developing its business plans; procuring governmental authorizations;
raising capital; hiring management and other key personnel; developing,
acquiring and integrating operations support systems and other back office
systems; 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 in connection with the formation of
any new business, and the competitive environment in which the Company
operates. The Company's performance will further be affected by its ability to
access potential markets; secure financing or raise additional capital;
implement expanded interconnection and collocation with established telephone
company facilities; lease adequate trunking capacity from established telephone
companies or competitive local exchange carriers; purchase and install switches
in additional markets; implement its anticipated services; manage future
growth; implement efficient operations support systems and other back office
systems; develop a sufficient customer base; attract, retain and motivate
qualified personnel; develop strategic alliances or investments needed to
complement existing business; and achieve acceptable profits on long distance
business due to high levels of competition, declining prices and low customer
retention rates. The Company's networks and the provisions of
telecommunications services are subject to significant regulation at the
federal, state and local levels. Delays in receiving required regulatory
approvals or the enactment of new adverse regulation or regulatory requirements
may have a material adverse effect upon the Company. The telecommunications
industry is subject to rapid and significant changes in technology and is
highly competitive. Although management believes that the Company will be able
to successfully mitigate these risks, there can be no assurance that the
Company will be able to do so or that the Company will ever operate profitably.

Expenses are expected to exceed revenues in each location in which the
Company offers service until a sufficient customer base is established. It is
anticipated that obtaining a sufficient customer base will take a number of
years, and positive cash flows from operations are not expected in the near
future.

NOTE 2. BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission (the "SEC"). The interim consolidated financial
statements include the consolidated accounts of Choice One Communications Inc.
and its wholly-owned subsidiaries (collectively, "the Company") with all
significant intercompany transactions eliminated. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair statement of the financial position, results of operations and cash
flows for the interim periods presented have been made. Certain footnote
disclosures normally included in financial statements

F-19
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

prepared in accordance with generally accepted accounting principles (GAAP)
have been condensed or omitted pursuant to such SEC rules and regulations.
These financial statements should be read in conjunction with the Company's
audited financial statements as of and for the year ended December 31, 1999.
The results of operations for the three months ended March 31, 2000 are not
necessarily indicative of the results to be expected for the full year. Certain
amounts in the prior period's consolidated financial statements have been
reclassified to conform to the current period presentation.

NOTE 3. ACQUISITION.

On February 24, 2000, the Company acquired EdgeNet, Inc. a corporation based
in Buffalo, New York, which is engaged in the business of providing Internet
home page design and development. The purchase price was approximately $4.1
million, approximately $1.7 million in cash and approximately $2.4 million in a
promissory note that is convertible into 132,148 shares of our common stock not
sooner than 180 days after the closing of the initial public offering. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the net assets and results of operations of EdgeNet, Inc. have
been included in the Company's consolidated statement since the acquisition
date. The purchase price was allocated based upon the fair value of the assets
acquired and liabilities assumed with any excess reflected as goodwill ($3.5
million), which is being amortized on a straight-line basis over ten years.

In connection with the acquisition, liabilities assumed and cash paid were
as follows:

<TABLE>
<S> <C>
Fair value of assets acquired, including cash acquired............... $4,397
Less-liabilities assumed............................................. 134
------
Total consideration paid............................................. 4,263
Less-cash acquired................................................... 1
Less-amounts borrowed................................................ 2,400
------
Net cash paid for acquisition........................................ $1,862
======
</TABLE>

NOTE 4. PRO FORMA RESULTS OF OPERATIONS

The following unaudited pro forma condensed results of operations combine
the operations of the Company with those of Atlantic Connections as adjusted
for the acquisition on November 3, 1999 by the Company. The pro forma results
of operations are presented as if the acquisition of Atlantic Connections was
consummated on January 1, 1999. The pro forma information is presented after
giving effect to certain adjustments for depreciation, amortization of
intangible assets and interest expense on the acquisition financing. The pro
forma statements do not give effect to the up to $2.1 million additional
purchase price payable in cash or, at our option, our common stock if specified
performance criteria are met in the 12 months following the acquisition.

F-20
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The unaudited pro forma results of operations are based upon currently
available information and upon certain assumptions that the Company believes
are reasonable. The unaudited pro forma statements do not purport to represent
what the Company's financial position or results of operations would actually
have been if the transaction in fact occurred on such date or at the beginning
of the period indicated or to project the Company's financial position or the
results of operations at any future date or for any future period.

<TABLE>
<CAPTION>
Pro Forma
Three Months
Ended
March 31, 1999
--------------
<S> <C>
Revenues.................................................... $ 1,783
Loss from operations........................................ (4,570)
Net loss.................................................... $ (4,795)
Net loss per share, basic and diluted....................... $ (0.23)
Weighted average number of shares outstanding, basic and
diluted.................................................... 21,275,829
</TABLE>

NOTE 5. PROPERTY AND EQUIPMENT

Property and equipment, at cost consisted of the following at March 31,
2000 and December 31, 1999:

<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Switch equipment...................................... $71,915 $56,263
Computer equipment and software....................... 14,034 11,416
Office furniture and equipment........................ 4,493 2,687
Leasehold improvement................................. 4,367 1,675
Construction in progress.............................. 3,007 5,277
------- -------
$97,816 $77,318
======= =======
</TABLE>

NOTE 6. OTHER ASSETS

Other assets consisted of the following at March 31, 2000 and December 31,
1999:

<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Goodwill............................................. $ 9,298 $ 5,464
Deferred financing costs............................. 5,340 5,305
Customer base........................................ 3,800 3,300
Indefeasible right to use............................ 1,703 --
Other assets......................................... 664 1,406
-------- -------
20,805 15,475
Less-Accumulated amortization........................ (1,194) (643)
-------- -------
$ 19,611 $14,832
======== =======
</TABLE>

NOTE 7. LONG-TERM DEBT

In October 1998, the Company, as a guarantor, and the Company's
subsidiaries, as borrowers, entered into an agreement for a revolving credit
facility with three financial institutions (the "Credit Agreement"). The
Credit Agreement provided the Company with a maximum credit facility of $60.0
million. The Credit Agreement was used to finance capital expenditures and to
provide working capital.

F-21
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In November 1999, the Company, as a guarantor, and the Company's
subsidiaries, as borrowers, amended and restated the Credit Agreement (the
"Amended Agreement"). The Amended Agreement, which terminates on November
3,2007, provides the Company with a maximum revolving credit facility of $100.0
million and a delayed draw term loan of $50.0 million. Any unused portion of
the term loan commitment will expire on November 3, 2000. The Amended Agreement
was used to finance the purchase of Atlantic, and will be used to finance
capital expenditures and to provide working capital. Borrowings under the
Amended Agreement are secured by substantially all of the assets of the Company
and bear interest, at the Company's option, at either the LIBOR rate or the
base rate (the higher of the prime interest rate or the federal funds rate plus
0.5 percent), with additional percentage points added based on the Company's
leverage ratio, as defined in the agreement. In addition, the Company is also
required to pay a commitment fee of 0.75 percent to 1.50 percent per annum
based on the Company's utilization of the Amended Agreement.

The Amended Agreement revised certain covenants including maximum debt to
capital ratio, minimum revenue amounts, maximum earnings before interest,
taxes, depreciation and amortization (EBITDA) losses, maximum capital
expenditure levels, minimum ratio of fixed assets to total debt, maximum
leverage ratio, maximum fixed charge coverage ratio, and minimum interest
coverage ratio, all as defined in the Amended Agreement. At March 31, 2000, the
Company was in compliance with these covenants.

The Amended Agreement also requires the Company to enter into hedging
agreements with respect to interest rate exposure with an aggregate notional
principal amount equal to 50 percent of the outstanding borrowings once at
least 50 percent of the aggregate commitment has been utilized. The aggregate
commitment under the Amended Agreement is reduced by 1.25 percent per quarter
commencing on December 31, 2002 until September 30, 2003, by 2.50 percent per
quarter commencing on December 31, 2003 until September 30, 2004, by 6.25
percent per quarter commencing on December 31, 2004 until September 30, 2005,
and by 7.50 percent per quarter commencing on December 31,2005 until
termination of the loan on November 3, 2007. At March 31, 2000, there were no
borrowings under the Amended Agreement.

In February 2000, in connection with the acquisition of EdgeNet, the Company
entered into $2.4 million of promissory notes with the shareholders of EdgeNet.
The promissory notes are convertible into 132,148 shares of our common stock
not sooner than 180 days after the closing of the initial public offering.

NOTE 8. CAPITALIZATION

On January 17, 2000, the Company's Board of Directors voted to amend the
Certificate of Incorporation of the Company to increase the number of
authorized common shares and preferred shares to 150 million and 5 million
respectively, as calculated after the stock split.

On January 25, 2000, the Company's Board of Directors approved a 354.60-for-
one stock split, the effect of which is retroactively reflected within these
financial statements for all periods presented.

On February 16, 2000, The Company raised $164.3 million of gross proceeds in
an initial public offering of Common Stock (the "Equity Offering").

The Company's institutional investors and management owned 95.0 percent and
5.0 percent, respectively, of the ownership interests of Choice One LLC, an
entity that owned substantially all of the Company's outstanding capital stock.
As a result of the successful initial public offering, Choice One LLC was
dissolved and its assets, which consisted almost entirely of such capital
stock, was distributed to the Company's institutional investors and management
in accordance with the LLC Agreement. The LLC Agreement provided that the
Equity Allocation between the Company's institutional investors and management
be 68.5 percent to the Investor Members and 31.5 percent to management based
upon the valuation implied by the initial public offering.

F-22
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Under generally accepted accounting principles, upon the consummation of the
initial public offering, the Company was required to record the increase (based
upon the valuation of the Common Stock implied by the Equity Offering) in the
assets of Choice One LLC allocated to management as a $119.9 million increase
in additional paid-in capital, with a corresponding increase in noncash
deferred compensation, of which we were required to record $64.5 million as a
noncash, nonrecurring charge to operating expense and $55.4 million was
recorded as a deferred management ownership allocation charge. The deferred
charge will be amortized at $19.0 million, $23.9 million, $11.6 million and
$0.9 million during 2000, 2001, 2002 and 2003, respectively, which is the
period over which the Company has the right to repurchase the securities (at
the lower of fair market value or the price paid by the employee) in the event
the management employee's employment with the Company is terminated.

F-23
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1999 and 1998

(All amounts in thousands, except share and per share data)

Description of Business

Choice One Communications Inc. and subsidiaries ("Choice One" or the
"Company"), an integrated communications provider, was incorporated under the
laws of the State of Delaware on June 2, 1998. Choice One is a wholly owned
subsidiary of Choice One Communications L.L.C. ("Choice One LLC").

The Company is an integrated communications provider offering broadband data
and voice telecommunications services primarily to small and medium-sized
businesses in second and third tier markets in the northeastern United States.
The Company's services include high speed data and Internet service,
principally utilizing digital subscriber line technology, local exchange
service and long distance service. The Company seeks to become the leading
integrated communications provider in each target market by offering a single
source for competitively priced, high quality, customized telecommunications
services.

The Company's success will be affected by the problems, expenses, and delays
encountered in connection with the formation of any new business, and the
competitive environment in which the Company operates. The Company's
performance will further be affected by its ability to access potential
markets; secure financing or raise additional capital; implement expanded
interconnection and collocation with established telephone company facilities;
lease adequate trunking capacity from established telephone companies or
competitive local exchange carriers; purchase and install switches in
additional markets; implement its anticipated services; manage future growth;
implement efficient operations support systems and other back office systems;
develop a sufficient customer base; attract, retain and motivate qualified
personnel; develop strategic alliances or investments needed to complement
existing business; and achieve acceptable profits on long distance business due
to high levels of competition, declining prices and low customer retention
rates. The Company's networks and the provisions of telecommunications services
are subject to significant regulation at the federal, state and local levels.
Delays in receiving required regulatory approvals or the enactment of new
adverse regulation or regulatory requirements may have a material adverse
effect upon the Company. The telecommunications industry is subject to rapid
and significant changes in technology and is highly competitive. Although
management believes that the Company will be able to successfully mitigate
these risks, there can be no assurance that the Company will be able to do so
or that the Company will ever operate profitably.

Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include all accounts of Choice One
Communications Inc. and all of its subsidiaries. All significant intercompany
balances and transactions have been eliminated.

F-24
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Cash and Cash Equivalents

Cash and cash equivalents are highly liquid investments with original
maturities of three months or less. The cost of the cash equivalents
approximates fair market value.

Property and Equipment

Property and equipment includes office furniture and equipment, computer
equipment and software, switch equipment, construction-in-progress of switches
and leasehold improvements. These assets are stated at cost, which includes
direct costs, capitalized labor and capitalized interest. For financial
reporting purposes, depreciation and amortization are computed using the
straight-line method over the following estimated useful lives:

<TABLE>
<S> <C>
Switch equipment.................................................. 10 years
Computer equipment and software................................... 3-5 years
Office furniture and equipment.................................... 3-7 years
</TABLE>

Leasehold improvements are amortized using the straight-line method over the
shorter of the estimated life of the asset or the related lease term.
Betterments, renewals and extraordinary repairs that extend the life of the
asset are capitalized; other repairs and maintenance are expensed as incurred.

Other Assets

Other assets primarily consist of goodwill, customer base, deferred
financing costs and other assets.

Goodwill represents the excess purchase price over the fair value of net
assets acquired and is being amortized using the straight-line method over ten
years.

Customer base represents the fair value of the customer base obtained in the
acquisition of Atlantic Connections, L.L.C. (see Note 3) and is being amortized
using the straight-line method over five years.

Deferred financing costs consists of capitalized amounts for bank financing
fees, professional fees and other expenses related to the Company's credit
facility. These costs are being amortized on a straight-line basis, which
approximates the effective interest rate method, over the life of the related
debt (eight years). Amortization expense for these costs is included as a
component of interest expense in the Consolidated Statements of Operations.

Other assets consist primarily of professional fees and other expenses
associated with the Company's anticipated initial public offering of Common
Stock. Upon the successful completion of the initial public offering, these
costs will be deducted from the net proceeds received by the Company.

The Company reviews its long-lived assets in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-lived Assets and Long-lived Assets to be
Disposed of," for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If such
events or changes in circumstances are present, a loss is recognized if the
carrying value of the asset is in excess of the sum of the undiscounted cash
flows expected to result from the use of the asset and its eventual
disposition. An impairment loss is measured as the amount by which the carrying
amount of the asset exceeds the fair value of the asset.

F-25
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Income Taxes

Income taxes are accounted for in accordance with SFAS No. 109, "Accounting
for Income Taxes." SFAS No. 109 requires an asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities. Deferred
tax assets and liabilities are measured using the tax rates and laws that are
currently in effect. In addition, the amount of any future tax benefits is
reduced by a valuation allowance until it is more likely than not that such
benefits will be realized.

Deferred Compensation

The Company recognizes deferred compensation for the difference between the
estimated fair market value of the Company's stock and the price at which units
of Choice One LLC have been sold to management employees since the formation of
the Company or the exercise price of certain options granted. The deferred
compensation charge is amortized over the period in which the employee earns
the right to sell the stock at market value or, in the case of options, over
the vesting period.

Derivatives

The Company has limited involvement with derivative financial instruments
and does not use them for trading purposes. The Company uses derivative
instruments solely to reduce the financial impact of interest rate changes on
its Credit Agreement (see Note 7). The Company's Credit Agreement requires the
Company to enter into hedging agreements with respect to interest rate exposure
with an aggregate notional principal amount equal to 50.0 percent of the
outstanding borrowings once at least 50.0 percent of the aggregate commitment
has been utilized.

The differentials to be received or paid under these agreements will be
recognized as an adjustment to interest expense in the Consolidated Statements
of Operations. Gains and losses on termination of interest rate swaps will be
recognized when terminated in conjunction with the retirement of the associated
debt. At December 31, 1999 and 1998, the Company was not a party to any
derivative financial instrument agreements.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133 requires that every derivative be recorded as either an asset or liability
in the balance sheet and measured at its fair value. SFAS No. 133 also requires
that changes in the derivative's fair market value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
formally document, designate, and assess the effectiveness of transactions that
receive hedge accounting. The Company is required to adopt SFAS No. 133, as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB Statement No. 133," on a prospective basis for interim
periods and fiscal years beginning January 1, 2001. The Company has not yet
determined the effect of adopting SFAS No. 133.

Fair Value of Financial Instruments

The Fair Value of Financial Instruments are accounted for in accordance with
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." SFAS No.
107 requires that the Company disclose the fair value of its financial
instruments for which it is practicable to estimate fair value. The carrying
amounts of cash and cash equivalents, prepaid expenses and other current
assets, accounts payable and amounts included in accruals

F-26
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

meeting the definition of a financial instrument approximate fair value because
of the short-term maturity of these instruments. Based on borrowing rates
currently available to the Company for loans with similar terms and maturities,
long-term debt approximates fair value.

Recognition of the Cost of Start-up Activities

In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-5, "Reporting on the Costs of Start-up Activities"
("SOP 98-5"). SOP 98-5 requires start-up activities and organization costs to
be expensed as incurred and start-up costs to be capitalized prior to the
adoption of SOP 98-5 be reported as the cumulative effect of a change in
accounting principle. The Company expensed all such costs as incurred in
accordance with SOP 98-5.

Net Loss per Common Share

The Company calculates net loss per share under the provisions of the SFAS
No. 128, "Earnings per Share." SFAS No. 128 requires dual presentation of basic
and diluted earnings per share on the face of the income statement. Basic
earnings per share is based on the weighted average number of common shares
outstanding. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. No reconciliation of basic and
diluted is needed, as the effect of dilutive securities would be antidilutive.
The Company had options to purchase 605,202 and 198,397 shares outstanding at
December 31, 1999 and 1998, respectively, that were not included in the
calculation of diluted loss per share because the effect would be antidilutive.

Comprehensive Income

During 1998 the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which requires comprehensive income and its components to be presented
in the financial statements. During 1998 and 1999, the Company had no
comprehensive income components; therefore, comprehensive loss was the same as
net loss for both periods presented.

Revenue Recognition

Revenue is recognized in the month in which service is provided. Deferred
revenue represents advance billings for services not yet provided. Such revenue
is deferred and recognized in the month in which service is provided.

Use of Estimates

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

Acquisition

In November 1999, the Company purchased all of the outstanding units of
Atlantic Connections, L.L.C. ("Atlantic"), a local and long distance provider
with operations in the Portsmouth, New Hampshire and Worcester, Massachusetts
metropolitan areas. The purchase price was approximately $8.3 million and is
subject to adjustment based on Atlantic's October billed revenue and working
capital at October 31, 1999 under the

F-27
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

terms of the Purchase Agreement. In addition, the Purchase Agreement includes
an earn-out provision that will require the Company to pay up to an additional
25 percent of the initial purchase price if certain objectives are met. Those
objectives include sales, access line provisioning and customer retention
targets as well as the retention of certain key employees. The additional
purchase price will be paid approximately one year after the purchase date. The
transaction was accounted for as a purchase and is included in the Company's
Consolidated Statements of Operations since the date of acquisition. The
purchase price was allocated based upon the fair value of the assets acquired
and liabilities assumed with any excess reflected as goodwill ($5,464), which
is being amortized on a straight-line basis over ten years.

In connection with the acquisition, liabilities assumed and cash paid were
as follows:

<TABLE>
<S> <C>
Fair value of assets acquired, including cash acquired............. $10,304
Less-liabilities assumed........................................... 2,038
-------
Total consideration paid........................................... 8,266
Less-cash acquired................................................. 17
Less-amounts borrowed.............................................. 8,249
-------
Net cash paid for acquisition...................................... $ --
=======
</TABLE>

The following table sets forth the unaudited pro forma results of operations
of the Company for the years ended December 31, 1999 and 1998. The unaudited
pro forma results of operations assume that the operations of the Company were
combined with those of Atlantic as if the acquisition occurred on January 1,
1998. The unaudited pro forma results of operations are presented after giving
effect to certain adjustments for depreciation, amortization of intangible
assets, and interest expense on the acquisition financing. The unaudited pro
forma results of operations are based upon currently available information and
upon certain assumptions that the Company believes were reasonable. The
unaudited pro forma results do not purport to represent what the Company's
financial position or results of operations would actually have been if the
transaction in fact had occurred on such date or at the beginning of the period
indicated or to project the Company's financial position or the results of
operations at any future date or for any future period.

<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Revenues........................................... $ 11,658 $ 6,472
Net loss........................................... $ (34,215) $ (7,876)
Net loss per share, basic and diluted.............. $ (1.55) $ (0.44)
Weighted average number of shares outstanding,
basic and diluted................................. 22,022,256 18,017,791
</TABLE>

On February 24, 2000, the Company acquired EdgeNet, Inc., a corporation
based in Buffalo, New York, which is engaged in the business of providing
Internet home page design and development. The purchase price was approximately
$4.1 million, approximately $1.7 million in cash and approximately $2.4 million
in a promissory note that is convertible into 132,148 shares of its common
stock not sooner than 180 days after the closing of the initial public
offering. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the net assets and results of operations of
EdgeNet, Inc. have been included in the Company's consolidated statement since
the acquisition date.

The purchase price was allocated based upon the fair value of the assets
acquired and liabilities assumed with any excess reflected as goodwill ($3.5
million), which is being amortized on a straight-line basis over ten years.

F-28
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In connection with the acquisition, liabilities assumed and cash paid were
as follows:

Property and Equipment

Property and equipment, at cost consisted of the following at December 31:

<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Switch equipment............................................ $56,263 $ 7,080
Computer equipment and software............................. 11,416 6,088
Office furniture and equipment.............................. 2,687 217
Leasehold improvements...................................... 1,675 150
Construction in progress.................................... 5,277 7,611
------- -------
$77,318 $21,146
======= =======
</TABLE>

Depreciation expense for the year ended December 31, 1999 and for the period
from inception (June 2, 1998) through December 31, 1998 amounted to $4,855 and
$36, respectively. No depreciation expense was recorded in 1998 on the switch
equipment costs. Depreciation of the switch equipment began once the switches
were placed in service in 1999. Construction in progress costs relate to
projects to acquire, install and make operational switch equipment. Direct
labor costs incurred in connection with the installation and construction of
certain equipment is capitalized until such equipment becomes operational.
These costs are then amortized over the life of the related asset. Capitalized
labor included in property, plant and equipment was $3,894 and $617 at December
31, 1999 and 1998, respectively. Approximately $250 of interest costs,
associated with borrowings used to finance the construction of long-term
assets, was capitalized at December 31, 1999. There was no capitalized interest
at December 31, 1998, as capital expenditures were funded by capital
contributions and the issuance of common stock.

Other Assets

Other assets consisted of the following at December 31:

<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Goodwill.................................................... $ 5,464 $ --
Deferred financing costs.................................... 5,305 1,628
Customer base............................................... 3,300 --
Other assets................................................ 1,406 150
------- ------
15,475 1,778
Less-Accumulated amortization............................... (643) (51)
------- ------
$14,832 $1,727
======= ======
</TABLE>

F-29
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Accrued Expenses

Accrued expenses consisted of the following at December 31:

<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Accrued network costs........................................ $ 3,969 $ --
Accrued switch equipment costs............................... 2,470 4,611
Accrued payroll and employee related benefits................ 1,440 936
Accrued leasehold improvements............................... 1,091 --
Accrued software costs....................................... 906 3,760
Accrued interest............................................. 547 --
Other expenses............................................... 805 405
------- ------
$11,228 $9,712
======= ======
</TABLE>

Long-Term Debt

In October 1998, the Company, as a guarantor, and the Company's
subsidiaries, as borrowers, entered into an agreement for a revolving credit
facility with three financial institutions (the "Credit Agreement"). The Credit
Agreement provided the Company with a maximum credit facility of $60.0 million.
The Credit Agreement was used to finance capital expenditures and to provide
working capital.

In November 1999, the Company, as a guarantor, and the Company's
subsidiaries, as borrowers, amended and restated the Credit Agreement (the
"Amended Agreement"). The Amended Agreement, which terminates on November 3,
2007, provides the Company with a maximum revolving credit facility of $100.0
million and a delayed draw term loan of $50.0 million. Any unused portion of
the term loan commitment will expire on November 3, 2000. The Amended Agreement
was used to finance the purchase of Atlantic, and will be used to finance
capital expenditures and to provide working capital. Borrowings under the
Amended Agreement are secured by substantially all of the assets of the Company
and bear interest, at the Company's option, at either the LIBOR rate or the
base rate (the higher of the prime interest rate or the federal funds rate plus
0.5 percent), with additional percentage points added based on the Company's
leverage ratio, as defined in the agreement. In addition, the Company is also
required to pay a commitment fee of 0.75 percent to 1.50 percent per annum
based on the Company's utilization of the Amended Agreement.

The Amended Agreement revised certain covenants including maximum debt to
capital ratio, minimum revenue amounts, maximum earnings before interest,
taxes, depreciation and amortization (EBITDA) losses, maximum capital
expenditure levels, minimum ratio of fixed assets to total debt, maximum
leverage ratio, maximum fixed charge coverage ratio, and minimum interest
coverage ratio, all as defined in the Amended Agreement. At December 31, 1999,
the Company was in compliance with these covenants.

The aggregate commitment under the Amended Agreement is reduced by 1.25
percent per quarter commencing on December 31, 2002 until September 30, 2003,
by 2.50 percent per quarter commencing on December 31, 2003 until September 30,
2004, by 6.25 percent per quarter commencing on December 31, 2004 until
September 30, 2005, and by 7.50 percent per quarter commencing on December 31,
2005 until termination of the loan on November 3, 2007.

As of December 31, 1999, $51.5 million principal amount of revolving
borrowings was outstanding under the Amended Agreement, which bore interest at
a weighted average rate of 10.78 percent. The Company had no long-term debt
outstanding as of December 31, 1998.

F-30
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Stockholder's Equity

Capitalization

The Company's board of directors approved a 354.60-for-one stock split on
January 25, 2000, the effect of which is retroactively reflected within these
financial statements for all periods presented.

In July 1998, the Company's institutional investors and management entered
into a Limited Liability Company agreement (the "LLC agreement") in order to
govern the affairs of Choice One LLC, which presently holds all of the
outstanding shares of the Company's Common Stock. Choice One LLC has two
outstanding classes of Units. Class A Units are held by its institutional
investors (95 percent) and Class B Units are held by management (5 percent).
The rights of the two classes of Units will differ upon, among other events,
the consummation of a public securities offering by the Company.

On June 30, 1999, the Company's institutional investors and management
entered into an agreement amending the LLC Agreement. The amendment increases
the amount of capital contributions committed by its institutional investors
and management as a whole by approximately $71.3 million to a total capital
commitment of approximately $133.4 million. In addition, the existing Investor
Purchase Agreements were amended such that certain of its institutional
investors increased their pro rata commitment to Choice One LLC on the same
terms as those included in the previous commitments. These commitments
providing for additional equity contributions expire on January 1, 2001 or upon
the completion of a successful debt or equity offering as defined in the
agreement. If the commitments terminate, the total capital committed to the LLC
would reduce back to an aggregate of approximately $62.1 million.

Choice One LLC has agreed to make contributions as necessary to fund the
Company's expansion into fourteen markets. In order to obtain funds, the
Company submitted proposals to Choice One LLC detailing the funds necessary to
build out the Company's business in these markets. Through December 31, 1999,
Choice One LLC has approved the proposals for fourteen markets. As of December
31, 1999 and 1998, Choice One LLC has contributed a total of approximately
$61.8 million and $17.8 million, respectively, to the Company.

Stock Option Plan

On August 12, 1998, the Company's stockholder approved the 1998 Employee
Stock Option Plan (the "Plan"). The persons to whom options are granted, the
number of shares granted to each and the period over which the options become
exercisable are determined by the Employee Option Plan Administrative
Committee. The options granted have a term of ten years and vest at equal rates
over a four-year period. The total number of shares available under the Plan is
1,063,791.

The Company accounts for stock based compensation issued to its employees in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and has elected to adopt the "disclosure-only" provisions of SFAS No. 123,
"Accounting for Stock Based Compensation." Had compensation cost for the Plan
been determined based on the fair value of the options at the grant dates for
awards under the plan consistent with the method prescribed in SFAS No. 123,
the Company's net loss would have increased to the pro forma amount indicated
below for the year ended December 31, 1999 and the period from inception
(June 2, 1998) through December 31, 1998.

<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Net loss as reported..................................... $(32,475) $(5,074)
Net loss pro forma....................................... $(32,658) $(5,087)
</TABLE>

F-31
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Net loss per share, basic and diluted:

<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
As reported.................................................. $(1.47) $(0.28)
Pro forma.................................................... $(1.48) $(0.28)
</TABLE>

For purposes of the pro forma disclosure above, the fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option pricing model and the minimum value method permitted by SFAS No. 123 for
entities not publicly traded with the following weighted-average assumptions
used for grants in 1999 and 1998:

<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Dividend yield..................................... 0.0 percent 0.0 percent
Risk-free interest rate............................ 5.74 percent 4.99 percent
Expected life...................................... 7 years 7 years
</TABLE>

The weighted average grant date fair value of options granted during the
year ended December 31, 1999 and the period from inception (June 2, 1998)
through December 31, 1998 was $12.09 and $13.99, respectively. SFAS No. 123 has
only been applied to options granted beginning August 12, 1998. As a result,
the pro forma compensation expense may not be representative of that to be
expected in future years.

The following is a summary of the activity in the Company's Plan during the
year ended December 31, 1999 and the period from inception (June 2, 1998)
through December 31, 1998:

<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- ------- --------
<S> <C> <C> <C> <C>
Options outstanding, beginning of
period................................ 198,397 $2.82 -- $ --
Options granted........................ 492,333 5.92 198,397 2.82
Options forfeited...................... (85,528) 2.94 -- --
------- -------
Options outstanding, end of period..... 605,202 5.32 198,397 2.82
======= =======
</TABLE>

The weighted-average remaining contractual life of options outstanding was
9.4 years, with exercise prices ranging from $2.82 to $9.40, as of December 31,
1999. None of the options granted were exercisable at December 31, 1999 or
1998. During January 2000, the Company granted options for 42,392 shares with
an exercise price of $14.48 per share.

Options outstanding as of December 31, 1999 consisted of the following:

<TABLE>
<CAPTION>
Weighted-Average
Weighted-Average Remaining
Shares Exercise Price Contractual Life
------ ---------------- ----------------
<S> <C> <C>
239,885 $2.82 8.9
134,144 4.00 9.5
90,008 7.57 9.8
141,165 9.40 9.9
-------
605,202 5.32 9.4
=======
</TABLE>

As the estimated fair market value of the Company's stock exceeded the
exercise price of certain options granted, the Company has recognized total
gross deferred compensation expense of $6,466 and $1,957 at

F-32
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999 and 1998, respectively, of which $1,115 and $201 has been
amortized to expense during the year ended December 31, 1999 and the period
from inception (June 2, 1998) through December 31, 1998, respectively. The
deferred compensation is amortized to expense over the vesting period of the
options.

The Company's certificate of incorporation provides that it may issue
preferred stock without shareholder approval. Under certain circumstances, as
defined in the certificate of incorporation and by-laws, preferred stock could
be issued by the Company in connection with a shareholder rights plan. The
issuance of preferred stock in connection with a shareholder rights plan could
cause substantial dilution to any person or group that attempts to acquire the
Company on terms not approved in advance by the Company's board of directors.

Income Taxes

The Company had approximately $30,225 and $150 of net operating loss
carryforwards for federal income tax purposes at December 31, 1999 and 1998,
respectively. The net operating loss carryforwards will expire in the years
2019 and 2018, respectively, if not previously utilized. The Company has
recorded a valuation allowance equal to the net deferred tax assets at December
31, 1999 and 1998, due to the uncertainty of future operating results. The
valuation allowance will be reduced at such time as management believes it is
more likely than not that the net deferred tax assets will be realized. Any
reductions in the valuation allowance will reduce future income tax provisions.

The deferred tax asset is comprised of the following at December 31:

<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Start-up and other capitalized costs...................... $ 1,117 $ 1,538
Net operating loss carryforwards.......................... 10,259 50
Compensation related adjustments.......................... 526 80
Less: valuation allowance................................. (11,902) (1,668)
-------- -------
Net deferred tax asset.................................... $ -- $ --
======== =======
</TABLE>

Under existing tax law, all operating expenses incurred prior to a company
commencing its principal operations are capitalized and amortized over a 60-
month period for tax purposes.

Commitments and Contingencies

Operating Lease Agreements

The Company leases office space and certain other equipment under various
operating leases that expire through 2009. The minimum aggregate payments under
noncancelable leases are as follows for the years ending December 31:

<TABLE>
<S> <C>
2000................................................................. $ 1,921
2001................................................................. 1,915
2002................................................................. 1,838
2003................................................................. 1,790
2004................................................................. 1,739
Thereafter........................................................... 7,765
-------
$16,968
=======
</TABLE>

Rent expense for the year ended December 31, 1999 and for the period from
inception (June 2, 1998) through December 31, 1998 was approximately $1,111 and
$186, respectively.

F-33
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

401(k) Plan

The Company provides a defined contribution 401(k) plan to substantially all
of its employees meeting certain service and eligibility requirements. The
Company pays a monthly matching contribution equal to 50 percent of the
employees' contributions up to a maximum of 6 percent of their eligible
compensation. Plan expenses were approximately $224 and $32 during the year
ended December 31, 1999 and for the period from inception, June 2, 1998,
through December 31, 1998, respectively.

Annual Incentive Plan

During 1998, the Company's board of directors approved the 1998/99 Bonus
Plan (the "Bonus Plan"). All full-time noncommissioned Choice One employees are
eligible to participate in the Bonus Plan. The total amount included in
operations for these incentive bonuses was approximately $748 and $538 during
the year ended December 31, 1999 and for the period from inception, June 2,
1998, through December 31, 1998, respectively.

Other Agreements

In 1999, the Company entered into a sponsorship agreement with Buffalo
Bills, Inc. Under the sponsorship agreement, the Company obtained certain
marketing and signage rights related to Ralph Wilson Stadium and the Buffalo
Bills, a National Football League team, and became the exclusive
telecommunications provider of Ralph Wilson Stadium during the 1999 through
2003 seasons. The agreement requires the Company to pay a total of $2.4 million
during the period from September 30, 1999 through June 30, 2004.

In 1998, the Company entered into a three-year general agreement with Lucent
Technologies, Inc. ("Lucent") establishing terms and conditions for the
purchase of Lucent products, services and licensed materials. The agreement
requires the Company to purchase a minimum of $30.0 million of Lucent products,
services and licensed materials. If the Company fails to purchase the minimum
requirements, an additional price premium is charged.

In 1998, the Company entered into a capacity agreement with Frontier
Communications of the West Inc. from which the Company will purchase dedicated
circuit capacity for the transport of its long distance traffic. The agreement
contains certain minimum circuit term and commitment charges depending on the
specific circuits selected.

In 1998, the Company entered into a service bureau agreement with Saville
Systems Inc. to process the Company's billing records. The agreement contains
minimum monthly transaction fees.

Related Parties

The Company is a majority owned subsidiary of Choice One LLC. As of December
31, 1999, and 1998, Choice One LLC has made aggregate capital contributions to
the Company of approximately $61.8 million and $17.8 million, respectively.
Choice One LLC may continue to make additional capital contributions to the
Company as discussed in Note 8 to these financial statements, but no such
contributions will be required after the Company consummates an initial public
offering of its stock. Certain investors in Choice One LLC are also employees
of the Company. Upon an initial public offering by the Company, a sale of the
Company or liquidation or dissolution of the Company, Choice One LLC will
dissolve and its assets (which are expected to consist almost entirely of
capital stock of the Company) will be distributed to the institutional
investors and employee investors of Choice One LLC in accordance with an
allocation formula calculated immediately prior to such dissolution. The
Company will account for any increase in the allocation of assets to the
employee investors in Choice One LLC in accordance with generally accepted
accounting principles and SEC regulations in effect at the time of such
increase, and this will result in a charge to the Company's earnings (see Note
12).

F-34
<PAGE>

CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

As the estimated fair market value of the Company has exceeded the price at
which units of Choice One LLC have been sold to management employees since the
formation of the Company, the Company has recognized total gross deferred
compensation of $4,359 and $1,742 at December 31, 1999 and 1998, respectively,
of which $933 and $175 has been amortized to expense during the year ended
December 31, 1999 and the period from inception (June 2, 1998) through December
31, 1998, respectively. The deferred compensation charge is amortized based
upon the period over which the Company has the right to repurchase the
securities (at the lower of fair market value or the price paid by the
employee) in the event the management employee's employment with the Company is
terminated, which expires over a four or five year period from the date of
issuance. Upon an initial public stock offering, the period over which the
Company has the right to repurchase the securities is reduced by one year.

Subsequent Events

Stock Authorizations

On January 17, 2000, the Company's board of directors voted to amend the
Certificate of Incorporation of the Company to include a total of 150 million
authorized shares of common stock and 5 million authorized shares of preferred
stock, as calculated after the stock split and the initial public offering.

Public Stock Offering

The Company will seek to raise approximately $114 million of gross proceeds
in an initial public offering of Common Stock (the "Equity Offering"). The
Company's institutional investors and management currently own 95.0 percent and
5.0 percent, respectively, of the ownership interests of Choice One LLC, an
entity that owns substantially all of the Company's outstanding capital stock.
If the Equity Offering is consummated, Choice One LLC will dissolve and its
assets, which consist almost entirely of such capital stock, will be
distributed to the Company's institutional investors and management in
accordance with the LLC Agreement. The LLC Agreement provides that the Equity
Allocation between the Company's institutional investors and management will
range between 95.0 percent/5.0 percent and 66.7 percent/33.3 percent based upon
the valuation of the Company's Common Stock implied by the Equity Offering.
Based upon the current valuation of the Company's Common Stock implied by the
Equity Offering, excluding the effect of options, the Equity Allocation will be
68.5 percent to the Investor Members and 31.5 percent to management. Management
will receive the full 31.5 percent allocation if the value of the common stock
distributable to the Company's institutional investors based on the initial
public offering price exceeds certain hurdle rate thresholds specified in the
LLC Agreement for the return on the equity invested by the Company's
institutional investors. However, the maximum amount allocable to management
was reduced based on the amount of the Company's institutional investors equity
undrawn and the length of time of such equity commitment and management will
earn the maximum amount to which it is entitled. Under generally accepted
accounting principles, upon the consummation of the Equity Offering, the
Company will be required to record the increase (based upon the valuation of
the Common Stock implied by the Equity Offering) in the assets of Choice One
LLC allocated to management as an increase in additional paid-in capital, a
portion of which will be recorded as a noncash, nonrecurring charge to
operating expense and a portion of which will be recorded as a deferred
management
ownership allocation charge. The deferred charge will be amortized over 2000,
2001, 2002 and 2003, which is the period over which the Company has the right
to repurchase the securities (at the lower of fair market value or the price
paid by the employee) in the event the management employee's employment with
the Company is terminated.

F-35
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Unitholders
Atlantic Connections, LLC

We have audited the accompanying consolidated balance sheet of Atlantic
Connections, LLC as of December 31, 1998, and the related consolidated
statements of operations, unitholders' equity, and cash flows for the period
from July 24, 1998 (date of inception) to December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Atlantic
Connections, LLC at December 31, 1998, and the results of its operations and
its cash flows for the period from July 24, 1998 (date of inception) to
December 31, 1998, in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

Boston, Massachusetts
June 4, 1999, except for
Note 9, as to which the date
is November 3, 1999

F-36
<PAGE>

ATLANTIC CONNECTIONS, LLC

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 100,585 $ 227,485
Accounts receivable, less allowance for doubtful
amounts of $120,357 at December 31, 1998 and
$159,099 at September 30, 1999 (Unaudited) 547,937 755,157
Unbilled receivables............................. 150,872 197,192
Note receivable from former owners............... 186,693 --
Prepaid expenses and other assets................ 7,530 2,500
---------- ----------
Total current assets......................... 993,617 1,182,334
Property and equipment:
Switching equipment, including equipment under
capital leases.................................. 549,621 568,417
Computer equipment............................... 16,965 56,770
Office equipment................................. 38,299 38,497
Vehicles......................................... 6,025 6,025
---------- ----------
610,910 669,709
Less accumulated depreciation and amortization... (46,360) (127,080)
---------- ----------
564,550 542,629
Other assets....................................... -- 9,775
Intangible assets, net of accumulated amortization
of $168,481 at December 31, 1998 and $545,808 at
September 30, 1999 (Unaudited).................... 2,927,873 2,550,546
---------- ----------
Total assets................................. $4,486,040 $4,285,284
========== ==========
</TABLE>

<TABLE>
<CAPTION>
LIABILITIES AND UNITHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Line-of-credit.......................................... -- $ 200,000
Accounts payable........................................ $ 857,677 1,399,684
Accrued expenses........................................ 126,788 39,431
Current portion of capital lease obligations............ 82,568 66,787
Current portion of long-term borrowings................. 52,263 51,341
---------- -----------
Total current liabilities........................... 1,119,296 1,757,243
Long-term borrowings and capital lease obligations, less
current portions......................................... 3,087,677 3,012,006
Redeemable warrants..................................... 66,600 66,600
Unitholders' equity (deficit):
Common units, no par value: 500,000 units authorized;
71,000 issued and outstanding........................ 816,666 816,666
Accumulated deficit................................... (604,199) (1,367,231)
---------- -----------
Total unitholders' equity (deficit)................. 212,467 (550,565)
---------- -----------
Total liabilities and unitholders' equity
(deficit).......................................... $4,486,040 $ 4,285,284
========== ===========
</TABLE>

See accompanying notes.

F-37
<PAGE>

ATLANTIC CONNECTIONS, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
For the period from
July 24, 1998 Nine Months
(date of inception) ended
to December 31, September 30,
1998 1999
------------------- -------------
<S> <C> <C>
(Unaudited)
Net revenues................................. $2,180,277 $ 6,239,057
Cost of revenues............................. 1,857,775 4,794,064
---------- -----------
Gross profit................................. 322,502 1,444,993
Operating expenses:
Sales and marketing.......................... 90,878 302,140
General and administrative................... 724,274 1,647,427
---------- -----------
815,152 1,949,567
---------- -----------
Loss from operations......................... (492,650) (504,574)
Interest expense............................. 111,549 258,458
---------- -----------
Net loss..................................... $ (604,199) $ (763,032)
========== ===========
</TABLE>

See accompanying notes.

F-38
<PAGE>

ATLANTIC CONNECTIONS, LLC

CONSOLIDATED STATEMENTS OF UNITHOLDERS' EQUITY (DEFICIT)

For the period from July 24, 1998 (date of inception)
to December 31, 1998 and the Nine Months ended
September 30, 1999 (Unaudited)

<TABLE>
<CAPTION>
Common Total
--------------- Accumulated Unitholders'
Units Amount Deficit Equity (Deficit)
------ -------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Issuance of common units for
cash....................... 71,000 $816,666 -- $ 816,666
Net loss.................... -- -- $ (604,199) (604,199)
-------- ----------- --------- ---
Balance at December 31,
1998....................... 71,000 816,666 (604,199) 212,467
Net loss (unaudited)........ -- -- (763,032) (763,032)
-------- ----------- --------- ---
Balance at September 30,
1999 (unaudited)........... 71,000 $816,666 $(1,367,231) $(550,565)
====== ======== =========== =========
</TABLE>

See accompanying notes.

F-39
<PAGE>

ATLANTIC CONNECTIONS, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
For the period from
July 24, 1998 Nine Months
(date of inception) to ended
December 31, September 30,
1998 1999
---------------------- -------------
(Unaudited)
<S> <C> <C>
Operating activities
Net loss................................ $ (604,199) $(763,032)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization......... 214,841 466,039
Provision for allowance for doubtful
amounts.............................. 31,549 60,000
Changes in operating assets and
liabilities:
Accounts receivable................... 36,252 (267,220)
Unbilled receivables.................. 5,295 (46,320)
Prepaid expenses and other current
assets............................... 8,525 5,030
Other assets.......................... -- (9,775)
Accounts payable...................... (229,566) 542,007
Accrued expenses...................... 61,616 (87,357)
----------- ---------
Net cash used in operating
activities........................... (475,687) (100,628)
Investing activities
Purchase of property and equipment...... (51,356) (58,800)
Note receivable from former owners...... (186,693) 186,693
Cash paid for acquired assets, including
acquisition costs...................... (1,268,393) --
----------- ---------
Net cash (used in) provided by
investing activities................. (1,506,442) 127,893
Financing activities
Proceeds from sale of units............. 816,666 --
Proceeds of senior notes payable and
redeemable warrants.................... 1,500,000 --
Proceeds from line-of-credit............ -- 200,000
Payments on long-term debt.............. (206,550) (39,296)
Payments on capital lease obligations... (27,402) (61,069)
----------- ---------
Net cash provided by financing
activities........................... 2,082,714 99,635
----------- ---------
Increase in cash and cash equivalents... 100,585 126,900
Cash and cash equivalents at the
beginning of period.................. -- 100,585
----------- ---------
Cash and cash equivalents at the end
of period............................ $ 100,585 $ 227,485
=========== =========
Supplemental disclosures of cash flow
information
Cash paid for interest.................. $ 91,643 $ 260,271
Noncash investing and financing
activities:
Long-term debt issued or assumed in
connection with acquisitions........... 1,754,958 --
Capital lease obligations assumed in
acquisitions........................... 269,986 --
</TABLE>

See accompanying notes.

F-40
<PAGE>

ATLANTIC CONNECTIONS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nature of Business and Organization

Atlantic Connections, LLC (the Company) is a limited liability company
incorporated in the state of Massachusetts on July 24, 1998. The term of the
Company may continue until June 1, 2048 and can be extended prior to the
expiration date. The Company is a local telecommunications carrier with
locations in Portsmouth, NH and Worcester, MA, and is an integrated
communications provider offering local, long distance, data and private line
services to small and medium-sized businesses in the Northeastern United
States.

The liability of each member of the Company is limited to such member's
respective capital contribution.

Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Atlantic Connections, Ltd. (See Note 3). All
intercompany amounts have been eliminated in consolidation.

Advertising Cost

The Company expenses advertising costs as incurred.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.

Concentrations of Credit Risk

The financial instruments that potentially subject the Company to
concentrations of risk are cash and cash equivalents and accounts and unbilled
receivables. The risk with respect to cash and cash equivalents is minimized
by the Company's policy of investing in financial instruments with short-term
term maturities issued by highly-rated financial institutions. The risk with
respect to accounts and unbilled receivables is minimized by the large number
of the Company's customers. The Company performs periodic credit evaluations
of its customers' financial condition and generally does not require
collateral. Credit losses have been within management's expectations.
Customers are located throughout the New England area.

Impairment of Long-Lived Assets

The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed
Of." Under SFAS 121, the carrying value of long-lived assets are reviewed if
the facts and circumstances suggest they may be impaired. If this review
indicates that the affected assets may not be recoverable, as determined based
upon a projection of undiscounted operating cash flows, the carrying value of
the affected assets would be reduced to fair value.

Intangible Assets

Intangible assets result from acquisitions and principally consist of the
excess of the acquisition cost over the fair value of the identifiable
tangible and intangible assets of the businesses acquired, or goodwill, and
amounts attributable to non-compete agreements. Goodwill is amortized on a
straight-line basis over its expected life, seven years. The non-compete
agreements are amortized on a straight-line basis over the term of the
agreement, three years.

F-41
<PAGE>

ATLANTIC CONNECTIONS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Amortization expense was $168,481 and $377,327 for the period July 24, 1998
to December 31, 1998 and the nine months ended September 30, 1999 (Unaudited),
respectively.

Property and Equipment

Property and equipment are stated at cost and are being depreciated using
the straight-line method over the estimated useful life of three to seven
years. Leasehold improvements are being amortized over the shorter of their
useful lives or the remaining life of the lease. Equipment under capital leases
amounted to $352,525 at December 31, 1998 and $314,754 at September 30, 1999
(Unaudited).

Depreciation expense was $46,360 and $80,719 for the period July 24, 1998 to
December 31, 1998 and the nine months ended September 30, 1999 (Unaudited),
respectively. Amortization of equipment under capital leases is included with
depreciation in the accompanying financial statements.

Revenue Recognition

Revenue is recognized in the month in which the service is provided.

Unbilled Receivables

Unbilled receivables represent services rendered to customers prior to the
balance sheet date but unbilled at that date based on the customer's cycle date
of billing.

Use of Estimates

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

Comprehensive Income

The Company has no elements of comprehensive income (loss) and, accordingly,
comprehensive income (loss) is the same as net income (loss) for the period
from July 24, 1998 to December 31, 1998 and the nine months ended September 30,
1999.

Interim Financial Information (Unaudited)

The interim financial information at September 30, 1999 and for the nine
months ended September 30, 1999, all of which is unaudited, was prepared by the
Company on a basis consistent with the audited financial statements. In
management's opinion, such information reflects all adjustments which are of a
normal recurring nature and which are necessary to present fairly the results
of the periods presented.

Accrued Expenses

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Salaries.......................................... $ 67,080 $20,598
Professional fees................................. 36,524 --
Interest.......................................... 23,184 18,833
-------- -------
$126,788 $39,431
======== =======
</TABLE>

F-42
<PAGE>

ATLANTIC CONNECTIONS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Acquisitions

On September 8, 1998, the Company acquired substantially all of the business
assets and assumed substantially all of the liabilities of Atlantic
Connections, Inc. (ACI) and acquired the stock of Atlantic Connections, Ltd.
(ACL), effective as of September 1, 1998. ACI and ACL were related through
holders of our common stock and management. The acquisitions were accounted for
as purchases and the results of operations of ACI and ACL are included in the
accompanying consolidated financial statements from the effective date of the
acquisitions.

The total purchase price was approximately $4,443,000, including acquisition
costs, and was paid in cash, notes issued to the former owners and liabilities
assumed. The purchase price was allocated approximately as follows:

<TABLE>
<S> <C>
Current assets, principally accounts receivable and unbilled
receivables................................................... $ 788,000
Fixed assets................................................... 559,000
Intangibles, including non-compete agreement and goodwill...... 3,096,000
----------
$4,443,000
==========
</TABLE>

A reconciliation to cash paid for the acquired assets is as follows:

<TABLE>
<S> <C>
Total purchase price............................................ $4,443,000
Less current liabilities and long-term debt assumed or issued... (3,175,000)
----------
Cash used to acquire assets..................................... $1,268,000
==========
</TABLE>

Subsequent to the acquisition, certain post closing adjustments were made in
accordance with the arrangements between the former owners and the Company. The
resulting adjustments resulted in a note receivable due from the former owners
at December 31, 1998 of $186,693.

The pro forma unaudited results of operations for the year ended December
31, 1998, assuming the purchase of ACI and ACL had consummated as of January 1,
1998, follows:

<TABLE>
<S> <C>
Net Revenues..................................................... $6,473,000
Net Loss......................................................... (1,568,000)
</TABLE>

F-43
<PAGE>

ATLANTIC CONNECTIONS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Borrowings

Long-Term Debt

A summary of the Company's long-term debt, including capital leases, at
December 31, 1998 and September 30, 1999 (Unaudited) is as follows:

<TABLE>
<CAPTION>
1998 1999
---------- -----------
(Unaudited)
<S> <C> <C>
Note payable to former owners, 8% interest; interest
only for the first twenty-four months. Payments of
principal and interest of $5,353 for months twenty-
five through eighty-five. Due in full October 2005.
Secured by substantially all business assets......... $ 241,343 $ 241,343

Note payable to former owners, 8% interest; interest
only for the first twenty-four months. Principal and
interest payments of $16,201 per month for months
twenty-five through eighty-five. Due in full October
2005. Secured by substantially all business assets of
the Company.......................................... 713,287 713,287

Note payable to former owners, 8% interest with
monthly principal and interest payments of $8,091
through April 15, 2007. Secured by substantially all
business assets of the Company....................... 591,894 552,597

Senior notes payable to venture capital firm; 12%
interest; face amount $1,400,000, due in full March
31, 2005. Interest due quarterly; quarterly principal
payments of $75,000 begin June 30, 2000.............. 1,333,400 1,341,392

Various capital lease obligations; interest rates
ranging from 7% to 9%................................ 242,584 181,515
---------- ----------
3,222,508 3,130,134
Less current portions:
Capital lease obligations........................... (82,568) (66,787)
Long-term borrowings................................ (52,263) (51,341)
---------- ----------
$3,087,677 $3,012,006
========== ==========
</TABLE>
Senior note payable to venture capital firm; 12%
interest; convertible into units of the Company equal
to 15% of the fully diluted equity of the Company;
due March 31, 2005................................... 100,000 100,000

The senior notes payable to venture capital firm above are senior in
priority to other borrowings of the Company, except those, if any, in
connection with the line-of-credit to a bank described below. The senior notes
payable require the Company to comply with various financial covenants
including maintenance of minimum working capital, minimum capital and
limitations on the ratio of senior indebtedness to capital, as defined. At
December 31, 1998, the Company was not in compliance with certain of the
covenants and the venture capital firm waived the events of noncompliance
through December 31, 1998.

At September 30, 1999, the Company was not in compliance with certain of the
covenants. Such events of non-compliance were cured by the acquisition
described in Note 9.

Borrowings

In connection with the senior notes payable, the Company issued a redeemable
warrant exchangeable into 10% of the fully diluted equity of the Company. The
estimated fair value of the redeemable warrant of $66,600 at September 8, 1998
has been reduced from the face of the senior notes payable. The resulting
discount will be amortized to interest expense over the term of the senior
notes payable. Amortization expense was $7,992 for the nine months ended
September 30, 1999 (Unaudited).

F-44
<PAGE>

ATLANTIC CONNECTIONS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Line-of-Credit

On April 30, 1999, the Company obtained two credit facilities with a bank.
The line-of-credit is a $500,000 facility to support working capital. The
second facility is a $100,000 equipment line-of-credit to acquire equipment.
The unused portion of the facilities expires May 31, 2000, with the working
capital line-of-credit renewable at the Bank's discretion. Interest is at the
prime rate plus 2.0% and is paid monthly in arrears. No amounts were
outstanding under these facilities at December 31, 1998 and $200,000 was
outstanding under these facilities at September 30, 1999 (Unaudited).

Aggregate maturities of long-term debt as of December 31, 1998 for the next
five years are as follows:

<TABLE>
<S> <C>
Years ended December 31:
1999........................................................... $ 52,263
2000........................................................... 324,294
2001........................................................... 543,958
2002........................................................... 564,206
2003........................................................... 586,136
Thereafter..................................................... 975,667
-----------
$ 3,046,524
===========
</TABLE>

Leases

Future minimum lease payments under noncancelable operating and capital
leases as of December 31, 1998 are as follows:

<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- --------
<S> <C> <C>
1999.................................................... $ 35,266 $106,187
2000.................................................... 19,230 76,562
2001.................................................... 12,205 61,822
2002.................................................... -- 43,276
2003.................................................... -- 4,153
-------- --------
66,701 292,000
Less amounts representing interest...................... -- (49,416)
-------- --------
$ 66,701 $242,584
======== ========
</TABLE>

Rent expense was $14,261 and $35,901 in the period from July 24, 1998 to
December 31, 1998 and the nine months ended September 30, 1999 (Unaudited).

In June 1999, the Company entered into a five-year noncancelable operating
lease for a new office facility. The Company has a one-time renewal option for
either a one, three or five year extension. The minimum annual lease payments
are approximately $38,000.

Unitholders' Equity

Issuance of Common Units

During the period July 24, 1998 to December 31, 1998, the Company
authorized 500,000 units designated as no par value common units and issued
71,000 units in exchange for $816,666 in cash.

F-45
<PAGE>

ATLANTIC CONNECTIONS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Warrants

In connection with the senior notes payable (see Note 5), the Company issued
a warrant to purchase an equity interest in the Company equivalent to 10% of
the fully diluted equity ownership. The warrants are immediately exercisable
and expire September 8, 2008. Up to 5% of the warrants may be earned back by
the Company at the rate of up to 1% for each year the Company meets or exceeds
certain EBITDA targets and for each year the Company makes principal payments
in accordance with the warrant agreement. The warrants are redeemable by the
Company, at the option of the investor, beginning any time after the sixth year
and, accordingly, are classified outside of equity.

At December 31, 1998, the Company has reserved 10,000 units for exercise of
the warrants and 15,000 units for conversion of the convertible senior notes
payable.

Income Taxes

Since the Company is a limited liability company, all taxes are paid by the
unitholders of the Company as the Company is treated as a pass-through entity
for federal and state income tax purposes. Accordingly, there is no tax
provision or benefit recorded for the period from July 24, 1998 to December 31,
1998 and the nine months ended September 30, 1999.

Subsequent Event

On November 3, 1999, Choice One Communications, Inc. acquired all of the
outstanding units of Atlantic Connections, LLC in an acquisition to be
accounted for as a purchase business combination. The acquisition was effective
from November 1, 1999.

F-46
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Atlantic Connections, Inc.

We have audited the accompanying balance sheets of Atlantic Connections,
Inc. as of December 31, 1997 and August 31, 1998, and the related statements of
operations, stockholders' deficit, and cash flows for the year ended December
31, 1997 and the eight months ended August 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 Atlantic Connections, Inc.
at December 31, 1997 and August 31, 1998, and the results of its operations and
its cash flows for the year ended December 31, 1997 and the eight months ended
August 31, 1998, in conformity with generally accepted accounting principles.

s/ Ernst & Young LLP

Boston, Massachusetts
November 10, 1999

F-47
<PAGE>

ATLANTIC CONNECTIONS, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
December 31, August 31,
1997 1998
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, less allowance for doubtful
amounts of $10,000 at December 31, 1997 and $22,802
at August 31, 1998.................................. $ 232,026 $ 265,759
Unbilled receivables................................. 34,394 43,426
Prepaid expenses and other assets.................... 11,720 --
--------- ---------
Total current assets................................. 278,140 309,185
Property and equipment:
Switching equipment, including equipment under
capital leases...................................... 186,732 187,360
Office equipment..................................... -- 13,400
--------- ---------
186,732 200,760
Less accumulated depreciation and amortization....... (95,848) (122,950)
--------- ---------
90,884 77,810
--------- ---------
Total assets......................................... $ 369,024 $ 386,995
========= =========

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
Cash overdraft....................................... $ 143,977 $ 32,183
Accounts payable..................................... 283,165 645,929
Accrued expenses..................................... 21,221 46,926
Current portion of capital lease obligations......... 17,547 5,670
Current portion of note payable to affiliate......... 29,607 29,607
Current portion of long-term borrowings.............. 9,365 3,205
--------- ---------
Total current liabilities............................ 504,882 763,520
Capital lease obligations.............................. 70,653 77,534
Note payable to affiliate, less current portion........ 177,460 189,460
Long-term borrowings, less current portion............. 115,284 115,284
Stockholders' deficit:
Common stock, no par value: 300 shares authorized,
issued and outstanding.............................. 166,900 166,900
Less: Treasury stock, at cost; 47 shares............. (130,490) (130,490)
Accumulated deficit.................................. (535,665) (795,213)
--------- ---------
Total stockholders' deficit.......................... (499,255) (758,803)
--------- ---------
Total liabilities and stockholders' deficit.......... $ 369,024 $ 386,995
========= =========
</TABLE>

See accompanying notes.

F-48
<PAGE>

ATLANTIC CONNECTIONS, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Eight Months
Year Ended Ended
December 31, August 31,
1997 1998
------------ ------------
<S> <C> <C>
Net revenues......................................... $2,150,397 $2,028,891
Cost of revenues..................................... 1,613,424 1,781,367
---------- ----------
Gross profit......................................... 536,973 247,524
Operating expenses:
Selling, general and administrative................ 588,690 476,772
---------- ----------
Loss from operations................................. (51,717) (229,248)
Interest expense..................................... 30,160 30,300
---------- ----------
Net loss............................................. $ (81,877) $ (259,548)
========== ==========
</TABLE>

See accompanying notes.

F-49
<PAGE>

ATLANTIC CONNECTIONS, INC.

STATEMENTS OF STOCKHOLDERS' DEFICIT

Year ended December 31, 1997
and the eight months ended August 31, 1998

<TABLE>
<CAPTION>
Common Treasury Total
--------------- ---------------- Accumulated Stockholders'
Shares Amount Shares Amount Deficit Deficit
------ -------- ------ --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 300 $166,900 $(428,669) $(261,769)
Purchase of treasury
stock.................. (47) $(130,490) (130,490)
Dividends paid.......... (25,119) (25,119)
Net loss................ (81,877) (81,877)
--- -------- --- --------- --------- ---------
Balance at December 31,
1997................... 300 166,900 (47) (130,490) (535,665) (499,255)
Net loss................ (259,548) (259,548)
--- -------- --- --------- --------- ---------
Balance at August 31,
1998................... 300 $166,900 (47) $(130,490) $(795,213) $(758,803)
=== ======== === ========= ========= =========
</TABLE>

See accompanying notes.

F-50
<PAGE>

ATLANTIC CONNECTIONS, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Eight Months
Year Ended Ended
December 31, August 31,
1997 1998
------------ ------------
<S> <C> <C>
Operating activities
Net loss........................................... $(81,877) $(259,548)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization.................... 30,129 27,102
Provision for allowance for doubtful amounts..... 10,000 12,802
Changes in operating assets and liabilities:
Accounts receivable.............................. (91,724) (46,535)
Unbilled receivables............................. (4,986) (9,032)
Prepaid expenses and other assets................ (11,720) 11,720
Accounts payable................................. 50,043 353,607
Accrued expenses................................. 21,221 34,862
-------- ---------
Net cash (used in) provided by operating
activities...................................... (78,914) 124,978
Investing activities
Purchase of property and equipment................. -- (14,028)
-------- ---------
Net cash used in investing activities............ -- (14,028)
Financing activities
Proceeds of notes payable to affiliate............. 55,506 12,000
Payments on long-term borrowings................... (38,715) (6,160)
Dividends paid..................................... (25,119)
Payments on capital lease obligations.............. -- (4,996)
Proceeds (payments) of cash overdraft.............. 87,242 (111,794)
-------- ---------
Net cash (used in) provided by financing activities.. 78,914 (110,950)
Increase in cash and cash equivalents................ -- --
Cash and cash equivalents at the beginning of
period............................................ -- --
-------- ---------
Cash and cash equivalents at the end of period..... $ -- $ --
======== =========
Supplemental disclosures of cash flow information
Cash paid for interest............................... $ 20,204 $ 8,586
Noncash investing and financing activities:
Long-term debt issued to purchase treasury
stock........................................... 130,490 --
Capital lease obligations assumed................ 101,074 --
</TABLE>

See accompanying notes.

F-51
<PAGE>

ATLANTIC CONNECTIONS, INC.

NOTES TO FINANCIAL STATEMENTS

Nature of Business and Organization

Atlantic Connections, Inc. (the Company) was incorporated in the state of
Massachusetts on May 31, 1991. The Company is a local telecommunications
carrier located in Worcester, MA and is an integrated communications provider
offering local, long distance, data and private line services to small and
medium-sized businesses in the Northeastern United States.

Significant Accounting Policies

Concentrations of Credit Risk

The financial instruments that potentially subject the Company to
concentrations of risk are cash, accounts receivables and unbilled receivables.
The risk with respect to cash is minimized by the Company's policy of investing
in financial instruments with short-term term maturities issued by highly-rated
financial institutions. The risk with respect to accounts receivable and
unbilled receivables is minimized by the large number of the Company's
customers. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Credit losses
have been within management's expectations.

Impairment of Long-Lived Assets

Property and Equipment

Property and equipment are stated at cost and are being depreciated using
the straight-line method over the estimated useful lives of three to seven
years. Leasehold improvements are being amortized over the shorter of their
useful lives or the remaining life of the lease. Equipment under capital leases
amounted to $80,859 at December 31, 1997 and $69,448 at August 31, 1998.

Depreciation expense was $30,129 for the year ended December 31, 1997 and
$27,102 for the eight months ended August 31, 1998. Amortization of equipment
under capital leases is included with depreciation in the accompanying
financial statements.

Income Taxes

No provision has been made for federal income taxes as each shareholder is
individually liable for federal income taxes under the provisions of Subchapter
S of the Federal Income Tax Code. The Company determined Massachusetts state
income taxes at the applicable corporate statutory rate using the liability
method as required under the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Because of the Company's net
loss position for 1998 and 1997, no state tax provision was recognized.

Revenue Recognition

Revenue is recognized in the month in which the service is provided.

F-52
<PAGE>

ATLANTIC CONNECTIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Unbilled Receivables

Unbilled receivables represent services rendered to customers prior to
December 31, 1997 and August 31, 1998 but unbilled at that date based on the
customer's cycle date of billing.

Use of Estimates

Related Party

The Company has a note payable to a related party, Atlantic Connections,
Ltd., and relates to advances for working capital and the sharing of certain
costs, such as salaries. The Company and Atlantic Connections, Ltd. are related
through common management and some holders of our common stock. Total amount
due as of December 31, 1997 and August 31, 1998 is $207,067 and $237,383,
respectively. No amounts have been re-paid and the remaining balance is due in
full September 1, 2000. As of August 31, 1998 amounts representing interest on
the outstanding principal is $18,316.

Financing Arrangements

Long-Term Debt

A summary of the Company's long-term debt, including capital leases, at
December 31, 1997 and August 31, 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Note payable to former owner, 8% interest. Payments of
principal and interest of $1,583 per month for 60 months
and due in full by April 15, 2007......................... $124,649 $118,489
Note payable to affiliate, 10.5% interest with monthly
principal and interest payments of $2,062 through
September 1, 2000......................................... 207,067 219,067
Capital lease obligation, 9% interest. Principal and
interest payments of $2,057 per month for 60 months and
due in full April 2002.................................... 88,200 83,204
-------- --------
419,916 420,760
Less current portions:..................................... (56,519) (38,482)
-------- --------
$363,397 $382,278
======== ========
</TABLE>

Aggregate maturities of note payables for the next five years are as
follows:

<TABLE>
<S> <C>
Four months ending December 31, 1998................................ $ 32,812
Year ending December 31, 1999....................................... 27,436
Year ending December 31, 2000....................................... 157,151
Year ending December 31, 2001....................................... 11,896
Year ending December 31, 2002....................................... 12,884
Year ending December 31, 2003....................................... 95,377
--------
$337,556
========
</TABLE>

F-53
<PAGE>

ATLANTIC CONNECTIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Financing Arrangements

Leases

Future minimum lease payments under noncancelable operating and capital
leases are as follows:

<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
<S> <C> <C>
Four months ended December 31, 1998.......................... $ 4,500 $ 8,228
Year ending December 31, 1999................................ 13,500 24,682
Year ending December 31, 2000................................ 13,500 24,682
Year ending December 31, 2001................................ 10,125 24,682
Year ending December 31, 2002................................ -- 8,228
------- -------
41,625 90,502
Less amounts representing interest........................... -- (7,298)
------- -------
$41,625 $83,204
======= =======
</TABLE>

Rent expense was $17,912 for the year ending December 31, 1997 and $12,449
for the eight months ended August 31, 1998.

Subsequent Event

On September 8, 1998, substantially all of the Company's assets were
acquired by Atlantic Connections, LLC. Atlantic Connections, LLC also assumed
substantially all of the Company's liabilities. The transaction had an
effective date of September 1, 1998.

F-54
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Atlantic Connections, Ltd.

We have audited the accompanying balance sheets of Atlantic Connections,
Ltd. as of December 1, 1997 and August 31, 1998, and the related statements of
operations, stockholders' deficit, and cash flows for the year ended December
31, 1997 and the eight months ended August 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 Atlantic Connections, Ltd.
at December 31, 1997 and August 31, 1998, and the results of its operations and
its cash flows for the year ended December 31, 1997 and the eight months ended
August 31, 1998, in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

Boston, Massachusetts
November 10, 1999

F-55
<PAGE>

ATLANTIC CONNECTIONS, LTD.

BALANCE SHEETS

<TABLE>
<CAPTION>
December 31, August 31,
1997 1998
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, less allowance for doubtful
amounts of $40,000 at December 31, 1997 and $45,390
at August 31, 1998.................................. $ 277,980 $ 290,777
Note receivable from affiliate....................... 29,607 29,607
Unbilled receivables................................. 113,224 107,854
Prepaid expenses and other assets.................... 1,482 4,875
--------- ---------
Total current assets................................. 422,293 433,113
Property and equipment:
Switching equipment, including equipment under
capital leases...................................... 361,956 489,975
Office equipment..................................... 40,143 41,304
Vehicles............................................. 14,095 12,946
--------- ---------
416,194 544,225
Less accumulated depreciation and amortization....... (308,123) (341,695)
--------- ---------
108,071 202,530
Note receivable from affiliate......................... 177,460 207,776
Other assets........................................... 10,000 180
--------- ---------
Total assets........................................... $ 717,824 $ 843,599
========= =========

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdraft....................................... $ 273,058 $ 212,759
Line-of-credit....................................... 75,000 75,000
Accounts payable..................................... 60,390 232,342
Accrued expenses..................................... 63,251 250,381
Income tax payable................................... 104,170 118,005
Deferred taxes....................................... 114,388 --
Current portion of capital lease obligations......... 17,547 19,909
Current portion of long term borrowings.............. 166,213 123,514
--------- ---------
Total current liabilities............................ 874,017 1,031,910
Capital lease obligations.............................. 70,653 166,874
Long-term borrowings, less current portion............. 481,045 481,045
Stockholders' deficit:
Class A common stock, no par value: 200 shares
authorized; 170 shares issued and outstanding....... 123,000 123,000
Class B common stock, no par value: 400 shares
authorized; 341 shares issued and outstanding......... 7,008 7,008
Less: Treasury stock, at cost; 170 shares............ (541,579) (541,579)
Accumulated deficit.................................. (296,320) (424,659)
--------- ---------
Total stockholders' deficit............................ (707,891) (836,230)
--------- ---------
Total liabilities and stockholders' deficit............ $ 717,824 $ 843,599
========= =========
</TABLE>

See accompanying notes.

F-56
<PAGE>

ATLANTIC CONNECTIONS, LTD.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Year Eight months
ended ended
December 31, August 31,
1997 1998
------------ ------------
<S> <C> <C>
Net revenues......................................... $3,385,666 $2,263,422
Cost of revenues..................................... 2,105,777 1,647,620
---------- ----------
Gross profit......................................... 1,279,889 615,802
Operating expenses:
Selling, general and administrative.................. 954,803 794,874
---------- ----------
Income (loss) from operations........................ 325,086 (179,072)
Interest expense..................................... 53,263 19,597
---------- ----------
Income (loss) before income tax...................... 271,823 (198,669)
Tax provision (benefit).............................. 181,317 (70,330)
---------- ----------
Net income (loss).................................... $ 90,506 $ (128,339)
========== ==========
</TABLE>

See accompanying notes.

F-57
<PAGE>

ATLANTIC CONNECTIONS, LTD.

STATEMENTS OF STOCKHOLDERS' DEFICIT

Year ended December 31, 1997
and eight months ended August 31, 1998

<TABLE>
<CAPTION>
Class A Class B
Common Common Treasury Total
--------------- ------------- ---------------- Accumulated Stockholders'
Shares Amount Shares Amount Shares Amount Deficit Deficit
------ -------- ------ ------ ------ --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 170 $123,000 341 $7,008 -- -- $(286,826) $(156,818)
Purchase of treasury
stock.................. -- -- (170) $(541,579) -- (541,579)
Dividends paid.......... -- -- -- -- (100,000) (100,000)
Net income.............. -- -- -- -- 90,506 90,506
-------- ------ --------- --------- ---------
Balance at December 31,
1997................... 170 123,000 341 7,008 (170) (541,579) (296,320) (707,891)
Net loss................ (128,339) (128,339)
--- -------- --- ------ ---- --------- --------- ---------
Balance at August 31,
1998................... 170 $123,000 341 $7,008 (170) $(541,579) $(424,659) $(836,230)
=== ======== === ====== ==== ========= ========= =========
</TABLE>

See accompanying notes.

F-58
<PAGE>

ATLANTIC CONNECTIONS, LTD.

STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Eight months
Year ended ended
December 31, August 31,
1997 1998
------------ ------------
<S> <C> <C>
Operating activities
Net income (loss).................................. $ 90,506 $(128,339)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation..................................... 32,065 33,474
Provision for allowance for doubtful amounts..... 40,000 5,390
Deferred taxes................................... 100,715 (114,388)
Changes in operating assets and liabilities:
Accounts receivable............................ 2,630 (18,187)
Unbilled receivables........................... 7,515 5,370
Prepaid expenses and other assets.............. 1,561 (3,393)
Other assets................................... (10,000) 9,820
Accounts payable............................... (379,653) 171,952
Accrued expenses............................... (2,676) 187,130
Income taxes payable........................... 78,963 13,835
--------- ---------
Net cash (used in) provided by operating
activities...................................... (38,374) 162,664
Investing activities
Purchase of property and equipment................. (21,424) (10,151)
--------- ---------
Net cash used in investing activities............ (21,424) (10,151)
Financing activities
Proceeds of notes payable.......................... 140,000 --
Dividends paid..................................... (100,000) --
Advances to affiliate.............................. (101,183) (30,316)
Payments on long-term borrowings................... (139,065) (42,699)
Payments on capital lease obligations.............. (13,300) (19,199)
Proceeds (payments) of cash overdraft.............. 273,058 (60,299)
--------- ---------
Net cash (used in) provided by financing
activities...................................... 59,510 (152,513)
Decrease in cash and cash equivalents................ (288) --
Cash and cash equivalents at the beginning of
period............................................ 288 --
--------- ---------
Cash and cash equivalents at the end of period..... $ -- $ --
========= =========
Supplemental disclosures of cash flow information
Cash paid for interest............................. $ 54,868 $ 41,359
Cash paid for taxes................................ 1,639 9,273
Noncash investing and financing activities:
Long-term debt issued to purchase treasury stock... 541,579 --
Capital lease obligations assumed.................. 101,500 117,782
</TABLE>

See accompanying notes.

F-59
<PAGE>

ATLANTIC CONNECTIONS, LTD.

NOTES TO FINANCIAL STATEMENTS

Nature of Business and Organization

Atlantic Connections, Ltd. (the Company) was incorporated in the state of
New Hampshire on April 29, 1988. The Company is a local telecommunications
carrier located in Portsmouth, NH and is an integrated communications provider
offering local, long distance, data and private line services to small and
medium-sized businesses in the Northeastern United States.

Significant Accounting Policies

Concentrations of Credit Risk

The financial instruments that potentially subject the Company to
concentrations of risk are cash, accounts receivables and unbilled receivables.
The risk with respect to cash is minimized by the Company's policy of investing
in financial instruments with short-term term maturities issued by highly-rated
financial institutions. The risk with respect to accounts and unbilled
receivables is minimized by the large number of the Company's customers. The
Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have been
within management's expectations. Customers are located throughout the New
England area.

Impairment of Long-Lived Assets

Property and Equipment

Property and equipment are stated at cost and are being depreciated using
the straight-line method over the estimated useful life of three to seven
years. Leasehold improvements are being amortized over the shorter of their
useful lives or the remaining life of the lease. Equipment under capital leases
amounted to $80,859 at December 31, 1997 and $180,787 at August 31, 1998.

Depreciation expense was $32,065 for the year ended December 31, 1997 and
$33,475 for the eight months ended August 31, 1998. Amortization of equipment
under capital leases is included with depreciation in the accompanying
financial statements.

Income Taxes

The Company provides for income taxes under the liability method prescribed
by Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax basis of assets
and liabilities using enacted tax rates in effect for the year in which the
difference is expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.

Revenue Recognition

Revenue is recognized in the month in which the service is provided.

F-60
<PAGE>

ATLANTIC CONNECTIONS, LTD.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Unbilled Receivables

Unbilled receivables represent services rendered to customers prior to
December 31, 1997 and August 31, 1998 but unbilled at that date based on the
customer's cycle date of billing.

Significant Accounting Policies

Use of Estimates

Related Party

The Company has a note receivable from a related party, Atlantic
Connections, Inc., and relates to advances for working capital and the sharing
of certain costs, such as salaries. The Company and Atlantic Connections, Inc.
are related through common management and some holders of our common stock.
Total amount due as of December 31, 1997 and August 31, 1998 is $207,067 and
$237,383, respectively. No amounts have been re-paid and the remaining balance
is due in full September 1, 2000.

Financing Arrangements

Long-Term Debt

A summary of the Company's long-term debt, including capital leases, at
December 31, 1997 and August 31, 1998 is as follows:

<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Note payable to bank, 10% interest. Payments of
principal and interest of $2,975 per month for 60
months and due in full by April 16, 2002. Note contains
a subjective acceleration clause; amount is classified
as current............................................. $ 124,601 $ 109,270
Note payable to former owner, 8% interest. Payments of
principal and interest of $6,508 due on April 15,
2007................................................... 517,852 492,830
Note payable to bank, 8.9% interest with 36 monthly
principal and interest payments of $321 through April,
1999................................................... 4,805 2,459
Various capital lease obligations; interest rates
ranging from 7% to 9%.................................. 88,200 186,783
--------- ---------
735,458 791,342
Less current portion.................................... (183,760) (143,423)
--------- ---------
$ 551,698 $ 647,919
========= =========
</TABLE>

Aggregate maturities of long-term debt for the next five years are as
follows:

<TABLE>
<S> <C>
Four months ended December 31, 1998................................... $ 22,656
Year ending December 31, 1999......................................... 69,251
Year ending December 31, 2000......................................... 74,245
Year ending December 31, 2001......................................... 81,051
Year ending December 31, 2002......................................... 64,013
Thereafter............................................................ 293,343
--------
$604,559
========
</TABLE>

F-61
<PAGE>

ATLANTIC CONNECTIONS, LTD.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Line-of-Credit

The Company has a credit facility with a bank. The line-of-credit is a
$75,000 facility to support working capital. The unused portion of the facility
expires May 31, 1999. Interest is at the prime rate plus 1.5% and is paid
monthly in arrears. $75,000 was outstanding under this facility at December 31,
1997 and August 31, 1998.

Leases

Future minimum lease payments under noncancelable operating and capital
leases are as follows:

<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- --------
<S> <C> <C>
Four months ended December 31, 1998......................... $ 6,199 $ 27,169
Year ending December 31, 1999............................... 19,270 81,505
Year ending December 31, 2000............................... 3,234 51,928
Year ending December 31, 2001............................... -- 37,140
Year ending December 31, 2002............................... -- 24,839
-------- --------
28,703 222,581
Less amounts representing interest.......................... -- (35,798)
-------- --------
$ 28,703 $186,783
======== ========
</TABLE>

Rent expense was $16,172 for the year ended December 31, 1997 and $10,713
for the eight months ended August 31, 1998.

Income Taxes

Significant components of the provision (benefit) for income taxes are as
follows:

<TABLE>
<CAPTION>
Eight
Months
Year Ended Ended
December 31, August 31,
1997 1998
------------ ----------
<S> <C> <C>
Current:
Federal............................................... $ 68,829 $ 36,072
State................................................. 11,773 7,986
-------- --------
80,602 44,058
-------- --------
Deferred:
Federal............................................... 82,876 (93,655)
State................................................. 17,839 (20,733)
-------- --------
100,715 (114,388)
-------- --------
Total (benefit) expense................................. $181,317 $(70,330)
======== ========
</TABLE>

F-62
<PAGE>

ATLANTIC CONNECTIONS, LTD.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Deferred income taxes arise principally from temporary differences related
to a change from the accrual to cash method of accounting for tax purposes. The
components of the Company's deferred income taxes are as follows:

<TABLE>
<CAPTION>
December 31, August 31,
1997 1998
------------ ----------
<S> <C> <C>
Deferred tax liabilities:
Adjustment of accrual to cash basis................... $(113,562) $ 19,823
Fixed assets differences.............................. (826) (16,022)
Total deferred tax liabilities.......................... (114,388) 3,801
Deferred tax assets:
Less valuation allowance.............................. -- 3,801
--------- --------
Net deferred tax liability............................ $(114,388) $ --
========= ========
</TABLE>

Income Taxes

The difference between the provision (benefit) for income taxes and the
amount computed by applying the statutory federal income tax rate is as
follows:

<TABLE>
<CAPTION>
Eight Months
Year Ended Ended
December 31, August 31,
1997 1998
------------- --------------
<S> <C> <C> <C> <C>
Federal taxes at statutory rates................. $ 92,420 34.0% $(67,547) 34.0%
Add/(deduct):
Change in valuation allowance.................. -- 3,801 (1.9)
State income taxes, net of federal benefit..... 12,802 4.7 (8,413) 4.2
Effect of graduated rates...................... 781 0.3 -- --
Additional taxes due to IRS examination........ 71,508 26.3 -- --
Other.......................................... 3,806 1.4 1,829 (.9)
-------- ---- -------- ----
$181,317 66.7% $(70,330) 35.4%
======== ==== ======== ====
</TABLE>

Subsequent Event

On September 8, 1998, Atlantic Connections, LLC acquired 100% of the
outstanding stock of the Company. The transaction had an effective date of
September 1, 1998.

F-63
<PAGE>

APPENDIX A--Fairness Opinions

May 14, 2000

The Board of Directors
Choice One Communications Inc.
100 Chestnut Street
Suite 700
Rochester, NY 14604

Dear Members of the Board:

We understand that Choice One Communications Inc., a Delaware corporation
("Choice One" or the "Company"), is considering a transaction whereby a wholly
owned subsidiary of the Company ("Acquiror Sub") will merge (the "Merger") with
US Xchange, Inc., a Delaware corporation ("Xchange" or the "Target"). Pursuant
to the terms of an Agreement and Plan of Merger (the "Merger Agreement"), the
aggregate consideration to be paid by the Company for all of the issued and
outstanding shares of common stock, par value of $0.01 per share ("Xchange
Common Stock"), of Target and all outstanding options, warrants and other stock
issuance agreements (the "Consideration") will consist of: (i) cash
consideration of $339 million, less the principal of, interest/1/, on and
retirement premium in excess of 101% of principal amount on the 15% Senior
Notes due July 1, 2008 of the Target's subsidiary (the "Notes"), the principal
on other indebtedness of the Target and its subsidiaries and costs incurred by
the Target in connection with the transactions contemplated by the Merger
Agreement, and (ii) a number of shares of Company common stock equal to the
quotient of (A) $224 million, (i) less the value of the restricted stock to be
granted to continuing employees not involved in the fiber business, the
principal amount of all loans made by the Company to the Target to fund
operating losses and interest thereon (excluding any amounts spent towards
capital expenditures), and any Deficiency (as defined below), (ii) plus any
Surplus (as defined below), divided by (B) $32. The stock consideration is to
adjusted for any negative difference ("Deficiency") or positive difference
("Surplus") between the Net Receivables Position (as defined below) reflected
on the audited balance sheet as of March 31, 2000 and the pro forma balance
sheet dated as of the closing date of the Merger. After the closing of the
Merger, the cash consideration is to be adjusted for any negative difference or
positive difference between the Net Receivables Position reflected on the pro
forma balance sheet as of the closing date of the Merger and the audited
balance sheet as of the closing date of the Merger. "Net Receivables Position"
means the excess of accounts receivable over all accounts payable plus accrued
expenses (excluding accrued interest) of the Target and its subsidiaries shown
on any specified balance sheet of the Target and its subsidiaries.

The terms and conditions of the Merger are more fully set forth in the
Merger Agreement.

You have requested our opinion as to the fairness to the Company from a
financial point of view of the Consideration to be paid by the Company in the
Merger.

UBS Warburg LLC ("UBSW") has acted as financial advisor to the Board of
Directors of the Company in connection with the Merger and will receive a fee
upon the consummation thereof. In the past, UBSW and its predecessors have
provided investment banking services to the Company and received customary
compensation for the rendering of such services. In the ordinary course of
business, UBSW, its successors and affiliates have traded securities of the
Company for their own accounts and, accordingly, may at any time hold a long or
short position in such securities.

Our opinion does not address the Company's underlying business decision to
effect the Merger. At your direction, we have not been asked to, nor do we,
offer any opinion as to the material terms of the Merger Agreement or the form
of the Merger. In rendering this opinion, we have assumed, with your consent,
that the final executed form of the Merger Agreement does not differ in any
material respect from the draft that we have examined, and that all parties
will comply with all the material terms of the Merger Agreement.

--------
/1/Includes only that interest expense incurred from signing up until the
sooner of closing or 90 days after signing.

A-1
<PAGE>

In arriving at our opinion, we have, among other things: (i) reviewed
certain publicly available business and historical financial information
relating to the Company and Target, (ii) reviewed certain internal financial
information and other data relating to the business and financial prospects of
the Company, including estimates and financial forecasts prepared by management
of the Company, that were provided to us by the Company and not publicly
available, (iii) reviewed certain internal financial information and other data
relating to the business and financial prospects of the Target, including
estimates and financial forecasts prepared by the managements of the Company
and the Target and not publicly available, (iv) conducted discussions with
members of the senior managements of the Company and the Target, (v) reviewed
publicly available financial and stock market data with respect to certain
other companies in lines of business we believe to be generally comparable to
those of the Company and the Target, (vi) compared the financial terms of the
Merger with the publicly available financial terms of certain other
transactions which we believe to be generally relevant, (vii) considered
certain pro forma effects of the Merger on the Company's financial statements
and reviewed certain estimates of synergies prepared by Company management,
(viii) reviewed the May 14, 2000 draft of the Merger Agreement, and (ix)
conducted such other financial studies, analyses, and investigations, and
considered such other information as we deemed necessary or appropriate.

In connection with our review, at your direction, we have not assumed any
responsibility for independent verification for any of the information reviewed
by us for the purpose of this opinion and have, at your direction, relied on
its being complete and accurate in all material respects. In addition, at your
direction, we have not made any independent evaluation or appraisal of any of
the assets or liabilities (contingent or otherwise) of the Company or Target,
nor have we been furnished with any such evaluation or appraisal. With respect
to the financial forecasts, estimates, pro forma effects and calculations of
synergies referred to above, we have assumed, at your direction, that they have
been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of each company as to the future
performance of their respective companies. In addition, we have assumed with
your approval that the future financial results, including the calculation of
synergies, referred to above will be achieved at the times and in the amounts
projected by management. Our opinion is necessarily based on economic,
monetary, market and other conditions as in effect on, and the information made
available to us as of, the date hereof.

Based upon and subject to the foregoing, it is our opinion that, as the date
hereof, the Consideration to be paid by the Company in the Merger is fair, from
a financial point of view, to the Company.

Very truly yours,

UBS Warburg LLC

/s/ Aaron Hill
By __________________________________
Aaron Hill
Managing Director

/s/ Brian Hanson
By __________________________________
Brian Hanson
Managing Director

A-2
<PAGE>

May 14, 2000

Board of Directors
Choice One Communications, Inc.
100 Chestnut Street, Suite 700
Rochester, NY 14604

Dear Members of the Board of
Directors:

We understand that Morgan Stanley Dean Witter Capital Partners IV, L.P.,
MSDWCP IV 892 Investors, L.P. and Morgan Stanley Dean Witter Capital Investors
IV, L.P. (collectively, "Morgan Stanley") are considering an investment in
certain securities of Choice One Communications, Inc., a Delaware corporation
(the "Company"), consisting of 200,000 shares of the Company's Series A Senior
Cumulative Preferred Stock, no par value ("Series A Preferred Stock"), and
warrants ("Warrants") to purchase shares of Common Stock, $.01 par value per
share ("Common Stock"), of the Company representing 4.25% of the outstanding
Common Stock on a pro forma fully diluted basis as of and after giving effect
to the closing of the Acquisition (as defined below), for an aggregate purchase
price of $200 million. The Series A Preferred Stock and the Warrants are
collectively referred to as the "Securities". We understand that the closing of
the sale of securities is being made in connection with, and will take place
concurrently with, the closing of the proposed acquisition (the "Acquisition")
by the Company of US Xchange, Inc., a Delaware corporation ("Xchange").

You have requested our opinion as to the fairness, from a financial point of
view, of the financial terms of the Securities to the Company.

In arriving at our opinion, we have, among other things: (i) reviewed
certain publicly available business and historical financial information
relating to the Company and certain other pro forma financial information
relating to the Company after giving effect to the Acquisition; (ii) reviewed
the historical market prices and trading volumes of the Common Stock; (iii)
compared the financial terms of the Securities with the publicly available
financial terms of certain other securities that we considered relevant; (iv)
reviewed the commitment letter of Morgan Stanley, dated April 27, 2000,
including the term sheet attached thereto (the "Term Sheet"), containing the
financial terms of the Securities and a description of the proposed
Acquisition; and (v) conducted such other financial studies, analyses and
investigations, and considered such other information as we have deemed
necessary or appropriate.

In connection with our review, at your direction, we have not assumed any
responsibility for independent verification of any of the information reviewed
by us for the purpose of this opinion and have, at your direction, relied on
its being complete and accurate in all material respects. In addition, at your
direction, we have not made any independent evaluation or appraisal of any of
the assets or liabilities (contingent or otherwise) of the Company or Xchange
in connection with this opinion, nor have we been furnished with any such
evaluation or appraisal. Our opinion is necessarily based on economic,
monetary, regulatory, market and other conditions as in effect on, and the
information made available to us as of, the date hereof.

Our opinion does not address the Company's underlying business decision to
effect the issuance of the Securities or the Acquisition. At your direction, we
have not been asked to, nor do we, offer any opinion as to the non-financial
terms of the Securities. In rendering this opinion, we have assumed, with your
consent, that the final executed forms of any purchase or subscription
agreement, the certificate of designation of the Securities and any other
document relating to the Securities reflect in all material respects the
financial terms of the Securities as set forth in the Term Sheet. We have not
negotiated the terms of the Securities, and, except for three parties known to
you, we have not been authorized to and have not solicited indications of
interest in any similar securities of the Company from other parties.

UBS Warburg ("UBSW") has provided in the past, and continues to provide,
investment banking services to the Company and has received, and will receive,
customary compensation for the rendering of such services. In the ordinary
course of business, UBSW, its successors and affiliates may trade securities of
the Company for their own accounts and, accordingly, may at any time hold a
long or short portion in such securities.

A-3
<PAGE>

Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the financial terms of the Securities are fair, from a financial
point of view, to the Company.

Very truly yours,

UBS WARBURG LLC

/s/ Aaron Hill
By __________________________________
Aaron Hill
Managing Director

/s/ Brian Hanson
By __________________________________
Brian Hanson
Managing Director

A-4