COOPERATIVE HOLDINGS INC, S-1/A, 2000-06-05

COOPERATIVE HOLDINGS INC
S-1/A, 2000-06-05
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 2000

REGISTRATION NO. 333-34394

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

COOPERATIVE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 4813 22-3713227
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

------------------------
412-420 WASHINGTON AVENUE,
BELLEVILLE, NEW JERSEY 07109
(973) 759-8100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
LOUIS A. LOMBARDI, SR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COOPERATIVE HOLDINGS, INC.
412-420 WASHINGTON AVENUE
BELLEVILLE, NEW JERSEY 07109
(973)759-8100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:

DAVID J. SORIN
WILLIAM J. THOMAS
BUCHANAN INGERSOLL PROFESSIONAL CORPORATION
650 COLLEGE ROAD EAST
PRINCETON, NEW JERSEY 08540
(609) 987-6800

BARRY M. ABELSON
MICHAEL P. GALLAGHER
PEPPER HAMILTON LLP
EIGHTEENTH AND ARCH STREETS
3000 TWO LOGAN SQUARE
PHILADELPHIA, PENNSYLVANIA 19103-2799

(215) 981-4000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.

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

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

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

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

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.01 par value per share..................... $82,800,000 $21,859.20(2)
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act.

(2) The Registrant previously paid such fee on April 7, 2000.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed. These
securities may not be sold nor may offers to buy be accepted prior to the
time the registration statement becomes effective. This prospectus shall
not constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any state in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such state.

SUBJECT TO COMPLETION, DATED JUNE 5, 2000

PROSPECTUS

6,000,000 SHARES

[COOPERATIVE HOLDINGS, INC. LOGO]
COOPERATIVE HOLDINGS, INC.

COMMON STOCK

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

This is the initial public offering of common stock by Cooperative
Holdings, Inc. We are selling 5,000,000 shares of our common stock and a selling
stockholder is selling 1,000,000 shares of common stock for a total of 6,000,000
shares of common stock. We will not receive any of the proceeds from the sale of
shares by the selling stockholder.

There is currently no public market for our common stock. We currently
expect that the initial public offering price will be between $9.00 and $11.00
per share, and have applied to have our common stock included for quotation on
the Nasdaq National Market under the symbol "CCII."

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

SEE "RISK FACTORS" BEGINNING ON PAGE 7 TO READ ABOUT RISKS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.

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

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

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds to Cooperative (before expenses)................... $ $
Proceeds to selling stockholder............................. $ $
</TABLE>

The underwriters may also purchase up to 900,000 additional shares of
common stock from the selling stockholder at the initial public offering price,
less the underwriting discount, to cover over-allotments.

Delivery of the shares will be made on or about , 2000.

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

PENNSYLVANIA MERCHANT GROUP ROTH CAPITAL PARTNERS, INC.

Prospectus dated , 2000
<PAGE> 3
EDGAR Description of Artwork

[In the upper left-hand corner, our logo appears which is a globe
encircled with the Company's name. To the right of the logo is a map of the
United States from which an enlarged map of the States of Maine, New Hampshire,
Vermont, Massachusetts, Rhode Island, Connecticut, New York, New Jersey,
Pennsylvania, Delaware, Maryland, Virginia and West Virginia appears. From this
enlarged map appears a further enlarged map of New Jersey. These enlarged maps
are marked and shaded to show our current operating area, planned expansion
area and future expansion area.]

<PAGE> 4

PROSPECTUS SUMMARY

The summary may not contain all the information that you should consider
before investing in our common stock. This prospectus includes forward-looking
statements which involve risks and uncertainties. All references to "we," "us,"
or "our," in this prospectus mean Cooperative Holdings, Inc. and its wholly-
owned subsidiaries Cooperative Communications, Inc., Eastern Computer Services,
L.L.C., CPV Communications, Inc. and KDR Communications, Inc.

OUR COMPANY

We provide integrated telecommunications services, including local and long
distance service and our recently launched DSL service. Our customer base
consists of over 7,500 small and medium-sized businesses. The majority of our
customers are located in New Jersey, and we plan to expand our services to
Pennsylvania, New York, Massachusetts and portions of Connecticut. We began
reselling long distance services in 1990 and providing local service in 1993. To
capitalize upon the growing need for high-speed data connectivity, we recently
began offering our QuikSpeed digital subscriber line, or DSL, service. We
believe the roll-out of our DSL service will allow us to fulfill voice, data,
Internet and e-commerce needs of our existing customer base of voice-only
customers all on a single bill.

DSL technology has emerged as a commercially viable, cost-effective means
of providing high-speed data transmission using an existing telecommunications
network. Industry sources have projected the United States small business market
for DSL will reach $2.3 billion by 2003. Our DSL service offers high-speed data,
voice, Internet and video connectivity. We began offering QuikSpeed on a limited
basis in September 1999 and broadly introduced the service in April 2000. As of
April 30, 2000, we had 243 orders for DSL service 109 of which are operational.

In marketing our DSL service, we believe we have several competitive
advantages over our current and potential competitors, particularly those who do
not currently offer local and long distance services. These include:

- our ability to offer one-stop services for voice, including local and
long distance, and data, all on a single bill;

- our ten years of focusing on customer service as evidenced by our low
customer turnover or churn rate which has averaged 4.9% over the last
three years;

- our knowledge of our geographic market, including our long-term
relationship with our customers;

- our ability to offer virtual private networks for voice and data
transmission;

- our QuikSpeed DSL service permits voice over DSL, creating a low cost
solution to our customers, and does not require our customers to have
their own Internet service provider, or ISP;

- our ability and willingness to offer customized solutions to our small
and medium-sized business customers, including 700 directory assistance,
sales tracking, specialized billing formats and call blocking; and

- our interconnection agreements with Bell Atlantic for New Jersey and
Pennsylvania.

Our Centrex voice service network currently interfaces with 70 Bell
Atlantic central offices in New Jersey. Where we do not lease space in a
telecommunications company's central office, we will install equipment in leased
facilities which we will connect to the central office. We recently entered into
interconnection agreements with Bell Atlantic which allow us to install, or
collocate, our networking equipment in multiple Bell Atlantic central offices in
New Jersey and Pennsylvania, providing a direct connection between us and our
customers. We expect to have approximately 20 collocations operational by May
31, 2001. These agreements further enable us to provide fully operational local
and toll service. We believe that pursuing a "smart-build" strategy, whereby we
own more of the network elements, while

<PAGE> 5

continuing to lease transmission lines, will allow us to generate higher
operating margins, obtain origination and termination fees from other carriers
and maintain greater control over our network operations and service quality.

We believe that small and medium-sized businesses have significant and
increasing needs for advanced telecommunications services which have been
generally neglected by the traditional local telephone companies. We seek to
meet these needs by offering customized solutions, integrated telecommunications
services and our QuikSpeed DSL services. Many of our target customers want
customized solutions but do not have the internal expertise to design, purchase
and maintain these kinds of systems and services themselves.

We plan to be a one-stop provider of voice, data and Internet
telecommunications services in the Bell Atlantic service area starting with New
Jersey, Pennsylvania, New York, Massachusetts and portions of Connecticut.
Elements of our strategy to meet this objective include:

- implementing a rapid DSL roll-out;

- offering our customers one-stop shopping;

- maximizing speed to market through our "smart-build" strategy;

- focusing on the small and medium-sized business market;

- building market share by focusing on direct sales; and

- providing superior customer service.

We have a limited operating history as a provider of integrated voice and
data communications services. We incurred net losses of approximately $1.1
million and $118,000 in fiscal 1997 and fiscal 1999, respectively. We also
incurred net losses of approximately $274,000 and $1.8 million in the nine month
periods ended February 28, 1999 and February 29, 2000, respectively. As of
February 29, 2000, we had negative working capital of $2.6 million. Although we
had net income of $283,000 in fiscal 1998, we cannot be certain that we will be
able to achieve profitable levels of operations in the future.

2
<PAGE> 6

THE OFFERING

Common stock offered by
Cooperative......................... 5,000,000 shares

Common stock offered by the selling
stockholder....................... 1,000,000 shares

Total............................... 6,000,000 shares

Common stock to be outstanding
after the offering................ 23,600,000 shares

Proposed Nasdaq National Market
symbol.............................. "CCII"

Use of proceeds..................... We intend to use the net proceeds from
this offering to fund:

- capital expenditures in connection
with our planned roll-out of DSL
service and planned expansion of
our network, including the
installation of DSL equipment in
central offices, the acquisition
of DSL modems to lease to
customers and the purchase of high
speed digital switches;

- the acquisition of rights to
deploy our equipment at the
central offices of Bell Atlantic
and other service providers;

- the enhancement of our network to
enable us to provide additional
value-added services;

- the hiring of direct sales
personnel and expansion of our
marketing efforts;

- the improvement of our network
management, billing and other back
office systems; and

- working capital and general
corporate purposes, including
possible future acquisitions or
strategic investments.

Risk factors........................ Investing in the common stock involves
certain risks. See "Risk Factors."

The number of shares of common stock to be outstanding after this offering
is based on the shares outstanding as of February 29, 2000 and does not
include:

- 3,540,000 shares of common stock authorized for issuance under our 2000
Stock Plan, 1,029,047 of which will be issuable upon exercise of
outstanding options upon the consummation of this offering at exercise
prices equal to the initial public offering price; and

- 30,000 shares of common stock issuable upon exercise of an outstanding
non-plan option as of the date of this prospectus at an exercise price of
$0.01 per share.

Unless otherwise noted, all information in this prospectus:

- assumes the underwriters will not exercise their option to purchase
additional shares of common stock to cover over-allotments, if any; and

- gives effect to the reorganization of Cooperative Communications,
Inc. and Eastern Computer Services, L.L.C. as wholly-owned
subsidiaries of Cooperative Holdings, Inc. in March 2000.

3
<PAGE> 7

CORPORATE INFORMATION AND REORGANIZATION

In February 2000, Cooperative Holdings, Inc. was incorporated in Delaware
and in March 2000 each of the security holders of Cooperative Communications,
Inc. and Eastern Computer Services, L.L.C. exchanged or contributed all of their
outstanding securities for newly issued securities of Cooperative Holdings, Inc.
with equal rights and preferences. As a result of this reorganization,
Cooperative Communications, Inc. and Eastern Computer Services, L.L.C. became
wholly-owned subsidiaries of Cooperative Holdings, Inc. CPV Communications, Inc.
and KDR Communications, Inc. are wholly-owned subsidiaries of Cooperative
Communications, Inc. Cooperative Communications, Inc., the operating company,
was incorporated in New Jersey in 1990. Eastern Computer Services, L.L.C. was
organized in New Jersey in 1995.

Our principal offices are located at 412-420 Washington Avenue, Belleville,
New Jersey 07109, and our telephone number is (973) 759-8100. We maintain a
website at www.cooperativenet.com. Any references to our website do not
incorporate by reference the information contained at our website into this
prospectus, and the only information that you should rely on in making your
decision whether to invest in our common stock is the information contained in
this prospectus.

All of the historical financial information in this prospectus reflects the
combined operations of our wholly-owned subsidiaries, Cooperative
Communications, Inc. and Eastern Computer Services, L.L.C. Prior to the
formation of Cooperative Holdings, Inc. and the reorganization, all of our
operating activities were conducted through Cooperative Communications, Inc. and
Eastern Computer Services, L.L.C. The financial statements of Cooperative
Holdings, Inc. are not included in this prospectus as Cooperative Holdings, Inc.
did not commence operations until March 20, 2000 and had no assets or
liabilities prior to such date.

4
<PAGE> 8

SUMMARY COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

You should read the summary selected combined financial data together with
our combined financial statements and related notes and the sections of this
prospectus entitled "Capitalization" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
NINE MONTH PERIODS
ENDED
YEAR ENDED MAY 31, ---------------------------
----------------------------------------------------------- FEBRUARY 28, FEBRUARY 29,
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ------- ------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS DATA:
Revenue............................... $12,573 $20,474 $28,718 $37,200 $ 40,598 $30,235 $ 29,442
------- ------- ------- ------- ----------- ------- -----------
Operating expenses:
Costs of revenue (excluding
depreciation and amortization).... 9,383 16,314 22,468 29,073 31,725 23,872 24,083
Selling, general and administrative
expenses.......................... 2,869 4,736 5,957 7,286 8,222 6,045 5,946
Depreciation and amortization....... 46 194 333 455 780 555 807
Stock based compensation............ -- -- 840 -- -- -- --
------- ------- ------- ------- ----------- ------- -----------
Total operating expenses.......... 12,298 21,244 29,598 36,814 40,727 30,472 30,836
------- ------- ------- ------- ----------- ------- -----------
Income (loss) from operations..... 275 (770) (880) 386 (129) (237) (1,394)
Other income (expense), net........... (27) (78) (61) 92 109 61 (419)
------- ------- ------- ------- ----------- ------- -----------
Income (loss) before income tax
expense (benefit)................. 248 (848) (941) 478 (20) (176) (1,813)
Income tax expense (benefit)........ 100 (215) 128 195 98 98 --
------- ------- ------- ------- ----------- ------- -----------
Net income (loss)(1).............. $ 148 $ (633) $(1,069) $ 283 $ (118) $ (274) $ (1,813)
======= ======= ======= ======= =========== ======= ===========
Pro forma information:
Historical loss before income tax
expense (benefit)................. $ (20) $ (1,813)
Pro forma income tax expense
(benefit) (unaudited)(2).......... 200 (450)
----------- -----------
Pro forma net loss (unaudited)...... $ (220) $ (1,363)
=========== ===========
Pro forma net loss per common share
(unaudited)(3):
Basic............................. $ (0.01) $ (0.07)
Diluted........................... $ (0.01) $ (0.07)
=========== ===========
Pro forma weighted average common
shares outstanding (unaudited)(4):
Basic............................. 18,600,000 18,600,000
Diluted........................... 18,630,000 18,630,000
=========== ===========
</TABLE>

(2) Pro forma income tax expense (benefit) gives effect to the change of Eastern
from a limited liability company to a tax paying entity.

(3) Pro forma basic net loss per common share is computed by dividing pro forma
net loss by the pro forma weighted average common shares outstanding assuming
Cooperative Holdings, Inc. was formed on June 1, 1998. Pro forma diluted net
loss per common share is calculated in a manner consistent with pro forma basic
net loss per common share except that it also includes the dilutive effect of an
option granted in fiscal 1997 to acquire 30,000 shares of our common stock at a
nominal value.

(4) Pro forma weighted average common shares outstanding reflects all of our
issued and outstanding shares of common stock and gives effect to the
reorganization of Cooperative Communications, Inc. and the exchange of all of
its common stock for shares of our common stock. Diluted pro forma weighted
average common shares outstanding includes the option described in footnote 3
above.

5
<PAGE> 9

The following table provides selected combined balance sheet data. The as
adjusted column reflects the sale by us of 5,000,000 shares offered hereby,
assuming an initial public offering price of $10.00 per share, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us.

<TABLE>
<CAPTION>
FEBRUARY 29, 2000
MAY 31, ----------------------
1999 ACTUAL AS ADJUSTED
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
COMBINED BALANCE SHEET DATA:
Cash and cash equivalents................................. $7,180 $ 3,655 $49,155
Working capital (deficit)................................. 470 (2,615) 43,077
Total assets.............................................. 19,131 15,718 61,026
Stockholders' and members' deficit........................ (1,630) (3,443) 42,057
</TABLE>

6
<PAGE> 10

RISK FACTORS

You should carefully consider the risks described below before making an
investment decision.

Risks Related to Growth and New Service Offerings

CUSTOMERS MAY NOT ACCEPT US AS THEIR PROVIDER OF INTEGRATED TELECOMMUNICATIONS
SERVICES WHICH WOULD ADVERSELY AFFECT OUR REVENUE AND GROWTH PLANS.

We cannot assure you that customers will accept us as a provider of
integrated telecommunications services -- local, long distance and data
services, as well as new services, such as DSL. Some of our competitors, such as
Bell Atlantic, Covad, AT&T and Sprint, have greater resources, name recognition
and existing relationships with customers which may provide them with a
competitive advantage over us. If we are not accepted by our target customers,
our planned expansion could fail.

OUR LIMITED HISTORY AS A PROVIDER OF INTEGRATED VOICE AND DATA SERVICES MAY NOT
BE A RELIABLE BASIS FOR EVALUATING US.

We have limited operating and financial information as a provider of
integrated voice and data telecommunications services which you can use to
evaluate our performance and determine whether you should invest in our common
stock. Although we began reselling long distance telecommunications services in
1990, we only began providing local exchange service in 1993 and DSL services in
September 1999.

WE HAVE HAD A HISTORY OF OPERATING LOSSES AND MAY NOT ACHIEVE PROFITABLE LEVELS
OF OPERATIONS IN THE FUTURE.

We incurred net losses of approximately $1.1 million and $118,000 in fiscal
1997 and fiscal 1999, respectively and had net income of $283,000 in fiscal
1998. We also incurred net losses of approximately $274,000 and $1.8 million in
the nine month periods ended February 28, 1999 and February 29, 2000,
respectively. As of February 29, 2000, we had negative working capital of $2.6
million. We recently entered into five year lease obligations for DSL equipment
in the amount of $3.6 million and obtained commitments from our vendor for
financing related to the installation and maintenance of the equipment. We
expect to record significant operating charges related to the equipment over the
next five years. We cannot be certain that we will be able to achieve profitable
levels of operations or sufficient levels of liquidity in the future.

OUR FAILURE TO CONTINUE OUR EXPANSION WOULD ADVERSELY AFFECT OUR REVENUE AND
PROFITABILITY.

If we do not expand our business to achieve economies of scale and to
benefit from our infrastructure, it would adversely affect our revenue and
profitability and could cause us to lose customers. Our planned expansion could
fail if we are not able to:

- access potential markets;

- obtain required governmental authorizations;

- obtain interconnection and collocation arrangements with traditional
local telephone companies;

- develop a sufficient customer base;

- lease adequate transmission capacity from various carriers; and

- purchase and install switches in additional markets.

WE MAY NOT BE ABLE TO MANAGE OUR PLANNED GROWTH, WHICH COULD ADVERSELY AFFECT
OUR REVENUE AND PROFITABILITY.

If we fail to effectively manage our growth, our services, revenue and
operating expenses would be adversely affected. Future expansion of our
business, in particular our planned network expansion, will

7
<PAGE> 11

place significant additional strains on our personnel, financial and other
resources. Our ability to manage our planned geographic growth will be
particularly dependent on our ability to develop and retain an effective sales
force, customer service personnel and qualified technical personnel across
several different locations. In addition, we may not be able to:

- maintain the quality of our operations;

- control our costs;

- maintain compliance with all applicable regulations; and

- expand our internal management, technical, information and accounting
systems in order to support our planned growth.

WE MAY NOT HAVE SUFFICIENT FUNDS AVAILABLE TO EXPAND OUR BUSINESS AND RAISING
FUNDS THROUGH THE ISSUANCE OF EQUITY OR DEBT SECURITIES WILL DILUTE YOUR
OWNERSHIP INTERESTS.

If we are unable to raise sufficient funds, we may have to curtail current
operations and delay or abandon plans for future expansion. This would result in
underutilization of our established infrastructure and planned expansion and
reduced profitability and may negatively affect our ability to compete for and
satisfy the demands resulting from the growth and expansion of our customers. We
will need to make significant capital expenditures in order to expand our
current business and to enter new markets. We expect to fund these expenditures
through existing resources, internally generated funds, and equity and debt
financings.

If we raise funds through the issuance of additional equity securities, the
percentage ownership of our then current stockholders will be reduced and the
holders of new equity securities may have rights senior to those of our common
stockholders. If additional funds are raised through a bank credit facility or
the issuance of debt securities, the holder of this indebtedness would have
rights senior to the rights of our common stockholders and the terms of this
indebtedness could impose restrictions on our operations.

FUTURE ACQUISITIONS MAY NOT INCREASE OUR REVENUE OR EARNINGS AND WILL REQUIRE
SIGNIFICANT MANAGEMENT RESOURCES.

An acquisition of a complimentary business may not produce the revenue,
earnings or business synergies that we anticipate, and an acquired business
might not perform as we expect. If we pursue any acquisition, though we have no
definitive agreements to do so at this time, our management could spend a
significant amount of time and effort in identifying and completing the
acquisition and may be distracted from the operation of our business. If we
complete an acquisition, we would need to devote a significant amount of
management resources to integrating the acquired business with our existing
operations, and that integration may not be successful.

OUR REVENUE AND EXPANSION PLANS MAY BE ADVERSELY AFFECTED AS A RESULT OF A LACK
OF MARKET GROWTH.

If the market for our services fails to develop or grows more slowly than
anticipated, our revenue growth and expansion plans could be adversely affected.
The high-speed data telecommunications industry is only in the early stages of
development and is subject to rapid and significant technological change. Many
providers of high-speed data telecommunications services are testing products
from numerous suppliers for various applications, and these suppliers have not
broadly adopted an industry standard. In addition, certain industry groups are
in the process of trying to establish standards which could limit the types of
technologies we could use. Certain critical issues concerning commercial use of
DSL technology for Internet access, including security, reliability, ease and
cost of access and quality of service remain unresolved and may impact the
growth of and demand for these services. As a result, we cannot accurately
predict the rate at which the market for our service will grow, if at all, or
whether emerging technologies will render our services less competitive or
obsolete.

8
<PAGE> 12

Risks Related to Telecommunications Agreements

A FAILURE TO ESTABLISH AND MAINTAIN INTERCONNECTION AGREEMENTS ON FAVORABLE
TERMS WOULD ADVERSELY AFFECT OUR ABILITY TO DELIVER SERVICE BECAUSE WE RELY ON
FACILITIES OWNED BY OTHER COMPANIES IN ORDER TO AVOID THE DELAY AND EXPENSE OF
INSTALLING OUR OWN FACILITIES TO DELIVER TELEPHONE SERVICES TO OUR CUSTOMERS.

We must be able to obtain and maintain interconnection agreements with
traditional local telephone companies on favorable terms. If we have
difficulties obtaining high quality, reliable and reasonably priced services
from the traditional local telephone companies on a timely basis, through
interconnection agreements where required, our services will be less attractive
to customers and our business will be adversely affected.

Under the Telecommunications Act of 1996, traditional local telephone
companies may be required to allow companies like ours to interconnect with
their networks, lease elements of their networks, and locate our equipment at
their facilities. By leasing facilities owned by traditional local telephone
companies, we avoid incurring much of the delay and expense required to install
our own facilities. However, the Telecommunications Act does not assure the time
frame in which those services will be offered to us or assure that we will be
able to purchase those services at rates and on terms and conditions that allow
us to remain competitive and profitable. Because we compete with traditional
local telephone companies in our markets, they may be reluctant to cooperate
with us. They have incentives to delay our entry into, and renewals of,
interconnection agreements with them. Many new competitive companies such as
ours have experienced difficulties in working with traditional local telephone
companies with respect to initiating, interconnecting, and implementing
telecommunications services and locating their equipment in their central
offices.

To date, we have entered into two interconnection agreements which govern
our interconnection with Bell Atlantic covering New Jersey and Pennsylvania. We
will need to establish and maintain interconnection agreements with Bell
Atlantic and other traditional local telephone companies for the other states
where we plan to offer local telecommunications services by means other than
resale. Our agreements with Bell Atlantic are each for a term of two years. Our
agreements with Bell Atlantic require Bell Atlantic to perform certain
responsibilities -- for example, providing collocation and access to individual
network components -- only to the extent required by applicable laws,
regulations and ordinances. Because implementation of the Telecommunications Act
of 1996 is subject to numerous federal and state policy rulemaking proceedings
and judicial review, there is still uncertainty as to the extent to which our
agreements with Bell Atlantic will provide us with the facilities and services
we require.

Under the Telecommunications Act of 1996 we must first attempt to negotiate
the terms of interconnection agreements with traditional local telephone
companies. If negotiations fail, then any disputed issues may be resolved by
arbitration. Whether reached by negotiation or arbitration, interconnection
agreements must be approved by state regulators and are also subject to
oversight by the FCC and the courts. These governmental authorities may modify
the terms or prices of our interconnection agreements in ways that could
adversely affect our ability to deliver service and our business and results of
operations. We cannot be certain that we will be able to enter into or renew or
enter into new interconnection agreements on favorable terms.

IF WE ARE UNABLE TO ESTABLISH AND MAINTAIN AGREEMENTS THAT ALLOW US TO RESELL
SOME SERVICES THAT WE CANNOT PROVIDE OURSELVES OUR ABILITY TO DELIVER SERVICES
WOULD BE ADVERSELY AFFECTED.

Our failure to enter into new or replacement resale agreements on favorable
terms could adversely affect our ability to deliver services and adversely
impact our revenue. We have relied and will continue to rely on other long
distance and local telephone companies to provide transmission and termination
service for much of our traffic. Agreements with long distance carriers
typically provide for the resale of long distance services on a timed basis and
may contain minimum volume commitments. Agreements with local telephone
companies typically provide for maximum line limits. Negotiation of these
agreements

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involves estimates of future supply and demand for transmission capacity as well
as estimates of the calling pattern and traffic levels of our future customers.
If we fail to meet our minimum volume commitments, we may be obligated to pay
underutilization charges. If we underestimate our need for transmission
capacity, we may be required to obtain capacity through more expensive means. In
the past, we have had to obtain additional lines under tariffs which were more
expensive than the rates under our agreements. We expect that we will exceed our
maximum line limits until we have migrated a sufficient number of customers to
our DSL service.

We also have entered into agreements with Bell Atlantic that allow us to
obtain at a discount Bell Atlantic's local retail services for resale to our
customers. Where tariffs are available from traditional local telephone
companies such as Bell Atlantic and there is no need to enter into resale
agreements, we plan on obtaining local services through tariffs. We have relied
and will continue to rely on resale agreements with Bell Atlantic or other
traditional local telephone companies to provide much of our local services
including, in some instances, DSL services. As in the case of interconnection
agreements, resale agreements for local services must be negotiated or
arbitrated and then approved by state regulators. Resale agreements are also
subject to oversight by the FCC and the courts. These governmental authorities
may modify the terms or discount rates contained in our resale agreements in
ways that could adversely affect our ability to deliver service and adversely
affect our revenue and profitability.

We also rely on resale agreements to provide our customers with other
services, including cellular service, teleconferencing and Internet access. We
currently resell cellular services under a resale agreement with Verizon
Wireless. Verizon Wireless currently is required to permit unrestricted resale
of its cellular services under the FCC's rules. Those rules, however, are
scheduled to expire in November 2002. We cannot be assured that we will be able
to resell cellular services on acceptable terms, or at all, after November 2002.
If we were unable to resell Verizon Wireless's cellular services for any reason,
we may be unable to obtain replacement services on acceptable terms or at all.
Our inability to provide cellular services or other resold services could
negatively impact our ability to deliver comprehensive services and negatively
affect our revenue and profitability.

Risks Related to Equipment, Capacity and Facilities

BECAUSE WE DEPEND HEAVILY ON TRANSMISSION CAPACITY LEASED FROM OTHER PARTIES,
OUR INABILITY TO OBTAIN SUFFICIENT LEASED TRANSMISSION CAPACITY COULD SERIOUSLY
LIMIT OUR OPERATIONS.

If we cannot lease sufficient transmission capacity, our operations could
be limited or we could be forced to make additional unexpected capital
expenditures to install our own transmission capacity as well as obtain local
franchise permits or other authorizations. We currently lease transmission
capacity from various companies to connect our switching equipment to the
traditional local telephone companies' networks. We depend heavily upon other
telephone companies for telecommunications transmission lines.

WE DEPEND ON PORTIONS OF THE TRADITIONAL LOCAL TELEPHONE COMPANIES NETWORKS FOR
DSL TECHNOLOGY THAT MAY NOT OPERATE AS EXPECTED WHICH COULD ADVERSELY AFFECT OUR
ABILITY TO DELIVER SERVICE.

We depend significantly on the quality of the copper telephone lines we
lease from Bell Atlantic, or other traditional local telephone companies
providing services in our target markets, and their maintenance of these lines
to provide DSL services. Our ability to provide DSL services could be adversely
affected if these lines do not operate as expected.

All transport technologies using copper telephone lines have the potential
to interfere with, or to be interfered with by, other traffic on adjacent copper
telephone lines. This interference could degrade the performance of our services
or make us unable to provide service on selected lines. In addition, traditional
local telephone companies may claim that the potential for interference by DSL
technology permits them under the FCC's rules to restrict or delay our
deployment of DSL services. The telecommunications industry and regulatory
agencies are still developing procedures to resolve interference issues between
competitive telephone companies such as us and traditional local telephone
companies, and these

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procedures may not be effective. We may be unable to successfully negotiate
interference resolution procedures with traditional local telephone companies.
Interference, or claims of interference, if widespread, would adversely affect
our speed of deployment, reputation, brand image, service quality and client
retention, satisfaction, and consequently, our revenue.

OUR FAILURE TO OBTAIN ACCESS TO TRANSMISSION FACILITIES COULD ADVERSELY AFFECT
OUR ABILITY TO DELIVER SERVICES.

If traditional local telephone companies such as Bell Atlantic do not
provide us with adequate and timely access to collocation space to install our
equipment or access to their transmission facilities on acceptable terms and
conditions, we may not have alternate means of connecting all of the facilities
necessary to provide service to our customers, which could result in delays,
additional costs or our inability to provide services in certain locations. We
must use telephone lines and other facilities controlled by the traditional
local telephone companies such as Bell Atlantic to provide connections to our
customers. In addition, we depend on the traditional local telephone companies
to test and maintain the quality of the lines that we use. We have not
established a history of installing or collocating our equipment on the premises
of traditional local telephone companies or accessing their transmission
facilities in large volumes. The traditional local telephone companies may also
experience a shortage of collocation space or transmission capacity, and there
is no guarantee that we will be able to secure space in the future. In addition,
because we compete with traditional local telephone companies in our markets,
they may be reluctant to cooperate with us. The increasing number of competitive
local telephone companies that request collocation space from the traditional
telephone companies will also affect the availability of space and transmission
capacity.

In connection with our planned DSL roll-out, we intend to install equipment
to interconnect with Bell Atlantic's facilities at 20 locations by May 31, 2001.
However, we have experienced, and expect to experience in the future, lengthy
periods between our request for and the actual provision of the space needed for
these installations. We may be unable to obtain access to collocation and
transmission facilities from the traditional local telephone companies, or to
gain timely access at acceptable rates. In addition, if telephone exchanges are
not sufficiently available in a particular area code, the profitability of
collocation sites in that area will be decreased because we can only provide
outbound services. Currently, sufficient telephone exchanges are not available
in certain area codes in New Jersey. If this situation continues for an extended
period of time, it could adversely impact our collocation plans.

Risks Related to Technology and System Failures

IF THE DSL TECHNOLOGIES THAT WE USE BECOME OBSOLETE, WE WILL NOT BE ABLE TO
COMPETE EFFECTIVELY.

If other cost-effective means of providing high-speed data transmission are
developed, our DSL services could become obsolete. If this occurs, we will not
be able to compete effectively because we will not be able to meet customer
expectations and we may not be able to recover our investment in these
technologies. If we attempt to incorporate new technologies or products into our
systems, those new technologies and products may not be compatible with our
existing technologies and services. We may not be able to obtain timely access
to new technology on satisfactory terms or incorporate new technology into our
systems in a cost effective manner or at all.

A SYSTEM FAILURE, INCLUDING A FAILURE WHICH IS BEYOND OUR CONTROL, COULD DELAY
OR INTERRUPT OUR SERVICES.

Our operations are dependent upon our ability to support our highly complex
network infrastructure. The occurrence of a natural disaster, operational
disruption, breach of security or other unanticipated problem could cause
interruptions in the services we provide and could jeopardize the security of
confidential information being transmitted by our customers. Additionally, the
failure of a major supplier to provide the transmission capacity we require
could cause interruptions in the service we provide and impact our ability to
acquire, manage or service our customers.

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<PAGE> 15

Risks Related To Competition

OUR STRATEGY DEPENDS ON OTHER COMPANIES WHO COMPETE WITH US AND WHO HAVE AN
INTEREST IN DELAYING OUR ABILITY TO PROVIDE TELECOMMUNICATIONS SERVICES.

In addition to interconnecting with Bell Atlantic's network to provide our
services, we also rely on the telecommunications services of Bell Atlantic,
Sprint, Cable & Wireless and Qwest, among others. Each of these companies
competes with us in the sale of certain telecommunications services.
Consequently, these companies have certain incentives to delay and obstruct:

- our entry into, and renewals of, interconnection or resale agreements
with them;

- our access to their central offices to install our equipment and provide
our services;

- our access to acceptable transmission lines and copper telephone lines;
and

- our introduction and expansion of our services.

Any such delays would negatively impact our ability to service our customers and
harm our competitive position.

In June 1998, we informally settled an ongoing dispute with one of our
major suppliers. The settlement was formalized by written agreement in June
1999.

WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST BELL ATLANTIC AND OTHER WELL
ESTABLISHED CARRIERS IN PROVIDING LOCAL TELEPHONE SERVICE.

Bell Atlantic and other companies who compete with us enjoy advantages that
put us at a competitive disadvantage. In each of our target markets, we will be
competing principally with Bell Atlantic, the traditional local telephone
company serving those markets. As our markets expand, we will also compete with
other traditional local telephone companies. The traditional local telephone
companies, including Bell Atlantic, are well-established providers of local
telephone services serving most of the telephone subscribers within their
respective service areas. In addition, traditional local telephone companies
have long-standing relationships with regulatory authorities at the federal and
state levels.

We face additional competition from long distance carriers, such as AT&T,
MCI WorldCom and Sprint, seeking to enter, reenter or expand entry into the
local telephone marketplace. In addition, we face competition from the
following:

- other competitive local telephone companies;

- resellers;

- cable television companies;

- electric utilities;

- microwave carriers;

- wireless telephone system operators; and

- private networks built by large end-users.

This competition places downward pressure on prices, which may make it difficult
for us to provide these services profitably, and we may not be able to compete
effectively with these companies.

WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN PROVIDING LONG DISTANCE SERVICE
WHICH MAY MAKE IT DIFFICULT TO PROFITABLY PROVIDE THESE SERVICES.

We face intense competition from long distance telephone companies in the
provision of long distance services, which places downward pressure on prices
for long distance service and may make it difficult for us to provide these
services profitably. Although the long distance market is dominated by three
major

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<PAGE> 16

competitors, AT&T, MCI WorldCom and Sprint, hundreds of other companies also
compete in the long distance marketplace. We may not be able to effectively
compete with these companies.

The regional Bell operating companies created by the break-up of AT&T, such
as Bell Atlantic, are prohibited from providing most types of long distance
telecommunications services originating within their home service areas.
However, the Telecommunications Act of 1996 established a procedure in which
such a company could lift this restriction by showing that it had taken
sufficient steps to open its local telecommunications network to competitors. On
December 22, 1999, the FCC approved Bell Atlantic's application for authority to
provide all forms of originating long distance service in New York State. This
decision, which has been appealed to the United States Court of Appeals for the
District of Columbia Circuit, could adversely affect our business. Previously,
competitive carriers such as us enjoyed a competitive advantage because we could
offer one-stop shopping for local and long distance service while the regional
Bell operating companies could not. This advantage no longer exists in New York,
one of our target markets where Bell Atlantic has already started to offer long
distance service.

Bell Atlantic is in various stages of applying for this same authority in
other states within our target geographic region. In Pennsylvania, the public
utility commission has approved a proposal requiring Bell Atlantic to establish
separate affiliates for the provision of wholesale and retail services. The
commission's decision has been appealed and even if upheld will require further
proceedings to determine how the separate affiliate requirement will be
implemented. Any resulting requirement for Bell Atlantic to provide certain
services through a separate affiliate could facilitate Bell Atlantic's ability
to obtain FCC authority to provide all forms of originating long distance in
Pennsylvania. We believe other regional Bell operating companies may obtain
permission to provide long distance services during the next one to two years.

If other regional Bell operating companies obtain FCC approval to enter the
long distance market, our business could be further adversely affected. In
addition, both proposed and recently completed mergers involving regional Bell
operating companies could facilitate their ability to provide many services we
offer, to our disadvantage. Examples of such mergers include Bell Atlantic's
proposed merger with GTE, SBC's merger with Ameritech, Qwest's proposed
acquisition of US West, and MCI WorldCom's proposed acquisition of Sprint.

WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN PROVIDING DSL SERVICE.

We face intense competition from other providers of DSL service such as
Covad and Northpoint. This competition places downward pressure on prices for
DSL service and may make it difficult for us to provide these services
profitably.

OUR FAILURE TO SUSTAIN DESIRED PRICING LEVELS COULD IMPAIR OUR ABILITY TO
ACHIEVE PROFITABILITY OR POSITIVE CASH FLOW.

Our failure to achieve or sustain market acceptance at desired pricing
levels could impair our ability to achieve profitability or positive cash flow.
Prices for telecommunications services have historically fallen, a trend we
expect to continue. Accordingly, we cannot predict to what extent we may need to
reduce our prices to remain competitive or whether we will be able to sustain
future pricing levels as our competitors introduce competing services or similar
services at lower prices.

OUR COMPETITION HAS SUPERIOR RESOURCES, PLACING US AT A COST AND PRICE
DISADVANTAGE, WHICH COULD ADVERSELY AFFECT OUR PROFITABILITY.

We may not be able to compete effectively with many of our current and
potential competitors who have substantially greater financial, personnel and
other resources, including brand name recognition and relationships with
existing customers. As a result, some of our competitors can raise capital at a
lower cost than we can. Also, our competitors' greater name recognition may
provide them with a competitive advantage in marketing their services. In
addition, our competitors' costs advantages give them the ability to reduce
their prices for an extended period of time if they so choose.

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<PAGE> 17

Risks Related to Government Regulations

OUR SERVICES ARE SUBJECT TO EVOLVING FEDERAL, STATE AND LOCAL LAWS AND
REGULATIONS, AND CHANGES IN LAWS OR REGULATIONS COULD ADVERSELY AFFECT OUR
ABILITY TO COMPETE AND OTHER ASPECTS OF OUR BUSINESS.

Federal Laws and Regulations. We may be subject to substantial costs,
delays and missed opportunities because of ongoing compliance with extensive
regulations or changes in the law. Our provisioning of telecommunications
services is heavily regulated at the federal, state, and local levels.
Compliance with these regulations imposes substantial costs on us and restricts
our ability to conduct our business. Nonetheless, we rely heavily on
implementation and enforcement of laws and regulations that are designed to
enable competitive telephone companies like us to compete against traditional
telephone companies.

The Telecommunications Act of 1996 opens the local services market by
requiring traditional local telephone companies such as Bell Atlantic to permit
interconnection to their networks and establishing traditional local telephone
company's obligations with respect to the following:

- network elements;

- resale of traditional local telephone company's retail services;

- number portability;

- dialing parity; and

- access to rights of way and other services that must be made available to
competitors such as us.

Traditional local telephone companies are required to negotiate in good
faith with carriers which request any or all of the above arrangements. Under
the Telecommunications Act of 1996, if we cannot reach agreement within a
prescribed time, either carrier may request binding arbitration of the disputed
issues by the state regulatory commission. Even when an agreement has not been
reached, traditional local telephone companies remain subject to interconnection
obligations established by the FCC and state telecommunications regulatory
commissions. We may not be able to obtain interconnection and reciprocal
compensation on satisfactory terms without extensive delays and expense.
Further, because implementation of the Telecommunications Act is subject to
numerous federal and state policy rulemaking proceedings and litigation in
federal courts, there is still uncertainty as to what impact it will have on us.

Although state public utilities commissions have continued to conduct
arbitrations, and to implement and enforce interconnection agreements during the
pendency of the litigation in federal courts, this litigation may affect the
scope of state commissions' authority to conduct such proceedings or to
implement or enforce interconnection agreements. The litigation could also
result in new or additional rules being promulgated by the FCC. Given the
general uncertainty surrounding these rules, we may not be able to continue to
obtain or enforce interconnection terms that are acceptable to us or that are
consistent with our business plans. Even our interconnection agreements with
Bell Atlantic do not insulate us from these ongoing regulatory and court
proceedings, because such agreements require Bell Atlantic to perform certain
responsibilities -- for example, providing us with space to install our
equipment, collocation and access to individual network assets -- only to the
extent required by applicable laws, regulations and ordinances. The outcome of
these ongoing regulatory and court proceedings could adversely affect our
ability to compete against Bell Atlantic and other telephone companies in our
target markets.

Our cost of providing long distance services, as well as our revenue from
providing local services, will be affected by changes in the rates that
traditional local telephone companies charge to long distance carriers for
origination and termination of calls over local networks. These charges are
known as "access charges." The FCC has made major changes in the interstate
access charge structure pursuant to the Telecommunications Act of 1996,
including recently granting greater pricing flexibility for traditional local
telephone companies and deregulation of some access services. Most recently, on
May 31, 2000, the FCC issued an order that reduces interstate access rates
charged by traditional local telephone companies in order to remove universal
service subsidies contained in those rates. As part of that proceeding, some

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<PAGE> 18

major long distance companies agreed to pass through access charge reductions to
their customers and to eliminate minimum monthly usage charges, which may make
it more difficult for us to price our end user customer rates competitively. The
FCC has also initiated a proceeding to determine whether to regulate the access
charges of competitive local telephone companies. If the increased pricing
flexibility for traditional local telephone companies and other access charge
reforms are not effectively monitored by federal regulators, it could have a
material adverse effect on our ability to price interstate access services in
the future.

The FCC has significantly expanded the federal universal service subsidy
regime since enactment of the Telecommunications Act of 1996. Most recently, the
FCC's access charge reform order issued on May 31, 2000 created a new universal
service fund designed to replace subsidies contained in interstate access
charges. Providers of interstate telecommunications service, such as us, as well
as certain other companies, must pay for the programs funded by the subsidy
regime. Our contribution to these universal service funds is based on our
telecommunications service end-user revenues. We offset the contribution to the
federal universal service subsidy by passing on our cost of the contribution to
our customers as permitted by FCC regulations. We are currently unable to
quantify the amount of future subsidy payments that we will be required to make
and the effect that these required payments will have on our financial condition
because of uncertainties in the outcome of ongoing FCC, state public utility
commission, and court proceedings or Congressional action. We cannot be assured
that universal service contribution requirements will not have a material
adverse affect on our profitability.

We cannot predict the outcome of the proceedings, litigation and
legislation described above or other proceedings, litigation and legislation
that may affect us. Any changes in the existing regulatory framework may
increase our legal, administrative or operating costs, or may otherwise limit or
constrain our activities, any of which could have a material adverse effect on
our business prospects, financial condition, or results of operations.

State and Local Regulation. Our business and operations are also subject
to state regulators who determine whether and on what terms we will be
authorized to operate as a competitive local telephone company in their state.
In addition, local municipalities may require us to obtain various permits which
could increase the cost of services or delay development of our network. For
example, in each state in which we desire to offer our services, we must obtain
prior authorization from the appropriate state authorities. Our business and our
financial condition could be adversely affected if the state public utility
commissions impose fines, revocation, or other penalties on us for failure to
comply with regulatory requirements. Many states require prior approvals or
notifications for certain transfers of assets, customers or ownership or
reorganization of certificated carriers, and for the issuance of equity
securities, notes or indebtedness and related transactions. We are filing
several applications which seek permission, retroactively as necessary, for our
reorganization into a holding company structure. We have no assurances whether
these applications or applications we may file for future transactions will be
granted. Such notice and approval requirements could prevent or delay our
completion of any of these transactions and could prevent another company from
acquiring us. In addition, state and local regulatory requirements may change
with little notice, which could adversely affect our business prospects,
financial condition and results of operations.

ONGOING REGULATORY AND COURT PROCEEDINGS COULD ADVERSELY AFFECT OUR ABILITY TO
PROVIDE DSL SERVICES AND TO COMPETE IN THE DSL MARKET.

We offer DSL services in competition with traditional local telephone
companies such as Bell Atlantic and other competing DSL providers. To provide
DSL services we will lease necessary network elements from traditional local
telephone companies such as Bell Atlantic or resell the DSL services that they
offer to their retail customers. The FCC has adopted or is considering several
regulations that affect our ability to provide DSL services to our customers.
These rulings require further implementation by state public utility
commissions, and some of the rulings are subject to appeals in court. We cannot
predict the outcome of these proceedings and cannot be assured that they will
not adversely affect our ability to offer DSL services.

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<PAGE> 19

Risks Related to Market Performance

VARIABILITY OF QUARTERLY OPERATING RESULTS COULD RESULT IN FLUCTUATIONS IN THE
TRADING PRICE OF THE COMMON STOCK.

It is likely that in some future quarters our operating results will be
below the expectations of investors and securities analysts. If this happens,
the trading price of the common stock could decline. Our historical quarterly
operating results have fluctuated, and will continue to fluctuate, significantly
from period to period depending upon factors including:

- the success of our efforts to expand our customer base;

- changes in and the timing of expenditures relating to the continued
expansion of our network;

- the development of new services;

- the success of our sales and marketing efforts;

- changes in pricing policies by us and by our competitors; and

- factors relating to acquisitions.

OUR STOCK PRICE MAY BE VOLATILE.

We expect that the market price of our common stock will fluctuate as a
result of variations in our quarterly operating results. These fluctuations may
be exaggerated if the trading volume of our common stock is low. In addition,
due to the technology intensive and evolving nature of our business, the market
price of our common stock may rise and fall in response to a variety of factors,
including:

- announcements of technological or competitive developments;

- acquisitions or strategic alliances by us or our competitors;

- the operating and stock price performance of comparable companies;

- changes in estimates of our financial performance or changes in
recommendations by securities analysts regarding us or our industry;

- general market or economic conditions; or

- rulings made by the FCC or state regulatory authorities which affect our
competitors or us.

In addition, the stock market in general has experienced dramatic price and
volume fluctuations from time to time. These fluctuations may or may not be
based upon any business or operating results. Our common stock may experience
similar or even more dramatic price and volume fluctuations which may continue
indefinitely.

AN ACTIVE TRADING MARKET MAY NOT DEVELOP FOR OUR COMMON STOCK.

There is no public market for our common stock. We are seeking to have our
common stock included for quotation on the Nasdaq National Market. However, only
6,000,000 of our 23,600,000 outstanding shares of common stock will be initially
publicly traded. This may not be a sufficient number of shares publicly
available to sustain an active trading market. If the total market value or the
minimum bid price of our common stock decreases significantly, we may not
satisfy continued listing requirements for the Nasdaq National Market. If our
common stock is no longer traded on the Nasdaq National Market, it will be more
difficult for shareholders to trade our common stock.

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<PAGE> 20

WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION WHICH
YOU MIGHT FAVOR AND COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.

Provisions of our certificate of incorporation and bylaws and provisions of
Delaware law could delay, defer or prevent an acquisition or change of control
on terms you find attractive or otherwise adversely affect the price of our
common stock. For example, our certificate of incorporation:

- authorizes 5,000,000 shares of undesignated preferred stock which our
board of directors can designate and issue without further action by our
stockholders;

- establishes a classified board of directors;

- eliminates the rights of stockholders to call a special meeting of
stockholders; and

- eliminates the ability of stockholders to take action by written consent.

Risks Related to Management and Personnel

THE LOMBARDI FAMILY WILL CONTINUE TO CONTROL US AND MAY MAKE DECISIONS ADVERSE
TO YOUR INTERESTS.

Upon completion of this offering, The Louis A. Lombardi 1996 Family Limited
Partnership, The Patrick C. Lombardi 1996 Family Limited Partnership and Louis
A. Lombardi, Jr. will own, in the aggregate, approximately 75% of our
outstanding common stock. Accordingly, these stockholders collectively will be
able to control our management policy, decide all fundamental corporate actions,
including mergers, substantial acquisitions and dispositions and elect our board
of directors. These stockholders may ultimately make decisions that are adverse
to your interests as minority stockholders. This concentration of ownership may
also have the effect of delaying or preventing a change in control on terms you
might find attractive, which could negatively affect our stock price.

OUR SUCCESS DEPENDS ON A LIMITED NUMBER OF KEY PERSONNEL WHO WOULD BE DIFFICULT
TO REPLACE.

If we are unable to attract and retain our key employees, the value of your
investment could suffer. We depend on a limited number of key management, sales,
marketing and development personnel to manage and operate our business, most
notably Louis A. Lombardi, Sr. and Louis A. Lombardi, Jr. We believe that our
success depends to a significant degree upon our ability to attract and retain
highly skilled personnel, including our engineering and technical staff. The
competition for qualified personnel in the telecommunications industry is
intense. For this reason, we cannot assure you that we will be able to hire or
retain necessary personnel in the future.

Risks Related to this Offering

UPON COMPLETION OF THIS OFFERING, YOU WILL EXPERIENCE IMMEDIATE SUBSTANTIAL
DILUTION.

The initial public offering price is substantially higher than the book
value of our common stock. At an assumed initial offering price of $10 per
share, the tangible book value of the common stock after the offering will be
$1.77 per share. This represents an immediate and substantial dilution per share
of the common stock. The dilution per share represents the difference between
the amount per share paid by the purchasers of shares of common stock in this
offering and the net tangible book value per share of common stock immediately
after the completion of this offering. In addition, to the extent outstanding
options are exercised, there will be further dilution to new investors.

WE EXPECT ABOUT 17,600,000 SHARES OF COMMON STOCK TO BECOME AVAILABLE FOR SALE
180 DAYS FROM THE DATE OF THIS PROSPECTUS, AND SALES OF THESE SHARES MAY DEPRESS
OUR SHARE PRICE.

Sales of a substantial number of our shares of common stock in the public
market following this offering -- or the expectation of such sales -- could
cause the market price of our common stock to drop.

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<PAGE> 21

After this offering, we will have outstanding 23,600,000 shares of common stock.
All 6,000,000 shares sold in this offering will be freely tradable. The
remaining 17,600,000 shares outstanding after this offering will be available
for sale in the public markets 180 days after the date of this prospectus,
subject to limitations on the number of shares that can be sold in any
three-month period.

In addition, we intend to file a registration statement to register all
3,540,000 shares of common stock that we may issue under our 2000 Stock Plan and
the 30,000 shares of common stock issuable and underlying outstanding non-plan
options. After this registration statement is effective, shares issued upon
exercise of stock options will be eligible for resale in the public market
without restriction. Upon the consummation of this offering, we will have
options to purchase an aggregate of 1,059,047 shares of common stock issued and
outstanding.

WE WILL RETAIN BROAD DISCRETION IN USING OUR PORTION OF THE NET PROCEEDS FROM
THIS OFFERING AND MAY SPEND A SUBSTANTIAL PORTION IN WAYS IN WHICH YOU DO NOT
AGREE.

We will retain a significant amount of discretion over the application of
the net proceeds to us from this offering as well as over the timing of our
expenditures. Because of the number and variability of factors that may
determine our use of the net proceeds to us from the offering, we may apply the
net proceeds to us from this offering in ways with which you disagree.

ABSENCE OF DIVIDENDS.

We have never paid, and do not anticipate paying in the foreseeable future,
any dividends on our common stock.

Risks Regarding Forward-Looking Statements

FORWARD-LOOKING STATEMENTS MAY PROVE TO BE INACCURATE.

Actual results may differ materially from those suggested by the
forward-looking statements for various reasons, including those discussed in
this section. Some of the statements contained in this prospectus are
forward-looking. The words "believe," "expect," "intend," "anticipate,"
"estimate," "plan," "future," and other similar expressions generally identify
forward-looking statements. They include statements concerning:

- liquidity and capital expenditures;

- growth strategy;

- acquisitions activities;

- regulatory matters affecting the telecommunications industry;

- competitive conditions in the telecommunications industry;

- projected growth of the telecommunications industry;

- general economic conditions; and

- Year 2000 issues.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements concerning our
operations, performance and financial condition, including our future economic
performance, plans and objectives and the likelihood of success in developing
and expanding our business. These statements are based upon a number of
assumptions and estimates which are subject to significant uncertainties, many
of which are beyond our control. The words "may," "would," "could," "will,"
"expect," "anticipate," "believe," "intend," "plan,"

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"estimate" and similar expressions are meant to identify such forward-looking
statements. Actual results may differ materially from those expressed or implied
by such forward-looking statements. Factors that could cause actual results to
differ materially include, but are not limited to, those set forth in "Risk
Factors."

We undertake no obligation to update such statements or publicly release
the result of any revisions to these forward-looking statements which we may
make to reflect events or circumstances after the date of this prospectus or to
reflect the occurrence of unanticipated events.

19
<PAGE> 23

USE OF PROCEEDS

We estimate that we will receive net proceeds from the sale of our common
stock offered by this prospectus of approximately $45.5 million, assuming an
initial offering price of $10 per share. This estimate includes the deduction of
the underwriting discount and estimated offering expenses payable by us. We will
not receive any proceeds from the sale of the shares being offered by the
selling stockholder.

We intend to use a portion of the net proceeds to us from the offering,
approximately, as follows:

- $26.2 million for capital expenditures in connection with our planned
roll-out of DSL service and planned expansion of our network, including
the purchase and installation of DSL equipment in central offices, the
purchase of DSL modems for use at customer premises and the purchase of
high-speed digital switches;

- $5.2 million for the enhancement of our network to enable us to provide
additional value-added services rather than reselling services of other
companies;

- $3.0 million for the hiring of additional direct sales, operations and
support personnel;

- $2.6 million for the acquisition of rights to deploy our equipment at the
central offices of Bell Atlantic and other service providers;

- $1.0 million for the improvement of our network management, billing and
other back office systems to facilitate our planned growth; and

- $500,000 for the expansion of our marketing efforts.

We will use the balance of approximately $7.0 million to fund working
capital requirements and for other general corporate purposes. This may include
using a portion of the net proceeds to finance acquisitions of businesses or
technologies that complement our business. Although we have discussions in the
ordinary course of our business with potential acquisition targets, we currently
do not have any commitments or agreements with respect to any acquisitions.

We currently intend to allocate substantial proceeds among the foregoing
uses. The precise allocation of funds among these uses will depend on future
commercial, technological, regulatory or other developments in or affecting our
business, the competitive climate in which we operate and the emergence of
future opportunities. Because of the number and variability of factors that
determine our use of the net proceeds to us from this offering, we cannot assure
you that our application of the net proceeds will not vary substantially from
our current intentions. Pending application of the net proceeds for the purposes
described above, we intend to invest such funds in short-term, investment-grade,
interest-bearing securities.

DIVIDEND POLICY

We have never paid any cash dividends on our common stock and do not
anticipate declaring or paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings, if any, to fund the development and
growth of our business. Declaration or payment of future dividends, if any, will
be at the discretion of our board of directors after taking into account various
factors, including our financial condition, operating results, current and
anticipated cash needs and plans for expansion.

Because Eastern Computer Services, L.L.C. operated as a limited liability
company from its formation in 1995 until the reorganization of Eastern Computer
Services, L.L.C. and Cooperative Communications, Inc. as our subsidiaries in
March 2000, the net income of Eastern Computer Services, L.L.C. in past years
has been distributed to its members. Distributions were made through May 31,
1999 and no additional distributions were made after that date or will be made
in subsequent periods.

20
<PAGE> 24

CAPITALIZATION

The following table sets forth our pro forma capitalization as of February
29, 2000:

- on a pro forma basis giving effect to the reorganization of Cooperative
Communications, Inc. and Eastern Computer Services, L.L.C. as our
wholly-owned subsidiaries; and

- on an as adjusted basis to give effect to the sale by us of 5,000,000
shares of common stock offered hereby, assuming an initial public
offering price of $10.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us
and the application of the estimated net proceeds therefrom.

You should read this table in conjunction with "Selected Combined Financial
Data," our historical combined financial statements, including the notes
thereto, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which appear elsewhere in this prospectus.

<TABLE>
<CAPTION>
FEBRUARY 29, 2000
------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
--------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 3,655 $49,155
======= =======
Long term obligations....................................... $ 6,162 $ 6,162
------- -------
Stockholders' equity (deficit):
Preferred stock: $0.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding........... -- --
Common stock: $0.01 par value, 60,000,000 shares
authorized; 18,600,000 shares issued and outstanding,
proforma; 23,600,000 shares issued and outstanding,
proforma, as adjusted.................................. 186 236
Additional paid-in capital................................ 744 46,194
Accumulated deficit....................................... (4,373) (4,373)
------- -------
Total stockholders' equity (deficit)................... (3,443) 42,057
------- -------
Total capitalization................................... $ 2,719 $48,219
======= =======
</TABLE>

The number of shares of capital stock excludes:

- any shares of common stock to be issued pursuant to the over-allotment
option;

- 3,540,000 shares of common stock authorized for issuance under our 2000
Stock Plan under which 1,029,047 options will be outstanding upon the
consummation of this offering at exercise prices equal to the initial
public offering price; and

- 30,000 shares of common stock issuable upon the exercise of an
outstanding non-plan option as of the date of this prospectus at an
exercise price of $0.01 per share.

21
<PAGE> 25

DILUTION

Our pro forma net tangible book value as of February 29, 2000, was $(3.6)
million, or $(.20) per share of common stock. Pro forma net tangible book value
per share is determined by dividing our tangible net worth, tangible assets less
liabilities, by the number of shares of common stock outstanding before the
offering and giving effect to the reorganization of Cooperative Communications,
Inc. and Eastern Computer Services, LLC as our wholly-owned subsidiaries.

After giving effect to the sale of the shares of common stock offered by
us, at an assumed initial public offering price of $10.00 per share, and after
deducting the underwriting discounts and commissions and estimated offering
expenses payable by us, our pro forma net tangible book value as of February 29,
2000 was $1.77 per share of common stock. This represents an immediate increase
in such net tangible book value of $1.97 per share to our existing investors and
immediate dilution of $8.23 per share to new investors purchasing shares in this
offering. The following table illustrates the per share dilution.

<S> <C> <C>
Assumed initial public offering price per share............. $10.00
Pro forma net tangible book value as of February 29, 2000... $(.20)
Increase per share attributable to this offering............ 1.97
-----
Pro forma net tangible book value per share after this
offering.................................................. 1.77
------
Dilution per share to new investors......................... $ 8.23
======
</TABLE>

The following table shows the difference between existing stockholders and
new investors with respect to the number of shares purchased from us, the total
consideration paid and the average price paid per share at an assumed initial
public offering price of $10.00 per share. Underwriting discounts and
commissions and offering expenses have not been deducted.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing investors................... 18,600,000 78.8% $ 1,000 --% $ --
New investors........................ 5,000,000 21.2 50,000,000 100.0 10.00
---------- ----- ----------- -----
Total........................... 23,600,000 100.0% $50,001,000 100.0%
========== ===== =========== =====
</TABLE>

The calculations above exclude from the number of outstanding shares of
common stock:

- 3,540,000 shares of common stock issuable upon the exercise of options
reserved for grant under our 2000 Stock Plan of which no shares were
issuable upon the exercise of outstanding plan options as of February
29, 2000, but under which 1,029,047 options will be outstanding upon the
consummation of this offering at exercise prices equal to the initial
public offering price; and

- 30,000 shares of common stock issuable upon the exercise of an
outstanding non-plan option with an exercise price of $0.01 per share as
of February 29, 2000.

If all of the options outstanding as of February 29, 2000 had been
exercised at that date, there would be additional dilution to new investors.

22
<PAGE> 26

SELECTED COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The selected combined financial data as of May 31, 1997, 1998 and 1999 and
as of February 29, 2000, and for each of the years ended May 31, 1997, 1998 and
1999 and for the nine month period ended February 29, 2000, are derived from our
audited combined financial statements, including the notes thereto, which are
included elsewhere in this prospectus. The selected combined financial data as
of May 31, 1995 and 1996 and for each of the two years ended May 31, 1995 and
1996 and as of February 28, 1999 and for the nine month period ended February
28, 1999 have been derived from our unaudited combined financial statements. The
unaudited financial data include all adjustments (consisting only of normal,
recurring adjustments) that we consider necessary for fair presentation of the
combined financial position and results of operations for these periods. The
results of the nine month period ended February 29, 2000 are not necessarily
indicative of the results for any future period. You should read the selected
combined financial data together with our combined financial statements,
including the notes thereto, and the sections of this prospectus entitled
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

<TABLE>
<CAPTION>
NINE MONTH PERIODS ENDED
YEAR ENDED MAY 31, ---------------------------
----------------------------------------------------------- FEBRUARY 28, FEBRUARY 29,
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ------- ------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF
OPERATIONS DATA:
Revenue..................... $12,573 $20,474 $28,718 $37,200 $ 40,598 $30,235 $ 29,442
------- ------- ------- ------- ----------- ------- -----------
Operating expenses:
Costs of revenue
(excluding depreciation
and amortization)....... 9,383 16,314 22,468 29,073 31,725 23,872 24,083
Selling, general and
administrative
expenses................ 2,869 4,736 5,957 7,286 8,222 6,045 5,946
Depreciation and
amortization............ 46 194 333 455 780 555 807
Stock based
compensation............ -- -- 840 -- -- -- --
------- ------- ------- ------- ----------- ------- -----------
Total operating
expenses.............. 12,298 21,244 29,598 36,814 40,727 30,472 30,836
------- ------- ------- ------- ----------- ------- -----------
Income (loss) from
operations............ 275 (770) (880) 386 (129) (237) (1,394)
Other income (expense),
net....................... (27) (78) (61) 92 109 61 (419)
------- ------- ------- ------- ----------- ------- -----------
Income (loss) before
income tax expense
(benefit)............... 248 (848) (941) 478 (20) (176) (1,813)
Income tax expense
(benefit)............... 100 (215) 128 195 98 98 --
------- ------- ------- ------- ----------- ------- -----------
Net income (loss)(1).... $ 148 $ (633) $(1,069) $ 283 $ (118) $ 274 $ (1,813)
======= ======= ======= ======= =========== ======= ===========
PRO FORMA INFORMATION:
Historical loss before
income tax expense
(benefit)................. $ (20) $ (1,813)
Pro forma income tax
expense (benefit)
(unaudited)(2).......... 200 (450)
----------- -----------
Pro forma net loss
(unaudited)............. $ (220) $ (1,363)
=========== ===========
Pro forma net loss per
common share
(unaudited)(3):
Basic................... $ (0.01) $ (0.07)
Diluted................. $ (0.01) $ (0.07)
=========== ===========
</TABLE>

23
<PAGE> 27

---------------
(1) Since Eastern Computer Services, L.L.C., or Eastern, was operated as a
limited liability company which was taxed as a partnership for federal, state
and local income tax purposes until March 2000, each member of Eastern had been
individually responsible for reporting the member's share of Eastern's net
income or loss. Accordingly, we have not provided for income taxes in our
combined financial statements related to Eastern's income. Cash distributions
were made to Eastern's members of $360, $700 and $540 in the years ended May 31,
1997, 1998 and 1999. No additional distributions were made after May 31, 1999 or
will be made in subsequent periods.

(2) Pro forma income tax expense (benefit) gives effect to the change of Eastern
from a limited liability company to a tax paying entity.

24
<PAGE> 28

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

You should read the following discussion of our financial condition and
results of operations in conjunction with the combined financial statements and
notes thereto included elsewhere in this prospectus. The results shown in this
prospectus are not necessarily indicative of the results we will achieve in any
future periods.

OVERVIEW

We provide integrated telecommunications services, including local and long
distance service and our recently launched DSL service. Our customer base
consists of over 7,500 small and medium-sized businesses. The majority of our
customers are located in New Jersey, and we plan to expand our services to
Pennsylvania, New York, Massachusetts and portions of Connecticut. As of April
1, 2000, we had approximately 34,100 local access lines providing local and long
distance services and approximately 44,600 equal access lines providing local
toll and/or long distance services. Approximately 60% of this traffic
historically has originated and terminated on our network and we expect this to
increase as we roll out our DSL service. We began reselling long distance
services in 1990 and providing local service in 1993. We offer our customers
telecommunications services consisting of outbound local and long distance
services, inbound toll free service, data services, calling cards, paging
services, Internet services and our recently introduced DSL service.

The following table sets forth for the periods indicated, the revenue
generated from our telecommunications services as a percentage of the total
revenue.

<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
---------------------------------
YEAR ENDED NINE MONTH PERIOD
MAY 31, FEBRUARY 29,
------------ -----------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Local service............................................... 45.9% 51.3% 51.5%
Outbound service (long distance and inter-local access and
transport area calls)..................................... 28.6 20.3 18.3
Toll free calls............................................. 13.1 13.4 12.5
Monthly fees................................................ 8.3 10.9 14.4
Other services.............................................. 4.1 4.1 3.3
</TABLE>

In 1998, we hired four key employees from Westinghouse Communications, now
owned by RSL Communications, to lead our efforts to pursue new technologies such
as DSL. These executives have over 85 years of combined experience in the
telecommunications industry. We expect that a significant portion of our future
revenue will be generated from the sale of DSL services. Our strategy is to
offer DSL service as a comprehensive telecommunications solution to offer cost
efficiency, flexibility, high quality and reliability for video, voice and data
telecommunications.

Our "smart-build" strategy, whereby we locate equipment in or near a
traditional local telephone company's central offices, is central to the success
of our DSL roll-out. This enables us to lease network assets owned by the
traditional local telephone company and reach a wide range of customers without
having to build network connections to each one of them. The availability of
space in central offices and the timing and cost of obtaining that space varies
by location. Based on our experience to date, we estimate that it will cost
between $285,000 and $310,000 to lease space, purchase and install equipment in
each central office we enter. Where space is available in a desired central
office, we believe the time to obtain the required local approvals and deploy
our equipment in that space will typically range from three to nine months.
Where space is not available in a central office, we will install equipment in
nearby leased facilities which we will connect to the central office. Where it
is not economically feasible to deploy such facilities, we intend to continue to
resell services of other providers. As our equipment in a central office becomes
operational, we will migrate our local and DSL customers onto our network
facilities.

25
<PAGE> 29

We recently entered into two-year interconnection agreements with Bell
Atlantic to provide us with rights to locate equipment in multiple Bell Atlantic
central offices in New Jersey and Pennsylvania. The agreements also provide:

- access to network assets;

- the switching and routing of service;

- reciprocal payment of fees for the transport and termination of local
calls over our respective networks;

- network maintenance and management;

- number portability enabling customers to retain their telephone numbers
when changing carriers; and

- directory services, such as listing information and directory assistance.

As we expand into new geographic markets and roll out our DSL service, we
expect to incur significant additional capital expenditures and selling and
marketing expenses. Capital expenditures will primarily consist of the purchase
of switching equipment, DSL equipment, customer site equipment, central office
equipment and network management equipment. We will incur other costs and
expenses, including costs related to the development and maintenance of our
network, administrative overhead and premises leases. We expect that a
significant amount of these costs and expenses will be incurred before we
generate revenue from such activities in a particular market. However, we
believe these expenses will become a smaller percentage of our revenue as we
increase our customer base, roll out our DSL service and migrate customers onto
our network.

Telecommunications services provided by Bell Atlantic constitute the
majority of our costs of revenue. Services provided by Bell Atlantic totaled
$9.0 million, $15.2 million and $20.6 million in the years ended May 31, 1997,
1998 and 1999, respectively, and $15.8 million in the nine month period ended
February 29, 2000. As we intend to expand in the Bell Atlantic service area, we
anticipate that telecommunications services provided by Bell Atlantic will
continue to comprise a significant portion of our costs of revenue.

FACTORS AFFECTING OPERATIONS

Revenue. To date, our revenue has been derived from monthly recurring
charges, usage charges and initial non-recurring charges in connection with
providing local and long distance service. Monthly recurring charges include the
fees paid by customers for lines in service and additional features on those
lines. Usage charges consist of fees paid by our customers for local, outbound,
toll-free and calling card services. Initial non-recurring charges are paid by
customers, if applicable, for the initiation of our service. Monthly fees
include both monthly recurring charges and initial non-recurring charges. In the
future, we expect that a significant portion of our revenue will be derived from
the sale of DSL services. Reciprocal compensation payable by traditional local
telephone companies historically has not constituted a significant portion of
our revenue. We do not expect that reciprocal compensation payable by Bell
Atlantic under the recently executed interconnection agreement will represent a
significant portion of our revenue in the foreseeable future.

Costs of Revenue. Our costs of revenue are comprised primarily of
transport expenses, expenses for local services, long distance expenses, access
charges, line installation expenses and engineering costs. Such costs do not
include amortization or depreciation costs. The transport expenses are payments
incurred by us for transmission facilities used to connect our customers to our
switches and to connect to the traditional local telephone company and other
competitive local telephone company networks. Our interconnection agreements
with Bell Atlantic provide for reciprocal compensation related to calls that
originate with a customer of ours and terminate on Bell Atlantic's network. We
do not anticipate that reciprocal compensation will represent a significant
portion of our costs of revenue in the foreseeable future. Other fees under
these interconnection agreements include charges for network assets, cross
connection fees, installation charges and rental costs of space in central
offices. Although it has recently increased slightly due to a decrease in
revenue, over time, we expect our aggregate costs of revenue to

26
<PAGE> 30

decline as a percentage of revenue due to the up front costs we incur when we
initially enter a new geographic market.

For the nine month period ended February 29, 2000, approximately 73% of our
costs of revenue were usage sensitive costs, such as transport expenses, local
and long distance expenses and access charges.

We expect that these costs will be a significant portion of our cost of
long distances services in the future. We have entered into resale agreements
with several long distance carriers to provide us with the ability to provide
our customers with long distance service. Our existing resale agreements contain
minimum volume commitments. We expect to enter into resale agreements for long
distance service with other carriers in the future. Such agreements typically
provide for the resale of long distance services on a per-minute basis and also
may contain minimum and maximum line restrictions. If we fail to meet minimum
volume commitments, we may be obligated to pay underutilization charges. In the
past, we have met our minimum volume commitments. If we underestimate our need
for transmission capacity and exceed our maximum volume limits and are unable to
negotiate agreements with telecommunications carriers, we may be required to
obtain capacity through more expensive means. In the past, we have had to obtain
additional lines under tariffs which were more expensive than the rates under
our agreements. We expect that we will exceed our maximum line limits until we
have migrated a sufficient number of customers to our DSL service.

Under our network build-out strategy, we have leased from Bell Atlantic and
other carriers the local fiber line capacity required to connect our switch to
particular central offices of Bell Atlantic. We intend to continue obtaining the
capacity we need by leasing it from other carriers. In the future, however, we
may seek to replace this leased line capacity with our own fiber if warranted by
traffic volume growth. We cannot assure you that all required line capacity will
be available to us on a timely basis or on favorable terms. The failure to
obtain leased fiber could delay our ability to penetrate some of our markets or
require us to make additional unexpected up-front capital expenditures to
install our own fiber and could have a material adverse effect on our business
prospects, financial condition and results of operations.

We offset contributions to the federal universal service subsidy by passing
on our cost of the contribution to our customers as permitted by FCC
regulations.

Selling, General and Administrative Expenses. Our recurring selling,
general and administrative expenses include sales and marketing, customer
service, corporate administration, personnel and billing. Currently, our sales
and marketing efforts are directed through a network of 99 commission-based
independent agents and a direct sales force of nine professionals primarily
focused on cultivating new accounts and expanding existing accounts. As we
expand our service offerings, we believe that a direct sales force is more
effective to capitalize on cross-selling opportunities. Therefore, we intend to
increase our direct sales force to 35 professionals by December 31, 2000. We
plan to accomplish this, in part, by recruiting from the most effective of our
99 independent representatives. By the end of 2001, we plan to have a sales
force equally divided between direct sales people and independent agents. We do
not expect an increase in our selling expenses as a result of our planned
increase in sales professionals as the related salaries will be offset by
decreased sales commissions to commission-based independent agents.

Depreciation and amortization expense. Depreciation and amortization
expense includes depreciation on switching equipment as well as general property
and equipment. This expense includes:

- depreciation of network and operations equipment;

- depreciation of computer hardware and information systems; and

- amortization and depreciation of building, property and equipment under
capital leases.

We expect depreciation and amortization expense to increase significantly
as we increase capital expenditures in our expansion efforts beginning with our
newly entered into capital lease obligations related to our DSL equipment.

27
<PAGE> 31

Stock-based compensation. During fiscal 1997, we granted options to an
employee to purchase 30,000 shares of common stock at a nominal exercise price.
Such grant resulted in non-cash employee compensation expense which has been
recorded to account for the difference, on the date of the grant, between the
fair market value and the exercise price of stock options granted to the
employee. The resulting employee compensation of $840,000 was recognized in the
combined statement of operations in 1997 as such options vested immediately.

Income taxes. From its inception in May 1995 until the contribution of all
of the ownership interests in Eastern Computer Services, L.L.C., or Eastern, by
its members to us in March 2000, Eastern operated as a limited liability company
which was taxed as a partnership for federal and state tax purposes.
Accordingly, the earnings of Eastern were included in the taxable income of the
members of Eastern for federal and state income tax purposes. In connection with
this offering and due to the contribution, Eastern is now taxed as a C
Corporation. As a result, we will record future tax expense and benefits using
the asset and liability method pursuant to the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Income
tax expense recorded in the historical combined financial statements principally
reflects income taxes currently payable to federal and state taxing authorities
based on the results of the operations of Cooperative Communications, Inc., and
its subsidiaries, or Cooperative, during the respective periods. No income tax
benefit has been provided on the losses realized by Cooperative as we believe it
is more likely than not that Cooperative will not realize such benefits.

Our pro-forma effective tax rate for fiscal 1999 and the nine month period
ended February 29, 2000, assuming Eastern was taxed as a C corporation for the
respective periods, would have been different from the combined federal and
state statutory tax rate of approximately 40% due to state operating loss
carryback limitations and since we believe it is more likely than not that
deferred tax benefits will not be realized. The effect of taxes on our results
of operations is not discussed below because the historic taxation of our
operations does not provide a meaningful comparison with respect to periods
following the contribution of Eastern to us.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated certain financial
data as a percentage of revenue:

<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
---------------------------------------------------------------------------------
NINE MONTH
PERIODS ENDED
YEAR ENDED MAY 31, ---------------------------
--------------------------------------------------- FEBRUARY 28, FEBRUARY 29,
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ------ ----- ------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue............................. 100% 100% 100% 100% 100% 100% 100%
----- ------ ------ ----- ------ ------ ------
Operating expenses:
Cost of revenue (excluding
depreciation and
amortization)................... 74.63 79.68 78.24 78.15 78.15 78.95 81.80
Selling, general and
administrative expenses......... 22.82 23.13 20.74 19.59 20.25 19.99 20.19
Depreciation and amortization..... 0.37 0.95 1.16 1.22 1.92 1.84 2.74
Stock based compensation.......... -- -- 2.92 -- -- -- --
----- ------ ------ ----- ------ ------ ------
Total operating expenses........ 97.82 103.76 103.06 98.96 100.32 100.78 104.73
----- ------ ------ ----- ------ ------ ------
Income (loss) from operations... 2.18 (3.76) (3.06) 1.04 (0.32) (0.78) (4.73)
Other income (expense), net......... (0.20) (0.38) (0.21) 0.25 0.27 .20 (1.42)
----- ------ ------ ----- ------ ------ ------
Income (loss) before income tax
expense (benefit)................. 1.98 (4.14) (3.27) 1.29 (0.05) (0.58) (6.15)
Income tax expense (benefit)...... 0.80 (1.05) 0.45 0.52 0.24 0.32 --
----- ------ ------ ----- ------ ------ ------
Net income (loss)............... 1.18 (3.09) (3.72) 0.77 (0.29) (0.90) (6.15)
===== ====== ====== ===== ====== ====== ======
</TABLE>

28
<PAGE> 32

Nine Months Ended February 29, 2000 Compared to Nine Months Ended February 28,
1999

Revenue. Our revenue for the nine month period ended February 29, 2000 was
$29.4 million, as compared to $30.2 million in the nine month period ended
February 28, 1999, a decrease of $793,000, or 2.6%. This decrease resulted
primarily from a decrease in usage charges, offset in part by an increase in
monthly recurring charges. Competitive pricing pressure continued to lower the
average price we charged for calling minutes. In the nine month period ended
February 29, 2000, our average price per minute of domestic retail traffic
decreased approximately 11.1% as compared to the 1999 period. We expect that our
pricing for the foreseeable future will continue to be subject to competitive
pricing pressure. During the past several years, market prices for many
telecommunications services have been declining, a trend we believe will likely
continue.

Costs of revenue. Our costs of revenue for the nine month period ended
February 29, 2000 increased $211,000, or 0.9%, to $24.1 million from $23.9
million for the nine month period ended February 28, 1999. This increase was
primarily due to increased costs for line charges and access charges and, to a
lesser extent, increased costs associated with purchasing additional Centrex
lines at tariff prices after we exceeded our contractual limit. As a percentage
of revenue, costs of revenue increased from 79.0% in the 1999 period to 81.8% in
the 2000 period primarily as a result of the foregoing cost increases and
reductions in revenue.

Selling, general and administrative expenses. Our selling, general and
administrative expenses for the nine month period ended February 29, 2000
decreased $99,000, or 1.7%, to $5.9 million from $6.0 million for the nine month
period ended February 28, 1999. This decrease was primarily due to a reduction
of commission expenses of $178,000 due to lower sales and a change in the mix of
commissionable sales, a reduction of $140,000 due to the realignment of our
direct sales force which we began in July 1999, and the termination of one of
our telemarketing programs. This decrease was also due to a reduction of rent
expense of $102,000 associated with the capitalization of our lease on the
Belleville, New Jersey facility in December 1998 and a reduction in bad debt
expense of $175,000. Offsetting these changes was an increase of $229,000 for
salaries for administrative and technical personnel related to our expansion and
an increase of $147,000 in professional fees. Selling, general and
administrative expenses as a percentage of revenue represented 20.2% and 20.0%
for the nine month periods ended February 29, 2000 and February 28, 1999,
respectively. Salaries and related employee expenses were the largest components
of selling, general and administrative expenses for the nine month periods ended
February 29, 2000 and February 28, 1999.

Depreciation and amortization expense. Our depreciation and amortization
expense for the nine month period ended February 29, 2000 increased $252,000, or
45.4%, to $807,000 from $555,000 for the nine month period ended February 28,
1999. This increase was primarily comprised of $207,000 related to the
acquisition of equipment, primarily under capital leases, including our Class
4/5 switch in August 1999, and, to a lesser extent, $45,000 related to the
capitalization of the lease on our Belleville, New Jersey facility.

Interest income (expense). Our interest income for the nine month period
ended February 29, 2000 decreased $32,000, or 11.4%, to $248,000 from $280,000
for the nine month period ended February 28, 1999. This decrease was primarily
due to increased available cash in the fiscal 1999 period because of payments we
withheld from a major supplier pending settlement of a dispute. Our interest
expense for the nine month period ended February 29, 2000 increased $439,000, or
184.5%, to $677,000 from $238,000 for the nine month period ended February 28,
1999. This increase was due to interest of $301,000 associated with the
settlement of this dispute and $138,000 related to additional acquisitions of
property and equipment under capital leases.

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

Revenue. Our revenue for the year ended May 31, 1999 was $40.6 million, as
compared to $37.2 million in the year ended May 31, 1998, an increase of $3.4
million, or 9.1%. This increase was primarily due to an increase in usage
charges of $3.8 million, an increase in monthly recurring charges of $1.4
million and an increase in toll free charges of $588,000, offset in part by a
decrease in sales of long

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distance telecommunications services of $2.4 million. The number of calling
minutes increased 8.0% as a result of additional customers and additional
calling minutes sold. However, due to competitive pressures, our average price
per minute of domestic retail traffic decreased approximately 10.9% in fiscal
1999 as compared to fiscal 1998.

Costs of revenue. Our costs of revenue for the year ended May 31, 1999
increased $2.7 million, or 9.3%, to $31.7 million from $29.1 million in the year
ended May 31, 1998. Such increase was primarily due to an increase in transport
costs and an increase local service costs associated with higher calling
minutes. As a percentage of revenue, costs of revenue remained constant at 78.2%
in fiscal 1999 and fiscal 1998.

Selling, general and administrative expenses. Our selling, general and
administrative expenses for the year ended May 31, 1999 increased $936,000, or
12.8%, to $8.2 million from $7.3 million in the year ended May 31, 1998. Such
increase was primarily due to approximately $1.1 million in higher salaries as a
result of our expanding business and the hiring of several key employees from
Westinghouse Communications in connection with our DSL roll-out and, to a lesser
extent, increases in bad debt expense of $148,000 and travel and meeting
expenses of $102,000. These increases were partially offset by a decrease of
$102,000 in building rent associated with the capitalization of the lease on our
Belleville, New Jersey facility and a decrease of $138,000 in professional fees.
Selling, general and administrative expenses as a percentage of revenue
represented 20.3% and 19.6% in fiscal 1999 and fiscal 1998, respectively.
Salaries and related employee expenses were the largest components of selling,
general and administrative expenses in fiscal 1999 and fiscal 1998. DSL research
and roll-out expenses represented $490,000, or 6.0%, of selling, general and
administrative expenses in fiscal 1999. DSL-related expenses were minimal in
fiscal 1998.

Depreciation and amortization expense. Our depreciation and amortization
expense for the year ended May 31, 1999 increased $325,000, or 71.4%, to
$780,000 from $455,000 in the year ended May 31, 1998. This increase was
comprised of $122,000 related to the acquisition of equipment acquired directly
and under capital leases in the second half of fiscal 1998, as well as
additional equipment in 1999 and $45,000 associated with the capitalization of
the lease on our Belleville, New Jersey facility. This increase also reflected
an amortization charge of $158,000 for a customer list acquired in May 1998.

Interest income (expense). Our interest income for the year ended May 31,
1999 increased $148,000, or 64.3%, to $378,000 from $230,000 in the year ended
May 31, 1998. This increase was due primarily to interest earned on funds we
withheld from a major supplier in connection with a dispute. Our interest
expense for the year ended May 31, 1999 increased $166,000, or 109.2%, to
$318,000 from $152,000 in the year ended May 31, 1998. This increase was
primarily due to additional acquisitions of property and equipment under capital
leases.

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

Revenue. Our revenue for the year ended May 31, 1998 was $37.2 million, as
compared to $28.7 million in the year ended May 31, 1997, an increase of $8.5
million, or 29.6%. This increase was due to a $3.7 million increase in usage
charges, an increase in long distance telecommunications services of $1.8
million, an increase in toll free charges of $1.3 million, a $876,000 increase
in monthly recurring charges and a $823,000 increase in other services,
including calling card fees. The number of calling minutes increased 22% as a
result of additional customers and additional calling minutes sold. Our average
price for a minute of domestic retail traffic decreased approximately 12.5% in
fiscal 1998 due to competitive pressures.

Costs of revenue. Our costs of revenue for the year ended May 31, 1998
increased $6.6 million, or 29.3%, to $29.1 million from $22.5 million in the
year ended May 31, 1997. This increase was primarily due to an increase in
transport costs and local service costs associated with higher calling minutes.
As a percentage of revenue, costs of revenue remained constant at 78.2% in
fiscal 1998 and fiscal 1997.

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Selling, general and administrative expenses. Our selling, general and
administrative expenses for the year ended May 31, 1998 increased $1.3 million,
or 21.7%, to $7.3 million from $6.0 million in the year ended May 31, 1997. This
increase was primarily comprised of bad debt expense of $321,000 associated with
higher levels of sales and higher commissions of $312,000 . In addition, such
increase was due to increases in salaries as a result of expanding our business
and hiring additional telemarketing personnel of $357,000, professional fees of
$125,000 and promotional costs of $50,000. Selling, general and administrative
expenses as a percentage of revenue represented 19.6% and 20.7% in fiscal 1998
and fiscal 1997, respectively. Salaries and related employment expenses were the
largest components of selling, general and administrative expenses in fiscal
1998 and fiscal 1997.

Depreciation and amortization expense. Our depreciation and amortization
expense for the year ended May 31, 1998 increased $122,000, or 36.6%, to
$455,000 from $333,000 in the year ended May 31, 1997. This increase was due
primarily to the acquisition of additional equipment in the second half of
fiscal 1997 and fiscal 1998.

Interest income (expense). Our interest income for the year ended May 31,
1998 increased $162,000, or 238.2%, to $230,000 from $68,000 in the year ended
May 31, 1997. This increase was primarily due to interest earned on funds we
withheld from a major supplier in connection with a dispute. Our interest
expense for the year ended May 31, 1998 increased $12,000, or 8.6%, to $152,000
from $140,000 in the year ended May 31, 1998. Such increase was due primarily to
acquisitions of equipment under capital leases.

LIQUIDITY AND CAPITAL RESOURCES

Historically, we have financed our operations through operating cash flow
supplemented by funds from equipment financing. Cash provided by operating
activities was $8.3 million and $692,000 for the years ended May 31, 1998 and
1999. Cash used in operating activities was $2.9 million for the nine month
period ended February 29, 2000. These decreases in cash from operating
activities resulted primarily from the payment of amounts owed to a major
supplier and a decrease in net income, offset in part by changes in assets and
liabilities, principally trade accounts receivable.

Our working capital was $6.4 million and $470,000 as of May 31, 1998 and
1999. Working capital as of May 31, 1999 included $7.2 million in cash and cash
equivalents. As of February 29, 2000, we had negative working capital of $2.6
million, which included $3.7 million in cash and cash equivalents.

Net cash used in investing activities was $610,000, $106,000 and $175,000
for the years ended May 31, 1998 and 1999 and the nine month period ended
February 29, 2000. Cash used in investing activities during these periods
principally represents the purchase of computer equipment for use by office
personnel and a customer list in 1998.

Net cash used in financing activities was $1.1 million, $2.0 million and
$472,000 for the years ended May 31, 1998 and 1999 and the nine month period
ended February 29, 2000. In the nine month period ended February 29, 2000, cash
used in financing activities was primarily for payments under capital leases and
expenses related to this offering. In fiscal 1998, cash used in financing
activities was primarily for payments under capital leases and distributions to
members. In fiscal 1999, cash used in financing activities was primarily for
payments under capital leases, distributions to members and a loan to
stockholders. In the three years ended May 31, 1999, Eastern made total
aggregate distributions to its members of $1.6 million. With the conversion of
Eastern to a C Corporation for tax purposes, we will not be obligated to make
such member distributions.

In June 1998, we informally settled an ongoing dispute with one of our
major suppliers. The settlement was formalized by written agreement in June
1999. Under this settlement, we agreed to pay a total of $10.5 million as
follows: approximately $1.0 million was paid in June 1998, $3.0 million was paid
in June 1999 and $181,000 per month is payable for 36 months thereafter. The
settlement did not have a significant impact on our results of operations as the
settlement approximated the net amount of the

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supplier's invoices that we accrued. We expect to be able to satisfy the future
obligations associated with the settlement through cash provided by operations
or borrowings under credit facilities.

We have a credit facility with a bank that allows us to borrow up to $1.5
million. This credit facility is subject to periodic renewal and expires on
November 2, 2000. Amounts outstanding under this facility bear interest at the
bank's prime lending rate which was 9.0% per annum as of March 31, 2000. This
loan is secured by our trade accounts receivable. No amounts were outstanding
under this facility as of April 30, 2000. We intend to renew this credit
facility upon its expiration. We have not historically relied on borrowings
under credit facilities to finance our operations. If cash from operations is
not sufficient to meet our financing requirements, we will pursue additional
bank credit facilities to finance our operations.

We expect to lease additional office space in New Jersey in the next six
months to accommodate the growth of our administrative staff and sales and
marketing personnel. Recently, we entered into equipment leases and obtained
financing for installation and maintenance of the equipment relating to our DSL
roll-out in the amount of $13 million payable over five years. These leases
contain repayment terms that increase in amount over the five year period
providing for up-front liquidity.

We believe that our existing available cash, the proceeds from this
offering, credit facilities and the cash flow expected to be generated from
operations will be adequate to satisfy our current and planned operations for at
least the next 12 months. No assurance can be given, however, that this will be
the case. Our proceeds from this offering will be approximately $45.5 million
after deducting the underwriting discounts and commissions and estimated
offering expenses payable by us. Obtaining the proceeds from this offering is
critical to our spending plans over the next 12 months. Depending upon our rate
of growth and profitability, particularly if we pursue any significant
acquisitions, we may require additional equity or debt financing to meet our
working capital requirements or capital equipment needs. Over the next 12
months, we intend to make capital expenditures of approximately $22 million in
connection with the roll-out of our DSL services and our expansion into new
markets. We expect to fund these expenditures through the net proceeds of this
offering, existing resources, internally generated funds, and equity and debt
financings. If we are unable to raise sufficient funds, we may have to delay or
abandon some of our expenditures or plans for future expansion. There can be no
assurance that additional financing will be available when required or, if
available, will be on terms satisfactory to us. Our failure to raise additional
financing, if needed, could impair our ability to achieve profitability or
positive cash flow, which could have a material adverse effect on our
operations.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts and for hedging
activities. SFAS No. 133 (as amended by SFAS No. 137) is effective for all of
our fiscal quarters beginning June 1, 2001. This statement is not expected to
affect us as we currently do not have derivative instruments or engage in
hedging activities.

In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position, or SOP, 98-5, "Reporting on the Costs of Start-Up
Activities," which requires the costs of start-up activities to be expensed as
incurred. SOP 98-5 is effective for us beginning in fiscal 2000. We do not
believe that adoption of this SOP will have a material effect on our financial
statements as start-up costs have historically been expensed as incurred.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have limited exposure to financial market risks, including changes in
interest rates. At March 31, 2000, all of our available excess funds are cash or
cash equivalents whose value is not subject to changes in interest rates. We
currently hold no derivative instruments and do not earn foreign-source income.
We expect to invest our cash only in debt obligations issued by the United
States government or its agencies with maturities of less than one year.
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YEAR 2000 COMPUTER ISSUES

We did not experience any significant computer or systems problems relating
to the Year 2000. Upon review of our internal and external systems during 1999,
we determined that we did not have any material exposure to such computer
problems and that the software and systems required to operate our business and
provide our services were Year 2000 compliant. As a result, we did not incur,
and do not expect to incur, any material expenditures relating to Year 2000
systems remediation.

We are not aware of any material problems resulting from Year 2000 issues
associated with products and services of third party providers. We will continue
to monitor our mission critical computer applications and those of our suppliers
and vendors throughout the Year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.

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BUSINESS

OUR COMPANY

We provide integrated telecommunications services, including local and long
distance service and our recently launched DSL service. Our customer base
consists of over 7,500 small and medium-sized businesses. The majority of our
customers are located in New Jersey, and we plan to expand our services to
Pennsylvania, New York, Massachusetts and portions of Connecticut. We began
reselling long distance services in 1990 and providing local service in 1993. To
capitalize upon the growing need for high-speed data connectivity, we recently
began offering our QuikSpeed DSL service. We believe the roll-out of our DSL
service will allow us to fulfill the voice, data, Internet and e-commerce needs
of our existing customer base of voice-only customers all on a single bill.

Our DSL service offers high-speed data, voice, Internet and video
connectivity. We began offering QuikSpeed on a limited basis in September 1999
and broadly introduced the service in April 2000. As of April 30, 2000, we had
243 orders for DSL service, 109 of which are operational.

- our ability to offer one-stop services for voice, including local and
long distance, and data, all on a single bill;

- our ten years of focusing on customer service to small and medium-sized
businesses, as evidenced by our low customer turnover or churn rate
which has averaged 4.9% over the last three years;

- our knowledge of our geographic market, including our long-term
relationship with our customers;

- our ability to offer virtual private networks for voice and data
transmission;

- our QuikSpeed DSL service permits voice over DSL, creating a lower cost
solution to our customers, and does not require our customers to have
their own ISP;

- our interconnection agreements with Bell Atlantic for New Jersey and
Pennsylvania.

INDUSTRY BACKGROUND

Market Trends

According to data published by the FCC, the United States local and long
distance telecommunications market had revenue of approximately $210 billion in
1998, $65.6 billion of which were generated within the area served by Bell
Atlantic. The Bell Atlantic service area consists of portions of Connecticut,
New York, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont, New
Jersey, Pennsylvania, Virginia, West Virginia, Maryland, Delaware and
Washington, D.C. In addition, industry sources have projected the United States
small business market for DSL will reach $2.3 billion by 2003. The small
business market is defined as businesses with fewer than 100 employees.

We believe that a number of important trends are reshaping the United
States telecommunications industry, creating substantial market opportunity.
These trends include:

- rapid opening of telecommunications networks to competition;

- increasing demand, particularly from small and medium-sized businesses,
for

- high-speed data services, such as DSL;

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- Internet access and transport;

- personal computer-based applications;

- telecommuting solutions;

- integrated and customized solutions; and

- emergence of electronic commerce in the marketplace.

By marketing to existing customers and bundling service offerings,
competitive local telephone companies have begun to exploit a variety of
opportunities, including high-speed Internet access and transport, DSL,
local-area and wide-area network connectivity, managed network services, virtual
private networks, remote access and electronic commerce services. We believe
that new entrants have an excellent opportunity to establish themselves as
leading providers of such value-added services.

Small and Medium-Sized Businesses

Small and medium-sized businesses are increasingly using high-speed
telecommunications connections to access the Internet in order to compete more
effectively with larger organizations. High-speed data services and Internet
connectivity are becoming increasingly important due to the dramatic increase in
Internet usage. The popularity of the Internet with consumers has driven the
rapid growth in exploiting the Internet as a commercial medium. Businesses have
established websites, corporate intranets and extranets and implemented
electronic commerce applications to expand their customer reach and improve
their telecommunications efficiency. International Data Corporation stated that
as of December 31, 1999, 52.3% of small businesses have Internet access. To
remain competitive, we believe companies will require high-speed connections to:

- maintain Internet websites;

- access critical information and business applications; and

- communicate more efficiently with employees, customers and suppliers.

We believe DSL service is particularly attractive to small and medium-sized
businesses who seek to obtain these high-speed data services at affordable
prices. International Data Corporation forecasts that, in the United States,
small business DSL lines will increase from 60,000 in 1999 to 2.5 million in
2003, representing 20% of all DSL lines. DSL service provides a lower cost
alternative to T-1 lines, which are typically used by larger businesses. In
addition, because small and medium-sized businesses typically have no
telecommunications manager, they have a limited ability to navigate through the
various choices of local and long distance services, data services, Internet
access, paging and other customized services. We believe small and medium-sized
business customers prefer to use one telecommunications service provider that
will provide them with a scalable package of services on a single bill.

OUR GROWTH STRATEGY

Our objective is to provide integrated telecommunications services,
including voice, data and Internet to small and medium-sized businesses in New
Jersey, Pennsylvania, New York, Massachusetts and portions of Connecticut. By
offering a comprehensive package of high-speed telecommunications services,
together with traditional local and long distance services, we believe that we
can accelerate our ability to establish new customer accounts and cross-sell our
existing telecommunications services. Our strategy to meet this objective is to:

Implement a rapid DSL roll-out. We intend to market DSL services to our
existing customer base to build a significant customer base for our QuikSpeed
DSL service of high-speed voice, data, Internet and video connectivity. We seek
to capitalize on the growing demand for high-speed digital telecommunications by
small and medium-sized businesses who want lower cost alternatives to T-1 lines.
In April 2000, we introduced our QuikSpeed DSL service on a broad basis. As of
April 30, 2000, we had 243 orders for DSL service, 109 of which are operational.

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Offer our customers one-stop shopping. We believe that our ability to
provide one-stop shopping for a comprehensive package of telecommunications
services, all conveniently invoiced on a single bill, will enable us to better
meet the needs of our customers, penetrate our target markets and capture a
larger portion of our customers' total expenditures on telecommunications
services.

Maximize speed to market through our "smart-build" strategy. We believe
our "smart-build" strategy enables us to roll-out our complete suite of
telecommunications services and generate revenue more rapidly than if we first
constructed our own transmission lines. Under this strategy, we plan to:

- deploy our QuikSpeed DSL service using existing copper telephone lines;

- locate our equipment in or near the central office facilities of Bell
Atlantic as indicated by customer demand; and

- lease specific network assets from other carriers until growth justifies
acquiring those assets.

We believe that this flexible deployment strategy has the additional
advantage of reducing initial capital requirements in each market, allowing us
to focus our capital resources on equipping central offices where customer
demand for DSL services justifies such capital outlay. Once we install our DSL
equipment in a central office, our subsequent capital investments to expand
service from that location are directly related to the number of customers who
order our DSL service. This reduces our overall capital expenditures until
additional paying customers have ordered our service. Where we cannot install
equipment in a central office, we plan to install DSL equipment in nearby leased
facilities and connect such equipment to the central office.

We have worked with Bell Atlantic in connection with providing our services
since 1990. Although we have had disputes with Bell Atlantic in the ordinary
course of business from time to time, we believe our working relationship with
Bell Atlantic continues to be positive. We recently executed interconnection
agreements with Bell Atlantic which allow us to deploy equipment in multiple
Bell Atlantic central offices in New Jersey and Pennsylvania. The agreements
also include:

- access to network assets;

- the switching and routing of service;

- reciprocal payment of fees for the transport and termination of local
calls over our respective networks;

- network maintenance and management;

- number portability enabling customers to retain their telephone number
when changing carriers; and

- directory services, such as listing information and directory
assistance.

Focus on the small and medium-sized business market. We believe that small
and medium-sized businesses have significant and increasing needs for advanced
telecommunications services. Our strategy is to meet these needs by offering
customized solutions, integrated telecommunications services and our QuikSpeed
DSL services all on a single bill. Many of our target customers want customized
solutions but do not have the internal expertise to design, purchase and
maintain these kinds of systems and services themselves. We believe that these
target customers are not adequately served by traditional local telephone
companies who typically offer customized solutions only to large customers. We
believe that traditional local telephone companies have generally neglected to
target small and medium-sized businesses.

Build market share by focusing on direct sales. We intend to sell directly
to customers and provide them personalized customer care through a single point
of contact. We often act as a consultant to our small and medium-sized business
customers who typically do not have an in-house telecommunications manager. We
believe that employing a direct sales force with extensive local market and
telecommunications sales experience, rather than independent representatives who
tend to be less technologically proficient, enhances the likelihood of success.
We intend to expand our direct sales force by adding
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approximately 28 in-house sales professionals during 2000 to service our
existing customer base as well as to implement our QuikSpeed DSL deployment
plan. We believe that a larger direct sales force will enable us to learn
additional information from our customers about their needs and preferences and
help us to offer additional value-added services.

Provide Superior Customer Service. We believe that superior customer
service is critical to attracting and retaining customers. We continually seek
to enhance our service approach, which utilizes a trained team of customer sales
and service representatives to coordinate customer installation, billing and
service. Our experienced customer care representatives provide 24x7 customer
support. Our annual churn rate has averaged 4.9% over the last three years.

OUR NETWORK STRATEGY

Overview. We intend to pursue a "smart-build" network deployment strategy
that involves owning and operating our own switches while leasing transmission
lines on an incremental basis as customer demand dictates. Our strategy has been
to build a geographic concentration of customers before building, acquiring or
extending our network to serve those customers. Once this geographic
concentration exists and network economics justify deployment, we plan to expand
our switching transport capacity and migrate existing customers onto our
network.

We believe that expanding control over certain components of our network,
rather than relying solely on the telecommunications facilities of third
parties, will enable us to have more flexibility in meeting customer needs for
new services. We believe expansion of our network will allow us to generate
higher operating margins, obtain origination and termination fees from other
carriers and maintain greater control over our network operations and service
quality. Where expected market penetration does not economically justify the
deployment of our own network assets, we will continue to utilize the network
assets of other carriers. For customers outside of our target markets, we can
provide services through the resale of other carriers' services.

As of April 1, 2000, we had approximately 34,100 local access lines
providing local and long distance services and approximately 44,600 equal access
lines providing local toll and/or long distance services. Approximately 60% of
this traffic historically has originated and terminated on our network.

DSL Service. DSL technology has emerged as a commercially viable,
cost-effective means of providing high-speed data transmission using existing
copper telephone wires. DSL technology allows multiple users to simultaneously
transmit and receive voice and data over a single connection.

By using existing facilities, DSL avoids the considerable up-front fixed
costs necessary to deploy alternative high-speed digital telecommunications
technologies, such as fiber, cable, wireless and satellite networks. As a
result, a significant portion of the investment in a DSL network is incurred
only as customers order the service. In addition, we anticipate that continued
advances in DSL technologies and transmission speeds will further reduce the
cost of deploying DSL services.

To roll-out our QuikSpeed DSL service, we intend to install DSL equipment
in or near Bell Atlantic central offices where we expect customer demand to be
greatest. We estimate that it will cost between $285,000 to $310,000 to lease
space, purchase and install our equipment in each central office we enter. We
will also acquire DSL modems to lease to our customers so they may connect with
our network.

Integrated network architecture. We provide services to our customers over
a single integrated network that supports local, long distance and high-speed
data and Internet services. We believe that the integrated design of our local,
long distance and data networks significantly reduces our cost of providing a
bundled service offering. Our integrated network architecture includes customer
premise equipment, network assets provided by traditional local telephone
companies, equipment located in or near central offices, our switching platforms
and a high speed digital network.

Customer connections. To reach our customers, we lease simple copper
telephone lines, or, if customer traffic justifies, T-1 lines from the
traditional local telephone company. By utilizing these

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customer connections, we obtain access and termination revenue as if we owned
the copper telephone lines and are able to rapidly connect the customer directly
to our network. We are also able to avoid the cost and delay associated with
deploying our own fiber lines to our customers' premises. We are not burdened by
the operating and financing expenses associated with owning a fiber network.

Central office connections. Our voice service network currently interfaces
with 70 Bell Atlantic central offices in New Jersey. We recently entered into
interconnection agreements with Bell Atlantic which allow us to deploy equipment
in Bell Atlantic central offices in any local area in which we operate in New
Jersey and Pennsylvania. This will allow our customers to be directly connected
to our equipment at the central office. Within each central office where
customer demand is greatest, we plan to deploy DSL equipment to support our DSL
service offering. This approach is designed to be scalable in order to support
emerging applications as customer requirements dictate.

Where we do not have central office facilities, we will install DSL
equipment in nearby leased facilities which we will connect to the central
office. Where it is not economically feasible to lease such facilities, we
intend to resell DSL services of other providers.

DSL modems and on-site connections. We will purchase DSL modems and lease
them to our customers as part of the DSL service contract. We will configure the
DSL modem and arrange for the installation of the modem and on-site wiring
needed to connect the modem to the leased copper telephone line. We plan to
contract with independent field service organizations to perform these services,
in addition to using a small internal staff.

Switching platforms. In 1995, we began operating our first switch, a
Siemens/Stromberg Carlson DCO (CS) Class 4 switch. In November 1999, we began
operating a Siemens EWSD Class 4/5 switch which is capable of handling DSL
traffic. These switches connect telephone calls for our customers. We are in the
process of migrating traffic from the Class 4 switch to the Class 4/5 switch.
After this migration, we plan to discontinue use of the Class 4 switch. We also
lease DS-3s which integrate hundreds of T-1's from Bell Atlantic Centrex
dedicated customers into our switching system. All of our local and long
distance switched services use Signaling System 7 to reduce connect time delays.

Transmission capacity. We currently lease transmission lines from Bell
Atlantic, Sprint, Qwest, RSL Communications, CNE Communications (formerly
Fonorola) and Cable & Wireless. We generally seek to lease fiber transmission
lines in each of our current and target markets and work with carriers to ensure
connections to synchronous optical networks wherever possible which allows the
transmission of data from multiple customers over the same fiber transmission
lines. This increases network transmission capacity and improves service
restoration following a fiber optic cable failure on the network.

Interconnection. We have interconnection agreements with Bell Atlantic
covering New Jersey and Pennsylvania. Our interconnection agreements are subject
to approval of the relevant state public utility commission. Under the terms of
the Telecommunications Act of 1996, each traditional local telephone company
such as Bell Atlantic is required to negotiate interconnection agreements with
competitive local telephone companies. Where an interconnection agreement cannot
be reached on terms and conditions satisfactory to us, we may pursue arbitration
of any disputes before the state public utility commissions. In other states,
central office connections are available to us through tariffs.

Information systems. Our current information system supports the following
applications:

- a customer billing retrieval system supporting six years of prior
invoicing;

- a tracking system covering all customer records, order entry, trouble
tickets and sales information;

- call detail record rating and billing operations;

- a complete scanning and retrieval system;

- Internet and e-mail connectivity; and

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- an on-line Internet retrieval system supporting both sales professionals
and customer billing and reporting.

We plan to upgrade our information systems to satisfy changing customer
requirements.

Orders are received through the United States mail, fax, or the Internet
and scanned electronically into various databases. Credit is checked on-line
with various credit reporting agencies and orders are processed with multiple
carriers. The individual process varies from electronic data entry to
handwritten orders. Call detail from our two switches and underlying carriers
are rated on a daily basis. We provide consolidated billing with our proprietary
billing system. Billing reports and invoicing are produced on a single cycle at
the end of the month.

SERVICES

We have tailored our voice, data and Internet service offerings to meet the
specific needs of small and medium-sized businesses. Through our direct sales
force, we are able to further customize service offerings to meet our customers'
needs.

Local services. We provide local telephone services including local toll
service, via Centrex. Centrex is a business voice service offered by a local
telephone company from a local central office. Centrex offers features similar
to those of a private branch exchange, a telephone routing system located at a
customer's premises. Through Centrex service, small and medium-sized businesses
are able to avoid the costs of locating expensive equipment at their own
premises. Some of the Centrex features include intercom, call forwarding, call
transfer, toll restriction, least cost routing and call hold.

Long distance services. We provide domestic and international long
distance services. Long distance calls which do not terminate on our network are
passed to long distance carriers which route the remaining portion of the call.
As our customers grow geographically, we can service their branch offices across
the United States by providing the long distance services of other carriers. Our
ability to integrate local and long distance services allows us to aggregate a
customer's local and long distance charges on a single, consolidated bill.

QuikSpeed DSL services. We broadly introduced DSL service in April 2000
under the name "QuikSpeed." We began offering QuikSpeed DSL service in September
1999 on a limited basis. As of April 30, 2000 we had 243 orders for QuikSpeed
service. Our QuikSpeed DSL service will permit voice as well as data
transmission. We believe that by combining voice and data transmissions over one
line, we will substantially lower our aggregate cost for providing DSL service.

We currently offer symmetric DSL which provides up to 1.54 megabits per
second of speed to and from the customer. The speed and effectiveness of the DSL
connection varies based on a number of factors, including the distance of the
customer from the central office and the condition of the copper line that
connects the customer to the central office. In order for DSL service to operate
at its maximum speed, the provider's DSL equipment must be located in or near a
traditional local telephone company's central office no more than 12,000 feet to
15,000 feet away from the customer's site.

Virtual private network services. Virtual private networks are generally
used to connect the separate locations of a single business beyond the local
calling area. These services include a dedicated, non-switchable link from one
or more customer-specified locations to other customer-specified locations. We
provide these services by leasing certain network facilities.

Switched digital services. Switched digital services provide the
capability to transmit voice, video or data. These services allow a customer to
transmit at full duplex, digital synchronous 56/64 kilobits per second or
higher.

Frame relay. Frame relay services are dedicated networks that do not
require the customer to lease dedicated transmission lines. Frame relay services
are designed for customers who serve single or multiple locations from one
originating location. These services can be used to facilitate multi-media
networking

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between high-speed devices such as work stations, super computers, routers and
bridges. We currently have nationwide availability.

Enhanced Internet services. We offer dedicated and dial-up high-speed
Internet access services. Dedicated access services are telecommunications lines
dedicated or reserved for use by particular customers. Our Internet services
also include e-mail, web hosting, website design and dial-up services for our
customers' employees.

Video DSL. When network demand is light, we intend to offer video DSL to
our customers to take advantage of excess capacity. This service allows
customers to access video data such as movies and video games over their
personal computers.

Value-Added services. We offer additional value-added services to
compliment our core local and long distance services, including:

- Audioconferencing. This service allows up to 1,000 toll callers and up
to 60 local callers to communicate at the same time.

- Audio 2000 and Directory Live. This service allows customized telephone
commercials and Internet advertising for our customers and also allows
them to establish a customer website.

- Calling Cards. These traditional calling cards allow the user to place
calls from anywhere in the United States or Canada. We offer features
such as conference calling, international origination, speed dialing and
messaging.

- Cellular Service. We provide outbound long distance and international
calling and equipment for cellular telephone service.

- Videoconferencing. We provide video and audio telecommunication between
two or more people via video compression devices.

- Integrated Billing On-Line. We provide our customers with a single bill
for all of their telecommunications services. These integrated billings,
which are also available on-line or on CD-ROM, permit our customers to
better analyze their telecommunications expenditures. Our billing
on-line service allows customers to access data in a secure environment
and manipulate the data within the bill in conducting their customized
analysis.

Unified messaging. We are currently testing a unified messaging service
which will enable customers to direct, retrieve, deliver, compile and manage
their voice telecommunications through a single telephone number.

Services under development. We are currently developing the following
service offerings:

- data-only asymmetric DSL, which we plan on deploying by the end of this
year, which will provide up to nine megabits per second; and

- application oriented services such as the ability to block telemarketing
calls.

SALES AND MARKETING

Sales. Currently, our sales and marketing efforts are directed through a
network of commission-based independent agents and a direct sales force of
professionals primarily focused on cultivating new accounts and expanding
existing accounts. As we expand our service offerings, we believe that a direct
sales force is more effective to capitalize on cross-selling opportunities.
Therefore, we intend to increase our direct sales force from nine to 35
professionals, by December 31, 2000. We plan to accomplish this, in part, by
recruiting from the most effective of our 99 independent representatives. By the
end of 2001, we plan to have a sales force equally divided between direct sales
people and independent agents. Unlike large businesses, our small to
medium-sized business customers typically have no in-house telecommunications
manager and generally can make decisions concerning telecommunications services
in a relatively short

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time frame. Our sales professionals work closely with the decision maker in such
businesses to analyze their telecommunications needs and provide solutions in a
short period of time.

All new sales representatives receive formal training to give them a
thorough knowledge of our services. We train our sales force with a
customer-focused program that promotes increased sales through both customer
attraction and customer retention.

We will continue to seek salespeople with strong sales backgrounds in our
existing and target markets, including salespeople from long distance companies,
telecommunications equipment manufacturers, network systems integrators and
traditional local telephone companies. We plan to continue to attract and retain
highly qualified salespeople by offering them an opportunity to work with an
experienced management team in an entrepreneurial environment.

We compensate all sales personnel with both a salary and a commission
structure based on signing new customers and retaining existing customers. We
believe that our compensation structure motivates each sales person to remain
actively involved with customers and participate in the customer support
process. We believe this approach increases customer retention and cross-selling
opportunities and reduces the costs of customer support.

Marketing. In our existing markets, we position ourselves as a high
quality alternative to the traditional local telephone company by offering a
complete package of customized voice, data and Internet services. This is
designed to allow us to capture the total telecommunications expenditures of any
single customer. Through our QuikSpeed DSL roll-out, we also plan to market to
new customers our other services. We intend to build our reputation and brand
identity by working closely with our customers to develop services tailored to
their needs and by implementing targeted advertising and promotional efforts,
such as print ads, cable advertising and direct mail. Marketing personnel
identify potential business customers by several methods, including customer
referral, market research and telemarketing.

CUSTOMERS

Our 7,500 small and medium-sized business customers for voice service
include regional banks, universities, healthcare providers, real estate
agencies, law firms, telemarketers and transportation companies. The majority of
our customers are located in New Jersey, and we plan to expand our services to
Pennsylvania, New York, Massachusetts and portions of Connecticut. We have
targeted potential large volume users of our services such as businesses who
have intranets and extranets or who make significant use of the Internet. Our
target customers are businesses with fewer than 100 employees with
telecommunications service costs ranging from $400 to $5,000 per month.

Our target customers, particularly for DSL services, include our existing
base of 7,500 small and medium-sized business customers as well as the
following:

- businesses currently using other high-speed data telecommunications
services;

- professional or service-based firms that have multiple ISP accounts and
phone lines;

- branch offices that require transmission of large files between
locations;

- businesses with a substantial amount of revenue from mail order or
Internet sales from customers outside their immediate geographic
territory; and

- businesses that use data-intensive applications, such as financial
services, technology, and publishing.

None of our customers accounted for more than 5% of our total revenue in
either fiscal 1999 or the first nine months of fiscal 2000. Our customer churn
rate has averaged 4.9% over the last three years.

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CUSTOMER SERVICE

We believe that superior customer service is critical to attracting and
retaining customers. We continually seek to enhance our service approach, which
utilizes a trained team of customer sales and service representatives to
coordinate customer installation, billing and service. Our information systems
are designed to gather and distribute customer information for use in all
aspects of our business, including order provisioning and monitoring, customer
care and billing.

We provide 24x7 customer support primarily through our Network Operations
Control Center located in Belleville, New Jersey. Experienced customer care
representatives answer all customer calls. Many of our customer care
representatives are cross-trained in sales, allowing customers to work with a
single representative.

The Network Operations Control Center is a single point of interface for
monitoring all of the networks and provisioning services and systems necessary
to operate the network. The control center is designed to accommodate our
anticipated growth. The control center is utilized for a variety of network
management and control functions, such as trouble resolution, trouble ticket
status and carrier interface. Trained technicians monitor our network 24 hours a
day, to ensure quality transmissions. We conduct monthly or quarterly meetings
with each of our telecommunications service providers to assess service levels,
order status, trouble ticket resolution and commitment levels.

Our customer support department currently receives approximately 320
support calls per day. We believe that our level of customer service will
provide us with a competitive advantage selling local and DSL services. As of
April 30, 2000, we employed 22 people in customer support provisioning. We
anticipate that we will continue to hire additional customer support personnel
as the size of our customer base increases.

COMPETITION

The telecommunications industry is highly competitive. We believe that the
principal competitive factors affecting our business will be pricing, network
reliability, broad service offerings, customer service and accurate billing. Our
ability to compete effectively will depend upon our continued ability to
maintain high quality, market driven services at prices generally equal to or
below those charged by our competitors. To maintain our competitive posture, we
believe that we must be in a position to reduce our prices in order to meet
reductions in rates, if any, by others. Any such reductions could adversely
affect us. Many of our current and potential competitors have financial,
personnel, and other resources, including brand name recognition, substantially
greater than ours as well as other competitive advantages over us.

Traditional Local Telephone Companies. In each of the markets we have
targeted, we will compete principally with Bell Atlantic, the traditional local
telephone company servicing New Jersey, New York, Pennsylvania, Massachusetts
and portions of Connecticut. Bell Atlantic is now able to offer long distance
services to its local telephone customers in New York. Bell Atlantic and the
other regional Bell operating companies are actively seeking removal of federal
regulatory restrictions that prevent them from entering the long distance market
in other states. Many experts expect the regional Bell operating companies to be
successful in entering the long distance market in other states within the next
two years. The regional Bell operating companies may expect to offset market
share losses in their local markets by capturing a significant percentage of the
long distance market.

The regional Bell operating companies and other local telephone companies
with whom we will compete in our target markets have the following competitive
advantages:

- long-standing relationships with their customers;

- substantially greater financial, technical and marketing resources;

- ability to subsidize competitive services with revenue from a variety of
businesses;

- long-standing relationships with regulatory authorities at the federal
and state levels; and

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- certain existing regulations that favor the traditional local telephone
company over us in certain respects.

Recent regulatory initiatives, which allow competitive local telephone
companies such as ourselves to interconnect with traditional local telephone
company facilities, provide us with increased business opportunities. Such
opportunities, however, have been, and likely will continue to be, accompanied
by increased pricing flexibility for and relaxation of regulatory oversight of
the traditional local telephone companies.

For example, the FCC recently adopted an order that provides for increased
priced flexibility for traditional local telephone companies and deregulation of
some access services. The order also provides a framework of increased pricing
flexibility of other services if a traditional local telephone company satisfies
certain criteria to show competition exists in specified geographic areas. After
meeting these requirements, traditional local telephone companies will be
allowed to offer discounts to large customers through contract arrangements. The
order also permits traditional local telephone companies to offer new access
services by filing tariffs without prior approval and dispensing with the
requirement that they provide cost supports for their pricing. The FCC also
issued a Notice of Proposed Rulemaking that would permit added pricing
flexibility for local telephone companies for additional services conditioned on
competitive criteria, and initiates an inquiry into whether competitive local
telephone companies' access rates should be regulated. Implementation of the
FCC's order could have a material adverse effect on us by making it more
difficult for us to compete against traditional local telephone companies.
However, as purchasers of access services, we may see increased competition for
those services which could lower prices we have to pay for such services.

Competitive Long Distance Telephone Companies/Competitive Local Telephone
Companies/Other Market Entrants. We also face, and expect to continue to face,
competition from other current and potential market entrants, including:

- long distance carriers seeking to enter, re-enter or expand entry into
the local exchange market such as AT&T, MCI Worldcom, and Sprint;

- other competitive local telephone companies;

- out-of-region traditional local telephone companies;

- resellers of local telephone services;

- cable television companies;

- electric utilities;

- microwave carriers;

- wireless telephone system operators; and

- private networks built by large end-users.

In addition, a continuing trend toward mergers, acquisitions and strategic
alliances in the telecommunications industry could also increase the level of
competition we face. Consolidation is also occurring within traditional local
telephone companies, such as the proposed plans for mergers between SBC and
Ameritech, and between Bell Atlantic and GTE. These types of consolidations and
alliances could put us at a further competitive disadvantage.

The Telecommunications Act of 1996 imposes certain regulatory requirements
on all local exchange carriers, including competitors such as ourselves, while
granting the FCC expanded authority to reduce the level of regulation applicable
to any or all telecommunications service providers. The manner in which these
provisions of the Telecommunications Act are implemented and enforced could have
a material adverse effect on our ability to successfully compete against
traditional local telephone companies and other telecommunications service
providers.

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The changes in the Telecommunications Act of 1996 radically altered the
market opportunity for traditional local telephone companies. Because many
existing competitive local telephone companies initially entered the market
providing dedicated access services in the pre-1996 era, they had to build a
fiber optic transmission facility before offering services. Since 1996, switches
were added by most competitive local telephone companies to take advantage of
the opening of the local market. With the Telecommunications Act of 1996
requiring competitive access to the traditional local telephone company
networks, competitive local telephone companies are now able to enter the market
more rapidly by installing switches and leasing fiber transmission capacity
until traffic volume justifies building their own facilities. New competitive
local telephone companies will not have to replicate existing facilities and can
be more opportunistic in designing and implementing networks.

Competition for Provision of Long Distance Services. The long distance
telecommunications industry has numerous entities competing for the same
customers and a high average churn rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. We believe that business customers have a lower
average churn rate. Prices in the long distance market have declined
significantly in recent years and are expected to continue to decline.

Data/Internet Service Providers. The competition for ISP customers in the
telecommunications industry is high and we expect that competition will
intensify. In addition, alternative competing technologies regarding this
service may emerge. Our competitors in this market include other
telecommunications companies, including integrated on-line services providers
with their own telecommunications networks. Many of these competitors have
greater financial, technological, marketing, personnel and other resources than
ours.

Cable Modem Service Providers. Cable modem service providers, such as
Excite@Home and its cable partners, are offering or preparing to offer
high-speed Internet access over cable networks to consumers and businesses.
Where deployed, these networks provide high-speed local access services, in some
cases at speeds higher than DSL service.

Wireless and Satellite Data Service Providers. Several new companies,
including Advanced Radio Telecom, Teligent and WinStar Communications, are
emerging as wireless data service providers. In addition, other companies,
including Motorola Satellite Systems and Hughes Communications, are emerging as
satellite-based data service providers. These companies use a variety of new and
emerging technologies to provide high-speed data services.

Competition from International Telecommunications Providers. Under the
recent World Trade Organization agreement on basic telecommunications services,
the United States and 68 other members of the World Trade Organization committed
themselves to opening their respective telecommunications markets to foreign
ownership and/or to adopting regulatory measures to protect competitors against
anticompetitive behavior by dominant telecommunications companies, effective in
some cases as early as January 1998. Although we believe that the World Trade
Organization agreement could provide us with significant opportunities to
compete in markets that were not previously accessible and to provide more
reliable services at lower costs than we could have provided prior to
implementation of the World Trade Organization agreement, it could also provide
similar opportunities to our competitors. There can be no assurance that the
pro-competitive effects of the World Trade Organization agreement will not have
a material adverse effect on our business prospects, financial condition and
results of operations or that members of the World Trade Organization will
implement the terms of the World Trade Organization agreement.

REGULATION

Our telecommunications and information services business is subject to
varying degrees of federal, state and local regulation.

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FEDERAL REGULATION

Overview. The FCC regulates interstate and international
telecommunications services. The FCC imposes extensive regulation on common
carriers such as traditional local telephone companies that have some degree of
market power. The FCC imposes less regulation on companies without market power,
such as us. The FCC permits nondominant companies to provide domestic interstate
services without prior authorization; but it requires nondominant companies to
obtain an authorization to operate facilities, or to resell telecommunications
services, between the United States and international points. We have obtained
FCC authorization to provide international services and have filed tariffs for
our interstate and international long distance services with the FCC. We are
also required periodically to pay federal regulatory fees and to file reports
regarding our international traffic and revenue. Failure to comply with these
requirements could subject us to fines and penalties. We are in compliance with
most of these requirements and have undertaken to achieve full compliance.

Telecommunications Act of 1996 and Implementing Regulations. We are also a
competitive local telephone company competing with traditional local telephone
companies such as the regional Bell operating companies subject to the
provisions of the Telecommunications Act of 1996. The Telecommunications Act is
intended to increase competition by permitting any entity, including cable
television companies and utilities, to enter any telecommunications market,
subject to reasonable state regulation of safety, quality and consumer
protection. Because implementation of the Telecommunications Act is subject to
numerous federal and state policy rulemaking proceedings and judicial review,
there is still uncertainty as to what impact it will have on us.

The Telecommunications Act of 1996 opens the local services market by
requiring traditional local telephone companies to permit interconnection to
their networks and establishing other obligations of traditional local telephone
companies with respect to:

- Reciprocal Compensation. Requires all traditional local telephone
companies and competitive local telephone companies to complete calls
originated by competing local telephone companies under arrangements and
at prices based on a reasonable approximation of incremental cost or
through mutual exchange of calls without explicit payment.

- Resale. Requires all traditional local telephone companies and
competitive local telephone companies to permit resale of their
telecommunications services without unreasonable restrictions or
conditions. In addition, traditional local telephone companies are
required to offer wholesale versions of all retail services to other
local telephone companies for resale at discounted rates, based on the
costs avoided by traditional local telephone companies in the wholesale
offering.

- Interconnection. Requires all traditional local telephone companies and
competitive local telephone companies to permit their competitors to
interconnect with their facilities. Requires all traditional local
telephone companies to permit interconnection at any technically feasible
point within their networks, on nondiscriminatory terms and at prices
based on cost (which may include a reasonable profit). At the option of
the company seeking interconnection, the requesting company must be
allowed to install equipment in a traditional local telephone company's
premises, except where the traditional local telephone company can
demonstrate space limitations or other technical impediments to such
installation.

- Access to Individual Network Elements. Requires traditional local
telephone companies to provide competing companies with access to
individual components of their local telephone networks so that the
competing companies can obtain some, but not necessarily all, of those
components to provide service in competition with the traditional local
telephone companies. This requirement is designed to provide flexibility
for competitive telephone companies like us to purchase only the
equipment we need to deliver our services.

- Number Portability. Requires traditional local telephone companies to
allow a customer to retain its existing telephone number if it switches
from a traditional local telephone company to a competing local telephone
company.

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- Dialing Parity. This requirement is designed to ensure that customers of
one local telephone company will not detect a quality difference in
dialing telephone numbers or accessing operators or emergency services of
another local telephone company.

Access to Rights-of-Way. Requires all traditional local telephone
companies and competitive local telephone companies to permit competing carriers
access to poles, ducts, conduits and rights-of-way at regulated prices.

Traditional local telephone companies are required to negotiate in good
faith with competing local telephone companies requesting any or all of the
above arrangements. If the negotiating companies cannot reach agreement within a
prescribed time, either company may request binding arbitration of the disputed
issues by the state regulatory commission. We recently executed interconnection
agreements with Bell Atlantic for New Jersey and Pennsylvania.

In 1996, the FCC established the rules implementing the above requirements
and provided guidelines for review of interconnection agreements by state public
utility commissions. The specific terms and scope of the interconnection rules
has been shaped by subsequent litigation in the federal courts, including the
Supreme Court. The FCC recently released an order largely retaining its list of
individual network elements that traditional local telephone companies must
lease to competing telephone companies such as us. The FCC, however, eliminated
the requirement to provide access to switching in certain dense urban areas,
operator services, and directory assistance.

These federal court decisions continue to cause uncertainty about the rules
governing the pricing, terms and conditions of interconnection agreements.
Although state public utilities commissions have continued to conduct
arbitrations, and to implement and enforce interconnection agreements during the
pendency of appellate court proceedings, the Supreme Court's recent ruling and
further proceedings on remand may affect the scope of state commissions'
authority to conduct such proceedings or to implement or enforce interconnection
agreements. Given the general uncertainty surrounding the effect of these
decisions, we may not be able to continue to obtain or enforce interconnection
terms that are acceptable to us or that are consistent with our business plans.

Regional Bell Operating Companies' Authority to Offer In-Region Long
Distance Service. The Telecommunications Act of 1996 permits a regional Bell
operating company to enter the long distance market in its traditional service
area if it obtains FCC approval based on several procedural and substantive
requirements, including:

- the regional Bell operating company has entered into interconnection
agreements;

- under some circumstances, the regional Bell operating company has offered
to enter into such agreements in those states in which it seeks long
distance relief;

- the interconnection agreements satisfy a 14-point checklist of
competitive requirements; and

- the FCC is satisfied that the regional Bell operating company's entry
into long distance markets is in the public interest.

The Telecommunications Act of 1996, immediately upon its enactment, permitted
the regional Bell operating companies to enter long distance markets outside of
their traditional service areas.

Recently, the FCC approved Bell Atlantic's petition to offer long distance
in New York. The FCC's decision has been appealed to the United States Court of
Appeals for the District of Columbia Circuit, or the D.C. Circuit, which, on
January 27, 2000, declined to stay the FCC's decision pending appeal. Bell
Atlantic therefore has begun to provide long distance service in New York, one
of our target markets for providing services including long distance services.
Bell Atlantic is also in the process of applying for, and may obtain, authority
to offer in-region long distance services in other states within our target
geographic region.

Tariffs. The FCC in an October 1996 order, eliminated the requirement that
non-dominant carriers such as us maintain tariffs on file with the FCC for
domestic interstate services. The order does not apply

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to regional Bell operating companies, such as Bell Atlantic, or other local
telephone companies. That order was stayed by an appellate court pending its
review of the order on the merits.

Recently, the appellate court upheld the FCC's order. As the FCC implements
this order, telecommunications carriers such as us will no longer be able to
rely on the filing of tariffs with the FCC as a means of providing notice to
customers of prices, terms and conditions on which they offer their interstate
services.

Access Charges. Our cost of providing long distance services, as well as
our revenue from providing local services, are affected by changes in the access
charge rates imposed by traditional local telephone companies on long distance
carriers for origination and termination of calls over local facilities. The FCC
has made major changes in the interstate access charge structure, including
recent changes granting additional pricing flexibility to the larger traditional
local telephone companies. If this increased pricing flexibility is not
effectively monitored by federal regulators, it could have a material adverse
effect on our ability to price our interstate access services competitively. A
recent FCC order also initiated a rulemaking to determine whether the FCC should
regulate the access charges of competitive local telephone companies.

Reciprocal Compensation for ISP Traffic. Several FCC and state public
utility commission rulings may affect our ability to recover compensation from
traditional local telephone companies for calls placed by their customers and
delivered over our network to an ISP. Traditional local telephone companies have
claimed that no compensation is owed to the competitive local telephone company
for transporting and terminating such calls. As a result, traditional local
telephone companies have resisted paying competitive local telephone companies
for the transport and termination of such calls.

The FCC has initiated a proceeding to determine a compensation scheme for
Internet traffic. We currently do not receive reciprocal compensation for
Internet traffic under our interconnection agreements with Bell Atlantic in New
Jersey and Pennsylvania, and we may never be able to obtain such compensation in
New Jersey, Pennsylvania or any other state.

Regulation of Internet Services. The FCC has to date treated ISPs as
enhanced service providers, exempt from federal and state regulations governing
telephone companies, including the obligation to pay access charges and
contribute to the universal service fund. Nevertheless, regulations governing
disclosure of confidential communications, copyright excise tax, and other
requirements may apply to our provision of Internet access services. We cannot
predict the likelihood that state, federal or foreign governments will impose
additional regulation on our Internet business, nor can we predict the impact
that future regulation will have on our operations.

Universal Service. The FCC has established a significantly expanded
federal universal service subsidy regime. In a May 1997 order, the FCC
established new universal service funds to support telecommunications and
information services provided to qualifying schools and libraries and to rural
health care providers. The FCC also expanded the federal subsidies for local
telephone services provided to low-income consumers. In a May 31, 2000 order,
the FCC further required that universal service funds be increased to replace
implicit subsidies contained in the access rates that traditional local
telephone companies charge to long distance companies for origination and
termination of calls over local networks. Providers of interstate
telecommunications service, such as us, as well as certain other companies, must
pay for these programs. Our contribution to these universal service funds is
based on our telecommunications service end-user revenues. Currently, the FCC
assesses such payments on the basis of a provider's revenue for the previous
year. We are currently unable to quantify the amount of future subsidy payments
that we will be required to make and the effect that these required payments
will have on our financial condition because of uncertainties concerning the
size of the universal fund and uncertainties concerning the classification of
our services. The FCC has also announced that it will revise its rules for
subsidizing service provided to consumers in high cost areas, which may result
in further substantial increases in the overall cost of the subsidy program. The
FCC's universal service program may also be altered as a result of the agency's
reconsideration of its policies, or by future Congressional action.

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Collocation. In March 1999, the FCC adopted rules designed to make it
easier and less expensive for competitive local telephone companies such as us
to install our equipment at the central offices of traditional local telephone
companies such as Bell Atlantic. The rules, among other things, restricted the
traditional local telephone company's ability to prevent certain types of
equipment from being installed and required traditional local telephone
companies to offer alternative installation arrangements which will be less
costly. The D.C. Circuit recently overturned portions of those rules, holding
that they allow competitive local exchange carriers too much leeway to install
multifunctional equipment, connect with other competitive local telephone
companies, and decide, over traditional local telephone company objections,
where to place equipment in traditional local telephone company premises. The
Court directed the FCC to conduct further proceedings to redefine the terms that
the court considered overbroad.

Digital Wiretapping. The Communications Assistance to Law Enforcement Act
enacted in 1994, requires telecommunications carriers to make available certain
telecommunications capabilities to United States law enforcement officials to
permit those authorities to continue to intercept communications involving
advanced technologies such as digital and wireless transmission communications.
Under this statute, we are obligated to ensure that our equipment, facilities,
and services will meet capability and capacity requirements in order to enable
law enforcement agencies to intercept wireline and wireless transmission
communications transmitted over our network. Courts may impose fines of up to
$10,000 per day on telephone companies that fail to meet the required capability
functions, as determined by industry standards. This statute also requires
telephone companies to enable a specific number of simultaneous interceptions
determined on a geographic basis by March 12, 2001. We cannot predict the nature
and extent of the impact that these requirements will have on us in general.

Regulation That Particularly Affects DSL Services. To provide DSL services
we will lease necessary network elements from traditional local telephone
companies such as Bell Atlantic or resell the DSL services that they offer to
their retail customers. The FCC has adopted and is considering several
regulations that particularly affect the rates, terms and conditions upon which
we can obtain these elements and services and our ability to compete in the DSL
market.

- Advanced Services Orders. In August 1998, the FCC adopted requirements
for traditional local telephone companies such as Bell Atlantic to offer
to competitive local telephone companies such as us the necessary
individual network components to provide advanced data transmission
services. The FCC also concluded that traditional local telephone
companies must offer these services to competitive local telephone
companies at a discount for resale. This decision has been the subject
of appeals and further litigation.

The FCC has clarified, however, that DSL services provided to ISPs would
not be subject to resale at a discount. Accordingly, traditional local
telephone companies may enter into volume and term discounts for the
provisioning of DSL services for ISPs without having to make such
arrangements available to other requesting competitive local telephone
companies at discounted rates. This FCC decision could adversely affect
us if it gives ISPs, particularly large ISPs such as America Online, an
economic incentive to use traditional local telephone companies such as
Bell Atlantic to meet all of their DSL needs in order to qualify for
bulk discount pricing that Bell Atlantic now offers.

- Line Sharing. The FCC recently ruled that traditional local telephone
companies are required to provide line sharing, which will allow
competitive local telephone companies such as us to offer data services
over the same copper line the consumer uses for voice services without
the competitive local telephone company being required to offer the
voice services. The FCC's order has been appealed to the D.C. Circuit.
Even if the FCC's order is upheld, further arbitration proceedings at
the state level may be required to enforce the FCC requirements and to
set prices for line sharing. The line sharing requirements are also
subject to technical restrictions to prevent disruptions in any services
that the traditional local telephone company may provide on the same
line. It is uncertain whether we will be able to benefit from the FCC's
line sharing decision.

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<PAGE> 52

- Separate DSL Affiliate Requirements. In various proceedings, the FCC
has considered whether traditional local telephone companies such as
Bell Atlantic may or should provide advanced data services such as DSL
services through a separate affiliate. In the proceeding in which the
FCC recently granted Bell Atlantic authority to provide long distance
services in New York, Bell Atlantic agreed to provide DSL services in
New York through a separate affiliate. At present it is not clear how
Bell Atlantic's use of a separate affiliate to provide DSL services will
ultimately affect competing DSL providers such as us. On the one hand,
the establishment of a separate DSL affiliate could benefit Bell
Atlantic by allowing it to offer advanced services to the public on a
largely unregulated basis. On the other hand, the establishment of a
separate DSL affiliate could benefit competitors like us by enabling us
to obtain interconnection, independent network assets and other
wholesale services under the same rates, terms and conditions as those
offered by Bell Atlantic to its affiliate. We cannot determine the
affect of separate DSL affiliate requirements until those requirements
have been further implemented and enforced.

Cellular Service. The package of telecommunications services that we
provide includes cellular services of Verizon Wireless that we resell to our
customers. Under Section 20.12 of the FCC's rules, Verizon Wireless must permit
unrestricted resale of its cellular services. The resale requirement under
Section 20.12 of the FCC's rules expires in November of 2002.

Our resale of cellular service is generally unregulated, except for fees
and assessments such as universal service fund contributions. Our underlying
provider, Verizon Wireless must be licensed by the FCC to provide cellular
services. If Verizon Wireless fails to comply with FCC regulations, then the FCC
could take enforcement action such as revoking or declining to renew a Verizon
Wireless license. Verizon Wireless could also terminate its cellular service at
any time because of insolvency or other reasons beyond our control. If we were
unable to resell Verizon Wireless's cellular services for any reason, we may be
unable to obtain replacement services on acceptable terms or at all. Any change
in the underlying cellular service provider could require changes in customer
equipment at significant expense and inconvenience to our customers.

Payphone Compensation. Section 276 of the Telecommunications Act of 1996
requires payphone owners to be compensated for each completed call originated at
their payphones. Although the FCC has issued several orders that have been
remanded and vacated on appeal, on February 4, 1999, the FCC released its Third
Report and Order that established a default rate for payphone compensation of
$0.24. We are obligated to compensate payphone owners in accordance with the
FCC's rules for completed calls from payphones that are routed to us.

Slamming. A customer may change telephone companies at any time, but the
FCC regulates the process by which such changes are made. Specific
customer-instituted procedures must be followed, and when they are not,
particularly if the change is unauthorized or fraudulent, the process is known
as slamming. The FCC recently decided to apply its slamming rules, which
originally covered only long distance, to local service. The FCC has levied
significant fines for certain slamming cases. The risk of financial damage and
harm to business reputation from slamming offenses can be significant. Several
complaints alleging slamming have been filed against us at the FCC over the past
five years, but none has resulted in adverse FCC action.

STATE REGULATION

The states' regulation of competitive local telephone companies varies in
intensity. The majority of states require that companies seeking to provide
local exchange and other intrastate services apply for and obtain the requisite
authorization from the state public utility commission. The resale of services
provided by other carriers is sometimes exempt from such requirements. The
authorization process generally requires the carrier to demonstrate that it has
sufficient financial, technical and managerial capability and that granting the
authorization will serve the public interest. We currently provide resold
competitive local exchange services and intrastate long distance services in New
Jersey and resold intrastate long distance services in Massachusetts. These
states do not require specific authorization by the state public utility

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<PAGE> 53

commission for these services. In New York, North Carolina and Pennsylvania, we
provide resold intrastate long distances services under authorizations issued by
the state public utility commissions as required in those states. We intend to
file in the near future applications for authority in additional states or to
expand the authority we have already obtained in the above states. There can be
no assurance that such state authorizations will be granted on a timely basis,
or at all.

In the states in which we operate, we are, and will continue to be, subject
to regulatory directives. Most states require that competitive local telephone
companies charge just and reasonable rates and not discriminate among similarly
situated customers. Other state requirements include the filing of periodic
reports, the payment of various regulatory fees and surcharges, and compliance
with service standards and consumer protection rules. In most states, intrastate
tariffs are required for various intrastate services, although non-dominant
companies like us are not typically subject to price or rate of return
regulation for tariffed intrastate services.

Many states require prior approvals or notifications for certain transfers
of assets, customers, or ownership, including reorganizations, of certificated
companies such as us, and for the issuance of stock, debt and related
transactions. Our holding company structure will reduce the impact of many of
these requirements. We have not received approval for our reorganization into a
holding company structure. We are filing the necessary papers at the relevant
public utility commissions seeking approval, retroactively as necessary, of the
reorganization and arguing that approval of the transaction is in the public
interest. Although we believe that our applications will be approved in due
course, it is possible that the state commissions will deny the applications
and/or impose fines, license conditions, commence revocation proceedings or
otherwise exercise their authority to address violations of statutes and
regulations.

State public utility commissions have a substantial role in setting rates
for individual network elements and wholesale services that we need to purchase
from traditional local telephone companies to provide service to our customers.
The results of state rate-setting proceedings have determined, and will continue
to determine, the price we pay for, and whether it is economically attractive
for us to use, these network elements and services. State public utility
commissions also have broad authority to review and approve, reject, or set the
terms of our interconnection agreements with traditional local telephone
companies.

LOCAL REGULATION

We may be required to obtain various permits and authorizations from cities
or counties in which we operate our own facilities. Such actions by local
governments that pose barriers to entry for competitive telecommunications
companies may be preempted by the FCC, but the FCC's preemption authority is the
subject of litigation. Although our network consists primarily of individual
network components leased from Bell Atlantic, in certain instances we may deploy
our own facilities and therefore may need to obtain certain municipal permits or
other authorizations. The actions of local governments in imposing conditions on
the grant of permits or other authorizations or their failure to act in granting
such permits or other authorizations could have a material adverse effect on our
business prospects, operating results and financial condition.

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<PAGE> 54

FACILITIES

We are headquartered in Belleville, New Jersey and lease, pursuant to oral
and written lease agreements, offices and space in a number of locations
primarily for sales and marketing offices and network equipment deployment. As
of May 1, 2000, we leased offices and space at three locations. The table below
lists our material facilities:

<TABLE>
<CAPTION>
APPROXIMATE
LOCATION USE LEASE EXPIRATION SQUARE FOOTAGE
-------- --- ---------------- --------------
<S> <C> <C> <C>
Belleville, NJ corporate headquarters and December 2028 12,120
switching facility
Monroeville, PA sales and marketing office May 2003 1,541
Rutherford, NJ equipment deployment Month-to-month 294
</TABLE>

We expect to lease additional office space in New Jersey in the next six
months to accommodate the growth of our administrative staff and sales and
marketing personnel. After obtaining such new leased facilities, we believe that
our leased facilities will be adequate to meet our current needs in the markets
in which we have begun to offer services, and that additional facilities are
available to meet our development and expansion needs in existing and projected
target markets for the foreseeable future.

EMPLOYEES

As of April 30, 2000, we had a total of 76 full-time employees consisting
of 22 in customer support/provisioning, 14 in sales and marketing, 13 in finance
and MIS, 11 in management and administration, 7 in operations, 5 in network
engineering, and 4 in switching. None of our employees are covered by a
collective bargaining agreement. We believe that our relations with our
employees are good.

TRADEMARKS

"QuikSpeed," "Much More than Dial Tone" and "New Jersey's own
Telecommunications Company" are our servicemarks. All other trademarks or
servicemarks appearing in this prospectus are the trademarks or service marks of
their respective companies.

LEGAL PROCEEDINGS

We are not currently subject to any material legal proceedings. However, we
may from time to time become a party to various legal proceedings arising in the
ordinary course of our business.

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<PAGE> 55

MANAGEMENT

EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS

Our executive officers, key employees and directors are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
EXECUTIVE OFFICERS:
Louis A. Lombardi, Sr. ........... 61 President and Chief Executive Officer and Chairman of the
Board
Louis A. Lombardi, Jr. ........... 37 Chief Operating Officer and Director
Jay M. Brzezanski................. 53 Chief Financial Officer and Secretary
Michael Lombardi.................. 35 Vice President of Finance, Treasurer and Director
Daniel L. Hradesky................ 59 Vice President of Business Development and Strategic
Planning and Director
Keith T. Fallon................... 37 Vice President of Sales

KEY EMPLOYEES:
Dawn B. Androsky.................. 39 Vice President of Marketing
Karen McDine...................... 48 Vice President of Network Engineering
Richard A. Snyder................. 53 Vice President of Technology

NON-EMPLOYEE DIRECTORS:
Ronald O. Brown, Ph.D.(1)(2)...... 58 Director
Myron Feldman(1)(2)............... 76 Director
John H. Trzaka(1)(2).............. 67 Director
</TABLE>

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

(1) Member of compensation committee.

(2) Member of audit committee.

Louis A. Lombardi, Sr. is the father of Louis A. Lombardi, Jr. and Michael
Lombardi.

The executive officers and key employees listed above have held their
respective positions with Cooperative Holdings, Inc. since inception with the
exception of Mr. Hradesky who has been a director since April 6, 2000. Prior to
that, with the exception of Mr. Hradesky, such persons held similar positions
with Cooperative Communications, Inc. The present principal occupations and
recent employment history of each of our executive officers, key employees and
directors listed above are set forth below.

All directors hold office until their successors have been elected and
qualified. All executive officers are elected annually by the board of directors
and serve at the discretion of the board of directors and until their successors
are elected and qualified.

Louis A. Lombardi, Sr. founded Cooperative and all related entities and has
served as our President and Chief Executive Officer and as a director since our
inception. Mr. Lombardi has more than twenty years of experience in the
telecommunications industry. From 1965 to 1980, Mr. Lombardi was President of
Eastern Computer Systems, Inc., a computer billing and services company
primarily serving the telecommunications industry.

Louis A. Lombardi, Jr., joined Cooperative in 1990 and has served in
various executive capacities, most recently as Chief Operating Officer. In this
capacity, he directs the day-to-day operations including sales and marketing,
customer services, operations and engineering, administration and management
information systems. Mr. Lombardi was elected to our board of directors in
December 1999. From 1981 to 1991, he served in various capacities with Eastern
Computer Services, Inc. His most recent position was as Operations Manager, in
which capacity he was primarily responsible for the day-to-day operations of the
business.

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<PAGE> 56

Jay M. Brzezanski has served as our Chief Financial Officer since January
2000. Mr. Brzezanski has over twenty-eight years of experience in senior
financial positions, including experience with telecommunications and computer
conversions. Mr. Brzezanski was employed as the Senior Vice President -- Finance
and Chief Information Officer of Sleepy's Inc. and affiliates from 1997 to 2000
and as the Senior Vice President and Chief Financial Officer of Rockaway
Bedding, Inc. and affiliates from 1994 to 1997. Mr. Brzezanski is a Certified
Management Accountant and a Certified Internal Auditor. Mr. Brzezanski is a
Colonel in the United States Army Reserves.

Michael Lombardi has served as our Vice President of Finance and Treasurer
since 1994 and was and continues to be, together with the Chief Financial
Officer, responsible for accounting and finance functions. Mr. Lombardi was
elected to our board of directors in December 1999. Before joining us, Mr.
Lombardi was the Vice President and Controller of Atlantic Express, Inc. Mr.
Lombardi held such positions from 1989 to 1994 and his responsibilities included
monitoring cash flow, acting as the liaison with external auditors and banks and
developing and implementing financial policies and procedural manuals.

Daniel L. Hradesky has served as our Vice President of Business Development
and Strategic Planning since 1998. Mr. Hradesky was elected to our board of
directors in April 2000. Between 1969 and 1998, Mr. Hradesky held various
positions with Westinghouse Communications, now owned by RSL Communications
(Westinghouse), including Director -- Sales, Director -- Network Services and
Manager -- Network Operations. During his tenure with Westinghouse, he was named
a "Top 100 Manager." Most recently, Mr. Hradesky was responsible for providing
support, maintenance and proposal development services to major customers as
well as supervising product development and field sales.

Keith T. Fallon has served as our Vice President of Sales since 1993. Prior
to joining us, Mr. Fallon was employed by MCI Telecommunications from 1985 to
1993 where, immediately prior to his departure, he served as National Account
Manager -- Carrier Services. In that capacity, Mr. Fallon was responsible for
sales to interexchange carriers, competitive local exchange carriers and
independent telephone companies.

Dawn B. Androsky has served as our Vice President of Marketing since 1998.
As Vice President of Marketing, Ms. Androsky is responsible for all of our
marketing efforts, including development and maintenance of our website and
sales intranet, product launches and private label programs. Ms. Androsky has
over sixteen years of supervisory experience in all facets of the
telecommunications industry. From 1994 to 1998, Ms. Androsky served as both the
Director -- Marketing and Director -- Sales Engineering for Westinghouse. Prior
to her employment with Westinghouse, Ms. Androsky served as the Manager, Access
Services with Sprint. Ms. Androsky is also a Major in the United States Air
Force Reserves, having served in the United States Air Force on active duty from
1983 to 1988.

Karen McDine has served as our Vice President of Network Engineering since
1995. In that capacity, Ms. McDine is responsible for the design and engineering
of our network for local, long distance and international services. From 1970 to
1995, Ms. McDine held various network design and sales engineering positions
with Westinghouse. From 1994 to 1995, she was Director -- Sales Engineering and
from 1990 to 1994, she was Manager -- Network Design.

Richard A. Snyder has served as our Vice President of Technology since
1998. Prior to joining us, Mr. Snyder was employed with Westinghouse for over
twenty-five years where he held several senior level project management and
customer service positions, most recently as Director -- Customer Service.

Ronald O. Brown, Ph.D. was elected to our board of directors in February
2000. Dr. Brown is currently the President and a director of Ronald O. Brown
Consulting, Inc., an independent information technology and enterprise network
management consulting firm, founded by Dr. Brown in 1996. In that capacity, Dr.
Brown provides consulting services to corporations, governments, vendors and
carriers on all aspects of data, voice, multimedia, and image
telecommunications, strategic planning, systems engineering and design, market
development, operations and management, and information systems management and
implementation. Dr. Brown is also an occasional lecturer at Ball State
University where he teaches a telecommunications class. Formerly, Dr. Brown was
the National Director of Telecommunications and

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<PAGE> 57

Office Information Systems Consulting for Coopers & Lybrand. Dr. Brown is a
Registered Professional Engineer and a member of the board of directors of the
Maine Telecommunications Users Group.

Myron Feldman was elected to our board of directors in February 2000. Mr.
Feldman currently serves as the Vice Chairman of the board of directors of
Allied Beverage Group, a position he has held since 1996. Prior to joining
Allied Beverage Group, Mr. Feldman held various positions during a 50 year
career with F&A Distributing Company, a New Jersey based wine and spirits
distributor, culminating with the position of President and Chief Executive
Officer.

John H. Trzaka was elected to our board of directors in February 2000. Mr.
Trzaka is a retired financial management executive. From 1986 until his
retirement in 1993, Mr. Trzaka served as the Director -- Financial Division of
the New Jersey Casino Control Commission. In that capacity, Mr. Trzaka was
responsible for the operation and management of the financial valuation,
auditing and collection units. From 1966 to 1985, Mr. Trzaka served in various
positions with McGraw Hill, Inc., including Vice President -- Finance and
Administration for its broadcasting company. Mr. Trzaka is a Certified Public
Accountant who has participated as a task force member for the Financial
Accounting Standards Board.

CLASSES OF THE BOARD

We currently have seven directors. Following the closing of this offering,
our board of directors will be divided into three classes of directors, with
each class serving staggered three-year terms. Class A, initially comprised of
Ronald O. Brown, Ph.D., Michael Lombardi and Daniel L. Hradesky will serve until
our annual meeting of stockholders in 2000. Class B, initially comprised of
Louis A. Lombardi, Jr. and Myron Feldman will serve until our annual meeting of
stockholders in 2001. Class C, initially comprised of Louis A. Lombardi, Sr. and
John H. Trzaka will serve until our annual meeting of stockholders in 2002.

Our bylaws permit the board of directors to increase or decrease the size
of the board. Any additional directorships resulting from an increase in the
number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of the total number of
directors. This classification of the board of directors may have the effect of
delaying or preventing changes in control or management of Cooperative.

COMPENSATION COMMITTEE

Our board of directors has a compensation committee, which approves
salaries and incentive compensation for our executive officers and administers
our stock plan. The compensation committee currently consists of Ronald O.
Brown, Ph.D., Myron Feldman and John H. Trzaka.

AUDIT COMMITTEE

Our board of directors has an audit committee, which reviews the results
and scope of the audit and other services provided by our independent
accountants. The audit committee currently consists of Ronald O. Brown, Ph.D.,
Myron Feldman and John H. Trzaka.

DIRECTOR COMPENSATION

Directors who are employed by us, including Louis A. Lombardi, Sr., Louis
A. Lombardi, Jr., Michael Lombardi and Daniel L. Hradesky, are not currently
entitled to receive any compensation for serving on our board of directors. Our
outside directors, Ronald O. Brown, Ph.D., Myron Feldman and John H. Trzaka
receive $500 per meeting as compensation for serving on our board of directors.
In addition, each outside director shall receive, upon the consummation of the
offering, options to purchase 20,000 shares of our common stock at exercise
prices equal to the initial public offering price. The stock options will vest
over a three-year period with one-third vesting at the end of each year. We pay
for the reasonable out-of-pocket expenses incurred by each director in
connection with attending board and committee meetings.

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<PAGE> 58

EXECUTIVE COMPENSATION

The following table summarizes the compensation we paid to our named
executive officers, consisting of our chief executive officer and four most
highly compensated executive officers (earning in excess of $100,000) for the
fiscal year ended May 31, 2000. None of the perquisites and other benefits paid
to each named executive officer exceeded the lesser of $50,000 or 10% of the
total annual salary and bonus received by that officer.

FISCAL 2000 SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------
ALL OTHER
NAME AND PRINCIPAL ANNUAL
POSITION(S) SALARY COMPENSATION
------------------ -------- ------------
<S> <C> <C>
Louis A. Lombardi, Sr.
President and Chief Executive Officer..................... $124,560 $ 9,280(1)
Louis A. Lombardi, Jr.
Chief Operating Officer................................... $175,915 $ 11,810(1)
Michael Lombardi
Vice President of Finance and Treasurer................... $117,305 $ 8,250(1)
Daniel L. Hradesky
Vice President of Business Development and Strategic
Planning.................................................. $127,404 --
Keith T. Fallon
Vice President of Sales................................... $ 93,769 $ 65,833(2)
</TABLE>

---------------
(1) Represents automobile allowance.

(2) Includes an automobile allowance and amounts paid as commissions on sales.

OPTION GRANTS IN LAST FISCAL YEAR

No options were granted to or exercised by the named executive officers
during the fiscal year ended May 31, 1999. There were no options exercised
during the fiscal year ended May 31, 1999. Upon the consummation of this
offering, there will be 1,029,047 options outstanding under the 2000 Stock Plan,
100,000 of which will be issued to Louis A. Lombardi, Jr., 100,000 of which will
be issued to Michael Lombardi, 100,000 of which will be issued to Daniel L.
Hradesky and 50,000 of which will be issued to Keith T. Fallon, each at an
exercise price equal to the initial public offering price. Mr. Fallon also holds
a non-plan option to purchase 30,000 shares of common stock which was issued in
fiscal 1997 at an exercise price of $0.01 per share.

The following table sets forth information concerning individual grants of
stock options made during fiscal 2000 to each of the named executive officers.

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<PAGE> 59

OPTION GRANTS IN FISCAL YEAR 2000

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT
NUMBER OF TOTAL ASSUMED ANNUAL
SECURITIES OPTIONS RATES OF STOCK
UNDERLYING GRANTED TO EXERCISE PRICE APPRECIATION
OPTIONS EMPLOYEES OR BASE FOR OPTION TERM(3)
GRANTED(1) IN FISCAL PRICE EXPIRATION ---------------------
NAME (#) YEAR(2) ($/SH) DATE 5%($) 10%($)
(A) (B) (C) (D) (E) (F) (G)
------------------------------------- ---------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Louis A. Lombardi, Sr................ -- -- -- -- -- --
Louis A. Lombardi, Jr................ 100,000 10.5% $10.00 4/3/10 628,900 1,593,700
Michael Lombardi..................... 100,000 10.5% $10.00 4/3/10 628,900 1,593,700
Daniel L. Hradesky................... 100,000 10.5% $10.00 4/3/10 628,900 1,593,700
Keith T. Fallon...................... 50,000 5.3% $10.00 4/3/10 314,450 796,850
</TABLE>

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

(1) All options were granted under the 2000 Stock Plan and shall be cancelled if
this offering shall not be completed on or before September 1, 2000.

(2) Based on an aggregate of 949,322 options granted to employees in fiscal
2000, including options granted to the named executive officers.

(3) Based on the mid-range offering price of $10.00 per share.

2000 STOCK PLAN

The 2000 Stock Plan was adopted by the board of directors on February 11,
2000 and approved by our stockholders on March 21, 2000. The 2000 Stock Plan was
effective as of March 21, 2000 and shall remain in effect until terminated by
the board of directors. The total number of shares of common stock with respect
to which options may be granted under the Plan shall not exceed 15% of the
shares of common stock outstanding at any time during the term of the Plan,
calculated on a fully diluted basis, provided that no more than 3,540,000 shares
shall be cumulatively available for the grant of incentive stock options under
the Plan. Those eligible to receive stock option grants under the 2000 Stock
Plan include employees, non-employee directors and consultants. The 2000 Stock
Plan is administered by the compensation committee of our board of directors.

Subject to the provisions of the 2000 Stock Plan, the administrator of the
2000 Stock Plan has the discretion to determine the optionees and/or grantees,
the type of options to be granted, the vesting provisions, the terms of the
grants and other related provisions as are consistent with the 2000 Stock Plan.
The exercise price of an incentive stock option may not be less than the fair
market value per share of the common stock on the date of grant or, in the case
of an optionee who beneficially owns 10% or more of the voting power of all
classes of our capital stock, not less than 110% of the fair market value per
share on the date of grant. The exercise price of a non-qualified stock option
may not be less than 85% of the fair market value per share of the common stock
on the date of grant. Fair market value is determined by the board of directors
in good faith. We anticipate that following consummation of this offering, fair
market value shall be determined in accordance with the closing sale price of
our common stock as quoted on the Nasdaq National Market. In addition, the 2000
Stock Plan allows for the grant of stock purchase rights.

Incentive stock options terminate not more than ten years from the date of
grant, subject to earlier termination upon or after a fixed period following the
optionee's death, disability or termination of employment with us. The term of
any options granted to a holder of more than 10% of the capital stock may be no
longer than five years. Options granted under the 2000 Stock Plan to our
employees will vest in the manner determined by the board of directors. Options
are not assignable or otherwise transferable except by will or as per the laws
of descent and distribution. In the event of a merger or consolidation of us
with or into another corporation or the sale of all or substantially all of our
assets in which the

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<PAGE> 60

successor corporation does not assume outstanding options or issue equivalent
options, our board of directors is required to provide accelerated vesting of
outstanding options.

NON-PLAN OPTIONS ISSUED TO EMPLOYEES

In June 1996, Cooperative issued to Keith T. Fallon a non-plan option to
purchase 30,000 shares of our common stock at an exercise price of $0.01. In
March 2000, this option was exchanged for an option in Cooperative Holdings,
Inc. with substantially similar terms in connection with our reorganization. The
option is fully vested and may be exercised until the expiration of two years
after Mr. Fallon's termination of employment.

QUALIFIED 401(k) AND PROFIT SHARING PLAN

We maintain a tax-qualified 401(k) plan. Employees who are 18 years of age
may elect to participate in the plan after completing six months of service with
us. We match 33% of employee contributions up to 6% of compensation deferred.
Our matching contributions vest at a rate 20% per year starting with the
employee's first year of service. Although we have not historically done so, we
may also make discretionary profit-sharing contributions to all employees who
satisfy plan participation requirements.

EMPLOYMENT AGREEMENTS, NON-COMPETITION, NON-DISCLOSURE AND INVENTION ASSIGNMENT
AGREEMENTS

Louis A. Lombardi, Sr. is a party to an agreement with us effective March
20, 2000 under which he serves as our President and Chief Executive Officer at
an initial annual base salary of $225,000, subject to annual adjustment. Louis
A. Lombardi, Jr. is a party to an agreement with us effective March 20, 2000
under which he serves as our Chief Operating Officer at an initial annual base
salary of $165,000, subject to annual adjustment. The compensation committee may
award either or both of these individuals additional bonus payments or incentive
compensation in its discretion. The initial term of each such agreement is for
three years and is automatically extended for successive one-year periods unless
terminated by either party upon written notice four months before the employment
would otherwise end. Each of the employment agreements may be terminated earlier
by us or the respective executive under certain conditions.

If the employment period is terminated by us without cause, by the
executive for good reason (as defined in the respective employment agreements),
because the executive is not reelected to office, or as a result of the
executive's death or disability, then the executive and/or his estate or
beneficiaries will be entitled to receive benefits under our employee benefit
programs as in effect on the date of such termination to the extent permitted
under such programs. In addition, the beneficiary will be entitled to receive an
amount equal to that executive's base salary for a period of time ending on the
later to occur of (1) the date which is twelve months after the date of
termination, or (2) the date the employment agreement would have otherwise
expired.

In addition to the amounts payable pursuant to the preceding sentence, if,
during the six month period immediately preceding or following a change of
control (as defined in the respective employment agreement), Mr. Lombardi, Sr.
or Mr. Lombardi, Jr. is terminated other than for cause by us, upon death,
disability or without cause by Mr. Lombardi, Sr. or Mr. Lombardi, Jr., then the
terminated party shall receive a lump sum payment equal to his annual salary as
in effect immediately prior to his termination.

If we terminate the employment period for cause or if the executive resigns
without good reason, then the executive will be entitled to receive his base
salary through the date of termination and we will have no further liability
whatsoever to the executive.

In addition, each of Mr. Lombardi, Sr. and Mr. Lombardi, Jr. also is the
beneficiary of a term life insurance policy in his respective name, in the face
amount of $50,000 and $10,000, respectively, for which we pay the premiums. Each
employment agreement also contains certain non-competition, non-solicitation and
confidentiality provisions.

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<PAGE> 61

In addition to the foregoing agreements, we have executed agreements with
each of our employees, whereby each employee agrees to maintain the
confidentiality of our information and to assign inventions to us.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During the year ended May 31, 1999, the compensation of our executive
officers was determined by the board of directors. The compensation committee
was established by the board of directors in February 2000. The compensation
committee consists of Ronald O. Brown, Ph.D., Myron Feldman and John H. Trzaka.
There are no compensation committee interlocks.

KEY PERSON INSURANCE

We intend to obtain, prior to the consummation of this offering, key person
life insurance policies on the lives of Louis A. Lombardi, Sr. and Louis A.
Lombardi, Jr. The face amount of each such policy is intended to be $500,000 for
Louis A. Lombardi, Sr. and $1,000,000 for Louis A. Lombardi, Jr. We do not
intend to maintain key person life insurance on any of our other executive
officers or key personnel.

LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:

- any breach of their duty of loyalty to the corporation or its
stockholders;

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

- unlawful payments of dividends or unlawful stock repurchases or
redemption; or

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

This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or recession.

Our bylaws provide that we shall indemnify our directors and executive
officers, employees and our agents to the fullest extent permitted by law. We
believe that indemnification under our bylaws covers at least negligence and
gross negligence on the part of indemnified parties. Our bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in that capacity, regardless
of whether the bylaws would permit indemnification. We intend to obtain, prior
to the consummation of this offering, director and officer liability insurance
that covers matters, including matters arising under the Securities Act of 1933.

We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for judgments, fines, settlement amounts and expenses,
including attorneys' fees, incurred by any of these persons in any action or
proceeding, including any action by or in the right of Cooperative, arising out
of that person's services as a director, executive officer, employee, agent,
contractor, of ours, any subsidiary of ours or any other company or enterprise
to which the person provides services at our request. We believe that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and executive officers.

There is no pending litigation or proceeding involving any director,
officer, employee or agent of Cooperative where indemnification will be required
or permitted. We are not aware of any pending or threatened litigation or
proceeding that might result in a claim for such indemnification.

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<PAGE> 62

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In November 1998, we loaned $1,000,000 to Louis A. Lombardi, Sr. and
Patrick C. Lombardi evidenced by a promissory note. The note is a 20 year note
with interest at a rate of 9.5% per year. The promissory note is secured by our
facility in Belleville, New Jersey, which is owned by Louis A. Lombardi, Sr. and
the estate of Patrick C. Lombardi.

In December 1998, we entered into a 20 year net lease agreement with Louis
A. Lombardi, Sr. and the estate of Patrick C. Lombardi for the Belleville, New
Jersey facility. The lease agreement requires monthly payments of approximately
$17,000 per month. The terms of the lease require us to pay for essentially all
costs of operating and maintaining the Belleville facility, including taxes,
utilities, insurance and maintenance. The lease also provides for increased
rental payments due to increases in the Consumer Price Index for northern New
Jersey.

We sublease a portion of the Belleville facility to Cooperative Industries,
L.L.C. and Eastern Computer Systems, Inc. each of which are owned by Louis A.
Lombardi, Sr. and the estate of Patrick C. Lombardi pursuant to a five year
lease expiring in fiscal 2004. The entities are engaged in business operations
different from those in which we engage. The lease arrangements provide for
rental payments in the amount of $1,000 per month.

In connection with the lease on the Belleville facility, we and Louis A.
Lombardi, Sr. and the estate of Patrick C. Lombardi entered into an Offset
Agreement which provides for a legal right of full and complete offset of the
lease obligation in the event that Louis A. Lombardi, Sr. and the estate of
Patrick C. Lombardi fail to make payment when due under the $1,000,000
promissory note.

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<PAGE> 63

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth as of April 30, 2000 and as adjusted to give
effect to the sale of common stock offered hereby, certain information regarding
beneficial ownership of our common stock by:

- each person we expect to be the beneficial owner of more than 5% of the
outstanding shares of common stock;

- each director and any named executive officer;

- all directors and named executive officers as a group; and

- each selling stockholder.

The address for each officer and director is c/o Cooperative Holdings,
Inc., 412-420 Washington Avenue, Belleville, New Jersey 07109.

<TABLE>
<CAPTION>
PERCENTAGE(2)
SHARES TO BE SOLD -----------------------------------
NAME NUMBER(1) BY SELLING STOCKHOLDER PRIOR TO OFFERING AFTER OFFERING
---- ---------- ---------------------- ----------------- --------------
<S> <C> <C> <C> <C>
The Louis A. Lombardi 1996
Family Limited Partnership,
412-420 Washington Avenue
Belleville, NJ 07109.......... 8,783,333 -- 47.22% 37.22%
The Patrick C. Lombardi 1996
Family Limited Partnership,
412-420 Washington Avenue
Belleville, NJ 07109.......... 8,783,333 1,000,000 47.22 32.98
Louis A. Lombardi, Sr.(3)....... 8,783,333 -- 47.22 37.22
Daniel L. Hradesky(4)........... -- -- -- --
Louis A. Lombardi, Jr.(5) ...... 1,033,334 -- 5.56 4.38
Michael Lombardi(5)............. -- -- -- --
Keith T. Fallon(6).............. 30,000 -- 0.16 0.13
Ronald O. Brown, Ph.D.(7) ...... -- -- -- --
Myron Feldman(7)................ -- -- -- --
John H. Trzaka(7)............... -- -- -- --
Directors and named executive
officers as a group (eight
persons)(8)................... 9,846,667 -- 52.85% 41.67%
</TABLE>

---------------
Less than 1%.

(1) Beneficial ownership includes any shares as to which the individual or
entity has sole or shared voting power or investment power and also any
shares which the individual or entity has a right to acquire within 60 days
after this offering through the exercise of any stock options. The inclusion
herein of such shares, however, does not constitute an admission that the
named stockholder is a direct or indirect beneficial owner of such shares.
Unless otherwise indicated, each person or entity named in the table has
sole voting power and investment power with respect to all shares of capital
stock listed as owned by such person or entity.

(2) Applicable percentage of ownership is based on an aggregate of 18,600,000
shares of common stock outstanding on February 29, 2000 and an aggregate of
23,600,000 shares of common stock outstanding after the completion of this
offering.

(3) Represents 8,783,333 shares of common stock held by The Louis A. Lombardi
1996 Family Limited Partnership of which Louis A. Lombardi, Sr. is a general
partner. Mr. Lombardi has voting and dispositive power with respect to such
shares.

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<PAGE> 64

(4) Excludes 100,000 shares of common stock issuable pursuant to options granted
under the 2000 Stock Plan, none of which are exercisable within 60 days of
the date hereof.

(5) Excludes 100,000 shares of common stock issuable pursuant to options granted
under the 2000 Stock Plan, none of which are exercisable within 60 days of
the date hereof. Each of Louis A. Lombardi, Jr. and Michael Lombardi are
limited partners of The Louis A. Lombardi 1996 Family Limited Partnership.
Each disclaims beneficial ownership of the shares held by The Louis A.
Lombardi 1996 Family Limited Partnership except to the extent of his
pecuniary interest therein.

(6) Represents options to purchase 30,000 shares of common stock exercisable on
the date hereof. Excludes 50,000 shares of common stock issuable pursuant to
options granted under the 2000 Stock Plan, none of which are exercisable
within 60 days of the date hereof.

(7) Excludes 20,000 shares of common stock issuable pursuant to options granted
under the 2000 Stock Plan, none of which are exercisable within 60 days of
the date hereof.

(8) Excludes 410,000 shares of common stock issuable pursuant to options granted
under the 2000 Stock Plan, none of which are exercisable within 60 days of
the date hereof.

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<PAGE> 65

DESCRIPTION OF CAPITAL STOCK

GENERAL MATTERS

Cooperative Communications, Inc. was incorporated in New Jersey in 1990. In
February 2000, Cooperative Holdings, Inc. was incorporated in Delaware and in
March 2000 the stockholders of Cooperative Communications, Inc. exchanged all of
their outstanding shares of common stock of that company for newly issued shares
of Cooperative Holdings, Inc. with equivalent rights and preferences. As a
result, Cooperative Communications, Inc. became a wholly-owned subsidiary of
Cooperative Holdings, Inc. In addition, the outstanding option to purchase
shares of common stock of Cooperative Communications, Inc. was exchanged and is
now exercisable for shares of common stock of Cooperative Holdings, Inc.

Upon consummation of this offering, our authorized capital stock will
consist of 60,000,000 shares of common stock, par value $0.01 per share, and
5,000,000 shares of undesignated preferred stock, par value $0.01 per share.
After completion of this offering, there will be 23,600,000 shares of common
stock issued and outstanding based upon the 18,600,000 shares outstanding as of
April 30, 2000 and the 5,000,000 shares being issued by us in this offering.

COMMON STOCK

The holders of our common stock are entitled to one vote for each share
held of record upon such matters and in such manner as may be provided by law.
There are no cumulative voting rights with respect to the election of directors.
Subject to preferences applicable to any outstanding shares of preferred stock,
the holders of common stock are entitled to receive ratably dividends, if any,
as may be declared by the board of directors out of funds legally available for
dividend payments. In the event we liquidate, dissolve or wind up, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities and liquidation preferences of any outstanding shares of
the preferred stock. Holders of common stock have no preemptive rights or rights
to convert their common stock into any other securities. There are no redemption
or sinking fund provisions applicable to the common stock.

PREFERRED STOCK

The preferred stock is issuable from time to time in one or more series and
with such designations, preferences and other rights for each series as shall be
stated in the resolutions providing for the designation and issue of each such
series adopted by our board of directors. The board of directors is authorized
by our certificate of incorporation to determine, among other things, the
voting, dividend, redemption, conversion, exchange and liquidation powers,
rights and preferences and the limitations thereon pertaining to such series.
The board of directors, without stockholder approval, may issue preferred stock
with voting and other rights that could adversely affect the voting power of the
holders of the common stock and that could have certain anti-takeover effects.
We have no present plans to issue any shares of preferred stock. The ability of
the board of directors to issue preferred stock without stockholder approval
could have the effect of delaying, deferring or preventing a change in control
of us or the removal of existing management.

CERTAIN ANTI-TAKEOVER PROVISIONS

General

Provisions of Delaware law and our certificate of incorporation and bylaws
could make it difficult for a third party to acquire us and to remove our
incumbent officers and directors. These provisions, summarized below, are
expected to discourage coercive takeover practices and inadequate takeover bids
and to encourage persons seeking to acquire control of us to negotiate first
with our board of directors. We believe that the benefits of increased
protection of our ability to negotiate with the proponent of an unfriendly or
unsolicited acquisition proposal outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation could result in an
improvement of the terms of the proposal.

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<PAGE> 66

Delaware Statute

We are subject to Section 203 of the Delaware General Corporation Law,
which regulates corporate acquisitions. In general, Section 203 prohibits a
publicly-held Delaware corporation from engaging in a business combination with
an interested stockholder for a period of three years following the date the
person became an interested stockholder, unless:

- the board of directors approved the business combination or the
transaction in which such stockholder became an interested stockholder
prior to the date the interested stockholder attained such status;

- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or

- on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
corporation's voting stock not owned by the interested stockholder.

A business combination generally includes a merger, sale of assets or
stock, or other transaction resulting in a financial benefit to the interested
stockholder. In general, an interested stockholder is a person who, together
with affiliates and associates, owns, or within three years prior the
determination of interested stockholder status did own, 15% or more of a
corporation's outstanding voting stock.

Board of Directors

Our bylaws provide that the number of our directors shall be fixed from
time to time by resolutions adopted by the affirmative vote of either a majority
of the board of directors or the stockholders. However, there shall not be less
than one director. In addition, the bylaws provide that any vacancies may be
filled by the affirmative vote of:

- a majority of the remaining directors, even if less than a quorum;

- a sole remaining director; or

- a majority of the stockholders.

Generally, directors may be removed from office by the affirmative vote of
the holders of a majority of our voting power.

Our certificate of incorporation and bylaws provide that, effective upon
the closing of this offering, the terms of office of the members of the board of
directors will be divided into three classes: Class A, whose term will expire at
the annual meeting of stockholders to be held in 2000, Class B, whose term will
expire at the annual meeting of stockholders to be held in 2001 and Class C,
whose term will expire at the annual meeting of stockholders to be held in 2002.
At each annual meeting of stockholders after the initial classification, the
successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. Our bylaws permit the board of directors to increase or
decrease the size of the board of directors. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of
one-third of the total number of directors. This classification of the board of
directors may have the effect of delaying or preventing changes in control or
management of our company.

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<PAGE> 67

Advance Notice Procedures

Our bylaws provide for an advance notice procedure for the nomination, by
stockholders, of candidates for election as directors, and other stockholder
proposals to be considered at annual meetings of stockholders. In general,
notice of intent to nominate a director or raise matters at such meetings must:

- be received in writing by us at least 150 days prior to the anniversary
of the previous year's annual meeting of stockholders or, for any
special meeting, no later than ten days after notice of such meeting is
first given to stockholders;

- contain certain information concerning the person to be nominated or the
matters to be brought before the meeting; and

- contain certain information concerning the stockholder submitting the
proposal.

Special Meetings and Action by Written Consent

Our bylaws provide that, effective upon the closing of this offering,
special meetings of stockholders may be called only by the president, the
chairman of the board, or by order of a majority of the board of directors. In
addition, our certificate of incorporation provides that, upon closing of this
offering, our stockholders may not act by written consent in lieu of a meeting
of stockholders.

Amendment

Amendment of the foregoing provisions requires approval by holders of at
least 66 2/3% of all of the outstanding shares of our capital stock entitled to
vote in the election of directors, voting together as a single class. The super
majority voting requirement is 80% of all outstanding shares for any amendment
of the provisions of our certificate of incorporation and bylaws with respect to
limitations on directors' liability, the staggered board of directors and
indemnification of directors and officers. Our bylaws may also be amended by
action of the board of directors.

REGISTRATION RIGHTS

In connection with our reorganization in March 2000, we issued an option to
purchase 30,000 shares of our common stock in exchange for an option of
Cooperative with substantially similar terms issued in June 1996. The shares
under this option have piggyback registration rights on our registration of
shares under option plans.

LIMITATIONS ON DIRECTORS' LIABILITY

Our certificate of incorporation provides that none of our directors shall
be liable to us or our stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability:

- for any breach of the director's duty of loyalty to us or our
stockholders;

- for acts or omissions not in good faith or involving a knowing violation
of law;

- in respect of certain unlawful dividend payments or stock redemptions or
repurchases;

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

The effect of these provisions will be to eliminate our right and the right of
our stockholders to recover monetary damages against a director for breach of
fiduciary duty as a director, including breaches resulting from grossly
negligent behavior, except in the situations described above. Our bylaws mandate
that we indemnify our directors to the fullest extent authorized under Delaware
law. We have entered into indemnification agreements with each of our directors
providing for indemnification of such directors to the fullest extent permitted
by applicable law.

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<PAGE> 68

LISTING

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

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company. The transfer agent's address and telephone number is
40 Wall Street, New York, New York 10005, (212) 936-5100.

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<PAGE> 69

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, we will have 23,600,000 shares of common
stock outstanding. Of these shares, the 6,000,000 shares sold in the offering,
plus any additional shares sold upon exercise of the underwriters'
over-allotment option, will be freely transferable by persons other than our
affiliates without restriction or further registration under the Securities Act
of 1933. The remaining 17,600,000 outstanding shares will be restricted
securities within the meaning of Rule 144 under the Securities Act and may not
be sold in the absence of registration under the Securities Act of 1933 unless
an exemption from registration is available, such as the exemption afforded by
Rule 144.

LOCK-UP AGREEMENTS

Our officers and directors, and each of our stockholders each have entered
into lock-up agreements with representatives of the underwriters, providing
that, subject to certain exceptions, they will not offer, sell or otherwise
dispose of any shares of common stock, or securities convertible into or
exchangeable for common stock, or enter into any agreement to sell, for a period
of 180 days after the date of this prospectus without the prior written consent
of Pennsylvania Merchant Group, acting as the representative of the
underwriters. Pennsylvania Merchant Group may release any of such shares in its
sole discretion at any time and without prior notice. Immediately following
expiration of the lock-up period, all of the restricted shares will become
eligible for sale pursuant to Rule 144, subject to certain limitations described
below.

RULE 144

In general, under Rule 144 of the Securities Act of 1933, a person, or
persons whose shares are aggregated, who has beneficially owned restricted
securities for at least one year, including a person who may be deemed an
affiliate, is entitled to sell within any three month period a number of our
shares of common stock that does not exceed the greater of:

- 1% of the then-outstanding shares of our common stock; or

- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on
which notice of the sale is filed with the Securities and Exchange
Commission.

Sales under Rule 144 are subject to restrictions relating to manner of
sale, notice and availability of current public information about us. A person
who is not our affiliate at any time during the 90 days preceding a sale and who
has beneficially owned shares for at least two years would be entitled to sell
shares following this offering under Rule 144(k) without regard to the volume
limitations, manner of sale provisions or notice requirements of Rule 144.

RULE 701

Our employees, directors, officers or consultants who purchased our shares
in connection with a written compensatory plan or contract may be entitled to
rely on the resale provisions of Rule 701. Rule 701 permits non-affiliates to
sell their Rule 701 of the Securities Act shares without having to comply with
the public information, holding period, volume limitation or notice provisions
of Rule 144. Affiliates may sell their Rule 701 shares without having to comply
with Rule 144's holding period restrictions. In each of these cases, Rule 701
allows the stockholders to sell 90 days after the date of this prospectus.

Upon the consummation of this offering, there will be outstanding options
to purchase an aggregate of 1,059,047 shares of common stock. Giving effect to
vesting provisions limiting the exercisability of all the outstanding options
and the lock-up period applicable to certain option holders, none of these
shares will become available for sale in the public market pursuant to Rules 144
and 701 under the Securities Act of 1933 until at least 180 days after
completion of this offering. After the expiration of the lock-up period
17,600,000 shares will become available for resale.

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<PAGE> 70

REGISTRATION STATEMENT ON FORM S-8

Following this offering, we intend to file a registration statement on Form
S-8 under the Securities Act of 1933 to register the shares of common stock
reserved for issuance under our 2000 Stock Plan as well as non-plan options. The
stock registered under that registration statement will thereafter be available
for sale in the public market, subject to the resale limitations of Rule 144
applicable to our affiliates.

Since there has been no public market for shares of the common stock prior
to this offering, we are unable to predict the effect that sales made pursuant
to Rules 144 or 701 under the Securities Act of 1933, or otherwise, may have on
the prevailing market price of the shares of the common stock. Sales of a
substantial amount of the common stock in the public market, or the perception
that such sales could occur, could adversely affect the market prices of our
stock.

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<PAGE> 71

UNDERWRITING

Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each of the underwriters named below has severally agreed
to purchase, and we and the selling stockholder have agreed to sell to such
underwriters, the number of shares set forth opposite the name of such
underwriter.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Pennsylvania Merchant Group.................................
Roth Capital Partners, Inc. ................................
---------
Total............................................. 6,000,000
=========
</TABLE>

The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the shares (other than those
covered by the over-allotment option described below) if they purchase any of
the shares.

The underwriters, for whom Pennsylvania Merchant Group and Roth Capital
Partners, Inc. are acting as representatives, propose to offer some of the
shares directly to the public at the public offering price set forth on the
cover page of this prospectus and some of the shares to certain dealers at the
public offering price less a concession not in excess of $ per share. The
underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share on sales to certain other dealers. If all of the shares are
not sold at the initial offering price, the representatives may change the
public offering price and the other selling terms. The representatives have
advised us and the selling stockholder that the underwriters do not intend to
confirm any sales to any accounts over which they exercise discretionary
authority.

The selling stockholder has granted to the underwriters an option,
exercisable for 30 days from the date of this prospectus, to purchase up to
900,000 additional shares of common stock at the public offering price less the
underwriting discount. The underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, in connection with this offering.
To the extent such option is exercised, each underwriter will be obligated,
subject to certain conditions, to purchase a number of additional shares
approximately proportionate to such underwriter's initial purchase commitment.

We, our officers and directors, and all of our stockholders have agreed
that, for a period of 180 days from the date of this prospectus, we and they
will not, without the prior written consent of Pennsylvania Merchant Group
dispose of or hedge any shares of common stock of Cooperative or any securities
convertible into or exchangeable for common stock. Pennsylvania Merchant Group
in its sole discretion may release any of the securities subject to those
lock-up agreements at any time without notice.

Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price for the shares was
determined by negotiations between us, the selling stockholder and the
representatives. Among the factors considered in determining the initial public
offering price were our record of operations, our current financial condition,
our future prospects, our markets, the economic conditions in and future
prospects for the industry in which we compete, our management, and currently
prevailing general conditions in the equity securities markets, including
current market valuations of publicly traded companies considered comparable to
us. There can be no assurance, however, that the prices at which the shares will
sell in the public market after this offering will not be lower than the price
at which they are sold by the underwriters or that an active trading market in
the common stock will develop and continue after this offering.

We have applied to have the common stock included for quotation on the
Nasdaq National Market under the symbol "CCII." We cannot assure you, however,
that an active or orderly trading market will develop for the common stock or
that our common stock will trade in the public markets subsequent to the
offering at or above the initial offering price.

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<PAGE> 72

In order to facilitate the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock during and after the offering. Specifically, the underwriters may
over-allot or otherwise create a short position in the common stock for their
own account by selling more shares of common stock than we have actually sold to
them. The underwriters may elect to cover any short position by purchasing
shares of common stock in the open market or by exercising the over-allotment
option granted to the underwriters. In addition, the underwriters may stabilize
or maintain the price of the common stock by bidding for or purchasing shares of
common stock in the open market and may impose penalty bids, under which selling
concessions allowed to syndicate members or other broker-dealers participating
in the offering are reclaimed if shares of common stock previously distributed
in the offering are repurchased in connection with stabilization transactions or
otherwise. The effect of these transactions may be to stabilize or maintain the
market price at a level above that which might otherwise prevail in the open
market and these transactions may be discontinued at any time. The imposition of
a penalty bid may also affect the price of the common stock to the extent that
it discourages resales.

The underwriters may, from time to time, engage in transactions with, and
perform services for, us in the ordinary course of their business.

The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us and the selling stockholder in connection with
this offering. These amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares of common
stock.

<TABLE>
<CAPTION>
PAID BY COOPERATIVE PAID BY SELLING STOCKHOLDER
---------------------------- ----------------------------
NO EXERCISE FULL EXERCISE NO EXERCISE FULL EXERCISE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Per share........................ $ $ $ $
Total............................ $ $ $ $
</TABLE>

In connection with the offering, Pennsylvania Merchant Group and Roth
Capital Partners, Inc., on behalf of the underwriters, may purchase and sell
shares of common stock in the open market. These transactions may include
over-allotment, syndicate covering transactions and stabilizing transactions.
Over-allotment involves syndicate sales of common stock in excess of the number
of shares to be purchased by the underwriters in the offering, which creates a
syndicate short position. Syndicate covering transactions involve purchases of
the common stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Stabilizing transactions consist of
certain bids or purchases of common stock made for the purpose of preventing or
retarding a decline in the market price of the common stock while the offering
is in progress.

The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Pennsylvania Merchant Group or Roth Capital Partners, Inc., in covering
syndicate short positions or making stabilizing purchases, repurchases shares
originally sold by that syndicate member.

Any of these activities may cause the price of the common stock to be
higher than the price that otherwise would exist in the open market in the
absence of such transactions. These transactions may be effected on the Nasdaq
National Market or in the over-the-counter market, or otherwise and, if
commenced, may be discontinued at any time.

We and the selling stockholder have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, or to contribute to payments the underwriters may be required to make in
respect of any of those liabilities.

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<PAGE> 73

LEGAL MATTERS

The validity of the shares of the common stock offered hereby will be
passed upon by Buchanan Ingersoll Professional Corporation. Certain legal
matters in connection with the offering will be passed upon for the Company by
Swidler Berlin Shereff Friedman, LLP, special FCC counsel, and for the
underwriters by Pepper Hamilton LLP.

EXPERTS

The combined financial statements and financial statement schedule of
Cooperative Communications, Inc. and subsidiaries and Eastern Computer Services,
L.L.C. as of May 31, 1998 and 1999 and February 29, 2000, and for each of the
years in the three-year period ended May 31, 1999 and the nine month period
ended February 29, 2000, have been included herein and in the prospectus in
reliance upon the reports of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933 with respect to the
shares of common stock offered hereby. This prospectus does not contain all the
information which is in the registration statement. We refer you to the
registration statement and to the exhibits and schedules filed with the
registration statement for further information with respect to us and the shares
of common stock offered in this prospectus. Statements contained in this
prospectus as to the content of any contract or other document are necessarily
summaries.

The registration statement and the exhibits and schedules attached thereto
may be inspected without charge at the Public Reference Room of the Commission
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of the registration statement
may be obtained from the Public Reference Room of the Commission at prescribed
rates. This material also may be obtained on the Commission's website at
www.sec.gov. Information regarding the operation of the Public Reference Room
may be obtained by calling the Commission at (800) SEC-0330.

We intend to furnish our stockholders with annual reports containing
financial statements certified by our independent accountants and make available
quarterly reports containing unaudited financial information for the first three
quarters of each year.

70
<PAGE> 74

COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

INDEX

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Combined Financial Statements:
Independent Auditors' Report.............................. F-2
Combined Balance Sheets as of May 31, 1998 and 1999 and
February 29, 2000...................................... F-3
Combined Statements of Operations for the Years ended May
31, 1997, 1998 and 1999 and for the nine month periods
ended February 28, 1999 (unaudited) and February 29,
2000................................................... F-4
Combined Statements of Stockholders' and Members' Deficit
for the Years ended May 31, 1997, 1998 and 1999 and for
the nine month period ended February 29, 2000.......... F-5
Combined Statements of Cash Flows for the Years ended May
31, 1997, 1998 and 1999 and for the nine month periods
ended February 28, 1999 (unaudited) and February 29,
2000................................................... F-6
Notes to Combined Financial Statements.................... F-7
</TABLE>

F-1
<PAGE> 75

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Members
Cooperative Communications, Inc. and
Eastern Computer Services, L.L.C.:

We have audited the accompanying combined balance sheets of Cooperative
Communications, Inc. and subsidiaries and Eastern Computer Services, L.L.C., as
of May 31, 1998 and 1999, and February 29, 2000, and the related combined
statements of operations, stockholders' and members' deficit, and cash flows for
each of the years in the three-year period ended May 31, 1999 and the nine month
period ended February 29, 2000. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined 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 audit provides a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Cooperative
Communications, Inc. and subsidiaries and Eastern Computer Services, L.L.C. as
of May 31, 1998 and 1999, and February 29, 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended May 31, 1999 and the nine month period ended February 29, 2000 in
conformity with generally accepted accounting principles.

KPMG LLP

Short Hills, New Jersey

May 10, 2000, except for

the third paragraph

of note 10 which

is as of May 25, 2000

F-2
<PAGE> 76

COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FEBRUARY 29, 2000
-----------------------
MAY 31 PRO FORMA
----------------- STOCKHOLDERS'
1998 1999 ACTUAL DEFICIT
------- ------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,590 $ 7,180 $ 3,655
Trade accounts receivable, less allowance for doubtful
accounts and billing adjustments of $700 and $835 at May
31, 1998 and 1999, respectively, and $750 at February
29, 2000 (note 4)....................................... 7,138 8,058 6,253
Due from affiliates (note 9).............................. -- 53 106
Prepaid line costs, current............................... 257 127 84
Prepaid expenses and other current assets................. 15 141 210
------- ------- -------
Total current assets............................... 16,000 15,559 10,308
Property and equipment, net (note 5)........................ 1,542 3,181 4,960
Due from affiliates (note 9)................................ 24 -- --
Prepaid line costs, excluding current portion............... 84 43 34
Intangible asset -- customer list (note 6).................. 475 317 198
Other assets (note 3)....................................... 63 31 218
------- ------- -------
Total assets....................................... $18,188 $19,131 $15,718
======= ======= =======
LIABILITIES AND STOCKHOLDERS' AND MEMBERS' DEFICIT
Current liabilities:
Current installments of obligations under capital leases
(note 10)............................................... $ 474 $ 642 $ 676
Current installments of obligations under capital
lease -- affiliate (note 9)............................. -- 15 16
Accounts payable and accrued expenses (note 8)............ 8,524 14,112 11,984
Income taxes payable...................................... 80 60 60
Deferred revenue, current................................. 491 260 187
------- ------- -------
Total current liabilities.......................... 9,569 15,089 12,923
Obligations under capital leases, excluding current
installments (note 10).................................... 773 526 2,514
Obligations under capital lease -- affiliate, excluding
current installments (note 9)............................. -- 766 755
Deferred revenue, excluding current portion................. 157 103 76
Accrued telecommunications costs, excluding current portion
(note 14)................................................. 8,661 4,277 2,893
------- ------- -------
Total liabilities.................................. 19,160 20,761 19,161
------- ------- -------
Stockholders' and members' deficit: (notes 3 and 11)
Preferred stock $.01 par value. Authorized 5,000,000
shares; no shares issued or outstanding -- pro forma.... -- -- -- --
Common stock $.01 par value. Authorized 60,000,000 shares;
18,600,000 shares issued and outstanding -- pro forma... -- -- -- $ 186
Common stock, no par value. Authorized -- 20,000,000
shares, issued and outstanding 5,400,000 shares......... 1 1 1 --
Additional paid-in capital................................ 840 840 840 744
Accumulated deficit....................................... (2,067) (2,497) (4,373) (4,373)
Members' equity........................................... 254 26 89 --
------- ------- ------- -------
Total stockholders' and members' deficit........... (972) (1,630) (3,443) (3,443)
Commitments and contingencies (notes 9, 10, 14 and 16)......
------- ------- ------- -------
Total liabilities and stockholders' and members'
deficit.......................................... $18,188 $19,131 $15,718 $(3,443)
======= ======= ======= =======
</TABLE>

See accompanying notes to combined financial statements.
F-3
<PAGE> 77

COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES

AND EASTERN COMPUTER SERVICES, L.L.C.

COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
NINE MONTH PERIODS ENDED
YEARS ENDED MAY 31 -------------------------
------------------------------ FEBRUARY 28 FEBRUARY 29
1997 1998 1999 1999 2000
------- ------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue................................... $28,718 $37,200 $ 40,598 $30,235 $ 29,442
------- ------- ---------- ------- ----------
Operating expenses:
Costs of revenues (excluding
depreciation and amortization) (notes
1 and 16)............................ 22,468 29,073 31,725 23,872 24,083
Selling, general and administrative
expenses (notes 9 and 15)............ 5,957 7,286 8,222 6,045 5,946
Depreciation and amortization (notes 5
and 6)............................... 333 455 780 555 807
Stock based compensation (note 12)...... 840 -- -- -- --
------- ------- ---------- ------- ----------
Total operating expenses........ 29,598 36,814 40,727 30,472 30,836
------- ------- ---------- ------- ----------
Income (loss) from operations... (880) 386 (129) (237) (1,394)
------- ------- ---------- ------- ----------
Other income (expense):
Interest income -- affiliate (note 9)... -- -- 47 24 70
Interest income......................... 68 230 331 256 178
Interest expense -- affiliate (note
9)................................... -- -- (72) (42) (126)
Interest expense........................ (140) (152) (246) (196) (551)
Other income -- affiliate (note 9)...... 11 14 14 10 10
Other income, net....................... -- -- 35 9 --
------- ------- ---------- ------- ----------
Other income (expense), net..... (61) 92 109 61 (419)
------- ------- ---------- ------- ----------
Income (loss) before income tax
expense (note 13)............. (941) 478 (20) (176) (1,813)
Income tax expense........................ 128 195 98 98 --
------- ------- ---------- ------- ----------
Net income (loss)............... $(1,069) $ 283 $ (118) $ (274) $ (1,813)
======= ======= ========== ======= ==========
Pro forma information (note 3):
Historical loss before income tax
expense (benefit).................... $ (20) $ (1,813)
Pro forma income tax expense (benefit)
(unaudited).......................... 200 (450)
---------- ----------
Pro forma net loss (unaudited).......... $ (220) $ (1,363)
========== ==========
Pro forma net loss per common share
(unaudited):
Basic................................ $ (0.01) $ (0.07)
Diluted.............................. $ (0.01) $ (0.07)
========== ==========
Pro forma weighted average common shares
outstanding (unaudited):
Basic................................ 18,600,000 18,600,000
Diluted.............................. 18,630,000 18,630,000
========== ==========
</TABLE>

See accompanying notes to combined financial statements.
F-4
<PAGE> 78

COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

COMBINED STATEMENTS OF STOCKHOLDERS' AND MEMBERS' DEFICIT
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL ACCUMULATED MEMBERS'
SHARES AMOUNT PAID-IN CAPITAL DEFICIT EQUITY TOTAL
--------- ------ --------------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 1, 1996..... 5,400,000 $ 1 -- $ 18 $ 15 $ 34
Net income (loss)........... -- -- -- (1,816) 747 (1,069)
Stock based compensation
(note 12)................. -- -- $840 -- -- 840
Distributions to members.... -- -- -- -- (360) (360)
--------- --- ---- ------- ----- -------
Balance at May 31, 1997..... 5,400,000 1 840 (1,798) 402 (555)
Net income (loss)........... -- -- -- (269) 552 283
Distributions to members.... -- -- -- -- (700) (700)
--------- --- ---- ------- ----- -------
Balance at May 31, 1998..... 5,400,000 1 840 (2,067) 254 (972)
Net income (loss)........... -- -- -- (430) 312 (118)
Distributions to members.... -- -- -- -- (540) (540)
--------- --- ---- ------- ----- -------
Balance at May 31, 1999..... 5,400,000 1 840 (2,497) 26 (1,630)
Net income (loss)........... -- -- -- (1,876) 63 (1,813)
--------- --- ---- ------- ----- -------
Balance at February 29,
2000...................... 5,400,000 $ 1 $840 $(4,373) $ 89 $(3,443)
========= === ==== ======= ===== =======
</TABLE>

See accompanying notes to combined financial statements.
F-5
<PAGE> 79

COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

COMBINED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTH PERIODS
ENDED
YEARS ENDED MAY 31 -------------------------
--------------------------- FEBRUARY 28 FEBRUARY 29
1997 1998 1999 1999 2000
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................ $(1,069) $ 283 $ (118) $ (274) $(1,813)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Loss on disposal of fixed assets.......... -- -- 3 3 --
Stock based compensation.................. 840 -- -- -- --
Depreciation and amortization............. 333 455 780 555 807
Allowance for doubtful accounts........... 100 100 135 150 (85)
Changes in assets and liabilities:
Trade accounts receivable............... (2,424) (853) (1,055) (947) 1,890
Due from affiliates..................... (27) (14) (29) (27) (53)
Prepaid line costs...................... (195) 124 171 160 52
Prepaid expenses and other current
assets............................... 12 (15) (126) (181) (69)
Other assets............................ -- (60) 32 45 5
Accounts payable and accrued expenses... 3,024 8,401 1,204 149 (3,512)
Deferred revenue........................ 435 (211) (285) (208) (100)
Income taxes payable.................... 3 77 (20) 38 --
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities............... 1,032 8,287 692 (537) (2,878)
------- ------- ------- ------- -------
Cash flows from investing activities:
Capital expenditures......................... (123) (135) (106) (82) (175)
Acquisition of customer lists................ -- (475) -- -- --
------- ------- ------- ------- -------
Net cash used in investing
activities......................... (123) (610) (106) (82) (175)
------- ------- ------- ------- -------
Cash flows from financing activities:
Payments under capital leases................ (211) (380) (465) (397) (294)
Distributions to members..................... (360) (700) (540) (150) --
Payments for offering costs.................. -- -- -- -- (192)
Loans to/repayments from stockholders........ -- -- (991) (996) 14
------- ------- ------- ------- -------
Net cash used in financing
activities......................... (571) (1,080) (1,996) (1,543) (472)
------- ------- ------- ------- -------
Net increase (decrease) in cash and
cash equivalents................... 338 6,597 (1,410) (2,162) (3,525)
Cash and cash equivalents at beginning of
period....................................... 1,655 1,993 8,590 8,590 7,180
------- ------- ------- ------- -------
Cash and cash equivalents at end of period..... $ 1,993 $ 8,590 $ 7,180 $ 6,428 $ 3,655
======= ======= ======= ======= =======
Supplemental disclosure of cash paid for:
Interest..................................... $ 139 $ 142 $ 291 $ 221 $ 661
======= ======= ======= ======= =======
Income taxes................................. $ 125 $ 118 $ 118 $ 59 --
======= ======= ======= ======= =======
Supplemental disclosure of noncash financing
and investing activities:
Stock based compensation..................... $ 840 -- -- -- --
Capital lease of equipment................... $ 18 $ 551 $ 2,165 $ 2,121 $ 2,982
Exchange of equipment under capital lease.... -- -- -- -- $ (690)
======= ======= ======= ======= =======
</TABLE>

See accompanying notes to combined financial statements.
F-6
<PAGE> 80

COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS
MAY 31, 1998 AND 1999 AND FEBRUARY 29, 2000
(INFORMATION AS OF AND FOR THE NINE MONTH
PERIOD ENDED FEBRUARY 28, 1999 IS UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(1) DESCRIPTION OF COMPANY BUSINESS

Cooperative Communications, Inc. and subsidiaries (Cooperative) and Eastern
Computer Services, LLC (Eastern) (collectively, the Company) provide integrated
voice and data communication services to small and medium sized businesses. The
Company offers its customers a single point of contact for a comprehensive
package of communication services, including local, long distance, internet,
cellular and other enhanced voice and data services. The Company has
approximately 7,500 customers and is authorized to provide services in five
states with the majority of its customers being located in New Jersey. No single
customer accounted for more than 5% of revenues during each of the periods
presented.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation

The accompanying combined financial statements include the accounts of
Cooperative Communications, Inc. and subsidiaries and Eastern Computer Services,
LLC, a Delaware Limited Liability Company. All of the issued and outstanding
capital stock of Cooperative Communications, Inc. is owned by three
shareholders. The same three shareholders own the members interests in Eastern
Computer Services, LLC. On March 20, 2000, the entities were reorganized through
the formation of Cooperative Holdings, Inc. The financial statements of
Cooperative Holdings, Inc. are not included in the accompanying combined
financial statements as Cooperative Holdings, Inc. did not commence operations
until March 20, 2000 and had no assets or liabilities prior to such date (note
3). The combined financial statements are intended to present the financial
position and results of operations of the entities with common ownership and
business purpose. All significant intercompany balances and transactions have
been eliminated in combination and consolidation.

(b) Unaudited Interim Financial Information

The accompanying combined statements of operations and cash flows for the
nine month period ended February 28, 1999 are unaudited. In the opinion of
management, these combined statements have been prepared on the same basis as
the audited combined financial statements and include all adjustments,
consisting of only normal recurring adjustments, necessary for the fair
presentation of the results for such nine month period.

These accompanying unaudited interim financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions of Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements.

Operating results for the nine month period ended February 29, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending May 31, 2000.

The Company currently leases its transport capacity from a limited number
of suppliers and is dependent upon the availability of collocation space and
fiber optic transmission facilities owned by the suppliers. The Company is
currently vulnerable to the risk of renewing favorable supplier contracts,

F-7
<PAGE> 81
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

timeliness of the supplier in processing the Company's orders for customers and
is at risk to regulatory agreements that govern the rates to be charged to the
Company.

(d) Use of Estimates

The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amount of revenues and expenses during the
reporting period. Such estimates include the levels of valuation allowances for
billing adjustments and doubtful accounts receivable and deferred tax assets.
Actual results could differ from those estimates. The markets for the Company's
services are characterized by intense competition, rapid technological
development, regulatory changes, and frequent new product introductions, all of
which could impact the future value of the Company's assets.

(e) Cash Equivalents

Cash equivalents of $6,991, $5,260 and $2,369 at May 31, 1998, 1999 and
February 29, 2000, respectively, consist of U.S. Treasury bills with an initial
term of less than three months. For purposes of the combined statements of cash
flows, the Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.

(f) Property and Equipment

Property and equipment are stated at cost. Equipment under capital leases
are stated at the present value of minimum lease payments.

Depreciation of property and equipment is calculated on the straight-line
method over the estimated useful lives of the assets. Property and equipment
held under capital leases and leasehold improvements are amortized straight-line
over the lease term or estimated useful life of the asset.

<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
IN YEARS
------------
<S> <C>
Building.................................................... 20
Equipment................................................... 5
Computer equipment.......................................... 5
Telecommunications equipment................................ 5-10
Furniture and fixtures...................................... 10
Leasehold improvements...................................... 20
</TABLE>

Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized. Expenditures for maintenance
and repairs are charged to expense as incurred.

(g) Income Taxes

Eastern has been organized and operated under a limited liability company
agreement structured in a manner that is intended to result in the
classification of Eastern as a partnership for federal and state income tax
purposes. Consequently, the results of operations of Eastern are subject to
corporate federal and state income tax but pass directly through to the
individual members of Eastern in proportion to their

F-8
<PAGE> 82
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

respective ownership interests. Upon contribution of Eastern to Cooperative
Holdings, Inc, Eastern will be taxed as a C corporation (note 3).

Income taxes for Cooperative are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.

(h) Revenue Recognition

The Company recognizes revenues from telecommunications services in the
period the related services are provided.

Deferred revenue principally represents payment received related to
installation and activation fees charged customers to initiate service.
Installation and activation fees are initially deferred and subsequently
recognized in revenue over the estimated subscriber life which approximates
three years.

Costs incurred in connection with activation of customer services are
initially deferred and recognized as costs of telecommunications services over
the estimated subscriber life. Such costs are included in prepaid line costs in
the accompanying combined balance sheets.

(i) Accounting for Stock Options

The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25 "Accounting for
Stock Issued to Employees", and related interpretations, in accounting for its
fixed plan employee stock options. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. For disclosure purposes, pro forma net loss
and pro forma net loss per common share information included in note 12 are
provided in accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" as if the fair-value-based method had
been applied.

(j) Fair Value of Financial Instruments

The fair value of financial instruments is determined by reference to
market data and other valuation techniques as appropriate. The Company believes
the fair value of its financial instruments, principally cash and cash
equivalents, trade accounts receivable, accounts payable and accrued expenses,
obligations under capital leases and other long term obligations approximates
their recorded values due to the short-term nature of the instruments or
interest rates, which are comparable with current rates.

(k) Impairment of Long-lived Assets and Long-lived Assets to be Disposed of

Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the

F-9
<PAGE> 83
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.

(l) Segment Information

The Company is managed and operated as one business. The entire business is
managed by a single management team that reports to the chief executive officer.
The Company does not operate separate lines of business or product lines.
Accordingly, the Company does not prepare discrete financial information with
respect to separate product areas and does not have separately reportable
segments as defined by Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information."

(m) Impact of Recent Accounting Standards

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," (SFAS No. 133), which establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts and for hedging activities. SFAS No. 133 (as amended
by SFAS No. 137) is effective for all of the Company's fiscal quarters beginning
June 1, 2001. This statement is not expected to affect the Company as it
currently does not have derivative instruments or engage in hedging activities.

In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up
Activities", which requires the costs of start-up activities and organization
costs be expensed as incurred. SOP 98-5 is effective for the Company beginning
in fiscal 2000. Management of the Company does not believe that adoption of this
SOP will have a material affect on its combined financial statements as start-up
costs have historically been expensed as incurred.

(3) RECAPITALIZATION, PROFORMA INFORMATION AND PROFORMA NET LOSS PER COMMON
SHARE

Recapitalization

In January 2000, the Company's Board of Directors authorized the filing of
a Registration Statement on Form S-1 to sell shares of common stock through an
initial public offering (IPO). In connection with the contemplated IPO, the
Board of Directors, stockholders and members of the Company approved the
formation of Cooperative Holdings, Inc. (Holdings) through the filing of a
certificate of incorporation on February 9, 2000. Holdings is authorized to
issue up to 60,000,000 shares of common stock with a par value of $.01 per share
and up to 5,000,000 shares of undesignated preferred stock with a par value of
$.01 share. Accordingly, the total number of shares of all classes of capital
stock Holdings is authorized to issue is 65,000,000. Holders of common stock are
entitled to one vote for each share held, receive dividends ratably, if any, as
may be declared by the Board of Directors and share ratably in all assets
remaining after payment of liabilities and liquidation preferences of any
outstanding shares of preferred stock. The preferred stock is issuable from time
to time in one or more series and with such designations, preferences and other
rights as determined by the Board of Directors. The Board of Directors is
authorized to determine, among other things, the voting, dividend, redemption,
conversion, exchange and liquidation powers, rights and preferences and the
limitations thereon pertaining to such series.

On March 20, 2000, Cooperative, its stockholders and Holdings entered into
a plan of reorganization and exchange agreement (the Reorganization). Pursuant
to the Reorganization, the stockholders of Cooperative exchanged all of their
issued and outstanding shares of no par value common stock for shares

F-10
<PAGE> 84
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

of $.01 par value common stock of Holdings at which time Cooperative became a
wholly-owned subsidiary of Holdings. The stockholders of Cooperative received
3.444 shares of Holdings common stock for each share of Cooperative common stock
held. Also on March 20, 2000, the members of Eastern entered into a contribution
with Holdings (the Contribution) pursuant to which the members contributed their
equity ownership interests to Holdings at which time Eastern became a
wholly-owned subsidiary of Holdings.

Outstanding options to purchase 30,000 shares of common stock of
Cooperative were exchanged for an equal number of options to purchase shares of
common stock of Holdings (note 12). The exchanged options in Holdings have been
issued outside of the Cooperative Holdings, Inc. 2000 Stock Option Plan
described in note 12 and with terms and conditions substantially the same as the
terms and conditions of the options prior to the exchange. Subsequent to the
Reorganization, a total of 18,600,000 shares of Holdings common stock are issued
and outstanding. There are no issued and outstanding shares of preferred stock.
The Reorganization is intended to qualify as a non-taxable reorganization
pursuant to Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as
amended. The Reorganization and Contribution were accounted for using carryover
basis. Accordingly, no gain or loss was recognized on the transactions.

The Company has deferred expenses of the proposed IPO totaling $192 at
February 29, 2000. Such deferred costs are included in other assets in the
accompanying combined balance sheet.

Pro Forma Information -- Unaudited

The accompanying combined financial statements include unaudited pro forma
information which gives effect to the following:

Stockholders' Deficit Information

(a) The formation of Holdings and the exchange of each of the issued and
outstanding shares of no par value common stock of Cooperative for
3.444 shares of $.01 par value common stock of Holdings.

(b) The reclassification of the undistributed earnings in Eastern to
additional paid-in capital assuming a distribution to the members
followed by a contribution to the capital of Holdings.

Income Tax Expense (Benefit) and Net Loss Per Common Share

(a) The organization of Eastern as a tax paying entity. As discussed in
note 2, prior to the contribution, Eastern was not subject to income
taxes and, therefore, no provision for income taxes is included in the
historical combined financial statements. Pro forma income tax expense
(benefit) was computed in accordance with the asset and liability
method and assumes Eastern was organized as a tax paying entity at the
beginning of the periods presented.

(b) The formation of Holdings and the exchange of each of the issued and
outstanding shares of no par value common stock of Cooperative for
3.444 shares of $.01 par value common stock of Holdings.

Pro Forma Net Loss Per Common Share

Pro forma basic net loss per common share is computed by dividing net loss
by the pro forma weighted average number of common shares outstanding assuming
the formation of Holdings had occurred at the beginning of the periods
presented.
F-11
<PAGE> 85
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Pro forma diluted net loss per common share was calculated in a manner
consistent with pro forma basic net loss per common share except that pro forma
diluted net loss per common share also includes the dilutive effect of 30,000
options issued in 1997 to acquire an equivalent number of shares of common stock
for nominal consideration (note 12). There were no additional potential common
shares outstanding other than the options described above.

All share and per share data have been retroactively adjusted to reflect
the effects of the stock split (see note 11).

(4) TRADE ACCOUNTS RECEIVABLE

Trade accounts receivable, consist of the following:

<TABLE>
<CAPTION>
MAY 31
---------------- FEBRUARY 29
1998 1999 2000
------ ------ -----------
<S> <C> <C> <C>
Billed................................................ $7,629 $8,727 $6,904
Unbilled.............................................. 209 166 99
------ ------ ------
7,838 8,893 7,003
Less allowance for doubtful accounts and billing
adjustments......................................... 700 835 750
------ ------ ------
$7,138 $8,058 $6,253
====== ====== ======
</TABLE>

Unbilled receivables represents telecommunication services rendered as of
the balance sheet date for which a bill has not been issued to the customer.
Unbilled receivables are generally billed to customers in the immediately
succeeding month.

Increase to the allowance for billing adjustments have been recorded with a
corresponding reduction in revenues in the accompanying combined statement of
operations.

(5) PROPERTY AND EQUIPMENT

Property and equipment, including equipment under capital leases, consists
of the following:

<TABLE>
<CAPTION>
MAY 31
---------------- FEBRUARY 29
1998 1999 2000
------ ------ -----------
<S> <C> <C> <C>
Building.............................................. $ -- $1,788 $1,788
Equipment............................................. 110 140 141
Computer equipment.................................... 580 879 1,031
Telecommunications equipment.......................... 1,509 1,603 2,895
Furniture and fixtures................................ 291 328 353
Leasehold improvements................................ 108 115 122
------ ------ ------
2,598 4,853 6,330
Less accumulated depreciation and amortization........ 1,056 1,672 1,370
------ ------ ------
$1,542 $3,181 $4,960
====== ====== ======
</TABLE>

Depreciation and amortization expense related to property and equipment
(including capital leases) amounted to $333, $455 and $622 for the years ended
May 31, 1997, 1998 and 1999, respectively, and $688 for the nine month period
ended February 29, 2000. During the nine month period ended

F-12
<PAGE> 86
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

February 29, 2000, the Company exchanged telecommunications equipment under
capital lease with a net book value of $690 for similar equipment having a
capitalized value of $2,808 (see note 10).

(6) INTANGIBLE ASSET -- CUSTOMER LIST

Commencing in 1994, the Company had a sales agent agreement with a
third-party for the purposes of selling communications services. The sales agent
agreement required the Company to pay a commission based on the type of service
to be rendered. In May 1998, the Company reached a settlement agreement (the
Agreement) with the third-party for the termination of the sales agent
agreement. The Agreement required the Company to pay all then outstanding and
unpaid commissions due amounting to $25. Such commissions were included in the
combined statement of operations for fiscal 1998. In addition, the Company
acquired all rights, title and interests in the customer lists and any
relationships therewith from the third party for $475. In return, the third
party agreed not to directly or indirectly participate in the solicitation, sale
or provision of telecommunications services to any specified customer for a
period of three years. The acquisition cost of the customer list is payable in
four equal installments with the first installment due at signing. The remaining
three installments were paid during fiscal 1999.

The Company has reflected the cost of the customer list of $475 as an
intangible asset and is amortizing the asset to operations over the duration of
the Agreement which is three years. During the year ended May 31, 1999 and the
nine month period ended February 29, 2000, the Company recorded amortization
expenses of $158 and $119, respectively.

(7) CREDIT FACILITY

The Company has a credit facility with a bank which provides periodic
borrowings of up to $1,500 secured by trade accounts receivable. The credit
facility is subject to periodic renewal and is currently set to expire (subject
to further renewal) on November 2, 2000. Outstanding borrowings under the credit
facility bear interest at the bank's prime lending rate of 8.75% at February 29,
2000. The Company had no outstanding borrowings under the credit facility at May
31, 1998 and 1999 and February 29, 2000.

(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

<TABLE>
<CAPTION>
MAY 31
----------------- FEBRUARY 29
1998 1999 2000
------ ------- -----------
<S> <C> <C> <C>
Accounts payable..................................... $1,042 $ 921 $ 824
Accrued telecommunications costs..................... 4,271 9,576 7,300
Sales taxes payable.................................. 2,075 823 744
Universal service taxes payable...................... 808 2,497 2,846
Accrued commissions.................................. 328 295 270
------ ------- -------
$8,524 $14,112 $11,984
====== ======= =======
</TABLE>

Included in accrued telecommunications costs is $979, $4,389 and $1,854 at
May 31, 1998, 1999 and February 29, 2000, respectively, related to the current
portion of amounts due to a supplier pursuant to a settlement arrangement (see
note 14).

F-13
<PAGE> 87
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(9) RELATED PARTY TRANSACTIONS

In November 1998, the Company advanced two shareholders/executive officers
$1,000 evidenced by a promissory note. The advance was used to repay in full the
then outstanding mortgage obligation on the Company's headquarters and
operations facility (the Facility) located in Belleville, New Jersey. The
promissory note is repayable by the shareholders/executives to the Company over
a period of 20 years in equal monthly installments of approximately $9 including
interest at a rate of 9.5% per annum. Principal payments to be received by the
Company over the next five fiscal years are as follows: 2000 -- $18;
2001 -- $20; 2002 -- $22; 2003 -- $25; and; 2004 -- $27. The promissory note is
secured by the Facility.

In December 1998, the Company entered into a lease agreement (the Lease
Agreement) with the same two shareholders/executive officers for a lease of the
Facility. The lease agreement requires monthly payments of approximately $17 per
month ($200 per annum) for a period of 20 years. Principal payments to be made
by the Company over the next five fiscal years are as follows: 2000 -- $33;
2001 -- $36; 2002 -- $40; 2003 -- $44; and; 2004 -- $48. Monthly lease payments
are subject to escalation to reflect any increases in the Consumer Price Index
for northern New Jersey. The lease is a "Triple Net Lease" requiring the Company
to pay for essentially all costs of operating and maintaining the Facility
including taxes, utilities, insurance, maintenance and reports.

The lease has been accounted for as a capital lease in accordance with the
provisions of Statement of Financial Accounting Standards No. 13, "Accounting
for Leases." Accordingly, the Company capitalized the Facility at the
commencement of the lease in the amount of $1,788 representing the present value
of the future minimum lease payments discounted at the Company's incremental
borrowing rate estimated at 9.5%. the amount capitalized approximated the fair
value of the facility. The Company is amortizing the building on a straight-line
basis over a period of 20 years.

In connection with the execution of the lease, the Company and the
shareholders/executives entered into a legal right of full and complete offset
of the lease obligation and aforementioned note receivable. Accordingly, the
Company has reflected the initial net obligation in the amount of $781,
subsequently reduced through net principal payments as a capital lease
obligation-affiliate in the accompanying combined balance sheets at May 31,
1999.

Prior to entering into the Lease Agreement, the Company leased the Facility
from the same two shareholders/executive officers under an informal
month-to-month arrangement which included essentially the same cost structure as
the Lease Agreement except that real estate taxes were not paid by the Company.

Rent expense charged to operations under the aforementioned month-to-month
lease arrangement amounted to $205, $205 and $103 for the years ended May 31,
1997, 1998 and 1999, respectively.

The Company subleases a portion of its headquarters and operations facility
to two entities owned by the same shareholders as the Company. The entities are
engaged in business operations different from that of the Company. The lease
arrangements provide for rental payments in the amount of $1 per month,
including a pro-rata share of the utilities, taxes, insurance, maintenance and
repairs for a period of five years expiring in 2005. Sublease rental income to
be recognized by the Company over the succeeding five fiscal years through
expiration will be $14 per year.

For the years ended May 31, 1997, 1998, 1999 and for the nine month period
ended February 29, 2000, the Company recognized rental income in the amount of
$11, $14, $14 and $10, respectively. Such amounts are included in other
income-affiliate in the accompanying combined statements of operations. Amounts
due from these entities under the aforementioned lease arrangements amounted to
$24, $37 and
F-14
<PAGE> 88
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

$47 at May 31, 1998, 1999 and February 29, 2000, respectively, and are included
in due from affiliates in the accompanying combined balance sheets.

(10) LEASES

The Company is obligated under various equipment and building capital
leases that expire at various dates during the next 2 to 20 years. The gross
amount of equipment and buildings and related accumulated amortization recorded
under capital leases consists of the following:

<TABLE>
<CAPTION>
MAY 31
---------------- FEBRUARY 29
1998 1999 2000
------ ------ -----------
<S> <C> <C> <C>
Building.............................................. $ -- $1,788 $1,788
Equipment............................................. 1,969 2,330 3,472
------ ------ ------
1,969 4,118 5,260
Less accumulated amortization....................... 823 1,346 797
------ ------ ------
$1,146 $2,772 $4,463
====== ====== ======
</TABLE>

In August 1999, the Company exchanged telecommunications switch equipment
under a capital lease with a net book value of $690 for similar equipment with
increased capacity having a capitalized value of $2,808. The new lease is for a
period of five years (see note 5). In March and April 2000, the Company entered
into several leases for additional telecommunications switch equipment
aggregating $67.

In March and April 2000, the Company entered into several leases for
telecommunications equipment aggregating approximately $3,600. The equipment
lease agreements require monthly payments in increasing amounts ranging from $18
to $99 over a five year period commencing when the Company takes possession of
the equipment. The Company also obtained a commitment from the vendor to provide
financing for the installation and maintenance of the equipment aggregating
approximately $4,500. Amounts financed for installation and maintenance are
repayable over a similar period in increasing amounts. In fiscal 2001, the
Company expects to record a charge to operations of up to $1,000 in connection
with the aforementioned equipment leases. On May 25, 2000, the Company received
notification from the vendor regarding an increase in the amount of equipment
lease, installation and maintenance financing to $13,000.

The Company also has several noncancelable operating leases, primarily for
telecommunications equipment and office space, that expire over the next three
years. Rental expense for operating leases, including the informal
month-to-month headquarters and operations facility lease (see note 9), was
$228, $227, $148 and $62 in the years ended May 31, 1997, 1998, 1999 and for the
nine month period ended February 29, 2000, respectively.

F-15
<PAGE> 89
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Future minimum lease payments under noncancelable operating leases and
future minimum capital lease payments, excluding the headquarters and operations
facility capital lease, as of February 29, 2000 are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Year ending May 31:
2000...................................................... $ 242 $12
2001...................................................... 1,051 48
2002...................................................... 1,014 16
2003...................................................... 941 --
2004...................................................... 804 --
2005...................................................... -- --
------ ---
Total minimum lease payments...................... 4,052 $76
===
Less amount representing interest (at rates ranging
from 7.0% to 22.5%)................................... 862
------
Present value of net minimum capital lease
payments............................................ 3,190
Less current installments of obligations under capital
leases................................................ 676
------
Obligations under capital leases, excluding current
installments........................................ $2,514
======
</TABLE>

(11) STOCKHOLDER'S AND MEMBERS' EQUITY

Stockholder's Equity

In October 1996, the Board of Directors of Cooperative Authorized a 6 for 1
stock split increasing the number of authorized shares of no par value common
stock from 1,000,000 shares to 6,000,000 shares and the number of issued and
outstanding shares from 900,000 to 5,400,000 shares. All share and per share
data in the accompanying combined financial statements have been retroactively
adjusted to reflect the effect of the stock split. In June 1997, the Board of
Directors approved an increase in the number of authorized shares of no par
value common stock from 6,000,000 to 20,000,000.

Members' Equity

Eastern has one class of members. All equity members vote in proportion to
their respective equity ownership interests in Eastern. Net profits and losses
of Eastern are allocated to the capital accounts of the members as described in
the Eastern operating agreement, generally in proportion to their respective
ownership interests. No members are liable for any obligation of the Eastern or
are required to contribute any additional capital related to deficits incurred.
Distributions to members in the accompanying combined statements of
stockholder's and member's deficit represent payments made to such members in
proportion to their respective ownership interests.

(12) STOCK OPTIONS

In June 1996, Cooperative granted 30,000 options to acquire an equivalent
number of shares of common stock at an exercise price of $.01 per share to a
certain member of senior management. The options vested immediately upon grant
and may be exercised at any time on or before two years after the recipient is
no longer employed by Cooperative. The options are not subject to the effect of
stock split

F-16
<PAGE> 90
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

described in note 11. The fair market value of Cooperative's common stock on the
date of grant, as determined by the Company's Board of Directors, was
approximately $28 per share. Accordingly, the Company recognized compensation
expense of $840 in the combined statement of operations for the year ended May
31, 1997.

Effective June 1, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). This statement defines a fair value method of
accounting for an employee stock option or similar equity instrument. However,
it allows an entity to continue to measure compensation cost for those
instruments using the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" provided it discloses the effect of SFAS 123 in footnotes to the
financial statements. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method.

Had the Company elected to recognize compensation cost based on the fair
value of the stock options at the date of grant under SFAS 123, net loss the
year ended May 31, 1997, would not have been materially different due to the
issuance of the aforementioned options with a nominal exercise price.

On February 11, 2000, the Board of Directors of Holdings approved the
adoption of an employee equity incentive plan. The Cooperative Holdings, Inc.
2000 Stock Plan (the Plan) authorizes the grant of incentive stock options
within the meaning of section 422 of the Internal Revenue Code of 1986, as
amended, and non-qualified stock options for the purchase of an aggregate of up
to 3,540,000 shares (subject to adjustment for stock splits and similar capital
changes) of common stock to employees and, in the case of non-qualified stock
options, to consultants and directors of Holdings as defined in the Plan. In
addition, the Plan provides for the granting of restricted stock awards and
other stock awards at the discretion of the Board of Directors. No stock based
compensation awards have been granted pursuant to the plan as of February 29,
2000.

(13) INCOME TAXES

Income tax expense attributable to income (loss) from operations consists
of the following:

<TABLE>
<CAPTION>
YEARS ENDED MAY 31 NINE MONTH
-------------------- PERIOD ENDED
1997 1998 1999 FEBRUARY 29, 2000
---- ---- ---- -----------------
<S> <C> <C> <C> <C>
Current:
Federal..................................... $ 99 $151 $76 --
State and local............................. 29 44 22 --
---- ---- --- --
128 195 98 --
---- ---- --- --
Deferred:
Federal..................................... -- -- -- --
State and local............................. -- -- -- --
---- ---- --- --
-- -- -- --
---- ---- --- --
Total income tax expense............ $128 $195 $98 --
==== ==== === ==
</TABLE>

F-17
<PAGE> 91
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

The actual income tax expense differs from the expected income tax expense
(benefit) (computed by applying the U.S. Corporate income tax rate of 34% to
income (loss) before income tax expense) as follows:

<TABLE>
<CAPTION>
YEARS ENDED MAY 31 NINE MONTH
----------------------- PERIOD ENDED
1997 1998 1999 FEBRUARY 29, 2000
----- ----- ----- -----------------
<S> <C> <C> <C> <C>
Computed "expected" federal income tax
expense (benefit)....................... $(320) $ 163 $ (7) $(616)
Change in valuation allowance for deferred
tax assets allocated to income tax
expense................................. 763 187 188 742
State income taxes, net of federal income
tax benefit............................. 19 36 15 (110)
Income taxed directly to members.......... (254) (188) (106) (21)
Other, net................................ (80) (3) 8 5
----- ----- ----- -----
$ 128 $ 195 $ 98 $ --
===== ===== ===== =====
</TABLE>

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:

<TABLE>
<CAPTION>
MAY 31
--------------- FEBRUARY 29
1998 1999 2000
------ ----- -----------
<S> <C> <C> <C>
Deferred tax assets:
Federal and State net operating loss................. $ -- -- $1,112
Trade accounts receivable allowances................. 280 334 299
Prepaid line costs................................... 327 300 47
Deferred revenue..................................... 122 77 105
Deferred stock-based compensation.................... 335 335 335
Other................................................ 156 241 114
------ ----- ------
Total gross deferred tax assets.............. 1,220 1,287 2,012
Less valuation allowance............................. 1,076 1,264 2,006
------ ----- ------
Net deferred tax assets...................... 144 23 6
------ ----- ------
Deferred tax liabilities:
Depreciation......................................... (27) (23) (6)
Section 481 adjustment, cash to accrual conversion... (117) -- --
------ ----- ------
Total gross deferred tax liabilities......... (144) (23) (6)
------ ----- ------
Net deferred tax asset....................... $ -- -- --
====== ===== ======
</TABLE>

The valuation allowance for deferred tax assets as of June 1, 1997, 1998
and 1999 was $889, $1,076, and $1,264, respectively. The net change in the
valuation allowance for the years ended May 31, 1997, 1998 and 1999 was an
increase of $763, $187 and $188, respectively, and an increase of $742 for the
nine month period ended February 29, 2000.

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment.

Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the

F-18
<PAGE> 92
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Company will realize the benefits of these deductible differences net of the
existing valuation allowance at February 29, 2000.

(14) TRANSMISSION COST SETTLEMENT

The Company is routinely involved in various disputes with its suppliers of
telecommunications services arising in the normal course of business, as is
common in the industry. The Company's policy is to record supplier invoices at
the full value and recognize any cost reduction upon written notification from
the vendor that a credit will be issued. Alternatively, if the amount of credit
can be estimated with reasonable accuracy, the Company will record the net
amount due.

Commencing in 1993, the Company had an ongoing dispute with one of its
major suppliers. A settlement of the dispute was verbally agreed to by the
parties in June 1998 and formalized in June 1999. Pursuant to the settlement,
the Company agreed to pay a total of $10,500, including interest, payable as
follows: $1,044 in June 1998, $2,957 in June 1999 and $181 per month for 36
months thereafter. The results of the settlement did not have a significant
impact on the Company's combined financial position and results of operations as
the settlement approximated the net amount of supplier invoices accrued by the
Company.

The Company has recorded the present value of the settlement, using a
discount rate of 8%, of $9,640, $8,661 and $4,747 in the accompanying combined
balance sheets at May 31, 1998, 1999 and February 29, 2000, respectively. The
current portion of the obligation of $979, $4,389 and $1,854 at May 31, 1998,
1999 and February 29, 2000, respectively, has been included in accrued
telecommunications costs in accounts payable and accrued expenses in the
accompanying combined balance sheets (see note 8).

(15) EMPLOYEE BENEFIT PLANS

The Company adopted a 401(k) and profit sharing plan during fiscal 1999,
covering substantially all of its employees. Under the plan, employees may elect
to contribute a portion of their compensation to the 401(k) plan, subject to
certain limitations. Company matching contributions are made at a rate of 33% of
the first 6% of participant compensation contributed to the plan. In addition,
the Company may make discretionary profit sharing contributions to the plan.
Company contributions vest over a period of 5 years. Total contributions made by
the Company to the plan amounted to $1 and $22 for the year ended May 31, 1999
and the nine month period ended February 29, 2000, respectively.

(16) COMMITMENTS AND CONTINGENCIES

The Company has a resale agreement with an incumbent local exchange carrier
which expires in fiscal 2004. Per the agreement, the Company is obligated to pay
fees for a certain number of minimum lines and a surcharge in the event the
Company exceeds the maximum number of lines contracted. The Company has exceeded
this minimum amount stipulated in the agreement during each of the years in the
three year period ended May 31, 1999 and the nine month period ended February
29, 2000. The Company is dependent on the cooperation of the incumbent local
exchange carrier to provide access service for the origination and termination
of its local and long distance traffic. Historically, these access charges can
make up a significant percentage of the overall cost of providing these
services. To the extent the access services of the local exchange carrier are
used, the Company and its customers are subject to the quality of service,
equipment failures and service interruptions of the local exchange carrier.

F-19
<PAGE> 93
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Recently, the Company entered into interconnection agreements with the same
local exchange carrier. The agreements provide the Company and the carrier with
network interconnection or collocation in New Jersey and Pennsylvania. The
agreements also provide for access to unbundled network elements, switching and
routing of service, reciprocal compensation for the transport and termination of
local calls over the terminating carrier switch and various other services. Fees
for services provided are payable monthly at rates specified in the agreement.

The Company has long distance telecommunications service agreements with
several interexchange carriers. The terms of these agreements range from month
to month to up to 24 months and generally require the Company to meet certain
minimum usage levels. Failure to meet the minimum usage levels would have an
adverse affect on the Company's pricing arrangements. The Company generally
meets the minimum usage requirements in the ordinary course of business.

The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.

F-20
<PAGE> 94

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

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT OR ADDITIONAL
INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE
THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED
BY THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT
COVER OF THIS PROSPECTUS.

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

TABLE OF CONTENTS
------------------------

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 7
Use of Proceeds....................... 20
Dividend Policy....................... 20
Capitalization........................ 21
Dilution.............................. 22
Selected Combined Financial Data...... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 34
Management............................ 52
Certain Relationships and Related
Transactions........................ 59
Principal and Selling Stockholders.... 60
Description of Capital Stock.......... 62
Shares Eligible for Future Sale....... 66
Underwriting.......................... 68
Legal Matters......................... 70
Experts............................... 70
Where You Can Find More Information... 70
Index to Combined Financial
Statements.......................... F-1
</TABLE>

UNTIL , 2000, ALL DEALERS THAT BUY, SELL OR TRADE THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------

6,000,000 SHARES

COMMON STOCK

[COOPERATIVE HOLDINGS, INC. LOGO]
--------------------
PROSPECTUS
, 2000
--------------------
PENNSYLVANIA MERCHANT
GROUP

ROTH CAPITAL PARTNERS, INC.
------------------------------------------------------
------------------------------------------------------
<PAGE> 95

PART II

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission registration fee and the NASD
filing fee. All the expenses below will be paid by us.

<TABLE>
<CAPTION>
ITEM AMOUNT
---- ----------
<S> <C>
Securities and Exchange Commission Registration fee......... $ 21,859
NASD filing fee............................................. 8,780
Nasdaq National Market listing (entry) fee.................. 95,000
Blue Sky fees and expenses.................................. 15,000
Printing and engraving expenses............................. 150,000
Legal fees and expenses..................................... 350,000
Accounting fees and expenses................................ 350,000
Transfer Agent and Registrar fees........................... 4,500
Miscellaneous............................................... 4,861
----------
Total....................................................... $1,000,000
==========
</TABLE>

-----------------------
* To be supplied by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law permits each Delaware
business corporation to indemnify its directors, officers, employees and agents
against expenses and liabilities in connection with any proceeding involving
such persons by reason of his serving or having served in such capacities or for
each such person's acts taken in his capacity as a director, officer, employee
or agent of the corporation if such actions were taken in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal proceeding, if he
had no reasonable cause to believe his conduct was unlawful, provided that any
such proceeding is not by or in the right of the corporation.

Section 102(b)(7) of the Delaware General Corporation Law enables a
corporation in its certificate of incorporation to limit the liability of
directors of the corporation to the corporation or its stockholders.
Specifically, a certificate of incorporation may provide that directors of the
corporation will not be personally liable for money damages for breach of a duty
as a director, except for liability (1) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (2) for acts or omissions not in
good faith or which involve a knowing violation of law, (3) with respect to
unlawful payment of dividends or other unlawful purchase or redemption of shares
of the corporation, or (4) for any transaction from which the director derived
an improper personal benefit.

Our Certificate of Incorporation limits the liability of our directors as
authorized by Section 102(b)(7).

Article XI of our bylaws specifies that we shall indemnify our directors,
officers, employees and agents to the extent such party is a party to any action
because he was a director, officer, employee or agent of ours. We have agreed to
indemnify such parties for their actual and reasonable expenses. This provision
of the bylaws is deemed to be a contract between us and each director and
officer who serves in such capacity at any time while such provision and the
relevant provisions of the Delaware General Corporation Law are in effect, and
any repeal or modification thereof shall not offset any action, suit or
proceeding theretofore or thereafter brought or threatened based in whole or in
part upon any such state of facts.

We have executed indemnification agreements with each of our officers and
directors pursuant to which we have agreed to indemnify such parties to the full
extent permitted by law, subject to certain exceptions, if
II-1
<PAGE> 96

such party becomes subject to an action because such party is a director,
officer, employee, agent of fiduciary of ours.

We intend to obtain liability insurance for the benefit of our directors
and officers which will provide coverage for losses of directors and officers
for liabilities arising out of claims against such persons acting as directors
or officers of the registrant (or any subsidiary thereof) due to any breach of
duty, neglect, error, misstatement, misleading statement, omission or act done
by such directors and officers, except as prohibited by law.

At present, there is no pending litigation or proceeding involving a
director or officer of ours as to which indemnification is being sought nor are
we aware of any threatened litigation that may result in claims for
indemnification by any director or officer.

Reference is made to Section 6 of the Underwriting Agreement, the proposed
form of which is filed as Exhibit No. 1.1, in which the underwriters agree to
indemnify our directors and officers and certain other persons, against civil
liabilities, including certain liabilities under the Securities Act.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Prior to this offering, we issued the following securities:

In March 2000, we issued shares of our common stock to the holders of all
of the issued and outstanding shares of capital stock of Cooperative
Communications, Inc. As a result, Cooperative Communications, Inc. became a
wholly-owned subsidiary of ours. Prior to such issuance, we had no stockholders.
We also issued an option to purchase 30,000 shares of our common stock at an
exercise price of $0.01 per share in exchange for an option to purchase 30,000
shares of common stock of Cooperative Communications, Inc. In addition, all of
the members of Eastern Computer Services, L.L.C., who had constituted all of the
stockholders of Cooperative Communications, Inc., contributed to us all of their
membership interests in Eastern. As a result, Eastern Computer Services, L.L.C.
became a wholly-owned subsidiary of ours.

In April 2000, our board of directors approved the issuance, upon the
consummation of this offering, of options to purchase 1,029,047 shares of common
stock under our 2000 Stock Plan to employees, officers and consultants at
exercise prices equal to the initial public offering price.

We believe that the foregoing issuances of securities, if they constitute
sales, are exempt from registration under the Securities Act by virtue of the
exemption provided by Section 4(2) thereof for transactions not involving a
public offering or Rule 701 under the Securities Act as transactions made
pursuant to a written compensatory plan or pursuant to a written contract
relating to compensation. The sales of securities were made without the use of
an underwriter and the certificates evidencing the shares bear a restrictive
legend permitting their transfer only upon registration of the shares or an
exemption under the Securities Act. We believe that all recipients had adequate
access to information about us.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS

(a) Exhibits

II-2
<PAGE> 97

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.2+** Plan of Reorganization and Exchange Agreement dated March
20, 2000 among Cooperative Holdings, Inc., Cooperative
Communications, Inc. and the shareholders and optionholders
of Cooperative Communications, Inc.
10.3** Form of Indemnification Agreement by and between Cooperative
Holdings, Inc. and each of its directors and executive
officers.
10.4** Employment Agreement by and between Cooperative Holdings,
Inc. and Louis A. Lombardi, Sr., dated as of March 20, 2000.
10.5** Employment Agreement by and between Cooperative Holdings,
Inc. and Louis A. Lombardi, Jr., dated as of March 20, 2000.
10.6** 2000 Stock Plan.
10.7* Lease of Portion of Premises at 412-420 Washington Avenue,
Belleville, New Jersey 07109, dated as of December 1, 1998,
by and between Louis Lombardi and Patrick Lombardi, as
landlord, and Cooperative Communications, Inc., as tenant.
10.8 $1,000,000 Promissory Note, dated November 30, 1998, payable
to Cooperative Communications, Inc. by Louis Lombardi and
Patrick Lombardi.
10.9 Amendment No. 1 to Lease of Portion of Premises at 412-420
Washington Avenue, Belleville, New Jersey 07109, effective
as of December 1, 1998, by and between Louis Lombardi, Sr.
and the Estate of Patrick Lombardi, as landlord, and
Cooperative Communications, Inc., as tenant.
10.10 Amendment No. 1 to Promissory Note dated November 30, 1998,
effective as of November 30, 1998, executed by Louis
Lombardi, Sr. and the Estate of Patrick Lombardi.
10.11 Offset Agreement, dated as of January 1, 2000, by and
between Cooperative Communications, Inc., as tenant, and
Louis Lombardi and the Estate of Patrick Lombardi, as
landlord.
21** List of subsidiaries of Cooperative Holdings, Inc.
23.1 Independent Auditors' Report and Consent of KPMG LLP.
23.2* Consent of Buchanan Ingersoll Professional Corporation
(contained in the opinion filed as Exhibit 5 to the
Registration Statement).
23.3* Consent of Swidler Berlin Shereff Friedman LLP.
24** Powers of Attorney of certain officers and directors of
Cooperative Holdings, Inc.
27 Financial Data Schedule.
</TABLE>

---------------
* To be filed by Amendment.

** Previously filed.

+ The schedules or exhibits to this document are not being filed herewith
because we believe that the information contained therein should not be
considered material to an investment decision in us or such information is
otherwise adequately disclosed in this Registration Statement on Form S-1. We
agree to furnish supplementally a copy of any schedule or exhibit to the
Commission upon request.

(b) Financial Statement Schedules

Schedule II -- Valuation and Qualifying Accounts

II-3
<PAGE> 98

SCHEDULE II

COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MAY 31, 1997, 1998 AND 1999

AND NINE MONTH PERIOD ENDED FEBRUARY 29, 2000

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONS
---------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER ACCOUNTS DEDUCTIONS BEGINNING OF
DESCRIPTION PERIOD EXPENSES (DESCRIBE) (DESCRIBE) PERIOD
----------- ------------ ---------- -------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts and
billing adjustments:
Period Ending:
May 31, 1997................... $500 $1,042 $ (942) $600
May 31, 1998................... 600 1,067 (967) 700
May 31, 1999................... 700 1,390 (1,255) 835
February 29, 2000.............. 835 540 (625) 750
</TABLE>

Deductions include amounts charged to the allowance for doubtful accounts and
billing adjustments during the respective periods.

II-4
<PAGE> 99

ITEM 17. UNDERTAKINGS

We hereby undertake that:

(1) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted as to directors, officers and controlling
persons pursuant to the provisions described in Item 14, or otherwise, we
have been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by a
director, officer or controlling person of ours in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, we
will, unless in the opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.

(2) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus as filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by Cooperative pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

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

(4) At the closing, as specified in the underwriting agreement, we
shall provide the underwriters certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.

II-5
<PAGE> 100

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, we have duly
caused this Amendment to the Registration Statement on Form S-1 to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Belleville, State of New Jersey, on the 5th day of June, 2000.

COOPERATIVE HOLDINGS, INC.

By: /s/ LOUIS A. LOMBARDI, SR.
------------------------------------
Louis A. Lombardi, Sr.
President and Chief Executive
Officer

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Louis A. Lombardi, Sr. President and Chief Executive June 5, 2000
--------------------------------------------------- Officer and Director
Louis A. Lombardi, Sr. (Principal Executive Officer)

/s/ Louis A. Lombardi, Jr. Chief Operating Officer and Director June 5, 2000
---------------------------------------------------
Louis A. Lombardi, Jr.

/s/ Jay Brzezanski Chief Financial Officer and June 5, 2000
--------------------------------------------------- Secretary (Principal Financial and
Jay Brzezanski Accounting Officer)

* Executive Vice President and June 5, 2000
--------------------------------------------------- Treasurer and Director
Michael Lombardi

* Vice President of Business June 5, 2000
--------------------------------------------------- Development and Strategic Planning
Daniel L. Hradesky and Director

* Director June 5, 2000
---------------------------------------------------
Ronald O. Brown, Ph.D.

* Director June 5, 2000
---------------------------------------------------
Myron Feldman

* Director June 5, 2000
---------------------------------------------------
John Trzaka
</TABLE>

* By his signature set forth below the undersigned, pursuant to duly authorized
powers of attorney filed with the Securities and Exchange Commission, has
signed this Amendment to the Registration Statement on behalf of the person
indicated.

By: /s/ LOUIS A. LOMBARDI, JR.

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

Louis A. Lombardi, Jr.

(Attorney-in-fact)

II-6
<PAGE> 101

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1** Certificate of Incorporation of Cooperative Holdings, Inc.
3.2** Bylaws of Cooperative Holdings, Inc.
5* Form of Opinion of Buchanan Ingersoll Professional
Corporation.
10.1** Contribution Agreement dated as of March 20, 2000 among
Cooperative Holdings, Inc. and the members of Eastern
Computer Services, L.L.C.
10.2+** Plan of Reorganization and Exchange Agreement dated as of
March 20, 2000 among Cooperative Holdings, Inc., Cooperative
Communications, Inc. and the shareholders and optionholders
of Cooperative Communications, Inc.
10.3** Form of Indemnification Agreement by and between Cooperative
Holdings, Inc. and each of its directors and executive
officers.
10.4** Employment Agreement by and between Cooperative Holdings,
Inc. and Louis A. Lombardi, Sr., dated as of March 20, 2000.
10.5** Employment Agreement by and between Cooperative Holdings,
Inc. and Louis A. Lombardi, Jr., dated as of March 20, 2000.
10.6** 2000 Stock Plan.
10.7* Lease of Portion of Premises at 412-420 Washington Avenue,
Belleville, New Jersey 07109, dated as of December 1, 1998,
by and between Louis Lombardi and Patrick Lombardi, as
landlord, and Cooperative Communications, Inc., as tenant.
10.8 $1,000,000 Promissory Note, dated November 30, 1998, payable
to Cooperative Communications, Inc. by Louis Lombardi and
Patrick Lombardi.
10.9 Amendment No. 1 to Lease of Portion of Premises at 412-420
Washington Avenue, Belleville, New Jersey 07109, effective
as of December 1, 1998, by and between Louis Lombardi, Sr.
and the Estate of Patrick Lombardi, as landlord, and
Cooperative Communications, Inc., as tenant.
10.10 Amendment No. 1 to Promissory Note dated November 30, 1998,
effective as of November 30, 1998, executed by Louis
Lombardi, Sr. and the Estate of Patrick Lombardi.
10.11 Offset Agreement, dated as of January 1, 2000, by and
between Cooperative Communications, Inc., as tenant, and
Louis Lombardi and the Estate of Patrick Lombardi, as
landlord.
21** List of subsidiaries of Cooperative Holdings, Inc.
23.1 Independent Auditors' Report and Consent of KPMG LLP.
23.2* Consent of Buchanan Ingersoll Professional Corporation
(contained in the opinion filed as Exhibit 5 to the
Registration Statement).
23.3* Consent of Swidler Berlin Shereff Friedman LLP.
24** Powers of Attorney of certain officers and directors of
Cooperative Holdings, Inc.
27 Financial Data Schedule.
</TABLE>

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

* To be filed by Amendment.

** Previously filed.

+ The schedules or exhibits to this document are not being filed herewith
because we believe that the information contained therein should not be
considered material to an investment decision in Cooperative or such
information is otherwise adequately disclosed in this Registration Statement
on Form S-1. We agree to furnish supplementally a copy of any schedule or
exhibit to the Commission upon request.