E SPIRE COMMUNICATIONS INC
10-Q, 2000-08-14
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)
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<PAGE>   1

===============================================================================

                    U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                   FORM 10-Q

              [X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
                        PERIOD ENDED: JUNE  30, 2000
              [ ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                        THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
                        PERIOD FROM __________ TO __________

                         COMMISSION FILE NUMBER 0-25314

                          e.spire COMMUNICATIONS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

               DELAWARE                                 52-1947746
    (STATE OR OTHER JURISDICTION OF               (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)               IDENTIFICATION NO.)
        12975 WORLDGATE DRIVE                     20170
          HERNDON, VIRGINIA                       (ZIP CODE)
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                  703.639.6000
                (ISSUER'S TELEPHONE NUMBER INCLUDING AREA CODE)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

               COMMON STOCK, $0.01 PAR VALUE TITLE OF SECURITIES

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

    Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:

     The number of shares at e.spire Common Stock, Par Value $0.01 outstanding
on August 1, 2000 was 53,270,274.

===============================================================================

                                       1


<PAGE>   2

                          E.SPIRE COMMUNICATIONS, INC.

                                  FORM 10 - Q

                                     INDEX

<TABLE>
<CAPTION>
                         PART I. FINANCIAL INFORMATION
<S>                                                                                <C>
Item 1.             Financial Statements

                    Condensed Consolidated Balance Sheets - June 30, 2000
                    (unaudited) and December 31, 1999                               3
                    Unaudited Condensed Consolidated Statements of Operations -
                    Three and Six Months Ended June 30, 2000 and 1999 (unaudited)   4
                    Unaudited Condensed Consolidated Statements of Cash Flows -
                    Six Months Ended June 30, 2000 and 1999 (unaudited)             5
                    Notes to Unaudited Condensed Consolidated Interim Financial
                    Statements                                                      6
Item 2.             Management's Discussion and Analysis of Financial Condition
                    and Results of Operations                                       9
Item 3.             Quantitative and Qualitative Disclosures about Market Risk      15

                          PART II. OTHER INFORMATION

Item 1.             Legal Proceedings                                               15
Item 4.             Submission of Matters to a Vote of Security Holders             16
Item 6.             Exhibits and reports on Form 8-K                                16
Signatures          ................................................................18
Index of Exhibits   ................................................................18
</TABLE>

                                       2

<PAGE>   3



                                     PART I
                             FINANCIAL INFORMATION

ITEM 1 -- FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                      ($ IN THOUSANDS, EXCEPT SHARE DATA)

                                                                                 JUNE 30,   DECEMBER 31,
                                                                                   2000         1999
                                                                               -----------  ------------
                                                                               (UNAUDITED)
<S>                                                                            <C>          <C>
                                ASSETS

Current Assets:
    Cash and cash equivalents                                                  $    61,635    $   62,525
    Restricted cash and investments                                                  2,800        18,754
    Trade accounts receivable, net of allowance for doubtful accounts
      of $35,109 and $28,707 at June 30, 2000 and December 31,
      1999, respectively                                                           119,271        97,238
    Unbilled revenue                                                                 7,903        14,032
    Other current assets                                                             5,598         9,435
                                                                               -----------    ----------
     Total current assets                                                          197,207       201,984
                                                                               -----------    ----------


Inventory, Networks, equipment and furniture, gross                                912,287       848,698
    Less: accumulated depreciation and amortization                               (218,704)     (166,224)
                                                                               -----------    ----------
                                                                                   693,583       682,474
Deferred financing fees, net of accumulated amortization of $16,327
    and $13,246 at June 30, 2000 and December 31, 1999, respectively                41,583        44,660
Intangible assets, net of accumulated amortization of
    $13,238  and $11,203 at June 30, 2000 and December 31, 1999,
    respectively                                                                     5,417         7,452
Other assets                                                                         7,723         4,672
                                                                               -----------    ----------
     Total assets                                                              $   945,513    $  941,242
                                                                               ===========    ==========

       LIABILITIES, REDEEMABLE STOCK, AND STOCKHOLDERS' DEFICIT

Current Liabilities:
    Accounts payable                                                           $    53,900    $   46,106
    Accrued employee costs                                                           8,994         5,262
    Other accrued liabilities                                                       20,802        15,995
    Notes payable - current portion                                                164,000       164,000
    Obligations under capital leases - current portion                              11,890         9,932
    Accrued interest                                                                15,858        14,344
                                                                               -----------    ----------
     Total current liabilities                                                     275,444       255,639
                                                                               -----------    ----------
Long-Term Liabilities:
    Notes payable, less current portion                                            781,390       749,406
    Obligations under capital leases, less current portion                          38,775        46,786
    Other long-term liabilities                                                     15,635         9,010
                                                                               -----------    ----------
     Total liabilities                                                           1,111,244     1,060,841
                                                                               -----------    ----------

Redeemable stock:
    14 3/4% Redeemable Preferred Stock due 2008                                     96,317        87,051
    12 3/4% Junior Redeemable Preferred Stock due 2009                             207,505       194,545
                                                                               -----------    ----------
     Total redeemable stock                                                        303,822       281,596

Stockholders' deficit:
    Series A Convertible Preferred Stock, $1 par value, 250,000 shares
      authorized, 81,177 and 0 shares, respectively, issued and
      outstanding                                                                       81             0
    Common Stock, $0.01 par value, 125,000,000 shares authorized,
       52,743,645 and 51,149,825 shares, respectively, issued and
       outstanding                                                                     527           511
    Additional paid-in capital                                                     318,986       236,577
    Accumulated deficit                                                           (789,147)     (638,283)
                                                                               -----------    ----------
Total stockholders' deficit                                                       (469,553)     (401,195)
                                                                               -----------    ----------

Total liabilities, redeemable stock, and stockholders' deficit                 $   945,513    $  941,242
                                                                               ===========    ==========
</TABLE>

See accompanying notes to unaudited condensed consolidated financial
statements.

                                       3

<PAGE>   4

                          E.SPIRE COMMUNICATIONS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
               ($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                   --------------------------------------   --------------------------------------
                                                    For the three months ended June 30,       For the six months ended June 30,
                                                   --------------------------------------   --------------------------------------
                                                         2000                 1999                2000                 1999
                                                   -----------------    -----------------   ------------------    ----------------
<S>                                               <C>                  <C>                 <C>                   <C>
Revenues:
       Telecommunications services                      $    55,498          $    38,664         $    109,743         $    72,943
       Network technologies services                         30,135               18,565               34,381              36,605
       CyberGate                                              7,053                6,091               14,339              11,845
                                                   -----------------    -----------------   ------------------    ----------------
Total revenues                                               92,686               63,320              158,463             121,393

Cost of sales:
       Telecommunications services, excluding
       noncash stock compensation of $266, $474,
       $266 and $994, respectively                           35,559               25,535               71,647              51,305

       Network technologies services, excluding
       noncash stock compensation of $207, $148,
       $344, and $333, respectively                          16,362               10,778               19,879              19,881
       CyberGate                                              3,565                2,949                7,162               5,313
                                                   -----------------    -----------------   ------------------    ----------------
Total cost of sales                                          55,486               39,262               98,688              76,499

Gross margin:
       Telecommunications services                           19,939               13,129               38,096              21,638
       Network technologies services                         13,773                7,787               14,502              16,724
       CyberGate                                              3,488                3,142                7,177               6,532
                                                   -----------------    -----------------   ------------------    ----------------
Total gross margin                                           37,200               24,058               59,775              44,894

Operating expenses:
       Selling, general and administrative,
       excluding noncash stock compensation of
       $886, $1,522, $2,332  and $3,866,
       respectively                                          46,016               37,830               92,561              74,052
       Noncash stock compensation expense                     1,359                2,144                2,942               5,193
       Depreciation and amortization                         29,592               23,502               57,765              43,677
                                                   -----------------    -----------------   ------------------    ----------------
Total operating expenses                                     76,967               63,476              153,268             122,922

Loss from operations                                       (39,767)             (39,418)             (93,493)            (78,028)

Nonoperating income/expense
       Interest and other income                            (1,840)              (3,251)              (3,235)             (7,518)
       Interest and other expense                            30,860               23,210               60,606              46,055
                                                   -----------------    -----------------   ------------------    ----------------

Net loss                                                   (68,787)             (59,377)            (150,864)           (116,565)

Preferred stock dividends, accretion
and beneficial conversion                                    12,842               10,000               48,852              19,697
                                                   -----------------    -----------------   ------------------    ----------------

Net loss applicable to common
stockholders                                           $   (81,629)         $   (69,377)        $   (199,716)       $   (136,262)
                                                   =================    =================   ==================    ================

Basic and diluted net loss per
common share                                           $     (1.56)         $     (1.40)         $     (3.85)        $     (2.77)
                                                   =================    =================   ==================    ================

Weighted average number of
common shares outstanding                                52,372,627           49,696,463           51,922,232          49,191,841
                                                   =================    =================   ==================    ================
</TABLE>

                                       4

<PAGE>   5

See accompanying notes to unaudited condensed consolidated financial
statements.

                                       5

<PAGE>   6



                          E.SPIRE COMMUNICATIONS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                ($ IN THOUSANDS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                           FOR THE SIX MONTH ENDED JUNE 30,
                                                                               2000                1999
                                                                      ----------------------------------------
<S>                                                                   <C>                  <C>
Cash flows from operating activities

Net Loss                                                                    $(150,864)          $ (116,565)
Adjustments to reconcile net loss to net cash used in operating
  activities
       Depreciation and amortization                                           57,765               43,761
       Interest deferral and accretion                                         31,984               28,489
       Amortization of deferred financing fees                                  3,081                2,494
       Noncash stock compensation                                               2,942                5,193
       Non-monetary revenue                                                         -              (11,862)
       Changes in operating assets and liabilities:
             Trade accounts receivable                                        (15,904)             (26,345)
             Other current assets                                                 599               (3,491)
             Other assets                                                        (596)                  (2)
             Accounts payable                                                   7,794              (13,601)
             Other liabilities                                                 14,989                3,911
                                                                             --------           ----------
Net cash used in operating activities                                         (48,210)             (88,018)

Cash flows from investing activities
       Release of restricted cash and investments related to
         network activities                                                       745                2,708
       Other assets - non operating                                            (2,455)                 (82)
       Payments for networks, equipment and furniture                         (65,008)            (132,726)
                                                                             --------           ----------
Net cash used in investing activities                                         (66,718)            (130,100)

Cash flows from financing activities
       Issuance of Preferred Stock                                            100,665                    -
       Costs associated with Preferred Stock issuance                          (1,952)                   -
       Payment of dividends for preferred stock                                   (61)                 (57)
       Payment of lease obligation                                             (4,634)              (3,960)
       Payment of deferred financing fees                                          (4)                (574)
       Release of restricted cash and investments related to
         financing activities                                                  15,209               11,503
       Exercise of warrants, options and other financing activities             4,815                2,875
                                                                             --------           ----------
Net cash provided by financing activities                                     114,038                9,787


Net decrease in cash & cash equivalents                                          (890)            (208,331)
Cash and cash equivalents - beginning of period                                62,525              328,758
                                                                             ========           ==========
Cash and cash equivalents - end of period                                    $ 61,635           $  120,427
                                                                             ========           ==========

Supplemental disclosure of cash flow information:
       Interest paid                                                         $ 24,424           $   18,636
       Assets acquired under capital lease                                   $    295           $   19,329
       Dividends declared on preferred stock                                 $ 20,495           $   13,411
       Increase in intangibles                                               $      -           $       14
       Accrual of stock bonuses                                              $  1,621           $    4,053
</TABLE>

See accompanying notes to unaudited condensed consolidated financial
statements.

                                       6

<PAGE>   7


                          E.SPIRE COMMUNICATIONS, INC.

                   NOTES TO UNAUDITED CONDENSED CONSOLIDATED
                          INTERIM FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

    The condensed consolidated financial statements include the accounts of
e.spire Communications, Inc. ("e.spire" or the "Company") and its wholly-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.

    The condensed consolidated balance sheet as of June 30, 2000, the condensed
consolidated statements of operations for the three and six months ended June
30, 2000 and 1999, and the condensed consolidated statements of cash flows for
the six months ended June 30, 2000 and 1999, have been prepared by the Company,
without audit. In the opinion of management, all adjustments, which include
normal recurring adjustments necessary to present fairly the financial
position, results of operations and cash flows as of June 30, 2000, and for all
periods presented, have been made. Certain amounts in the 1999 condensed
consolidated statements have been reclassified to conform to the 2000
presentation. Operating results for the three and six months ended June 30,
2000, are not necessarily indicative of the operating results for the full
year.

    Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The Company believes that the disclosures
provided are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and the related notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1999.

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

RESTRICTED CASH AND INVESTMENTS

    The Company has provided performance bonds and letters of credit in various
cities in connection with its operations, resulting in a restriction to cash
amounting to approximately $2,800,000 at June 30, 2000, and $3,629,000 at
December 31, 1999. The face amount of all bonds and letters of credit is
approximately $14,105,000 as of June 30, 2000, and $21,559,000 as of December
31, 1999.

USE OF ESTIMATES

     In conformity with generally accepted accounting principles, the
preparation of the condensed consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities. Furthermore, as required, management may make estimates
in connection with the disclosure of contingent assets and liabilities at the
dates of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results may differ from
those estimates.

RISKS AND UNCERTAINTIES

a) Liquidity and Negative Cash Flow

    To date, the Company has funded the construction of its networks and its
operations with external financing through various preferred stock, common
stock, and debt issuances, as well as through capital lease financing. As a
result of certain of these transactions, the Company will be required to
satisfy substantially higher periodic cash debt service obligations in the
future. There can be no assurance that the Company will be able to generate
sufficient cash flow or otherwise obtain funds to cover interest, principal and
redeemable preferred stock dividend payments associated with currently
outstanding and future debt and other obligations.

    The Company has never been profitable, has never generated positive cash
flow from consolidated operations and, since its inception has incurred
significant net operating losses and negative cash flow. In accordance with the
terms of its debt facilities, the Company has also deferred payment of most of
its interest charges. During fiscal year 2000, the Company will begin making
cash interest payments from operating funds on its 2007 Senior Notes and Senior
Secured Credit Facility. In addition, the Company will be required to make
principal payments on the Senior Secured Credit Facility during fiscal year
2000. The Company's continued development, construction, expansion, and
operation of local networks, as well as the further development of additional
services, including local switched voice and high-speed data services, will
require continued substantial capital expenditures. The Company's ability to
fund these expenditures is dependent upon the Company raising substantial
financing. To meet its remaining capital requirements and to fund operations and
cash flow deficiencies, the Company will be required to sell additional equity
securities, acquire additional credit facilities, sell additional debt
securities, or sell certain Company assets, some of which may require the
consent of the Company's

                                       7

<PAGE>   8


bondholders. There can be no assurance that the Company will be able to obtain
the additional financing necessary to satisfy its cash requirements or to
successfully implement its growth strategy. Failure to raise sufficient capital
could compel the Company to delay or abandon some or all of its plans or
expenditures, which could have a material adverse effect on its business,
results of operations, and financial condition. In the first quarter of 2000,
the Company received commitment letters for $175 million in equity funding. The
Company received approximately $100.7 million of this amount in March 2000.
Funding of the remaining $74.3 million was subject to receiving shareholder
approval by a certain date, which did not occur. Instead, one of the Company's
principal stockholders signed a term sheet with the Company and the lenders
under the Credit Facilities, under which the principal stockholder has agreed to
provide the Company with $124.3 million in equity and subordinated debt
financing.  The financing commitment would supersede any previous commitments
from those parties, including the $50 million commitment discussed below. The
stockholders agreed to use commercially reasonable efforts to enter into
definitive agreements with respect to this financing. The stockholder's
obligation to provide such financing will be subject to certain conditions,
which include, but are not limited to, receiving shareholder approval, the
absence of any material adverse change or certain debt covenant violations under
the Credit Facilities. Management believes that the Company's current cash
resources, together with amounts expected to be available pursuant to the
funding commitments described above, will be sufficient to fund the Company's
continuing negative cash flow and required capital expenditures through 2000. If
required, the Company also believes that it could raise additional funds from
the sale of certain assets, which are not essential to the Company's core
operations.

    The Senior Secured Credit Facilities ("Credit Facilities") contain financial
covenants with which the Company must comply, including adjusted EBITDA
(Earnings before interest, taxes, depreciation, amortization, and noncash
compensation), debt to capital ratio, and capital expenditures. The Company was
not in compliance with the financial covenants as of December 31, 1999, March
31, 2000 and June 30, 2000, resulting in an event of default under the Credit
Facilities which allows the lenders to accelerate the maturity of the borrowings
under the Credit Facilities and which would also result in the acceleration of
other obligations of the Company, including the 2005 Notes, 2006 Notes, 2007
Notes and 2008 Notes (the Notes). On April 13, 2000, the Company obtained a
waiver of non-compliance as of December 31, 1999 and the lenders agreed to a
standstill on actions related to such non-compliance until June 15, 2000. On
June 14, 2000, the Company obtained an extension of the standstill until July
10, 2000. On July 14, 2000, the Company signed a term sheet with the lenders
under the Credit Facilities to amend its financial covenants on a going forward
basis to levels that the Company believes it will be able to attain. Also, the
lenders agreed to a continuation on the standstill on actions related to such
non-compliance until the earlier of August 25, 2000 or the date of signing the
amendment to the Credit Facilities which amends, among other things, the
financial covenants. Although the Company has not yet signed the amendment, it
is continuing to work with its lenders in preparing a definitive agreement with
respect to such amendments. However, there can be no assurance that a definitive
agreement with the lenders will be reached and entering into of such an
agreement is conditioned upon, among other things, the Company entering into the
agreement for additional equity financing with the principal stockholders as
discussed above. Going forward, it may be necessary for the Company to draw
against investor equity commitments in order to maintain compliance under the
amendments to the financial covenants contained in the term sheet. As part of
the agreement with the lenders, the Company paid $15 million of the facility's
principal on July 14, 2000 and will pay an additional $10 million of the
facility's principal at the final closing of the amendment. Thereafter, the
Company will pay a .5% point increase in interest rates once the amendment is
executed. At December 31, 1999 and June 30, 2000, the Company has classified its
obligation under the Credit Facilities as a current liability as a result of the
debt covenant violation and will do so until the amendment is signed. The Senior
Notes cannot be accelerated unless payment of amounts due under the Credit
Facilities is accelerated and therefore, remain classified as long-term
obligations as of June 30, 2000.

b) Reciprocal Compensation

    The Company has recorded net revenue of approximately $12.8 million and
$28.4 million, respectively, for the three and six months ended June 30, 2000
and approximately $10.7 million and $18.8 million for the same periods of 1999
for reciprocal compensation relating to the transport and termination of local
traffic, primarily to Internet Service Providers ("ISPs"), from customers of
Incumbent Local Exchange Carriers ("ILECs") pursuant to various interconnection
agreements. Some ILECs have not paid a substantial portion of the amounts
billed by the Company and have disputed these charges based on the belief that
such calls are not local traffic as defined by the various agreements and are
not subject to payment of transport and termination charges under state and
federal laws and public policies. However, the Company has resolved certain of
these disputes, as discussed in the following paragraphs. The resolutions of
these disputes have been, and will continue to be, based on rulings by state
public utility commissions and/or by the Federal Communications Commission
(FCC), commercial arbitrators, or through negotiations between the parties. To
date, there have been favorable final rulings from over 30 state public utility
commissions that ISP traffic is subject to the payment of reciprocal
compensation under current interconnection agreements. Many of these state
commission decisions have been appealed by the ILECs. To date, six U.S.
District Court decisions and three federal circuit court of appeals decisions
have been issued upholding state commission decisions ordering the payment of
reciprocal compensation for ISP traffic.

    On February 25, 1999, the FCC issued a decision that ISP-bound traffic is
jurisdictionally interstate in nature. The decision relies on the long-standing
federal policy that ISP traffic, although jurisdictionally interstate, is
treated as though it is local traffic for pricing purposes. The decision also
emphasized that, because the FCC concluded that there currently are no federal
rules governing inter-carrier compensation for ISP traffic, the determination
as to whether such traffic was subject to reciprocal compensation under the
terms of interconnection agreements was properly made by the state commissions
and that carriers were bound by their interconnection agreements and state
commission decisions regarding the payment of reciprocal compensation for ISP
traffic.

    The FCC has initiated a rulemaking proceeding regarding the adoption of
prospective federal rules for intercarrier compensation

                                       8
<PAGE>   9

for ISP traffic. In its notice of rulemaking, the FCC expressed its preference
that compensation rates for this traffic continue to be set by negotiations
between carriers, with disputes resolved by arbitrations conducted by state
commissions, pursuant to the Telecommunications Act of 1996.

    Since the issuance of the FCC's decision on February 25, 1999, at least 21
state public utility commissions, have either ruled or reaffirmed that ISP
traffic is subject to reciprocal compensation under current interconnection
agreements, and two state commissions have declined to apply reciprocal
compensation for ISP traffic under current interconnection agreements.

    On March 24, 2000, the United States Court of Appeals for the District of
Columbia Circuit vacated and remanded the FCC's February 25, 1999 decision. The
court found that the FCC did not provide an adequate basis for its February
1999 decision that the reciprocal compensation provisions of the
Telecommunications Act and the FCC rules did not apply to ISP traffic. The
Company does not believe that the Circuit Court's decision will adversely
affect the state decisions noted above with respect to reciprocal compensation.
The decision does, however, create some uncertainty, and there can be no
assurance that future FCC or state rulings will be favorable to the Company.
The Company has participated in a number of regulatory proceedings that address
the obligation of the ILECs to pay the Company reciprocal compensation for
ISP-bound traffic under the Company's interconnection agreements. These
proceedings include complaint proceedings brought by the Company against
individual ILECs for failure to pay reciprocal compensation under the terms of
a current interconnection agreement, generic state commission proceedings
concerning the obligations of ILECs to pay reciprocal compensation to CLECs,
and arbitration proceedings before state commissions addressing the payment of
reciprocal compensation on a prospective basis under new interconnection
agreements.

    In January 2000, a commercial arbitrator awarded e.spire damages in the
amount of approximately $1.9 million, including interest, from an ILEC for the
state of Florida. This award settles reciprocal compensation from such ILEC for
the state of Florida through July 31, 1999. The Company has initiated the
process to obtain a further award through at least March 31, 2000. In February
2000, a commercial arbitrator granted e.spire the right to recover $14.2
million from BellSouth, representing reciprocal compensation, including accrued
interest, through December 31, 1999 for the states of Alabama, Louisiana, and
South Carolina. e.spire has subsequently collected these amounts. e.spire also
received favorable decisions from the PUCs in Georgia and Florida. BellSouth
appealed both decisions, but e.spire settled the appeals on favorable terms.
e.spire also recently settled a similar collection complaint in Kentucky.
e.spire has collected these Georgia, Florida and Kentucky settlement amounts.

    Accordingly, the Company through its commercial arbitration award and these
recent settlements, has collected all reciprocal compensation billed to
BellSouth through December 31, 1999, totaling approximately $25 million.
e.spire and BellSouth have also agreed to prospective reciprocal compensation
rates, eliminating litigation over the ISP issue and setting rates through
December 31, 2002. Such rates are less than historical rates and decrease
annually through 2002 when the agreement expires.

    The Company has outstanding trade accounts receivable related to reciprocal
compensation of approximately $35.2 million at June 30, 2000, net of
allowances. The allowances are determined based on a state-by-state analysis of
the collectibility of billed amounts. The Company believes that this
receivable, net of allowances, is collectible, and that future reciprocal
compensation will be realized, although the timing of receipts cannot be
predicted at this time.

    Certain of the Company's interconnection agreements with the ILECs have
expired or will soon expire. The Company believes that there is substantial
risk that the future rates for reciprocal compensation under new
interconnection agreements, some of which are currently in negotiation, will be
significantly lower than current rates. In addition, legislation has been
introduced in Congress that would eliminate reciprocal compensation and mandate
"bill and keep" compensation for local traffic bound for ISPs. Such
legislation, if passed and signed into law, could substantially reduce
e.spire's reciprocal compensation revenues.

c) Lawsuits

Ten shareholder class action lawsuits were filed against the Company and
Anthony J. Pompliano, David L. Piazza and Douglas R. Hudson (former officers of
e.spire) on and after April 20, 2000, in the United States District Court for
the District of Maryland (the "Court"). The lawsuits purport to be class
actions filed on behalf of purchasers of the stock of the Company during the
period August 12, 1999 through March 30, 2000. Plaintiffs allege that
defendants made false and misleading statements about the Company's financial
condition, revenues, expenses and results of operations, in violation of
federal securities laws. Plaintiffs have filed several motions seeking
consolidation of the lawsuits. The Court ordered that the lawsuits will be
consolidated and that plaintiffs file a consolidated complaint. The Company
expects to file a motion to dismiss that complaint, and is not required to
respond before that complaint is filed. The Company believes that plaintiffs'
claims have no basis and intends to vigorously defend the actions.

d) Other

    One of ACSI Network Technology's ("ACSI NT") customers announced that it
was experiencing liquidity problems and has filed for protection under the
applicable bankruptcy laws. As of June 30, 2000, the Company has receivables
from this customer totaling approximately $2.0 million. The Company believes
that it has several methods of recovery for this amount, including reclaiming
the

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<PAGE>   10

asset sold to the customer. Based on an analysis of currently available
information, the Company believes that it has adequately reserved for its
exposure to loss related to this receivable. However, as more information
becomes available regarding the customers' financial condition, the Company
will continue to evaluate this receivable for collectibility. ACSI NT is a
wholly owned subsidiary of e.spire which provides full service network
development solutions including business planning, market analysis,
engineering, and project management construction.

NOTE 3: FINANCING ACTIVITIES

    To date, the Company has funded the construction of its networks and its
operations with external financings, as described in the Liquidity and Capital
Resources section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.

    On July 14, 2000, the Company announced that it had signed the final terms
for an amendment to its Senior Secured Credit Facility. On April 13, 2000, the
Company obtained a waiver of non-compliance as of December 31, 1999 and the
lenders agreed to a standstill on actions related to such non-compliance until
June 15, 2000. On June 14, 2000, the Company obtained an extension of the
standstill until July 10, 2000. On July 14, 2000, the Company signed a term
sheet with the lenders to amend our financial covenants on a going forward basis
to levels that the Company believes will allow for compliance. Also, the lenders
agreed to a continuation on the standstill on actions related to such
non-compliance until the earlier of August 25, 2000 or the date of signing the
amendment to the Credit Facilities which amends, among other things, the
financial covenants. Although the Company has not yet signed the amendment, it
is continuing to work with its lenders in preparing a definitive agreement with
respect to such amendments. However, there can be no assurance that a definitive
agreement with the lenders will be reached and entering into of such agreement
is conditioned upon, among other things, the Company entering into the agreement
for additional equity financing with the principal stockholders as discussed in
the Risks and Uncertainties section in Note 2 above. Going forward, it may be
necessary for the Company to draw against investor equity commitments in order
to maintain compliance under the amendments to the financial covenants contained
in the term sheet. As part of the agreement with the lenders, the Company paid
$15 million of the facility's principal on July 14, 2000 and will pay an
additional $10 million of the facility's principal at the final closing of the
amendment. The Company will pay a .5% point increase in interest rates on the
Credit Facilities once the amendment is executed.

NOTE 4: NEW ACCOUNTING PRONOUNCEMENTS

    In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101-Revenue Recognition in Financial Statements. This
SAB expresses the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company can
apply the accounting and disclosure requirements of this SAB retrospectively,
or may report a change in accounting principle as of January 1, 2000 no later
than the quarter beginning October 1, 2000. Management of the Company expects
the SEC to issue further guidance with respect to certain implementation issues
of SAB No. 101. Management is currently evaluating whether SAB No. 101 will
have an impact on the Company's revenue recognition for installation and other
up-front fees.

    In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. The new standard establishes
accounting and reporting standards for derivative instruments embedded in other
contracts and for hedging activities. This statement, as amended, is effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company does not expect SFAS 133 to have a material affect on its financial
position or results of operations.

    In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation (FIN) No. 44, Accounting for Certain Transactions Involving
Stock Compensation. FIN 44 further defines the accounting consequence of
various modifications to the terms of a previously fixed stock option or award
under APB 25. FIN 44 becomes effective on July 1, 2000, but certain conclusions
in FIN 44 cover specific events that occur after December 15, 1998 or January
12, 2000. The Company does not expect FIN 44 to have a material affect on its
financial position or results of operations.

NOTE 5: SEGMENT REPORTING

    During 1998, the Company adopted SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. The Company has identified three
reportable segments: Telecommunications, CyberGate, and Network Technologies.
The Telecommunications segment provides special access, local switched voice,
and data transmission over the Company's own facilities and on a resale basis.
CyberGate provides Internet, high-speed data communications and web-hosting
services. The Network Technologies segment offers fiber optic network design,
project management and construction services. The Company's reportable segments
are strategic business units that offer different products and services. They
are managed separately because each business unit requires different technology
and marketing strategies.

    The Company evaluates the performance of each segment based on revenues
from third parties and gross margin, which are separately disclosed on the
condensed consolidated statement of operations for Telecommunications services,
Network

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<PAGE>   11


Technologies and CyberGate. The Company also evaluates performance based on
adjusted EBITDA for CyberGate. The reportable total assets for
Telecommunications services, CyberGate and Network Technologies services are
approximately $802.8 million, $18.3 million and $124.4 million, respectively, at
June 30, 2000. Network Technologies services assets primarily consist of
accounts receivable and inventory, networks, equipment and furniture that are
specifically identifiable with Network Technologies. CyberGate adjusted EBITDA
for the three and six months ended June 30, 2000 was approximately $(0.9)
million and $(1.1) million, respectively and approximately $0.1 million and $0.7
million for the same periods of 1999.

ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other sections herein,
including statements regarding the development of the Company's businesses, the
markets for the Company's services and products, the Company's anticipated
capital expenditures, and other similar statements are forward-looking
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995) which can be identified as any statement that does not relate
strictly to historical or current facts. Forward-looking statements use such
words as plans, expects, will, will likely result, are expected to, will
continue, is anticipated, estimate, project, believes, anticipates, intends,
may, should, continue, seek, could and other similar expressions. Although the
Company believes that its expectations are based on reasonable assumptions, it
can give no assurance that its expectations will be achieved. The important
factors that could cause actual results to differ materially from those in the
forward-looking statements herein (the "Cautionary Statements") include,
without limitation, the Company's degree of financial leverage, risks
associated with debt service requirements and interest rate fluctuations, the
impact of restriction under the Company's financial instruments, dependence on
availability of transmission facilities, regulation risks including the impact
of the Telecommunications Act of 1996, contingent liabilities, the impact of
competitive services and pricing, the ability of the Company to successfully
implement its strategies, as well as the other risks referenced from time to
time in the Company's filings with the SEC, including the Company's Form 10-K
for the year ended December 31, 1999. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Statements.
The Company does not undertake any obligation to release publicly any revisions
to such forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.

OVERVIEW

    e.spire Communications, Inc., formed in 1993, seeks to be a leading
facilities-based integrated communications provider primarily to business
customers. The Company currently operates in 38 markets throughout the United
States where it has state-of-the-art local fiber optic networks. The Company's
wholly-owned subsidiary, CyberGate, an ISP, delivers high-speed data
communications services, including computer network connections and related
infrastructure services, that provide both commercial and residential customers
access to the Internet through their personal computer and the use of a modem.
By the end of 1997, the Company had become one of the first Competitive Local
Exchange Carriers ("CLECs") to combine the provision of dedicated, local and
long distance voice services with frame relay, ATM and Internet services.
Having established this suite of telecommunications services which emphasizes
data capabilities in addition to traditional CLEC offerings, e.spire seeks to
provide customers with superior service and competitive prices while offering a
single source for integrated communications services designed to meet its
business customers' needs. The Company's facilities-based network
infrastructure is designed to provide services to customers on an end-to-end
basis, and, as of June 30, 2000, was comprised of 3,890 route miles of fiber in
its 38 local networks in 21 states, state of the art equipment including 46 ATM
switches, 51 routers, 28 voice switches and approximately 26,000 backbone long
haul miles in its leased coast-to-coast broadband data network.

    With the passage of the Federal Telecommunications Act of 1996 ("Telecom
Act, FTA or the Act"), the Company enhanced the scope of its product offerings
from dedicated services to a full range of switched voice, data and Internet
services in order to meet the needs of business end-users, and is expanding its
sales, marketing, customer care and operations support systems ("OSS")
capabilities. The Company introduced local switched voice services, including
local exchange services, in late 1996 and long distance services in late 1997.
In late 1998, e.spire announced that it would begin to eliminate its resale
business.

    The development of the Company's business and the construction, acquisition
and expansion of its networks require significant capital expenditures, a
substantial portion of which are incurred before realization of revenues. These
expenditures, together with the associated early operating expenses, result in
negative cash flow until an adequate customer base is established. However, as
the Company's customer base grows, the Company expects that incremental
revenues can be generated with decreasing incremental operating expenses. The
Company has made specific strategic decisions to build high capacity networks
with broad market coverage, which initially increases its level of capital
expenditures and operating losses. However, the Company believes that over the
long term this strategy will enhance the Company's financial performance by
increasing the traffic flow over its network.

    The Company formed ACSI Network Technologies, Inc.("ACSI NT") to pursue
opportunities in fiber optic network design and

                                       11

<PAGE>   12

construction with carriers, large end user customers and municipalities. ACSI
NT is a wholly owned subsidiary of e.spire which provides full service network
development solutions including business planning, market analysis,
engineering, project management and construction.

RESULTS OF OPERATIONS

REVENUES

    The Company reported an increase in total revenues of $29.4 million, or
46%, to $92.7 million for the three months ended June 30, 2000, compared with
revenues of $63.3 million for the three months ended June 30, 1999, as
discussed below. For the six months ended June 30, 2000, total revenues
increased $37.1 million, or 31%, to $158.5 million from $121.4 million for the
same period of 1999, as discussed below.

TELECOMMUNICATIONS SERVICES

    The Company reported an increase in Telecommunications services revenues of
$16.8 million, or 44%, to $55.5 million for the quarter ended June 30, 2000,
compared with revenues of $38.7 million for the quarter ended June 30, 1999.
For the six months ended June 30, 2000, telecommunications services revenues
increased $36.8 million, or 50% to $109.7 million from $72.9 million for the
six months ended June 30, 1999. Included in Telecommunications services are
revenues from the dedicated access, switched local, long distance, reciprocal
compensation and data products. The increase in revenues was attributable to
the Company's greater presence in its markets and an expanded customer base.
The revenue increase was partially due to increased reciprocal compensation
revenue as discussed below and increases in the Company's other service
offerings such as special access, on-net switched and data services. Also,
these increases in revenues were partially offset by a decrease in resale
revenue due to the Company's elimination of its switched resale portfolio.

    The Company also increased the number of route miles, fiber miles,
co-locations, buildings connected, voice switches and data POPs. Between June
30, 2000 and June 30, 1999, the Company increased route miles by 243 miles, or
7% and increased fiber miles by 17,819 or 11%. Of the 243 route miles added
over the 12 month period, 238 route miles are long haul connections between
selected local metropolitan fiber networks of the Company, with an associated
828 fiber miles. Co-locations increased by 7 or 7%, and buildings connected
increased by 751, or 20%. Voice switches deployed increased to 28 as of June
30, 2000, from 25 as of June 30, 1999. The growth is attributable to the
Company's leased coast-to-coast broadband network infrastructure by which it
delivers both ATM and frame relay products via its 388 data POPs, which are a
combination of both e.spire's infrastructure and various network-to-network
interconnection arrangements. The number of data POPs has increased to 388 as
of June 30, 2000, from 387 as of June 30, 1999.

    Included in Telecommunications services revenues is reciprocal compensation
of approximately $12.8 million and $10.7 million, for the three months ended
June 30, 2000 and 1999, respectively and approximately $28.4 million and $18.8
million for the six months ended June 30, 2000 and 1999, respectively.
Reciprocal compensation relates to the transport and termination of local
traffic, primarily to ISPs from ILEC customers, pursuant to various
interconnection agreements. These ILECs have not paid a substantial portion of
the amount billed by the Company and have disputed these charges based on the
belief that such calls are not local traffic as defined by the various
agreements and under state and federal law and public policies. As of June 30,
2000, the Company has received payments of approximately $54.7 million for
reciprocal compensation. The continued resolution of the remaining disputes
will be based on rulings by state PUCs, the FCC, the courts and/or commercial
arbitrators. In February 1999, the FCC ruled that ISP-bound traffic is
jurisdictionally "interstate in nature." The FCC also found that the reciprocal
compensation provisions of the Telecommunications Act did not apply to ISP
traffic but delegated to state PUCs the decision of whether reciprocal
compensation must be paid under the terms of local interconnection agreements.
On March 24, 2000, the United States Court of Appeals for the District of
Columbia Circuit vacated and remanded the FCC's decision on the grounds that
the FCC did not provide an adequate basis for its decision that the reciprocal
compensation provisions of the Telecommunications Act did not apply to ISP
traffic, and remanded further consideration. e.spire has obtained favorable
rulings from the Georgia and Florida PSCs requiring payment of past due
reciprocal compensation from BellSouth in those states, BellSouth appealed this
decision, but e.spire settled the appeal on favorable terms. e.spire has
several pending proceedings before state PSCs and commercial arbitrators to
collect outstanding amounts from multiple ILECs. Accordingly the Company,
through its commercial arbitration awards and these recent settlements has
collected all reciprocal compensation billed to BellSouth through December 31,
1999, totaling approximately $25 million. e.spire and BellSouth have also
agreed to prospective reciprocal compensation rates, eliminating litigation
over the ISP issue and setting new rates through December 31, 2002. Such rates
are less than historical rates and decrease annually through 2002. Although
there can be no assurance that future regulatory or arbitration rulings will be
favorable to the Company and the timing of receipts cannot be predicted at this
time, the Company believes that its outstanding receivables for reciprocal
compensation of $35.2 million at June 30, 2000, net of allowance, are
ultimately collectible.

NETWORK TECHNOLOGIES SERVICES

    Network Technologies services revenues increased $11.5 million, or 62%, to
$30.1 million for the three months ended June 30,

                                       12

<PAGE>   13

2000, compared with revenues of $18.6 million for the three months ended June
30, 1999. The increase in revenues is attributable to the continued growth in
the size and number of contracts in this operation. The majority of the 2000
revenues are related to the sale of conduit in one of the Company's markets to
two major customers.

    For the six month periods ended June 30, 2000 and 1999, Network
Technologies services revenues decreased $2.2 million, or 6%, to $34.4 million
from $36.6 million, respectively. The decrease in revenues is attributable to
the impact of adopting FIN 43 in the third quarter of 1999 which requires the
Company to recognize revenue for dark fiber Indefeasible Rights of Use ("IRUs")
as an operating lease over the term of the contract. The decrease in revenue is
also a result of the mix of contracts signed in the first quarter of 2000. The
Network Technologies segment offers construction services, including the sale
of IRUs on portions of e.spire's networks to IXCs and other customers, fiber
optic network design and project management services. Also included in Network
Technologies revenues are revenues for construction contracts and grants of
IRUs on portions of e.spire's networks to IXCs and other customers. The Company
recognized approximately $6.2 million and $11.9 million for the three and six
months ended June 30, 1999, in revenues from agreements to exchange IRU
multiple fibers along certain sections of e.spire's networks for dissimilar
assets or for IRUs on other companies networks with substantial cash payments.
Included in the three and six months ended June 30, 2000, revenues of
approximately $25.4 million and $30.0 million, respectively, derived from
contracts with 2 and 3 major customers, respectively. As previously discussed,
under FIN 43, the Company is required to recognize revenue for certain
contracts for the provision of dark fiber IRUs entered into subsequent to June
30, 1999 as operating leases over the term of the contract. To the extent that
contracts entered into by the Company in the future do not transfer title to
dark fiber and related conduit, the Company's timing of recognition of revenues
will continue to be deferred.

CYBERGATE

    Internet services reported an increase in revenues of $1.0 million, or 16%,
to $7.1 million for the quarter ended June 30, 2000, compared with revenues of
$6.1 million for the quarter ended June 30, 1999. For the six months ended June
30, 2000, Internet services revenues increased $2.5 million, or 21% to $14.3
million from $11.8 million for the six months ended June 30, 1999. Included in
Internet services are revenues from Internet access and web hosting. The
increase in revenues was attributable to an increase in the web hosting
revenues which was partially offset by a decrease in the Internet access
revenues. The change in revenue mix and growth is due to a change in market
conditions and the Company's increased focus on its' web hosting business.

COST OF SALES

    For the quarter ended June 30, 2000, compared with the quarter ended June
30, 1999, total cost of sales increased $16.2 million, or 41%, to $55.5 million
from $39.3 million for the three months ended June 30, 1999, as discussed
below. Cost of sales increased $22.2 million, or 29%, to $98.7 million for the
six months ended June 30, 2000 from $76.5 million for the same period of 1999,
as discussed below.

TELECOMMUNICATIONS SERVICES

    Cost of sales for Telecommunications services increased $10.1 million, or
39%, to $35.6 million for the quarter ended June 30, 2000, from $25.5 million
for the same period of 1999. For the six months ended June 30, 2000,
telecommunications services cost of sales increased $20.3 million, or 40%, to
$71.6 million from $51.3 million for the six months ended June 30, 1999. These
increases relate to growth in the delivery of switched, data and special access
services and the addition of engineering and operations personnel dedicated to
supporting the network infrastructure.

    Included in cost of sales are costs of Telecommunications services paid to
IXCs, ILECs and others for leased telecommunications facilities, access and
services. Such costs increased approximately $7.5 million to approximately
$31.0 million for the three months ended June 30, 2000, from approximately
$23.5 million for the three months ended June 30, 1999. For the six months
ended June 30, 2000, these costs increased approximately $15.0 million to $62.5
million compared with $47.5 million for the same period of 1999. In addition,
network related personnel costs such as employee salaries and benefits are also
included in cost of sales. For the three months ended June 30, 2000 and 1999,
these costs increased approximately $2.5 million, or 123%, to approximately
$4.5 million from $2.0 million, respectively. For the six months ended June 30,
2000 and 1999, these costs increased approximately $5.3 million, or 140%, to
approximately $9.1 million from $3.8 million, respectively. The increases were
primarily due to increases in employees.

NETWORK TECHNOLOGIES SERVICES

    Cost of sales for Network Technologies services increased $5.6 million, to
approximately $16.4 million for the quarter ended June 30, 2000, compared with
$10.8 million for the same period of 1999. The increase was due to the increase
in the size of and number of contracts during the quarter. For the six months
ended June 30, 2000 and 1999, these costs were approximately $19.9 million for
each period. Included in Network Technologies cost of sales are direct
materials and labor associated with the construction of networks and costs
associated with contracted services.

CYBERGATE

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<PAGE>   14

Cost of sales for Internet services increased $0.6 million, or 21%, to
approximately $3.6 million for the quarter ended June 30, 2000, compared with
$3.0 million for the same period of 1999. For the six months ended June 30,
2000, cost of sales increased approximately $1.9 million, or 35%, to $7.2
million from $5.3 million for the same period of 1999. These increases were due
to increased charges for domain registration charges associated with the
increase in the web hosting customer base. The increases were partially offset
by decreases in telco expenses due to the decrease in Internet access
customers.

GROSS MARGIN

    For the quarter ended June 30, 2000, total gross margin increased $13.1
million to 40.1% from 38.0% for the quarter ended June 30, 1999, as discussed
below. Gross margins increased $14.9 million to 37.7% for the six months ended
June 30, 2000 from 37.0% for the six months ended June 30, 1999, as discussed
below.

TELECOMMUNICATIONS SERVICES

    Telecommunications services gross margin increased $6.8 million to 35.9%
for the quarter ended June 30, 2000 from 34.0% for the same period of 1999. For
the six months ended June 30, 2000, telecommunications services gross margins
increased $16.5 million to 34.7% from 29.7% for the same period of 1999. These
increases were primarily due to increases in sales volume, which resulted in
increases in reciprocal compensation as described above. Furthermore, the
Company continues to achieve network cost savings through negotiations with its
vendors.

NETWORK TECHNOLOGIES SERVICES

    Network Technologies services gross margin increased $ 6.0 million to 45.7%
for the three months ended June 30, 2000 from 41.9% for the three months ended
June 30, 1999. The increase was due to the fact that the conduit contracts
entered into during the second quarter of 2000 carry a higher margin due to
market conditions in the Company's markets. For the six months ended June 30,
2000 Network Technologies services gross margin decreased $2.2 million to 42.2%
from 45.7% for the same period of 1999. The decrease is principally due to
change in mix of revenue. During the six months ended June 30, 1999, the
Company's revenue was principally from dark fiber sales. For the six months
ended June 30, 2000, a greater percentage of the Company's revenue was
comprised of construction management contracts, which generally carry a lower
margin than dark fiber sales.

INTERNET SERVICES

    Internet services gross margins increased $0.4 million, or 11%, to $3.5
million for the three months ended June 30, 2000, compared with $3.1 million
for the same period of 1999. For the six months ended June 30, 2000, gross
margins increased approximately $0.7 million, or 10%, to $7.2 million from $6.5
million for the same period of 1999. These increases were primarily due to
increases in the Company's web hosting business due to the Company's increased
focus on this line of business. Also, the increase was partially offset by the
decline in the Internet access services.

OPERATING EXPENSES

SELLING, GENERAL AND ADMINISTRATIVE

    For the quarter ended June 30, 2000, selling, general and administrative
("SG&A") expenses increased $8.2 million, or 22%, to $46.0 million from $37.8
million for the same period of 1999, as discussed below. SG&A expenses
increased $18.5 million, or 25%, to $92.6 million for the six months ended June
30, 2000 from $74.1 million for the same period of 1999, as discussed below.

    Included in SG&A expenses are personnel costs such as employee salaries,
benefits and commissions. Such costs increased $2.4 million, to $17.5 million
for the quarter ended June 30, 2000 from $15.1 million for the quarter ended
June 30, 1999. For the six months ended June 30, 2000, these costs increased
approximately $6.2 million to $35.7 million compared with $29.5 million for the
same period of 1999. Also, included in SG&A expenses are operating costs such
as rent, advertising, general administrative and office expenses. These
expenses increased $5.8 million, to $28.5 million for the quarter ended June
30, 2000 from $22.7 million for the quarter ended June 30, 1999. For the six
months ended June 30, 2000, these costs increased approximately $12.3 million
to $56.9 million compared with $44.6 million for the same period of 1999.

    Increases in SG&A are the result of increases in the Company's personnel
that are necessary to support and grow the Company's operations. Costs directly
related to the increase in personnel include salaries, benefits, bonuses and
commissions. Another significant portion of the SG&A increase is due to
back-office expenses such as professional services costs which have been
necessary to maintain and improve existing processes. In addition, increases in
costs for facilities and related expenses have been incurred due to an
increased number of office locations and facilities. Also, in connection with
the Company's growth in revenue, bad debt allowances have increased. The
Company continues to monitor on an ongoing basis its SG&A costs to evaluate any
costs that can be eliminated.

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<PAGE>   15

NON-CASH STOCK COMPENSATION

    Non-cash stock compensation expense decreased $.7 million, or 37%, to $1.4
million for the quarter ended June 30, 2000, from $2.1 million for the quarter
ended June 30, 1999. Non-cash stock compensation expenses decreased $2.3
million, or 43%, to $2.9 million for the six months ended June 30, 2000 from
$5.2 million for the same period of 1999.

    Included in non-cash compensation are accruals for the issuance of common
stock in connection with performance bonuses and costs of grants of employee
stock options. Costs associated with the accrual for performance bonuses were
approximately $1.3 million and $2.0 million for the quarters ended June 30,
2000 and 1999, respectively, and $1.6 million and $4.1 million for the six
months ended June 30, 2000 and 1999. The Company did not incur any costs for
the quarter ended or the six months ended June 30, 2000 in association with
stock option plans, due to the Company's granting of stock options at fair
market value. The related costs incurred were $0.1 million for the quarter
ended June 30, 1999, and $1.1 million for the six months ended June 30, 1999.

DEPRECIATION AND AMORTIZATION

    Depreciation and amortization expenses increased $6.1 million, or 26%, to
$29.6 million for the quarter ended June 30, 2000, from $23.5 million for the
quarter ended June 30, 1999. For the six months ended June 30, 2000,
depreciation and amortization expenses increased $14.1 million, or 32%, to
$57.8 million from $43.7 million for the same period of 1999. These increases
were due to an increase in gross property, plant and equipment to $912.3
million at June 30, 2000, compared with gross property, plant and equipment of
$714 million at June 30, 1999.

INTEREST AND OTHER INCOME

    Interest and other income decreased $1.5 million, or 43%, to $1.8 million
for the quarter ended June 30, 2000, from $3.3 million for the quarter ended
June 30, 1999. Interest and other income decreased $4.3 million, or 57%, to
$3.2 million for the six months ended June 30, 2000 from $7.5 million for the
same period of 1999. The decrease in interest and other income reflects a
decrease in the cash and cash equivalents and restricted cash and investments
balances of $87.7 million from $152.1 million at June 30, 1999 to $64.4 million
at June 30, 2000. These funds have been invested in commercial paper, U.S.
Government Securities and money market instruments.

INTEREST AND OTHER EXPENSE

    Interest and other expense increased $7.7 million, or 33%, to $30.9 million
for the quarter ended June 30, 2000, from $23.2 million for the quarter ended
June 30, 1999. Interest and other expense increased $14.5 million, or 32%, to
$60.6 million for the six months ended June 30, 2000 from $46.1 million for the
same period of 1999. The increase was primarily due to the accrual of interest
incurred in connection with the Credit Facilities, the accrual of interest
related to the 13% Senior Discount Notes due 2005 (the "2005 Notes"), the 12
3/4% Senior Discount Notes due 2006 (the "2006 Notes") and the interest expense
associated with the Company's capital leases.

NET LOSS & NET LOSS APPLICABLE TO COMMON STOCKHOLDERS

    As a result of the previously discussed increases in revenues, cost of
sales, operating expenses, depreciation and amortization, and interest income
and expense, net loss increased $9.4 million, or 16%, to $68.8 million for the
quarter ended June 30, 2000 from $59.4 million for the quarter ended June 30,
1999. Net loss increased $34.3 million, or 29%, to $150.9 million for the six
months ended June 30, 2000 from $116.6 million for the same period of 1999.
Further, net loss applicable to common stockholders increased $12.2 million, or
18%, to $81.6 million for the quarter ended June 30, 2000 from $69.5 million
for the same period of 1999. For the six months ended June 30, 2000, net loss
applicable to common stockholders increased $63.5 million, or 47%, to $199.7
million from $136.3 million for the same period of 1999. These increases to net
loss applicable to common stockholders were attributable to the preferred stock
dividends and accretion related to the 14 3/4% Preferred Stock and the 12 3/4%
Preferred Stock and to the beneficial conversion charge related to the
convertible Preferred Stock issued in the first quarter of 2000.

    The Series A Convertible Preferred Stock was issued at a conversion price
that was less than market price at the time of the funding commitment. Thus,
under Emerging Issues Task Force Issue 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" the Company recognized a beneficial conversion charge of
$24.6 million in the first quarter of 2000. The full amount of the charge was
recognized in the first quarter because the Preferred Stock is immediately
convertible into Common Stock.

LIQUIDITY AND CAPITAL RESOURCES

    The Company's further development and enhancement of new services, the
continued development, construction, expansion, operation and potential
acquisition of networks will require substantial capital expenditures. The
funding of these expenditures is

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<PAGE>   16
dependent upon the Company's ability to raise substantial financing. From the
Company's inception through June 30, 2000, the Company has raised net proceeds
of approximately $1.4 billion from debt and equity financings. The Company's
cash, cash equivalents and restricted cash decreased $16.9 million for the six
months ended June 30, 2000, due to capital expended for the expansion of the
Company's infrastructure and services and to fund negative cash flow, including
principal and interest payments. The Company expects to incur additional capital
expenditures for the expansion of its infrastructure and services and to fund
negative cash flow in the future. During fiscal year 2000, the Company will be
required to make cash interest payments on its 2007 Senior Notes and cash
interest and principal payments on its Senior Secured Credit Facility. At June
30, 2000, the Company had approximately $64.4 million of cash, cash equivalents
and restricted cash available for such purposes. In the first quarter of 2000,
the Company announced that it had secured $175 million in funding commitments
from Greenwich Street Capital Partners II, L.P., The Huff Alternative Income
Fund, L.P., ("W.R. Huff") and Honeywell International Inc. Master Retirement
Trust. As more fully discussed below, the Company completed the sale of $100.7
million on March 3, 2000. Funding of the remaining $74.3 million was subject to
receiving shareholder approval by a certain date, which did not occur. Instead,
one of the Company's principal stockholders have agreed to provide the Company
with $124.3 million in equity and subordinated debt financing. The financing
commitment would supersede any previous commitments from those parties,
including the $50 million commitment discussed below. The stockholder has
agreed, in connection with the negotiation of amendments to the Company's Credit
Facilities, to use commercially reasonable efforts to enter into definitive
agreements with respect to this financing. The stockholder's obligation to
provide the financing may be subject to certain conditions, which may include,
but are not limited to, receiving shareholder approval, the absence of any
material adverse change or certain debt covenant violations under the Credit
Facilities. The Company had entered into a stand-by commitment for an additional
$50 million in equity financing, subject to certain conditions. This may be
superseded as discussed above. The Company continues to consider potential
arrangements that may fit the Company's strategic plan. Any arrangements that
the Company might consider are likely to require additional equity or debt
financing, which the Company will seek to obtain as required and which may also
require the Company obtain the consent of its debt holders.

    On March 3, 2000, e.spire completed a private offering of 81,777 shares of
Series A Convertible Preferred Stock and 175,000 warrants with Greenwich Street
Capital Partners II, L.P., The Huff Alternative Income Fund, L.P. and Honeywell
International Inc. Master Retirement Trust, and received $100.7 million in
proceeds therefrom. Each share of Series A Convertible Preferred Stock is
initially convertible into 126.4 shares of Common Stock (an effective
conversion price of $7.91 per share), and each warrant is initially exercisable
for 44.1 shares of Common Stock (at an initial exercise price of $9.89 per
share). The warrants will automatically expire on the tenth anniversary after
the date that they are issued. Dividends on the Series A Preferred Stock accrue
from the date of issuance, are cumulative and are payable quarterly in arrears,
at a per annum rate of 7% of $1,000 (the "stated value"), plus the accrued but
unpaid dividends thereon, subject to an adjustment in the dividend rate to 15%
upon the occurrence of certain events and to 20% upon a change of control.
Dividends on the convertible preferred stock are cumulative and shall accrue
whether or not the company has earnings or profits, whether or not there are
funds legally available for the payment of such dividends and whether or not
dividends are declared by the Company. Dividends on the convertible preferred
stock are payable only when and if declared by the Company; provided that all
accrued but unpaid dividends on any share of convertible preferred stock must
be paid by the Company upon the conversion of such share of convertible
preferred stock. The convertible preferred stock is junior to the 14.75%
Redeemable Preferred Stock and ranks pari passu to the 12.75% Redeemable
Preferred Stock. All dividends will be paid by the Company in shares of its
Common Stock equal to accrued dividends divided by a rate equal to the
effective conversion price described above or, if no shareholder approval has
been obtained, the closing price of the common stock on March 6, 2000 ($13.44).
In connection with the issuance of the convertible preferred stock, the Company
has agreed to certain restrictive covenants, which are substantially similar to
the covenants that were entered into in connection with the issuance of the
Company's 12 3/4% Redeemable Preferred Stock. The Certificate of Designation
provides that these covenants shall be deemed waived automatically if waived or
amended by the holders of the 12 3/4% preferred stock.

    In December 1999, e.spire obtained an additional commitment of $50 million
in capital lease financing from GATX Capital Corporation, a diversified
financial services company, and its telecommunications investing affiliate,
GATX Telecom Investors II-A, L.L.C. (collectively "GATX"). The proceeds were
used primarily to finance voice switches, including remote modules and
associated software, as well as other related telecommunications networking
equipment. As of December 31, 1999, e.spire had drawn approximately $16 million
under these capital leases. The remainder of the facility is not available to
the Company.

    On August 12, 1999, the Company entered into the Credit Facilities which
consists of a $35 million revolver, a $55 million multiple draw term loan, each
with a 6.5 year maturity, and a $110 million term loan with a 7 year maturity.
Of the Credit Facilities, a total of $164 million was immediately available to
the Company and was outstanding as of June 30, 2000. The remaining $36 million
is not available to the Company due to the terms of the amendment agreed to
between the Company and its syndicated bank group on July 14, 2000 as discussed
below. In conjunction with the Credit Facilities, the Company retired a $35
million credit facility with Newcourt Commercial Finance Corporation on August
12, 1999.

    The Credit Facilities are collateralized by the capital stock of all of the
restricted subsidiaries of the Company and the assets of the Company and its
restricted subsidiaries, including promissory notes representing intercompany
indebtedness. In addition, the Credit Facilities contain certain covenants,
which impose restrictions on the Company and its restricted subsidiaries. These
include, without limitation, restrictions on the declaration or payment of
dividends with respect to the capital stock of the Company, the conduct of
certain activities, certain investments, the creation of additional liens or
indebtedness, the disposition of assets, transactions with affiliates and
fundamental changes.

                                       16

<PAGE>   17
 The Credit Facilities contain financial covenants with which the Company must
comply, including adjusted EBITDA (Earnings before interest, taxes,
depreciation, amortization, and noncash compensation), debt to capital ratio,
and capital expenditures. The Company was not in compliance with the financial
covenants as of December 31, 1999, March 31, 2000 and June 30, 2000, resulting
in a default under the Credit Facilities which allows the lenders to accelerate
the maturity of the borrowings under the Credit Facilities and which would also
result in the acceleration of other obligations of the Company, including the
2005 Notes, 2006 Notes, 2007 Notes and 2008 Notes (collectively the "Notes"). On
April 13, 2000, the Company obtained a waiver of non-compliance as of December
31, 1999 and the lenders agreed to a standstill on actions related to
non-compliance as of March 31, 2000 until June 15, 2000. On June 14, 2000, the
Company obtained an extension of the standstill until July 10, 2000. On July 14,
2000, the Company signed a term sheet with the lenders to amend the financial
covenants on a going forward basis to levels that the Company believes it will
be able to meet. Also, the lenders agreed to a continuation of the standstill on
actions related to such non-compliance until the earlier of August 25, 2000 or
the date of signing the amendment to the Credit Facilities which amends, among
other things, the financial covenants. Although the Company and its lenders have
not yet signed the agreement, the Company is continuing to work with the lenders
to prepare a definitive agreement with respect to such amendments. Entering into
of such agreement is conditioned upon, among other things, the Company entering
into the agreement for additional financing with the principal stockholder as
discussed above. Going forward, it may be necessary for the Company to draw
against investor equity commitments in order to maintain compliance under the
amendments to the financial covenants contained in the term sheet. As part of
signing the term sheet with the lenders, the Company paid $15 million of the
facility's principal on July 14, 2000 and will pay an additional $10 million of
the facility's principal at the final closing of the amendment. Thereafter, the
Company will pay a .5% point increase in interest rates.

    The Company has never been profitable, has never generated positive cash
flow from consolidated operations and, since its inception has incurred
significant net operating losses and negative cash flow. In accordance with the
terms of its debt facilities, the Company has also deferred payment of most of
its interest charges. During fiscal year 2000, the Company will be required to
make cash interest payments on its 2007 Senior Notes and Senior Secured Credit
Facility as well as principal payments on the Credit Facility. The Company's
continued development, construction, expansion, and operation of local
networks, as well as the further development of additional services, including
local switched voice and high-speed data services, will require continued
substantial capital expenditures. The Company's ability to fund these
expenditures is dependent upon the Company raising substantial financing. To
meet its remaining capital requirements and to fund operations and cash flow
deficiencies, the Company will be required to sell additional equity
securities, increase its existing credit facility, acquire additional credit
facilities, sell additional debt securities, or sell certain Company assets,
some of which may require the consent of the Company's bondholders. There can
be no assurance that the Company will be able to obtain the additional
financing necessary to satisfy its cash requirements or to successfully
implement its growth strategy. Failure to raise sufficient capital could compel
the Company to delay or abandon some or all of its plans or expenditures, which
could have a material adverse effect on its business, results of operations,
and financial condition.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

    The Company's long-term debt includes both fixed and variable rate
instruments. The fair market value of the Company's fixed rate long-term debt
is sensitive to changes in interest rates. The Company runs the risk that
market rates will decline and the required payments will exceed those based on
current market rate. Under its current policies, the Company does not use
interest rate derivative instruments to manage its exposure to interest rate
changes.

PART II

OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

Ten shareholder class action lawsuits were filed against the Company and
Anthony J. Pompliano, David L. Piazza and Douglas R. Hudson (former officers of
e.spire) on and after April 20, 2000, in the United States District Court for
the District of Maryland (the "Court"). The lawsuits purport to be class
actions filed on behalf of purchasers of the stock of the Company during the
period August 12, 1999 through March 30, 2000. Plaintiffs allege that
defendants made false and misleading statements about the Company's financial
condition, revenues, expenses and results of operations, in violation of
federal securities laws. Plaintiffs have filed several motions seeking
consolidation of the lawsuits. The Court ordered that the lawsuits will be
consolidated and that plaintiffs file a consolidated complaint. The Company
expects to file a motion to dismiss that complaint, and is not required to
respond before that complaint is filed. The Company believes that plaintiffs'
claims have no basis and intends to vigorously defend the actions.

In addition, the Company and its subsidiaries are currently parties to other
routine litigation incidental to their business, none of which, individually or
in the aggregate, are expected to have a material adverse effect on the
Company. The Company and its subsidiaries are parties to various court appeals
and regulatory arbitration proceedings relating to certain of the Company's
interconnection agreements and continue to participate in regulatory
proceedings before the FCC and state regulatory agencies

                                       17
<PAGE>   18

ITEM 2 - CHANGES IN SECURITIES

On July 20, 2000, e.spire issued to Thomas Benham, Sr., 50,000 shares of common
stock pursuant to a Confidential Settlement and Release Agreement dated as of
May 19, 2000. This transaction was consummated as a private transaction
pursuant to Section 4(2) of the Securities Act of 1933.

ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    On May 30, 2000, the Company held its annual meeting of stockholders and
five proposals were considered. All such proposals were approved by the
stockholders.

    The first proposal was to elect the seven nominees to the Board of
Directors. The following is a separate tabulation with respect to the vote for
each nominee.

<TABLE>
<S>                                   <C>                        <C>
         George F. Schmitt:            For:     47,173,676        Against: 0
         William R. Huff:              For:     48,702,252        Against: 0
         Edwin M. Banks:               For:     45,965,314        Against: 0
         Peter C. Bentz:               For:     48,701,979        Against: 0
         Frederick Galland:            For:     48,708,079        Against: 0
         Christopher L. Rafferty:      For:     48,700,579        Against: 0
         Joseph R. Thornton:           For:     48,699,155        Against: 0
</TABLE>

    The second proposal was to approve and ratify amendments to the 1996
Employee Stock Purchase Plan (the "Plan") to increase the number of shares of
Common Stock reserved for issuance upon exercise of options granted under the
Plan from 1,000,000 to 2,000,000 shares. The following is a breakdown of the
vote on such matter.

<TABLE>
<CAPTION>
          Abstained         For            Against           Broker Non-Votes
          ---------         ---            ---------         ----------------
<S>                        <C>            <C>               <C>
         79,668             21,958,906     1,850,109                  0
</TABLE>

    The third proposal was to ratify and approve amendments to the 1994 Employee
Stock Option Plan (the "Stock Option Plan") to increase the number of shares of
Common Stock reserved for issuance upon exercise of options granted under the
Plan from 11,000,000 to 13,500,000. The following is a breakdown of the vote on
such matter.

<TABLE>
<CAPTION>
          Abstained         For            Against           Broker Non-Votes
          ---------         ---            ---------         ----------------
<S>                        <C>            <C>               <C>
         83,930             20,101,447     3,703,306                  0
</TABLE>

    The fourth proposal was to ratify and approve amendments to the 1998
Restricted Stock Plan increasing the number of shares of Common Stock reserved
for issuance from 20,000 to 1,000,000.

<TABLE>
<CAPTION>
          Abstained         For            Against           Broker Non-Votes
          ---------         ---            ---------         ----------------
<S>                        <C>            <C>               <C>
          84,768            19,737,152     4,066,763                  0
</TABLE>

    The fifth proposal was to ratify the selection of KPMG LLP as the
independent auditors of the Company for the fiscal year ending December 31,
2000.

<TABLE>
<CAPTION>
          Abstained         For            Against           Broker Non-Votes
          ---------         ---            ---------         ----------------
<S>                        <C>            <C>               <C>
          49,317            49,141,963     133,419                    0
</TABLE>

ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

<TABLE>
<CAPTION>
            EXHIBIT
             NUMBER                            DESCRIPTION
        ---------------    ---------------------------------------------------
<S>                       <C>
              10.1         Limited Waiver to the $200 Million Senior Secured
                           Credit Facility dated
</TABLE>

                                       18

<PAGE>   19

<TABLE>
<S>                      <C>
                          as of April 13, 2000, by and among e.spire
                          Communications, Inc., and its affiliates, the
                          financial institutions, Goldman Sachs Credit
                          Partners L.P., as sole Lead Arranger and
                          Syndication Agent, The Bank of New York, as
                          Administrative Agent for Lenders First Union
                          National Bank, as Documentation Agent, and Newcourt
                          Commercial Finance Corporation, as Collateral Agent
                          Forbearance until June 15, 2000

              10.2        Limited Waiver to the $200 Million Senior Secured
                          Credit Facility dated as of June 14, 2000, by and
                          among e.spire Communications, Inc., and its
                          affiliates, the financial institutions, Goldman
                          Sachs Credit Partners L.P., as sole Lead Arranger
                          and Syndication Agent, The Bank of New York, as
                          Administrative Agent for Lenders First Union
                          National Bank, as Documentation Agent, and Newcourt
                          Commercial Finance Corporation, as Collateral Agent.
                          Forbearance until July 10, 2000

              10.3        Limited Waiver to the $200 Million Senior Secured
                          Credit Facility dated as of July 10, 2000, by and
                          among e.spire Communications, Inc., and its
                          affiliates, the financial institutions, Goldman
                          Sachs Credit Partners L.P., as sole Lead Arranger
                          and Syndication Agent, The Bank of New York, as
                          Administrative Agent for Lenders First Union
                          National Bank, as Documentation Agent, and Newcourt
                          Commercial Finance Corporation, as Collateral Agent.
                          Forbearance until July 14, 2000

              10.4        Limited Waiver to the $200 Million Senior Secured
                          Credit Facility dated as of July 14, 2000, by and
                          among e.spire Communications, Inc., and its
                          affiliates, the financial institutions, Goldman
                          Sachs Credit Partners L.P., as sole Lead Arranger
                          and Syndication Agent, The Bank of New York, as
                          Administrative Agent for Lenders First Union
                          National Bank, as Documentation Agent, and Newcourt
                          Commercial Finance Corporation, as Collateral Agent.
                          Forbearance until August 15, 2000

              10.5        Limited Waiver regarding certain closing conditions
                          dated as of April 13, 2000 by and between e.spire
                          and The Huff Alternative Income Fund, L.P. ("Huff"),
                          (ii) Greenwich Street Capital Partners II, L.P.,
                          GSCP Offshore Fund, L.P., Greenwich Fund, L.P.,
                          Greenwich Street Employees Fund, L.P. and TRV
                          Executive Fund, L.P. (together, "Greenwich Street")
                          and (iii) the Honeywell International Inc. Master
                          Retirement Fund ("Honeywell", together with Huff and
                          Greenwich Street, the "Investors")

              10.6        Amendment regarding filing of Proxy Statement dated
                          as of April 13, 2000 by and between e.spire and The
                          Huff Alternative Income Fund, L.P. ("Huff"), (ii)
                          Greenwich Street Capital Partners II, L.P., GSCP
</TABLE>

                                       19

<PAGE>   20

<TABLE>
<S>                        <C>
                            Offshore Fund, L.P., Greenwich Fund, L.P., Greenwich
                            Street Employees Fund, L.P. and TRV Executive Fund,
                            L.P. (together, "Greenwich Street") and (iii) the
                            Honeywell International Inc. Master Retirement Fund
                            ("Honeywell", together with Huff and Greenwich
                            Street, the "Investors")

               27           Financial Data Schedule

               99           Supplemental Financial Information
</TABLE>

(b)  Reports on Form 8-K

         On July 12, 2000, e.spire filed a Current Report on Form 8-K
              announcing that its Interim Chief Financial Officer, Bradley E.
              Sparks accepted the position on a permanent basis. Also, the
              Company announced the appointment of Donald W. Bush as its
              Treasurer.

         On July 24, 2000, e.spire filed a Current Report on Form 8-K
              announcing that it and its syndicated bank group have signed the
              final terms for an amendment to its Senior Secured Credit
              Facility, executed in August 1999. e.spire expects to prepare the
              documentation, completing the amendment, in the next few weeks,
              at which time the specific terms will be made public.

         On July 31, 2000, e.spire filed a Current Report on Form 8-K
              announcing its earnings for the quarter ended June 30, 2000.

                                   SIGNATURES

    In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                              E.SPIRE Communications, Inc.
                                              ----------------------------
                                              (Registrant)

                                    By:       /s/ GEORGE F. SCHMITT
                                              ---------------------
                                              George F. Schmitt,
                                              Chairman of the Board of
                                              Directors
                                              And Interim Chief Executive
                                              Officer

                                              Date: August 14, 2000

                                    By:       /s/ BRADLEY E. SPARKS
                                              ---------------------
                                              Bradley E. Sparks,
                                              Chief Financial Officer


                                              Date: August 14, 2000


                               INDEX OF EXHIBITS

<TABLE>
<CAPTION>
   EXHIBIT NO.                             DESCRIPTION                                PAGE NO.
---------------   -------------------------------------------------------------      ---------
<S>               <C>                                                                <C>
      10.1        Limited Waiver to the $200  Million Senior Secured Credit             E-1
                  Facility dated as of April 13, 2000, by and among e.spire
                  Communications, Inc., and its affiliates, the financial
                  institutions Goldman Sachs Credit Partners L.P., as sole Lead
                  Arranger and Syndication Agent, The Bank of New York, as
                  Administrative Agent for Lenders First Union National Bank,
                  as Documentation Agent, and Newcourt Commercial Finance
                  Corporation, as Collateral Agent

</TABLE>

                                       20

<PAGE>   21

<TABLE>
<S>               <C>                                                                <C>
                  Forbearance until June 15, 2000

      10.2        Limited Waiver to the $200 Million Senior Secured Credit              E-2
                  Facility dated as of June 14, 2000, by and among e.spire
                  Communications, Inc., and its affiliates, the financial
                  institutions Goldman Sachs Credit Partners L.P., as sole Lead
                  Arranger and Syndication Agent, The Bank of New York, as
                  Administrative Agent for Lenders First Union National Bank,
                  as Documentation Agent, and Newcourt Commercial Finance
                  Corporation, as Collateral Agent . Forbearance until July 10,
                  2000

      10.3        Limited Waiver to the $200 Million Senior Secured Credit              E-3
                  Facility dated as of July 10, 2000, by and among e.spire
                  Communications, Inc., and its affiliates, the financial
                  institutions Goldman Sachs Credit Partners L.P., as sole Lead
                  Arranger and Syndication Agent, The Bank of New York, as
                  Administrative Agent for Lenders First Union National Bank,
                  as Documentation Agent, and Newcourt Commercial Finance
                  Corporation, as Collateral Agent. Forbearance until July 14,
                  2000


      10.4        Limited Waiver to the $200 Million Senior Secured Credit              E-4
                  Facility dated as of July 14, 2000, by and among e.spire
                  Communications, Inc., and its affiliates, the financial
                  institutions Goldman Sachs Credit Partners L.P., as sole Lead
                  Arranger and Syndication Agent, The Bank of New York, as
                  Administrative Agent for Lenders First Union National Bank,
                  as Documentation Agent, and Newcourt Commercial Finance
                  Corporation, as Collateral Agent. Forbearance until August
                  15, 2000

      10.5        Limited Waiver regarding certain closing conditions dated as          E-5
                  of April 13, 2000 by and between e.spire and The Huff
                  Alternative Income Fund, L.P. ("Huff"), (ii) Greenwich Street
                  Capital Partners II, L.P., GSCP Offshore Fund, L.P.,
                  Greenwich Fund, L.P., Greenwich Street Employees Fund, L.P.
                  and TRV Executive Fund, L.P. (together, "Greenwich Street")
                  and (iii) the Honeywell International Inc. Master Retirement
                  Fund ("Honeywell", together with Huff and Greenwich Street,
                  the "Investors")

      10.6        Amendment regarding filing of Proxy Statement dated as of             E-6
                  April 13, 2000 by and between e.spire and The Huff
                  Alternative Income Fund, L.P. ("Huff"), (ii) Greenwich Street
                  Capital Partners II, L.P., GSCP Offshore Fund, L.P.,
                  Greenwich Fund, L.P., Greenwich Street Employees Fund, L.P.
                  and TRV Executive Fund, L.P. (together, "Greenwich Street")
                  and (iii) the Honeywell International Inc. Master Retirement
                  Fund ("Honeywell", together with Huff and Greenwich Street,
                  the "Investors")


</TABLE>

                                       21

<PAGE>   22

<TABLE>
<S>               <C>                                                                <C>
                  letter

       27         Financial Data Schedules                                              E-9

       99         Supplemental Financial Information                                    E-10
</TABLE>

                                       22




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