DIGEX INC, SB-2/A, 1996-09-30

DIGEX INC
SB-2/A, 1996-09-30
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1996

REGISTRATION NO. 333-05871

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

AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT

UNDER
THE SECURITIES ACT OF 1933

----------------
DIGEX, INCORPORATED
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

MARYLAND 4813 52-1672337
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)

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

6800 VIRGINIA MANOR ROAD
BELTSVILLE, MARYLAND 20705
(301) 847-5000
(ADDRESS AND TELEPHONE NUMBER
OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE OF BUSINESS)

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

CHRISTOPHER R. MCCLEARY, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
6800 VIRGINIA MANOR ROAD
BELTSVILLE, MARYLAND 20705
(301) 847-5000
(NAME, ADDRESS, AND TELEPHONE NUMBER
OF AGENT FOR SERVICE)

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

Copies to:
JOHN D. WATSON, JR., ESQ.
LATHAM & WATKINS J. WARREN GORRELL, JR.

1001 PENNSYLVANIA AVENUE, N.W. DAVID B. H. MARTIN, JR.

SUITE 1300 HOGAN & HARTSON L.L.P.

WASHINGTON, D.C. 20004-2505 555 THIRTEENTH STREET, N.W.

(202) 637-2200 WASHINGTON, D.C. 20004-1109

(202) 637-5600

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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT.

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

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SECTION 8(A), MAY DETERMINE.

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

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 1996
PROSPECTUS

[DIGITAL EXPRESS GROUP LOGO APPEARS HERE]

3,750,000 SHARES OF COMMON STOCK

All of the shares of Common Stock, $.01 par value per share (the "Common
Stock"), offered hereby (the "Shares") are being sold by DIGEX, Incorporated
(the "Company"). Prior to this offering (the "Offering"), there has been no
public market for the Common Stock. It is currently anticipated that the
initial public offering price will be between $9.00 and $11.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.

The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "DIGX."

SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES.

-----------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY (1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................................... $ $ $
Total (2)..................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

(1) Before deducting expenses payable by the Company estimated at $1,200,000.

(2) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 562,500 additional shares of Common Stock at the Price to
Public, less the Underwriting Discount, solely to cover over-allotments, if
any. If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."

The Shares are offered subject to receipt and acceptance by the Underwriters,
to prior sale and to the Underwriters' right to reject any order in whole or in
part and to withdraw, cancel or modify the offer without notice. It is expected
that delivery of the Shares will be made at the office of Friedman, Billings,
Ramsey & Co., Inc., Arlington, Virginia, or through the facilities of The
Depository Trust Company, on or about , 1996.

-----------

FRIEDMAN, BILLINGS, RAMSEY & CO., INC.

The date of this Prospectus is , 1996.
<PAGE>

[DIGITAL EXPRESS GROUP LOGO APPEARS HERE]

[MAP APPEARS HERE]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET
(INCLUDING THE NASDAQ NATIONAL MARKET) OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE>

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act
with respect to the Common Stock offered hereby (the "Registration
Statement"). This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the shares of Common Stock offered
hereby, reference is hereby made to the Registration Statement, including the
exhibits, financial statements and schedules thereto. Statements contained in
this Prospectus regarding the contents of any contract or other document are
not necessarily complete; with respect to each such contract or document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference.

As a result of this Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports and
other information with the Commission. A copy of the Registration Statement,
including the exhibits, financial statements and schedules thereto, may be
inspected without charge at the principal office of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and
at its regional offices located at Seven World Trade Center, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661, and copies of such material may be obtained from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549 upon payment of the fees prescribed by the
Commission. The Commission also maintains a "web site' that contains
registration statements, reports, proxy and information statements and other
materials that are filed through the Commission's Electronic Data Gathering,
Analysis, and Retrieval system. This web site can be accessed at
http://www.sec.gov.

REPORTS TO STOCKHOLDERS

The Company intends to furnish to its stockholders annual reports containing
consolidated financial statements audited by its independent certified public
accountants and quarterly reports containing unaudited summary financial
information for the first three quarters of each fiscal year.

3
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Investors should carefully consider the
information set forth under "Risk Factors." Unless otherwise indicated, all
information in this Prospectus assumes (i) no exercise of the Underwriters'
over-allotment option, (ii) the issuance of 2,680,336 shares of common stock,
$.01 par value (the "Common Stock"), upon the conversion (the "Preferred Stock
Conversion") of all outstanding shares of the Company's Series A and Series B
convertible preferred stock, $1.00 par value (collectively, the "Preferred
Stock"), at or prior to the offering of Common Stock made hereby (the
"Offering"), (iii) the exercise of warrants to purchase 1,868,408 shares of
Common Stock concurrently with the Preferred Stock Conversion (the "Warrant
Exercise") and (iv) reincorporation of the Company as a Delaware corporation.
All share totals stated herein reflect the Company's 505.26-for-1 stock split
of March 1995, the 10-for-1 stock split of August 1995 and a 1-for-2.5 reverse
stock split which will occur in connection with the Offering. See "Glossary"
for the definitions of certain terms and acronyms used herein.

THE COMPANY

DIGEX, Incorporated ("DIGEX" or the "Company") is a leading independent
national Internet service provider ("ISP") that focuses exclusively on
businesses, government agencies and other institutional customers ("business
customers"). The Company offers a comprehensive range of INDUSTRIAL STRENGTH
Internet solutions, including business connectivity, Web server hosting and
security and other network products. After receiving its first major infusion
of institutional equity capital in March 1995, the Company reoriented its
strategy to focus exclusively on business customers, who generally require high
bandwidth connectivity, and also began to develop its Web server hosting
business. Additionally, in the first half of 1996, the Company brought in an
experienced management team and completed a DS-3 backbone ring around the
continental United States. As a result, the Company's leased line and server
customers have grown from approximately 65 accounts at April 30, 1995 to
approximately 1050 accounts at August 31, 1996.

The Company believes that Internet solutions are increasingly achieving
"mission critical" status for business customers as the role of the Internet
and corporate intranets grows. International Data Corporation ("IDC") has
estimated that the number of Internet users was approximately 56 million in
1995, approximately 71% of which (or 40 million) were business users, and that
the aggregate number of users will grow to approximately 200 million by 1999.
In addition, according to Netcraft, Ltd., the number of corporate Internet
sites, defined as domain names ending in ".com," has increased from 4,912 in
August 1995 to 171,738 in June 1996.

DIGEX's nationwide network infrastructure provides Internet connectivity to
business customers in 33 U.S. metropolitan areas through 40 points of presence
("POPs"). Leveraging off a strong and well-established presence in the eastern
United States, the Company has embarked on a major expansion program which will
result in a total of 55 POPs (serving 48 U.S. metropolitan areas) by the end of
1996. The Company's network infrastructure is designed to provide business
customers with a high degree of reliability, enhanced performance and scalable
bandwidth. It uses Cisco Systems 7513 routers and a redundant clear channel DS-
3 loop architecture which provides 90 Mbps of coast-to-coast capacity,
monitored by a 24x7x365 network operations center ("NOC"). Unlike the network
infrastructure of regional ISPs, which typically connect at only one peering
point, the Company's network connects with the networks of other national ISPs
at the three major peering points across the U.S.

4
<PAGE>

The Company's objective is to be a single-source provider of reliable high-
performance INDUSTRIAL STRENGTH Internet solutions that serve the needs of
business customers. To achieve this objective, the Company will focus
exclusively on business customers, expand and optimize its nationwide network,
provide a comprehensive range of Internet solutions, implement multiple
distribution channels for its solutions and focus on customer acquisition and
retention.

As part of its distribution strategy, the Company is targeting
telecommunications service providers who wish to provide private label Internet
services to their customers without building their own facilities. The Company
recently entered into its first such multi-year private network agreements with
LCI International, Inc. ("LCI"), WinStar Communications, Inc. ("WinStar") and
Orion Atlantic, L.P. ("Orion"). Through its private network agreement with the
Company, Orion will resell the Company's connectivity services to its customers
in Europe. The Company expects that its ability to attract additional private
network customers will be significantly enhanced by the announcement of these
agreements.

In June 1996, the Company entered into an agreement with Microsoft
Corporation ("Microsoft"), pursuant to which Microsoft's Consulting Services
Group built a "Server Farm" for the Company with servers running Microsoft's
Windows NT 4.0 operating system. Under this agreement, the Company introduced
the world's first Windows NT 4.0 hosted server product line on September 3,
1996. The Company is currently engaged in discussions with Microsoft to include
DIGEX in Microsoft's Solution Provider Program, which would result in the
Company being designated a preferred vendor for Microsoft's corporate
customers. There can be no assurance, however, that these discussions will
culminate in an agreement with Microsoft.

The Company was founded in 1990 by a group of Internet pioneers as a Maryland
corporation under the name "Digital Express Group, Inc." The Company, which is
now named "DIGEX, Incorporated," is reincorporating as a Delaware corporation
in connection with the Offering. The Company's principal executive offices are
located at 6800 Virginia Manor Road, Beltsville, Maryland 20705, and the
Company's telephone number is (301) 847-5000. The Company's Web site is located
at http://www.digex.net.

5
<PAGE>

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered......................... 3,750,000 shares (1)
Common Stock Outstanding after the Offering.. 9,863,991 shares (1)(2)
Use of Proceeds.............................. The Company intends to use the net
proceeds of the Offering to fund
operating losses associated with the
expansion of the Company's business,
and, potentially, to acquire business-
focused regional ISPs or to purchase
their subscriber bases. See "Use of
Proceeds."
Nasdaq National Market Symbol................ DIGX
</TABLE>

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(1) Excludes shares of Common Stock subject to the Underwriters' over-allotment
option granted by the Company.
(2) Based on the number of shares outstanding as of June 30, 1996 (assuming the
Preferred Stock Conversion and the Warrant Exercise, both of which will
occur at or prior to the consummation of the Offering). Does not include
2,283,300 shares issuable upon the exercise of options at a weighted
average exercise price of $2.79 per share presently outstanding under the
Company's Incentive Stock Option Plan (the "1995 Stock Option Plan") and
the Company's Equity Participation Plan (the "Equity Plan" and, together
with the 1995 Stock Option Plan, the "Stock Option Plans"), as well as
202,280 shares issuable upon the exercise of options authorized but not
granted under the Equity Plan. See "Management--Incentive Stock Option
Plans." Also does not include warrants to purchase 240,000 shares of Common
Stock at an exercise price of $3.75 per share granted to WinStar in
connection with the Company's private network agreement with WinStar (the
"WinStar Warrants").

The Company has applied for federal registration of the following
servicemark: INDUSTRIAL STRENGTH Internet SM. This Prospectus also includes
product names and other trade names of the Company and of other organizations.

6
<PAGE>

SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- -----------------------
1993 1994 1995 1995 1996
-------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $431,098 $1,577,609 $ 5,075,316 $1,665,432 $ 5,235,204
Costs and expenses:
Cost of revenue........ 216,656 1,002,503 4,471,500 1,321,663 5,246,961
Sales and marketing.... 18,326 263,075 1,710,234 561,093 2,587,472
General and administra-
tive.................. 135,238 366,392 2,715,752 588,116 3,376,091
-------- ---------- ----------- ---------- -----------
Total expenses.......... 370,220 1,631,970 8,897,486 2,470,872 11,210,524
-------- ---------- ----------- ---------- -----------
Income (loss) from oper-
ations................. 60,878 (54,361) (3,822,170) (805,440) (5,975,320)
Other income (expense):
Interest and other in-
come.................. -- -- 72,002 17,453 47,746
Interest expense....... -- (23,693) (226,745) (45,249) (1,167,149)
-------- ---------- ----------- ---------- -----------
-- (23,693) (154,743) (27,796) (1,119,403)
-------- ---------- ----------- ---------- -----------
Income (loss) before in-
come taxes............. 60,878 (78,054) (3,976,913) (833,236) (7,094,723)
Income taxes............ (25,540) (3,470) -- -- --
-------- ---------- ----------- ---------- -----------
Net income (loss)....... 35,338 (81,524) (3,976,913) (833,236) (7,094,723)
Accretion of Preferred
Stock to redemption
value.................. -- -- (338,698) (109,163) (252,881)
-------- ---------- ----------- ---------- -----------
Net income (loss) at-
tributable to common
stockholders........... $ 35,338 $ (81,524) $(4,315,611) $ (942,399) $(7,347,604)
======== ========== =========== ========== ===========
Pro forma net income
(loss) per common
share(1)............... $ (0.47) $ (0.69)
=========== ===========
Pro forma average common
and common equivalent
shares outstanding(1).. 8,254,069 8,689,950
=========== ===========
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
PRO FORMA
AS
ACTUAL ADJUSTED(2)
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 6,269,000 $39,944,000
Working capital (deficit).............................. (6,018,179) 27,656,821
Total assets........................................... 18,841,779 52,516,779
Total indebtedness, less current portion............... 1,714,283 1,714,283
Mandatorily redeemable preferred stock................. 10,518,159 --
Total stockholders' equity (deficit)................... (7,939,558) 36,253,601
</TABLE>
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(1) Pro forma net loss per common share adjusts historical earnings per share
for the assumed conversion of convertible securities which are not included
in the historical computations. These convertible securities will
automatically convert into shares of Common Stock upon the consummation of
the Offering. Historical net loss was reduced by $450,871 for the year
ended December 31, 1995 and $1,311,347 for the six months ended June 30,
1996 to adjust for interest expense and preferred stock accretion related
to the convertible securities. See Note 2 to Financial Statements.

(2) The pro forma as adjusted data give effect to (i) the Preferred Stock
Conversion and the Warrant Exercise, both of which will occur upon
consummation of the Offering and (ii) the issuance and sale by the Company
of the shares of Common Stock offered hereby (at an assumed offering price
of $10.00 per share, after deducting estimated underwriting discount and
expenses of the Offering payable by the Company).

7
<PAGE>

RISK FACTORS

Investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should carefully consider the factors set forth
below, together with the other information contained in this Prospectus,
before making a decision to purchase the Common Stock offered hereby.

ACCUMULATED DEFICIT; NET LOSSES; LIMITED OPERATING HISTORY

At June 30, 1996, the Company had an accumulated deficit of approximately
$11.8 million. The Company experienced net losses of approximately $4.0
million and $7.1 million in the year ended December 31, 1995 and in the six
months ended June 30, 1996, respectively. The Company is currently making
significant capital expenditures intended to expand the Company's network and
organizational infrastructure, and expects to incur operating and net losses
in 1996 and 1997. The Company expects that its operating and net losses during
the last two quarters of 1996 will increase significantly compared to its
operating and net losses for the first two quarters of 1996. The grant of
options through June 30, 1996 will result in a $2.7 million non-cash
compensation charge during the period July 1, 1996 through December 31, 1999.
There can be no assurance that the Company will achieve or sustain
profitability in the future.

Although the Company has been in existence since 1990, it reoriented its
strategy in March 1995 to focus exclusively on business customers. As a
result, prospective investors have limited relevant operating and financial
data upon which to base an evaluation of the Company and an investment in the
Common Stock offered hereby.

INTENSE COMPETITION

The market for Internet connectivity services is extremely competitive.
There are no substantial barriers to entry, and the Company expects that
competition will intensify in the future.

Currently, the Company's primary competitors are other ISPs focused on
business customers, including UUNET Technologies, Inc. ("UUNET"), BBN
Corporation ("BBN") and PSINet Inc. ("PSI"). UUNET, BBN and PSI, in
particular, all have significantly greater market presence and financial,
technological and personnel resources than the Company and have more extensive
network infrastructures than the Company. To a lesser extent, the Company
competes with other national and regional ISPs, of which there are currently
more than 1500, including NETCOM On-Line Communications Services, Inc.
("NETCOM"). The Company also currently competes with AT&T Corp. ("AT&T"), MCI
Communications Corporation ("MCI") and Sprint Corporation ("Sprint"). The
Telecommunications Act of 1996 is removing a number of regulatory obstacles to
the entry of other telecommunications companies into the Internet connectivity
market. Accordingly, the Company expects all of the other major
telecommunications service providers, including the Regional Bell Operating
Companies ("RBOCs"), to compete fully in the Internet connectivity market.
Deregulation of the telecommunications industry has already led to significant
horizontal integration through acquisitions and joint ventures, and the
Company expects these trends to continue.

The telecommunications companies with which the Company competes have access
to significantly greater financial, technological and personnel resources than
the Company and also have large existing business customer bases. In addition,
interexchange carriers ("IXCs"), including AT&T, MCI and Sprint, possess
existing nationwide telecommunications networks and generally face lower
infrastructure costs in providing Internet connectivity than the Company.
Although its WorldNet offering targets the consumer market, AT&T is party to
an agreement with BBN pursuant to which it can market BBN's business
connectivity services to AT&T's business customer base or, in the alternative,
provide its own Internet connectivity. In addition, MCI and British
Telecommunications P.L.C. have announced that they intend to merge their
international high-speed data networks and their Internet backbones, thus
offering their customers international Internet connectivity services. GTE
Corp. ("GTE") and UUNET have also recently announced a strategic alliance
whereby GTE's customers may obtain access to the Internet through UUNET's
network.

8
<PAGE>

Although most local exchange carriers ("LECs"), such as the RBOCs, and
competitive access providers ("CAPs") do not currently possess nationwide
networks, they generally have lower communications costs than the Company in
providing leased lines to businesses in the areas in which they operate.
Moreover, significant consolidation among RBOCs, including SBC Communications
Inc.'s recently-announced proposal to acquire Pacific Telesis Group ("PacTel")
and the proposed merger of NYNEX Corp. and Bell Atlantic Corporation ("Bell
Atlantic"), could result in the expansion of networks which can compete for
Internet connectivity customers. In addition, MFS Communications Company, Inc.
("MFS") has acquired UUNET and can now offer its customers expanded Internet
connectivity, and World Com, Inc. has recently announced an agreement to
acquire MFS. PacTel has also announced an offering of consumer connectivity to
customers in California.

Certain companies are also exploring the possibility of providing high-speed
data services using alternative delivery methods. For example, @Home, a joint
venture between Tele-Communications, Inc. and Kleiner Perkins Caufield &
Byers, has stated its intent to provide high-speed data services over cable
television plant, and Hughes Network Systems, Inc. ("HNS") has launched
DirecPC, which will deliver high-speed data through direct broadcast satellite
technology. If these technologies gain commercial acceptance, operators of
cable television and direct broadcast satellite systems could become
competitors of the Company. CAI Wireless Systems, Inc., a wireless cable
television service, also has announced that it has begun testing the first
Internet connectivity product delivered by wireless cable.

The Company also competes, to a lesser extent, with certain on-line service
providers which offer Internet connectivity in conjunction with their primary
products or services. For example, Microsoft provides Internet connectivity
through its Microsoft Network, which was built by UUNET (in which Microsoft
holds a significant minority stake) and which is a standard integrated feature
of its Windows 95 operating system, and International Business Machines
Corporation ("IBM") offers its OS/2 WARP operating system preconfigured to
provide Internet connectivity through the Advantis network, which is
controlled by IBM. Microsoft has also recently announced strategic marketing
alliances for Internet access with MCI, AT&T and NETCOM. In addition, America
Online, Inc. ("AOL"), CompuServe, Inc. ("CompuServe") and Prodigy Services
Company ("Prodigy"), currently provide Internet connectivity and have
announced plans to offer expanded Internet connectivity capabilities.

The market for Web server hosting services is highly fragmented and
extremely competitive. There are no substantial barriers to entry and the
Company expects that competition will intensify in the future. Currently the
Company's primary competitors are other ISPs, including BBN, UUNET and PSI,
and companies whose primary business is developing and operating "Server
Farms," such as Internet Direct, Inc. ("Internet Direct"). In addition, many
organizations currently host Web servers at their own facilities.

As a result of an increase in the number of competitors, and vertical and
horizontal integration in the industry, the Company currently encounters and
expects to encounter significant pricing pressure and other competition in the
future. Advances in technology as well as changes in the marketplace and the
regulatory environment are constantly occurring, and the Company cannot
predict the effect that ongoing or future developments may have on the
Internet connectivity and Web server hosting markets generally or on the
Company specifically. See "Risk Factors--Dependence Upon Product Development;
Risks of Changing Technology and Industry Standards" and "--Potential
Liability for Information Disseminated Over Network; Regulation."

DIFFICULTIES IN MANAGING GROWTH; PAST DEFICIENCIES IN INTERNAL CONTROL
STRUCTURE; NEW MANAGEMENT; NEED TO HIRE ADDITIONAL PERSONNEL

The rapid growth of the Company's business and its product and service
offerings has placed, and is expected to continue to place, a significant
strain on the Company's managerial, operational and accounting resources.

9
<PAGE>

Demands on the Company's operational and accounting information systems and
controls, including its billing, accounts receivable and payable tracking and
other accounting systems, have grown rapidly with the Company's expanding
customer base and its new focus on business customers. In the past, the
Company has experienced difficulties in billing its customers, pursuing
delinquent accounts receivable balances, recording payables in the proper
period, performing timely reconciliations of financial statement data on a
monthly basis and maintaining adequate accounting controls. These difficulties
were considered by the Company's independent auditors to be evidence of
material weaknesses in the internal control structure, as communicated to
management and the Board of Directors at the completion of the audit of the
Company's financial statements for the year ended December 31, 1995. The
Company has taken actions to upgrade and improve its accounting systems and
controls and to increase the number of qualified accounting personnel during
the six months ended June 30, 1996, and the Company's auditors, in connection
with their audit of the Company's financial statements for the six months
ended June 30, 1996, communicated to management and the Board of Directors
that they noted no material weaknesses involving the Company's internal
control structure and operations. Notwithstanding these upgrades and
improvements, additional actions with respect to the Company's accounting
systems and controls may be required, particularly if the Company should
experience significant additional growth.

Increasing demands for the Company's Internet solutions and related customer
support services have also created additional demands on the Company's network
infrastructure and technical support and customer services personnel. The
Company has in the past experienced difficulties making installations on a
timely basis and providing adequate customer support. Although the Company has
hired additional support and customer service personnel and has established a
24x7x365 NOC, it is possible that such difficulties will continue in the
future.

The Company has a new management team and a substantial number of new
employees. At December 31, 1994, the Company had 32 employees, and at
September 24, 1996, the Company had 263 employees. In addition, key members of
the Company's current management team, including Christopher R. McCleary, the
Company's Chairman, President and Chief Executive Officer; Thomas M. Brandt,
Jr., the Company's Senior Vice President, Finance and Administration, and
Chief Financial Officer; Brian M. Deobald, the Company's Vice President,
Telecommute Products Group; Earl P. Galleher, the Company's Vice President,
Internet Server Products Group; and Nicholas J. Magliato, the Company's Vice
President, Private Networks Group, have joined the Company since February
1996.

To manage its growth, the Company must continue to improve its operational
and accounting information systems and controls and must attract and retain
additional highly qualified management, financial, technical, sales and
marketing and customer service personnel. Any failure of the Company to manage
its growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING; RISKS ASSOCIATED
WITH CURRENT FINANCING ARRANGEMENTS

The Company currently anticipates that funds advanced by WinStar under the
terms of its private network agreement and the net proceeds of the 1996
Venture Financing (as defined) and the Offering, together with existing and
anticipated financing arrangements and funds from operations, will be
sufficient to meet the Company's anticipated working capital, lease
commitments and capital expenditure requirements in 1996 and 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." In this regard, the Company
currently anticipates that it will be required to arrange approximately $15.0
million in equipment financing in order to fund planned expansion of its
network through the end of 1997. There can be no assurance that the Company
will be able to arrange such equipment financing on acceptable terms or at
all. Moreover, the Company may need to raise additional funds through public
or private debt or equity financing in the event that the Company's estimates
of operating losses and capital requirements change or prove inaccurate or in
order for the Company to respond to unanticipated competitive pressures or to
take advantage of unanticipated opportunities. Such opportunities could
include the acquisition of

10
<PAGE>

business-focused regional ISPs or the purchase of their subscriber bases,
international expansion, acquisitions of complementary businesses or
technologies and the development of new products. There can be no assurance
that additional financing will be available on terms favorable to the Company,
or at all. If adequate funds are not available or are not available on
acceptable terms, the Company may not be able to continue its network
expansion, to take advantage of market opportunities, to develop new products
or otherwise to respond to competitive pressures. Such inability could have a
material adverse effect on the Company's business, financial condition and
results of operations.

In addition, the Company's financing arrangements are secured by
substantially all of the Company's assets, require the Company to satisfy
certain financial covenants and restrict the payment of dividends. Such
collateral security arrangements entitle the Company's secured lenders to
foreclose upon the Company's assets in the event of a default under the
Company's financing arrangements and may adversely affect the Company's ability
to obtain additional financing.

The Company's obligations under its private network agreement with WinStar
are also secured by substantially all of the Company's assets. This security
interest will terminate by its terms upon the consummation of the Offering.

DEPENDENCE ON NETWORK INFRASTRUCTURE; MAINTENANCE OF PEERING RELATIONSHIPS

The Company's success will depend upon the geographic reach, capacity,
reliability and security of its network infrastructure. The Internet is
comprised of many ISPs who operate their own networks and interconnect with
other ISPs at various peering points. The establishment and maintenance of
peering relationships with other ISPs is necessary in order to exchange traffic
with other ISPs without having to pay retail rates. The Company expects the
industry's current practice regarding peering to evolve by the end of 1996 to
require an ISP to have (i) a coast-to-coast DS-3 backbone, (ii) 45 Mbps
connections to three U.S. peering points and (iii) a 24x7x365 NOC in order to
qualify for peering with the major national ISPs. Although the Company
currently meets these requirements, there is no assurance that other national
ISPs will maintain peering relationships with the Company. In addition, there
may develop increasing requirements associated with maintaining peering with
the major national ISPs with which the Company may have to comply. The Company
also expects to be required to expand and adapt its network infrastructure in
order to respond to its growing number of customers, demands to transmit
increasing amounts of data and changes to its customers' product and service
requirements. The expansion and adaptation of the Company's network
infrastructure will require substantial financial, operational and managerial
resources. There can be no assurance that the Company will be able to expand or
adapt its network infrastructure to meet the industry's evolving standards or
its customers' growing demand and changing requirements on a timely basis, at a
commercially reasonable cost, or at all, or that the Company will be able to
deploy successfully any expanded and adapted network infrastructure.

RISKS TO PHYSICAL NETWORK; RISKS TO INTEGRITY OF DATA ON NETWORK

The Company's operations are dependent upon its ability to protect its
network infrastructure against damage from fire, earthquakes, severe flooding,
mudslides, power loss, telecommunications failures and similar events or to
construct networks which are not vulnerable to the effects of these events. A
significant portion of the Company's computer equipment, including components
critical to the operation of its Internet backbone, is located at the Company's
facilities in Beltsville, Maryland. The Company experienced a four-hour service
interruption due to severe flooding in Pennsylvania in 1996. The Company
believes that this type of service interruption is not abnormal in the
industry. However the occurrence of a natural disaster or other unanticipated
problems at the Company's NOC, its hubs (sites at which the Company has located
routers, switches and other computer equipment which make up the backbone of
the Company's network infrastructure) or at a number of the Company's POPs in
the future could cause additional major interruptions in the services provided
by the Company. Furthermore, the failure of an individual POP would result in
interruption of service to the customers served by such POP until necessary
repairs were effected or replacement equipment was installed.

In addition, some ISPs have in the past experienced interruptions in service
as a result of the accidental or intentional actions of Internet users, current
and former employees or others, and the Company has experienced

11
<PAGE>

interruptions in service as a result of accidental or intentional actions of
Internet users. Further interruptions of service may occur in the future. In
the past, there have been break-ins to computers connected to the Internet at
General Electric Company, Sprint and IBM, as well as the computer systems of
NETCOM and the San Diego Supercomputer Center, and there have also been
incidents involving hackers bypassing firewalls and stealing sensitive
information. Unauthorized use of the Company's network could jeopardize the
security of confidential information stored in the computer systems of the
Company and its customers, which may result in liability of the Company to its
customers or deter potential subscribers. The industry-standard network
security measures in use by the Company have been circumvented at other
companies' facilities and educational facilities in the past but not at the
Company's facilities. However, there can be no assurance that such measures
will not be circumvented in the future at the Company.

The failure of the Company to adequately manage service disruptions resulting
from physical damage to its network or breaches of the network's integrity,
could have a material adverse effect on the Company's business, financial
condition and results of operations.

DEPENDENCE UPON SUPPLIERS; LIMITED SOURCES OF SUPPLY

The Company relies on other companies to supply certain key components of its
network infrastructure, including telecommunications services and networking
equipment which, in the quantities and quality demanded by the Company, are
available only from limited sources. For example, the Company currently relies
on Cisco Systems, Inc. ("Cisco") to supply routers critical to the Company's
network, and the Company could be adversely affected if routers from Cisco were
to become unavailable on commercially reasonable terms. MCI, which is a
competitor of the Company, and Cable & Wireless, Inc. ("Cable & Wireless") are
the Company's primary providers of data communications facilities and network
capacity and lease physical space to the Company for routers, modems and other
equipment. The Company is also dependent upon LECs and CAPs to provide
telecommunications services to the Company and its customers. The Company
expects these telecommunications companies to become competitors of the Company
as well. The Company has from time to time experienced delays in receiving
telecommunications services, and there can be no assurance that the Company
will be able to obtain such services on the scale and within the time frames
required by the Company at a commercially reasonable cost, or at all.

Certain of the Company's suppliers, including the RBOCs and certain other
LECs, are currently subject to tariff controls and other price constraints
which in the future could be changed. In addition, regulations under the
Telecommunications Act of 1996 will affect the prices charged to the Company by
the RBOCs and certain other LECs. Such regulatory changes could result in
increased prices of services and products to the Company. See "--Potential
Liability for Information Disseminated Over Network; Regulation."

DEPENDENCE UPON KEY PERSONNEL

The Company's success will depend upon the continued service of its senior
management team and its technical, marketing and sales personnel. The Company's
employees, including members of its management team, may voluntarily terminate
their employment with the Company at any time, and competition for qualified
employees in the Internet industry is intense. Six senior executives do,
however, have employment agreements with the Company which run through March or
May 1997 (or, in the case of Christopher McCleary, the Company's Chairman,
President and Chief Executive Officer, through December 1999). Although most of
these employment agreements contain non-competition and non-disclosure
agreements, there can be no assurance that these provisions will be enforceable
in whole or in part. Except for key-person insurance the Company maintains on
Douglas E. Humphrey, its Senior Vice President, Chief Technology Officer and
co-founder, the Company does not maintain key-person insurance on any executive
officer of the Company. The loss of the services of key personnel could have a
material adverse effect upon the Company's business, financial condition, and
results of operations.

DEPENDENCE UPON CONTINUED DEVELOPMENT OF BUSINESS MARKET

A substantial portion of the Company's revenues to date have been, and
substantially all of the Company's revenues for the foreseeable future will be,
derived from the sale of its Internet solutions to business customers.

12
<PAGE>

The Company's success will depend upon the continued development and expansion
of the business market for Internet solutions and the networks which comprise
the Internet, as well as the extent to which Internet connectivity becomes
critical to achievement of the objectives of the Company's business customers.
Certain key issues concerning the extensive use of the Internet by business
customers, including data security, network reliability, ease and cost of
access and quality of service remain unresolved and may impact the growth of
Internet use by business customers. In particular, numerous published reports
have indicated that a perceived lack of security of commercial data, such as
credit card numbers, has significantly impeded commercial exploitation of the
Internet to date, and there can be no assurance that encryption or other
technologies will be developed that satisfactorily addresses these security
concerns. Published reports have also indicated that capacity constraints
caused by growth in the use of the Internet may, unless resolved, impede
further development of the Internet to the extent that users experience
delays, transmission errors and other difficulties. The failure of the market
for business-related Internet solutions to continue to develop would adversely
impact the Company's business, financial condition and results of operations.

DEPENDENCE UPON PRODUCT DEVELOPMENT; RISKS OF CHANGING TECHNOLOGY AND INDUSTRY
STANDARDS

The Company's success will depend upon its ability to respond to the rapidly
changing requirements of its business customers for Internet solutions. The
Internet industry is characterized by rapidly changing technology and evolving
industry standards, emerging competition and frequent new product and service
introductions. There can be no assurance that the Company can successfully
identify new product opportunities or develop and bring new products and
services to market in a timely manner. The Company is also at risk from
fundamental technological changes in the way Internet solutions are marketed
and delivered. Integrating technological advances may require substantial time
and expense, and there can be no assurance that the Company will succeed in
adapting its network infrastructure.

In addition, new technologies or industry standards have the potential to
replace or provide lower cost alternatives to the Company's existing products
and services. The adoption of such new technologies or industry standards
could render the Company's existing products and services obsolete and
unmarketable. For example, the Company's services rely on the continued
widespread commercial use of Transmission Control Protocol/Internet Protocol
("TCP/IP"). Alternative open and proprietary protocol standards that compete
with TCP/IP, including proprietary protocols developed by IBM and Novell,
Inc., have been or are being developed.

Failure of the Company to adapt to changes in technology and industry
standards would have a material adverse effect on the Company's business,
financial condition and results of operations.

POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED OVER NETWORK; REGULATION

The law relating to the liability of on-line service providers and ISPs for
information carried on or disseminated through the facilities of their
networks is currently unsettled. Several lawsuits seeking a judgment of such
liability are currently pending. In one case brought against an ISP, Religious
Technology Center v. Netcom On-Line Communication Services, Inc., the United
States District Court for the Northern District of California ruled in a
preliminary phase that under certain circumstances ISPs could be held liable
for copyright infringement. The case has not reached final judgment. The
Telecommunications Act of 1996 prohibits and imposes criminal penalties and
civil liability for using an interactive computer service for transmitting
certain types of information and content, such as indecent or obscene
communications. This provision has been declared unconstitutional by the
United States District Court for the Eastern District of Pennsylvania, which
has issued a preliminary injunction against its enforcement. The United States
Department of Justice has asked the United States Supreme Court to review the
decision. Numerous states have adopted or are currently considering similar
types of legislation. The imposition upon ISPs or Web server hosts of
potential liability for materials carried on or disseminated through their
systems could require the Company to implement measures to reduce its exposure
to such liability, which may require the expenditure of substantial resources
or the discontinuation of certain product or service offerings. The Company
believes that it is currently unsettled whether the Telecommunications Act of
1996 prohibits and imposes liability for any services provided by the Company
should the content of information transmitted be subject to the statute.

13
<PAGE>

Although the Company is not currently subject to direct regulation by the
Federal Communications Commission (the "FCC") or any other federal or state
agency, changes in the regulatory environment relating to the Internet
connectivity market, including regulatory changes which directly or indirectly
affect telecommunications costs or increase the likelihood or scope of
competition from the RBOCs or other telecommunications companies, could affect
the prices at which the Company may sell its services. For example, proposed
regulations at the FCC would require discounted Internet connectivity rates for
schools and libraries. In addition, certain localities have imposed a tax on
companies that connect customers to the Internet, and other localities may
impose similar taxes. The Company cannot predict the impact, if any, that
future regulation or regulatory changes may have on its business.

POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

The Company's quarterly operating results have in the past and may in the
future vary significantly depending upon a number of factors, such as the
pricing and mix of services and products sold by the Company, terminations of
service, new product introductions by the Company and its competitors, the
timing of the expansion of the Company's network infrastructure, market
acceptance of new and enhanced versions of the Company's products and services,
changes in pricing policies by its competitors, the Company's ability to obtain
sufficient supplies of limited source components and the lengthening of the
Company's sales cycle. Many of these factors are beyond the Company's control.
In addition, the timing of the installation of significant orders by the
Company's suppliers in the past has been, and in the future may be, delayed by
lags in the installations of lines and equipment by the Company's
telecommunications subcontractors. For example, the severe winter weather which
struck the eastern United States in January 1996 resulted in significant
installation delays for new customers and consequent delays in the recognition
of revenue from these new customers. In addition, in response to competitive
pressures, the Company could be forced to take certain pricing or marketing
actions that would have a material effect on the amount of revenues in the
short term. The Company's expense levels are relatively fixed in the short
term; as a result, variations in the timing and amounts of revenues recognized
could have a material adverse effect on the Company's quarterly operating
results.

SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL ADVERSE EFFECT ON STOCK PRICE

Future sales of substantial amounts of the Company's Common Stock could
adversely affect the market price of the Common Stock. Several of the Company's
principal stockholders hold a significant portion of the Company's outstanding
Common Stock, and a decision by one or more of these stockholders to sell their
shares could adversely affect the market price of the Common Stock. The Shares
offered hereby (plus any shares issued upon exercise of the Underwriters' over-
allotment option) will be freely tradeable without restriction, except to the
extent that such shares are purchased by "affiliates" of the Company. The
holders of Common Stock, and certain holders of warrants to purchase Common
Stock, of the Company, including officers and directors of the Company, have
entered into contractual agreements with the Underwriters (the "Lock-Up
Agreements") providing that they will not offer, sell or contract to sell, or
otherwise dispose of, directly or indirectly, or announce an offering of, any
shares of Common Stock of the Company beneficially owned by them or any
securities convertible into, or exchangeable for, Common Stock for a period of
180 days after the date of the Underwriting Agreement without the prior written
consent of the Underwriters, other than shares of stock disposed of as bona
fide gifts. As a result, notwithstanding possible earlier eligibility for sale
under the provisions of Rules 144 and 144(k) under the Securities Act of 1933,
as amended (the "Act"), shares subject to the Lock-Up Agreements will not be
saleable until the Lock-Up Agreements expire or their terms are waived by the
Underwriters. Assuming the Underwriters do not release stockholders from the
Lock-Up Agreements, the following shares will be eligible for sale in the
public market at the following times: beginning on the effective date of the
Registration Statement (the "Effective Date"), only the shares sold in the
Offering to non-affiliates will be immediately available for sale in the public
market; and beginning 180 days after the date of the Underwriting Agreement,
1,617,907 shares will be eligible for sale pursuant to Rule 144, all of which
are held by affiliates of the Company. An additional 4,548,744 shares will
become eligible for sale pursuant to Rule 144 at various times during the two-
year period following the Effective Date (although such shares will continue to

14
<PAGE>

be subject to the Lock-Up Agreements until the expiration of the terms
thereof). The holders of approximately 4,266,660 shares of the Common Stock
are entitled to certain rights with respect to the registration of such shares
under the Act beginning six months after the Effective Date. In addition, the
Company may register certain shares of Common Stock issuable under the Stock
Option Plans, and such registration shall be effective upon filing with the
Commission. As of August 31, 1996, there were outstanding options under the
Stock Option Plans to purchase 2,055,500 shares, of which options for 313,266
shares were fully vested and exercisable. No shares have been issued to date
under the Stock Option Plans. See "Shares Eligible for Future Sale."

CONTROL BY CERTAIN STOCKHOLDERS; ANTI-TAKEOVER MEASURES

Following the Offering, the Company's executive officers, directors and
principal stockholders will beneficially own or control approximately 57.7% of
the outstanding shares of Common Stock, assuming exercise of vested options,
the Preferred Stock Conversion and the Warrant Exercise. As a result, these
stockholders will have the ability to control the election of the Company's
Board of Directors and the outcome of corporate actions requiring stockholder
approval. See "Principal Stockholders."

Certain provisions of the Company's Certificate of Incorporation and Bylaws
could make it more difficult for a third party to acquire, and could
discourage a third party from attempting to acquire, control of the Company.
Certain of these provisions allow the Company to issue Preferred Stock with
rights senior to those of the Common Stock without any further vote or action
by the stockholders, eliminate the right of stockholders to act by written
consent, provide for a classified board of directors and impose various
procedural and other requirements which could make it more difficult for
stockholders to effect certain corporate actions. The provisions of the
Company's Certificate of Incorporation which permit the Board of Directors to
authorize the issuance of one or more classes of Preferred Stock, as well as
certain other charter provisions and certain provisions of Delaware law, could
limit the price that certain investors might be willing to pay in the future
for shares of Common Stock and may have the effect of delaying or preventing
transactions involving a change in control of the Company, including
transactions in which stockholders might receive a substantial premium for
their shares over then-current market prices. The issuance of Preferred Stock
also could decrease the amount of earnings and assets available for
distribution to the holders of Common Stock or could adversely affect the
rights and powers, including voting rights, of the holders of the Common
Stock. See "Description of Capital Stock--Common Stock" "--Preferred Stock,"
and "--Delaware Law and Limitations on Change in Control."

ABSENCE OF PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE; POSSIBLE
VOLATILITY OF STOCK PRICE

Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that an active public market will develop or be
sustained after the Offering. The initial public offering price will be
determined by negotiations between the Company and the Underwriters'
representative. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The stock market
has from time to time experienced significant price and volume fluctuations
which have particularly affected the market prices of the stocks of ISPs and
other technology companies and which may be unrelated to the operating
performance of particular companies. Factors such as quarterly variations in
actual or anticipated operating results, changes in earnings estimated by
analysts, market conditions in the industry, announcements by competitors,
regulatory actions and general economic conditions may have a significant
effect on the market price of the Common Stock.

DILUTION

Purchasers of the Common Stock offered hereby will suffer an immediate and
substantial dilution, in the amount of $6.32 per share, in the pro forma net
tangible book value per share of the Common Stock as of June 30, 1996, from
the initial public offering price. See "Dilution."

15
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company of the Offering, at an assumed offering price
of $10.00 per share, after deducting estimated underwriting discount and
expenses of the Offering payable by the Company, will be approximately $33.7
million (approximately $38.9 million if the Underwriters' over-allotment option
is exercised in full). The Company intends to use the net proceeds to fund
operating losses associated with the expansion of the Company's business and,
potentially, to acquire business-focused regional ISPs or to purchase their
subscriber bases. The Company has no current specific plans, commitments or
agreements with respect to any such potential acquisitions. Pending such uses,
the net proceeds to the Company will be invested in U.S. government securities
and other short term, investment grade, interest-bearing securities.

DILUTION

The net tangible book value of the Company at June 30, 1996 (after giving
effect to the 1996 Venture Financing, the Warrant Exercise and the Preferred
Stock Conversion) was $2,578,601, or approximately $0.42 per share of Common
Stock. Net tangible book value per share is determined by dividing the
Company's tangible net worth (tangible assets less total liabilities) by the
number of shares of Common Stock outstanding. After giving effect to the sale
of 3,750,000 shares of Common Stock offered hereby and the receipt of the
estimated net proceeds therefrom (at the assumed public offering price of
$10.00 per share and after deducting estimated underwriting discount and
expenses of the Offering payable by the Company), the pro forma net tangible
book value of the Company at June 30, 1996 would have been $36.3 million, or
$3.68 per share. This represents an immediate dilution of $6.32 per share to
purchasers of Common Stock in the Offering. Dilution is determined by
subtracting the pro forma net tangible book value per share after the Offering
from the initial offering price per share. The following table illustrates this
per share dilution:

<TABLE>
<S> <C> <C>
Initial offering price per share.................................. $10.00
Pro forma net tangible book value per share before the Offering. $0.42
Increase in net tangible book value per share attributable to
new investors ................................................. 3.26
-----
Pro forma net tangible book value per share after the Offering.... 3.68
------
Dilution per share to new investors............................... $ 6.32
======
</TABLE>

The following table summarizes, as of June 30, 1996, on a pro forma basis and
after giving effect to the Offering, the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company and the
average price per share paid by the existing stockholders and by new investors
purchasing Common Stock in the Offering. Based on an assumed initial public
offering price of $10.00 per share before deducting estimated underwriting
discount and expenses of the Offering payable by the Company, the number of
shares of Common Stock purchased from the Company is 3,750,000, the total
consideration paid to the Company is $37,500,000, the average price per share
paid by the existing stockholders is $1.98 and the price per share paid by new
investors is $10.00.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Existing stockholders..... 6,113,991 62% $12,126,391 24% $ 1.98
New investors............. 3,750,000 38% $37,500,000 76% 10.00
--------- --- ----------- ---
Total................... 9,863,991 100% $49,626,391 100%
========= === =========== ===
</TABLE>

16
<PAGE>

CAPITALIZATION

The following table sets forth, as of June 30, 1996, (i) the Company's
actual capitalization, (ii) the pro forma capitalization after giving effect
to the Preferred Stock Conversion and the Warrant Exercise, and (iii) the pro
forma capitalization, as adjusted for the issuance and sale by the Company of
the 3,750,000 shares of Common Stock offered hereby, after deducting estimated
underwriting discount and expenses of the Offering payable by the Company (at
the assumed public offering price of $10.00 per share). This table should be
read in conjunction with the Company's financial statements and the notes
thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
----------- ----------- ------------
<S> <C> <C> <C>
Current portion of capital lease
obligations............................ $ 1,497,563 $ 1,497,563 $ 1,497,563
----------- ----------- -----------
Total current indebtedness.......... $ 1,497,563 $ 1,497,563 $ 1,497,563
=========== =========== ===========
Capital lease obligations, less current
portion................................ $ 1,714,283 $ 1,714,283 $ 1,714,283
Series A mandatorily redeemable
preferred stock, $1.00 par value(1):
Authorized shares--70,000 actual and
pro forma; none pro forma as adjusted
Issued and outstanding shares--45,455
actual; none pro forma and pro forma
as adjusted.......................... 2,391,770 -- --
Series B mandatorily redeemable
preferred stock, $1.00 par value(1):
Authorized shares--130,000 actual and
pro forma; none pro forma as adjusted
Issued and outstanding shares--81,264
actual; none pro forma and pro forma
as adjusted.......................... 8,126,389 -- --
Stockholders' equity (deficit):
Common stock, $.01 par value:
Authorized shares--49,800,000 actual
and pro forma; 47,000,000 pro forma
as adjusted
Issued and outstanding shares--
1,617,907 actual; 6,113,991 pro
forma; 9,863,991 pro forma as
adjusted(2).......................... 16,179 61,140 98,640
Additional paid-in capital............ 3,824,636 14,297,834 47,935,334
Accumulated deficit................... (11,780,373) (11,780,373) (11,780,373)
----------- ----------- -----------
Total stockholders' equity
(deficit).......................... (7,939,558) 2,578,601 36,253,601
----------- ----------- -----------
Total capitalization.............. $ 4,292,884 $ 4,292,884 $37,967,884
=========== =========== ===========
</TABLE>
- --------

(1) Preferred Stock is not presented in this table as a part of stockholders'
equity of the Company because it is mandatorily redeemable at the option
of the holders thereof. Each outstanding share of the Company's Preferred
Stock will convert into shares of Common Stock upon the closing of this
Offering and will be cancelled, retired and returned to the shares which
the Company is authorized to issue. See "Description of Capital Stock" and
Notes 8, 9 and 18 of Notes to Financial Statements.

(2) Excludes 2,500,480 shares of Common Stock reserved for issuance to
employees under the Stock Option Plans (of which options to purchase
2,283,300 shares are outstanding). See "Management--Incentive Stock Option
Plans," "Shares Eligible for Future Sale" and Note 13 of Notes to the
Company's Financial Statements. Also excludes 240,000 shares of Common
Stock reserved for issuance to WinStar pursuant to the WinStar Warrants.

17
<PAGE>

DIVIDEND POLICY

The Company does not currently pay dividends on its Common Stock and does not
anticipate paying dividends in the foreseeable future. It is the present policy
of the Company's Board of Directors to retain earnings, if any, to finance the
expansion of the Company's business. The payment of dividends in the future
will depend on the results of operations, financial condition, capital
expenditure plans and other cash obligations of the Company and will be at the
sole discretion of the Board of Directors. In addition, the Company's line of
credit with Silicon Valley Bank prohibits the Company from declaring dividends
while borrowings are outstanding, and provisions of future financing
arrangements of the Company may also prohibit or limit the Company's ability to
pay dividends. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."

18
<PAGE>

SELECTED FINANCIAL AND PRO FORMA FINANCIAL DATA

The selected financial data for each of the three years in the period ended
December 31, 1995 and the six-month periods ended June 30, 1995 and June 30,
1996 have been derived from the Company's audited financial statements which
are included elsewhere in this Prospectus. The selected financial data should
be read in conjunction with and is qualified in its entirety by reference to
the financial statements of the Company and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- ------------------------
1993 1994 1995 1995 1996
-------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $431,098 $1,577,609 $ 5,075,316 $ 1,665,432 $ 5,235,204
Costs and expenses:
Cost of revenue....... 216,656 1,002,503 4,471,500 1,321,663 5,246,961
Sales and marketing... 18,326 263,075 1,710,234 561,093 2,587,472
General and adminis-
trative.............. 135,238 366,392 2,715,752 588,116 3,376,091
-------- ---------- ----------- ----------- -----------
Total expenses.......... 370,220 1,631,970 8,897,486 2,470,872 11,210,524
-------- ---------- ----------- ----------- -----------
Income (loss) from oper-
ations................. 60,878 (54,361) (3,822,170) (805,440) (5,975,320)
Other income (expense):
Interest and other in-
come................. -- -- 72,002 17,453 47,746
Interest expense...... -- (23,693) (226,745) (45,249) (1,167,149)
-------- ---------- ----------- ----------- -----------
-- (23,693) (154,743) (27,796) (1,119,403)
-------- ---------- ----------- ----------- -----------
Income (loss) before
income taxes........... 60,878 (78,054) (3,976,913) (833,236) (7,094,723)
Income taxes............ (25,540) (3,470) -- -- --
-------- ---------- ----------- ----------- -----------
Net income (loss)....... 35,338 (81,524) (3,976,913) (833,236) (7,094,723)
Accretion of Preferred
Stock to redemption
value.................. -- -- (338,698) (109,163) (252,881)
-------- ---------- ----------- ----------- -----------
Net income (loss)
attributable to common
stockholders........... $ 35,338 $ (81,524) $(4,315,611) $ (942,399) $(7,347,604)
======== ========== =========== =========== ===========
Pro forma net income
(loss) per common
share(1)............... $ (0.47) $ (0.69)
=========== ===========
Pro forma average common
and common equivalent
shares outstanding(1).. 8,254,069 8,689,950
=========== ===========
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------
DECEMBER 31, PRO FORMA
1995 ACTUAL AS ADJUSTED (2)
------------ ----------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 832,582 $ 6,269,000 $ 39,944,000
Working capital (deficit)............ (1,820,464) (6,018,179) 27,656,821
Total assets......................... 5,051,786 18,841,779 52,516,779
Total indebtedness, less current por-
tion................................ 821,709 1,714,283 1,714,283
Mandatorily redeemable preferred
stock............................... 2,138,889 10,518,159 --
Total stockholders' equity (deficit). (1,527,742) (7,939,558) 36,253,601
</TABLE>

- --------

(2) The pro forma as adjusted data give effect to (i) the Preferred Stock
Conversion and the Warrant Exercise, both of which will occur upon
consummation of the Offering and (ii) the issuance and sale by the Company
of the shares of Common Stock offered hereby (at the assumed public
offering price of $10.00 per share, after deducting estimated underwriting
discount and expenses of the Offering payable by the Company).

19
<PAGE>

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

OVERVIEW

DIGEX is a leading national ISP that focuses exclusively on business
customers. The Company was founded in 1990 by a group of Internet pioneers as a
local provider of dial-up Internet connectivity. After receiving its first
major infusion of institutional equity capital in March 1995, the Company
reoriented its strategy to focus exclusively on business customers, who
generally require high bandwidth connectivity, and also began to develop its
Web server hosting business. The Company brought in an experienced management
team in the first quarter of 1996. In the second quarter of 1996, the Company
completed a DS-3 backbone ring around the continental United States, enabling
the Company to provide its solutions to business customers nationwide.

The Company derives its revenue from providing a comprehensive range of
INDUSTRIAL STRENGTH Internet solutions, including business connectivity, Web
server hosting and security and other network products. Business connectivity
and Web server hosting customers are typically signed to contracts with minimum
terms of one year. Revenues generated from these customers are typically in the
form of recurring monthly fees, installation and start-up charges and sales of
related equipment, applications and services.

The Company has made significant investments in developing and expanding its
network infrastructure and its customer service and sales and marketing
efforts. The substantial costs incurred in connection with this expansion
contributed heavily to the Company's operating losses in 1995 and the six
months ended June 30, 1996. In anticipation of future growth, the Company
expects to continue to make significant investments in its network
infrastructure, to be funded from equipment financing, to the extent that the
Company is able to arrange such financing on favorable terms, throughout the
remainder of 1996 and in 1997. The Company's leased line and server customers
have expanded from approximately 65 accounts at April 30, 1995 to approximately
1050 accounts at August 31, 1996.

The Company's quarterly operating results have fluctuated and will continue
to fluctuate from period to period depending upon factors such as the timing
and installation of significant orders, the pricing and mix of services and
products sold by the Company, terminations of service, new product
introductions by the Company and its competitors, market acceptance of new and
enhanced versions of the Company's products and services, changes in pricing
policies by its competitors, the Company's ability to obtain sufficient
supplies of limited source components, the lengthening of the Company's sales
cycle and the timing of the expansion of the Company's network infrastructure.

In view of the significant growth of the Company's operations, the Company
believes that period-to-period comparisons of its financial results should not
be relied upon as an indication of future performance and that the Company may
experience future period-to-period fluctuation in operating results. The
Company's short-term focus is on building and expanding its customer base,
which will require it to make significant investments in its network
infrastructure, personnel, marketing and the development of new products and
services, and which may adversely impact short-term operating results. The
Company expects to incur operating and net losses in 1996 and 1997. The Company
expects that its operating and net losses during the last two quarters of 1996
will increase significantly compared to its operating and net losses for the
first two quarters of 1996. There can be no assurance that the Company will
achieve or sustain profitability in the future.

RESULTS OF OPERATIONS

The following table sets forth the percentage of the Company's revenue and
total expenses represented by certain line items from the Company's statement
of operations.

20
<PAGE>

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
----------------- -------------
1993 1994 1995 1995 1996
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue..................... 100% 100% 100% 100% 100%
Costs and expenses:
Cost of revenue........... 50 63 88 79 100
Sales and marketing....... 4 17 34 34 49
General and administra-
tive..................... 32 23 53 35 65
--- --- --- ---- -----
Total expenses.............. 86 103 175 148 214
--- --- --- ---- -----
Income (loss) from opera-
tions...................... 14 (3) (75) (48) (114)
Interest expense, net....... -- (2) (3) (2) (21)
--- --- --- ---- -----
Income (loss) before income
taxes...................... 14 (5) (78) (50) (135)
Income taxes ............... 6 0 -- -- --
--- --- --- ---- -----
Net income (loss)....... 8% (5)% (78)% (50)% (135)%
=== === === ==== =====
</TABLE>

SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1995

REVENUE

The Company derives its revenue from providing a comprehensive range of
INDUSTRIAL STRENGTH Internet solutions, including business connectivity, Web
server hosting and security and other network products. Revenue grew 214% from
$1.7 million in the six months ended June 30, 1995 to $5.2 million in the six
months ended June 30, 1996, the majority of which was due to the change in the
Company's strategy to focus exclusively on business customers, who generally
require high bandwidth connectivity, and the associated expansion of its sales
and marketing efforts, including the creation of a direct sales force, and to a
lesser extent the development of the Company's Web server hosting business.

COST OF REVENUE

Cost of revenue consists primarily of local access costs, network
infrastructure, leased network backbone circuit costs and network operations
and support costs. Network operations and support costs consist primarily of
personnel expenses relating to the operation of the network infrastructure,
including monitoring network traffic and quality, and costs of providing
technical support to customers. Cost of revenue increased 297% from $1.3
million in the six months ended June 30, 1995 to $5.2 million in the same
period in 1996. Cost of revenue increased as a percentage of revenues from 79%
in the 1995 period to 100% in the 1996 period. The increase in cost of revenue
was primarily due to costs associated with the Company's change in strategy to
focus exclusively on business customers. These costs include the hiring of
additional personnel to support the Company's expanding customer base and the
higher support requirements of business customers as well as the expansion of
the network backbone, the establishment of a 24x7x365 NOC, and the building of
redundant facilities. For example, the Company's customer support and network
operations personnel increased from 42 at June 30, 1995 to 69 at June 30, 1996.
The Company plans to continue to expand its network through 1996 and 1997,
which in turn will continue to increase cost of revenue. As the costs
associated with this expansion have been and will be incurred by the Company in
anticipation of growth in its customer base, the Company believes that, over
time, cost of revenue as a percentage of revenues will decline as its customer
base expands.

SALES AND MARKETING

Sales and marketing costs consist primarily of salaries and expenses of sales
and marketing personnel, advertising and promotion and marketing materials.
Sales and marketing costs rose 361% from $0.6 million in the six months ended
June 30, 1995 to $2.6 million in the same period in 1996. Sales and marketing
costs increased as a percentage of revenues from 34% in the 1995 period to 49%
in the 1996 period. The increase in

21
<PAGE>

sales and marketing costs was primarily due to the Company's change in strategy
to focus exclusively on business customers. The Company's prior business
strategy required minimal sales and marketing. The change in strategy required
the hiring of additional sales and marketing personnel (from 27 at June 30,
1995 to 85 at June 30, 1996) and the expansion of advertising and promotional
activities and product development efforts. The Company expects to continue to
invest heavily in sales and marketing in 1996 and 1997.

GENERAL AND ADMINISTRATIVE

General and administrative costs consist primarily of expenses associated
with the Company's management, accounting, finance and administrative
functions. General and administrative costs increased 474% from $0.6 million in
the six months ended June 30, 1995 to $3.4 million in the same period in 1996.
These costs increased as a percentage of revenues from 35% in the six months
ended June 30, 1995 to 65% in the same period in 1996. This increase in general
and administrative expenses was due primarily to the hiring of 28 additional
senior management, finance, accounting and administrative personnel to support
the Company's expanding operations. The Company expects to hire additional
personnel in anticipation of continued expansion of its operations. General and
administrative costs were also affected by a $400,000 non-cash compensation
charge in the six months ended June 30, 1996 related to the grant of stock
options. In addition, based on options granted through June 30, 1996,
additional compensation charges of $2.7 million will be reported as general and
administrative costs during the period July 1, 1996 through December 31, 1999.
See Note 13 to the financial statements for additional information with respect
to compensation expense related to stock option grants. The increase in the
general and administrative costs resulted principally from the increase in the
Company's general and administrative staff from 13 at June 30, 1995 to 41 at
June 30, 1996. The Company expects to hire additional personnel in anticipation
of continued expansion of its operations.

INTEREST EXPENSE

Interest expense increased from $45,249 in the six months ended June 30, 1995
to $1,167,149 in the same period in 1996. The increase in interest expense
during the 1996 period was primarily due to the Company's issuance of
subordinated debentures in November 1995 and February 1996 and increased
equipment financing and capital lease obligations incurred to finance network
expansion and to fund working capital requirements.

YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994

REVENUE

Revenue grew 222% from $1.6 million in 1994 to $5.1 million in 1995, the
majority of which was due to the change in the Company's strategy to focus
exclusively on business customers, who generally require high bandwidth
connectivity, and to a lesser extent the development of the Company's Web
server hosting business. In addition, the equity financing in March 1995
contributed to this increase by allowing the Company to greatly expand its
customer acquisition effort by building a direct sales force. The Company's
leased line and server customers expanded from approximately 16 accounts at
December 31, 1994 to approximately 360 accounts at December 31, 1995.

COST OF REVENUE

Cost of revenue increased 346% from $1.0 million in 1994 to $4.5 million in
1995. Cost of revenue increased as a percentage of revenues from 63% in 1994 to
88% in 1995. The increase in cost of revenue was primarily due to costs
associated with the Company's change in strategy to focus exclusively on
business customers. These costs included the hiring of additional personnel to
support the Company's expanding customer base as well as the expansion of the
network backbone, the establishment of a 24x7x365 NOC, and the building of
redundant facilities. The Company's customer support and network operations
personnel increased from 21 at December 31, 1994 to 53 at December 31, 1995.
The increased use of the network and the increase in capital expenditures to
expand the network infrastructure created an increase in depreciation and
amortization expense during 1995.

22
<PAGE>

SALES AND MARKETING

Sales and marketing costs rose 550% from $0.3 million in 1994 to $1.7 million
in 1995. Sales and marketing costs increased as a percentage of revenues from
17% in 1994 to 34% in 1995. The increase in sales and marketing costs was
primarily due to the Company's change in strategy to focus exclusively on
business customers. The Company's prior business strategy required minimal
sales and marketing. The Company's change in focus required the hiring of
additional sales and marketing personnel (from 8 at December 31, 1994 to 36 at
December 31, 1995), expanding advertising and promotional activities and
product development efforts. The Company expects to continue to invest heavily
in sales and marketing in 1996.

GENERAL AND ADMINISTRATIVE

General and administrative costs increased 650% from $0.4 million in 1994 to
$2.7 million in 1995. These costs increased as a percentage of revenues from
23% in 1994 to 53% in 1995. This increase in general and administrative
expenses was due primarily to the hiring of 12 additional senior management,
finance, accounting and administrative personnel to support the Company's
expanding operations. The Company expects to hire additional personnel in
anticipation of continued expansion of its operations. General and
administrative costs were also affected by a $475,000 non-cash compensation
charge in 1995 related to the grant of stock options and a $310,000 write-off
of accounts receivable in 1995 compared to a $15,000 write-off during 1994. See
Note 13 to the financial statements for additional information with respect to
compensation expense related to stock options. The Company's general and
administrative staff increased from 5 at December 31, 1994 to 17 at December
31, 1995. The Company expects to hire additional personnel in anticipation of
continued expansion of its operation.

INTEREST EXPENSE

Interest expense increased from $24,000 in 1994 to $227,000 in 1995. The
increase in interest expense during 1995 was primarily due to interest of
$124,000 on $2.0 million of subordinated debentures and an increase in
equipment financing and capital lease obligations incurred to finance network
expansion and to fund working capital requirements.

YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993.

REVENUE

Revenue grew 266% from $0.4 million in 1993 to $1.6 million in 1994, as a
result of increases in the number of the Company's customers due to the
commercialization of the Internet and significant growth in its usage. The
customer base in 1993 and 1994 was comprised primarily of individual dial-up
customers.

COST OF REVENUE

Cost of revenue increased 363% from $0.2 million in 1993 to $1.0 million in
1994. Cost of revenue increased as a percentage of revenues from 50% in 1993 to
63% in 1994. The increase in cost of revenue was primarily due to an increase
in the hiring of additional personnel to support the Company's expanding
customer base, relocation of the Company's headquarters to larger facilities
and the increase in capital expenditures to expand the network infrastructure,
which created an increase in depreciation and amortization expense during 1994.

SALES AND MARKETING

Sales and marketing costs rose from $18,000 in 1993 to $263,000 in 1994.
Sales and marketing costs increased as a percentage of revenues from 4% in 1993
to 17% in 1994. The increase in sales and marketing costs was due to expansion
of the advertising and promotional activities and the hiring of dedicated sales
representatives.

23
<PAGE>

GENERAL AND ADMINISTRATIVE

General and administrative costs increased 171% from $0.1 million in 1993 to
$0.4 million in 1994. These costs decreased as a percentage of revenues from
32% in 1993 to 23% in 1994. This increase in general and administrative costs
was due primarily to the hiring of additional management, finance, accounting
and administrative personnel to support the Company's expanding customer base.

INTEREST EXPENSE

Interest expense was $24,000 in 1994. There was no interest expense in 1993.
The interest expense incurred during 1994 was primarily due to equipment
financing and capital lease obligations incurred to finance network expansion
and to fund working capital requirements.

INCOME TAXES

Income tax expense decreased from $26,000 in 1993 to $3,000 in 1994 due to
the operating loss.

QUARTERLY RESULTS

The following table sets forth unaudited quarterly revenue for the six
quarters ended June 30, 1996. In the opinion of management, the unaudited
information set forth below has been prepared in accordance with generally
accepted accounting principles for interim financial information and Item
310(b) of Regulation S-B.

<TABLE>
<CAPTION>
1995 1996
THREE MONTHS ENDED THREE MONTHS ENDED
------------------------------------------ ---------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
-------- -------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $739,700 $925,300 $1,318,200 $2,092,100 $2,232,500 $3,002,700
</TABLE>

The Company's quarterly results may in the future vary significantly
depending on a variety of factors. See "Risk Factors--Potential Fluctuations in
Quarterly Operating Results." In view of the significant historic growth of the
Company's operations, the Company believes that period-to-period comparisons of
revenue should not be relied upon to estimate future revenue.

LIQUIDITY AND CAPITAL RESOURCES

The Company satisfied its cash requirements in 1995 and in the first six
months of 1996 principally through a combination of sales of equity and debt
securities to venture capital investors. The Company received $6.0 million in
1995 from the sale of equity and debt securities to venture capital investors.
In February 1996, the Company sold additional debt securities to venture
capital investors, together with warrants to purchase shares of Common Stock,
for gross proceeds of $1.0 million. Proceeds from these financings were used to
fund the rapid expansion of the Company's network infrastructure and internal
operations, including purchases of capital equipment and the hiring of
additional personnel. See "Certain Transactions."

In April 1996, to provide additional liquidity, the Company entered into a
Loan and Security Agreement with Silicon Valley Bank that provides a revolving
credit line secured by accounts receivable. The credit line allows the Company
to borrow a maximum amount equal to the lesser of $1.5 million or 80% of the
Company's eligible accounts receivable, at the rate announced from time to time
by Silicon Valley Bank as its "prime rate" plus 1% per annum, which was 9.25%
at June 30, 1996. The Company is currently unable to draw under the credit line
due to non-compliance with certain financial covenants; however, the Company is
actively engaged in negotiations with Silicon Valley Bank regarding a possible
waiver of such covenants in order to permit future borrowings.

24
<PAGE>

In April 1996, the Company obtained a commitment for an equipment lease line
under which the Company may lease equipment with a total cost of up to $2.0
million through December 31, 1996. The lease terms will range from 42 months
to 50 months and will be accounted for as capital leases with annual effective
interest rates approximating 14% per annum. The Company's capital lease
obligations as of June 30, 1996 were $3.2 million and its future minimum lease
payments through 2000 under certain operating leases were $2.0 million. Since
June 30, 1996, the Company has entered into approximately $4.0 million of
additional lease financing arrangements in order to fund network expansion.

In May 1996, the Company entered into agreements with venture capital
investors pursuant to which the Company issued shares of Series B Preferred
Stock in exchange for total cash consideration of $5.0 million. Proceeds from
this transaction, are being used to finance the Company's network
infrastructure expansion. The Company has received a standby commitment from
certain of its current venture capital investors to purchase up to $5.0
million of convertible subordinated debentures and warrants to purchase shares
of Common Stock in the event that the Company requires additional liquidity
prior to completion of the Offering. See "Certain Transactions."

In June 1996, the Company entered into a multi-year private network
agreement with WinStar. As part of the agreement, WinStar advanced $5.0
million in cash for connectivity services to be provided under such agreement
and received warrants to purchase 240,000 shares of Common Stock. The
estimated value of the WinStar Warrants, $228,000, was recorded as additional
paid-in capital and deferred revenue associated with such agreement was
recorded in the amount of $4,772,000. See Note 11 to the Financial Statements.
The Company's obligations to WinStar under such agreement are secured by
substantially all of the Company's assets, which security interest will
terminate by its terms upon the consummation of the Offering.

The Company generated positive cash flow from operating activities of
$124,000 in 1993 and $133,000 in 1994, compared to a negative cash flow from
operating activities of $2.5 million in 1995. The change in operating cash
flows from 1994 to 1995 was due primarily to increased costs relating to
expansion of the Company's network and organizational infrastructure,
including the hiring of additional management, marketing and sales, finance,
accounting and administrative personnel. In addition, purchases of fixed
assets increased from $98,000 in 1993, to $350,000 in 1994, and to $1.2
million in 1995, primarily to support the expansion of the Company's network
infrastructure.

The Company currently anticipates that funds advanced by WinStar under the
terms of its private network agreement, and the net proceeds of the 1996
Venture Financing and the Offering, together with existing and anticipated
financing arrangements and funds from operations, will be sufficient to meet
the Company's anticipated working capital, lease commitments and capital
expenditure requirements through the end of 1997. In this regard, the Company
currently anticipates that it will be required to arrange approximately $15.0
million in equipment financing in order to fund planned expansion of its
network through the end of 1997. There can be no assurance that the Company
will be able to arrange such equipment financing on acceptable terms or at
all. Moreover, the Company may need to raise additional funds through public
or private debt or equity financings in order to take advantage of
unanticipated opportunities, including international expansion, acquisitions
of complementary businesses or technologies, development of new products or
otherwise responding to unanticipated competitive pressures. In addition, the
Company may need to raise additional funds in the event that the Company's
estimates of operating losses and capital requirements change or prove
inaccurate. There can be no assurance that the Company will be able to raise
such capital on favorable terms or at all. See "Risk Factors--Future Capital
Needs; Uncertainty of Additional Financing; Risks Associated With Current
Financing Arrangements" and "Use of Proceeds."

25
<PAGE>

BUSINESS

DIGEX is a leading independent national ISP that focuses exclusively on
businesses, government agencies and other institutional customers ("business
customers"). The Company offers a comprehensive range of INDUSTRIAL STRENGTH
Internet solutions, including business connectivity, Web server hosting and
security and other network products. After receiving its first major infusion
of institutional equity capital in March 1995, the Company reoriented its
strategy to focus exclusively on business customers, who generally require
high bandwidth connectivity, and also began to develop its Web server hosting
business. Additionally, the Company brought in an experienced management team
in the first quarter of 1996 and completed a DS-3 backbone ring around the
continental United States in the first half of 1996. As a result, the
Company's leased line and server customers have grown from approximately 65
accounts at April 30, 1995 to approximately 1050 accounts at August 31, 1996.

The Company offers its INDUSTRIAL STRENGTH Internet solutions through four
separate and highly focused business units. The Business Connectivity Group
offers Internet connectivity solutions and other value-added solutions to
business customers, while the Telecommute Products Group focuses on the home-
office connectivity requirements of small businesses and high-end
professionals employed by companies that are served by the Business
Connectivity Group. The Internet Server Products Group provides Web server
hosting solutions enabling customers to deploy highly reliable Web servers
that are connected directly to the Internet backbone and are monitored on a
24x7x365 basis at the Company's network operations center ("NOC"). The Private
Networks Group seeks to create customized solutions for businesses looking to
provide private label Internet services without building their own facilities.
The Company recently entered into its first multi-year private network
agreements with LCI, WinStar and Orion. Through its private network agreement
with the Company, Orion will resell the Company's connectivity services to its
customers in Europe. The Company expects that its ability to attract
additional private network customers will be significantly enhanced by the
announcement of these agreements.

In June 1996, the Company entered into an agreement with Microsoft, pursuant
to which Microsoft's Consulting Services Group built a "Server Farm" for the
Company with servers running Microsoft's Windows NT 4.0 operating system.
Under such agreement, the Company introduced the world's first Windows NT 4.0
hosted server product line on September 3, 1996. The Company is currently
engaged in discussions with Microsoft to include DIGEX in Microsoft's Solution
Provider Program, which would result in the Company being designated a
preferred vendor for Microsoft's corporate customers. There can be no
assurance, however, that these discussions will culminate in an agreement with
Microsoft.

INDUSTRY BACKGROUND

The Internet is a global collection of computer networks that enables
businesses, government agencies, other institutional customers and individuals
to communicate, access and share information and conduct business remotely.
Use of the Internet has grown rapidly since the early 1990s, due in large part
to increasing personal computer and modem penetration, the development of the
World Wide Web, the introduction of easy-to-use navigational tools and
utilities for the Web and the availability of informational, entertainment and
commercial applications. Technological advances relating to the Internet have
occurred and continue to occur rapidly, resulting in a more robust, lower-cost
infrastructure, improved security and increased value-added services and
content. IDC has estimated that the number of Internet users will reach
approximately 200 million in 1999, from approximately 56 million in 1995.

While there has been significant media interest in the use of the Internet
by consumers, business customers currently account for a more significant
percentage of Internet use. According to IDC, approximately 71%, or 40
million, of the approximately 56 million Internet users in 1995 were business-
related users. Internet capabilities, including corporate Internet sites, are
becoming an increasingly important part of doing business. According to
Netcraft, Ltd., the number of corporate Internet sites, defined as domain
names ending in ".com", has increased from 4,912 in August 1995 to 171,738 in
June 1996.

26
<PAGE>

Because Internet and corporate intranet solutions are increasingly achieving
"mission critical" status, business customers are demanding advanced, highly
reliable solutions designed specifically for the needs of business.
Furthermore, as the use of the Internet expands, business customers are
requiring that providers offer a comprehensive range of services, including
connectivity, Web server hosting and security and other network products.
Finally, business customers often require knowledgeable and highly responsive
sales and customer service representatives in order to determine their optimal
Internet strategy quickly and to resolve any problems with their current
solutions.

THE DIGEX SOLUTION

The Company provides a comprehensive range of INDUSTRIAL STRENGTH Internet
solutions that serves the needs of business customers, who often desire a
responsive, single-source provider of reliable, high-performance Internet
connectivity and Web server hosting products and services.

Connectivity. DIGEX offers a complete product line of Internet connectivity
solutions to its business customers with a variety of service and pricing
programs based on bandwidth requirements. To complement its connectivity
offerings, the Company also sells customer-premise routers, firewall security
options and assigns and manages IP and E-mail addresses.

Web Server Hosting. The Company also offers a complete range of Web server
hosting solutions. The Company's business customers are able to locate highly
reliable Web sites on dedicated servers at the Company's "Server Farm," which
enables users to gain high speed access to the Web server given the server's
direct connection to the Internet backbone. In addition, the Company provides
24x7x365 monitoring of the server and Internet connection by the Company's
highly experienced technical staff, as well as easy server upgradability as
the customer's speed and capacity requirements grow.

The Company's Internet solutions are supported by its state-of-the-art
network infrastructure, including the Company's NOC and Server Farm located in
suburban Washington, D.C. The Company has built a redundant nationwide DS-3
backbone connecting to the three major Internet peering points at 45 Mbps and
has established peering relationships with other national ISPs, allowing DIGEX
to route its customers' traffic to the desired Internet address. The Company
believes that its combination of a nationwide network and peering
relationships significantly differentiates the Company from regional ISPs who,
without peering relationships, may have to pay retail rates to national
providers in order to exchange network traffic.

THE DIGEX STRATEGY

After receiving its first major infusion of institutional equity capital in
March 1995, the Company reoriented its strategy to focus on becoming the ISP
of choice for business customers. DIGEX's strategy focuses on five key
elements:

Focus on Businesses Customers. The Company believes that business customers
offer the greatest potential market for the Company's solutions due to this
market's low customer turnover and need for the higher value-added Internet
solutions which the Company provides. By focusing on these customers, the
Company believes it will be able to develop innovative, specialized products
and services that address the constantly evolving needs of business customers
at competitive prices. In addition, the Company believes that its less-focused
competition will have difficulty fulfilling the demanding needs of these
customers.

Provide Comprehensive Range of Internet Solutions. The Company provides a
comprehensive range of Internet solutions, enabling it to satisfy the needs of
business customers, who often seek a sole provider for all their Internet
requirements. The Company's sales forces for each of its business units are
incentivized to cross-market all of DIGEX's products and services.

Expand and Optimize Its Nationwide Network. The Company aims to expand its
highly reliable, nationwide DS-3 network, which the Company has designed to
specifically address the growing reliability and

27
<PAGE>

bandwidth requirements of business customers, so as to offer a comprehensive
range of connectivity solutions to such customers across the United States. The
Company believes that as it expands its network to more cities, it can offer
its solutions to additional business customers more cost-effectively than its
consumer-focused competitors, because fewer POPs are required to reach business
customers, who are largely concentrated in urban centers. In addition, the
Company attempts to optimize its network efficiency by counterbalancing
business connectivity, which makes greater use of the Company's network during
business hours, with Web server hosting, which makes greater use of the network
during non-business hours.

Implement Multiple Distribution Channels. The Company aims to reach its
customers through the Company's own direct sales force as well as through other
innovative methods of distribution. These methods currently include agent
relationships with advertising agencies and Web site developers who resell the
Company's Web server hosting solutions and the efforts of the Company's Private
Networks Group, which enters into long-term agreements with telecommunications
service providers to resell the Company's connectivity solutions under their
own brand names.

Focus on Customer Acquisition and Retention. In addition to acquiring
customers through its existing distribution channels, the Company believes that
as consolidation of the industry continues and it becomes more difficult for
regional ISPs to compete, the Company may be able to acquire opportunistically
business-focused regional ISPs or purchase their subscriber bases. The Company
also believes that customer responsiveness is becoming a key ingredient of
success for ISPs and has formed four focused business units to better serve and
retain customers. To aid in this effort, the Company has developed a highly
trained direct sales force with extensive Internet expertise which, based on
customer feedback, the Company believes significantly differentiates the
Company from its competitors.

NETWORK INFRASTRUCTURE

DIGEX's current network infrastructure is based upon a DS-3 ring around the
continental United States which provides two 45 Mbps paths between the east and
west coasts, allowing for a combined bandwidth of 90 Mbps when fully
operational. As shown on the map on the following page, customers can connect
to the Company's network from major cities across the United States. Clear
channel DS-3 circuits in the ring connect core routers in DIGEX POPs located in
cities on the ring. In the event of single points of failure, traffic can be
routed around the loop, providing for a minimum of 45 Mbps even in the event of
such a failure. Other network circuits connect routers in DIGEX POPs in cities
not located along the ring to nearby DIGEX routers residing on the ring. The
network backbone uses state-of-the-art routing platforms, including Cisco
Systems, Inc. ("Cisco") 7513 routers.

DIGEX customers are connected via high-speed leased lines, frame relay, SMDS
or other technologies to the local DIGEX POP, where data enters the DIGEX
backbone. If the destination of the data is on the DIGEX network, then the data
is delivered without ever leaving DIGEX's facilities. If the data is destined
for an Internet customer connected via another national ISP which has a peering
relationship with DIGEX, then the data is routed to the nearest peering
location where the data is passed from the DIGEX router to the router of the
other ISP, who then carries that traffic to the final destination. If the
destination is an ISP which does not have a peering relationship, then the data
is delivered to the national ISP from whom such ISP purchases its Internet
connectivity.

Currently, DIGEX's comprehensive range of connectivity solutions are
available in 33 U.S. metropolitan areas through 40 POPs, and the Company
expects to make its connectivity solutions available in a total of 48 U.S.
metropolitan areas through 55 POPs by the end of 1996. DIGEX currently leases
the majority of its intercity backbone DS-3 circuits from MCI and Cable &
Wireless, as well as collocation space at their facilities for DIGEX equipment.
The Company has a five-year agreement with MCI as well as three-year
commitments from Cable & Wireless for the lease of such circuits and the use of
collocation space to house DIGEX equipment. Management believes that it will be
able to renew or replace such contracts at comparable rates. Other DIGEX
network segments and customer connections are provided through LECs and CAPs.

28
<PAGE>

DIGEX's POPs and Nationwide Network Backbone

LOGO

DIGEX's network is monitored on a 24x7x365 basis by its NOC. Trouble calls
are serviced by the technical staff of either the Business Connectivity Group,
in the case of backbone or customer leased line difficulties, or the Internet
Server Products Group, in the case of problems with customer servers. MCI and
Cable & Wireless provide installation and maintenance services to assist DIGEX
at all locations where the Company collocates equipment. For equipment for its
remote POPs, DIGEX purchases routers from Cisco, CSU/DSUs from Digital Link
Corporation, IDSUs and DSUs from Kentrox Industries Inc. and modems and ISDN
from Cisco. Protected AC or DC power is used at all sites to protect against
power outages affecting the network.

In addition to these backbone facilities, DIGEX presently operates a Server
Farm at its suburban Washington, D.C. headquarters and intends to construct an
additional Server Farm and a back-up NOC on the west coast by the end of 1997.
The Company may decide to build additional Server Farms in the future to better
serve customer needs. Multiple Server Farms allow Internet users to access the
server closest to them and thus provide a better level of service, and would
allow DIGEX to minimize the amount of server-related traffic which it must
carry long distances over its network. Geographic distribution of customer data
also provides for redundancy in case of hardware, software or network failure,
contributing to increased uptime and service reliability.

29
<PAGE>

PRODUCTS AND SERVICES

The Company offers its INDUSTRIAL STRENGTH Internet solutions through four
separate and highly focused business units.

Business Connectivity Group

DIGEX provides complete connectivity solutions to its business customers,
including frame relay, leased lines and SMDS, with availability limited only by
the capabilities of the in-market LECs. See"--Network Infrastructure." The
majority of the revenue generated by the Business Connectivity Group is derived
from its frame relay and leased line products. The Company offers several
configurations and monthly pricing plans, each based on the bandwidth supplied
and thus on the speed and capacity of the facility. In addition, customers are
strongly encouraged to enter into long-term contracts. The Company's products
are highly scalable and are designed to facilitate ease of upgrade as the
customer's needs evolve. The following chart describes the Company's Business
Connectivity options:

<TABLE>
<CAPTION>
SERVICE TYPE SUMMARY DESCRIPTION
----------------------------------------- -----------------------------------
<C> <S>
Frame Relay Flat rate, scalable 32 Kbps to 1.54
Mbps connectivity solutions based
on frame relay technology for small
to medium size business customers,
running all standard Internet
applications.
Leased Line A complete range (56 Kbps to 45
Mbps) of dedicated, clear channel
circuits for local-area/wide-area
networks and enterprises running
all standard and high-bandwidth
Internet applications.
Ethernet Plus 2 Mbps to 16 Mbps connectivity
solutions for small to large
business customers; provides an
easy "plug and play" solution for
Ethernet-based networks running all
Internet applications.
Switched Multimegabit Data Service (SMDS) A wide range of scalable solutions
(1.17 Mbps to 34 Mbps); designed
for metropolitan-central business
customers seeking a cost-effective
way to support all Internet
applications.
</TABLE>

In addition to basic connectivity service, DIGEX sells and configures
customer-premise routers, firewall security options and other value-added
services. DIGEX is an authorized reseller of the Eagle firewall product family
from Raptor Systems, Inc., and Firewall-1 from Check Point Software
Technologies Ltd. The Company also offers Secure Computing Corporation's
Sidewinder Internet firewall software. In addition, the Company helps customers
with initial use of their particular DIGEX solution. The Company began
providing business connectivity solutions in 1994 and plans to introduce new
products on a controlled basis, to ensure that the quality of delivery, from
both a sales and a support perspective, is in place, thus solidifying the
Company's reputation and building on its promise for delivering INDUSTRIAL
STRENGTH Internet solutions.

Internet Server Products Group

The Company has offered a complete range of Web server hosting solutions
since 1994. The Company's business customers are able to locate highly reliable
Web sites on dedicated servers at the Company's "Server Farm," which enables
users to gain high speed access to the Web server given the server's direct
connection to the Internet backbone. In addition, the Company provides 24x7x365
monitoring of the server and Internet connection by the Company's highly
experienced technical staff as well as easy server upgradability as the
customer's speed and capacity requirements grow. As Web server needs evolve,
DIGEX's goal is to continue to meet the market with the most advanced server
solutions available. In September 1996, the Company introduced the world's
first Windows NT 4.0 hosted server product line.

30
<PAGE>

Private Networks Group

The Private Networks Group creates customized solutions for
telecommunications service providers looking to offer highly reliable private
label Internet connectivity solutions without incurring the lead time and
costs associated with building their own facilities. In turn, these providers
absorb customer-acquisition costs that would otherwise be borne by the
Company. When an individual contract is secured, a customized implementation
and service organization will be created to provide a premium level of support
for the private network customer. The Company expects that the operations of
the private network customer and the DIGEX support team will be integrated to
enhance customer support.

The Company began offering private network solutions in 1996 and recently
entered into multi-year private network agreements with LCI, WinStar, Orion
and World Reservation Systems, Inc. Through its private network agreement with
the Company, Orion will resell the Company's connectivity services to its
customers in Europe. The Private Network Group seeks to enter into multi-year
agreements having either take-or-pay commitments or bulk discounts based on
the aggregate amount of Internet solutions purchased. The Company's private
network agreement with LCI provides for a large-scale, multi-year commitment
by LCI to purchase Internet products and services from DIGEX. Similarly, under
WinStar's private network agreement with the Company, WinStar will purchase
during the next six years a minimum of $5.0 million of Internet connectivity
solutions with the right to purchase additional amounts, in each case on a
discounted basis. DIGEX's agreement with Orion provides for bulk discounts
over a 36-month period based on the aggregate amount of Internet services
purchased, while World Reservation Systems, Inc.'s private network agreement
with the Company includes a $1.3 million take-or-pay commitment to purchase
telecommute connectivity solutions.

Telecommute Products Group

The Telecommute Products Group began offering its solutions in 1990 and
offers a variety of high-end, dial-up options to business professionals,
telecommuters and small businesses. The group's products range from lower-
cost, limited-access capability products to premium-priced, high-speed, low-
latency products. This group focuses on two distinct customer groups: (i)
professionals who require reliable at-home Internet connectivity and whose
usage is frequently paid for as part of an integrated, total-solution
connectivity package procured on a large scale by their employers and (ii)
small businesses that are likely to broaden and upgrade their solutions,
eventually becoming Business Connectivity Group and Internet Server Products
Group customers. The Company is currently engaged in discussions with
Microsoft to include DIGEX in Microsoft's Solution Provider Program, which
would result in the Company's being designated a preferred vendor for
Microsoft's corporate customers. There can be no assurance, however, that
these discussions will culminate in an agreement with Microsoft. The Company
believes that the Telecommute Products Group complements the Business
Connectivity Group by providing high-end solutions to professionals employed
by Business Connectivity customers.

CUSTOMERS

The Company's leased line and server customers have expanded to
approximately 1050 accounts at August 31, 1996. In 1995, no customer accounted
for more than five percent of the Company's total revenues. In addition to its
leased line and server customers, the Company had approximately 5,000 dial-up
customers at August 31, 1996. The following are lists of selected DIGEX
customers:

31
<PAGE>

BUSINESS CONNECTIVITY

ALCOA
COMSAT Corporation
Credit Suisse
Disclosure, Inc.

Freeloader, Inc.

ITT Avionics

Litton Systems, Incorporated
Lucent Technologies Inc.
Merrill Lynch & Co., Inc.
National Basketball Association
Oracle Corporation
Piper & Marbury, LLP
PointCast, Inc.

SAIC

Southwestern Bell Corp.

TRW
University of Maryland
U.S. Dept. of Commerce/NOAA
Westinghouse Electric Corp.
Wheat First Butcher Singer, Inc.
The World Bank

INTERNET SERVERS

AMTRAK

ASPLUNDH
Campmor, Inc.
CIGNA Corp.

Emmy Awards
Federal Reserve Bank of Richmond
Grand Heritage Hotel Company
Maryland Dept. of Agriculture Graduate School
National Association of Investors
Orbit Questal Inc.
Philadelphia Federal Credit Union
PointCast, Inc.
TeeVee Toons, Inc.

20/20 Software, Inc.

The World Bank

Sales and Marketing

As of September 24, 1996, the Company employed 135 people in sales and
marketing. To date, the Company has sold its Internet solutions primarily
through its direct telephone sales force. Call activity is generated both by
"cold calling" and in response to customer referrals, E-mail correspondence
through the Company's Web site and a variety of promotional programs, including
advertising in general business and specialty periodicals, participation in
industry trade shows and press relations. In addition, the Company engages in
local promotional programs to support newly opened service locations. In order
to better serve the needs of its customers, the Company has developed a
specialized marketing approach for each business unit.

The sales force for the Company's Business Connectivity Group continues to
grow to meet the demands of customers along DIGEX's growing nationwide
network. The Company plans to add sales representatives who will focus on the
cities where the Company is opening new POPs along the network and to support
them with marketing programs to generate quality sales leads. In addition, the
Company purchases prequalified sales leads, solicits customers through direct
mail advertising, conducts sales seminars, advertises in national trade
publications and to participate in industry trade shows. The Company believes
that active marketing and lead generation efforts will allow the sales force
to become even more productive and efficient.

In addition to using the Business Connectivity Group's sales force for
marketing its products and services, the Internet Server Products Group has
created an Alliance Partner program, which is a national network of agents
selling its products. In connection with the Alliance Partner program, DIGEX
has entered into agent agreements with organizations in select cities
nationwide, such as advertising agencies, graphic design firms and development
companies whose primary business is the creation of Web sites. In addition,
DIGEX has deployed regional account executives to support these organizations
and to develop and maintain relationships with targeted end users.

The Private Networks Group has a dedicated business development team which
targets a number of types of potential customers, including IXCs, LECs, cable
operators, large private network providers, and CAPs. The Company seeks to
enter into long-term, non-exclusive arrangements with these potential
resellers.

32
<PAGE>

The Telecommute Products Group sells its services through the Company's
direct sales force, through private network providers and through direct
marketing to the group's target markets. The Company's targeted businesses
include telecommuters who may purchase connectivity through a customer of the
Business Connectivity Group and small or home office users who are likely to
upgrade their services in the future.

COMPETITION

The market for all types of Internet connectivity services is extremely
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. As a result of an
increase in the number of competitors, and vertical and horizontal integration
in the industry, the Company expects to encounter significant pricing pressure
and other competition in the future. Advances in technology as well as changes
in the marketplace and the regulatory environment are constantly occurring, and
the Company cannot predict the effect that ongoing or future developments may
have on the Internet industry generally or on the Company specifically. See
"Risk Factors--Competition," "--Dependence Upon Product Development; Risks of
Changing Technology and Industry Standards" and "--Potential Liability for
Information Disseminated Over Network; Regulation."

Connectivity

ISPs. Currently, the Company's primary competitors are other ISPs focused on
business customers including UUNET, BBN and PSI. UUNET, BBN and PSI in
particular have significantly greater market presence and financial,
technological and personnel resources than the Company and have extensive
coast-to-coast Internet backbones.

A number of these competitors, however, including UUNET and PSI, have chosen
to pursue individual connectivity customers in an effort to balance the use of
their networks, since business customers tend to use the Internet during
business hours, while individual customers tend to use the Internet after
business hours. As a result, these ISPs have been forced to build out their
networks beyond what would be necessary to serve business customers. DIGEX, on
the other hand, has found that it can maintain its focus on business customers
and build a network infrastructure that can serve a substantial majority of the
business marketplace with fewer POPs than its competitors. In addition, the
Company's Web server hosting business, while offering additional Internet
solutions to its business customers, generates a substantial portion of its
traffic after business hours, and thus balances the usage of the Company's
network. Thus, given its more focused business strategy and more efficient use
of capital, DIGEX can offer a comprehensive range of business Internet
solutions on a cost-effective basis.

To a lesser extent, the Company competes with other national and regional
ISPs, of which there are currently over 1500. Many of these competitors,
however, including NETCOM, do not share DIGEX's business focus. In addition,
due to the substantial increase in the amount of data traffic carried by the
networks of certain national ISPs, the Company expects the industry's current
practice regarding peering to evolve by the end of 1996 to require an ISP to
possess (i) a coast-to-coast DS-3 backbone, (ii) 45 Mbps connections to three
U.S. peering points and (iii) a 24x7x365 NOC in order to qualify for peering
with the major national ISPs. The Company expects ISPs which do not satisfy
these requirements by the end of 1996 either to be acquired by the large
national ISPs or to be forced to become resellers of Internet connectivity
services, purchasing their network bandwidth at retail rates from national
ISPs.

Telecommunications Companies. The Company currently competes with AT&T, MCI
and Sprint. In addition, a number of regulatory obstacles to the entry of other
telecommunications companies into the Internet connectivity market are being
removed. Accordingly, the Company expects competition to increase with other
major telecommunications companies, including MFS and the RBOCs. In addition,
deregulation of the telecommunications industry has already led to significant
horizontal integration through acquisitions and joint ventures, and the Company
expects these trends to continue.

The telecommunications companies the Company competes with have access to
significantly greater financial, technological and personnel resources than the
Company and large existing commercial customer

33
<PAGE>

bases. In addition, IXCs, including AT&T, MCI and Sprint, possess existing
nationwide telecommunications networks and generally face lower network
infrastructure costs in providing Internet connectivity than the Company.
Although its WorldNet offering targets the consumer market, AT&T is party to
an agreement with BBN pursuant to which it can market BBN's business
connectivity services to AT&T's commercial customer base or, in the
alternative, provide its own Internet connectivity. GTE Corp. ("GTE") and
UUNET have also recently announced a strategic alliance whereby GTE's
customers may obtain access to the Internet through UUNET's network. While
these telecommunications companies have little experience with TCP/IP
networking in general, and Internet connectivity in particular, they now may
employ their larger sales organizations to sell Internet connectivity to their
existing telephony customers, both commercial and consumer. However, the
Company believes that its sales and marketing personnel, which have
backgrounds in data-oriented services, particularly TCP/IP will be able to
sell Internet connectivity more effectively than the sales forces of most
telecommunications companies, which possess backgrounds largely in voice-
oriented services.

Most LECs, such as the RBOCs, and CAPs, on the other hand, do not currently
possess nationwide networks. In order to address the Internet connectivity
requirements of their current business customer bases, these companies must
either buy connectivity to an Internet network infrastructure or build such a
network. For example, MFS has acquired UUNET and can now offer expanded
Internet connectivity along with its traditional telecommunications services,
and World Com, Inc. has recently announced its agreement to acquire MFS. The
Company seeks to capitalize on the market opportunity created by
telecommunications companies that have chosen to buy, not build, Internet
connectivity for resale through its Private Networks Group, which sells
DIGEX's Internet connectivity services to telecommunications companies to be
remarketed under their own brands.

Cable Television and Direct Broadcast Satellite. Certain companies are
exploring the possibility of providing high-speed data services using
alternative delivery methods. For example, @Home, a joint venture between
Tele-Communications, Inc. and Kleiner Perkins Caufield & Byers, has stated its
intent to provide high-speed data services over cable television plant, and
HNS has lauched DirecPC, which will deliver high-speed data through direct
broadcast satellite technology. CAI Wireless Systems, Inc., a wireless cable
television service, also has announced that it has begun testing the first
Internet connectivity product delivered by wireless cable. However, since they
do not currently possess nationwide networks, these companies, in order to
provide Internet access, must either buy access to an Internet network
infrastructure or build such a network.

On-Line Service Providers. The Company also competes, to a lesser extent,
with certain on-line service providers who offer Internet connectivity in
conjunction with their primary products or services. For example, Microsoft
provides connectivity to the Internet through the Microsoft Network, which was
built by UUNET (in which Microsoft holds a significant minority stake), as a
standard integrated feature of its Windows 95 operating system, and IBM's OS/2
WARP operating system is preconfigured to provide Internet connectivity
through the Advantis network, which is controlled by IBM. Microsoft has also
recently announced strategic marketing alliances for Internet access with MCI,
AT&T and NETCOM. In addition, AOL, CompuServe and Prodigy currently provide
connectivity to the Internet, and many have announced plans to offer expanded
Internet connectivity capabilities. Currently, on-line service providers are
primarily focused on the consumer marketplace.

Web Server Hosting

The market for Web server hosting is highly fragmented and extremely
competitive. There are no substantial barriers to entry and the Company
expects the competition will intensify in the future. Currently, the Company's
primary competitors are other ISPs, including BBN, UUNET and PSI, and
companies whose primary business is developing and operating "Server Farms"
such as Internet Direct. In addition, many organizations currently host Web
servers at their own facilities. The Company believes, however, that as
bandwidth requirements increase, it will become more economical for these
organizations to outsource their needs. The Company believes that it
significantly differentiates itself from its competitors by offering flat-rate
billing, dedicated servers, 24x7x365 monitoring, upgradability and other
value-added services demanded by high-end business customers.

34
<PAGE>

PROPERTIES

The Company's administrative offices, as well as its NOC and Server Farm, are
located in Beltsville, Maryland, where the Company currently leases
approximately 73,000 square feet under leases that expire in 1998 and 2000. The
Company believes that this facility will meet its needs through at least the
remainder of 1996. The Company intends to lease space on the west coast of the
United States to house its second Server Farm, which the Company expects to
construct in 1997. The Company also leases space (typically less than 200
square feet) in various geographic locations to house the telecommunications
equipment for each of its POPs. See "Network Infrastructure" for a description
of the components of the Company's nationwide network, the Company's NOC and
the current Server Farm.

EMPLOYEES

As of September 24, 1996, the Company employed 263 persons full-time,
including 135 in sales and marketing, 86 in network operations (including eight
in technical support) and 42 in general and administrative functions. None of
the Company's employees is represented by a labor union, and the Company
considers its employee relations to be good.

LEGAL PROCEEDINGS

The Company is not involved in any material legal proceedings.

35
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The Company's executive officers, directors and other key employees, and
their ages as of June 1, 1996, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Christopher R. McCleary(1) 43 Chairman of the Board, President,
Chief Executive Officer
Clyde A. Heintzelman 57 Senior Vice President, Chief Operating
Officer, General Manager--Business
Connectivity Group
Thomas M. Brandt, Jr. 44 Senior Vice President, Chief Financial
Officer, Secretary
Earl P. Galleher 36 Vice President, General Manager--
Internet Server Products Group
Nicholas J. Magliato 30 Vice President, General Manager--
Private Networks Group
Brian M. Deobald 34 Vice President, General Manager--
Telecommute Products Group
William A. Pendley 32 Vice President, Assistant General
Manager--Business Connectivity Group
John C. Welling 31 Vice President, Controller
Douglas E. Humphrey 36 Senior Vice President, Chief
Technology Officer, Director
Sheryl R. Richeson 40 Vice President, Customer Service--
Business Connectivity Group
Edward J. Kern 27 Vice President, Network--Business
Connectivity Group
William F. Webb, Jr. 30 Vice President, Internet Server
Technical Operations
Michael T. Doughney 37 Vice President, Director
Frank A. Adams(1)(2) 50 Director
Thomas H. Cato(3) 53 Director
William F. Earthman III(1)(2) 44 Director
Ray A. Rothrock(1)(3) 41 Director
Robert M. Stewart(2) 41 Director
John H. Wyant(3) 50 Director
</TABLE>
- --------
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.

36
<PAGE>

Christopher R. McCleary joined DIGEX as President and Chief Executive Officer
in February 1996. Mr. McCleary has served as a director since joining the
Company and was elected Chairman of the Board of Directors in June 1996,
succeeding Frank A. Adams, who remains a director. Mr. McCleary was one of the
founding management team members at American Mobile Satellite Corporation
("AMSC"), where he served as a Vice President and General Manager, Satellite
Telephone Service from 1990 until joining DIGEX in 1996. Prior to joining AMSC,
Mr. McCleary was founder and President of the Satellite Network Antenna
Division of Radiation Systems, Inc. Mr. McCleary received his Bachelor's degree
from the University of Kentucky.

Clyde A. Heintzelman has served as Senior Vice President and Chief Operating
Officer since May 1995. From 1992 to 1994, Mr. Heintzelman was Vice President
of Sales and Marketing for Connective Strategies, Inc. ("CSI"), an ISDN startup
company. Mr. Heintzelman spent 28 years with Bell Atlantic prior to joining
CSI, serving as General Manager of Marketing and Sales for Bell Atlantic
Directory Services from 1990 until 1992 and as Vice President of Sales and
Marketing for the Business Market at C&P Telephone from 1985 to 1990. Mr.
Heintzelman was President and CEO of Bell Atlanticom from 1983 to 1985 and,
prior to that, was the general manager who established Bell Atlantic's Federal
Systems Division. Mr. Heintzelman received his Bachelor's degree from the
University of Delaware and has also done graduate work at the Wharton School,
the University of Pittsburgh and the University of Michigan.

Thomas M. Brandt, Jr. joined DIGEX as Senior Vice President and Chief
Financial Officer in June 1996. Mr. Brandt was named Secretary in late June
1996. Mr. Brandt was a director at Price Waterhouse LLP from 1993 until he
joined DIGEX. From 1987 through 1992, Mr. Brandt served as Vice President and
Chief Financial Officer for U.S. Metalsource Corporation, a metals distribution
business. Mr. Brandt received his M.B.A. degree from the Wharton School of the
University of Pennsylvania and his Bachelor's degree from Duke University.

Earl P. Galleher joined DIGEX as Vice President and General Manager--Internet
Server Products in March 1996. Prior to joining DIGEX, Mr. Galleher was
Director of Marketing at AMSC, which he joined in November 1991. Mr. Galleher
led the development of AMSC's product positioning, branding strategy and
subscriber acquisition investment plan. Prior to AMSC, Mr. Galleher was Manager
of Market Development at Southwestern Bell Mobile Systems Washington-Baltimore
system, which he joined in April 1990. Mr. Galleher received his Bachelor of
Arts degree from Denison University.

Nicholas J. Magliato joined DIGEX as Vice President and General Manager--
Private Networks in March 1996. Prior to joining DIGEX, Mr. Magliato was the
Director of Land Mobile Sales and Distribution at AMSC, which he joined in
April 1993. His responsibilities at AMSC included creating product plans for
wireless voice and data services and developing and implementing a nationwide
sales and distribution strategy. Prior to AMSC, Mr. Magliato was a
telecommunications consulting manager at Andersen Consulting LLP, which he
joined in August 1987. Mr. Magliato received a Bachelor's degree, concentrating
in Computer and Information Services, from Syracuse University.

Brian M. Deobald joined DIGEX as Vice President and General Manager--
Telecommute Products in March 1996. Prior to joining DIGEX, Mr. Deobald was the
Director of Product Management at AMSC, which he joined in November 1991. At
AMSC, Mr. Deobald created the company's business plan and developed and
introduced services, subscriber hardware, and pricing. Mr. Deobald joined AMSC
from AT&T International Communications Services where he managed strategic and
business planning since July 1989. Mr. Deobald received an M.B.A. from the
Wharton School and holds a Master's degree from Johns Hopkins University and a
Bachelor's degree from Georgetown University.

William A. Pendley joined DIGEX in December 1994 as Chief Financial Officer
and currently serves as Vice President and Assistant General Manager--Business
Connectivity. In 1995, Mr. Pendley was responsible for developing DIGEX's
financial business plan and securing the first-level financing with venture
capital investors. Prior to joining DIGEX, Mr. Pendley was Chief Financial
Officer for Intrafed, Inc., a software developer and system integrator, from
1994 and prior to that, served in a financial management position for IBM
Federal Systems from 1989. Mr. Pendley holds an M.B.A. in finance from New York
University and a Bachelor's degree from Georgetown University.

37
<PAGE>

John C. Welling joined DIGEX as a Vice President and Controller in April
1996. Prior to joining DIGEX, Mr. Welling was a senior manager at KPMG Peat
Marwick LLP, focusing on publicly-held companies, from 1987 until 1996. Mr.
Welling received a Bachelor's degree, with a concentration in accounting, from
Loyola College in Baltimore, Maryland.

Douglas E. Humphrey is the Senior Vice President, Chief Technology Officer
and co-founder of DIGEX. Mr. Humphrey has also served as a director of the
Company since 1990 and served as the Chief Executive Officer from the Company's
inception until Mr. McCleary joined DIGEX in February 1996. Mr. Humphrey was a
senior TCP/IP networking and computer security specialist for Tandem Computers,
Inc. from September 1987 to March 1993. From 1983 to 1987, Mr. Humphrey was
President and CEO of Computer Time Share Corporation. Mr. Humphrey attended the
University of Maryland at College Park.

Sheryl R. Richeson is Vice President, Customer Service--Business
Connectivity. Ms. Richeson joined DIGEX as Director of Customer Service in
October 1995. Ms. Richeson is an experienced telecommunications executive with
more than 14 years of management experience with Bell Atlantic, which she
joined in 1981. Ms. Richeson served as Director of Large Business Services and
as regional manager for Field Sales Support for Bell Atlantic. Ms. Richeson
holds a Master's degree from Johns Hopkins University and a Bachelor of Science
degree from the University of Colorado.

Edward J. Kern joined DIGEX in 1992 as Manager of Systems and was promoted to
Vice President, Network--Business Connectivity in May 1996. Prior to joining
DIGEX, Mr. Kern spent seven years building and managing TCP/IP networks as a
consultant for various companies. Mr. Kern is an active member of the Internet
Engineering Task Force.

William F. Webb, Jr. joined DIGEX as Vice President, Internet Server
Technical Operations in May 1996. Prior to joining DIGEX, Mr. Webb was a
manager at Andersen Consulting LLP beginning in June 1990. At Andersen
Consulting, Mr. Webb worked in the Telecommunications Industry Market Unit,
focusing on service activation systems for major telecommunications clients.
Mr. Webb holds an M.B.A. degree from Virginia Polytechnic Institute and State
University and a Bachelor of Science degree in Computer Science and Mathematics
from Eastern Nazarene College.

Michael T. Doughney is a Vice President and co-founder of DIGEX and has
served as a director of the Company since 1990. Mr. Doughney majored in
computer science and electrical engineering at the University of Maryland.

Frank A. Adams has been a director of the Company since April 1995. Mr. Adams
served as Chairman of the Board from April 1995 until June 1996, when Mr.
McCleary was elected Chairman. Mr. Adams is currently President and CEO of
Grotech Capital Group which he co-founded in 1984. Mr. Adams has held positions
with public companies, including PHH Corporation, RLC/Matlack and Westinghouse.
Mr. Adams is also a director of several private companies. Mr. Adams received
his Bachelor's and Juris Doctor degrees from the University of Baltimore and
has completed advanced management programs at Stanford University and Harvard
University.

Thomas H. Cato joined DIGEX in July 1996 as a director. Mr. Cato is a
business consultant in information systems and health care. From 1985 until
founding his consulting business in June 1995, Mr. Cato was president of HCA
Information Services, a wholly-owned subsidiary of Hospital Corporation of
America. Mr. Cato was a co-founder of ENDATA, a public information services
company. Mr. Cato, a retired colonel from the United States Army Reserves,
received his B.B.A. from Tulane University.

William F. Earthman III has been a director of the Company since April 1995.
Mr. Earthman is a general partner of Southern Venture Fund II, L.P. and a
Partner of Massey Burch Capital Corporation. Before joining Massey Burch
Capital Corporation as Vice President in 1989, he served at the firms of J.C.
Bradford & Co., Prudential-Bache Securities and, most recently, First Nashville
Corporation. Mr. Earthman is also a director of Ensys Environmental Products
Inc. Mr. Earthman received his Bachelor's degree from the University of
Virginia.

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<PAGE>

Ray A. Rothrock has been a director of the Company since April 1995. Mr.
Rothrock is a general partner of Venrock Associates and Venrock Associates II,
L.P. and has been with the firm since 1988. Mr. Rothrock was with Sun
Microsystems Inc. for four years prior to joining Venrock. Mr. Rothrock
received his M.B.A. degree from Harvard Business School, an MS in Nuclear
Engineering from Massachusetts Institute of Technology, and a Bachelor of
Science in Nuclear Engineering from Texas A&M University. He serves as a
director of Spyglass, Inc. and Check Point Software Technologies, Ltd. of Tel
Aviv, Israel and several private companies.

Robert M. Stewart has been a director of the Company since December 1995. Mr.
Stewart has been a Managing Director of the Anchor Financial Group LLC since
November 1995, a private investment banking firm in Washington, D.C. Prior to
joining Anchor Financial Group, Mr. Stewart was a Principal with Armata
Partners L.P. from April 1993 and, prior to that, a Vice President of Legg
Mason Wood Walker, Inc., which he joined in February 1989. Mr. Stewart holds an
M.B.A. from the Babcock Graduate School of Management of Wake Forest University
and a B.A. from Hampden-Sydney College.

John H. Wyant began serving as a director of the Company in June 1996. Mr.
Wyant is the president of Blue Chip Venture Company, which he founded in 1990.
Mr. Wyant is also a director of Zaring Homes Inc. and several private
companies. Mr. Wyant received his B.A. degree from Denison University and his
J.D. degree from Chase College of Law.

Each officer serves at the discretion of the Board of Directors. There are no
family relationships among any of the directors and executive officers of the
Company.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has established an Executive Committee, an Audit
Committee and a Compensation Committee.

The Executive Committee consists of Mr. Adams (Chairman), Mr. Earthman, Mr.
McCleary and Mr. Rothrock. The Executive Committee reviews, evaluates and makes
decisions and recommendations with respect to specific matters delegated to the
Executive Committee by the Board of Directors.

The Audit Committee consists of Mr. Rothrock (Chairman), Mr. Wyant and Mr.
Cato. The Audit Committee makes recommendations to the Board of Directors
regarding the selection of independent auditors, reviews the results and scope
of the audit and other services provided by the Company's independent auditors,
and reviews and evaluates the Company's audit and control functions.

The Compensation Committee consists of Mr. Earthman (Chairman), Mr. Adams and
Mr. Stewart. The Compensation Committee administers the Company's Stock Option
Plans and makes decisions concerning salaries and incentive compensation for
employees and consultants of the Company.

DIRECTORS' COMPENSATION

Non-employee directors are reimbursed for reasonable expenses incurred by
them in attending Board meetings. Pursuant to the terms of the Securities
Purchase Agreement by and among the Company, Mr. Humphrey, Mr. Doughney,
Grotech Capital Partners IV, L.P. ("Grotech IV"), Venrock Associates
("Venrock"), and Southern Venture Fund II, L.P. ("Southern"), dated as of March
24, 1995 (the "Securities Purchase Agreement"), the Company pays to each of
Grotech IV, Venrock and Southern an annual director's fee of $10,000 for the
respective directors designated by such entities. Under that certain Purchase
and Exchange Agreement (as defined), the Company also pays Blue Chip an annual
director's fee of $10,000 for the director designated by such entity. Upon
consummation of the Offering, the non-employee directors shall cease to be
entitled to receive such fees but shall continue to receive reimbursement for
reasonable expenses incurred in their capacity as directors. In addition, non-
employee directors are eligible for the grant of stock options under the
Company's Equity Plan. Each director who is not an employee of the Company has
been granted options to

39
<PAGE>

purchase 8,000 shares of Common Stock. In addition, each non-employee director
will be granted options to purchase 8,000 shares of Common Stock at each annual
meeting at which such director is re-elected as a director. See "--Incentive
Stock Option Plans--Equity Plan."

BOARD COMPOSITION

In connection with the reincorporation of the Company as a Delaware
corporation, the Company will amend and restate its Certificate of
Incorporation and Bylaws. The Certificate of Incorporation and Bylaws of the
Company will provide that the directors of the Company are divided into three
classes. A class of directors will be elected by plurality vote, with no
cumulative voting, at each annual meeting of stockholders. Messrs. Adams,
Humphrey and McCleary will be designated Class I directors and will serve until
the meeting of stockholders in 1997. Messrs. Doughney, Stewart and Wyant have
been designated Class II directors and will serve until the meeting of
stockholders in 1998. Messrs. Cato, Earthman and Rothrock will be designated
Class III directors and will serve until the meeting of stockholders in 1999.
Thereafter, each class of directors will have a term of three years, with a
term of one class expiring each year.

Under the Securities Purchase, Conversion and Exchange Agreement (the
"Purchase and Exchange Agreement"), dated as of May 30, 1996, by and among the
Company, Grotech IV, Grotech Partners III, L.P. ("Grotech Partners"), Grotech
III Companion Fund, L.P. ("Grotech Companion"), Grotech III Pennsylvania Fund,
L.P. ("Grotech Pennsylvania"), Venrock, Venrock Associates II, L.P. ("Venrock
II"), Southern, Blue Chip Capital Fund Limited Partnership ("Blue Chip"),
Crisler Capital Company, Limited Partnership ("Crisler," and together with
Grotech IV, Grotech Partners, Grotech Companion, Grotech Pennsylvania, Venrock,
Venrock II, Southern, and Blue Chip, the "1996 Venture Investors"),
Mr. Humphrey and Mr. Doughney, the 1996 Venture Investors and Messrs. Humphrey
and Doughney have agreed to vote their shares of voting stock of the Company
for the election of: (i) four directors designated by Messrs. Humphrey and
Doughney (Mr. Humphrey, Mr. Doughney, Mr. Stewart and Mr. McCleary), (ii) one
director designated by Grotech IV (Mr. Adams), (iii) one director designated by
Venrock (Mr. Rothrock), (iv) one director designated by Southern (Mr.
Earthman), (v) one director designated by Blue Chip (Mr. Wyant) and (vi) one
director to be jointly designated by the 1996 Venture Investors and Mr.
Humphrey (Mr. Cato). This agreement superseded provisions of the Securities
Purchase Agreement concerning the election of directors. The provisions of the
Purchase and Exchange Agreement concerning election of directors terminate
effective immediately prior to consummation of the Offering. Accordingly, no
stockholder shall be obligated to vote in favor of election of any person
nominated for election of the Board of Directors by any other stockholder
following consummation of the Offering.

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<PAGE>

EXECUTIVE COMPENSATION

The following table summarizes all compensation earned by Douglas E. Humphrey
(the "Named Executive Officer"), who served as the Company's Chief Executive
Officer during the fiscal year ended December 31, 1995. No other executive
officers of the Company earned in excess of $100,000 of salary and bonus during
the fiscal year ended December 31, 1995.

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
NAME AND ALL OTHER
PRINCIPAL FISCAL SALARY BONUS COMPENSATION
POSITION YEAR ($) ($) ($)(2)
- --------- ------ ---------- --------- ------------
<S> <C> <C> <C> <C>
Douglas E. Humphrey(1)................ 1995 $ 100,000 $ 20,000 $6,600
Chief Executive Officer
</TABLE>
- --------
(1) Mr. Humphrey was Chief Executive Officer of the Company until February
1996, when Mr. McCleary succeeded him. Mr. Humphrey is currently a Senior
Vice President and Chief Technology Officer of the Company.
(2) This amount represents a car allowance.

OPTION GRANTS IN 1995

No options were granted for the fiscal year ended December 31, 1995 to the
Named Executive Officer and no stock appreciation rights have been granted to
date. In addition, the Named Executive Officer currently holds no options for
the Common Stock and did not exercise any options during the fiscal year ended
December 31, 1995.

INCENTIVE STOCK OPTION PLANS

1995 STOCK OPTION PLAN

The Board of Directors has adopted an Incentive Stock Option Plan (the "1995
Stock Option Plan"). Under the 1995 Stock Option Plan, employees are entitled
to purchase Common Stock of the Company by cash payment or by delivery of
existing shares of Common Stock held by such employee. The purpose of the 1995
Stock Option Plan and of granting options to specified employees of the Company
pursuant thereto is to further the growth, development and financial success of
the Company by providing additional incentives to such persons by assisting
them to acquire shares of Common Stock of the Company and to benefit directly
from the Company's growth, development and financial success. Options granted
under the 1995 Stock Option Plan vest in accordance with one of the following
schedules or in accordance with an alternative schedule approved by the Board
of Directors: (i) 25% of the aggregate amount of options granted to a
particular employee upon the first anniversary of the date of hire of such
employee and the remaining 75% of the aggregate amount of options on a
quarterly basis, evenly spread out over the three-year period following the
first anniversary of the date of hire or (ii) 33% of the aggregate amount of
options granted to a particular employee upon the first anniversary of the date
of hire of such employee and the remaining 67% of the aggregate amount of
options on a quarterly basis, evenly spread out over the two-year period
following the first anniversary of the date of hire. Options granted under the
1995 Stock Option Plan expire on the tenth anniversary of the date of grant.
The Company has reserved 1,099,054 shares of Common Stock for issuance under
the 1995 Stock Option Plan, none of which have been issued to date. As of July
19, 1996, options for the purchase of 1,099,054 shares of Common Stock are
outstanding under the 1995 Stock Option Plan. The exercise price for all of
such outstanding options is $0.25 per share. No new options will be granted
under the 1995 Stock Option Plan.

EQUITY PLAN

The Company adopted the DIGEX, Incorporated 1996 Equity Participation Plan
(the "Equity Plan") effective as of May 31, 1996. The principal purposes of the
Equity Plan are to provide incentives for officers,

41
<PAGE>

employees and consultants of the Company through granting of options,
restricted stock and other awards ("Awards"), thereby stimulating their
personal and active interest in the Company's development and financial
success, and inducing them to remain in the Company's employ. In addition to
Awards made to officers, employees or consultants, the Equity Plan provides for
the granting of options ("Director Options") to the Company's independent non-
employee directors pursuant to a formula, as described in further detail below.

Under the Equity Plan, not more than 1,401,426 shares of Common Stock (or the
equivalent in other equity securities) are authorized for issuance upon
exercise of options, stock appreciation rights ("SARs") and other Awards, or
upon vesting of restricted or deferred stock Awards; provided however, that
Awards with respect to additional shares may be granted to the extent that
options expire or are otherwise terminated unexercised under the 1995 Stock
Option Plan. In the aggregate, no more than 2,500,480 shares may be outstanding
under the 1995 Stock Option Plan and the Equity Plan. As of the date hereof,
1,136,246 nonqualified stock options to purchase Common Stock have been granted
to employees under the Equity Plan and 1,136,246 are outstanding and Director
Options to purchase 48,000 shares of Common Stock have been granted to non-
employee directors under the Equity Plan. No other Awards have been made under
the Equity Plan. The exercise price for all such outstanding options ranges
from $3.73 to $10.00 per share.

The shares available under the Equity Plan upon exercise of stock options,
SARs and other Awards, and for issuance as restricted or deferred stock Awards,
may be either previously unissued shares or treasury shares, and may be equity
securities of the Company other than Common Stock. The Compensation Committee
or a subcommittee thereof (the "Compensation Committee") (the Board with
respect to Director Options) has the discretion to make appropriate adjustments
in the number and kind of securities subject to the Equity Plan and to
outstanding Awards thereunder to reflect dividends or other distributions; a
recapitalization, reclassification, stock split, reverse stock split, or
reorganization, merger or consolidation of the Company; the split-up, spin-off,
combination, liquidation or dissolution of the Company; or disposition of all
or substantially all of the assets of the Company or exchange of Common Stock
or other securities of the Company; or other similar corporate transaction or
event.

If any portion of a stock option, SAR or other Award terminates or lapses
unexercised, or is cancelled upon grant of a new option, SAR or other Award
(which may be at a higher or lower exercise price than the option, SAR or other
Award so cancelled), the shares which were subject to the unexercised portion
of such option, SAR or other Award, will continue to be available for issuance
under the Equity Plan.

The principal features of the Equity Plan are summarized below, but the
summary is qualified in its entirety by reference to the Equity Plan itself.

Administration

Prior to the Offering, the Board of Directors of the Company will administer
the Equity Plan; following the closing of the Offering, the Compensation
Committee will administer the Equity Plan with respect to awards and the full
Board will administer the Equity Plan with respect to Director Options. The
Compensation Committee will consist of at least two members of the Board,
neither of whom is an employee of the Company and if the Board so determines,
each of whom will be a "non-employee director" for purposes of Rule 16b-3 under
the Securities Exchange Act of 1934, as amended ("Rule 16b-3"). Subject to the
terms and conditions of the Equity Plan, the Compensation Committee has the
authority to select the persons to whom Awards are to be made, to determine the
number of shares to be subject thereto and the terms and conditions thereof,
and to make all other determinations and to take all other actions necessary or
advisable for the administration of the Equity Plan. Similarly, the Board has
discretion to determine the terms and conditions of grants of Director Options
and to interpret and administer the Equity Plan with respect to Director
Options, consistent with the specific formula terms described in more detail
below. The Compensation Committee (and the Board) are also authorized to adopt,
amend and rescind rules relating to the administration of the Equity Plan.

42
<PAGE>

Amendment and Termination

Amendments of the Equity Plan to increase the number of shares as to which
Awards may be made (except for adjustments resulting from stock splits and the
like, and mergers, consolidations and other corporate transactions) require the
approval of the Company's stockholders. In all other respects the Equity Plan
can be amended, modified, suspended or terminated by the Compensation Committee
or the Board, unless such action would otherwise require stockholder approval
as a matter of applicable law, regulation or rule. Amendments of the Equity
Plan will not, without the consent of the participant, affect such person's
rights under an Award previously awarded, unless the Award Agreement governing
such Award itself otherwise expressly so provides. Unless sooner terminated by
the Board or the Compensation Committee, the Equity Plan will expire on May 31,
2006. Such termination will not affect the validity of any Award outstanding
under the Equity Plan on the date of termination.

Eligibility

Options, SARs, restricted stock and other Awards under the Equity Plan may be
granted to individuals who are then officers or other employees of the Company
or any of its present or future subsidiaries. Such Awards also may be granted
to consultants of the Company selected by the Compensation Committee for
participation in the Equity Plan. Approximately 263 employees are eligible to
be granted Awards under the Equity Plan. More than one option, SAR, restricted
stock Award or other Award may be granted to an employee or consultant, but the
aggregate fair market value (determined at the time of grant) of shares with
respect to which an Incentive Stock Option is first exercisable by an optionee
(i.e. "vests") during any calendar year cannot exceed $100,000. Non-employee
directors may only be granted Director Options.

Payment for Shares

The exercise or purchase price for all options, Director Options, SARs,
restricted stock and other Awards that provide a right to acquire Common Stock,
together with any applicable tax required to be withheld, must be paid in full
in cash at the time of exercise or purchase or may, with the approval of the
Compensation Committee (or Board for Director Options) be paid in whole or in
part in Common Stock valued at their fair market value on the date of exercise
(which may, except with respect to incentive stock options, include an
assignment of the right to receive the cash proceeds from the sale of Common
Stock subject to an option or other right pursuant to a "cashless exercise"
procedure) or by delivery of other property, or by a recourse promissory note
payable to the Company, or by a combination of the foregoing.

Awards under the Equity Plan

The Equity Plan provides that the Compensation Committee may grant or issue
stock options, SARs, restricted stock, deferred stock, dividend equivalents,
performance awards, stock payments and other stock related benefits, or any
combination thereof. Each Award will be set forth in a separate agreement with
the person receiving the Award and will indicate the type, terms and conditions
of the Award.

Nonqualified Stock Options ("NQSOs") will provide for the right to purchase
Common Stock at a specified price which, except with respect to NQSOs intended
to qualify as performance-based compensation under Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code"), may be less than fair
market value on the date of grant (but not less than par value), and usually
will become exercisable (in the discretion of the Compensation Committee) in
one or more installments after the grant date, subject to the participant's
continued employment with the Company and/or subject to the satisfaction of
individual or Company performance targets established by the Compensation
Committee. NQSOs may be granted for any term specified by the Compensation
Committee.

Incentive Stock Options ("ISOs") will be designed to comply with the
provisions of the Code, and will be subject to certain restrictions contained
in the Code. Among such restrictions, ISOs must have an exercise price not less
than the fair market value of a share of Common Stock on the date of grant, may
only be granted to

43
<PAGE>

employees, must expire within a specified period of time following the
Optionee's termination of employment, and must be exercised within the ten
years after the date of grant; but may be subsequently modified to disqualify
them from treatment as ISOs. In the case of an ISO granted to an individual who
owns (or is deemed to own) at least 10% of the total combined voting power of
all classes of stock of the Company, the Equity Plan provides that the exercise
price must be at least 110% of the fair market value of a share of Common Stock
on the date of grant and the ISO must expire upon the fifth anniversary of the
date of its grant.

Restricted Stock may be sold to participants at various prices (but not below
par value) and made subject to such restrictions as may be determined by the
Compensation Committee. Restricted stock, typically, may be repurchased by the
Company at the original purchase price if the conditions or restrictions are
not met. In general, restricted stock may not be sold, or otherwise transferred
or hypothecated, until restrictions are removed or expire. Purchasers of
restricted stock, unlike recipients of options, will have voting rights and
will receive dividends prior to the time when the restrictions lapse.

Deferred Stock may be awarded to participants, typically without payment of
consideration, but subject to vesting conditions based on continued employment
or on performance criteria established by the Committee. Like restricted stock,
deferred stock may not be sold, or otherwise transferred or hypothecated, until
vesting conditions are removed or expire. Unlike restricted stock, deferred
stock will not be issued until the deferred stock award has vested, and
recipients of deferred stock generally will have no voting or dividend rights
prior to the time when vesting conditions are satisfied.

SARs may be granted in connection with stock options or other Awards, or
separately. SARs granted by the Compensation Committee in connection with stock
options or other awards typically will provide for payments to the holder based
upon increases in the price of the Common Stock over the exercise price of the
related option or other Awards, but alternatively may be based upon criteria
such as book value. Except as required by Section 162(m) of the Code with
respect to an SAR intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code, there are no restrictions
specified in the Equity Plan on the exercise of SARs or the amount of gain
realizable therefrom, although restrictions may be imposed by the Compensation
Committee in the SAR agreements. The Compensation Committee may elect to pay
SARs in cash or in Common Stock or in a combination of both.

Dividend Equivalents represent the value of the dividends per share paid by
the Company, calculated with reference to the number of shares covered by the
stock options, SARs or other Awards held by the participant.

Performance Awards may be granted by the Compensation Committee on an
individual or group basis. Generally, these Awards will be based upon specific
performance targets and may be paid in cash or in Common Stock or in a
combination of both. Performance Awards may include "phantom" stock Awards that
provide for payments based upon increases in the price of the Common Stock over
a predetermined period. Performance Awards may also include bonuses which may
be granted by the Compensation Committee on an individual or group basis and
which may be payable in cash or in Common Stock or in a combination of both.

Stock Payments may be authorized by the Compensation Committee in the form of
shares of Common Stock or an option or other right to purchase Common Stock as
part of a deferred compensation arrangement in lieu of all or any part of
compensation, including bonuses, that would otherwise be payable in cash to the
employee or consultant.

Director Options

Director Options are NQSOs granted to non-employee directors of the Company
pursuant to a formula. Under the formula in the Equity Plan, following the
closing of the Offering, when a director is initially elected to the Board and
is at that time a non-employee director, he or she automatically shall be
granted an NQSO to purchase 8,000 shares of Common Stock. During the term of
the Plan, each then current non-employee director shall automatically be
granted an NQSO to purchase 8,000 shares of Common Stock at each subsequent
annual

44
<PAGE>

meeting at which he or she is reelected to the Board. Members of the Board who
are employees who subsequently terminate employment with the Company and remain
on the Board will not receive an initial NQSO grant as a non-employee director,
but, to the extent they are otherwise eligible, will receive NQSOs as described
in the preceding sentence after such termination of employment. The exercise
price of the Director Options shall be the fair market value of a share of
Common Stock on the date of grant. Each Director Option shall become
exercisable in cumulative annual installments of one-third on each of the
first, second and third annual meeting of shareholders that are subsequent to
the date of grant and at which directors are elected, subject to the director's
continued service as a director; provided, however, to the extent permitted by
Rule 16b-3, the Board may accelerate the exercisability of Director Options
upon the occurrence of certain specified extraordinary corporate transactions
or events and provided further, that in any event, upon the occurrence of a
"Change in Control" of the Company (as defined in the Equity Plan) all
outstanding Director Options shall become immediately exercisable. No portion
of a Director Option shall be exercisable after the tenth anniversary of the
date of grant and no portion of a Director Option shall be exercisable upon the
expiration of one year following the Director's termination of services as a
director of the Company.

Miscellaneous Provisions

The Compensation Committee (or Board with respect to Director Options) has
discretion under the Equity Plan to provide that options and other rights to
acquire Common Stock will expire at specified times following, or become
exercisable in full upon, the occurrence of certain specified "extraordinary
corporate events;" but in such event the Compensation Committee may also give
optionees and other grantees the right to exercise their outstanding options or
rights in full during some period prior to such event, even though the options
or other Awards have not yet become fully exercisable, and the Compensation
Committee may also provide that all restrictions imposed on some or all shares
of restricted stock and/or deferred stock shall lapse, and some or all shares
of restricted stock may cease to be subject to the Company's right to
repurchase after such event.

The Equity Plan specifies that the Company may make loans to participants to
enable them to exercise options, purchase shares or realize the benefits of
other Awards granted under the Equity Plan. The terms and conditions of such
loans, if any are made, are to be set by the Compensation Committee (or the
Board with respect to Director Options).

The dates on which options or other Awards under the Equity Plan first become
exercisable and on which they expire will be set forth in individual Award
agreements setting forth the terms of the Awards. Such agreements generally
will provide that options and other Awards expire upon termination of the
participant's status as an employee, consultant or director, although the
Compensation Committee may provide that options or other Awards granted to
employees or consultants continue to be exercisable following a termination
without Cause (as defined in the Equity Plan), or following a Change in Control
of the Company (as defined in the Equity Plan), or because of the grantee's
retirement, death, disability or otherwise. Similarly, restricted stock granted
under the Equity Plan which has not vested generally will be subject to
repurchase by the Company in the event of the grantee's termination of
employment or consultancy, although the Compensation Committee may make
exceptions, based on the reason for termination or on other factors.

No option, SAR, Director Option or other Award granted under the Equity Plan
may be assigned or transferred by the grantee, except by will or the laws of
descent and distributions, although the shares underlying such Awards may be
transferred if all applicable restrictions have lapsed. During the lifetime of
the holder of any option or right, the option or right may be exercised only by
the holder.

As a condition to the issuance or delivery of stock or payment of other
compensation pursuant to the exercise or lapse of restrictions of any option or
other Award granted under the Equity Plan, the Company requires participants to
discharge applicable withholding tax obligations. Shares held by or to be
issued to a participant may also be used to discharge tax withholding
obligations related to exercise of options or receipt of other Awards, subject
to the discretion of the Compensation Committee to disapprove such use. In
addition, the Compensation Committee may grant to employees a cash bonus in the
amount of any tax related to awards.

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<PAGE>

In May and June of 1996, the Company granted NQSOs. The value of options
granted under the Equity Plan depends on the future market value of a share of
Common Stock on the date of exercise and such value is not presently
determinable.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES WITH RESPECT TO THE EQUITY PLAN

The tax consequences of the Equity Plan under current federal law are
summarized in the following discussion which deals with the general tax
principles applicable to the Equity Plan, and is intended for general
information only. Alternative minimum tax and state and local income taxes are
not discussed. Tax laws are complex and subject to change and may vary
depending on individual circumstances and from locality to locality. The tax
information summarized is not tax advice.

Nonqualified Stock Options. For federal income tax purposes, an optionee
generally will not recognize taxable income on the grant of an NQSO under the
Equity Plan, but will recognize ordinary income, and the Company generally will
be entitled to a deduction, upon the exercise of an NQSO. The amount of income
recognized (and the amount generally deductible by the Company) generally will
be equal to the excess, if any, of the fair market value of the shares at the
time of exercise over the aggregate exercise price paid for the shares,
regardless of whether the exercise price is paid in cash or in shares or other
property. An optionee's basis for the stock for purposes of determining his or
her gain or loss upon a subsequent disposition of the shares generally will be
the fair market value of the stock on the date of exercise of the NQSO, and any
subsequent gain or loss will generally be taxable as capital gains or losses.

Incentive Stock Options. An optionee generally will not recognize taxable
income upon either the grant or exercise of an ISO; however, the amount by
which the fair market value of the shares at the time of exercise exceeds the
exercise price will be an "item of tax preference" for the optionee. Generally,
upon the sale or other taxable disposition of the shares of the Common Stock
acquired upon exercise of an ISO, the optionee will recognize income taxable as
capital gains in an amount equal to the excess, if any, of the amount realized
in such disposition over the option exercise price, provided that no
disposition of the shares has taken place within either (a) two years from the
date of grant of the ISO or (b) one year from the date of exercise. If the
shares of Common Stock are sold or otherwise disposed of before the end of the
one-year and two-year periods specified above, the difference between the ISO
exercise price and the fair market value of the shares on the date of exercise
generally will be taxable as ordinary income; the balance of the amount
realized from such disposition, if any, generally will be taxed as capital
gain. If the shares of Common Stock are disposed of before the expiration of
the one-year and two-year periods and the amount realized is less than the fair
market value of the shares at the date of exercise, the optionee's ordinary
income generally is limited to excess, if any, of the amount realized in such
disposition over the option exercise price paid. The Company (or other employer
corporation) generally will be entitled to a tax deduction with respect to an
ISO only to the extent the optionee has ordinary income upon sale or other
disposition of the shares of Common Stock.

SARs. No taxable income is generally recognized upon the receipt of an SAR,
but upon exercise of the SAR the fair market value of the shares (or cash in
lieu of shares) received generally will be taxable as ordinary income to the
recipient in the year of such exercise. The Company generally will be entitled
to a compensation deduction for the same amount which the recipient recognizes
as ordinary income.

Restricted Stock and Deferred Stock. An employee to whom restricted or
deferred stock is issued generally will not recognize taxable income upon such
issuance and the Company generally will not then be entitled to a deduction,
unless, in the case of restricted stock, an election is made under Section
83(b) of the Code. However, when restrictions on shares of restricted stock
lapse, such that the shares are no longer subject to a substantial risk of
forfeiture, the employee generally will recognize ordinary income and the
Company generally will be entitled to a deduction for an amount equal to the
excess of the fair market value of the shares at the date such restrictions
lapse over the purchase price therefor. Similarly, when deferred stock vests
and is issued to the employee, the employee generally will recognize ordinary
income and the Company generally will be entitled to a deduction for the amount
equal to the fair market value of the shares at the date of issuance. If an
election is

46
<PAGE>

made under Section 83(b) with respect to qualifying restricted stock, the
employee generally will recognize ordinary income at the date of issuance equal
to the excess, if any, of the fair market value of the shares at that date over
the purchase price therefor and the Company will be entitled to a deduction for
the same amount. The Code does not permit a Section 83(b) election to be made
with respect to deferred stock.

Dividend Equivalents. A recipient of a dividend equivalent award generally
will not recognize taxable income at the time of grant, and the Company will
not be entitled to a deduction at that time. When a dividend equivalent is
paid, the participant generally will recognize ordinary income, and the Company
will be entitled to a corresponding deduction.

Performance Awards. A participant who has been granted a performance award
generally will not recognize taxable income at the time of grant, and the
Company will not be entitled to a deduction at that time. When an award is
paid, whether in cash or Common Stock, the participant generally will recognize
ordinary income, and the Company will be entitled to a corresponding deduction.

Stock Payments. A participant who receives a stock payment in lieu of a cash
payment that would otherwise have been made will generally be taxed as if the
cash payment has been received, and the Company generally will be entitled to a
deduction for the same amount.

Deferred Compensation. Participants who defer compensation generally will
recognize no income, gain or loss for federal income tax purposes when NQSOs
are granted in lieu of amounts otherwise payable, and the Company will not be
entitled to a deduction at that time. When and to the extent such NQSOs are
exercised, the rules regarding NQSOs outlined above will generally apply.

EMPLOYMENT CONTRACTS

In May 1995, the Company entered into an employment agreement with Mr.
Heintzelman. Pursuant to the terms of the agreement, Mr. Heintzelman's base
salary is $125,000 per year, plus a bonus, which was $20,000 in 1995. In
addition, Mr. Heintzelman also receives a $12,000 per year auto allowance
pursuant to the agreement. Mr. Heintzelman was granted options to purchase
200,000 shares of Common Stock of the Company at an exercise price of $0.25 per
share at the time of entering into the agreement and additional options to
purchase 10,800 shares of Common Stock of the Company at an exercise price of
$0.25 per share in January 1996. Grants were made pursuant to the 1995 Stock
Option Plan and vest as follows: 40,000 options vested 90 days after the date
of the agreement, one-third of the remaining aggregate options vested on the
first anniversary of the date of hire and the remainder will vest ratably on a
quarterly basis during the two years following the first anniversary. In May
1996, options to purchase 149,200 shares of Common Stock of the Company at an
exercise price of $3.73 per share were granted to Mr. Heintzelman pursuant to
the Stock Option Plans. These options vest as follows: one-third of the options
will vest on the first anniversary of the date of grant and the remaining two-
thirds of the options will vest ratably on a quarterly basis during the two
years following the first anniversary of the date of grant.

In February 1996, the Company entered into an employment agreement with Mr.
McCleary. Pursuant to the terms of the agreement, Mr. McCleary's base salary is
$175,000 per year ($25,000 of which is conditioned upon the completion of the
Offering), plus a bonus to be awarded annually as part of the Company's bonus
program for its management. Under the agreement, Mr. McCleary is also entitled
to participate in any Company incentive compensation plans, savings plans,
retirement plans, and other employee benefit plans as well as to receive an
auto and expenses allowance. Mr. McCleary was also granted options to purchase
241,874 shares of Common Stock of the Company at an exercise price of $0.25 per
share at the time of entering into the agreement. The grant was made pursuant
to the 1995 Stock Option Plan and vests as follows: one-third of the options
vest on the first anniversary of the date of hire and the remaining two-thirds
of the options vest ratably on a quarterly basis during the two years following
the first anniversary. In May 1996, options to purchase an additional 237,326
shares of Common Stock of the Company at an exercise price of $3.73 per share
were granted to Mr. McCleary pursuant to the Stock Option Plans. These options
vest as follows: one-third of the options vest

47
<PAGE>

on the first anniversary of the date of grant and the remaining two-thirds of
the options vest ratably on a quarterly basis during the two years following
the first anniversary of the date of grant. The initial term of the agreement
expires on December 31, 1999, but the agreement is subject to automatic renewal
terms of one year each.

In March 1996, the Company entered into employment agreements with Messrs.
Deobald, Galleher, and Magliato. Pursuant to the terms of these agreements,
these officers' base salaries are $120,000 per year, plus a bonus to be awarded
annually as part of the Company's bonus program for management. These officers
are also entitled to participate in any Company incentive compensation plans,
retirement plans, and other employee benefit plans as well as to receive a
$6,600 per year auto allowance. Messrs. Deobald, Galleher, and Magliato were
each granted options to purchase 40,000 shares of Common Stock of the Company
at an exercise price of $0.25 per share at the time of entering into their
respective employment agreements. Grants were made pursuant to the 1995 Stock
Option Plan and vest as follows: one-third of the options vest on the first
anniversary of the date of hire and the remaining two-thirds of the options
vest on a quarterly basis during the two years following the first anniversary.
In addition, each was granted options to purchase 16,000 shares of Common Stock
of the Company at an exercise price of $3.73 per share, effective as of May 31,
1996, and 64,000 shares of Common Stock of the Company at an exercise price of
$10.00 per share, effective as of July 19, 1996. Grants were made pursuant to
the Stock Option Plans and vest as follows: one-third of the options vest on
the first anniversary of the date of grant and the remaining two-thirds of the
options vest on a quarterly basis during the two years following the first
anniversary. The initial terms of the agreements expire in March 1997, but the
agreements are subject to automatic renewal terms of one year each.

In April 1996, the Company entered into an employment agreement with Mr.
Pendley. Pursuant to the terms of the agreement, Mr. Pendley's base salary is
$89,000 per year, plus a bonus to be awarded annually each December as part of
the Company's bonus program for its management. Under the agreement, Mr.
Pendley is also entitled to participate in any Company incentive compensation
plans, savings plans, retirement plans, and other employee benefit plans as
well as to receive an auto and expenses allowance. Mr. Pendley was also granted
options to purchase 120,000 shares of Common Stock of the Company at an
exercise price of $0.25 per share in September 1995 and options to purchase an
additional 6,400 shares of Common Stock of the Company at an exercise price of
$0.25 per share in January 1996. Grants were made pursuant to the 1995 Stock
Option Plan and vest as follows: one-third of the aggregate options vested on
December 15, 1995, the first anniversary of the date of hire, and the remaining
two-thirds of the aggregate options vest ratably on a quarterly basis during
the two years following the first anniversary, a portion of which have already
vested. In May 1996, options to purchase an additional 89,600 shares of Common
Stock of the Company at an exercise price of $3.73 per share were granted to
Mr. Pendley pursuant to the Stock Option Plans. These options vest as follows:
one-third of the options will vest on the first anniversary of the dates of
grant and the remaining two-thirds of the options will vest ratably on a
quarterly basis during the two years following the first anniversary of the
date of grant. The initial term of the agreement expires on March 31, 1997, but
the agreement is subject to automatic renewal terms of one year each.

In June 1996, the Company entered into an employment agreement with Mr.
Brandt. Pursuant to the terms of the agreement, Mr. Brandt's base salary is
$125,000 per year, plus a bonus to be awarded annually each December as part of
the Company's bonus program for its management. Under the agreement, Mr. Brandt
is also entitled to participate in any Company incentive compensation plans,
savings plans, retirement plans, and other employee benefit plans as well as to
receive an auto and expenses allowance. Mr. Brandt was also granted options to
purchase 40,000 shares of Common Stock of the Company, at an exercise price of
$3.73 per share in May 1996, and 40,000 shares of Common Stock of the Company,
at an exercise price of $10.00 per share in June 1996. Grants were made
pursuant to the Stock Option Plans and vest as follows: one-third of the
options vest on the first anniversary of the date of grant and the remaining
two-thirds of the options vest on a quarterly basis during the two years
following the first anniversary. The grant was made pursuant to the Stock
Option Plan and the options vest in accordance with the four-year schedule
contained therein. The initial term of the agreement expires on May 31, 1997,
but the agreement is subject to automatic renewal terms of one year each.

48
<PAGE>

CERTAIN TRANSACTIONS

The Company was incorporated on January 8, 1990 by Mr. Humphrey and Mr.
Doughney (the "Founders"). Mr. Humphrey contributed certain computer hardware
to the Company in exchange for 970,744 shares of Common Stock, and Mr. Doughney
contributed certain computer software to the Company in exchange for 647,163
shares of Common Stock.

On July 1, 1994, Robert M. Stewart, a director of the Company, and six other
individuals who are not affiliated with the Company loaned the Company $300,000
in cash. In consideration for their loan, the Company issued to these
individuals (i) 8% promissory notes (the "Bridge Notes") in aggregate principal
amount of $300,000 and (ii) warrants to purchase 190,883 shares of the Common
Stock (the "Bridge Warrants"). The Bridge Notes were to mature on the earlier
of July 12, 1995 and the date on which certain payments were made under the
Securities Purchase Agreement. Mr. Stewart loaned the Company $25,000 and was
issued Bridge Notes in like amount and Bridge Warrants representing the right
to purchase 15,906 shares of Common Stock at an exercise price of $1.57 per
share in this transaction.

On March 24, 1995, the Company entered into the Securities Purchase Agreement
with the Founders and Grotech IV, Venrock and Southern, pursuant to which the
Company issued a total of 45,454.54 shares of convertible preferred stock
(since redesignated Series A Convertible Preferred Stock), par value $1.00 per
share, together with warrants to purchase 1,120,000 shares of Common Stock of
the Company, for an aggregate cash investment of $4,000,000. The Bridge Notes
were repaid at their face amount with a portion of the proceeds of this
investment. Grotech IV was issued 18,181.82 shares of Series A Preferred Stock
and warrants to purchase 448,000 shares of Common Stock in consideration of its
investment of $1.6 million in cash, Venrock was issued 15,909.09 shares of
Series A Preferred Stock (4,925.83 shares of which were assigned to Venrock II)
and warrants to purchase 392,000 shares of Common Stock (121,348 of which were
assigned to Venrock II) in consideration of its investment of $1.4 million in
cash and Southern was issued 11,363.63 shares of Series A Preferred Stock and
warrants to purchase 280,000 shares of Common Stock in consideration of its
investment of $1.0 million in cash. Representatives of each of Grotech IV,
Venrock and Southern were elected to the Company's Board of Directors pursuant
to the Securities Purchase Agreement.

As a fee for arranging the above investment, the Company made a cash payment
of $200,000 to Armata Partners, L.P., the employer of Mr. Stewart at the time,
and issued warrants to purchase 91,200 shares of Common Stock to Mr. Stewart
and nine other individuals (the "Fee Warrants" and, together with the Bridge
Warrants, the "Initial Warrants"). These individuals (other than Mr. Stewart)
are not affiliated with the Company. Mr. Stewart received Fee Warrants
representing the right to purchase 23,566 shares of Common Stock at an exercise
price of $2.63 per share in this transaction.

Pursuant to a Stockholders Agreement (the "Stockholders Agreement"), dated
March 24, 1995, by and among the Company, Grotech IV, Venrock, Southern, Mr.
Humphrey and Mr. Doughney, the parties thereto agreed to grant rights of first
refusal to the other parties to such agreement in the event of the death,
disability or termination of employment of either Mr. Humphrey or Mr. Doughney
or in the event that either Mr. Humphrey or Mr. Doughney wishes to transfer any
of their shares of Common Stock of the Company. The provisions of the
Stockholders Agreement will terminate effective immediately prior to
consummation of the Offering.

On November 28, 1995, Grotech IV, Venrock, Southern and Venrock Associates
II, L.P. ("Venrock II" and, together with Grotech IV, Venrock and Southern, the
"Investors") loaned to the Company $800,000, $483,307, $500,000 and $216,693 in
cash, respectively. In consideration of these loans, the Company issued 10%
promissory notes due June 1, 1996 in the principal amount of $2,000,000 (the
"November 1995 Notes") and warrants to purchase 299,946 shares of Common Stock
to Grotech IV, Venrock, Venrock II and Southern as follows: Grotech IV
purchased promissory notes in the principal amount of $800,000 and warrants to
purchase 119,978 shares of Common Stock; Venrock purchased promissory notes in
the amount of $483,307 and warrants to purchase 72,483 shares of Common Stock;
Venrock II purchased promissory notes in the principal amount of $216,693 and
warrants to purchase 32,498 shares of Common Stock; and Southern purchased
promissory notes in the principal amount of $500,000 and warrants to purchase
74,987 shares of Common Stock.

49
<PAGE>

On February 23, 1996, the Company issued additional 10% promissory notes due
June 1, 1996 in the principal amount of $1,000,000 (the "February 1996 Notes")
and additional warrants to purchase 166,378 shares of Common Stock to the
Investors as follows: Grotech IV purchased promissory notes in the principal
amount of $400,000 and warrants to purchase 66,551 shares of Common Stock for a
cash purchase price of $400,000; Venrock purchased promissory notes in the
principal amount of $217,000 and warrants to purchase 36,104 shares of Common
Stock for a cash purchase price of $217,000; Venrock II purchased promissory
notes in the principal amount of $133,000 and warrants to purchase 22,128
shares of Common Stock for a cash purchase price at $133,000; and Southern
purchased promissory notes in the principal amount of $250,000 and warrants to
purchase 41,595 shares of Common Stock for a cash purchase price of $250,000.

On May 21, 1996, the Company issued additional promissory notes in the
principal amount of $1,000,000 (the "Convertible Notes") convertible into
shares of Series B Preferred Stock of the Company to the Investors as follows:
Grotech IV purchased promissory notes in the principal amount of $400,000 for a
cash purchase price of $400,000; Venrock purchased promissory notes in the
principal amount of $217,000 for a cash purchase price of $217,000; Venrock II
purchased promissory notes in the principal amount of $133,000 for a cash
purchase price of $133,000; and Southern purchased promissory notes in the
principal amount of $250,000 for a cash purchase price of $250,000.

On May 30, 1996, the Company, the Founders, the Investors, Grotech Partners,
Grotech Companion, Grotech Pennsylvania, Blue Chip and Crisler Capital Company,
Limited Partnership (together with the Investors, Grotech Partners, Grotech
Companion, Grotech Pennsylvania and Blue Chip, the "Purchasers") entered into
the Purchase and Exchange Agreement, whereby the Investors exchanged $2.0
million principal amount of November 1995 Notes and $1.0 million principal
amount February 1996 Notes (together with the right to receive $126,389 in
accrued interest thereon from the date of issuance) for 31,263.89 shares of
Series B Convertible Preferred Stock of the Company, par value $1.00 per share
(the "Series B Preferred Stock"), and converted $1.0 million principal amount
of Convertible Notes, in accordance with their terms, into 10,000 shares of
Series B Preferred Stock. In addition, the Purchasers paid $4,000,000 in cash
in exchange for a further 40,000 shares of Series B Preferred Stock. The above-
referenced exchange, conversion, and purchase resulted in the following
acquisitions of Series B Preferred Stock: Grotech IV acquired 22,505.56 shares
of Series B Preferred Stock; Grotech Partners acquired 8,537 shares of Series B
Preferred Stock; Grotech Companion acquired 930 shares of Series B Preferred
Stock; Grotech Pennsylvania acquired 533 shares of Series B Preferred Stock;
Venrock acquired 10,914.77 shares of Series B Preferred Stock; Venrock II
acquired 5,860.92 shares of Series B Preferred Stock. Southern acquired
11,982.64 shares of Series B Preferred Stock; Blue Chip acquired 16,000 shares
of Series B Preferred Stock; and Crisler acquired 4,000 shares of Series B
Preferred Stock.

The transactions of May 21 and May 30, 1996 are collectively referred to
herein as the "1996 Venture Financing." A representative of Blue Chip holds a
seat on the Company's Board of Directors pursuant to the terms of the Purchase
and Exchange Agreement. The rights of representatives of each of Grotech IV,
Venrock and Southern, as well as each of the Founders, to have seats on the
Company's Board of Directors, granted pursuant to the Securities Purchase
Agreement, were restated in the Purchase and Exchange Agreement. In addition,
pursuant to the Purchase and Exchange Agreement, Crisler obtained the right to
designate a representative (R. Dean Meiszer) to act as an observer at meetings
of the Company's Board of Directors. Such stockholders' rights to designate
directors or representatives to attend board meetings under the Purchase and
Exchange Agreement will terminate effective immediately prior to consummation
of the Offering. See "Management--Board Composition."

The holders of all outstanding shares of Series A Preferred Stock and Series
B Preferred Stock have agreed to convert their outstanding shares of Series A
Preferred Stock and Series B Preferred Stock, in accordance with their
respective terms, into 2,680,336 shares of Common Stock at or prior to the
consummation of the Offering (the "Preferred Stock Conversion"). As of the date
hereof, each share of Series A Preferred Stock is convertible into
approximately 11.0 shares of Common Stock and each share of Series B Preferred
Stock is convertible into approximately 26.83 shares of Common Stock. In
addition, all holders of warrants to purchase Common Stock

50
<PAGE>

(other than WinStar and one holder of Initial Warrants) will exercise such
warrants to purchase 1,868,408 shares of Common Stock upon consummation at or
prior to the Offering (the "Warrant Exercise"). See "Capital Stock of the
Company--Warrants."

The Company has received a standby funding commitment from certain of its
current venture capital investors to purchase up to $5.0 million of
convertible subordinated debentures and warrants to purchase shares of Common
Stock in the event that the Company requires additional liquidity prior to
completion of the Offering.

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<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth, as of August 31, 1996 and as adjusted to
reflect the Preferred Stock Conversion and the Warrant Exercise, certain
information with respect to the beneficial ownership of the Company's Common
Stock by: (i) each person (or group of affiliated persons) of the Company known
by the Company to own beneficially more than five percent of the outstanding
Common Stock; (ii) each director of the Company; (iii) the Named Executive
Officer and (iv) all directors and executive officers as a group. Information
is set forth on both a pre-Offering and a post-Offering basis. Except as
indicated in the footnotes to this table, the persons named in the table, based
on information provided by such persons, have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by them.

<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL SHARES(1)
SHARES OF -----------------
STOCK BENEFICIALLY BEFORE AFTER
NAME OWNED OFFERING OFFERING
---- ------------------ -------- --------
<S> <C> <C> <C>
Grotech Investors(2)...................... 1,706,664 26.2% 16.6%
Venrock Investors(3)...................... 1,180,311 18.1 11.5
Douglas E. Humphrey....................... 970,744 14.9 9.4
Southern Venture Fund II, L.P.(4)......... 843,079 12.9 8.2
Michael T. Doughney....................... 647,163 9.9 6.3
Blue Chip Capital Fund Limited Partner-
ship(5).................................. 429,285 6.6 4.2
Robert M. Stewart......................... 39,472 * *
Frank A. Adams(2)......................... 1,706,664 26.2 16.6
Ray A. Rothrock(3)........................ 1,180,311 18.1 11.5
William F. Earthman III(4)................ 843,079 12.9 8.2
John H. Wyant(5).......................... 429,285 6.6 4.2
Christopher R. McCleary(6)................ -- -- --
Thomas H. Cato............................ -- -- --
All directors and executive officers as a
group
(14 persons)(7).......................... 5,988,066 91.0 57.8
</TABLE>
- --------
*Less than one percent.

(1) Assumes no exercise of the Underwriters' over-allotment option. The Company
has granted the Underwriters an over-allotment option to purchase up to
562,500 shares of Common Stock.
(2) The Grotech Investors consist of Grotech IV, Grotech Partners, Grotech
Companion, and Grotech Pennsylvania. The address of the Grotech Investors
is 9690 Deereco Road, Timonium, MD 21093. The shares represent 1,438,361,
229,050, 24,952, and 14,228 shares owned by Grotech IV, Grotech Partners,
Grotech Companion, and Grotech Pennsylvania respectively. Mr. Adams, a
director of the Company, is also the general partner of Grotech Partners,
Grotech Capital Group IV, Inc. (the general partner of Grotech IV), and
Grotech Capital Group, Inc. (the general partner of Grotech Companion and
Grotech Pennsylvania). Mr. Adams disclaims beneficial ownership of the
shares held by the Grotech Investors, except to the extent of his economic
interest in the shares held by the Grotech Investors.
(3) The Venrock Investors consist of Venrock and Venrock II. The address of the
Venrock Investors is 30 Rockefeller Plaza, Suite 5508, New York, New York
10112. The shares represent 797,014 shares held by Venrock and 383,296
shares held by Venrock II. Mr. Rothrock, a director of the Company, is also
a general partner of Venrock and Venrock II. Mr. Rothrock disclaims
beneficial ownership of the shares held by the Venrock Investors, except to
the extent of his economic interest in the shares held by the Venrock
Investors.
(4) The address of Southern Venture Fund II, L.P. is 310 25th Avenue, North,
Suite 103, Nashville, TN 37203. Mr. Earthman, a director of the Company, is
also the general partner of Southern. Mr. Earthman disclaims beneficial
ownership of the shares held by Southern, except to the extent of his
economic interest in the shares held by Southern.
(5) Blue Chip Capital Fund Limited Partnership's address is 2000 PNC Center,
201 East Fifth Street, Cincinnati, OH 45202. Mr. Wyant is the president of
Blue Chip Venture Company, the general partner of Blue Chip. Mr. Wyant
disclaims beneficial ownership of the shares held by Blue Chip, except to
the extent of his economic interest in the shares held by Blue Chip.

(6) Mr. McCleary, the Chairman, President and Chief Executive Officer of the
Company holds options to purchase 480,000 shares of Common Stock, none of
which are exercisable within 60 days of August 31, 1996.

(7) Includes 124,599 options held by Mr. Heintzelman that are presently
exercisable or that will become exercisable within 60 days of August 31,
1996. See Notes 2, 3, 4, and 5 above.

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<PAGE>

CAPITAL STOCK OF THE COMPANY

The following description of the Company's capital stock does not purport to
be complete and is subject in all respects to applicable Delaware law and to
the provisions of the Company's Certificate of Incorporation and Bylaws, copies
of which have been filed as exhibits to the Registration Statement of which
this Prospectus is a part.

The authorized capital stock of the Company currently consists of 49,800,000
shares of Common Stock, $0.01 par value, and 200,000 shares of Preferred Stock,
$1.00 par value. As of August 31, 1996 there were 1,617,907 shares of Common
Stock issued and outstanding, 45,454.54 shares of Series A Preferred Stock
issued and outstanding, and 81,263.89 shares of Series B Preferred Stock issued
and outstanding. For a description of the terms of the currently outstanding
Series A Preferred Stock and Series B Preferred Stock, see Note 8 and Note 9 to
the Company's Financial Statements. Upon consummation of the Offering, the
Preferred Stock Conversion and the Warrant Exercise and assuming no exercise of
the Underwriters' over-allotment option, there will be 9,863,991 shares of
Common Stock issued and outstanding and no shares of Preferred Stock issued and
outstanding. An additional 2,055,500 shares of Common Stock will be issuable
upon exercise of outstanding options granted under the Stock Option Plans, and
240,000 shares of Common Stock will be issuable upon exercise of warrants held
by WinStar.

In connection with the reincorporation of the Company as a Delaware
corporation, the Company will amend and restate its Certificate of
Incorporation. Thereafter, the authorized capital stock of the Company shall
consist of 47,000,000 shares of Common Stock and 3,000,000 shares of Preferred
Stock.

COMMON STOCK

Each holder of Common Stock is entitled to one vote per share of record on
all matters to be voted upon by the shareholders. Holders will not have
cumulative voting rights in connection with the election of directors (or any
other matter). Subject to the preferential rights of any preferred stock that
may at the time be outstanding, each share of Common Stock will have an equal
and ratable right to receive dividends when, if and as declared from time to
time by the Board of Directors out of funds legally available therefor. The
Company has been, and may in the future be, subject to certain agreements which
restrict the payment of dividends. The Company does not anticipate paying cash
dividends in the foreseeable future. See "Dividend Policy."

In the event of liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share ratably in all assets remaining
after payments to creditors and after satisfaction of the liquidation
preference, if any, of any preferred stock that may at the time be outstanding.
Holders of Common Stock have no preemptive or redemption rights and are not
subject to further calls or assessments by the Company. Immediately upon
consummation of the Offering, all of the then outstanding shares of Common
Stock will be validly issued, fully paid and nonassessable. As of August 31,
1996, there were two record holders of the Common Stock. After giving effect to
the Preferred Stock Conversion and the Warrant Exercise, but before giving
effect to the consummation of the Offering, there will be approximately 21
record holders of the Common Stock.

PREFERRED STOCK

The holders of all outstanding shares of Preferred Stock have agreed to
convert all of such shares into a total of 2,680,335 shares of Common Stock
upon consummation of the Offering. Thereafter, the Board of Directors will have
the authority to issue up to 3,000,000 shares of Preferred Stock in one or more
series, to fix the rights, preferences, privileges and restrictions granted to
or imposed upon any unissued shares of Preferred Stock and to fix the number of
shares constituting any series and the designations of such series, without any
further vote or action by the stockholders. The Board of Directors, without
stockholder approval, will be able to issue Preferred Stock with voting and
conversion rights which could adversely affect the voting power of the holders
of Common Stock. The Company has no present plans to issue any Preferred Stock.
As of August 31, 1996, there were nine holders of the Preferred Stock of the
Company.

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<PAGE>

WARRANTS

The Company has issued warrants to purchase an aggregate of 2,108,408 shares
of Common Stock. Upon consummation of the Offering and the Warrant Exercise,
the warrants held by WinStar to purchase 240,000 shares of Common Stock (the
"WinStar Warrants") will remain outstanding. The exercise price of the WinStar
Warrants is $3.75 per share, and the WinStar Warrants expire on June 10, 2001.
All other holders of warrants to purchase Common Stock have agreed to exercise
such warrants at or prior to the consummation of the Offering, with the
exception of one holder of Initial Warrants to purchase 15,200 shares of Common
Stock, who has not yet made such an election.

DELAWARE LAW AND LIMITATIONS ON CHANGES IN CONTROL

Section 203 of the Delaware General Corporation Law (the "DGCL") prevents an
"interested stockholder" (defined in Section 203, generally, as a person owning
15% or more of a corporation's outstanding voting stock) from engaging in a
"business combination" (as defined in Section 203) with a publicly-held
Delaware corporation for three years following the date such person became an
interested stockholder unless (i) before such person became an interested
stockholder, the board of directors of the corporation approved the transaction
in which the interested stockholder became an interested stockholder or
approved the business combination; (ii) upon consummation of the transaction
that resulted in the interested stockholder's becoming an interested
stockholder, the interested stockholder owns at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced (excluding
stock held by directors who are also officers of the corporation and by
employee stock plans that do not provide employees with the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer); or (iii) following the transaction in which such
person became an interested stockholder, the business combination is approved
by the board of directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of the holders of 66 2/3% of the
outstanding voting stock of the corporation not owned by the interested
stockholder.

The Company's Bylaws will generally require 50 days advance notice of any
action to be proposed at any meeting of stockholders and set forth other
specific procedures that a stockholder must follow. There will also be specific
procedures, including advance notice, for the nomination of a person to the
Board of Directors when such person is nominated other than at the direction of
the Board. In addition, the Certificate of Incorporation will provide that a
special meeting of the Company's stockholders may only be called by the Board
of Directors; no such meeting may be called by the stockholders. Further, the
Certificate of Incorporation will eliminate the ability of stockholders to act
by written consent and consequently stockholders may only act at meetings
thereof. Any amendment of certain provisions of the Certificate of
Incorporation and Bylaws by stockholders will require the affirmative vote of
the holders of at least 75% of the shares of the Common Stock then outstanding.

In addition, the directors of the Company will be divided into three class,
with the term of one class expiring each year. Directors may be removed, with
or without cause, only with affirmative vote of holders of at least 75% of the
shares of Common Stock than outstanding. This provision could delay the
replacement of a majority of the directors and have the effect of making
changes in the Board of Directors more difficult than if such provision were
not in place.

These Certificate of Incorporation and Bylaw provisions, including the
provisions authorizing the Board of Directors to issue preferred stock without
stockholder approval, and the provisions of Section 203 of the DGCL could have
the effect of delaying, deferring or preventing a transaction involving a
change in control of the Company or the removal of existing management,
including transactions in which stockholders might receive a substantial
premium for their shares over then-current market prices. See "Risk Factors--
Control by Certain Stockholders; Anti-Takeover Measures."

LIMITATION ON DIRECTORS' AND OFFICERS' LIABILITY

The Certificate of Incorporation will provide that a director of the Company
will not be personally liable to the Company or its stockholders for monetary
damages for any breach of fiduciary duty as a director, except in

54
<PAGE>

certain cases where liability is mandated by the DGCL. The provision will have
no effect on any non-monetary remedies that may be available to the Company or
its stockholders, nor will it relieve the Company or its directors from
compliance with federal or state securities laws. The Bylaws of the Company
will generally provide that the Company shall indemnify, to the fullest extent
permitted by law, any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit, investigation,
administrative hearing or any other proceeding (each, a "Proceeding") by
reason of the fact that he is or was a director or officer of the Company, or
is or was serving at the request of the Company as a director, officer,
employee or agent of another entity, against expenses (including attorneys'
fees) and losses, claims, liabilities, judgments, fines and amounts paid in
settlement actually incurred by him in connection with such Proceeding.

CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK

Upon consummation of the Offering, there will be 37,136,009 shares of Common
Stock and 3,000,000 shares of Preferred Stock available for future issuance
without stockholder approval (assuming no exercise of the Underwriters' over-
allotment option), subject to compliance with rules applicable to companies
whose securities are traded on the Nasdaq National Market. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital or to facilitate corporate
acquisitions. The Company does not currently have plans to issue additional
shares of capital stock, other than shares of Common Stock which may be issued
upon the exercise of employee options or the WinStar Warrants. See "Shares
Eligible for Future Sale."

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.

SHARES ELIGIBLE FOR FUTURE SALE

GENERAL

Future sales of substantial amounts of the Company's Common Stock could
adversely affect the market price of the Common Stock. Several of the
Company's principal stockholders hold a significant portion of the Company's
outstanding Common Stock, and a decision by one or more of these stockholders
to sell their shares could adversely affect the market price of the Common
Stock. The Shares offered hereby (plus any shares issued upon exercise of the
Underwriters' over-allotment option) will be freely tradeable without
restriction, except to the extent that such shares are purchased by
"affiliates" of the Company. The holders of Common Stock and certain holders
of warrants to purchase Common Stock, including officers and directors of the
Company that hold shares of Common Stock, have entered into contractual
agreements with the Underwriters (the "Lock-Up Agreements") providing that
they will not offer, sell or contract to sell, or otherwise dispose of,
directly or indirectly, or announce an offering of, any shares of Common Stock
of the Company beneficially owned by them or any securities convertible into,
or exchangeable for, the Common Stock for a period of 180 days after the date
of the Underwriting Agreement without the prior written consent of the
Underwriters' representative, other than shares of stock disposed of as bona
fide gifts. As a result, notwithstanding possible earlier eligibility for sale
under the provisions of Rules 144 and 144(k) under the Act, shares subject to
the Lock-Up Agreements will not be saleable until the Lock-Up Agreements
expire or their terms are waived by the Underwriters' representative. Assuming
the Underwriters do not release stockholders from the Lock-Up Agreements, the
following shares will be eligible for sale in the public market at the
following times: beginning on the Effective Date, only the shares sold in the
Offering to non-affiliates will be immediately available for sale in the
public market; beginning 180 days after the date of the Underwriting
Agreement, 1,617,907 shares will be eligible for sale pursuant to Rule 144,
all of which are held by affiliates of the Company. An additional 4,548,744
shares will become eligible for sale pursuant to Rule 144 at various times
during the two-year period following the Effective Date (although such shares
will continue to be subject to the Lock-Up Agreements until the expiration of
the terms thereof). The holders of approximately 4,266,660 shares of the
Common Stock are entitled to certain rights with respect to the registration
of such shares under the Act beginning six months after the Effective Date. In
addition, the

55
<PAGE>

Company may register certain shares of Common Stock issuable under the Stock
Option Plans, and such registration shall be effective upon filing with the
Commission. As of August 31, 1996, there were outstanding options under the
Stock Option Plans to purchase 2,055,500 shares, of which options for 299,833
shares were fully vested and exercisable. No shares have been issued to date
under the Stock Option Plans.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate of the Company, who has
beneficially owned shares for at least two years (including holding periods of
prior owners other than affiliates) is entitled to sell, within any three-
month period commencing 90 days after the closing of this Offering, a number
of shares that does not exceed the greater of (i) 1% of the then outstanding
shares of Common Stock (98,640 shares immediately after the Offering) or (ii)
the average weekly trading volume in the Common Stock during the four calendar
weeks preceding such sale, subject to the filing of a Form 144 with respect to
such sale and certain other limitations and restrictions. In addition, a
person who is not deemed to have been an affiliate of the Company at any time
during 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least three years (including holding periods of
prior owners other than affiliates), would be entitled to sell such shares
under Rule 144(k) without regard to the requirements described above.

REGISTRATION RIGHTS

Pursuant to the Securities Purchase Agreement, as amended by the Purchase
and Exchange Agreement, Grotech IV, Grotech Partners, Grotech Companion,
Grotech Pennsylvania, Venrock, Venrock II, Southern, Blue Chip and Crisler are
entitled to certain rights with respect to the registration of their shares of
Registrable Securities (as defined therein) under the Act. Subject to certain
limitations, on the first two occasions that the Company registers any of its
securities under the Act, either for its own account or the account of other
security holders, such holders are entitled to written notice of the
registration and are entitled to include (at the Company's expense) such
holder's shares therein; provided, among other conditions, that the
underwriters of any such offering have the right to limit the number of such
shares included in the registration. Pursuant to the warrant certificates
evidencing the Initial Warrants, the individuals to whom the Initial Warrants
were issued hold the rights described above. In addition, pursuant to the
warrant certificate evidencing the WinStar Warrants, WinStar also holds
registration rights identical to those described above, except that WinStar's
rights are not limited to the first two registrations. Moreover, holders of at
least a majority of the shares of Registrable Securities can require the
Company, at any time after six months from the effective date of the initial
offering of shares of its Common Stock pursuant to a registration statement
under the Act, but on only one occasion, to file a registration statement
under the Act with respect to such shares, and the Company is required to
effect such registration and maintain the effectiveness of such registration
for a period of three months, subject to certain conditions and limitations.
All fees, costs and expenses of such registration of securities (other than
underwriting discounts in the case of the first type of registrations
described above, and other than legal and accounting expenses of such holders)
will be borne by the Company. However, Grotech IV, Grotech Partners, Grotech
Companion, Grotech Pennsylvania, Venrock, Venrock II, Southern, Blue Chip,
Crisler and Mr. Stewart have agreed to waive any and all rights to cause the
Company to register any securities held by the holder under the Act, or the
securities laws of any state in connection with a Qualifying IPO. For the
purposes thereof, a "Qualifying IPO" means an underwritten public offering of
the Company of shares of Common Stock which is consummated on or before
December 31, 1996, the net proceeds of which exceed $25,000,000.

56
<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in the underwriting agreement
between the Company and the Underwriters (the "Underwriting Agreement"), the
Company has agreed to sell to each of the Underwriters named below, and the
Underwriters, for whom Friedman, Billings, Ramsey & Co., Inc. is acting as
representative (the "Representative"), have severally agreed to purchase from
the Company, the respective number of shares of Common Stock set forth below
opposite their respective name. Under the Underwriting Agreement, the
Underwriters are obligated to purchase all of the 3,750,000 shares of Common
Stock offered hereby if any are purchased.

<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc....................
---------
Total................................................ 3,750,000
=========
</TABLE>

The Underwriters have advised the Company that the Underwriters propose to
initially offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share. After
the shares of Common Stock have been released for sale to the public, the
price to public and such concessions may be changed.

The Company has granted the Underwriters an option, exercisable for 30 days
after the date of this Prospectus, to purchase up to 562,500 additional shares
of Common Stock solely to cover over-allotments, if any, at the public
offering price, less the underwriting discount, shown on the cover page of
this Prospectus.

The Underwriters have reserved up to shares of the Common Stock offered
hereby for sale at the initial public offering price to directors, officers,
and employees of the Company and their business affiliates and related parties
who have expressed an interest in purchasing such shares. Such purchases will
be made on the same terms and conditions as will be initially offered by the
Underwriters to others in the Offering, and affiliated purchasers will, prior
to acquiring any shares, be required to represent to the Underwriters and the
Company that they are purchasing such shares for investment purposes only with
no present intention to resell the shares.

The Representative has informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.

The Company, its directors, officers and holders of its Common Stock, and
certain holders of warrants to purchase its Common Stock, have each agreed,
not to offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock, or any security convertible into or exercisable for shares of
Common Stock, for a period of 180 days after the date of this Prospectus
without the prior written consent of the Representative.

In the Underwriting Agreement, the Company has agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under
the Act. Each of the Underwriters may be deemed to be an "underwriter" for
purposes of the Act in connection with the Offering. The Company will
reimburse the Underwriters for their reasonable out-of-pocket expenses
(including legal fees and expenses) incurred in connection with the Offering.

Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiation between
the Company and the Representative. In determining such price, consideration
will be given to, among other things, the financial and operating history and
trends of the Company, the experience of its management, the position of the
Company in its industry, the Company's prospects and the Company's financial
results. Additionally, consideration will be given to the status of the
securities markets, market conditions for new offerings of securities and the
prices of similar securities of comparable companies.

57
<PAGE>

The Common Stock has been authorized for inclusion in the Nasdaq National
Market under the symbol "DIGX". In order to meet one of the requirements for
including the Common Stock on the Nasdaq National Market, the Underwriters have
undertaken to sell shares of Common Stock to a minimum of 400 beneficial
holders. There can be no assurance, however, that the Company will be able to
maintain the inclusion of the Common Stock in the Nasdaq National Market or
that an active trading market will develop.

LEGAL MATTERS

The legality of the Common Stock offered hereby will be passed upon for the
Company by Latham & Watkins, Washington, D.C. Certain legal matters will be
passed upon for the Underwriter by Hogan & Hartson L.L.P., Washington, D.C.

EXPERTS

The financial statements of the Company at December 31, 1994, December 31,
1995 and June 30, 1996, and for each of the three years in the period ended
December 31, 1995 and the six-month periods ended June 30, 1995 and 1996,
appearing in this Prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.

58
<PAGE>

GLOSSARY

<TABLE>
<S> <C>
56 Kbps........................ Equivalent to a single high-speed telephone
service line; capable of transmitting one voice
call or 56 Kbps of data. Currently in widespread
use by medium and large businesses primarily for
entry level high-speed data and very low-speed
video applications.
ATM............................ Asynchronous Transfer Mode. An information
transfer standard for routing traffic based on
an address contained within the first five bytes
of a fifty-three byte-long, fixed-length packet
or cell.
Backbone....................... A centralized high-speed network that
interconnects smaller, independent networks.
Bandwidth...................... The number of bits of information which can move
through a communications medium in a given
amount of time; the capacity of a
telecommunications circuit/network to carry
voice, data and video information. Typically
measured in Kbps and Mbps. Bandwidth from public
networks is typically available to business and
residential end-users in increments from 56 Kbps
to T-3.
CAP............................ Competitive Access Provider. A
telecommunications company that provides an
alternative to a LEC for local transport of
private line and special access
telecommunications services.
CSU/DSU (also IDSU, SMDSU)..... Channel Service Unit/Digital Service Unit. A
device used to terminate telephone company
equipment and prepare data for router interface.
DS-1 or T-1.................... A data communications circuit capable of
transmitting data at 1.5 Mbps; can transmit
compressed full motion video. Currently in
widespread use by medium and large businesses
for video, voice, and data applications.
DS-3 or T-3.................... A data communications circuit capable of
transmitting data at 45 Mbps. Equivalent to 28
T-1's of data capacity. Can also transmit
uncompressed, TV broadcast quality, full motion
video. Currently used only by
businesses/institutions and carriers for high
end applications.
Ethernet....................... A common method of networking computers in a
LAN. Ethernet will handle about 10 Mbps and can
be used with almost any kind of computer.

FDDI........................... Fiber Distributed Data Interface. A standard for
transmitting data on optical-fiber cables at a
rate of around 100 Mbps (10 times as fast as
Ethernet, about twice as fast as T-3).
Firewall....................... A system placed between networks that filters
data passing through it and prevents
unauthorized traffic, thereby enhancing the
security of the network.
</TABLE>

59
<PAGE>

<TABLE>
<S> <C>
Frame Relay................... An information transfer standard for relaying
traffic based on an address contained in the six
byte header of a variable length packet that is
up to 2,106 bytes long. Frame Relay has less
overhead than ATM but may be difficult to
implement at speeds greater than 45 Mbps.
Internet...................... A global collection of interconnected computer
networks which use TCP/IP, a common
communication protocol.
ISDN.......................... Integrated Services Digital Network. An
information transfer standard for transmitting
digital voice and data over telephone lines at
speeds up to 128 Kbps.
IXC........................... Interexchange Carrier. A telecommunications
company that provides telecommunications
services between local exchanges on an
interstate or intrastate basis.
Kbps.......................... Kilobits per second. A transmission rate. One
kilobit equals 1,024 bits of information.
LAN........................... Local Area Network. A data communications
network designed to interconnect personal
computers, workstations, minicomputers, file
servers and other communications and computing
devices within a localized environment.
Leased line................... Telecommunications line dedicated to a
particular customer along a predetermined
routes.
LEC........................... Local Exchange Carrier. A telecommunications
company that provides telecommunications
services in a geographic area in which calls
generally are transmitted without toll charges.
MAE-East...................... A major peering point (exchange point for
traffic) among ISPs, located in Falls Church,
Virginia.
MAE-West...................... A major peering point (exchange point for
traffic) among ISPs, located in Santa Clara,
California.
Mbps.......................... Megabits per second. A transmission rate. One
megabit equals 1,024 kilobits.
Modem......................... A device for transmitting digital information
over an analog telephone line.
NAP........................... Network Access Point. A location at which ISPs
exchange each other's traffic.
On-line service............... Commercial information services that offer a
computer user access to a specified slate of
information, entertainment, and communications
menus on what appears to be a single system.
Peering....................... The commercial practice under which nationwide
ISPs exchange each other's traffic without the
payment of settlement charges.
POP........................... Point of Presence. Telecommunications facility
through which the Company provides local
connectivity to its customers.
</TABLE>

60
<PAGE>

<TABLE>
<S> <C>
Router......................... A system placed between networks that relays
data to those networks based upon a destination
address contained in the data packets being
routed.
SLIP........................... Serial Line Internet Protocol. An information
transfer standard for transmitting Internet
Protocol packets over asynchronous data
connections between two points.
TCP/IP......................... Transmission Control Protocol/Internet Protocol.
A suite of network protocols that allow
computers with different architectures and
operating system software to communicate with
other computers on the Internet.
UNIX........................... A computer operating system for workstations and
PCs and noted for its portability and
communications functionality.
Web Site....................... A server connected to the Internet from which
Internet users can obtain information.
World Wide Web or Web.......... A collection of computer systems supporting a
communications protocol that permits multi-media
presentation of information over the Internet.
</TABLE>

61
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................. F-2
Financial Statements
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity (Deficit)............................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
DIGEX, Incorporated

We have audited the accompanying balance sheets of DIGEX, Incorporated as of
December 31, 1994, December 31, 1995 and June 30, 1996, and the related
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1995 and the six-
month periods ended June 30, 1995 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DIGEX, Incorporated at
December 31, 1994, December 31, 1995 and June 30, 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 and the six-month periods ended June 30, 1995 and 1996 in
conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Baltimore, Maryland
July 17, 1996

F-2
<PAGE>

DIGEX, INCORPORATED

BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- PRO FORMA
1994 1995 JUNE 30, 1996 JUNE 30, 1996
-------- ---------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents... $ 2,441 $ 832,582 $ 6,269,000 $ 6,269,000
Accounts receivable, less
allowance of $0 in 1994,
$50,000 in 1995 and
$126,579 in 1996........... 141,488 908,572 1,416,891 1,416,891
Due from officers and
employees.................. 24,124 -- 11,972 11,972
Inventory and prepaid
expenses................... 41,926 49,631 825,172 825,172
Deferred income taxes....... 14,679 7,681 7,681 7,681
-------- ---------- ----------- -----------
Total current assets..... 224,658 1,798,466 8,530,716 8,530,716
Property and equipment:
Computer equipment and
software................... 431,415 3,439,014 10,959,400 10,959,400
Office furniture and
equipment.................. 20,630 152,805 203,908 203,908
Leasehold improvements...... 8,871 163,811 287,705 287,705
-------- ---------- ----------- -----------
460,916 3,755,630 11,451,013 11,451,013
Accumulated depreciation and
amortization............... 109,789 764,966 1,689,779 1,689,779
-------- ---------- ----------- -----------
351,127 2,990,664 9,761,234 9,761,234
Deferred financing costs.... 77,857 -- 245,218 245,218
Other assets................ 1,500 262,656 304,611 304,611
-------- ---------- ----------- -----------
Total assets................ $655,142 $5,051,786 $18,841,779 $18,841,779
======== ========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued
expenses................... $208,329 $ 959,528 $ 7,974,939 $ 7,974,939
Notes payable, net of
discount of $13,734........ 286,266 -- -- --
Deferred revenue............ 153,049 389,472 5,076,393 5,076,393
Income taxes payable........ 20,910 -- -- --
Current portion of capital
lease obligations.......... -- 858,765 1,497,563 1,497,563
10% Convertible Debentures,
net of discount of $588,835
in 1995.................... -- 1,411,165 -- --
-------- ---------- ----------- -----------
Total current
liabilities............. 668,554 3,618,930 14,548,895 14,548,895
Deferred income taxes....... 6,998 -- -- --
Capital lease obligations,
less current portion....... -- 821,709 1,714,283 1,714,283
Series A Mandatorily
Redeemable Convertible
Preferred Stock, $1 par
value; 70,000 shares
authorized; 45,455 shares
issued and outstanding (pro
forma: none); redemption
price and liquidation
preference of $100 per
share, aggregating
$4,545,500................. -- 2,138,889 2,391,770 --
Series B Mandatorily
Redeemable Convertible
Preferred Stock, $1 par
value; 130,000 shares
authorized; 81,263.89
shares issued and
outstanding (pro forma:
none); redemption price and
liquidation preference $100
per share, aggregating
$8,126,389................. -- -- 8,126,389 --
Stockholders' equity
(deficit):
Common stock, $.01 par
value:
Authorized shares 1,000
shares in 1994 and
49,800,000 in 1995 and
1996....................
Issued and outstanding
shares 1,717,907 in
1994; 1,617,907 in 1995
and 1996 (pro forma:
6,113,991).............. 17,179 16,179 16,179 61,140
Additional paid-in
capital................... 25,393 2,834,672 3,824,636 14,297,834
Accumulated deficit........ (62,982) (4,378,593) (11,780,373) (11,780,373)
-------- ---------- ----------- -----------
Total stockholders' equity
(deficit).................. (20,410) (1,527,742) (7,939,558) 2,578,601
-------- ---------- ----------- -----------
Total liabilities and
stockholders' equity
(deficit).................. $655,142 $5,051,786 $18,841,779 $18,841,779
======== ========== =========== ===========
</TABLE>

See notes to financial statements.

F-3
<PAGE>

DIGEX, INCORPORATED

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------- -----------------------
1993 1994 1995 1995 1996
-------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net Revenue:
Online services....... $431,098 $1,577,609 $ 4,425,172 $1,594,440 $ 4,659,586
Equipment sales....... -- -- 650,144 70,992 575,618
-------- ---------- ----------- ---------- -----------
431,098 1,577,609 5,075,316 1,665,432 5,235,204
Costs and Expenses:
Data communications
and operations....... 216,656 1,002,503 4,013,377 1,264,635 4,734,327
Cost of equipment
sales................ -- -- 458,123 57,028 512,634
Sales and marketing... 18,326 263,075 1,710,234 561,093 2,587,472
General and
administrative....... 135,238 366,392 2,715,752 588,116 3,376,091
-------- ---------- ----------- ---------- -----------
Total expenses.......... 370,220 1,631,970 8,897,486 2,470,872 11,210,524
-------- ---------- ----------- ---------- -----------
Income (loss) from
operations............. 60,878 (54,361) (3,822,170) (805,440) (5,975,320)
Other income (expense):
Interest and other
income............... -- -- 72,002 17,453 47,746
Interest expense...... -- (23,693) (226,745) (45,249) (1,167,149)
-------- ---------- ----------- ---------- -----------
-- (23,693) (154,743) (27,796) (1,119,403)
-------- ---------- ----------- ---------- -----------
Income (loss) before
income taxes........... 60,878 (78,054) (3,976,913) (833,236) (7,094,723)
Income taxes............ (25,540) (3,470) -- -- --
-------- ---------- ----------- ---------- -----------
Net income (loss)....... 35,338 (81,524) (3,976,913) (833,236) (7,094,723)
Accretion of Series A
Mandatorily Redeemable
Convertible Preferred
Stock to redemption
value.................. -- -- (338,698) (109,163) (252,881)
-------- ---------- ----------- ---------- -----------
Net income (loss)
attributable to common
stockholders........... $ 35,338 $ (81,524) $(4,315,611) $ (942,399) $(7,347,604)
======== ========== =========== ========== ===========
Net income (loss) per
common share
attributable to common
stockholders........... $ -- $ (0.01) $ (0.63) $ (0.14) $ (0.98)
======== ========== =========== ========== ===========
Pro forma net loss per
common share
attributable to common
stockholders........... $ (0.47) $ (0.69)
=========== ===========
</TABLE>

See notes to financial statements.

F-4
<PAGE>

DIGEX, INCORPORATED

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1993...... $17,179 $ -- $ (16,796) $ 383
Net income for 1993............. -- -- 35,338 35,338
------- ---------- ------------ -----------
Balance at December 31, 1993.... 17,179 -- 18,542 35,721
Issuance of 190,883 warrants to
purchase common stock.......... -- 25,393 -- 25,393
Net loss for 1994............... -- -- (81,524) (81,524)
------- ---------- ------------ -----------
Balance at December 31, 1994.... 17,179 25,393 (62,982) (20,410)
Issuance of warrants to purchase
1,120,000 shares of common
stock, net of expenses of
$262,756....................... -- 1,650,459 -- 1,650,459
Issuance of warrants to purchase
299,946 shares of common stock. -- 682,378 -- 682,378
Value of vested common stock
options granted to employees... -- 475,442 -- 475,442
Accretion of Series A
Mandatorily Redeemable
Convertible Preferred Stock to
redemption value............... -- -- (338,698) (338,698)
Retirement of 100,000 shares of
common stock................... (1,000) 1,000 -- --
Net loss for 1995............... -- -- (3,976,913) (3,976,913)
------- ---------- ------------ -----------
Balance at December 31, 1995.... 16,179 2,834,672 (4,378,593) (1,527,742)
Issuance of warrants to purchase
166,378 shares of common stock. -- 361,872 -- 361,872
Issuance of warrants to purchase
240,000 shares of common stock. -- 228,000 -- 228,000
Value of vested common stock
options granted to employees... -- 400,092 -- 400,092
Accretion of Series A
Mandatorily Redeemable
Convertible Preferred Stock to
redemption value............... -- -- (252,881) (252,881)
Dividends accrued on Series B
Mandatorily Redeemable
Convertible Preferred Stock.... -- -- (54,176) (54,176)
Net loss for six months ended
June 30, 1996.................. -- -- (7,094,723) (7,094,723)
------- ---------- ------------ -----------
Balance at June 30, 1996........ $16,179 $3,824,636 $(11,780,373) $(7,939,558)
======= ========== ============ ===========
</TABLE>

See notes to financial statements.

F-5
<PAGE>

DIGEX, INCORPORATED

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------- -----------------------
1993 1994 1995 1995 1996
--------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)....... $ 35,338 $ (81,524) $(3,976,913) $ (833,236) $(7,094,723)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization.......... 22,158 83,948 655,177 154,707 924,813
Amortization of debt
discount charged to
interest expense...... -- 11,659 107,277 13,734 950,707
Non-cash compensation
recorded for vested
stock option grants... -- -- 475,442 -- 400,093
Deferred income taxes.. 17,859 (25,540) -- -- --
Changes in operating
assets and liabilities:
Accounts receivable... (72,352) (65,868) (767,084) (207,965) (508,319)
Inventory and prepaid
expenses............. -- (41,926) (7,705) 39,915 (775,541)
Cash overdraft........ 4,347 (4,347) -- -- --
Accounts payable and
accrued expenses..... 43,873 163,461 751,199 168,843 7,087,624
Deferred revenue...... 64,901 79,976 236,423 95,060 4,686,921
Income taxes payable.. 7,681 13,229 (20,910) (20,910) --
--------- --------- ----------- ---------- -----------
Net cash provided by
(used in) operating
activities............. 123,805 133,068 (2,547,094) (589,852) 5,671,575
Investing activities:
Due from officers and
employees.............. (22,670) (6,222) 24,124 (1,500) (11,972)
Purchase of property and
equipment.............. (98,273) (350,132) (1,199,160) (447,450) (5,576,515)
Decrease (increase) in
other assets........... (5,084) 3,584 (261,156) (143,338) (41,955)
--------- --------- ----------- ---------- -----------
Net cash used in
investing activities... (126,027) (352,770) (1,436,192) (592,288) (5,630,442)
Financing activities:
Proceeds from issuance
of (repayment of)
notes notes payable and
detachable stock
warrants............... -- 300,000 (300,000) (300,000) --
Borrowings under
revolving line of
credit................. -- -- -- -- 1,166,745
Repayments under
revolving line of
credit................. -- -- -- -- (1,166,745)
Repayment of capital
leases................. -- -- (415,080) (77,235) (587,497)
Proceeds from issuance
of 10% Subordinated
Debentures and
detachable stock
warrants............... -- -- 2,000,000 -- 1,000,000
Proceeds from issuance
of Series A Mandatorily
Redeemable Convertible
Preferred Stock and
detachable stock
warrants, net of
expenses of issuance... -- -- 3,528,507 3,528,507 --
Proceeds from issuance
of Series B Mandatorily
Redeemable Convertible
Preferred Stock........ -- -- -- -- 5,000,000
Proceeds from issuance
of warrants to purchase
common stock to
customer............... -- -- -- -- 228,000
Increase in deferred
financing costs........ -- (77,857) -- -- (245,218)
--------- --------- ----------- ---------- -----------
Net cash provided by
financing activities... -- 222,143 4,813,427 3,151,272 5,395,285
--------- --------- ----------- ---------- -----------
Net increase (decrease)
in cash and cash
equivalents............ (2,222) 2,441 830,141 1,969,132 5,436,418
Cash and cash
equivalents at
beginning of period.... 2,222 -- 2,441 2,441 832,582
--------- --------- ----------- ---------- -----------
Cash and cash
equivalents at end of
period................. $ -- $ 2,441 $ 832,582 $1,971,573 $ 6,269,000
========= ========= =========== ========== ===========
</TABLE>

See notes to financial statements.

F-6
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 1996

1. SIGNIFICANT ACCOUNTING POLICIES

Description of Business

DIGEX, Incorporated (the "Company"), is a national Internet service
provider. The Company's principal customers are businesses, government
agencies and other institutional customers. The services provided by the
Company include business connectivity, Web server hosting, individual dial-up
network access, education services, and security and other network products.

Use of Estimates

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

Cash Equivalents

The Company considers all short-term, highly liquid investments with
maturities of three months or less when purchased to be cash equivalents.

Inventory

Inventory, consisting primarily of computer equipment, is stated at the
lower of the first-in, first-out cost, or market.

Property and Equipment

Property and equipment is stated at cost. Depreciation is computed for owned
assets using the straight-line method over estimated useful lives of five
years. Assets capitalized under capital leases are amortized using the
straight-line method over the lesser of the lease term or the useful life of
the asset.

Deferred Financing Costs

Deferred financing costs at December 31, 1994 consist of costs incurred in
1994 to obtain equity financing. These costs were capitalized in 1994 and
accounted for as a reduction of Series A Mandatorily Redeemable Convertible
Preferred Stock in 1995 upon the closing of the transaction (see Note 8).
Deferred financing costs at June 30, 1996 consist of direct costs incurred
related to the initial filing of a registration statement for the sale of
common stock with the Securities and Exchange Commission.

Other Assets

Other assets consist primarily of security deposits on leased computer
equipment and office furniture and equipment. The deposits will be applied
against the final months lease payments.

Revenue Recognition & Accounts Receivable

The Company offers annual subscriptions to its customers for Internet access
and also may arrange for advance payments under contracts to deliver business
connectivity services. Advance payments for these services are deferred and
recognized in the periods in which the services are performed. Equipment sales
are recognized upon commencement of the related service. Receivables generally
are due within 30 days. The Company does not generally require collateral from
its customers.

F-7
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Advertising Costs

The Company expenses advertising costs as incurred. Advertising expense
totaled approximately $3,100, $24,600 and $488,900 in 1993, 1994 and 1995,
respectively.

Stock Options Granted to Employees

The Company records compensation expense for all stock-based compensation
plans using the intrinsic value method prescribed by APB Opinion 25,
Accounting for Stock Issued to Employees. In October 1995, the Financial
Accounting Standards Board issued FASB Statement No. 123, Accounting for
Stock-Based Compensation, which encourages companies to recognize expense for
stock-based awards based on their estimated value on the date of grant.
Statement 123, effective for 1996, does not require companies to change their
existing accounting for stock-based awards, but if the new fair value method
is not adopted, pro forma income and earnings per share data should be
provided in the notes to the financial statements. The Company intends to
continue to account for stock-based compensation plans using the intrinsic
value method, and will supplementally disclose in its 1996 annual financial
statements the required pro forma information as if the fair value method had
been adopted.

Income Taxes

The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.

Interim Financial Data

The financial statements of the Company for the six months ended June 30,
1995 and 1996 have been prepared on the same basis as the annual financial
statements and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary to state fairly
the financial information set forth therein, in accordance with generally
accepted accounting principles.

The results of operations for the six months ended June 30, 1996 are not
necessarily indicative of results expected for the full fiscal year.

F-8
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. EARNINGS PER SHARE

The following table summarizes the computations of share amounts used in the
computation of historical earnings (loss) per share presented in the
accompanying statements of operations (in thousands of shares):

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
----------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Weighted average number of shares of common
stock outstanding during the period......... 1,718 1,718 1,708 1,618 1,618
Options and warrants to purchase common stock
issued within one year of registration
statement................................... 2,990 2,990 2,990 2,990 2,990
Convertible debentures and preferred stock
issued within one year of registration
statement................................... 2,180 2,180 2,180 2,180 2,180
----- ----- ----- ------- -------
Total common and common equivalent shares of
stock considered outstanding during the
year........................................ 6,888 6,888 6,878 6,788 6,788
===== ===== ===== ======= =======
</TABLE>

Earnings (loss) per share is based upon the average number of shares of
common stock outstanding during each period. As required by the Securities and
Exchange Commission, all common stock warrants, options, convertible
debentures, and convertible preferred stock issued by the Company at exercise
prices or conversion rates below the expected public offering price during the
twelve-month period prior to the anticipated offering date have been included
in the computations as if they were outstanding for all periods presented. As
the Company expects the initial public offering price to exceed the exercise
prices or conversion rates for all securities issued after June 1995, all of
the securities issued between July 1, 1995 and the latest filing date have
been included in the computation of historical net income (loss) per common
share attributable to common shareholders.

The assumed conversion of all other potentially dilutive securities (issued
prior to July 1995) is anti-dilutive for all years presented, and therefore is
not considered in the computations.

Net loss per common share attributable to common shareholders for the six
months ended June 30, 1996 was reduced by $670,871 of interest expense
attributable to debentures converted into Series B Preferred Stock during the
period.

Pro forma net loss per share is presented to disclose the additional effect
on loss per share for the year ended December 31, 1995 and for the six months
ended June 30, 1996 assuming that the antidilutive convertible securities
which are not included in the historical calculations and which will convert
into common stock upon the closing of the proposed initial public offering
were converted into common stock on January 1, 1995, or their issuance date,
whichever date is later. Historical net loss was reduced by $450,871 for the
year ended December 31, 1995 and $1,311,347 for the six months ended June 30,
1996 to adjust for interest expense and preferred stock accretion.

F-9
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The following table summarizes the computations of share amounts used in the
computation of pro forma earnings (loss) per share presented in the
accompanying statements of operations (in thousands of shares):

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
DECEMBER 31, JUNE 30,
1995 1996
------------ ---------
(UNAUDITED)
<S> <C> <C>
Weighted average number of shares of common stock
outstanding during the period.......................... 1,708 1,618
Options and warrants to purchase common stock issued
within one year of registration statement.............. 2,990 2,990
Convertible debentures and preferred stock issued within
one year of registration statement..................... 2,180 2,180
Pro forma conversion of preferred stock and warrants.... 1,376 1,902
----- -----
Total common and common equivalent shares of stock
considered outstanding during the year................. 8,254 8,690
===== =====
</TABLE>

3. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------- ---------------------
1993 1994 1995 1995 1996
------- ------------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash paid during the period
for:
Interest...................... $ -- $ -- $ 105,100 $ 45,200 $ 118,700
Taxes......................... $ 7,700 $ -- $ -- $ -- $ --
Non-cash investing and
financing activities:
Equipment acquired under
capital lease................ $ -- $ -- $ 2,095,600 $1,048,300 $2,118,900
Conversion of 10% Convertible
Debentures and accrued
interest into Series B
Mandatorily Redeemable
Convertible Preferred Stock.. $ -- $ -- $ -- $ -- $3,126,400
</TABLE>

4. NOTES PAYABLE

In July 1994, the Company received $300,000 in connection with the issuance
of notes with a face value of $300,000 and detachable stock warrants to
purchase 190,883 shares of common stock for $1.58 per share. The portion of
the proceeds allocable to the warrants of $25,393, as estimated by the
Company, was accounted for as additional paid-in capital. The notes were
repaid in conjunction with the issuance of the Series A Mandatorily Redeemable
Convertible Preferred Stock in March 1995.

5. BORROWINGS UNDER LINE OF CREDIT

In April 1996, the Company entered into a loan agreement with a bank that
provides a revolving line of credit secured by accounts receivable. The credit
line allows the Company to borrow a maximum of $1.5 million, subject to
restrictions based on the available collateral, and expires on February 28,
1997. The credit line bears interest at a floating rate equal to the bank's
prime rate plus 1% per annum. In connection with this credit line, the Company
is required to comply with certain financial ratios and covenants. At June 30,
1996, the Company did not have any borrowings outstanding under this facility.

F-10
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL LEASE OBLIGATIONS

The Company leases equipment under capital leases. Property and equipment
includes the following amounts for leases that have been capitalized at June
30, 1996:

<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
Computer equipment.............................. $1,985,436 $4,033,066
Office furniture and equipment.................. 110,118 110,118
---------- ----------
2,095,554 4,143,184
Less accumulated amortization................... 444,683 940,616
---------- ----------
$1,650,871 $3,202,568
========== ==========
</TABLE>

Amortization of leased assets is included in depreciation and amortization
expense.

Future minimum payments under capital lease obligations consist of the
following at June 30, 1996:

<TABLE>
<S> <C>
Through December 31, 1996........................................... $ 885,376
1997................................................................ 1,508,220
1998................................................................ 903,432
1999................................................................ 293,147
2000................................................................ 1,333
----------
Total minimum lease payments........................................ 3,591,508
Amounts representing interest....................................... 379,662
----------
Present value of net minimum lease payments (including current por-
tion of $1,497,563)................................................ $3,211,846
==========
</TABLE>

7. 10% CONVERTIBLE DEBENTURES AND DETACHABLE STOCK WARRANTS

On November 28, 1995, the Company issued $2,000,000 of 10% Convertible
Debentures with detachable stock warrants for cash proceeds of $2,000,000. The
debentures were due on June 1, 1996. As discussed more fully in Note 9, in May
1996 the holders of the 10% Convertible Debentures converted their debentures
into shares of Series B Preferred Stock.

The detachable stock warrants entitle the holders to purchase 299,946 shares
of common stock at an exercise price of $0.25 per share and expire in November
2001. The exercise price is payable either in cash or through the retirement
of stock warrants. The warrants were valued at $682,378, or $2.28 per share,
based on an independent valuation of the Company's common stock and the use of
a generally accepted warrant valuation methodology. The estimated value of the
warrants was recorded as additional paid-in capital and the 10% Convertible
Debentures have been recorded net of a discount of $682,378. The Company
recognized interest expense of $93,543 and $588,835 for the year ended
December 31, 1995 and the six months ended June 30, 1996, respectively,
related to the amortization of this discount.

On February 15, 1996, the Company issued $1,000,000 of 10% Convertible
Debentures with detachable stock warrants for cash proceeds of $1,000,000. The
debentures have terms identical to those issued in November 1995, and were
also converted into Series B Preferred Stock in May 1996. The detachable stock
warrants entitle the holders to purchase 166,378 shares of common stock at an
exercise price of $0.25 per share and expire in February 2002. The exercise
price is payable either in cash or through the retirement of stock warrants.
The warrants were valued at $361,872, or $2.17 per share, based on an
independent valuation of the Company's common stock and the use of a generally
accepted warrant valuation methodology. The estimated value of the

F-11
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
warrants was recorded as additional paid-in capital and the 10% Convertible
Debentures have been recorded net of a discount of $361,872. The Company
recognized interest expense of $361,872 the period from February 15, 1996
through June 30, 1996 related to the amortization of this discount.

8. SERIES A MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND DETACHABLE
STOCK WARRANTS

The Company has authorized the issuance of 200,000 shares of Series A
Mandatorily Redeemable Convertible Preferred Stock ("Series A"). In March and
April 1995, the Company issued 45,455 shares of Series A with detachable stock
warrants for cash proceeds of $4,000,000. Dividends on the Series A are
cumulative at an annual rate of $6 per share beginning March 15, 1997 and $10
per share beginning March 15, 1999.

The detachable stock warrants entitle the holders to purchase 1,120,000
shares of common stock for an aggregate exercise price of $100 and expire six
years from the date of the final redemption of the Series A. The warrants were
valued at $1,913,215, or $1.71 per share, based on an estimate at the date of
the transaction of the relative values of the Series A and the warrants. The
costs of the issuance of $549,350 have been deducted proportionately from the
proceeds allocated to the warrants and the Series A.

The Series A was recorded at estimated fair value on the date of issuance,
less issue costs. The excess of the redemption value over the carrying value is
being accreted by periodic charges to retained earnings over the life of the
issue using the interest method.

The Company must redeem the Series A in 24 equal monthly installments of
1,894 shares commencing January 1, 2000 at a redemption price of $100 per share
plus any accrued and unpaid dividends. The Company may, at its option, redeem
at any time all, but not less than all, of the Series A for $100 per share plus
any accrued and unpaid dividends. If the Company redeems the Series A prior to
March 15, 1997, the redemption price will be reduced, but in no event will the
redemption price be less than $88 per share. The Series A is also convertible
at any time into 500,000 shares of common stock based on a conversion rate
defined in the Amended and Restated Articles of Incorporation. The Series A
will automatically convert into 500,000 shares of common stock immediately
prior to the closing of an initial public offering consummated on or before
December 31, 1996 generating net proceeds to the Company of at least $25
million.

Each share of Series A has substantially the same voting rights as the number
of shares of common stock into which it can be converted, as provided for in
the Amended and Restated Articles of Incorporation. The holders of the Series A
(in conjunction with the holders of the Series B Preferred Stock issued in May
1996 as discussed in Note 9) independently appoint three directors to the Board
of Directors. In the event the Company fails to meet its obligations to the
holders of the Series A under the aforementioned redemption provisions or upon
certain other events, the holders of the preferred stock are entitled to elect
a majority of the directors of the Board of Directors.

In connection with the issuance of the Series A, the Company also issued
warrants to purchase 91,200 shares of common stock with an exercise price of
$2.63 per share to investment bankers. These warrants expire in March 2002.

9. SERIES B MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK

In May 1996, the Company amended its Articles of Incorporation to authorize
the issuance of 130,000 shares of Series B Preferred Stock ("Series B") with a
par value of $1. Cumulative annual cash dividends on the Series B at the rate
of $8 per share become payable monthly commencing on the first date outstanding
through March 15, 1999, and after March 15, 1999, at the rate of $12 per share
per annum.

F-12
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The Company must redeem the Series B in monthly installments of 3,387 shares
beginning January 1, 2001 at $100 per share plus any unpaid dividends or,
immediately, if certain events specified in the Articles of Incorporation occur
and holders of 63% of the shares of Series B vote for redemption. In addition,
at any time after the earlier of May 24, 1999 or the date on which all shares
of Series A Preferred Stock have been redeemed, the holders of the Series B may
require the Company to redeem their shares at the greater of $200 per share or
fair market value, as determined by an independent investment banking firm.
Each share of Series B is convertible at the option of the holder at any time
after issuance into 33.54 shares of common stock. The Series B holders have the
same voting rights as the holders of common stock, assuming conversion.

On May 30, 1996, the Company issued 50,000 shares of Series B for $5 million.
The Series B will automatically convert into 1,341,515 shares of common stock
immediately prior to the closing of an initial public offering consummated on
or before December 31, 1996 generating net proceeds to the Company of at least
$25 million.

In connection with the issuance of the Series B, the holders of the 10%
Convertible Debentures (face value of $3 million, plus accrued interest of
$126,000) converted the debentures into 31,264 shares of Series B.

10. COMMON STOCK

In March 1995, the Company amended and restated the Articles of Incorporation
to authorize the issuance of 49,800,000 shares of $.01 par value common stock
and 200,000 shares of $1 par value Series A Mandatorily Redeemable Convertible
Preferred Stock with a redemption price and liquidation value of $100 per
share. In conjunction with the amendment, the Board of Directors approved a
505.26-for-1 stock split, effected in the form of a stock dividend. In August
1995, the Board of Directors approved a 10-for-1 stock split, also effected in
the form of a stock dividend. And finally, in July 1996, the Board of Directors
approved a 1-for-2.5 reverse stock split pursuant to the Company's initial
public offering of common stock. All share and per share amounts in the
accompanying financial statements have been restated to retroactively reflect
all splits.

11. AGREEMENT WITH CUSTOMER

In June 1996, the Company entered into a six-year private network agreement
with WinStar Communications, Inc. As part of the agreement, WinStar will
purchase $5 million of connectivity services which was paid in advance in June
1996. WinStar also received warrants to purchase 240,000 shares of common stock
for $3.75 per share. The warrants were valued at $228,000, or $0.95 per share,
based on independent valuation of the Company's common stock and the use of a
generally accepted warrant valuation methodology. The estimated value of the
warrants was recorded as additional paid-in capital of $228,000 and deferred
revenue associated with the contract was recorded in the amount of $4,772,000.

12. SHARES RESERVED FOR FUTURE ISSUANCE

The Company as of June 30, 1996 has reserved 6,844,244 shares of common stock
for future issuance upon the conversion of the Series A and Series B
Mandatorily Redeemable Convertible Preferred Stock, the exercise of all
outstanding stock purchase warrants, and the exercise of all outstanding stock
options.

13. STOCK OPTION PLAN

In 1995, the Company approved and adopted its 1995 Stock Option Plan (the
"Plan"). In 1996, the Company approved and adopted its 1996 Equity
Participation Plan. The Plans are administered by the Board of Directors. The
Plans provides for the granting of either qualified or non-qualified options to
purchase an

F-13
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
aggregate of up to 2,500,480 shares of common stock to eligible employees,
officers, directors and consultants of the Company. The 1996 Equity
Participation also provides for the granting of other equity participation
instruments.

The following table summarizes the stock option activity of the Company:

<TABLE>
<CAPTION>
SHARES EXERCISE PRICE
OUTSTANDING EXERCISABLE PER SHARE
----------- ----------- --------------
<S> <C> <C> <C>
Balances at January 1, 1995............. -- -- --
Granted................................ 632,280 -- $0.25
Became exercisable..................... -- 188,280 $0.25
Exercised/Surrendered
Canceled............................... (2,050) -- $0.25
--------- ------- --------------
Balances at December 31, 1995........... 630,230 188,280 $0.25
Granted................................ 1,438,120 -- $0.25 - $10.00
Became exercisable..................... -- 111,553 $0.25
Exercised/Surrendered
Canceled............................... (12,850) -- $0.25
--------- ------- --------------
Balances at June 30, 1996............... 2,055,500 299,833 $0.25 - $10.00
========= ======= ==============
</TABLE>

All of the options granted through June 30, 1996 are non-qualified stock
options and vest over 3 or 4 years. At the dates of grant, the estimated fair
value of a share of the Company's common stock ranged from $2.28 to $10.00.
The Company will record compensation expense of $2,659,221 over the vesting
period of the options. For the year ended December 31, 1995 and the six months
ended June 30, 1996, the Company recorded $475,442 and $400,092 of
compensation expense, respectively. The Company will record additional
compensation expense related to option grants through June 30, 1996 as
follows:

<TABLE>
<S> <C>
Six months ended December 31, 1996.................................. $ 389,423
Year ended December 31, 1997........................................ 747,161
1998........................................ 527,628
1999........................................ 119,475
----------
Total............................................................. $1,783,687
==========
</TABLE>

14. FAIR VALUES OF FINANCIAL INSTRUMENTS

The Series A and Series B Mandatorily Redeemable Convertible Preferred Stock
will automatically convert into common stock upon the expected closing of an
initial public offering in August 1996. Upon conversion, the securities will
not be considered financial instruments.

F-14
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

15. INCOME TAXES

The tax provisions for the six months ended June 30, 1995 and 1996 are based
on the estimated annual effective tax rate applicable for the full years.

Significant components of the Company's deferred tax assets and liabilities
are as follows:

<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1994 1995
-------- -----------
<S> <C> <C>
Deferred tax liability:
Tax over book depreciation.............................. $ 6,998 $ 49,581
Deferred tax assets:
Net operating loss carryforward......................... 32,402 1,382,447
Allowance for doubtful accounts......................... -- 19,310
Stock option compensation expense....................... -- 183,615
Accrued bonuses......................................... -- 23,172
-------- -----------
Total deferred tax assets................................ 32,402 1,608,544
-------- -----------
Net future income tax benefit............................ 25,404 1,558,963
Valuation allowance for net deferred tax assets.......... (17,723) (1,551,282)
-------- -----------
Net deferred tax assets.................................. $ 7,681 $ 7,681
======== ===========
</TABLE>

As of December 31, 1995, the Company had net operating loss carryforwards of
$3.6 million. These carryforwards expire in 2009 and 2010. The amount available
to be used in any given year will be limited by operation of certain provisions
of the Internal Revenue Code.

Income tax expense (benefit) consisted of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1993 1994 1995
-------- -------- -------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 5,237 $ 22,250 $ --
State................................................ 2,444 6,760 --
-------- -------- -----
7,681 29,010 --
Deferred (benefit):
Federal.............................................. 14,622 (20,911) --
State................................................ 3,237 (4,629) --
-------- -------- -----
17,859 (25,540) --
-------- -------- -----
$ 25,540 $ 3,470 $ --
======== ======== =====
</TABLE>

The Company's provision for income taxes resulted in effective tax rates that
varied from the statutory federal income tax rate as follows:

<TABLE>
<CAPTION>
1993 1994 1995
------- -------- -----------
<S> <C> <C> <C>
Expected federal income tax (benefit) at 34%..... $20,699 $(26,538) $(1,352,150)
State income taxes, net of federal benefit....... 2,813 (3,606) (183,733)
Expenses not deductible for tax purposes......... 2,028 4,357 3,602
Effect of valuation allowance.................... -- 17,723 1,533,559
Other............................................ -- 11,534 (1,278)
------- -------- -----------
Total............................................ $25,540 $ 3,470 $ --
======= ======== ===========
</TABLE>

F-15
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. OPERATING LEASES

The Company leases certain office space and equipment under noncancelable
operating leases that expire in various years through 2000. Future minimum
payments under noncancelable operating leases with initial terms of one year or
more consisted of the following at December 31, 1995:

<TABLE>
<S> <C>
1996........................................................... $ 531,665
1997........................................................... 504,723
1998........................................................... 485,930
1999........................................................... 314,931
2000........................................................... 205,184
----------
Total minimum lease payments................................... $2,042,433
==========
</TABLE>

Rental expense consisted of the following:

<TABLE>
<CAPTION>
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Office and storage.................................... $18,882 $19,200 $123,749
Furniture and equipment............................... 4,037 28,915 133,889
------- ------- --------
$22,919 $48,115 $257,638
======= ======= ========
</TABLE>

17. EMPLOYEE BENEFIT PLAN

The Company established a defined contribution benefit plan effective July 1,
1995. The plan covers substantially all employees who have three months of
service with the Company or who were employed by the Company on July 1, 1995.
Participants may contribute from 1% to 15% of their annual compensation to the
plan. In addition, the Company may make discretionary profit-sharing
contributions to the plan. No contributions were made by the Company during
1995.

18. PRO FORMA BALANCE SHEET

In connection with the issuance of the Series B, the holders of warrants to
purchase 1,868,408 shares of common stock agreed to exercise their warrants
immediately prior to the closing of an initial public offering consummated on
or before December 31, 1996 that generates net proceeds to the Company of at
least $25 million.

In June 1996 the Board of Directors approved the filing of a registration
statement for the sale of common stock with the Securities and Exchange
Commission that, upon closing, would meet the criteria for the automatic
exercise of warrants to purchase 1,868,408 shares of common stock, and the
conversion of the outstanding Series A Preferred Stock and Series B Preferred
Stock, all into common stock.

F-16
<PAGE>

DIGEX, INCORPORATED

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The following table summarizes the components of the pro forma balance sheet
(in thousands):

<TABLE>
<CAPTION>
ASSUMED
HISTORICAL CONVERSION TOTAL
JUNE 30, OF SECURITIES PRO
1996 UPON IPO FORMA
---------- ------------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 6,269 $ -- $ 6,269
Other current assets........................ 2,262 -- 2,262
-------- ------- --------
Total current assets......................... 8,531 -- 8,531
Property and equipment, net.................. 9,761 -- 9,761
Other noncurrent assets...................... 550 -- 550
-------- ------- --------
Total assets................................. $ 18,842 $ -- $ 18,842
======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses....... $ 7,975 $ -- $ 7,975
Other current liabilities................... 6,574 -- 6,574
-------- ------- --------
Total current liabilities.................... 14,549 -- 14,549
Capital lease obligations.................... 1,714 -- 1,714
Series A Preferred Stock..................... 2,392 (2,392) --
Series B Preferred Stock..................... 8,126 (8,126) --
Stockholders' equity:
Common stock................................ 16 45 61
Additional paid-in capital.................. 3,825 10,473 14,298
Accumulated deficit......................... (11,780) -- (11,780)
-------- ------- --------
Total stockholders' equity................... (7,939) 10,518 2,579
-------- ------- --------
Total liabilities and stockholders' equity... $ 18,842 $ -- $ 18,842
======== ======= ========
</TABLE>

F-17
<PAGE>

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

NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROSPECTUS, AND ANY INFORMATION OR REPRESENTATIONS NOT
CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COM-
PANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO
ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.

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

TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
Additional Information.................................................... 3
Reports to Stockholders................................................... 3
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 16
Dilution.................................................................. 16
Capitalization............................................................ 17
Dividend Policy........................................................... 18
Selected Financial and Pro Forma
Financial Data........................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 26
Management................................................................ 36
Certain Transactions...................................................... 49
Principal Stockholders.................................................... 52
Capital Stock of the Company.............................................. 53
Shares Eligible for Future Sale........................................... 55
Underwriting.............................................................. 57
Legal Matters............................................................. 58
Experts................................................................... 58
Glossary.................................................................. 59
Index to Financial Statements............................................. F-1
</TABLE>

UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS EF-
FECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

3,750,000 SHARES

[DIGITAL EXPRESS GROUP LOGO APPEARS HERE]

COMMON STOCK

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

PROSPECTUS
-----------------

FRIEDMAN, BILLINGS,

RAMSEY & CO., INC.

, 1996

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Amended and Restated Certificate of Incorporation of DIGEX, Incorporated
(the "Registrant" or "Company"), as amended (the "Amended and Restated
Certificate of Incorporation"), provides that the Registrant shall indemnify
to the fullest extent permitted by Section 145 of the General Corporation Law
of the State of Delaware (the "Delaware Law") any person whom it may indemnify
thereunder. The By-laws of the Registrant provide that indemnification shall
be made by the Registrant only upon a determination that indemnification is
proper in the circumstances because the individual met the applicable standard
of conduct. Advances for such indemnification may be made pending such
determination upon receipt of an undertaking by the director or officer to
repay all amounts so advanced in the event that it shall ultimately be
determined that such director or officer is not entitled to be indemnified by
the Registrant. In addition, the Amended and Restated Certificate of
Incorporation provides for the limitation to the extent permitted by the
Delaware Law of personal liability of directors to the Registrant and its
stockholders for monetary damages for breach of fiduciary duty as directors of
the Registrant.

The Company is obtaining a directors' and officers' insurance and company
reimbursement policy in the amount of $5,000,000. The policy insures directors
and officers against unindemnified loss arising from certain wrongful acts in
their capacities and reimburses the Registrant for such loss for which the
Registrant has lawfully indemnified its directors and officers. The policy
contains various exclusions, none of which will relate to the offering
hereunder.

ITEM 25. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION.

The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. Except
for the SEC registration fee and the NASD fee, all amounts are estimates.

<TABLE>
<S> <C>
SEC Registration Fee.......................................... $ 18,965.52
NASD Filing Fee............................................... 6,000.00
Printing and Engraving Expenses............................... 300,000.00
Legal Fees and Expenses....................................... 400,000.00
Accounting Fees and Expenses.................................. 250,000.00
Blue Sky Fees and Expenses.................................... 19,125.00
Directors' and Officers' Insurance............................ 200,000.00
Miscellaneous Expenses........................................ 5,909.48
-------------
Total...................................................... $1,200,000.00
=============
</TABLE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

The Company was incorporated on January 8, 1990 by Mr. Humphrey and Mr.
Doughney (the "Founders"). Mr. Humphrey contributed certain computer hardware
to the Company in exchange for 970,744 shares of Common Stock, and Mr.
Doughney contributed certain computer software to the Company in exchange for
647,163 shares of Common Stock.

On July 1, 1994, Robert M. Stewart, a director of the Company, and six other
individuals who are not affiliated with the Company loaned the Company
$300,000 in cash. In consideration for their loan, the Company issued to these
individuals (i) 8% promissory notes (the "Bridge Notes") in aggregate
principal amount of $300,000 and (ii) warrants to purchase 190,883 shares of
the Common Stock (the "Bridge Warrants"). The Bridge Notes were to mature on
the earlier of July 12, 1995 and the date on which certain payments were made
under the Securities Purchase Agreement.

II-1
<PAGE>

On March 24, 1995, the Company entered into the Securities Purchase
Agreement with the Founders and Grotech IV, Venrock and Southern, pursuant to
which the Company issued a total of 45,454.54 shares of convertible preferred
stock (since redesignated Series A Convertible Preferred Stock), par value
$1.00 per share, together with warrants to purchase 1,120,000 shares of Common
Stock of the Company, for an aggregate cash investment of $4,000,000. The
Bridge Notes were repaid at their face amount with a portion of the proceeds
of this investment. Grotech IV was issued 18,181.82 shares of Series A
Preferred Stock and warrants to purchase 448,000 shares of Common Stock in
consideration of its investment of $1.6 million in cash, Venrock was issued
15,909.09 shares of Series A Preferred Stock (4,925.83 shares of which were
assigned to Venrock II) and warrants to purchase 392,000 shares of Common
Stock (121,348 of which were assigned to Venrock II) in consideration of its
investment of $1.4 million in cash and Southern was issued 11,363.63 shares of
Series A Preferred Stock and warrants to purchase 280,000 shares of Common
Stock in consideration of its investment of $1.0 million in cash.
Representatives of each of Grotech IV, Venrock and Southern were elected to
the Company's Board of Directors pursuant to the Securities Purchase
Agreement.

As a fee for arranging the above investment, the Company made a cash payment
of $200,000 and issued warrants to purchase 91,200 shares of Common Stock to
Mr. Stewart and nine other individuals (the "Fee Warrants" and, together with
the Bridge Warrants, the "Initial Warrants"). These individuals (other than
Mr. Stewart) are not affiliated with the Company.

Pursuant to a Stockholders Agreement (the "Stockholders Agreement"), dated
March 24, 1995, by and among the Company, Grotech IV, Venrock, Southern, Mr.
Humphrey and Mr. Doughney, the parties thereto agreed to grant rights of first
refusal to the other parties to such agreement in the event of the death,
disability or termination of employment of either Mr. Humphrey or Mr. Doughney
or in the event that either Mr. Humphrey or Mr. Doughney wishes to transfer
any of their shares of Common Stock of the Company. The provisions of the
Stockholders Agreement will terminate effective immediately prior to
consummation of the Offering.

On November 28, 1995, Grotech IV, Venrock, Southern and Venrock Associates
II, L.P. ("Venrock II" and, together with Grotech IV, Venrock and Southern,
the "Investors") loaned to the Company $800,000, $483,307, $500,000 and
$216,693 in cash, respectively. In consideration of these loans, the Company
issued 10% promissory notes due June 1, 1996 in the principal amount of
$2,000,000 (the "November 1995 Notes") and warrants to purchase 299,946 shares
of Common Stock to Grotech IV, Venrock, Venrock II and Southern as follows:
Grotech IV purchased promissory notes in the principal amount of $800,000 and
warrants to purchase 119,978 shares of Common Stock; Venrock purchased
promissory notes in the amount of $483,307 and warrants to purchase 72,483
shares of Common Stock; Venrock II purchased promissory notes in the principal
amount of $216,693 and warrants to purchase 32,498 shares of Common Stock; and
Southern purchased promissory notes in the principal amount of $500,000 and
warrants to purchase 74,987 shares of Common Stock.

On February 23, 1996, the Company issued additional 10% promissory notes due
June 1, 1996 in the principal amount of $1,000,000 (the "February 1996 Notes")
and additional warrants to purchase 166,378 shares of Common Stock to the
Investors as follows: Grotech IV purchased promissory notes in the principal
amount of $400,000 and warrants to purchase 66,551 shares of Common Stock for
a cash purchase price of $400,000; Venrock purchased promissory notes in the
principal amount of $217,000 and warrants to purchase 36,104 shares of Common
Stock for a cash purchase price of $217,000; Venrock II purchased promissory
notes in the principal amount of $133,000 and warrants to purchase 22,128
shares of Common Stock for a cash purchase price at $133,000; and Southern
purchased promissory notes in the principal amount of $250,000 and warrants to
purchase 41,595 shares of Common Stock for a cash purchase price of $250,000.

On May 21, 1996, the Company issued additional promissory notes in the
principal amount of $1,000,000 (the "Convertible Notes") convertible into
shares of Series B Preferred Stock of the Company to the Investors as follows:
Grotech IV purchased promissory notes in the principal amount of $400,000 for
a cash purchase price of $400,000; Venrock purchased promissory notes in the
principal amount of $217,000 for a cash purchase price of $217,000; Venrock II
purchased promissory notes in the principal amount of $133,000 for a cash
purchase price of $133,000; and Southern purchased promissory notes in the
principal amount of $250,000 for a cash purchase price of $250,000.

II-2
<PAGE>

On May 30, 1996, the Company, the Founders, the Investors, Grotech Partners,
Grotech Companion, Grotech Pennsylvania, Blue Chip and Crisler Capital
Company, Limited Partnership (together with the Investors, Grotech Partners,
Grotech Companion, Grotech Pennsylvania and Blue Chip, the "Purchasers")
entered into the Purchase and Exchange Agreement, whereby the Investors
exchanged $2.0 million principal amount of November 1995 Notes and $1.0
million principal amount February 1996 Notes (together with the right to
receive $126,389 in accrued interest thereon from the date of issuance) for
31,263.89 shares of Series B Convertible Preferred Stock of the Company, par
value $1.00 per share (the "Series B Preferred Stock"), and converted $1.0
million principal amount of Convertible Notes, in accordance with their terms,
into 10,000 shares of Series B Preferred Stock. In addition, the Purchasers
paid $4,000,000 in cash in exchange for a further 40,000 shares of Series B
Preferred Stock. The above-referenced exchange, conversion, and purchase
resulted in the following acquisitions of Series B Preferred Stock: Grotech IV
acquired 22,505.56 shares of Series B Preferred Stock; Grotech Partners
acquired 8,537 shares of Series B Preferred Stock; Grotech Companion acquired
930 shares of Series B Preferred Stock; Grotech Pennsylvania acquired 533
shares of Series B Preferred Stock; Venrock acquired 10,914.77 shares of
Series B Preferred Stock; Venrock II acquired 5,860.92 shares of Series B
Preferred Stock. Southern acquired 11,982.64 shares of Series B Preferred
Stock; Blue Chip acquired 16,000 shares of Series B Preferred Stock; and
Crisler acquired 4,000 shares of Series B Preferred Stock.

The transactions of May 21 and May 30, 1996 are collectively referred to
herein as the "1996 Venture Financing." A representative of Blue Chip holds a
seat on the Company's Board of Directors pursuant to the terms of the Purchase
and Exchange Agreement. The rights of representatives of each of Grotech IV,
Venrock and Southern, as well as each of the Founders, to have seats on the
Company's Board of Directors, granted pursuant to the Securities Purchase
Agreement, were restated in the Purchase and Exchange Agreement. In addition,
pursuant to the Purchase and Exchange Agreement, Crisler obtained the right to
designate a representative (R. Dean Meiszer) to act as an observer at meetings
of the Company's Board of Directors. Such stockholders' rights to designate
Directors or representatives to attend board meetings under the Purchase and
Exchange Agreement will terminate effective immediately prior to consummation
of the Offering. See "Management--Board Composition."

The holders of all outstanding shares of Series A Preferred Stock and Series
B Preferred Stock have agreed to convert their outstanding shares of Series A
Preferred Stock and Series B Preferred Stock, in accordance with their
respective terms, into 2,680,336 shares of Common Stock at or prior to the
consummation of the Offering (the "Preferred Stock Conversion"). As of the
date hereof, each share of Series A Preferred Stock is convertible into
approximately 11.0 shares of Common Stock and each share of Series B Preferred
Stock is convertible into approximately 26.83 shares of Common Stock. In
addition, all holders of warrants to purchase Common Stock (other than WinStar
and one holder of Initial Warrants) will exercise such warrants to purchase
1,868,408 shares of Common Stock upon consummation at or prior to the Offering
(the "Warrant Exercise").

In June 1996, the Company entered into a multi-year private network
agreement with WinStar. As part of the agreement, WinStar advanced $5,000,000
to the Company for connectivity services and received warrants to purchase
240,000 shares of Common Stock.

No underwriters were involved in any of the foregoing transactions. The
sales of all such securities were deemed to be exempt from registration under
the Act, in reliance on Section 4(2) thereunder, as transactions by an issuer
not involving any public offering.

Since September 18, 1995, the Company at various times has granted options
to purchase shares of Common Stock of the Company to certain Company
employees. Options to purchase 2,298,200 shares of Common Stock have been
granted in the aggregate, at exercise prices ranging from $0.25 to $10.00 per
share. These grants were exempt from registration pursuant to Section 4(2) of
the Act, Rule 701 thereunder or other applicable exemptions.

II-3
<PAGE>

ITEM 27. EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant.(2)
3.2 By-Laws of the Registrant
(a) Amended and Restated By-laws of the Registrant.(2)
(b) Amendment No. 1 to Amended and Restated By-laws.(2)
4.1 Form of Common Stock certificate.(2)
5.1* Opinion of Latham & Watkins with respect to the legality of the
securities being registered.
10.1 MCI Special Customer Arrangement between MCI Telecommunications
Corporation and Digital Express Group, Inc. dated March 28,
1996.(2)
10.2 Customer contract with LCI International, Inc. dated May 29,
1996.(2)
10.3 Customer contract with WinStar Communications, Inc. dated June 6,
1996.(2)
10.4 Warrant agreement with WinStar Communications, Inc. dated June 6,
1996.(2)
10.5 Peering agreements
(a) Agreement for T1 Gateway Attachment Services, as amended, with
ANS CO+RE Systems Inc. dated February 1, 1994.(2)
(b)Bilateral Interconnection Agreement with PSINet Inc. dated
February 7, 1996.(2)
(c) Peering Agreement with MCI Telecommunications Corporation
dated April 21, 1995.(2)
10.6 Agreement with Hughes Network Systems, Inc. dated June 7, 1996.(2)
10.7 Lease agreement with Banbury Associates Limited Partnership dated
November 17, 1994.(2)
10.8 Lease Agreement with George Christancos, dated December 4,
1995.(2)
10.9 Lease Agreement with Executive Office Network, Ltd.(1)
10.10 Sublease Agreement with A.S. McGaughaan.(2)
10.11 Employment and consulting agreements
(a)Clyde A. Heintzelman, dated March 19, 1995.(1)
(b)Christopher R. McCleary, dated February 1, 1996.(1)
(c)Brian M. Deobald, dated March 25, 1996.(3)
(d)Earl P. Galleher, dated March 25, 1996.(3)
(e)Nicholas J. Magliato, dated March 25, 1996.(3)
(f)William A. Pendley, dated July 15, 1996.(3)
(g)Thomas M. Brandt, Jr., dated June 1, 1996.(1)
10.12* Stock option plans
(a)Incentive Stock Option Plan.
(b)1996 Equity Participation Plan.
10.13 Securities Purchase Agreement with Grotech Partners IV, L.P.,
Venrock Associates, Southern Venture Fund II, L.P., Douglas E.
Humphery and Michael T. Doughney dated March 24, 1995.(1)
10.14 Stockholders Agreement with Grotech Partners IV, L.P., Venrock
Associates, Southern Ventures II, L.P. Douglas E. Humphery and
Michael T. Doughney dated March 24, 1995.(1)
10.15 (a)Warrant Agreement with Grotech Partners IV, L.P. dated March
24, 1995.(1)
(b)Warrant Agreement with Venrock Associates dated March 24,
1995.(1)
(c)Warrant Agreement with Southern Venture Fund II, L.P. dated
March 24, 1995.(1)
10.16 Loan and Security Agreement with Silicon Valley Bank dated April
11, 1996.(1)
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
10.17 First Amendment to Loan and Security Agreement with Silicon Valley
Bank dated May , 1996.(1)
10.18 Revolving Promissory Note with Silicon Valley Bank dated April 11,
1996.(1)
10.19 Securities Purchase, Conversion and Exchange Agreement with
Grotech Partners IV, L.P., Grotech Partners III, L.P., Grotech III
Companion Fund, L.P., Grotech III Pennsylvania Fund, L.P., Venrock
Associates, Venrock Associates II, L.P., Southern Venture Fund II,
L.P., Blue Chip Capital Fund Limited Partnership, Crisler Capital
Company, Limited Partnership dated May 30, 1996.(1)
23.1 Consent of Ernst & Young LLP(4)
23.2* Consent of Latham & Watkins (to be included in Exhibit 5.1).
27 Financial Data Schedule(3)
</TABLE>
- --------
(1) Previously filed with the Company's Registration Statement on Form SB-2,
File No. 333-05871, filed June 12, 1996.
(2) Previously filed with Amendment No. 1 to the Registration Statement on Form
SB-2, filed July 5, 1996.

(3) Previously filed with Amendment No. 2 to the Registration Statement on Form
SB-2, filed July 23, 1996.

(4) Filed herewith.
*To be filed by amendment.

ITEM 28. UNDERTAKINGS

The undersigned Registrant hereby undertakes that:

(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred
or paid by a director, officer or controlling person of the small business
issuer in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the small business issuer will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.

(2) For determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4),
or 497(h) under the Act as part of this registration statement as of the
time the Commission declared it effective.

(3) For determining any liability under the Act, treat each post-
effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.

(4) It will provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.

II-5
<PAGE>

SIGNATURES

IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING ON FORM SB-2 AND AUTHORIZED THIS AMENDMENT
NO. 3 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN THE CITY OF
BELTSVILLE, STATE OF MARYLAND, ON SEPTEMBER 30, 1996.

DIGEX, Incorporated

/s/ Christopher R. McCleary
By: _________________________________
Christopher R. McCleary
Chief Executive Officer, President
and Chairman of the Board

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 has been signed below by the following persons in the capacities and on
the dates indicated.

SIGNATURE TITLE DATE

* Director
- ------------------------------------- September 30,
FRANK A. ADAMS 1996

/s/ Christopher R. McCleary Chief Executive
- ------------------------------------- Officer, President September 30,
CHRISTOPHER R. MCCLEARY and Chairman of the 1996
Board (principal
executive officer)

* Senior Vice
- ------------------------------------- President, Chief September 30,
THOMAS M. BRANDT, JR. Financial Officer 1996
(principal
financial officer)

* Vice President,
- ------------------------------------- Controller September 30,
JOHN C. WELLING (principal 1996
accounting officer)

II-6
<PAGE>

SIGNATURE TITLE DATE

* Senior Vice
- ------------------------------------- President, Director September 30,
DOUGLAS E. HUMPHREY 1996

* Vice President,
- ------------------------------------- Director September 30,
MICHAEL T. DOUGHNEY 1996

Director
- ------------------------------------- September 30,
THOMAS H. CATO 1996

* Director
- ------------------------------------- September 30,
WILLIAM F. EARTHMAN, III 1996

* Director
- ------------------------------------- September 30,
RAY A. ROTHROCK 1996

* Director
- ------------------------------------- September 30,
ROBERT M. STEWART 1996

* Director
- ------------------------------------- September 30,
JOHN H. WYANT 1996

*/s/ Christopher R. McCleary
By: _________________________________
ATTORNEY-IN-FACT

II-7
<PAGE>

EXHIBITS

<TABLE>
<CAPTION>
SEQUENTIAL
PAGE
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBER
----------- ---------------------- ----------
<C> <S> <C>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant.(2)
3.2 By-Laws of the Registrant
(a) Amended and Restated By-laws of the Registrant(2)
(b) Amendment No. 1 to Amended and Restated By-
laws(2)
4.1 Form of Common Stock certificate.(2)
5.1* Opinion of Latham & Watkins with respect to the
legality of the securities being registered.
10.1 MCI Special Customer Arrangement between MCI
Telecommunications Corporation and Digital Express
Group, Inc. dated March 28, 1996.(2)
10.2 Customer contract with LCI International, Inc. dated
May 29, 1996.(2)
10.3 Customer contract with WinStar Communications, Inc.
dated June 6, 1996.(2)
10.4 Warrant agreement with WinStar Communications, Inc.
dated June 6, 1996.(2)
10.5 Peering Agreements
(a) Agreement for T1 Gateway Attachment Services, as
amended, with ANS CO+RE Systems Inc. dated February
1, 1994.(2)
(b) Bilateral Interconnection Agreement with PSINet
Inc. dated February 7, 1996.(2)
(c) Peering Agreement with MCI Telecommunications
Corporation dated April 21, 1995.(2)
10.6 Agreement with Hughes Network Systems, Inc. dated
June 7, 1996.(2)
10.7 Lease agreement with Banbury Associates Limited
Partnership dated November 17, 1994.(2)
10.8 Lease Agreement with George Christancos, dated
December 4, 1995.(2)
10.9 Lease Agreement with Executive Office Network,
Ltd.(1)
10.10 Sublease Agreement with A.S. McGaughaan.(2)
10.11 Employment and consulting agreements
(a) Clyde A. Heintzelman, dated March 19, 1995.(1)
(b) Christopher R. McCleary, dated February 1,
1996.(1)
(c) Brian M. Deobald, dated March 25, 1996.(3)
(d) Earl P. Galleher, dated March 25, 1996.(3)
(e) Nicholas J. Magliato, dated March 25, 1996.(3)
(f) William A. Pendley, dated July 15, 1996.(3)
(g) Thomas M. Brandt, Jr., dated June 1, 1996.(1)
10.12* Stock option plans
(a) Incentive Stock Option Plan.
(b) 1996 Equity Participation Plan.
10.13 Securities Purchase Agreement with Grotech Partners
IV, L.P., Venrock Associates, Southern Venture Fund
II, L.P., Douglas E. Humphery and Michael T.
Doughney dated March 24, 1995.(1)
10.14 Stockholders Agreement with Grotech Partners IV,
L.P., Venrock Associates, Southern Ventures II, L.P.
Douglas E. Humphery and Michael T. Doughney dated
March 24, 1995.(1)
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
SEQUENTIAL
PAGE
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBER
----------- ---------------------- ----------
<C> <S> <C>
10.15 (a) Warrant Agreement with Grotech Partners IV, L.P.
dated March 24, 1995.(1)
(b) Warrant Agreement with Venrock Associates dated
March 24, 1995.(1)
(c) Warrant Agreement with Southern Venture Fund II,
L.P. dated March 24, 1995.(1)
10.16 Loan and Security Agreement with Silicon Valley Bank
dated April 11, 1996.(1)
10.17 First Amendment to Loan and Security Agreement with
Silicon Valley Bank dated May , 1996.(1)
10.18 Revolving Promissory Note with Silicon Valley Bank
dated April 11, 1996.(1)
10.19 Securities Purchase, Conversion and Exchange
Agreement with Grotech Partners IV, L.P., Grotech
Partners III, L.P., Grotech III Companion Fund,
L.P., Grotech III Pennsylvania Fund, L.P., Venrock
Associates, Venrock Associates II, L.P., Southern
Venture Fund II, L.P., Blue Chip Capital Fund
Limited Partnership, Crisler Capital Company,
Limited Partnership dated May 30, 1996.(1)
23.1 Consent of Ernst & Young LLP(4)
23.2* Consent of Latham & Watkins (to be included in
Exhibit 5.1).
27 Financial Data Schedule(3)
</TABLE>
- --------
(1) Previously filed with the Company's Registration Statement on Form SB-2,
File No. 333-05871, filed June 12, 1996.
(2) Previously filed with Amendment No. 1 to the Registration Statement on Form
SB-2, filed July 5, 1996.

(3) Previously filed with Amendment No. 2 to the Registration Statement on Form
SB-2, filed July 23, 1996.

(4) Filed herewith.
* To be filed by amendment.

<PAGE>

Exhibit 23.1

Consent Of Ernst & Young LLP, Independent Auditors

We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated July 17, 1996, in the Registration Statement (Amendment
No. 3 to Form SB-2 No. 333-05871) and related Prospectus of DIGEX, Incorporated
for the registration of 3,750,000 shares of its common stock.

/s/ ERNST & YOUNG LLP
Baltimore, Maryland
September 26, 1996