SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

 (mark one)

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
            SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended March 31, 1999

                                       OR

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
            SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to _________________


                          Commission File No. 333-53467

                                  Pathnet, Inc.
             (Exact name of registrant as specified in its charter)

         Delaware                                             52-1941838
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                               Identification No.)

     1015 31st Street, N.W.
         Washington, DC                                            20007
(Address of principal executive offices)                         (Zip Code)

                                 (202) 625-7284
              (Registrant's telephone number, including area code)

                                 Not Applicable
(Former name,former address and former fiscal year,if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                 Yes [X] No [ ]

As of May 10, 1999,  there were 2,906,860  shares of the Issuer's  common stock,
par value $.01 per share, outstanding.

<PAGE>


                         PATHNET, INC. AND SUBSIDIARIES
                          QUARTERLY REPORT ON FORM 10-Q
                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
                                      INDEX

<TABLE>
<CAPTION>
                                                                                     Page

<S>                                                                                  <C>

Part I.   Financial Information

Item 1.   Unaudited Consolidated Financial Statements

             Consolidated Balance Sheets as of March 31, 1999 (unaudited) and
               December 31, 1998                                                      3

           Unaudited Consolidated  Statements of Operations for the three months
               ended March 31, 1999 and 1998 and for the period  August 25, 1995
               (date of inception) to  March 31, 1999                                 4

            Unaudited  Consolidated  Statements  of  Comprehensive  Loss for the
               three  months  ended  March 31,  1999 and 1998 and for the period
               August 25, 1995 (date of inception) to March 31, 1999                  5

            Unaudited Consolidated Statements of Cash Flows for the three months
               ended March 31, 1999 and 1998 and for the period August 25, 1995
               (date of inception) to March 31, 1999                                  6

            Notes to Unaudited Consolidated Financial Statements                      7

Item 2.   Management's Discussion and Analysis of Financial Condition and Results 
                   of Operations                                                     12

Item 3.   Quantitative and Qualitative Disclosures About Market Risk                 16

Part II.   Other Information

Item 1.    Legal Proceedings                                                         17
Item 2.    Changes in Securities and Use of Proceeds                                 17
Item 3.    Defaults Upon Senior Securities                                           17
Item 4.    Submission of Matters to a Vote of Security Holders                       17
Item 5.    Other Information                                                         18
Item 6.    Exhibits and Reports on Form 8-K                                          18

Signatures                                                                           19

Exhibits Index                                                                       20
</TABLE>


                                       2
<PAGE>

Part I.     Financial Information

Item 1.    Financial Statements

                         PATHNET, INC. AND SUBSIDIARIES
                         (Development Stage Enterprises)
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                                     March 31,        December 31,
                                                                                                       1999               1998
                                                                                                  -------------     -------------
                                                                                                    (unaudited)
<S>                                                                                               <C>               <C>     
                                        ASSETS
Cash and cash equivalents                                                                         $  98,333,292     $  57,321,887
Note receivable                                                                                               -         3,206,841
Interest receivable                                                                                   2,511,486         3,848,753
Marketable securities available for sale, at market                                                  61,094,006        97,895,773
Prepaid expenses and other current assets                                                             4,374,514           205,505
                                                                                                  -------------     -------------
   Total current assets                                                                             166,313,298       162,478,759
Property and equipment, net                                                                          69,038,378        47,971,336
Deferred financing costs, net                                                                        10,224,246        10,508,251
Restricted cash                                                                                      10,846,191        10,731,353
Marketable securities available for sale, at market                                                  50,074,604        71,899,757
Pledged marketable securities held to maturity                                                       62,655,577        61,824,673
Other assets                                                                                            108,565                 -
                                                                                                  -------------     -------------
     Total assets                                                                                 $ 369,260,859     $ 365,414,129
                                                                                                  =============     =============
                  LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
                          AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable                                                                                  $  14,284,332     $  10,708,263
Accrued interest                                                                                     19,651,045         8,932,294
Accrued expenses and other current liabilities                                                        1,510,532           639,688
                                                                                                  -------------     -------------
   Total current liabilities                                                                         35,445,909        20,280,245
12 1/4% Senior Notes, net of unamortized bond discount of $3,685,500 and $3,787,875
   respectively                                                                                     346,314,500       346,212,125
Other non-current liabilities                                                                           103,017                 -
                                                                                                  -------------     -------------
   Total liabilities                                                                                381,863,426       366,492,370
                                                                                                  -------------     -------------
Series A convertible preferred stock, $0.01 par value, 1,000,000 shares authorized, issued
  and outstanding at March 31, 1999 and  December 31, 1998, respectively (liquidation
  preference $1,000,000)                                                                              1,000,000         1,000,000
Series B convertible preferred stock, $0.01 par value, 1,651,046 shares authorized, issued
  and outstanding at March 31, 1999 and  December 31, 1998, respectively (liquidation
  preference $5,033,367)                                                                              5,008,367         5,008,367
Series C convertible preferred stock, $0.01 par value, 2,819,549 shares authorized, issued
  and outstanding at March 31, 1999 and  December 31, 1998, respectively (liquidation
  preference $30,000,052)                                                                            29,961,272        29,961,272
                                                                                                  -------------      ------------
   Total mandatorily redeemable preferred stock                                                      35,969,639        35,969,639
                                                                                                  -------------      ------------
Common stock,  $0.01 par value,  60,000,000  shares authorized at March 31, 1999
  and December 31, 1998, respectively; 2,903,324 and 2,902,358 shares issued and
  outstanding at March 31, 1999 and December 31, 1998, respectively                                      29,033            29,024
Deferred compensation                                                                                  (843,988)         (978,064)
Additional paid-in capital                                                                            6,157,488         6,156,406
Accumulated other comprehensive income                                                                   74,320           208,211
Deficit accumulated during the development stage                                                    (53,989,059)      (42,463,457)
                                                                                                  -------------     -------------
   Total stockholders' equity (deficit)                                                             (48,572,206)      (37,047,880)
                                                                                                  -------------     -------------
     Total liabilities, mandatorily redeemable preferred stock and stockholders' equity(deficit)  $ 369,260,859     $ 365,414,129
                                                                                                  =============     =============
</TABLE>

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

                                       3
<PAGE>

                         PATHNET, INC. AND SUBSIDIARIES
                         (Development Stage Enterprises)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)
<TABLE>
<CAPTION>

                                                                                                      For the period
                                                                                                      August 25, 1995
                                                               For the three months ended           (date of inception
                                                                       March 31,                       to March 31,
                                                          ----------------------------------
                                                               1999                1998                    1999
                                                          -------------       --------------           -------------
<S>                                                       <C>                 <C>                      <C>

Revenue                                                   $     826,104       $      100,000           $   2,573,143
                                                          -------------       --------------           -------------
Operating expenses:
     Cost of revenue                                          2,651,200              714,740              10,198,820
     Selling, general and administrative                      2,795,360            2,110,807              18,420,709
     Depreciation expense                                       537,639               37,223               1,326,470
                                                          -------------       --------------           -------------
        Total operating expenses                              5,984,199            2,862,770              29,945,999
                                                          -------------       --------------           -------------
Net operating loss                                           (5,158,095)          (2,762,770)            (27,372,856)
Interest expense                                            (10,270,211)                   -             (43,258,022)
Interest income                                               3,814,608               80,740              17,929,844
Write-off of initial public offering costs                            -                    -              (1,354,534)
Other income (expense), net                                      88,096               (2,811)                 85,509
                                                          -------------       --------------           -------------
        Net loss                                          $ (11,525,602)      $   (2,684,841)          $ (53,970,059)
                                                          =============       ==============           =============
Basic and diluted loss per
     common share                                         $       (3.97)      $        (0.93)          $      (18.61)
                                                          =============       ==============           =============
Weighted average number of
     common shares outstanding                                2,902,895            2,901,022               2,900,762
                                                          =============       ==============           =============
</TABLE>



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

                                       4
<PAGE>

                         PATHNET, INC. AND SUBSIDIARIES
                         (Development Stage Enterprises)
                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                                      For the period
                                                                                                      August 25, 1995
                                                               For the three months ended           (date of inception
                                                                       March 31,                       to March 31,
                                                          ----------------------------------
                                                               1999                1998                    1999
                                                          -------------       --------------           -------------
<S>                                                       <C>                 <C>                      <C>
Net loss                                                  $ (11,525,602)      $   (2,684,841)         $  (53,970,059)

Other comprehensive income:
    Net unrealized (loss) gain on marketable
       securities available for sale                           (133,891)                  -                  74,320
                                                           ------------       --------------           -------------
Comprehensive loss                                        $ (11,659,493)      $   (2,684,841)          $ (53,895,739)
                                                           ============       ==============           =============
</TABLE>





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

                                       5
<PAGE>

                      PATHNET, INC. AND SUBSIDIARIES
                     (Development Stage Enterprises)
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (Unaudited)

<TABLE>
<CAPTION>
                                                                                                                    For the period
                                                                                                                   August 25, 1995
                                                                            For the three months ended           (date of inception
                                                                                          March 31,                 to March 31,
                                                                              --------------------------------
                                                                                   1999                1998              1999
                                                                              -------------     --------------      --------------
<S>                                                                           <C>               <C>                 <C>

Cash flows from operating activities:
   Net loss                                                                   $ (11,525,602)    $   (2,684,841)     $  (53,970,059)
   Adjustment to reconcile net loss to net cash used in operating activities
      Depreciation expense                                                          537,639             37,223           1,326,470
      Amortization of deferred financing costs                                      284,005                  -           1,126,795
      Loss on disposal of asset                                                           -                  -               5,500
      Write-off of deferred financing costs                                               -            337,910             581,334
      Interest expense resulting from amortization of discount on the
        bonds payable                                                               102,375                  -             409,500
      Amortization of premium paid on pledged securities                            167,295                  -             167,295
      Stock based compensation                                                      134,076                  -             835,371
      Interest expense for beneficial conversion feature of bridge loan                   -                  -             381,990
      Accrued interest satisfied by conversion of bridge loan to 
        Series B convertible preferred stock                                              -                  -              33,367
   Changes in assets and liabilities:
      Interest receivable                                                           339,068                  -          (4,507,884)
      Prepaid expenses and other assets                                          (4,277,574)          (108,145)         (4,483,079)
      Accounts payable                                                           (1,234,100)         1,687,380            (726,486)
      Accrued interest                                                           10,718,751                  -          19,651,045
      Accrued expenses and other liabilities                                        973,861            157,334           1,613,548
                                                                              -------------     --------------      --------------
        Net cash used in operating activities                                    (3,780,206)          (573,139)        (37,555,293)
                                                                               -----------      --------------      --------------
Cash flows from investing activities:
   Expenditures for network in progress                                         (16,668,923)        (2,084,372)        (52,028,047)
   Expenditures for property and equipment                                         (125,589)          (710,337)         (3,331,482)
   Sale (purchase) of marketable securities available for sale                   58,493,029                  -        (111,094,290)
   Purchase of marketable securities - pledged as collateral                              -                  -         (83,097,655)
   Sale of marketable securities - pledged as collateral                                  -                  -          22,271,181
   Restricted cash                                                                 (114,838)           471,475         (10,846,191)
   Repayment of note receivable                                                   3,206,841              9,000               9,000
                                                                              -------------     --------------      --------------
        Net cash provided by (used in) investing activities                      44,790,520         (2,314,234)       (238,117,484)
                                                                              -------------     --------------      --------------
Cash flows from financing activities:
   Issuance of voting and non-voting common stock                                         -                  -               1,000
   Proceeds from sale of preferred stock                                                  -                  -          35,000,052
   Proceeds from sale of Series B convertible  preferred stock  representing the
     conversion of committed but undrawn portion of bridge loan to Series B
     convertible preferred stock                                                          -                  -             300,000
   Proceeds from bond offering                                                            -                  -         350,000,000
   Proceeds from bridge loan                                                              -                  -             700,000
   Exercise of employee common stock options                                          1,091                 81               1,172
   Payment of issuance costs for preferred stock offerings                                -                  -             (63,780)
   Payment of deferred financing costs                                                    -            (87,482)        (11,932,375)
                                                                              -------------     --------------      --------------
        Net cash provided by (used in) financing activities                           1,091           (87,401)         374,006,069
                                                                              -------------     --------------      --------------
Net increase in cash and cash equivalents                                        41,011,405         (2,974,774)         98,333,292
Cash and cash equivalents at the beginning of period                             57,321,887          7,831,384                   -
                                                                              -------------     --------------      --------------
Cash and cash equivalents at the end of period                                $  98,333,292     $    4,856,610      $   98,333,292
                                                                              =============     ==============      ==============
</TABLE>


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


                                       6
<PAGE>



                         PATHNET, INC. AND SUBSIDIARIES
                         (DEVELOPMENT STAGE ENTERPRISES)
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.         THE COMPANY

         Pathnet, Inc. (Company) is a carrier's carrier, providing high-quality,
low-cost digital fiber and wireless  communications capacity to under-served and
second- and third-tier U.S. markets.  During the first quarter of 1999,  Pathnet
expanded its business strategy to include construction and deployment of digital
networks utilizing both wireless and fiber-optic  technologies.  The decision to
incorporate  fiber-optic  technologies  into  existing  plans  for a  nationwide
network was made to satisfy demand from potential  customers for  high-bandwidth
facilities,  which the  Company's  wireless  network is not  equipped to handle.
Pathnet offers  telecommunications  service to  inter-exchange  carriers,  local
exchange  carriers,   internet  service   providers,   Regional  Bell  Operating
Companies, cellular operators and resellers.

         During the first  quarter of 1999,  the Company  continued  to focus on
developing its network.  As part of its expanded  strategy,  the Company entered
into two agreements  with Worldwide  Fiber USA (WFI)  (formerly known as Pacific
Fiber  Link,  LLC) in  March  1999  to  construct  and  market  a  multi-conduit
fiber-optic network between Chicago,  Illinois and Denver, Colorado. (See note 9
to these Financial Statements.)

         As of March 31, 1999, the Company had  approximately  2,100 route miles
of  completed  network and  approximately  4,600  route  miles of network  under
construction.

         The Company's  business is funded primarily through equity  investments
by the Company's  stockholders and $350.0 million aggregate  principal amount of
12 1/4% Senior Notes due 2008 (Senior  Notes) which have been  registered  under
the Securities Act of 1933, as amended (Securities Act).

         A substantial portion of the Company's  activities to date has involved
developing  strategic  relationships  with railroads,  pipelines,  utilities and
state and local governments (Incumbents) and building its network.  Accordingly,
a majority of its revenues to date reflect only certain  consulting and advisory
services in connection with the design,  development and construction of digital
microwave  infrastructure.  The remainder of its revenues to date (approximately
28.8 per cent) has been derived from the sale of bandwidth  along the  Company's
digital  network.  The Company has  experienced  significant  operating  and net
losses and  negative  operating  cash flow to date and  expects to  continue  to
experience  operating and net losses and negative operating cash flow until such
time as it is  able to  generate  revenue  sufficient  to  cover  its  operating
expenses.

2.       BASIS OF ACCOUNTING

         While  the  Company  recently  commenced  providing   telecommunication
services  to  customers  and  recognizing  the  revenue  from  the  sale of such
telecommunication  services, its principal activities to date have been securing
contractual  alliances with Incumbents and partners,  designing and constructing
network   segments,   obtaining  capital  and  planning  its  proposed  service.
Accordingly,  the Company's consolidated financial statements are presented as a
development stage enterprise, as prescribed by Statement of Financial Accounting
Standards No. 7, "Accounting and Reporting by Development Stage Enterprises." As
a development stage enterprise,  the Company has been relying on


                                       7
<PAGE>

the issuance of equity and debt securities,  rather than recurring revenues, for
its primary sources of cash since inception.

         In June 1997,  the  Financial  Accounting  Standards  Board issued SFAS
No.131,   "Disclosures   About   Segments   of   an   Enterprise   and   Related
Information"("SFAS  No.  131").  SFAS No. 131 changes  the way public  companies
report  segment  information  in annual  financial  statements and also requires
those  companies to report  selected  segment  information in interim  financial
reports to stockholders.  It also establishes  standards for related disclosures
about products and services,  geographic areas, and major customers.  Management
believes the Company's current operations comprise only one segment, the sale of
telecommunications  capacity,  and as such,  adoption  of SFAS No.  131 does not
impact the disclosures made in the Company's financial statements.

         In the opinion of management,  the accompanying  unaudited consolidated
financial statements of the Company and its subsidiaries contain all adjustments
(consisting only of normal recurring  accruals)  necessary to present fairly the
Company's  consolidated financial position as of March 31, 1999, and the results
of operations and cash flows for the periods indicated.  Certain information and
footnote  disclosures  normally  included in  financial  statements  prepared in
accordance with generally accepted accounting  principles have been condensed or
omitted.  These unaudited  consolidated  financial  statements should be read in
conjunction  with the financial  statements  and notes  thereto  included in the
Company's  Annual  Report on Form 10-K for the period  ended  December  31, 1998
filed with the Securities and Exchange Commission. The results of operations for
the three  months  ended March 31, 1999 are not  necessarily  indicative  of the
operating results to be expected for the full year.

3.       REVENUE RECOGNITION

         The Company earns revenue from the sale of  telecommunication  capacity
and for project  management  and consulting  services.  Revenue from the sale of
telecommunications  capacity is earned when the service is provided. Revenue for
project management and consulting services is recognized based on the percentage
of the services completed.  The Company defers revenue when contractual payments
are received in advance of the performance of services.

         Revenue from the sale of  telecommunication  capacity  includes revenue
earned under indefeasible right of use (IRU) agreements.  The Company recognizes
revenue under such agreements on a straight-line basis over their term.

         On a limited basis,  the Company makes purchases of  telecommunications
equipment and ancillary  services on behalf of the Incumbents.  During the first
quarter  of  1999,  the  Company   purchased   approximately   $3.6  million  of
telecommunications  equipment, which includes shelters and towers, and ancillary
services on behalf of two of its  Incumbents.  The Company makes these purchases
in an agency  capacity,  passing  such costs onto the  Incumbents  at no margin.
Accordingly,  the Company has not recorded the  transactions in the accompanying
Consolidated  Statement  of  Operations.  As of  March  31,  1999,  the  Company
recorded,  as a component of Prepaid  Expenses and Other  Current  Assets,  $2.4
million related to these transactions.


                                       8
<PAGE>

4.       LOSS PER SHARE

         Basic  earnings  (loss) per share is computed  by  dividing  net income
(loss) by the  weighted  average  number of shares of Common  Stock  outstanding
during the applicable  period.  Diluted earnings (loss) per share is computed by
dividing  net income  (loss) by the  weighted  average  common  and  potentially
dilutive common equivalent shares  outstanding during the applicable period. For
each of the periods  presented,  basic and diluted  loss per share are the same.
The  exercise of  2,936,493  employee  Common  Stock  options,  the  exercise of
warrants to purchase  1,116,500  shares of Common Stock,  and the  conversion of
5,470,595  shares  of  Series  A,  B  and C  convertible  preferred  stock  into
15,864,715  shares of Common Stock as of March 31, 1999, which could potentially
dilute  basic  earnings  per  share  in the  future,  were not  included  in the
computation of diluted loss per share for the periods presented because to do so
would have been antidilutive in each case.

5.       MARKETABLE SECURITIES

         The Company's  marketable  securities  are  considered  "available  for
sale," and, as such, are stated at market value.  The net  unrealized  gains and
losses on  marketable  securities  are  reported  as part of  accumulated  other
comprehensive  income.  Realized  gains or  losses  from the sale of  marketable
securities are based on the specific identification method.

The following is a summary of the investments in marketable  securities at March
31, 1999:
<TABLE>
<CAPTION>

                                                                              Gross Unrealized 
                                                                              ---------------- 
                                                             Cost           Gains        Losses        Market Value
                                                      ----------------- ------------  -----------   ------------------
<S>                                                   <C>               <C>          <C>            <C>
Available for sale securities:
  U.S. Treasury securities and debt securities
      of U.S. Government agencies                     $      35,735,957 $      9,098 $     14,562   $       35,730,493
  Certificates of deposit and money market
      funds                                                   1,999,832        1,908           --            2,001,740
  Corporate debt securities                                  73,358,501       79,887        2,011           73,436,377
                                                      ----------------- ------------  -----------   ------------------
                                                      $     111,094,290 $     90,893  $    16,573   $      111,168,610
                                                      ================= ============  ===========   ==================
</TABLE>

         Net  proceeds  from the sales of  available  for sale  securities  were
approximately  $58,493,000  and gross  realized  gains on sales of available for
sale securities were  approximately  $86,000 during the three months ended March
31, 1999.



                                       9
<PAGE>


         The  amortized  cost and  estimated  fair value of  available  for sale
securities by contractual maturity at March 31, 1999 is as follows:
<TABLE>
<CAPTION>

                                                         Cost               Market Value
                                                 ------------------       ----------------
<S>                                              <C>                      <C>   
         Due in one year or less                 $       61,048,866      $      61,094,006
         Due after one year through two years            50,045,424             50,074,604
                                                 ------------------       ----------------
                                                 $      111,094,290      $     111,168,610
                                                 ==================       ================
</TABLE>

         Expected maturities may differ from contractual  maturities because the
issuers  of the  securities  may have the  right to prepay  obligations  without
prepayment penalties.

         In addition to marketable  securities,  the Company has  investments in
pledged  marketable  securities  that are pledged as collateral for repayment of
interest on the Company's Senior Notes through April 2000) and are classified as
non-current  assets on the  consolidated  balance  sheet.  As of March 31, 1999,
pledged marketable  securities consisted of U.S. Treasury securities  classified
as held to maturity  with an  amortized  cost of  approximately  $60.6  million,
interest  receivable on the pledged marketable  securities of approximately $2.0
million  and cash and cash  equivalents  of  approximately  $41,000.  All of the
investments contractually mature by March 31, 2000.

6.       PROPERTY AND EQUIPMENT

         Property and  equipment,  stated at cost, is comprised of the following
at March 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>

                                                                        March 31,             December 31,
                                                                           1999                   1998       
                                                                   -----------------         ----------------
         <S>                                                      <C>                     <C>   
         Network in progress                                       $     49,662,363       $       38,669,088
         Communications network                                          17,335,336                6,890,686
         Office and computer equipment                                    2,421,084                2,267,647
         Furniture and fixtures                                             767,982                  766,013
         Leasehold improvements                                             178,083                  166,733
                                                                   ----------------       ------------------
                                                                         70,364,848               48,760,167
         Less: accumulated depreciation                                  (1,326,470)                (788,831)
                                                                   ----------------       ------------------
 Property and equipment, net                                       $     69,038,378       $       47,971,336
                                                                   ================       ==================
</TABLE>

         Network in progress  includes  (i) all direct  material and labor costs
incurred on the  construction  of the network  together  with related  allocable
interest  costs,  necessary to construct  components of a high capacity  digital
network which is owned and maintained by the Company,  and (ii) network  related


                                       10
<PAGE>

inventory of parts and  equipment.  When a portion of network has been completed
and made  available  for use by the Company it is  transferred  from  network in
process to  communications  network.  As of March 31, 1999, the Company incurred
non-cash capital expenditures of approximately $15.0 million.

7.       RESTRICTED CASH

         Restricted  cash  comprises  amounts  held  in  escrow  to  secure  the
Company's  obligations under certain of its Fixed Point Microwave Services (FPM)
agreements.  The funds in each  escrow  account are  available  only to fund the
project to which the escrow is related until such project has been completed, at
which time surplus funds will be returned to the Company.  Generally,  funds are
released  from escrow to pay project  costs when such costs  incurred and agreed
upon under the contract.  During the three months ended March 31, 1999, no funds
were released from escrow.

8.       COMMITMENTS AND CONTINGENCIES

         As of March 31,  1999,  the Company had  capital  commitments  of up to
approximately  $93.0  million  relating to  telecommunication  and  transmission
equipment  and  its  agreement  with  WFI.  (see  note  9  to  these   Financial
Statements).

9.       FIBER AGREEMENT

         On March 31,  1999,  the  Company  signed  two  agreements  with WFI to
construct  and  market a  multi-conduit  fiber-optic  network  between  Chicago,
Illinois and Denver,  Colorado. The total shared projected cost for this project
is in excess of $100 million.  The 1,100-mile network between Chicago and Denver
will pass through Des Moines, Iowa; Omaha, Nebraska; and Lincoln,  Nebraska. WFI
will lead-manage the project with  construction to be completed in two segments.
The first  segment,  Chicago to Omaha,  is  expected to be complete in late 1999
with the second segment, Omaha to Denver, scheduled to come on line in 2000.



                                       11
<PAGE>


Item 2.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations

     CERTAIN  STATEMENTS  CONTAINED  IN  THIS  ITEM  CONSTITUTE  FORWARD-LOOKING
STATEMENTS. SEE "FORWARD-LOOKING STATEMENTS" BELOW.

Overview

         During  the  first  quarter  of 1999,  Pathnet  expanded  its  business
strategy to include  construction and deployment of digital  networks  utilizing
both  wireless  and  fiber-optic  technologies.   The  decision  to  incorporate
fiber-optic  technologies into existing plans for a nationwide  network was made
to satisfy demand from potential customers for high-bandwidth facilities.

         Due to Pathnet's focus to date on developing its network,  the majority
of its  revenues to date  reflect  certain  consulting  and  project  management
services in connection with the design,  development and construction of digital
microwave  infrastructure.  The  remaining  portion of its revenues has resulted
from  the  sale of  bandwidth  services  along  its  network.  The  Company  has
experienced  significant  operating and net losses and negative  operating  cash
flow to date and expects to continue to experience  operating and net losses and
negative  operating cash flow until such time as it is able to generate  revenue
sufficient to cover its operating expenses.

Worldwide Fiber Agreement

         The Company  continued to focus on developing  its network in the first
quarter of 1999.  As part of its  expanded  strategy,  the Company  entered into
agreements with Worldwide Fiber USA (WFI) (formerly known as Pacific Fiber Link,
LLC) in March 1999 to construct and market a multi-conduit  fiber-optic  network
between Chicago, Illinois and Denver, Colorado. The 1,100-mile network will pass
through Des Moines, Iowa; Omaha, Nebraska; and Lincoln, Nebraska.

Results of Operations

Three Months Ended March 31, 1999 Compared with the Three Months Ended March 31,
1998

         During the three months ended March 31, 1999, the Company  continued to
focus on developing relationships with railroads, pipelines, utilities and state
and local governments (collectively, "Incumbents") and partners, the buildout of
its network and the  development of its  infrastructure  including the hiring of
key management personnel.

         Revenue

         For the three  months  ended  March  31,  1999 and  1998,  the  Company
generated revenues of approximately $826,000 and $100,000, respectively. For the
three months ended March 31, 1999, the Company generated  revenues from the sale
of telecommunications  services of approximately $576,000, together with revenue
from consulting and advisory services in connection with the design, development
and construction of digital microwave  infrastructure of approximately $250,000.
For the three months  ended March 31, 1998,  the  Company's  revenues  consisted
primarily of revenue from consulting and

                                       12
<PAGE>

advisory  services.  The Company expects that a majority of future revenue to be
generated from the sale of telecommunications services.

         Operating Expenses

         For the three  months  ended  March  31,  1999 and  1998,  the  Company
incurred  operating  expenses of  approximately  $6.0 million and $2.9  million,
respectively.  The increase is primarily as a result of the continued  increased
activity in the buildout of the  Company's  network and  additional  staff costs
incurred as part the  development of the Company's  infrastructure.  The Company
expects selling,  general and administrative expenses to continue to increase in
the remainder of 1999 as  additional  staff is added.  Cost of revenue  reflects
direct costs associated with performance of  construction,  management  services
and costs  incurred  in  connection  with the  provision  of  telecommunications
services.

         Interest Expense

         Interest  expense  for the  three  months  ended  March  31,  1999  was
approximately $10.3 million.  There was no interest expense for the three months
ended March 31, 1998.  Interest  expense  primarily  represents  interest on the
Company's  12 1/4%  Senior  Notes  due 2008  issued in April  1998 (the  "Senior
Notes") together with the amortization expense related to bond issuance costs in
respect of the Senior Notes.

         Interest Income

         Interest  income for the three months ended March 31, 1999 and 1998 was
approximately $3.8 million and $81,000, respectively. This increase is primarily
a result of additional cash arising from the Senior Notes issued in April 1998.

Liquidity and Capital Resources

         The  Company  expects to  continue  to  generate  cash  primarily  from
external financing and, as its network matures, from operating  activities.  The
Company's  primary  uses of cash will be to fund capital  expenditures,  working
capital and operating  losses.  Deployment of the Company's  digital network and
expansion of the  Company's  operations  and services  will require  significant
capital expenditures.  Capital expenditures will be used primarily for continued
development  and  construction of its network,  implementation  of the Company's
sales and marketing  strategy and  constructing and improvement of the Company's
Network Operating Center (the "NOC").

         As of March 31,  1999,  the Company had  capital  commitments  of up to
approximately  $93.0 million  relating to  telecommunications  and  transmission
equipment and its agreement with WFI. It is  anticipated  that these will be met
with  current  resources  of the Company and with the sale of dark and lit fiber
capacity.

         As of March 31, 1999, the Company had  approximately  $209.4 million of
cash, cash  equivalents and marketable  securities  available for the funding of
future  operations.  The Company  expects these  resources will be sufficient to
fund the  implementation  of the Company's  business plan into 2000.  After such
time, the Company expects to be required to procure  additional  financing which
may include 

                                       13
<PAGE>


commercial bank borrowings,  additional vendor financing or the sale or issuance
of equity or debt  securities.  There can be no  assurance  the Company  will be
successful in raising sufficient capital or in obtaining such financing on terms
acceptable to the Company.

         Pursuant to a Commitment Letter between Lucent and the Company that was
executed  in  connection  with  the  supply  agreement  between  Lucent  and the
Company (the "Commitment  Letter"),  Lucent  may  provide  financing  of  up  to
approximately  $400  million for fiber  purchases  for the  construction  of the
Company's network and may provide or arrange financing for future phases of such
network. Under the terms of the Commitment Letter, the total amount of financing
provided by Lucent will not exceed $1.8  billion of the $2.1  billion  potential
value  of  the  supply  agreement.  Certain  material  terms  of  the  Company's
agreements  with  Lucent,  including  the terms of the  Commitment  Letter,  are
currently under review by Lucent and the Company. There can be no assurance that
the  transactions,  including the financing  contemplated by Commitment  Letter,
will be  consummated  at all or consummated  on the terms  described  above.  In
addition,  the  Company  may  require  additional  capital in the future to fund
operating deficits and net losses and for potential strategic  alliances,  joint
ventures and acquisitions.

         Because the  Company's  cost of designing  and building its network and
operating  its business,  as well as its  revenues,  will depend on a variety of
factors  (including,  among other things, the ability of the Company to meet its
roll-out  schedules,  its ability to negotiate favorable prices for purchases of
network  equipment,  the number of customers  and the services and products they
purchase,  regulatory  changes  and  changes in  technology),  actual  costs and
revenues will vary from expected  amounts,  possibly to a material  degree,  and
such variations are likely to affect the Company's future capital  requirements.
Accordingly,  there  can be no  assurance  that  the  Company's  actual  capital
requirements will not exceed the anticipated amounts described above.

Year 2000

         The Year 2000 issue exists  because many computer  systems and software
applications  use two digits  rather than four digits to designate an applicable
year. As a result,  the systems and applications may not properly  recognize the
Year 2000,  or process data that includes  that date,  potentially  causing data
miscalculations or inaccuracies or operational malfunctions or failures.

         In the  fourth  quarter of 1998,  the  Company  began a  corporate-wide
program to ready its technology systems and non-technology  systems and software
applications  for the Year 2000. The Company's  objective is to target Year 2000
compliance for all of its systems,  including  network and customer  interfacing
systems, and has grouped these systems into one of six compliance areas: Network
Architecture,   Internal   Infrastructure,   Software  Applications,   Financial
Relationships,  Supply-Chain  Relationships and Customer Relationships.  Because
the  Company  has  operated  for  only  a  few  years,  few  legacy  systems  or
applications  exist.  However,  the  Company  has  identified  all  systems  and
applications  that may need to be modified or  reprogrammed  in order to achieve
Year 2000 compliance and is working towards  implementing any necessary  changes
and expects to complete this process by the end of the third quarter of 1999.

         As part of its Year 2000 plan,  the Company has requested  confirmation
from its  communications  equipment  vendors and other key suppliers,  financial
institutions  and  customers  that their  systems  will 


                                       14
<PAGE>

be Year 2000 compliant. Responses received to-date indicate a high level of Year
2000 compliance at these companies,  however, there can be no assurance that the
systems of  companies  with which the Company  does  business  will be Year 2000
compliant..  The Company  expects to receive  additional  responses  in the next
quarter. If the vendors important to the Company fail to provide needed products
and services,  the Company's  network  buildout and operations could be affected
and  thereby  have a  material  adverse  effect  on  the  Company's  results  of
operations,  liquidity and  financial  condition.  Moreover,  to the extent that
significant customers are not Year 2000 compliant and that affects their network
needs, the Company's sales could be lower than otherwise anticipated.

         The  Company's  expenditures  to implement  its Year 2000 plan have not
been  material to date and it does not believe its future  expenditures  on this
matter will be material.  Because its existing  systems are  relatively  new, it
does not expect that it will have to replace any of its  systems.  To the extent
it would have to replace a significant  portion of its technology  systems,  its
expenditures could have material adverse effect on the Company.  The Company has
hired an outside consultant to assist it with its Year 2000 compliance,  but the
Company has relied primarily on its existing  employees to develop and implement
its Year 2000 compliance strategy.  As a result, its expenditures to ensure Year
2000  compliance have not been material to date. The Company expects to continue
to use existing  employees for the significant  part of its Year 2000 compliance
efforts in the future.

         The Company is currently  formulating a  contingency  plan in the event
that  certain  of its  suppliers  or  service  providers  may not be  Year  2000
compliant.  This plan will continue to be developed throughout 1999. The Company
expects to have such plan in operation by the end of the fourth quarter of 1999.

Forward-Looking Statements

         Certain  statements  in this Report,  in future  filings by the Company
with the Securities and Exchange Commission, in the Company's press releases and
in oral  statements  made by or with the  approval  of an  authorized  executive
officer  of  the  Company  constitute  forward-looking   statements,   including
statements  which can be  identified by the use of  forward-looking  terminology
such as "believes,"  "anticipates," "expects," "may," "will," or "should" or the
negative  of  such  terminology  or  other  variations  on such  terminology  or
comparable  terminology,  or by discussions of strategies that involve risks and
uncertainties.  All statements  other than statements of historical fact in this
Report,  including,  without  limitation,  such  statements  under  the  caption
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations,"  regarding the Company or any of the transactions described in this
Report or the timing, financing, strategies and effects of such transaction, are
forward-looking statements.  Although the Company believes that the expectations
reflected in such  forward-looking  statements  are  reasonable,  it can give no
assurance that such  expectations  will prove to be correct.  Important  factors
that could cause actual results to differ materially from expectations  include,
without  limitation,  those  described in conjunction  with the  forward-looking
statements in this Report, as well as the amount of capital needed to deploy the
Company's network;  the Company's  substantial  leverage and its need to service
its indebtedness; the restrictions imposed by the Company's current and possible
future financing arrangements; the ability of the Company to successfully manage
the  cost-effective  and timely  completion  of its  network  and its ability to
attract and retain  customers for its products and services;  the ability of the
Company to  implement  its newly  expanded  business  plan;  the  


                                       15
<PAGE>

ability of the Company to retain and attract  relationships  with the  incumbent
owners of the telecommunications  assets with which the Company expects to build
its network; the ability of the Company to obtain and maintain rights-of-way for
the deployment of its network;  the Company's  ability to retain and attract key
management  and other  personnel as well as the Company's  ability to manage the
rapid expansion of its business and operations; the Company's ability to compete
in the  highly  competitive  telecommunications  industry  in  terms  of  price,
service, reliability and technology; the Company's dependence on the reliability
of its network equipment, its reliance on key suppliers of network equipment and
the risk that its technology will become obsolete or otherwise not  economically
viable;  and the  Company's  ability  to conduct  its  business  in a  regulated
environment.  The  Company  does not  intend  to  update  these  forward-looking
statements.  These and other risks and  uncertainties  affecting the Company are
discussed in greater detail in the Company's 1998 Annual Report on Form 10-K.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

         The  Company  is exposed to the impact of  interest  rate  changes  and
changes  in the  market  value of its  investments.  As of March 31,  1999,  the
Company's investments include certificates of deposit,  money market funds, U.S.
Government obligations (primarily fixed income securities) and high-quality debt
securities.  The Company employs  established  policies and procedures to manage
its exposure to changes in the market risk of its marketable  securities,  which
are classified as available for sale as of March 31, 1999. The Company's  Senior
Notes  have fixed  interest  rates and the fair  value of these  instruments  is
affected  by  changes  in  market  interest  rates.  The  Company  has not  used
derivative financial instruments in its investment portfolio.

         Investments in fixed rate interest earning  instruments  carry a degree
of  interest  rate  risk.  The fair  market  value of  these  securities  may be
adversely impact due to a rise in interest rates. Investments in certificates of
deposit and money market funds may  adversely  impact  future  earnings due to a
decrease in interest rates.  Due in part to these factors,  the Company's future
investment income may all short of expectations due to changes in interest rates
or the Company may suffer losses in principal if forced to sell  securities that
have declined in market value due to changes in interest  rates. As of March 31,
1999,  a 10%  increase  or decline in  interest  rates would not have a material
impact on the Company's future earnings,  fair values,  or cash flows related to
investments  in   certificates  of  deposit  or  interest   earning   marketable
securities.  In addition,  as of March 31, 1999, a 10% decrease in market values
would not have a material impact on the Company's future earnings,  fair values,
financial   position  or  cash  flows  related  to   investments  in  marketable
securities.


                                       16
<PAGE>


Part II.   Other Information

Item 1.    Legal Proceedings

                  None

Item 2.    Changes in Securities and Use of Proceeds

                  None

Item 3.    Defaults Upon Senior Securities

                  None

Item 4.    Submission of Matters to a Vote of Security Holders

         During the first quarter,  the Company  solicited written consents from
its  stockholders  to approve (i) the removal of David Schaeffer as the Chairman
of the Board and  Treasurer  of the  Company,  (ii) the  appointment  of William
Smedberg as Treasurer of the Company and (iii) the offer by the Company to David
Schaeffer of a consultancy role with the Company on such terms and conditions to
be determined by a subcommittee  of the Board of Directors.  Effective  February
12, 1999, the Company received  written  consents  approving such proposals from
stockholders  representing  14,413,661  votes,  with  stockholders  representing
1,454,378  votes  abstaining  and  stockholders   representing  2,900,000  votes
objecting.

         On February 12, 1999 the Company  solicited  written  consents from the
holders  of its  Series A  Convertible  Preferred  Stock,  Series B  Convertible
Preferred  Stock and Series C Convertible  Preferred  Stock  (collectively,  the
"Preferred  Stockholders")  to approve (i) the removal of David Schaeffer as the
Chairman of the Board and  Treasurer of the  Company,  (ii) the  appointment  of
William  Smedberg as Treasurer of the Company and (iii) the offer by the Company
to David  Schaeffer  of a  consultancy  role with the  Company on such terms and
conditions  to be  determined  by a  subcommittee  of the  Board  of  Directors.
Effective  February 12, 1999, the Company received  written  consents  approving
such proposals from Preferred  Stockholders  representing  14,411,303 votes with
Preferred Stockholders representing 1,453,412 votes abstaining.

On March 3, 1999,  the Company  solicited  written  consents  from the Preferred
Stockholders to approve (i) the removal of William Smedberg as Vice President of
the Company and the  appointment of Mr.  Smedberg as Executive  Vice  President,
Corporate Development, (ii) increases and changes to the compensation of certain
employees  of the  Company,  (iii)  changes to the  authorized  signatories  for
transfers  and  withdrawals  of the  Company's  funds,  (iv) an  increase in the
Company's directors and officers insurance coverage, (v) certain interconnection
arrangements  relating  to the  Company's  network  and (vi) the  payment  of an
invoice for  outside  counsel  services.  Effective  March 3, 1999,  the Company
received written consents  approving such proposals from Preferred  Stockholders
representing 14,255,167 votes with preferred stockholders representing 1,609,548
votes abstaining.


                                       17
<PAGE>

Item 5.    Other Information

                  None

Item 6.    Exhibits and Reports on Form 8-K

         (a)      Exhibits

                  Exhibit Index

         (b)      Reports on Form 8-K

                  On  February 3, 1999,  the Company  filed a report on Form 8-K
         providing  information  under Items 5 and 7. The report  announced  the
         Company's  expansion of its integrated  network strategy to incorporate
         fiber in  response  to growing  demand on  selected  and the  Company's
         selection  of  Lucent  Technologies  to be the  exclusive  supplier  of
         fiber-optic cable for its nationwide, voice and data network.

                  On February 12, 1999,  the Company  filed a report on Form 8-K
         providing  information  under Items 5 and 7. The report  announced that
         David  Schaeffer  would no  longer  serve as  Chairman  of the Board or
         Treasurer of the Company.  The Company also  announced  that William R.
         Smedberg,   currently  the  Vice   President,   Finance  and  Corporate
         Development, will replace Mr. Schaeffer as Treasurer.

                  On April  29,  1999,  the  Company  filed a report on Form 8-K
         providing  information  under  Items  5 and  7.  The  report  announced
         strategic  agreements  with  Worldwide  Fiber  USA  (formerly  known as
         Pacific  Fiber  Link,  LLC) to  construct  and  market a  multi-conduit
         fiber-optic network between Chicago, Illinois and Denver, Colorado with
         a total projected cost for the project in excess of $100 million.



                                       18
<PAGE>




                                   SIGNATURES

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  Registrant  has duly  caused  this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                      PATHNET, INC.,
                                      a Delaware corporation
                                       (Registrant)



Date:    May 14, 1999              By: /s/ Richard A. Jalkut
                                      -----------------------------------------
                                      Richard A. Jalkut
                                       President and Chief Executive Officer



Date:    May 14, 1999              By: /s/ James M. Craig
                                      -----------------------------------------
                                      James M. Craig
                                       Executive Vice-President, Chief
                                        Financial Officer (Principal Accounting
                                        & Financial Officer)



                                       19
<PAGE>




                                  EXHIBIT INDEX

Pursuant to Item 601 of Regulation S-K

  Exhibit No.    Description of Exhibit
  -----------    ----------------------

      27.1        Financial  Data  Schedule for the three months ended March 31,
                  1999.

      99.1        Press  release  dated May 14, 1999  announcing  the  Company's
                  results for the first quarter of 1999.



                                       20
<PAGE>
[{"type": "10-Q", "sequence": "1", "description": "FORM 10-Q QTR ENDED MARCH 31, 99", "secsgml_size_bytes": 65282}]
{"company-data": {"conformed-name": "PATHNET INC", "cik": "0001061148", "assigned-sic": "4813", "irs-number": "521941838", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "10-Q", "act": "34", "file-number": "000-24745", "film-number": "99626724"}, "business-address": {"street1": "1015 31ST STREET NW", "city": "WASHINGTON", "state": "DC", "zip": "20007", "phone": "2026257284"}, "mail-address": {"street1": "1015 31ST STREET NW", "city": "WASHINGTON", "state": "DC", "zip": "20007"}}
SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

 (mark one)

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
            SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended March 31, 1999

                                       OR

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
            SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to _________________

                          Commission File No. 333-53467

                                  Pathnet, Inc.
             (Exact name of registrant as specified in its charter)

         Delaware                                             52-1941838
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                               Identification No.)

     1015 31st Street, N.W.
         Washington, DC                                            20007
(Address of principal executive offices)                         (Zip Code)

                                 (202) 625-7284
              (Registrant's telephone number, including area code)

                                 Not Applicable
(Former name,former address and former fiscal year,if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                 Yes [X] No [ ]

As of May 10, 1999,  there were 2,906,860  shares of the Issuer's  common stock,
par value $.01 per share, outstanding.
PATHNET, INC. AND SUBSIDIARIES
                          QUARTERLY REPORT ON FORM 10-Q
                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
                                      INDEX
Page
Part I.   Financial Information

Item 1.   Unaudited Consolidated Financial Statements

             Consolidated Balance Sheets as of March 31, 1999 (unaudited) and
               December 31, 1998                                                      3

           Unaudited Consolidated  Statements of Operations for the three months
               ended March 31, 1999 and 1998 and for the period  August 25, 1995
               (date of inception) to  March 31, 1999                                 4

            Unaudited  Consolidated  Statements  of  Comprehensive  Loss for the
               three  months  ended  March 31,  1999 and 1998 and for the period
               August 25, 1995 (date of inception) to March 31, 1999                  5

            Unaudited Consolidated Statements of Cash Flows for the three months
               ended March 31, 1999 and 1998 and for the period August 25, 1995
               (date of inception) to March 31, 1999                                  6

            Notes to Unaudited Consolidated Financial Statements                      7

Item 2.   Management's Discussion and Analysis of Financial Condition and Results 
                   of Operations                                                     12

Item 3.   Quantitative and Qualitative Disclosures About Market Risk                 16

Part II.   Other Information

Item 1.    Legal Proceedings                                                         17
Item 2.    Changes in Securities and Use of Proceeds                                 17
Item 3.    Defaults Upon Senior Securities                                           17
Item 4.    Submission of Matters to a Vote of Security Holders                       17
Item 5.    Other Information                                                         18
Item 6.    Exhibits and Reports on Form 8-K                                          18

Signatures                                                                           19

Exhibits Index                                                                       20
2
Part I.     Financial Information

Item 1.    Financial Statements

                         PATHNET, INC. AND SUBSIDIARIES
                         (Development Stage Enterprises)
                           CONSOLIDATED BALANCE SHEETS
March 31,        December 31,
                                                                                                       1999               1998
                                                                                                  -------------     -------------
                                                                                                    (unaudited)
ASSETS
Cash and cash equivalents                                                                         $  98,333,292     $  57,321,887
Note receivable                                                                                               -         3,206,841
Interest receivable                                                                                   2,511,486         3,848,753
Marketable securities available for sale, at market                                                  61,094,006        97,895,773
Prepaid expenses and other current assets                                                             4,374,514           205,505
                                                                                                  -------------     -------------
   Total current assets                                                                             166,313,298       162,478,759
Property and equipment, net                                                                          69,038,378        47,971,336
Deferred financing costs, net                                                                        10,224,246        10,508,251
Restricted cash                                                                                      10,846,191        10,731,353
Marketable securities available for sale, at market                                                  50,074,604        71,899,757
Pledged marketable securities held to maturity                                                       62,655,577        61,824,673
Other assets                                                                                            108,565                 -
                                                                                                  -------------     -------------
     Total assets                                                                                 $ 369,260,859     $ 365,414,129
                                                                                                  =============     =============
                  LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
                          AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable                                                                                  $  14,284,332     $  10,708,263
Accrued interest                                                                                     19,651,045         8,932,294
Accrued expenses and other current liabilities                                                        1,510,532           639,688
                                                                                                  -------------     -------------
   Total current liabilities                                                                         35,445,909        20,280,245
12 1/4% Senior Notes, net of unamortized bond discount of $3,685,500 and $3,787,875
   respectively                                                                                     346,314,500       346,212,125
Other non-current liabilities                                                                           103,017                 -
                                                                                                  -------------     -------------
   Total liabilities                                                                                381,863,426       366,492,370
                                                                                                  -------------     -------------
Series A convertible preferred stock, $0.01 par value, 1,000,000 shares authorized, issued
  and outstanding at March 31, 1999 and  December 31, 1998, respectively (liquidation
  preference $1,000,000)                                                                              1,000,000         1,000,000
Series B convertible preferred stock, $0.01 par value, 1,651,046 shares authorized, issued
  and outstanding at March 31, 1999 and  December 31, 1998, respectively (liquidation
  preference $5,033,367)                                                                              5,008,367         5,008,367
Series C convertible preferred stock, $0.01 par value, 2,819,549 shares authorized, issued
  and outstanding at March 31, 1999 and  December 31, 1998, respectively (liquidation
  preference $30,000,052)                                                                            29,961,272        29,961,272
                                                                                                  -------------      ------------
   Total mandatorily redeemable preferred stock                                                      35,969,639        35,969,639
                                                                                                  -------------      ------------
Common stock,  $0.01 par value,  60,000,000  shares authorized at March 31, 1999
  and December 31, 1998, respectively; 2,903,324 and 2,902,358 shares issued and
  outstanding at March 31, 1999 and December 31, 1998, respectively                                      29,033            29,024
Deferred compensation                                                                                  (843,988)         (978,064)
Additional paid-in capital                                                                            6,157,488         6,156,406
Accumulated other comprehensive income                                                                   74,320           208,211
Deficit accumulated during the development stage                                                    (53,989,059)      (42,463,457)
                                                                                                  -------------     -------------
   Total stockholders' equity (deficit)                                                             (48,572,206)      (37,047,880)
                                                                                                  -------------     -------------
     Total liabilities, mandatorily redeemable preferred stock and stockholders' equity(deficit)  $ 369,260,859     $ 365,414,129
                                                                                                  =============     =============
The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       3
PATHNET, INC. AND SUBSIDIARIES
                         (Development Stage Enterprises)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)
For the period
                                                                                                      August 25, 1995
                                                               For the three months ended           (date of inception
                                                                       March 31,                       to March 31,
                                                          ----------------------------------
                                                               1999                1998                    1999
                                                          -------------       --------------           -------------
Revenue                                                   $     826,104       $      100,000           $   2,573,143
                                                          -------------       --------------           -------------
Operating expenses:
     Cost of revenue                                          2,651,200              714,740              10,198,820
     Selling, general and administrative                      2,795,360            2,110,807              18,420,709
     Depreciation expense                                       537,639               37,223               1,326,470
                                                          -------------       --------------           -------------
        Total operating expenses                              5,984,199            2,862,770              29,945,999
                                                          -------------       --------------           -------------
Net operating loss                                           (5,158,095)          (2,762,770)            (27,372,856)
Interest expense                                            (10,270,211)                   -             (43,258,022)
Interest income                                               3,814,608               80,740              17,929,844
Write-off of initial public offering costs                            -                    -              (1,354,534)
Other income (expense), net                                      88,096               (2,811)                 85,509
                                                          -------------       --------------           -------------
        Net loss                                          $ (11,525,602)      $   (2,684,841)          $ (53,970,059)
                                                          =============       ==============           =============
Basic and diluted loss per
     common share                                         $       (3.97)      $        (0.93)          $      (18.61)
                                                          =============       ==============           =============
Weighted average number of
     common shares outstanding                                2,902,895            2,901,022               2,900,762
                                                          =============       ==============           =============
The accompanying notes are an integral part of these consolidated
                             financial statements.

                                       4
PATHNET, INC. AND SUBSIDIARIES
                         (Development Stage Enterprises)
                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                                   (unaudited)
For the period
                                                                                                      August 25, 1995
                                                               For the three months ended           (date of inception
                                                                       March 31,                       to March 31,
                                                          ----------------------------------
                                                               1999                1998                    1999
                                                          -------------       --------------           -------------
Net loss                                                  $ (11,525,602)      $   (2,684,841)         $  (53,970,059)

Other comprehensive income:
    Net unrealized (loss) gain on marketable
       securities available for sale                           (133,891)                  -                  74,320
                                                           ------------       --------------           -------------
Comprehensive loss                                        $ (11,659,493)      $   (2,684,841)          $ (53,895,739)
                                                           ============       ==============           =============
The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       5
PATHNET, INC. AND SUBSIDIARIES
                     (Development Stage Enterprises)
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (Unaudited)
For the period
                                                                                                                   August 25, 1995
                                                                            For the three months ended           (date of inception
                                                                                          March 31,                 to March 31,
                                                                              --------------------------------
                                                                                   1999                1998              1999
                                                                              -------------     --------------      --------------
Cash flows from operating activities:
   Net loss                                                                   $ (11,525,602)    $   (2,684,841)     $  (53,970,059)
   Adjustment to reconcile net loss to net cash used in operating activities
      Depreciation expense                                                          537,639             37,223           1,326,470
      Amortization of deferred financing costs                                      284,005                  -           1,126,795
      Loss on disposal of asset                                                           -                  -               5,500
      Write-off of deferred financing costs                                               -            337,910             581,334
      Interest expense resulting from amortization of discount on the
        bonds payable                                                               102,375                  -             409,500
      Amortization of premium paid on pledged securities                            167,295                  -             167,295
      Stock based compensation                                                      134,076                  -             835,371
      Interest expense for beneficial conversion feature of bridge loan                   -                  -             381,990
      Accrued interest satisfied by conversion of bridge loan to 
        Series B convertible preferred stock                                              -                  -              33,367
   Changes in assets and liabilities:
      Interest receivable                                                           339,068                  -          (4,507,884)
      Prepaid expenses and other assets                                          (4,277,574)          (108,145)         (4,483,079)
      Accounts payable                                                           (1,234,100)         1,687,380            (726,486)
      Accrued interest                                                           10,718,751                  -          19,651,045
      Accrued expenses and other liabilities                                        973,861            157,334           1,613,548
                                                                              -------------     --------------      --------------
        Net cash used in operating activities                                    (3,780,206)          (573,139)        (37,555,293)
                                                                               -----------      --------------      --------------
Cash flows from investing activities:
   Expenditures for network in progress                                         (16,668,923)        (2,084,372)        (52,028,047)
   Expenditures for property and equipment                                         (125,589)          (710,337)         (3,331,482)
   Sale (purchase) of marketable securities available for sale                   58,493,029                  -        (111,094,290)
   Purchase of marketable securities - pledged as collateral                              -                  -         (83,097,655)
   Sale of marketable securities - pledged as collateral                                  -                  -          22,271,181
   Restricted cash                                                                 (114,838)           471,475         (10,846,191)
   Repayment of note receivable                                                   3,206,841              9,000               9,000
                                                                              -------------     --------------      --------------
        Net cash provided by (used in) investing activities                      44,790,520         (2,314,234)       (238,117,484)
                                                                              -------------     --------------      --------------
Cash flows from financing activities:
   Issuance of voting and non-voting common stock                                         -                  -               1,000
   Proceeds from sale of preferred stock                                                  -                  -          35,000,052
   Proceeds from sale of Series B convertible  preferred stock  representing the
     conversion of committed but undrawn portion of bridge loan to Series B
     convertible preferred stock                                                          -                  -             300,000
   Proceeds from bond offering                                                            -                  -         350,000,000
   Proceeds from bridge loan                                                              -                  -             700,000
   Exercise of employee common stock options                                          1,091                 81               1,172
   Payment of issuance costs for preferred stock offerings                                -                  -             (63,780)
   Payment of deferred financing costs                                                    -            (87,482)        (11,932,375)
                                                                              -------------     --------------      --------------
        Net cash provided by (used in) financing activities                           1,091           (87,401)         374,006,069
                                                                              -------------     --------------      --------------
Net increase in cash and cash equivalents                                        41,011,405         (2,974,774)         98,333,292
Cash and cash equivalents at the beginning of period                             57,321,887          7,831,384                   -
                                                                              -------------     --------------      --------------
Cash and cash equivalents at the end of period                                $  98,333,292     $    4,856,610      $   98,333,292
                                                                              =============     ==============      ==============
The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       6
PATHNET, INC. AND SUBSIDIARIES
                         (DEVELOPMENT STAGE ENTERPRISES)
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.         THE COMPANY

         Pathnet, Inc. (Company) is a carrier's carrier, providing high-quality,
low-cost digital fiber and wireless  communications capacity to under-served and
second- and third-tier U.S. markets.  During the first quarter of 1999,  Pathnet
expanded its business strategy to include construction and deployment of digital
networks utilizing both wireless and fiber-optic  technologies.  The decision to
incorporate  fiber-optic  technologies  into  existing  plans  for a  nationwide
network was made to satisfy demand from potential  customers for  high-bandwidth
facilities,  which the  Company's  wireless  network is not  equipped to handle.
Pathnet offers  telecommunications  service to  inter-exchange  carriers,  local
exchange  carriers,   internet  service   providers,   Regional  Bell  Operating
Companies, cellular operators and resellers.

         During the first  quarter of 1999,  the Company  continued  to focus on
developing its network.  As part of its expanded  strategy,  the Company entered
into two agreements  with Worldwide  Fiber USA (WFI)  (formerly known as Pacific
Fiber  Link,  LLC) in  March  1999  to  construct  and  market  a  multi-conduit
fiber-optic network between Chicago,  Illinois and Denver, Colorado. (See note 9
to these Financial Statements.)

         As of March 31, 1999, the Company had  approximately  2,100 route miles
of  completed  network and  approximately  4,600  route  miles of network  under
construction.

         The Company's  business is funded primarily through equity  investments
by the Company's  stockholders and $350.0 million aggregate  principal amount of
12 1/4% Senior Notes due 2008 (Senior  Notes) which have been  registered  under
the Securities Act of 1933, as amended (Securities Act).

         A substantial portion of the Company's  activities to date has involved
developing  strategic  relationships  with railroads,  pipelines,  utilities and
state and local governments (Incumbents) and building its network.  Accordingly,
a majority of its revenues to date reflect only certain  consulting and advisory
services in connection with the design,  development and construction of digital
microwave  infrastructure.  The remainder of its revenues to date (approximately
28.8 per cent) has been derived from the sale of bandwidth  along the  Company's
digital  network.  The Company has  experienced  significant  operating  and net
losses and  negative  operating  cash flow to date and  expects to  continue  to
experience  operating and net losses and negative operating cash flow until such
time as it is  able to  generate  revenue  sufficient  to  cover  its  operating
expenses.

2.       BASIS OF ACCOUNTING

         While  the  Company  recently  commenced  providing   telecommunication
services  to  customers  and  recognizing  the  revenue  from  the  sale of such
telecommunication  services, its principal activities to date have been securing
contractual  alliances with Incumbents and partners,  designing and constructing
network   segments,   obtaining  capital  and  planning  its  proposed  service.
Accordingly,  the Company's consolidated financial statements are presented as a
development stage enterprise, as prescribed by Statement of Financial Accounting
Standards No. 7, "Accounting and Reporting by Development Stage Enterprises." As
a development stage enterprise,  the Company has been relying on

                                       7
the issuance of equity and debt securities,  rather than recurring revenues, for
its primary sources of cash since inception.

         In June 1997,  the  Financial  Accounting  Standards  Board issued SFAS
No.131,   "Disclosures   About   Segments   of   an   Enterprise   and   Related
Information"("SFAS  No.  131").  SFAS No. 131 changes  the way public  companies
report  segment  information  in annual  financial  statements and also requires
those  companies to report  selected  segment  information in interim  financial
reports to stockholders.  It also establishes  standards for related disclosures
about products and services,  geographic areas, and major customers.  Management
believes the Company's current operations comprise only one segment, the sale of
telecommunications  capacity,  and as such,  adoption  of SFAS No.  131 does not
impact the disclosures made in the Company's financial statements.

         In the opinion of management,  the accompanying  unaudited consolidated
financial statements of the Company and its subsidiaries contain all adjustments
(consisting only of normal recurring  accruals)  necessary to present fairly the
Company's  consolidated financial position as of March 31, 1999, and the results
of operations and cash flows for the periods indicated.  Certain information and
footnote  disclosures  normally  included in  financial  statements  prepared in
accordance with generally accepted accounting  principles have been condensed or
omitted.  These unaudited  consolidated  financial  statements should be read in
conjunction  with the financial  statements  and notes  thereto  included in the
Company's  Annual  Report on Form 10-K for the period  ended  December  31, 1998
filed with the Securities and Exchange Commission. The results of operations for
the three  months  ended March 31, 1999 are not  necessarily  indicative  of the
operating results to be expected for the full year.

3.       REVENUE RECOGNITION

         The Company earns revenue from the sale of  telecommunication  capacity
and for project  management  and consulting  services.  Revenue from the sale of
telecommunications  capacity is earned when the service is provided. Revenue for
project management and consulting services is recognized based on the percentage
of the services completed.  The Company defers revenue when contractual payments
are received in advance of the performance of services.

         Revenue from the sale of  telecommunication  capacity  includes revenue
earned under indefeasible right of use (IRU) agreements.  The Company recognizes
revenue under such agreements on a straight-line basis over their term.

         On a limited basis,  the Company makes purchases of  telecommunications
equipment and ancillary  services on behalf of the Incumbents.  During the first
quarter  of  1999,  the  Company   purchased   approximately   $3.6  million  of
telecommunications  equipment, which includes shelters and towers, and ancillary
services on behalf of two of its  Incumbents.  The Company makes these purchases
in an agency  capacity,  passing  such costs onto the  Incumbents  at no margin.
Accordingly,  the Company has not recorded the  transactions in the accompanying
Consolidated  Statement  of  Operations.  As of  March  31,  1999,  the  Company
recorded,  as a component of Prepaid  Expenses and Other  Current  Assets,  $2.4
million related to these transactions.

                                       8
4.       LOSS PER SHARE

         Basic  earnings  (loss) per share is computed  by  dividing  net income
(loss) by the  weighted  average  number of shares of Common  Stock  outstanding
during the applicable  period.  Diluted earnings (loss) per share is computed by
dividing  net income  (loss) by the  weighted  average  common  and  potentially
dilutive common equivalent shares  outstanding during the applicable period. For
each of the periods  presented,  basic and diluted  loss per share are the same.
The  exercise of  2,936,493  employee  Common  Stock  options,  the  exercise of
warrants to purchase  1,116,500  shares of Common Stock,  and the  conversion of
5,470,595  shares  of  Series  A,  B  and C  convertible  preferred  stock  into
15,864,715  shares of Common Stock as of March 31, 1999, which could potentially
dilute  basic  earnings  per  share  in the  future,  were not  included  in the
computation of diluted loss per share for the periods presented because to do so
would have been antidilutive in each case.

5.       MARKETABLE SECURITIES

         The Company's  marketable  securities  are  considered  "available  for
sale," and, as such, are stated at market value.  The net  unrealized  gains and
losses on  marketable  securities  are  reported  as part of  accumulated  other
comprehensive  income.  Realized  gains or  losses  from the sale of  marketable
securities are based on the specific identification method.

The following is a summary of the investments in marketable  securities at March
31, 1999:
Gross Unrealized 
                                                                              ---------------- 
                                                             Cost           Gains        Losses        Market Value
                                                      ----------------- ------------  -----------   ------------------
Available for sale securities:
  U.S. Treasury securities and debt securities
      of U.S. Government agencies                     $      35,735,957 $      9,098 $     14,562   $       35,730,493
  Certificates of deposit and money market
      funds                                                   1,999,832        1,908           --            2,001,740
  Corporate debt securities                                  73,358,501       79,887        2,011           73,436,377
                                                      ----------------- ------------  -----------   ------------------
                                                      $     111,094,290 $     90,893  $    16,573   $      111,168,610
                                                      ================= ============  ===========   ==================
Net  proceeds  from the sales of  available  for sale  securities  were
approximately  $58,493,000  and gross  realized  gains on sales of available for
sale securities were  approximately  $86,000 during the three months ended March
31, 1999.

                                       9
The  amortized  cost and  estimated  fair value of  available  for sale
securities by contractual maturity at March 31, 1999 is as follows:
Cost               Market Value
                                                 ------------------       ----------------
Due in one year or less                 $       61,048,866      $      61,094,006
         Due after one year through two years            50,045,424             50,074,604
                                                 ------------------       ----------------
                                                 $      111,094,290      $     111,168,610
                                                 ==================       ================
Expected maturities may differ from contractual  maturities because the
issuers  of the  securities  may have the  right to prepay  obligations  without
prepayment penalties.

         In addition to marketable  securities,  the Company has  investments in
pledged  marketable  securities  that are pledged as collateral for repayment of
interest on the Company's Senior Notes through April 2000) and are classified as
non-current  assets on the  consolidated  balance  sheet.  As of March 31, 1999,
pledged marketable  securities consisted of U.S. Treasury securities  classified
as held to maturity  with an  amortized  cost of  approximately  $60.6  million,
interest  receivable on the pledged marketable  securities of approximately $2.0
million  and cash and cash  equivalents  of  approximately  $41,000.  All of the
investments contractually mature by March 31, 2000.

6.       PROPERTY AND EQUIPMENT

         Property and  equipment,  stated at cost, is comprised of the following
at March 31, 1999 and December 31, 1998:
March 31,             December 31,
                                                                           1999                   1998       
                                                                   -----------------         ----------------
Network in progress                                       $     49,662,363       $       38,669,088
         Communications network                                          17,335,336                6,890,686
         Office and computer equipment                                    2,421,084                2,267,647
         Furniture and fixtures                                             767,982                  766,013
         Leasehold improvements                                             178,083                  166,733
                                                                   ----------------       ------------------
                                                                         70,364,848               48,760,167
         Less: accumulated depreciation                                  (1,326,470)                (788,831)
                                                                   ----------------       ------------------
 Property and equipment, net                                       $     69,038,378       $       47,971,336
                                                                   ================       ==================
Network in progress  includes  (i) all direct  material and labor costs
incurred on the  construction  of the network  together  with related  allocable
interest  costs,  necessary to construct  components of a high capacity  digital
network which is owned and maintained by the Company,  and (ii) network  related

                                       10
inventory of parts and  equipment.  When a portion of network has been completed
and made  available  for use by the Company it is  transferred  from  network in
process to  communications  network.  As of March 31, 1999, the Company incurred
non-cash capital expenditures of approximately $15.0 million.

7.       RESTRICTED CASH

         Restricted  cash  comprises  amounts  held  in  escrow  to  secure  the
Company's  obligations under certain of its Fixed Point Microwave Services (FPM)
agreements.  The funds in each  escrow  account are  available  only to fund the
project to which the escrow is related until such project has been completed, at
which time surplus funds will be returned to the Company.  Generally,  funds are
released  from escrow to pay project  costs when such costs  incurred and agreed
upon under the contract.  During the three months ended March 31, 1999, no funds
were released from escrow.

8.       COMMITMENTS AND CONTINGENCIES

         As of March 31,  1999,  the Company had  capital  commitments  of up to
approximately  $93.0  million  relating to  telecommunication  and  transmission
equipment  and  its  agreement  with  WFI.  (see  note  9  to  these   Financial
Statements).

9.       FIBER AGREEMENT

         On March 31,  1999,  the  Company  signed  two  agreements  with WFI to
construct  and  market a  multi-conduit  fiber-optic  network  between  Chicago,
Illinois and Denver,  Colorado. The total shared projected cost for this project
is in excess of $100 million.  The 1,100-mile network between Chicago and Denver
will pass through Des Moines, Iowa; Omaha, Nebraska; and Lincoln,  Nebraska. WFI
will lead-manage the project with  construction to be completed in two segments.
The first  segment,  Chicago to Omaha,  is  expected to be complete in late 1999
with the second segment, Omaha to Denver, scheduled to come on line in 2000.

                                       11
Item 2.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations

     CERTAIN  STATEMENTS  CONTAINED  IN  THIS  ITEM  CONSTITUTE  FORWARD-LOOKING
STATEMENTS. SEE "FORWARD-LOOKING STATEMENTS" BELOW.

Overview

         During  the  first  quarter  of 1999,  Pathnet  expanded  its  business
strategy to include  construction and deployment of digital  networks  utilizing
both  wireless  and  fiber-optic  technologies.   The  decision  to  incorporate
fiber-optic  technologies into existing plans for a nationwide  network was made
to satisfy demand from potential customers for high-bandwidth facilities.

         Due to Pathnet's focus to date on developing its network,  the majority
of its  revenues to date  reflect  certain  consulting  and  project  management
services in connection with the design,  development and construction of digital
microwave  infrastructure.  The  remaining  portion of its revenues has resulted
from  the  sale of  bandwidth  services  along  its  network.  The  Company  has
experienced  significant  operating and net losses and negative  operating  cash
flow to date and expects to continue to experience  operating and net losses and
negative  operating cash flow until such time as it is able to generate  revenue
sufficient to cover its operating expenses.

Worldwide Fiber Agreement

         The Company  continued to focus on developing  its network in the first
quarter of 1999.  As part of its  expanded  strategy,  the Company  entered into
agreements with Worldwide Fiber USA (WFI) (formerly known as Pacific Fiber Link,
LLC) in March 1999 to construct and market a multi-conduit  fiber-optic  network
between Chicago, Illinois and Denver, Colorado. The 1,100-mile network will pass
through Des Moines, Iowa; Omaha, Nebraska; and Lincoln, Nebraska.

Results of Operations

Three Months Ended March 31, 1999 Compared with the Three Months Ended March 31,
1998

         During the three months ended March 31, 1999, the Company  continued to
focus on developing relationships with railroads, pipelines, utilities and state
and local governments (collectively, "Incumbents") and partners, the buildout of
its network and the  development of its  infrastructure  including the hiring of
key management personnel.

         Revenue

         For the three  months  ended  March  31,  1999 and  1998,  the  Company
generated revenues of approximately $826,000 and $100,000, respectively. For the
three months ended March 31, 1999, the Company generated  revenues from the sale
of telecommunications  services of approximately $576,000, together with revenue
from consulting and advisory services in connection with the design, development
and construction of digital microwave  infrastructure of approximately $250,000.
For the three months  ended March 31, 1998,  the  Company's  revenues  consisted
primarily of revenue from consulting and

                                       12
advisory  services.  The Company expects that a majority of future revenue to be
generated from the sale of telecommunications services.

         Operating Expenses

         For the three  months  ended  March  31,  1999 and  1998,  the  Company
incurred  operating  expenses of  approximately  $6.0 million and $2.9  million,
respectively.  The increase is primarily as a result of the continued  increased
activity in the buildout of the  Company's  network and  additional  staff costs
incurred as part the  development of the Company's  infrastructure.  The Company
expects selling,  general and administrative expenses to continue to increase in
the remainder of 1999 as  additional  staff is added.  Cost of revenue  reflects
direct costs associated with performance of  construction,  management  services
and costs  incurred  in  connection  with the  provision  of  telecommunications
services.

         Interest Expense

         Interest  expense  for the  three  months  ended  March  31,  1999  was
approximately $10.3 million.  There was no interest expense for the three months
ended March 31, 1998.  Interest  expense  primarily  represents  interest on the
Company's  12 1/4%  Senior  Notes  due 2008  issued in April  1998 (the  "Senior
Notes") together with the amortization expense related to bond issuance costs in
respect of the Senior Notes.

         Interest Income

         Interest  income for the three months ended March 31, 1999 and 1998 was
approximately $3.8 million and $81,000, respectively. This increase is primarily
a result of additional cash arising from the Senior Notes issued in April 1998.

Liquidity and Capital Resources

         The  Company  expects to  continue  to  generate  cash  primarily  from
external financing and, as its network matures, from operating  activities.  The
Company's  primary  uses of cash will be to fund capital  expenditures,  working
capital and operating  losses.  Deployment of the Company's  digital network and
expansion of the  Company's  operations  and services  will require  significant
capital expenditures.  Capital expenditures will be used primarily for continued
development  and  construction of its network,  implementation  of the Company's
sales and marketing  strategy and  constructing and improvement of the Company's
Network Operating Center (the "NOC").

         As of March 31,  1999,  the Company had  capital  commitments  of up to
approximately  $93.0 million  relating to  telecommunications  and  transmission
equipment and its agreement with WFI. It is  anticipated  that these will be met
with  current  resources  of the Company and with the sale of dark and lit fiber
capacity.

         As of March 31, 1999, the Company had  approximately  $209.4 million of
cash, cash  equivalents and marketable  securities  available for the funding of
future  operations.  The Company  expects these  resources will be sufficient to
fund the  implementation  of the Company's  business plan into 2000.  After such
time, the Company expects to be required to procure  additional  financing which
may include 

                                       13
commercial bank borrowings,  additional vendor financing or the sale or issuance
of equity or debt  securities.  There can be no  assurance  the Company  will be
successful in raising sufficient capital or in obtaining such financing on terms
acceptable to the Company.

         Pursuant to a Commitment Letter between Lucent and the Company that was
executed  in  connection  with  the  supply  agreement  between  Lucent  and the
Company (the "Commitment  Letter"),  Lucent  may  provide  financing  of  up  to
approximately  $400  million for fiber  purchases  for the  construction  of the
Company's network and may provide or arrange financing for future phases of such
network. Under the terms of the Commitment Letter, the total amount of financing
provided by Lucent will not exceed $1.8  billion of the $2.1  billion  potential
value  of  the  supply  agreement.  Certain  material  terms  of  the  Company's
agreements  with  Lucent,  including  the terms of the  Commitment  Letter,  are
currently under review by Lucent and the Company. There can be no assurance that
the  transactions,  including the financing  contemplated by Commitment  Letter,
will be  consummated  at all or consummated  on the terms  described  above.  In
addition,  the  Company  may  require  additional  capital in the future to fund
operating deficits and net losses and for potential strategic  alliances,  joint
ventures and acquisitions.

         Because the  Company's  cost of designing  and building its network and
operating  its business,  as well as its  revenues,  will depend on a variety of
factors  (including,  among other things, the ability of the Company to meet its
roll-out  schedules,  its ability to negotiate favorable prices for purchases of
network  equipment,  the number of customers  and the services and products they
purchase,  regulatory  changes  and  changes in  technology),  actual  costs and
revenues will vary from expected  amounts,  possibly to a material  degree,  and
such variations are likely to affect the Company's future capital  requirements.
Accordingly,  there  can be no  assurance  that  the  Company's  actual  capital
requirements will not exceed the anticipated amounts described above.

Year 2000

         The Year 2000 issue exists  because many computer  systems and software
applications  use two digits  rather than four digits to designate an applicable
year. As a result,  the systems and applications may not properly  recognize the
Year 2000,  or process data that includes  that date,  potentially  causing data
miscalculations or inaccuracies or operational malfunctions or failures.

         In the  fourth  quarter of 1998,  the  Company  began a  corporate-wide
program to ready its technology systems and non-technology  systems and software
applications  for the Year 2000. The Company's  objective is to target Year 2000
compliance for all of its systems,  including  network and customer  interfacing
systems, and has grouped these systems into one of six compliance areas: Network
Architecture,   Internal   Infrastructure,   Software  Applications,   Financial
Relationships,  Supply-Chain  Relationships and Customer Relationships.  Because
the  Company  has  operated  for  only  a  few  years,  few  legacy  systems  or
applications  exist.  However,  the  Company  has  identified  all  systems  and
applications  that may need to be modified or  reprogrammed  in order to achieve
Year 2000 compliance and is working towards  implementing any necessary  changes
and expects to complete this process by the end of the third quarter of 1999.

         As part of its Year 2000 plan,  the Company has requested  confirmation
from its  communications  equipment  vendors and other key suppliers,  financial
institutions  and  customers  that their  systems  will 

                                       14
be Year 2000 compliant. Responses received to-date indicate a high level of Year
2000 compliance at these companies,  however, there can be no assurance that the
systems of  companies  with which the Company  does  business  will be Year 2000
compliant..  The Company  expects to receive  additional  responses  in the next
quarter. If the vendors important to the Company fail to provide needed products
and services,  the Company's  network  buildout and operations could be affected
and  thereby  have a  material  adverse  effect  on  the  Company's  results  of
operations,  liquidity and  financial  condition.  Moreover,  to the extent that
significant customers are not Year 2000 compliant and that affects their network
needs, the Company's sales could be lower than otherwise anticipated.

         The  Company's  expenditures  to implement  its Year 2000 plan have not
been  material to date and it does not believe its future  expenditures  on this
matter will be material.  Because its existing  systems are  relatively  new, it
does not expect that it will have to replace any of its  systems.  To the extent
it would have to replace a significant  portion of its technology  systems,  its
expenditures could have material adverse effect on the Company.  The Company has
hired an outside consultant to assist it with its Year 2000 compliance,  but the
Company has relied primarily on its existing  employees to develop and implement
its Year 2000 compliance strategy.  As a result, its expenditures to ensure Year
2000  compliance have not been material to date. The Company expects to continue
to use existing  employees for the significant  part of its Year 2000 compliance
efforts in the future.

         The Company is currently  formulating a  contingency  plan in the event
that  certain  of its  suppliers  or  service  providers  may not be  Year  2000
compliant.  This plan will continue to be developed throughout 1999. The Company
expects to have such plan in operation by the end of the fourth quarter of 1999.

Forward-Looking Statements

         Certain  statements  in this Report,  in future  filings by the Company
with the Securities and Exchange Commission, in the Company's press releases and
in oral  statements  made by or with the  approval  of an  authorized  executive
officer  of  the  Company  constitute  forward-looking   statements,   including
statements  which can be  identified by the use of  forward-looking  terminology
such as "believes,"  "anticipates," "expects," "may," "will," or "should" or the
negative  of  such  terminology  or  other  variations  on such  terminology  or
comparable  terminology,  or by discussions of strategies that involve risks and
uncertainties.  All statements  other than statements of historical fact in this
Report,  including,  without  limitation,  such  statements  under  the  caption
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations,"  regarding the Company or any of the transactions described in this
Report or the timing, financing, strategies and effects of such transaction, are
forward-looking statements.  Although the Company believes that the expectations
reflected in such  forward-looking  statements  are  reasonable,  it can give no
assurance that such  expectations  will prove to be correct.  Important  factors
that could cause actual results to differ materially from expectations  include,
without  limitation,  those  described in conjunction  with the  forward-looking
statements in this Report, as well as the amount of capital needed to deploy the
Company's network;  the Company's  substantial  leverage and its need to service
its indebtedness; the restrictions imposed by the Company's current and possible
future financing arrangements; the ability of the Company to successfully manage
the  cost-effective  and timely  completion  of its  network  and its ability to
attract and retain  customers for its products and services;  the ability of the
Company to  implement  its newly  expanded  business  plan;  the  

                                       15
ability of the Company to retain and attract  relationships  with the  incumbent
owners of the telecommunications  assets with which the Company expects to build
its network; the ability of the Company to obtain and maintain rights-of-way for
the deployment of its network;  the Company's  ability to retain and attract key
management  and other  personnel as well as the Company's  ability to manage the
rapid expansion of its business and operations; the Company's ability to compete
in the  highly  competitive  telecommunications  industry  in  terms  of  price,
service, reliability and technology; the Company's dependence on the reliability
of its network equipment, its reliance on key suppliers of network equipment and
the risk that its technology will become obsolete or otherwise not  economically
viable;  and the  Company's  ability  to conduct  its  business  in a  regulated
environment.  The  Company  does not  intend  to  update  these  forward-looking
statements.  These and other risks and  uncertainties  affecting the Company are
discussed in greater detail in the Company's 1998 Annual Report on Form 10-K.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

         The  Company  is exposed to the impact of  interest  rate  changes  and
changes  in the  market  value of its  investments.  As of March 31,  1999,  the
Company's investments include certificates of deposit,  money market funds, U.S.
Government obligations (primarily fixed income securities) and high-quality debt
securities.  The Company employs  established  policies and procedures to manage
its exposure to changes in the market risk of its marketable  securities,  which
are classified as available for sale as of March 31, 1999. The Company's  Senior
Notes  have fixed  interest  rates and the fair  value of these  instruments  is
affected  by  changes  in  market  interest  rates.  The  Company  has not  used
derivative financial instruments in its investment portfolio.

         Investments in fixed rate interest earning  instruments  carry a degree
of  interest  rate  risk.  The fair  market  value of  these  securities  may be
adversely impact due to a rise in interest rates. Investments in certificates of
deposit and money market funds may  adversely  impact  future  earnings due to a
decrease in interest rates.  Due in part to these factors,  the Company's future
investment income may all short of expectations due to changes in interest rates
or the Company may suffer losses in principal if forced to sell  securities that
have declined in market value due to changes in interest  rates. As of March 31,
1999,  a 10%  increase  or decline in  interest  rates would not have a material
impact on the Company's future earnings,  fair values,  or cash flows related to
investments  in   certificates  of  deposit  or  interest   earning   marketable
securities.  In addition,  as of March 31, 1999, a 10% decrease in market values
would not have a material impact on the Company's future earnings,  fair values,
financial   position  or  cash  flows  related  to   investments  in  marketable
securities.

                                       16
Part II.   Other Information

Item 1.    Legal Proceedings

                  None

Item 2.    Changes in Securities and Use of Proceeds

                  None

Item 3.    Defaults Upon Senior Securities

                  None

Item 4.    Submission of Matters to a Vote of Security Holders

         During the first quarter,  the Company  solicited written consents from
its  stockholders  to approve (i) the removal of David Schaeffer as the Chairman
of the Board and  Treasurer  of the  Company,  (ii) the  appointment  of William
Smedberg as Treasurer of the Company and (iii) the offer by the Company to David
Schaeffer of a consultancy role with the Company on such terms and conditions to
be determined by a subcommittee  of the Board of Directors.  Effective  February
12, 1999, the Company received  written  consents  approving such proposals from
stockholders  representing  14,413,661  votes,  with  stockholders  representing
1,454,378  votes  abstaining  and  stockholders   representing  2,900,000  votes
objecting.

         On February 12, 1999 the Company  solicited  written  consents from the
holders  of its  Series A  Convertible  Preferred  Stock,  Series B  Convertible
Preferred  Stock and Series C Convertible  Preferred  Stock  (collectively,  the
"Preferred  Stockholders")  to approve (i) the removal of David Schaeffer as the
Chairman of the Board and  Treasurer of the  Company,  (ii) the  appointment  of
William  Smedberg as Treasurer of the Company and (iii) the offer by the Company
to David  Schaeffer  of a  consultancy  role with the  Company on such terms and
conditions  to be  determined  by a  subcommittee  of the  Board  of  Directors.
Effective  February 12, 1999, the Company received  written  consents  approving
such proposals from Preferred  Stockholders  representing  14,411,303 votes with
Preferred Stockholders representing 1,453,412 votes abstaining.

On March 3, 1999,  the Company  solicited  written  consents  from the Preferred
Stockholders to approve (i) the removal of William Smedberg as Vice President of
the Company and the  appointment of Mr.  Smedberg as Executive  Vice  President,
Corporate Development, (ii) increases and changes to the compensation of certain
employees  of the  Company,  (iii)  changes to the  authorized  signatories  for
transfers  and  withdrawals  of the  Company's  funds,  (iv) an  increase in the
Company's directors and officers insurance coverage, (v) certain interconnection
arrangements  relating  to the  Company's  network  and (vi) the  payment  of an
invoice for  outside  counsel  services.  Effective  March 3, 1999,  the Company
received written consents  approving such proposals from Preferred  Stockholders
representing 14,255,167 votes with preferred stockholders representing 1,609,548
votes abstaining.

                                       17
Item 5.    Other Information

                  None

Item 6.    Exhibits and Reports on Form 8-K

         (a)      Exhibits

                  Exhibit Index

         (b)      Reports on Form 8-K

                  On  February 3, 1999,  the Company  filed a report on Form 8-K
         providing  information  under Items 5 and 7. The report  announced  the
         Company's  expansion of its integrated  network strategy to incorporate
         fiber in  response  to growing  demand on  selected  and the  Company's
         selection  of  Lucent  Technologies  to be the  exclusive  supplier  of
         fiber-optic cable for its nationwide, voice and data network.

                  On February 12, 1999,  the Company  filed a report on Form 8-K
         providing  information  under Items 5 and 7. The report  announced that
         David  Schaeffer  would no  longer  serve as  Chairman  of the Board or
         Treasurer of the Company.  The Company also  announced  that William R.
         Smedberg,   currently  the  Vice   President,   Finance  and  Corporate
         Development, will replace Mr. Schaeffer as Treasurer.

                  On April  29,  1999,  the  Company  filed a report on Form 8-K
         providing  information  under  Items  5 and  7.  The  report  announced
         strategic  agreements  with  Worldwide  Fiber  USA  (formerly  known as
         Pacific  Fiber  Link,  LLC) to  construct  and  market a  multi-conduit
         fiber-optic network between Chicago, Illinois and Denver, Colorado with
         a total projected cost for the project in excess of $100 million.

                                       18
SIGNATURES

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  Registrant  has duly  caused  this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                      PATHNET, INC.,
                                      a Delaware corporation
                                       (Registrant)

Date:    May 14, 1999              By: /s/ Richard A. Jalkut
                                      -----------------------------------------
                                      Richard A. Jalkut
                                       President and Chief Executive Officer

Date:    May 14, 1999              By: /s/ James M. Craig
                                      -----------------------------------------
                                      James M. Craig
                                       Executive Vice-President, Chief
                                        Financial Officer (Principal Accounting
                                        & Financial Officer)

                                       19
EXHIBIT INDEX

Pursuant to Item 601 of Regulation S-K

  Exhibit No.    Description of Exhibit
  -----------    ----------------------

      27.1        Financial  Data  Schedule for the three months ended March 31,
                  1999.

      99.1        Press  release  dated May 14, 1999  announcing  the  Company's
                  results for the first quarter of 1999.

                                       20