LOUDCLOUD INC
S-1/A, 2000-12-05
BUSINESS SERVICES, NEC
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<PAGE>


 As filed with the Securities and Exchange Commission on December 5, 2000
                                                      Registration No. 333-46606
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                ---------------

                              AMENDMENT NO. 3
                                       To
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     Under
                           The Securities Act of 1933
                                ---------------
                                LOUDCLOUD, INC.
             (Exact name of Registrant as specified in its charter)
                                ---------------
<TABLE>
<S>                                <C>                                <C>
            Delaware                              7389                            94-3340178
 (State or other jurisdiction of      (Primary Standard Industrial             (I.R.S. Employer
 incorporation or organization)       Classification Code Number)           Identification Number)
</TABLE>

                             599 N. Mathilda Avenue
                              Sunnyvale, CA 94086
                                 (408) 744-7300
  (Address, including zip code, and telephone number, including area code, of
                   Registrant's principal executive offices)
                                ---------------
                              Benjamin A. Horowitz
                     President and Chief Executive Officer
                                LOUDCLOUD, INC.
                             599 N. Mathilda Avenue
                              Sunnyvale, CA 94086
                                 (408) 744-7300
 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)
                                ---------------
                                   Copies to:
<TABLE>
<S>                                                <C>
              Larry W. Sonsini, Esq.                          William H. Hinman, Jr., Esq.
             Donna M. Petkanics, Esq.                          Simpson Thacher & Bartlett
               Craig D. Norris, Esq.                        3373 Hillview Avenue, Suite 250
              Kristin G. Keeffe, Esq.                             Palo Alto, CA 94304
               Eric R. Barnett, Esq.
         Wilson Sonsini Goodrich & Rosati
             Professional Corporation
                650 Page Mill Road
                Palo Alto, CA 94304
</TABLE>
                                ---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
                                ---------------
                        CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                   Proposed Maximum
                                                      Aggregate      Amount of
               Title of Each Class                     Offering     Registration
          of Securities to be Registered              Price (1)       Fee (2)
--------------------------------------------------------------------------------
<S>                                                <C>              <C>
Common Stock, $0.001 par value...................    $150,000,000     $39,600
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
    pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) A registration fee of $39,600 was paid with the initial filing.
                                ---------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a)
may determine.

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

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be     +
+changed. These securities may not be sold until the registration statement    +
+filed with the Securities and Exchange Commission is effective. This          +
+preliminary prospectus is not an offer to sell nor does it seek an offer to   +
+buy these securities in any jurisdiction where the offer or sale is not       +
+permitted.                                                                    +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

              Subject to Completion. Dated December 5, 2000.

                               10,000,000 Shares


                              [LOGO OF LOUDCLOUD]

                                  Common Stock

                                  -----------

  This is an initial public offering of shares of common stock of Loudcloud,
Inc. All of the 10,000,000 shares of common stock are being sold by Loudcloud.

  Prior to this offering, there has been no public market for the common stock.
It is currently estimated that the initial public offering price per share will
be between $10 and $12. Loudcloud has applied for quotation of the common stock
on the Nasdaq National Market under the symbol "LDCL."

  See "Risk Factors" beginning on page 7 to read about factors you should
consider before buying shares of the common stock.

  Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.

                                  -----------

<TABLE>
<CAPTION>
                                                                 Per Share Total
                                                                 --------- -----
<S>                                                              <C>       <C>
Initial public offering price...................................   $       $
Underwriting discount...........................................   $       $
Proceeds, before expenses, to Loudcloud.........................   $       $
</TABLE>

  To the extent that the underwriters sell more than 10,000,000 shares of
common stock, the underwriters have the option to purchase up to an additional
1,500,000 shares from Loudcloud at the initial public offering price less the
underwriting discount.

                                  -----------

  The underwriters expect to deliver the shares against payment in New York,
New York on       , 2000.

                                  -----------

Goldman, Sachs & Co.                                 Morgan Stanley Dean Witter

                                  -----------

                           Thomas Weisel Partners LLC

                                 Epoch Partners

                                  -----------

                        Prospectus dated        , 2000.
<PAGE>

[Inside Front Cover--Text and Graphics]

    This page contains a blue sky with white clouds as the background. The
Loudcloud logo appears near the top of the page. Under the logo the following
text appears:

               "Offering a new class of Internet infrastructure
                     services to established enterprises,
                     ASPs and Internet-based businesses."

    The middle of this page contains the following text:

    "Enabling our customers to:

    . Scale rapidly

    . Focus on their core business

    . Reduce time to market"
<PAGE>

[Inside Gatefold, pages one and two--Text and Graphics]

    The following title appears at the top of the first page and continues
across the second page:

         "The Loudcloud Infrastructure Network"

    The following text appears on the left side of the first page:

         "Challenge:

         Companies today have to manage, understand and optimize their Internet
    infrastructure--above and beyond creating their own applications."

    A diagram of the typical infrastructure of an Internet site appears below
this text with the following labels to its left:

         "Systems Administrators
         Database Administrators
         Performance Debuggers
         Network Administrators
         Software Engineers
         Security Experts"

    The following labels appear on the right side of the diagram:

         "Storage
         Databases
         Application Servers
         Web Servers
         Load Balancers
         Firewall
         Customer Application"

    Below this diagram, on the left side of the first page, the following text
appears:

         "Solution:

         Loudcloud provides businesses Internet infrastructure services that:

   .  Address the challenges associated with deploying, maintaining and growing
      Internet operations for critical business functions

   .  Enable businesses to benefit from reliable, high-quality and scalable
      Internet operations without undertaking the difficulty and expense
      associated with building the required expertise in-house

   .  Leverage Loudcloud's Opsware technology to deliver scalability and
      reliability for a broad base of customers

         Another diagram appears below this text. This diagram is encircled in a
   sketch of a cloud. The words "Loudcloud services" are centered in the
   diagram. The words "Customer Application" extends from a rectangle within the
   diagram.
            On the second page the following text appears about one-third of the
   way down and is centered across the page:

         "An infrastructure network that consistently deploys operations
   infrastructure capacity for our customers across multiple locations."
<PAGE>

    A diagram appears below this text which is also connected to the diagram on
the bottom of the first page of the fold out. The diagram consists of two
concentric ovals. The following text appears centered inside of the inner oval:

                                   "OPSWARE
                                  TECHNOLOGY
                            Powering the Loudcloud
                            Infrastructure Network"

    At the top of the outer oval, a small gray diamond containing the letters
"GNOC" appears. A series of small tan circles appear along the outer oval. The
small blue diagrams are inside each of the small tan circles. There is a key
below this diagram showing that a tan circle indicates a Third-Party Data
Center, a small blue diagram indicates a Customer and that GNOC indicates a
Global Network Operations Center.
<PAGE>

                               PROSPECTUS SUMMARY

    You should read this summary together with the entire prospectus, including
the more detailed information in our financial statements and accompanying
notes appearing elsewhere in this prospectus.

                                Loudcloud, Inc.

    We offer businesses a new class of Internet infrastructure services. Using
our Opsware technology, which automates formerly manual tasks associated with
deployment and maintenance of Internet operations, we provide a suite of
services that addresses the challenges of deploying, maintaining and growing
Internet operations for critical business functions. These manual tasks include
configuring hardware with the appropriate operating system, testing the
stability of the hardware within the overall operational environment, managing
the performance of the hardware and software on an ongoing basis and expanding
the capabilities of the infrastructure. Our Opsware technology allows us to
centrally and consistently deploy and maintain our customers' Internet
operations across multiple locations, with less manual intervention than would
traditionally be required. We generate revenue from the sale of our services,
which incorporate the technology infrastructure and the deployment and
maintenance expertise required to support and expand the scope of a customer's
Internet operations.

    Our customers include established enterprises, application service
providers and Internet-based businesses, each of which requires robust Internet
operations to successfully interact with their business partners and to deliver
their products and services to their customers. Our Smart Cloud services enable
our customers to benefit from reliable and high-quality Internet operations
that can grow to accommodate increasing business needs without requiring them
to undertake the difficulty and expense associated with developing the required
expertise in-house. Our services also allow our customers to focus on building
their businesses and developing their software applications rather than
spending valuable resources maintaining their Internet operations
infrastructure. Using our services, our customers are able to access the
operations capacity they require to efficiently run their Internet operations
and to increase or reduce that capacity as business needs dictate.

    We deliver our Smart Cloud services through the Loudcloud Infrastructure
Network, which allows us to centrally and consistently provision operations
infrastructure capacity for our customers across multiple locations. The
Loudcloud Infrastructure Network consists of our technology infrastructure
located in our centralized network operations center and a number of
interconnected third-party data centers. Among other things, the Loudcloud
Infrastructure Network allows our customers to maintain a duplicate operations
infrastructure in multiple locations and efficiently incorporate additional
functionality into their Internet operations as new technologies evolve.

    We manage this network using our Opsware technology. We believe, based upon
the experience of many of our employees who have run and managed large-scale
Internet operations, that our Opsware technology enables us to deploy and
maintain a customer's Internet operations more quickly and efficiently and with
a higher quality of service than a customer could otherwise do on its own.

    We were incorporated in September 1999 and have a limited operating
history. In addition, we have a history of losses, have not achieved
profitability and have an accumulated deficit through July 31, 2000 of $122.0
million. We anticipate that we will increase our investment in our business
and, therefore, we

                                       3
<PAGE>

expect to continue to incur significant operating losses and negative cash flow
for the foreseeable future. After this offering, our executive officers,
directors and their affiliates will own approximately 65.1% of our outstanding
common stock and, therefore will exercise significant control over all matters
requiring stockholder approval.

    Our strategy is to establish Loudcloud as the leading provider of Internet
infrastructure services. We plan to expand the geographic scope of the
Loudcloud Infrastructure Network and extend the capabilities of our Opsware
technology. We also intend to continue to invest in the development and
integration of additional services and to expand the scope of services we
provide.


                                       4
<PAGE>


                                  The Offering

<TABLE>
 <C>                                         <S>
 Shares offered by Loudcloud................ 10,000,000 shares

 Shares to be outstanding after this
  offering.................................. 104,759,167 shares

 Use of proceeds............................ For general corporate purposes, including
                                             working capital and capital expenditures.

 Proposed Nasdaq National Market symbol..... "LDCL"
</TABLE>

    Except as otherwise indicated, whenever we present the number of shares of
common stock outstanding, we have:

  .  included 34,543,188 shares, held primarily by our employees, that are
     subject to a right of repurchase by Loudcloud as of October 31, 2000;

  .  based this information on the shares outstanding as of October 31, 2000,
     excluding:

    .  2,336,036 shares of common stock issuable upon exercise of
       outstanding warrants at an exercise price of $0.01 per share,

    .  5,693,047 shares of common stock issuable upon exercise of
       outstanding options at a weighted average exercise price of $2.65
       per share, and

    .  33,392,162 shares of common stock available for future issuance
       under our various stock plans, including stock plans adopted or
       subsequently amended in connection with this offering;

  .  given effect to the automatic conversion of our outstanding preferred
     stock into common stock upon completion of this offering;

  .  assumed no exercise of options and warrants after October 31, 2000,
     other than the exercise of a warrant to purchase 10,000 shares of
     preferred stock at an exercise price of $0.84056 per share; and

  .  assumed no exercise of the underwriters' over-allotment option.

    Between November 1, 2000 and December 5, 2000, we granted to our employees
options to purchase 1,562,600 shares of common stock at a weighted average
exercise price of $9.00 per share, which reduced the number of shares of common
stock available for future issuance under our various stock plans.

                             Additional Information

    We were incorporated in Delaware in September 1999 under the name VCellar,
Inc. We changed our name to Loudcloud, Inc. in November 1999. Our principal
executive offices are located at 599 N. Mathilda Avenue, Sunnyvale, California
94086, and our telephone number is (408) 744-7300.

    Loudcloud, Access Control Cloud, Application Server Cloud, Content
Distribution Cloud, Customer Analytics Cloud, Database Cloud, Directory Cloud,
Mail Cloud, Monitoring Cloud, myLoudcloud, Smart Cloud, Staging Cloud, Storage
Cloud, Stress Cloud and Web Cloud are trademarks or service marks of Loudcloud.
This prospectus also contains brand names, trademarks and service marks of
companies other than Loudcloud, and these brand names, trademarks and service
marks are the property of their respective holders.

                                       5
<PAGE>

                         Summary Financial Information

    The following tables summarize the audited financial data for our business.
You should read this data along with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
related notes included elsewhere in this prospectus. Pro forma net loss per
share applicable to common stockholders reflects the conversion of all
outstanding preferred stock into common stock from the beginning of the period
presented or at the date of original issuance, if later, even though the effect
of the conversion is antidilutive. The as adjusted balance sheet data reflects
our receipt of the estimated net proceeds from the sale of 10,000,000 shares of
common stock in this offering at an assumed initial public offering price of
$11.00 per share after deducting the estimated underwriting discounts and
commissions and the estimated expenses of this offering.

<TABLE>
<CAPTION>
                                Period from
                                 Inception
                               (September 9,
                                  1999) to          Six Months Ended
                             January 31, 2000         July 31, 2000
                             -----------------     -------------------
                             (in thousands, except per share data)
<S>                          <C>                   <C>
Statements of Operations
 Data:
Net revenue................     $              --     $             1,941
Cost and expenses:
  Cost of revenue*.........                    --                  13,729
  Research and
   development*............                 1,453                   4,298
  Sales and marketing*.....                   710                   4,292
  General and
   administrative*.........                   760                   3,454
  Amortization of deferred
   stock compensation......                 2,208                  24,364
                                -----------------     -------------------
   Total costs and
    expenses...............                 5,131                  50,137
                                -----------------     -------------------
Loss from operations.......                (5,131)                (48,196)
Interest and other income
 (expense), net............                   150                  (1,247)
                                -----------------     -------------------
Net loss...................                (4,981)                (49,443)
Series C convertible
 preferred stock deemed,
 non-cash dividend.........                    --                 (67,530)
                                -----------------     -------------------
Net loss applicable to
 common stockholders.......     $          (4,981)    $          (116,973)
                                =================     ===================
Basic and diluted net loss
 per share applicable to
 common stockholders.......     $         (907.70)    $         (2,285.36)
                                =================     ===================
Shares used in computing
 basic and diluted net loss
 per share applicable to
 common stockholders.......                     5                      51
                                =================     ===================
Pro forma basic and diluted
 net loss per share
 applicable to common
 stockholders..............     $           (0.27)    $             (2.80)
                                =================     ===================
Shares used in computing
 pro forma basic and
 diluted net loss per share
 applicable to common
 stockholders..............                18,516                  41,703
                                =================     ===================

--------
* Excludes amortization of deferred stock compensation of the following:
  Cost of revenue..........     $              --     $             6,541
  Research and
   development.............                 1,224                   3,923
  Sales and marketing......                   361                   7,981
  General and
   administrative..........                   623                   5,919
<CAPTION>
                                      As of July 31, 2000
                             -----------------------------------------
                                  Actual               As Adjusted
                             -----------------     -------------------
                                        (in thousands)
<S>                          <C>                   <C>
Balance Sheet Data:
Cash and cash equivalents..     $         142,591     $           243,291
Working capital............               124,829                 225,529
Total assets...............               185,420                 286,120
Long-term obligations and
 senior discount notes, net
 of current portion........                38,890                  38,890
Stockholders' equity.......               124,682                 225,382
</TABLE>

                                       6
<PAGE>

                                 RISK FACTORS

    Any investment in our common stock involves a high degree of risk. You
should consider carefully the following information about risks, together with
the other information contained in this prospectus, before you decide whether
to buy our common stock. Additional risks and uncertainties not known to us or
that we now believe to be unimportant could also impair our business. If any
of the following risks actually occur, our business, results of operations and
financial condition could suffer significantly. As a result, the market price
of our common stock could decline, and you may lose all or part of the money
you paid to buy our common stock.

                         Risks Related to Our Business

We have a limited operating history, and our business model is new and
unproven, which makes it difficult to evaluate our future prospects.

    We were incorporated in September 1999 and deployed our first customer in
February 2000. Accordingly, we have a limited operating history and limited
financial data upon which you may evaluate our business and prospects. In
addition, our business model to provide Internet infrastructure services is
new and unproven and is likely to continue to evolve. Our potential for future
profitability must be considered in light of the risks, uncertainties,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets. Some of these risks relate to our potential inability to:

  .  acquire and deploy a sufficient number of customers to achieve
     profitability;

  .  successfully provide high levels of service quality to our existing
     customers as we expand the scale of our business;

  .  develop new service offerings that complement our existing offerings;

  .  extend our Opsware technology to further automate and reduce the costs
     of many of the processes required to deploy and support our customers;

  .  extend our Opsware technology to support a wide range of hardware and
     software to meet the needs of a large range of customers;

  .  forecast the amount of leased third-party data center space and
     infrastructure that we will require in order to accommodate customer
     growth;

  .  acquire or license third-party technologies and services that we
     require to deliver our services; and

  .  increase our brand awareness.

    We may not successfully address these risks. If we do not successfully
address these risks, we may not realize sufficient revenues or net income to
reach or sustain profitability.

We have a history of losses and expect to continue to incur significant
operating losses and negative cash flow, and we may never be profitable.

    We have spent significant funds to develop our current services, lease
third-party data center space, procure hardware, software and networking
products and develop our operations, research and development and sales and
marketing organizations. We have incurred significant operating and net losses
and negative cash flow and have not achieved profitability. As of July 31,
2000, we had an accumulated deficit of $122.0 million, which includes
approximately $94.1 million related to non-cash deferred stock compensation
and a non-cash deemed dividend on Series C preferred stock.

                                       7
<PAGE>

    We expect to increase our operating expenses in the future. To achieve
operating profitability, we will need to increase our customer base and
revenue and decrease our costs per customer. We may not be able to increase
our revenue or increase our operating efficiencies in this manner. If our
revenue grows more slowly than we anticipate, if we do not increase
utilization of our leased third-party data center space and technology
infrastructure or if our operating or capital expenses increase more than we
expect, our operating results will suffer. Moreover, because we expect to
continue to increase our investment in our business faster than we anticipate
growth in our revenue, we will continue to incur significant operating losses
and negative cash flow for the foreseeable future. Consequently, it is
possible that we will not achieve profitability, and even if we do achieve
profitability, we may not sustain or increase profitability on a quarterly or
annual basis in the future.

Our financial results may fluctuate significantly, which could cause our stock
price to decline.

    Our revenue and operating results could vary significantly from quarter to
quarter. These fluctuations could cause our stock price to fluctuate
significantly or decline. Important factors that could cause our quarterly
results to fluctuate materially include:

  .  the timing of obtaining new customers;

  .  the timing of deploying services for new customers;

  .  the timing and magnitude of operating expenses and capital
     expenditures;

  .  costs related to the various third-party technologies we incorporate
     into our services;

  .  utilization of our leased third-party data center space and technology
     infrastructure;

  .  changes in our pricing policies or those of our competitors; and

  .  the amount of credits that we may be required to issue to our customers
     if we fail to deliver our services pursuant to our scheduled uptime and
     performance guarantees.

    Our current and future levels of operating expenses and capital
expenditures are based largely on our growth plans and estimates of future
revenue. These expenditure levels are, to a large extent, fixed in the short
term. We may not be able to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall, and any significant shortfall in revenue
relative to planned expenditures could negatively impact our business and
results of operations. In addition, if our customer base expands rapidly or
unpredictably, we may not be able to efficiently utilize our leased third-
party data center space and infrastructure or we may not have sufficient
capacity to satisfy our customers' requirements, which could harm our
operating results. Moreover, because many of our expenses are components of
our cost of revenues, our gross margins are likely to be negative for the
foreseeable future.

    Due to these and other factors, quarter-to-quarter comparisons of our
operating results may not be meaningful. You should not rely on our results
for any one quarter as an indication of our future performance. In future
quarters, our operating results may fall below the expectations of public
market analysts or investors. If this occurs, the market price of our common
stock would likely decline.

We have grown very rapidly, and our ability to achieve profitability will
suffer if we fail to manage our growth.

    We have rapidly expanded our business since we were founded in September
1999. We have increased our number of employees from 71 at January 31, 2000,
to 147 at April 30, 2000, and to 516 at December 2, 2000. This growth has
placed, and will continue to place, a significant strain on our employees,
management systems and other resources. We expect our business to continue to
grow in

                                       8
<PAGE>

terms of headcount, geographic scope, number of customers and number of
services we offer. There will be additional demands on our customer service
support, research and development, sales and marketing and administrative
resources as we try to increase our service offerings, expand our geographic
scope and expand our target markets. The strains imposed by these demands are
magnified by our limited operating history. We may not be able to successfully
manage our growth. In order to manage our growth successfully, we must:

  .  improve and add to our management, financial and information systems
     and controls and other elements of our business process infrastructure;

  .  maintain a high level of customer service and support; and

  .  expand, retain, train, manage and integrate our employee base
     effectively.

    Any failure by us to effectively manage our growth could disrupt our
operations or delay execution of our business plan and consequently harm our
business.

If we are unable to diversify our customer base, a substantial portion of our
net revenue will continue to be derived from Internet-based businesses, which
could weaken our financial position.

    Our customers include established enterprises, application service
providers and Internet-based businesses. During the quarter ended July 31,
2000, we derived approximately 51% of our net revenue from customers that are
Internet-based businesses, of which Integral Development and SkillsVillage.com
accounted for 15% and 12%, respectively. Although we are planning to diversify
our customer base, we may not succeed. In general, Internet-based businesses
have exhibited less financial stability and may represent greater credit risks
than established enterprises and application service providers. To the extent
we continue to rely significantly on Internet-based customers, we will be
subject to an increased risk that these customers encounter financial
difficulties and fail to pay for our services or delay payment substantially,
which would adversely affect our net revenue and other financial results.

Sales efforts involving large enterprises and traditional businesses may
lengthen our sales and deployment cycles, which may cause our financial
results to suffer.

    Sales to large enterprises and traditional businesses generally have a
longer sales cycle than sales to Internet-based businesses. As a result, as we
continue to expend greater sales resources on these accounts, our average
sales cycle may increase, which could make it more difficult for us to
forecast revenue and plan expenditures. In addition, it may take longer to
deploy our services with these accounts, which would delay our ability to
recognize revenue from sales to these accounts. Any such delay could postpone
our ability to become profitable.

If customers require that we customize our services beyond what we currently
provide or that we perform systems integration work for them, our operating
results will suffer.

    We generally do not customize the delivery of our services beyond the
technology platforms that we currently support, and we do not provide general
systems integration work for our customers. Some businesses may prefer more
customized applications and services than our business model contemplates. If
we do not offer the desired customization, there may be less demand for our
services. Conversely, providing customization of our services would increase
our costs and could reduce our flexibility to provide broad-based services to
a wide range of customers. Accordingly, increased demand for

                                       9
<PAGE>

customization of our services could reduce our revenue and increase our
operating costs. If our customers require service for technology platforms
other than those we currently support, we may not be able to provide service
to those customers. If we do choose to support additional platforms, the added
complexity of our systems may increase our costs, decrease the reliability of
our services and limit our ability to scale. This may harm our ability to
attract and retain customers. Among the significant platforms we do not
currently support are the versions of the Unix operating systems offered by
Hewlett-Packard and IBM.

We are highly dependent upon our Opsware automation technology, and any
failure of this technology would harm our business.

    We are using and continuing to develop our Opsware technology to automate
formerly manual tasks in the deployment and maintenance of our customers'
Internet infrastructure. We rely on our Opsware technology to help ensure the
quality and reliability of our services and to help increase the efficiency
with which we deliver our services. Our business model assumes that our
Opsware technology will continue to bring greater efficiencies to our
operations. The deployment cycle for our services is complex, and we may not
be able to successfully utilize our Opsware technology to streamline this
process, which could increase our costs and harm our operating results.
Moreover, if our Opsware technology fails to work properly or if we are unable
to continue to expand the scope of its capabilities, the quality and
reliability of our services may decline, and we may be unable to grow our
revenue at the rate required to sustain our business. In addition, if we are
unable to continue to increase the functionality of our Opsware technology, we
would not achieve anticipated efficiencies and we would need to hire
additional personnel to support our customers, which would cause our cost of
revenue to increase and our margins to decline.

Our services depend upon the continued availability of leased data center
space from third parties.

    We lease and intend to continue to lease data center space from third
parties. If we are unable to acquire new or retain existing third-party data
center space, our growth could be slowed and our business could be harmed. In
the event that we cannot obtain adequate data center space from third parties,
we could also be required to build our own data center facilities, which would
require significant capital expenditures, could delay the expansion of our
operations and could change the nature of our business model. In addition,
because we are required in most circumstances to enter into contracts for data
center space in advance of customer commitments, if we are unable to grow our
customer base at the rate that we anticipate in the geographic areas in which
we have contracted for space, our operating results will suffer. Recently,
some of our existing data center providers have begun marketing new services
beyond their core co-location or web site hosting offerings. To the extent
that these providers expand the scope of these new services to address some of
the functionality we currently provide, this may limit our ability to renew
existing agreements and enter into new agreements for data center space with
existing or new data center providers.

We operate in a new, highly competitive market, and our inability to compete
successfully against new entrants and established companies would limit our
ability to increase our market share and would harm our financial results.

    Our market is rapidly evolving and highly competitive. It will likely be
characterized by an increasing number of market entrants, as there are few
barriers to entry, and by industry consolidation.

    Our primary current and prospective competitors include:

  .  providers of co-location or web site hosting and related services;

                                      10
<PAGE>

  .  technology vendors that have recently announced their intentions to
     offer some of the services that we offer currently to a portion of our
     targeted customer base; and

  .  providers of Internet systems integration or professional services.

    We expect that we will face competition from both existing competitors and
new market entrants in the future. Because we offer businesses the ability to
outsource their operations, we also compete against a company's internal
operations department, which may prefer to manage their own operations. This
may be particularly the case with larger enterprises, which represent one of
our key target markets.

    Many of our competitors have substantially greater financial, technical
and marketing resources, larger customer bases, longer operating histories,
more developed infrastructures, greater name recognition and more established
relationships in the industry than we have. As a result, many of our
competitors may be able to develop and expand their service offerings more
rapidly, adapt to new or emerging technologies and changes in customer
requirements more quickly, take advantage of acquisitions and other
opportunities more readily, achieve greater economies of scale, devote greater
resources to the marketing and sale of their services and adopt more
aggressive pricing policies than we can. Because of these competitive factors
and due to our comparatively small size and limited financial resources, we
may be unable to compete successfully.

    Our competitors and other companies may form strategic relationships with
each other to compete with us. These relationships may take the form of
strategic investments, joint-marketing agreements, licenses or other
contractual arrangements, any of which may increase our competitors' ability
to address customer needs with their product and service offerings. In
addition, we believe that there will be continued consolidation within the
markets in which we compete. Our competitors may consolidate with one another,
or acquire other technology providers, enabling them to more effectively
compete with us. This consolidation could affect prices and other competitive
factors in ways that would impede our ability to compete successfully and harm
our business. Some of the data centers providers with whom we have
relationships have begun marketing services beyond their core co-location or
web site hosting offerings. To the extent that these providers expand the
scope of these new services to address some of the functionality we currently
provide, some of these companies may be unwilling to provide services to us or
to enter into relationships with us.

Poor performance in or disruptions of the services we deliver to our customers
could harm our reputation, delay market acceptance of our services and subject
us to liabilities.

    We provide our customers scheduled uptime and performance guarantees
regarding the quality of our services. Our scheduled uptime guarantee assures
each customer that, except during scheduled maintenance windows or during
service outages or degradations caused by the customer, outages to its
Internet operations will be repaired within specified time limits. Our
performance guarantees assure our customers that if the responsiveness of a
customer's Internet operations falls below mutually agreeable levels, we will
restore the site to the appropriate levels within specified time limits. If we
fail to meet these guarantees, we may be required to credit a percentage of
the fees a customer has paid for our services, generally up to a maximum of
100% of all service fees accrued in the month of the outage. In addition, from
time to time we issue discretionary credits to address service and performance
issues, even though we have no contractual obligation to do so. These
discretionary credits are issued prior to recognizing revenue for the related
services.

    Our operations depend upon our ability and the ability of our third-party
data center and network services providers to maintain and protect the
computer systems on which we provide our services.

                                      11
<PAGE>

Although our data center and network providers maintain back-up systems, a
natural disaster, human error, physical or electronic security breaches, power
loss, sabotage or similar disruption at any of their sites could impair our
ability to provide our services to our customers until the site is repaired or
back-up systems become operable. Some of our data center providers, as well as
our corporate headquarters, are located in Northern California near known
earthquake fault zones. Our systems and the data centers we use are also
vulnerable to damage from fire, flood, power loss, telecommunications failures
and similar events.

    In addition, because many of our customers depend upon their Internet
operations to help run their businesses, they could be seriously harmed if the
services we provide to them work improperly or fail, even if only temporarily.
Our inability to maintain the quality of our services at guaranteed levels
could cause our reputation to suffer, hinder our ability to obtain and retain
new customers, force us to divert research and development and management
resources, cause a loss of revenue or subject us to liabilities, any one of
which could adversely affect our results and harm our business.

Our business will suffer if we do not enhance or introduce new services and
upgrades to meet changing customer requirements.

    The market for Internet infrastructure services is characterized by rapid
technological change, frequent new hardware, software and networking product
introductions and Internet-related technology enhancements, uncertain product
life cycles, changes in customer demands and evolving industry standards. Any
delays in responding to these changes and developing and releasing enhanced or
new services could hinder our ability to retain existing and obtain new
customers. In particular, our technology is designed to support a variety of
hardware, software and networking products that we believe to be proven and
among the most widely used. We cannot assure you, however, that present and
future customers will continue to use these products. Even if they do, new
versions of these products are likely to be released and we will need to adapt
our technology to these new versions. We must, therefore, constantly modify
and enhance our technology to keep pace with changes made to our customers'
hardware and software configurations and network infrastructures. If we fail
to promptly modify or enhance our technology in response to evolving customer
needs and demands, our technology could become obsolete, which would
significantly harm our business. In addition, frequent changes in the
hardware, software and networking components of the systems and services we
provide could adversely affect our ability to automate the deployment process,
a key element of our business strategy.

    If we do not develop, license or acquire new services, or deliver
enhancements to existing products on a timely and cost-effective basis, we may
be unable to meet the growing demands of our existing and potential customers.
In addition, as we introduce new services or technologies into existing
customer architectures, we may experience performance problems associated with
incompatibility among different versions of hardware, software and networking
products. To the extent that such problems occur, we may face adverse
publicity, loss of sales, delay in market acceptance of our services or
customer claims against us, any of which could harm our business.

We rely on third-party hardware, software and networking products to deliver
our services to our customers, and the loss of access to these products could
harm our business.

    As part of our normal operations, we purchase, license or lease software,
hardware and networking products from third party commercial vendors. We
obtain most of our components from third parties on a purchase order basis.
These products may not continue to be available on commercially reasonable
terms, or at all. The loss of these products could result in delays in the
sale of our services until equivalent

                                      12
<PAGE>

technology, if available, is identified, procured and integrated, and these
delays could result in lost revenues. Some of the key components of our
services are available only from sole or limited sources. For example, only
hardware manufactured by Sun Microsystems is compatible with the Solaris
operating system, which is a key component of our infrastructure. Further, to
the extent that the vendors from whom we purchase these products increase
their prices, our gross margins could be negatively impacted.

Security risks and concerns may decrease the demand for our services, and
security breaches may disrupt our services or make them inaccessible to our
customers.

    Our services involve the storage and transmission of business-critical,
proprietary information. If the security measures we or our third party data
centers have implemented are breached, our customers could lose this
information and we could be exposed to litigation and possible liability.
Anyone who circumvents these security measures could misappropriate business-
critical proprietary information or cause interruptions in our services or
operations. In addition, computer "hackers" could introduce computer viruses
into our systems or those of our customers, which could disrupt our services
or make them inaccessible to customers. We may be required to expend
significant capital and other resources to protect against the threat of
security breaches or to alleviate problems caused by breaches. Our security
measures and those that our third-party data centers provide may be inadequate
to prevent security breaches, and our business and reputation will suffer if
these breaches occur.

If we are unable to retain our executive officers and key personnel, we may
not be able to successfully manage our business or achieve our objectives.

    Our business and operations are substantially dependent on the performance
of our key employees, all of whom are employed on an at-will basis. If we lose
the services of one or more of our executive officers or key employees, in
particular, Marc Andreessen, our Chairman, Benjamin Horowitz, our President
and Chief Executive Officer and Timothy Howes, our President of Product
Operations and Chief Technical Officer, or if one or more of them decides to
join a competitor or otherwise compete directly or indirectly with us, we may
not be able to successfully manage our business or achieve our business
objectives.

Our business will suffer if we are unable to hire, train and retain highly
qualified employees.

    Our future success depends on our ability to identify, hire, train,
integrate and retain highly qualified technical, sales and marketing,
managerial and administrative personnel. As our customer base and revenue
continue to grow, we will need to hire a significant number of qualified
personnel. In particular, we need to hire a sufficient number of technical
operations personnel in order to deploy customers on a timely basis.
Competition for qualified personnel, especially those with Internet
experience, is intense, and we may not be able to attract, train, integrate or
retain a sufficient number of qualified personnel in the future. As we grow,
it will become more difficult to identify qualified personnel to fill
technical positions, which will cause us to rely increasingly on our internal
training programs. Accordingly, we expect to invest heavily in our training
infrastructure, and any failure to successfully expand our training
infrastructure could harm our ability to compete. Our failure to attract,
train, integrate and retain qualified personnel could seriously disrupt our
operations and increase our costs by forcing us to use more expensive outside
consultants and reduce the rate at which we can increase revenue.

    Important components of the compensation of our personnel are stock
options and restricted stock, which vest typically over a four-year period. We
face a significant challenge in retaining our employees if the value of these
stock options and restricted stock is either not substantial enough or so
substantial

                                      13
<PAGE>

that the employees leave after their stock options or restricted stock have
vested. To retain our employees, we expect to continue to grant new options
subject to vesting schedules, which could be dilutive to investors who
purchase our stock in this offering. If our stock price does not increase
significantly above the prices of our options, we may also need to issue new
options or grant additional shares of stock in the future to motivate and
retain our employees.

We may not be able to obtain the additional financing necessary to grow our
business.

    In order to grow our business and expand our geographic scope, we may
require additional financing. We plan to finance this growth primarily with
the proceeds of this offering, current and future vendor financing, equipment
lease lines and bank lines of credit, as well as other debt or equity
financings. We cannot be sure that we will be able to secure additional
financing on acceptable terms, or at all. Additionally, holders of any future
debt instruments or preferred stock may have rights senior to those of the
holders of our common stock, and any future issuance of common stock would
result in dilution of existing stockholders' equity interests. If we are
unable to obtain additional financing on acceptable terms or at all, our
revenue growth may be adversely affected.

If we do not continue to expand our direct and indirect sales organizations,
we will have difficulty acquiring and retaining customers.

    Our services require a sophisticated sales effort targeted at a limited
number of key people within our prospective customers' organizations. Because
the market for our services is new, many prospective customers are unfamiliar
with the services we offer. As a result, our sales effort requires highly
trained sales personnel. We need to continue to expand our marketing and sales
organization in order to increase market awareness of our services to a
greater number of organizations and, in turn, to generate increased revenue.
We are in the process of developing our direct sales force, and we require
additional qualified sales personnel. Competition for these individuals is
intense, and we may not be able to hire the type and number of sales personnel
we need. Moreover, even after we hire these individuals, they require
extensive training in our infrastructure services. In addition, we must
continue to develop our indirect sales and marketing channels. If we are
unable to continue to expand our direct and indirect sales operations and
train new sales personnel as rapidly as necessary, we may not be able to
increase market awareness and sales of our services, which may prevent us from
growing our revenue and achieving and maintaining profitability.

The rates we charge for our services may decline over time, which would reduce
our revenue and adversely affect our profitability.

    As our business model gains acceptance and attracts the attention of
competitors, we may experience pressure to decrease the fees for our services,
which could adversely affect our revenue and our gross margin. This pricing
pressure may be exacerbated by decreases in the cost of the third-party
hardware underlying our services, which may also make it more attractive for
potential customers to deploy an in-house solution. If we are unable to sell
our services at acceptable prices, or if we fail to offer additional services
with sufficient profit margins, our revenue growth will slow, our margins may
not improve and our business and financial results will suffer.

Due to our limited operating history, we have no ability to predict whether
our customers will renew our services.

    We provide our services through customer service agreements with our
customers. Many of our initial customer service agreements had one-year terms.
Since we have only recently begun to provide these

                                      14
<PAGE>

services, none of our customer service agreements has expired. Therefore, we
have no historical information with which to forecast future demand for our
services from our existing customer base after existing contracts expire.
Whether or not customers renew our services will depend, in large part, on
their level of customer satisfaction. Accordingly, we must invest sufficient
resources in our customer satisfaction programs and instill a high level of
customer service in all of our employees. If our customers elect not to renew
our services, our business and financial results may suffer.

Because our success depends on our proprietary technology, if third parties
infringe our intellectual property, we may be forced to expend significant
resources enforcing our rights or suffer competitive injury.

    Our success depends in large part on our intellectual property, including
our proprietary technology. We currently rely on a combination of copyright,
trademark, trade secret and other laws and restrictions on disclosure to
protect our intellectual property rights. These legal protections afford only
limited protection, and our means of protecting our proprietary rights may not
be adequate.

    Our intellectual property may be subject to even greater risk in foreign
jurisdictions, as the laws of many countries do not protect proprietary rights
to the same extent as the laws of the United States. If we cannot adequately
protect our intellectual property, our competitive position may suffer.

    We may be required to spend significant resources to monitor and police
our intellectual property rights. We may not be able to detect infringement
and may lose our competitive position in the market before we are able to
ascertain any such infringement. In addition, competitors may design around
our proprietary technology or develop competing technologies. Litigation may
be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement. Any
such litigation could result in substantial costs and diversion of resources,
including the attention of senior management.

Defending against intellectual property infringement and other claims could be
time consuming and expensive and, if we are not successful, could subject us
to significant damages and disrupt our business.

    Other companies, including our competitors, may obtain patents or other
proprietary rights that would prevent, limit or interfere with our ability to
make, use or sell our services. As a result, we may be found to infringe on
the proprietary rights of others. In the event of a successful claim of
infringement against us and our failure or inability to license the disputed
technology, our business and operating results would be significantly harmed.
Intellectual property litigation has become prevalent in the Internet and
software fields. Any litigation or claims, whether or not valid, could result
in substantial costs and diversion of resources. Intellectual property
litigation or claims could force us to do one or more of the following:

  .  pay costly damages;

  .  stop selling services that incorporate the challenged intellectual
     property;

  .  obtain a license from the holder of the infringed intellectual property
     right, which may not be available on reasonable terms or at all; and

  .  redesign our services or our network, if feasible.

    If we are forced to take any of the foregoing actions, our business may be
seriously harmed. In addition, any of these could have the effect of
increasing our costs and reducing our revenue. Our insurance may not cover
potential claims of this type or may not be adequate to indemnify us for all
liability that may be imposed.

                                      15
<PAGE>

We face risks associated with international operations that could harm our
business.

    We are committing significant resources to our international operations
and sales and marketing activities. For example, we have just recently
commenced operations in the United Kingdom. In addition, we plan to expand our
presence more broadly in Europe and the Asia-Pacific region and may also
expand into Latin America. We have limited experience conducting business
outside of the United States, and we may not be aware of all the factors that
may affect our business in foreign jurisdictions. We will be subject to a
number of risks associated with international business activities that may
increase our costs, lengthen our sales cycles and require significant
management attention. These risks include:

  .  increased costs and expenses related to the leasing of foreign, third-
     party data center space;

  .  difficulty in staffing and managing foreign operations;

  .  the added complexity and expense of adapting our Opsware technology to
     systems and equipment designed to operate outside the United States;

  .  protectionist laws and business practices that favor local competition;

  .  general economic and political conditions in international markets;

  .  potentially adverse tax consequences, including complications and
     restrictions on the repatriation of earnings;

  .  longer accounts receivable payment cycles and difficulties in
     collecting accounts receivable;

  .  currency exchange rate fluctuations; and

  .  unusual or burdensome regulatory requirements or unexpected changes to
     those requirements.

    If one or more of these risks were to materialize, our financial results
could suffer.

We expect to engage in future acquisitions or investments, which may harm our
operating results.

    Although we have no current agreements relating to acquisitions or
investments in other companies, we expect in the future to make acquisitions
or investments designed to increase our customer base, broaden our offerings
and expand our technology platform. We have not made acquisitions or
investments in the past, and therefore our ability to conduct acquisitions and
investments is unproven. If we fail to evaluate and to execute acquisitions or
investments successfully, they may seriously harm our business. To complete an
acquisition successfully, we must:

  .  properly evaluate the technology;

  .  accurately forecast the financial impact of the transaction, including
     accounting charges and transaction expenses;

  .  integrate and retain personnel;

  .  combine potentially different corporate cultures; and

  .  effectively integrate services and products as well as technology,
     sales, marketing and support operations.

    If we fail to do any of these, we may suffer losses or our management may
be distracted from our day-to-day operations. In addition, if we conduct
acquisitions using convertible debt or equity securities, existing
stockholders may be diluted.

                                      16
<PAGE>

                         Risks Related to our Industry

The Internet infrastructure services market is new, and our business will
suffer if the market does not develop as we expect.

    The Internet infrastructure services market is new and may not grow or be
sustainable. Potential customers may choose not to purchase operations
services from a third-party provider due to concerns about security,
reliability, cost or system availability. It is possible that our services may
never achieve market acceptance. We have a limited number of customers and
have deployed our services a limited number of times. In addition, we have not
yet provided our services on the scale that is anticipated in the future. We
incur operating expenses based largely on anticipated revenue trends that are
difficult to predict given the recent emergence of the Internet infrastructure
services market. If this market does not develop, or develops more slowly that
we expect, we may not achieve significant market acceptance for our services
and the rate of our revenue growth may decline.

Our success depends on the continued growth in the usage of the Internet.

    Rapid growth in the use of and interest in the Internet has occurred only
recently. Acceptance and use may not continue to develop at historical rates
and a sufficiently broad base of consumers and businesses may not adopt or
continue to use the Internet and other online services as a medium of
commerce. Factors that may affect Internet usage include:

  .  actual or perceived lack of security of information;

  .  congestion of Internet traffic or other usage delays; and

  .  reluctance to adopt new business methods.

    If Internet usage does not continue to increase, demand for our services
may be limited and our business and results of operations could be harmed.

Governmental regulation and the application of existing laws to the Internet
may slow the Internet's growth, increase our costs of doing business and
create potential liability for the dissemination of information over the
Internet.

    Laws and regulations governing Internet services, related communications
services and information technologies and electronic commerce are beginning to
emerge but remain largely unsettled, even in areas where there has been some
legislative action. It may take years to determine whether and how existing
laws, such as those governing intellectual property, privacy, libel,
telecommunications, and taxation, apply to the Internet and to related
services such as ours. Uncertainty and new laws and regulations, as well as
the application of existing laws to the Internet, in our markets could limit
our ability to operate in these markets, expose us to compliance costs and
substantial liability and result in costly and time consuming litigation. The
international nature of the Internet and the possibility that we may be
subject to conflicting laws of, or the exercise of jurisdiction by, different
countries may make it difficult or impossible to comply with all the laws that
may govern our activities. Furthermore, the laws and regulations relating to
the liability of online service providers for information carried on or
disseminated through their networks is currently unsettled.

                                      17
<PAGE>

Underdeveloped telecommunications and Internet infrastructure may limit the
growth of the Internet overseas and the growth of our business.

    Access to the Internet requires advanced telecommunications
infrastructure. The telecommunications infrastructure in many parts of Europe,
the Asia-Pacific region and Latin America is not as well developed as in the
United States and is partly owned and operated by current or former national
monopoly telecommunications carriers or may be subject to a restrictive
regulatory environment. The quality and continued development of
telecommunications infrastructure in Europe, the Asia-Pacific region and Latin
America will have a significant impact on our ability to deliver our services
and on the market use and acceptance of the Internet in general.

    In addition, the recent growth in the use of the Internet has caused
frequent periods of performance degradation, requiring the upgrade of routers
and switches, telecommunications links and other components forming the
infrastructure of the Internet by Internet service providers and other
organizations with links to the Internet. Any perceived degradation in the
performance of the Internet as a whole could undermine the benefits of our
services. The quality of our services is ultimately limited by and reliant
upon the speed and reliability of Internet-related networks operated by third
parties. Consequently, the emergence and growth of the market for our services
is dependent on improvements being made to the entire Internet infrastructure
in Europe, the Asia-Pacific region and Latin America.

                        Risks Related to this Offering

Our stock price may be particularly volatile and could decline substantially.

    Before this offering, there has not been a public market for our common
stock, and an active public market for our common stock may not develop or be
sustained after this offering. The initial public offering price will be
determined through negotiations between representatives of the underwriters
and us and may not be representative of the price of our common stock after
this offering. The market price of our common stock could be subject to
significant fluctuations after the offering and may decline below the price
you paid for your shares. The market for technology stocks, particularly
following an initial public offering, has been extremely volatile and
frequently reaches levels that bear no relationship to the past or present
operating performance of those companies. In addition, as an early stage
company, small delays in customer bookings, installations or revenue could
result in material variations in our quarterly results and quarter-to-quarter
growth in the foreseeable future. This could result in greater volatility in
our stock price. These fluctuations could also lead to costly class action
litigation that could significantly harm our business and operating results.

    Among the factors that could affect our stock price are:

  .  variations in our quarter-to-quarter operating results;

  .  announcements by us or our competitors of significant contracts, new or
     enhanced products or services, acquisitions, distribution partnerships,
     joint ventures or capital commitments;

  .  changes in financial estimates or investment recommendations by
     securities analysts following our business;

  .  our sale of common stock or other securities in the future;

  .  changes in economic and capital market conditions for companies in our
     sector;

  .  changes in market valuations or earnings of our competitors;


                                      18
<PAGE>

  .  changes in business or regulatory conditions; and

  .  the trading volume of our common stock.

Insiders will continue to have substantial control over us after this
offering, which could delay or prevent a change in control and may negatively
affect your investment.

    Following this offering, our executive officers, directors and their
affiliates will beneficially own, in the aggregate, approximately 65.1% of our
outstanding common stock. These stockholders will be able to exercise
significant influence over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which could have the effect of delaying or preventing a third
party from acquiring control over us and could affect the market price of our
common stock. In addition, the interests of those holding this concentrated
ownership may not always coincide with our interests or the interests of other
stockholders, and, accordingly, they could cause us to enter into transactions
or agreements that we would not otherwise consider. For information regarding
the ownership of our outstanding stock by our executive officers, directors,
principal stockholders and their affiliates, please see "Principal
Stockholders."

We have implemented anti-takeover provisions that could make it more difficult
to acquire us.

    Our certificate of incorporation, our bylaws and Delaware law contain
provisions that could make it more difficult for a third party to acquire us
without the consent of our board of directors, even if doing so would be
beneficial to our stockholders. For example, a takeover bid otherwise favored
by a majority of our stockholders might be rejected by our board of directors.
These provisions include:

  .  classifying our board of directors into three groups so that the
     directors in each group will serve staggered three-year terms, which
     would make it difficult for a potential acquirer to gain control of our
     board of directors;

  .  authorizing the issuance of shares of undesignated preferred stock
     without a vote of stockholders;

  .  prohibiting stockholder action by written consent; and

  .  limitations on stockholders' ability to call special stockholder
     meetings.

Substantial sales of our common stock could depress our stock price.

    If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. Based on shares outstanding as of October 31, 2000, upon
completion of this offering, we will have outstanding 104,759,167 shares of
common stock. Upon completion of this offering, the 10,000,000 shares being
sold in this offering will be eligible for sale in the public market
immediately, unless purchased by our affiliates. Our officers and directors
and most non-employee stockholders will be subject to agreements with the
underwriters or us that restrict their ability to transfer their stock for 180
days from the date of this prospectus, or earlier at Goldman, Sachs & Co.'s
and Morgan Stanley & Co. Incorporated's discretion. Employees, consultants and
a limited number of non-employee stockholders will be subject to a staged
lock-up based upon the general 180 day restriction, but subject to release
provisions after 90 days and 120 days depending on the market price of our
common stock, or earlier at Goldman, Sachs & Co.'s and Morgan Stanley & Co.
Incorporated's discretion. See "Shares Eligible for Future Sale."

                                      19
<PAGE>

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

    This prospectus contains forward-looking statements. These statements
relate to our, and in some cases our customers' or partners', future plans,
objectives, expectations, intentions and financial performance, and the
assumptions that underlie these statements. In some cases, you can identify
forward-looking statements because they use terms such as "anticipates,"
"believes," "continue," "could," "estimates," "expects," "intends," "may,"
"plans," "potential," "predicts," "should" or "will" or the negative of those
terms or other comparable words. These statements involve known and unknown
risks, uncertainties and other factors that may cause industry trends or our
actual results, level of activity, performance or achievements to be
materially different from any future results, levels of activity, performance
or achievements expressed or implied by these statements. These factors
include those listed under "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" and
elsewhere in this prospectus.

    Although we believe that expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We will not update any of the forward-
looking statements after the date of this prospectus to conform these
statements to actual results or changes in our expectations, except as
required by law. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus.

                                      20
<PAGE>

                                USE OF PROCEEDS

    We estimate that we will receive net proceeds of approximately $100.7
million from the sale of 10,000,000 shares of our common stock, or $116.0
million if the underwriters' over-allotment option is exercised in full, at
the assumed initial public offering price of $11.00 per share, after deducting
the estimated underwriting discounts and commissions and the estimated
offering expenses payable by us.

    The principal purposes of this offering are to raise funds, create a
public market for our common stock, facilitate our future access to the public
capital markets and increase our visibility. We intend to use the net proceeds
of this offering primarily for general corporate purposes, including working
capital and capital expenditures. The amounts and timing of these expenditures
will vary depending on a number of factors, including the amount of cash
generated or used by our operations, competitive and technological
developments and the rate of growth, if any, of our business. We may also use
a portion of the net proceeds to acquire additional businesses, services,
products or technologies or invest in additional businesses that we believe
will complement our current or future business. However, we have no specific
plans, agreements or commitments to do so and are not currently engaged in any
negotiations for any acquisition or investment. As a result, we will retain
broad discretion in the allocation of the net proceeds of this offering.
Pending the uses described above, we will invest the net proceeds of this
offering in short term interest bearing, investment-grade securities. We
cannot predict whether the proceeds will be invested to yield a favorable
return.

                                DIVIDEND POLICY

    We have never declared or paid dividends on our capital stock and do not
anticipate paying any dividends in the foreseeable future. Moreover, the
indenture governing our senior discount notes prohibits us from paying cash
dividends. We currently expect to retain our earnings, if any, for the
development of our business.

                                      21
<PAGE>

                                CAPITALIZATION

    The following table sets forth our capitalization as of July 31, 2000:

  .  on an actual basis;

  .  on a pro forma basis after giving effect to the conversion of all
     outstanding shares of preferred stock into common stock; and

  .  on the same pro forma basis as adjusted to give effect to our receipt
     and application of the estimated net proceeds from the sale of
     10,000,000 shares of common stock in this offering at an assumed
     initial public offering price of $11.00 per share.

<TABLE>
<CAPTION>
                                                    As of July 31, 2000
                                              ---------------------------------
                                                                     Pro Forma
                                               Actual    Pro Forma  as Adjusted
                                              ---------  ---------  -----------
                                              (in thousands, except per share
                                                           data)
<S>                                           <C>        <C>        <C>
Long-term obligations and senior discount
 notes, excluding current portion............ $  38,890  $  38,890   $  38,890

Stockholders' equity:
Preferred stock, $0.001 par value, 55,000
 shares authorized, 52,772 shares issued and
 outstanding actual; 15,000 shares authorized
 pro forma and pro forma as adjusted, none
 issued or outstanding pro forma and pro
 forma as adjusted...........................        53         --          --
Common stock, $0.001 par value, 100,000
 shares authorized, 40,822 shares issued and
 outstanding actual; 400,000 shares
 authorized, 93,594 shares issued and
 outstanding pro forma; 103,594 shares issued
 and outstanding pro forma as adjusted.......        41         94         104
Additional paid-in capital...................   328,985    328,985     429,675
Notes receivable from stockholders...........    (4,743)    (4,743)     (4,743)
Deferred stock compensation..................   (77,700)   (77,700)    (77,700)
Accumulated deficit..........................  (121,954)  (121,954)   (121,954)
                                              ---------  ---------   ---------
    Total stockholders' equity...............   124,682    124,682     225,382
                                              ---------  ---------   ---------
    Total capitalization..................... $ 163,572  $ 163,572   $ 264,272
                                              =========  =========   =========
</TABLE>

    This table excludes the following shares of common stock:

  .  2,336,036 shares issuable upon exercise of outstanding warrants at an
     exercise price of $0.01 per share;

  .  10,000 shares issuable upon exercise of an outstanding warrant at an
     exercise price of $0.84056 per share; and

  .  a total of 192,527 shares available for future issuance under our 1999
     Stock Plan as of July 31, 2000.

                                      22
<PAGE>

                                   DILUTION

    Our pro forma net tangible book value as of July 31, 2000 was
approximately $124.7 million, or $1.33 per share. Pro forma net tangible book
value per share represents the amount of our total tangible assets reduced by
the amount of total liabilities and divided by the total number of shares of
common stock outstanding including shares of common stock from the conversion
of preferred stock upon consummation of this offering. Dilution in pro forma
net tangible book value per share represents the difference between the amount
per share paid by purchasers of common stock in this offering and the pro
forma net tangible book value per share of common stock immediately after the
completion of this offering. After giving effect to the sale of the 10,000,000
shares of common stock offered by us at an assumed initial public offering
price of $11.00 per share, and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses payable by us, our
pro forma net tangible book value at July 31, 2000 would have been
approximately $225.4 million or $2.18 per share. This represents an immediate
increase in pro forma net tangible book value of $0.85 per share to the
existing stockholders and an immediate dilution of $8.82 per share to new
investors of common stock. The following table illustrates this dilution:

<TABLE>
<S>                                                                <C>   <C>
Assumed initial public offering price per share...................       $11.00
  Pro forma net tangible book value per share as of July 31,
   2000........................................................... $1.33
  Increase per share attributable to new investors................  0.85
                                                                   -----
Pro forma net tangible book value per share after this offering...         2.18
                                                                         ------
Dilution per share to new investors...............................       $ 8.82
                                                                         ======
</TABLE>

    The following table summarizes on a pro forma basis after giving effect to
the offering, as of July 31, 2000, the differences between the existing
stockholders and new investors with respect to the number of shares of common
stock purchased from us, the total consideration paid and the average price
per share paid.

<TABLE>
<CAPTION>
                                    Shares
                                   Purchased    Total Consideration     Average
                                --------------- ---------------------- Price Per
                                Number  Percent   Amount     Percent     Share
                                ------- ------- ----------- ---------- ---------
                                (in thousands, except percentage and per share
                                                    data)
<S>                             <C>     <C>     <C>         <C>        <C>
Existing stockholders..........  93,594   90.3%    $147,230      57.2%  $ 1.57
New investors..................  10,000    9.7      110,000      42.8    11.00
                                -------  -----  -----------  --------
  Total........................ 103,594  100.0%    $257,230     100.0%
                                =======  =====  ===========  ========
</TABLE>

    The foregoing discussion and tables are based upon the number of shares
actually issued and outstanding on July 31, 2000. As of July 31, 2000 there
were warrants outstanding to purchase a total of 2,336,036 shares of common
stock at an exercise price of $0.01 per share. To the extent that warrants
outstanding as of July 31, 2000 are exercised, there will be further dilution
to new investors. The above information assumes no exercise of the
underwriters' over-allotment option.

                                      23
<PAGE>

                            SELECTED FINANCIAL DATA

   The selected financial data below should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes included elsewhere
in this prospectus. The following selected statements of operations data for
the period from inception, on September 9, 1999, to January 31, 2000 and the
six months ended July 31, 2000 and the selected balance sheet data as of
January 31, 2000 and July 31, 2000 are derived from audited financial
statements included elsewhere in this prospectus. Historical results are not
necessarily indicative of results that may be expected for future periods.
Pro forma net loss per share applicable to common stockholders reflects the
conversion of all outstanding preferred stock into common stock from the
beginning of the period presented or at the date of original issuance, if
later, even though the effect of the conversion is antidilutive.

<TABLE>
<CAPTION>
                                                     Period from
                                                      Inception
                                                    (September 9,
                                                      1999) to      Six Months
                                                     January 31,  Ended July 31,
                                                        2000           2000
                                                    ------------- --------------
                                                     (in thousands, except per
                                                            share data)
<S>                                                 <C>           <C>
Statements of Operations Data:
Net revenue.......................................    $     --      $    1,941
Cost and expenses:
  Cost of revenue*................................          --          13,729
  Research and development*.......................       1,453           4,298
  Sales and marketing*............................         710           4,292
  General and administrative*.....................         760           3,454
  Amortization of deferred stock compensation.....       2,208          24,364
                                                      --------      ----------
    Total costs and expenses......................       5,131          50,137
                                                      --------      ----------
Loss from operations..............................      (5,131)        (48,196)
Interest and other income (expense), net..........         150          (1,247)
                                                      --------      ----------
Net loss..........................................      (4,981)        (49,443)
Series C convertible preferred stock deemed, non-
 cash dividend....................................          --         (67,530)
                                                      --------      ----------
Net loss applicable to common stockholders........    $ (4,981)     $ (116,973)
                                                      ========      ==========
Basic and diluted net loss per share applicable to
 common stockholders..............................    $(907.70)     $(2,285.36)
                                                      ========      ==========
Shares used in computing basic and diluted net
 loss per share applicable to common
 stockholders.....................................           5              51
                                                      ========      ==========
Pro forma basic and diluted net loss per share
 applicable to common stockholders................    $  (0.27)     $    (2.80)
                                                      ========      ==========
Shares used in computing pro forma basic and
 diluted net loss per share applicable to common
 stockholders.....................................      18,516          41,703
                                                      ========      ==========
-------
* Excludes amortization of deferred stock compensation of the following:
  Cost of revenue.................................    $     --      $    6,541
  Research and development........................       1,224           3,923
  Sales and marketing.............................         361           7,981
  General and administrative......................         623           5,919
<CAPTION>
                                                        As of
                                                     January 31,  As of July 31,
                                                        2000           2000
                                                    ------------- --------------
                                                           (in thousands)
<S>                                                 <C>           <C>
Balance Sheet Data:
Cash and cash equivalents.........................    $ 20,479      $  142,591
Working capital...................................      16,088         124,829
Total assets......................................      25,763         185,420
Long-term obligations and senior discount notes,
 net of current portion...........................          --          38,890
Stockholders' equity..............................      20,690         124,682
</TABLE>


                                      24
<PAGE>

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

    The following discussion should be read together with the financial
statements and the related notes included elsewhere in this prospectus. The
following discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results may differ significantly from those
projected in the forward-looking statements. Factors that might cause future
results to differ materially from those projected in the forward-looking
statements include, but are not limited to, those discussed below and
elsewhere in this prospectus, particularly in "Risk Factors."

Overview

    We offer businesses a new class of Internet infrastructure services that
address the challenges associated with deploying, maintaining and growing
Internet operations for critical business functions. We offer our Smart Cloud
services through the Loudcloud Infrastructure Network to provide businesses
with guaranteed levels of reliability and the ability to quickly and
efficiently grow their Internet operations, helping them to reduce the time it
takes to build or expand their Internet operations.

    We were founded in September 1999. From inception through January 2000, we
developed our initial service offerings, hired employees and began to market
our services. We deployed our first customer in February 2000. Our customers
purchase our services through customer service agreements, which generally
have terms of one to three years. Our agreements are renewed automatically for
periods ranging from three months to one year. We have signed customer service
agreements totaling approximately $76.0 million in minimum committed value
through October 30, 2000. We intend to recognize revenue related to these
agreements ratably over the period the managed services are provided to the
respective customers. The weighted average term of these agreements is 1.5
years. The amount of revenue we realize under these agreements may ultimately
be less than $76.0 million. For instance, revenue may not be recorded as a
result of down time or other credits as described below. Additionally these
agreements are subject to our standard termination provisions, including
breach or insolvency by either party to the agreement. Finally, customers'
ability to pay these amounts could become limited in the future based on their
operating results.

    We generate revenue from the sale of services. These services provide the
infrastructure, including the technology, data center space and operations
services required to maintain the complex Internet operations of our
customers. We recognize revenue ratably over the managed services contract
period or as services are fulfilled, provided that we have evidence of an
agreement, the price of the services is fixed or determinable, all contracted
services are being delivered and payment is reasonably assured. When
obligations remain after services are delivered, revenue is recognized only
after such obligations are fulfilled. Amounts billed and cash received in
excess of revenue recognized are included as deferred revenue. We record
bandwidth billings gross based on the indicators in Emerging Issue Task Force
No. 99-19 "Recording Revenue Gross as a Principal versus Net as an Agent." We
are the primary obligor as our customer service agreements identify us as the
party responsible for the fulfillment of bandwidth services to our customers.
We select the bandwidth providers from numerous potential suppliers. We have
inventory risk for bandwidth capacity as we forecast then purchase total
bandwidth capacity for a certain period of time, in order to secure bandwidth
capacity, which may be in excess of total actual customer demand during that
period of time. The fact that bandwidth capacity is not specifically
designated to a particular customer does not mitigate the inventory risk,
since we forecast and purchase total bandwidth capacity for a future period of
time. We have credit risk as we are responsible for collecting the sales price
from a customer, but we must pay the amount owed the bandwidth suppliers

                                      25
<PAGE>


after the suppliers perform, regardless of whether the sales price is fully
collected. Bandwidth revenue and bandwidth costs to third-party suppliers have
been insignificant through July 31, 2000. In August 2000, we began placing a
provision in our customer service agreements that obligates a customer to pay
incremental fees once we have fulfilled our readiness obligations by preparing
the Internet infrastructure if those customers are not ready to launch the
site. The provision for incremental fees was added to allow us to start
billing customers once we had met our obligations, since we incur costs
related to preparing the Internet infrastructure and incur additional costs
between the operational date and the launch date. The incremental fees begin a
defined period of time after the operational date and end on the launch date.
The managed service period begins on the launch of the site, and thus the fees
charged during the managed service period are not affected by the length of
time or fees charged between the operational date and launch date. We
recognize revenue between the operational date and launch date, as it
represents a separate and distinct earnings process, provided we have evidence
of an agreement, the price is fixed or determinable, we have fulfilled our
obligations and collectibility is reasonably assured.

    We generally guarantee 100% scheduled uptime to our customers on a monthly
basis. We reduce revenue for estimated credits given for unscheduled downtime
at the end of each month. We do not currently resell equipment or software to
our customers. Furthermore, bandwidth billings to customers are included in
net revenue and bandwidth costs to third-party suppliers are included in cost
of revenue.

    Cost of revenue consists primarily of payments on rental equipment,
salaries and benefits of our employees who provide services to our customers,
leases of data center space in third-party facilities, customer support
services, including network monitoring and support, and depreciation and
amortization of capitalized equipment and software.

    Research and development expenses consist primarily of salaries and
related personnel expenses, consultant fees and prototype expenses related to
the design and development of our technology. Sales and marketing expenses
consist primarily of salaries, commissions and related personnel expenses, as
well as advertising, trade shows and promotional expenses. General and
administrative expenses consist primarily of salaries and benefits of our
administrative personnel and fees for outside professional advisors.

    We intend to continue to invest in research and development and new
technologies to develop new services and further advance our offerings. In
addition, an important part of our strategy is to expand our operations and
employee base and build our sales, marketing, customer support, technical and
operational resources.

    We believe our success requires expanding our customer base, moving into
new geographies, achieving anticipated levels of utilization of our leased
third-party data center space and technology infrastructure, providing a high
level of customer service and being able to scale our capabilities through
automation technology. We expect that our operating expenses will increase as
we expand our sales and marketing operations worldwide, lease additional space
in third-party data centers around the world, fund greater levels of research
and development and expand our related infrastructure. As a result of
anticipated increases in our operating expenses, we expect to continue to
incur net losses both on a quarterly and annual basis for the foreseeable
future. Our operating expenses are based in part on our expectations of future
revenue and are relatively fixed in the short term. As such, a delay in the
recognition of revenue from one or more contracts could cause variations in
our operating results from quarter to quarter and could result in greater net
losses in a given quarter than expected.

    We recorded employee and non-employee deferred stock-based compensation of
approximately $17.2 million during the period from inception to January 31,
2000 and $87.3 million during the six

                                      26
<PAGE>


months ended July 31, 2000 in connection with stock purchase rights granted,
where the fair value of the underlying common stock was subsequently
determined to be greater than the exercise price on the date of grant. In
addition, the Company recorded deferred stock-based compensation of
approximately $66.8 million for the period from August 1, 2000 to November 28,
2000 in connection with stock purchase rights and stock options granted. We
amortized stock-based compensation expenses of approximately $2.2 million for
the period from inception to January 31, 2000 and $24.6 million for the six
months ended July 31, 2000. Stock purchase rights granted are typically
subject to a four-year vesting period. We are amortizing the deferred stock-
based compensation on the graded vesting method over the vesting periods of
the applicable stock purchase rights. As a result of the cumulative effect of
stock-based compensation, we expect stock-based compensation expense, which is
primarily attributable to amortization of deferred stock-based compensation
charges, to impact our reported results through year-ended January 31, 2005.
Based on stock purchase rights granted net of cancellations through November
28, 2000, we expect the remaining stock-based compensation expense of $142.6
million to be approximately $51.1 million for the six months ended January 31,
2001, $53.7 million for the year ended January 31, 2002, $26.5 million for the
year ended January 31, 2003, $10.3 million for the year ended January 31, 2004
and $1.0 million for the year ended January 31, 2005. Our policy is to use the
graded vesting method for recognizing compensation costs for fixed awards with
pro rata vesting. The graded vesting method provides for vesting of portions
of the overall awards at interim dates and results in greater vesting in
earlier years than the straightline method.

Results of Operations

    The following table sets forth statements of operations data for the
period from inception to January 31, 2000 and the quarters ended April 30,
2000 and July 31, 2000. This information has been derived from our audited and
unaudited financial statements that, in management's opinion, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information for the periods presented. This
information should be read together with the audited financial statements and
related notes included elsewhere in this prospectus. The operating results for
any period are not necessarily indicative of the operating results for any
future period.

<TABLE>
<CAPTION>
                                             Period from
                                              Inception
                                            (September 9, Three Months Ended
                                              1999) to    -------------------
                                             January 31,   April    July 31,
                                                2000      30, 2000    2000
                                            ------------- --------  ---------
                                                     (in thousands)
<S>                                         <C>           <C>       <C>
Statements of Operations Data:
Net revenue................................    $   --     $     86  $   1,855
Costs and expenses:
  Cost of revenue..........................        --        4,075      9,654
  Research and development.................      1,453       1,330      2,968
  Sales and marketing......................        710       1,043      3,249
  General and administrative...............        760       1,585      1,869
  Amortization of deferred stock
   compensation............................      2,208       5,846     18,518
                                               -------    --------  ---------
    Total costs and expenses...............      5,131      13,879     36,258
                                               -------    --------  ---------
Loss from operations.......................     (5,131)    (13,793)   (34,403)
Interest and other expense, net............        150        (808)      (439)
                                               -------    --------  ---------
Net loss...................................     (4,981)    (14,601)   (34,842)
Series C convertible preferred stock
 deemed, non-cash dividend.................         --          --    (67,530)
                                               -------    --------  ---------
Net loss applicable to common
 stockholders..............................    $(4,981)   $(14,601) $(102,372)
                                               =======    ========  =========
</TABLE>

                                      27
<PAGE>

Three Months Ended April 30, 2000 and July 31, 2000

    Net revenue. Net revenue was $86,000 during the quarter ended April 30,
2000 and $1.9 million during the quarter ended July 31, 2000. Net revenue
increased as a result of the deployment of customers and increased demand for
our services due to the growth of our direct sales force.

    Cost of revenue. Cost of revenue was $4.1 million during the quarter ended
April 30, 2000 and $9.7 million during the quarter ended July 31, 2000. Cost
of revenue increased as a result of renting additional equipment and
depreciating and amortizing additional purchased equipment and software to
meet customer demand. In addition, cost of revenue increased due to an
increase in the number of employees who provide services to our customers and
our lease of additional third-party data center space. We expect that our cost
of revenue will increase significantly as we continue to deploy additional
customers, increase headcount and lease additional third-party data center
space in multiple locations.

    Research and development. Research and development expenses were $1.3
million during the quarter ended April 30, 2000 and $3.0 million during the
quarter ended July 31, 2000. Research and development expenses increased
primarily as a result of an increase in related employee headcount, and the
rental of equipment and depreciation of purchased equipment used in the
potential development of new service offerings. We believe that continued
investment in research and development is critical to attaining our strategic
objectives and, as a result, expect these expenses to increase in the future.

    Sales and marketing. Sales and marketing expenses were $1.0 million during
the quarter ended April 30, 2000 and $3.2 million during the quarter ended
July 31, 2000. Sales and marketing expenses increased primarily as a result of
an increase in related employee headcount, commissions paid on sales to
customers and the opening of additional field offices to support our direct
sales force. We expect to significantly expand our field sales operations and
our direct sales headcount, both of which will substantially increase our
sales and marketing expenses.

    General and administrative. General and administrative expenses were $1.6
million during the quarter ended April 30, 2000 and $1.9 million during the
quarter ended July 31, 2000. General and administrative expenses increased
primarily as a result of increases in administrative and management personnel
and expenses necessary to support and scale our operations. The general and
administrative expenses also reflected increased recruiting costs and outside
professional advisor costs. We expect our general and administrative expenses
to increase in future periods as we continue to increase headcount and add
infrastructure to support our anticipated business growth and as we become
subject to the increased costs associated with being a public company.

    Stock-based compensation. Stock-based compensation expense was $5.8
million during the quarter ended April 30, 2000 and $18.5 million during the
quarter ended July 31, 2000. The increase was due primarily to the
amortization of expenses related to our grants of stock purchase rights with
exercise prices below the deemed fair value of our common stock.

    Interest and other expense, net. Interest and other expense, net, which is
comprised primarily of accretion on senior discount notes net of investment
interest income, decreased from $808,000 in the quarter ended April 30, 2000
to $439,000 in the quarter ended July 31, 2000. This decrease was due
primarily to interest income earned on proceeds received from our Series C
preferred stock issuance in June 2000.

    Provision for income taxes. We incurred a net taxable loss in the period
from inception to January 31, 2000 and the six months ended July 31, 2000. We,
therefore, did not record a provision for

                                      28
<PAGE>

income taxes in those periods. As of July 31, 2000, we had federal and state
net operating loss carryforwards of $7.5 million available to offset future
taxable income, which may be used, subject to limitations, to offset future
state and federal taxable income through 2008 and 2020, respectively. We have
recorded a valuation allowance against the entire net operating loss carry-
forwards because of the uncertainty that we will be able to realize the
benefit of the net operating loss carryforwards before they expire.

    Deemed, non-cash dividend. In June 2000, we sold 14.1 million shares of
Series C preferred stock to new and existing investors for a total purchase
price of $120.0 million in order to raise funds to meet our working capital
and capital expenditure requirements. We recorded a $67.5 million non-cash
dividend in the quarter ended July 31, 2000 due to the beneficial conversion
feature in the Series C convertible preferred stock due to the difference
between the deemed fair value at the date of issuance and actual issuance
price.

Period from inception (September 9, 1999) to January 31, 2000

    Through January 31, 2000, our activities primarily consisted of
establishing offices, conducting research and development, recruiting
management and technical personnel and obtaining financing. We had no revenue
during this period. Accordingly, we were considered to be in the development
stage. As of January 31, 2000, we had an accumulated deficit of $5.0 million.
These losses were funded primarily through the private issuances of equity
securities.

Liquidity and Capital Resources

    Since inception, we have financed our operations primarily through the
private placement of our preferred stock and sale of our senior discount notes
and, to a lesser extent, operating equipment lease financing, customer revenue
and capital equipment lease financing. As of July 31, 2000, we had
$142.6 million in cash and cash equivalents.

    Net cash provided by operating activities was $1.3 million for the period
from inception to January 31, 2000. Net cash used by operating activities was
$5.3 million for the six months ended July 31, 2000. Net cash provided by
operating activities for the period from inception to January 31, 2000, was
primarily attributable to the increase in accounts payable, accrued
liabilities and deferred revenue partially offset by the net loss for the
period. Net cash used by operating activities for the six months ended July
31, 2000, was primarily the result of a net loss and an increase in accounts
receivable, partially offset by increases in accounts payable, deferred
revenue and accrued compensation.

    Net cash used in investing activities was $4.3 million for the period from
inception to January 31, 2000 and $36.1 million for the six months ended July
31, 2000. Net cash used in investing activities, during both periods,
consisted primarily of investments in capital equipment.

    Net cash provided by financing activities was $23.5 million for the period
from inception to January 31, 2000 and $163.5 million for the six months ended
July 31, 2000. In both periods, cash received was primarily attributable to
net proceeds from the issuance of preferred stock. In the six months ended
July 31, 2000, we also received net proceeds from the sale of senior discount
notes.

    We have an aggregate of $30.4 million available under equipment lease
credit facilities as of July 31, 2000. Under the equipment lease facilities,
we are entitled to lease equipment with payment terms extending to 24 months.
Amounts outstanding under these facilities bear effective rates of interest
ranging from approximately 12% to 14% and are secured by the related leased
assets.

                                      29
<PAGE>

    As of July 31, 2000, our principal commitments consisted of obligations
outstanding under senior discount notes and operating and capital leases.
Although we have no material commitments for capital expenditures, we
anticipate a substantial increase in our capital expenditures and lease
commitments consistent with our anticipated growth in operations,
infrastructure and personnel.

    We believe that the net proceeds from the sale of common stock in this
offering, together with our current cash balances, will be sufficient to meet
our working capital and capital expenditure requirements for at least the next
12 months. Nevertheless, we may seek additional capital through private equity
or bank financing. Capital requirements will depend on many factors, including
the rate of sales growth, market acceptance of our services, costs of
providing our services, the timing and extent of research and development
projects and increases in our operating expenses. To the extent that funds
generated by this offering, together with existing cash and cash equivalents
balances and any cash from operations are insufficient to fund our future
activities, we may need to raise additional funds through public or private
equity or debt financing. In addition, although there are no present
understandings, commitments or agreements with respect to any acquisition of
other businesses, services, products and technologies, we may from time to
time evaluate potential acquisitions, which could increase our capital
requirements.

Recent Accounting Pronouncements

    In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133, which is
effective, as amended, for all quarters in fiscal years beginning after June
15, 2000, establishes accounting and reporting standards for derivative
financial instruments and hedging activities related to those instruments, as
well as other hedging activities. As we do not currently engage in derivative
or hedging activities, we do not expect the adoption of this standard to have
a significant impact on our financial statements.

    In December 1999, the SEC issued Staff Accounting Bulletin 101, or SAB
101, Revenue Recognition, which outlines the basic criteria that must be met
to recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements
filed with the SEC. We do not believe the adoption of SAB 101, as currently
proposed, will have a material impact on our financial position and results of
operations.

    In March 2000, the FASB issued Interpretation No. 44, or FIN 44,
Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB 25. This Interpretation clarifies (a) the definition of
employee for purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. This Interpretation is effective July 1,
2000, but certain conclusions in this Interpretation cover specific events
that occur after either December 15, 1998 or January 12, 2000. The adoption of
certain of the conclusions of FIN 44 covering events occurring during the
period after December 15, 1998 or January 12, 2000 did not have a material
effect on our financial position and results of operations. We do not expect
that the adoption of the remaining conclusions will have a material effect on
our financial position and results of operations.

    In March 2000, the Emerging Issues Task Force, or EITF, published its
consensus on EITF No. 00-2, Accounting for Web Site Development Costs, which
requires the following accounting for costs related to development of web
sites:

  .  Costs incurred in the planning stage, regardless of whether the
     planning activities relate to software, should be expensed as incurred;

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  .  Costs incurred during the development of web site applications and
     infrastructure involving, acquiring or developing hardware and software
     to operate the web site, including graphics that affect the look and
     feel of the web page, should be capitalized. All costs relating to
     software used to operate a web site should be accounted for under
     Statement of Position 98-1, Accounting for the Costs of Computer
     Software Developed or Obtained for Internal Use, or SOP 98-1. However,
     if a plan exists or is being developed to market the software
     externally, the costs relating to the software should be accounted for
     pursuant to SFAS No. 86, Accounting for the Costs of Computer Software
     to Be Sold, Leased or Otherwise Marketed;

  .  Costs paid to web site hosting services generally should be expensed
     over the period of benefit; and

  .  Costs incurred in operating the web site, including training,
     administration, maintenance, and other costs, should be expensed as
     incurred. However, costs incurred in the operation stage that involved
     providing additional functions or features to the web site should be
     accounted for as new software. Such costs should be capitalized or
     expensed based on the requirements of SOP 98-1, or SFAS No. 86, as
     applicable.

    We will be required to adopt EITF No. 00-2 in fiscal quarters beginning
after June 30, 2000. We believe our policy for accounting for costs incurred
to operate our hosted services will not be impacted by adoption of this
pronouncement.

    In March 2000, the EITF published its consensus on EITF No. 00-3,
Application of AICPA Statement of Position 97-2, Software Revenue Recognition,
to Arrangements That Include the Right to Use Software Stored on Another
Entity's Hardware. EITF No. 00-3 states that a software element covered by SOP
97-2 is only present in a hosting arrangement if the customer has the
contractual right to take possession of the software at any time during the
hosting period without significant penalty and it is feasible for the customer
to either run the software on its own hardware or contract with another party
unrelated to the vendor to host the software. We have historically treated our
hosted services as service arrangements, which is in accordance with the
guidance contained in this pronouncement. Our hosting arrangements do not
provide customers with the contractual right to take possession of the
software.

Quantitative and Qualitative Disclosures about Market Risk

    We have limited exposure to financial market risks, including changes in
interest rates. An increase or decrease in interest rates would not
significantly increase or decrease interest expense on our debt obligations
due to the fixed nature of our debt obligations. Our interest income is
sensitive to changes in the general level of U.S. interest rates, particularly
since the majority of our investments are in short-term instruments. Due to
the short-term nature of our investments, we believe that we are not subject
to any material market risk exposure.

    As we expand into foreign markets, our financial results could be affected
by factors such as changes in foreign currency exchange rates or weak economic
conditions in the foreign markets we plan to target. All of our sales are
currently made in U.S. dollars, and a strengthening of the dollar could make
our services less competitive in the foreign markets we plan to target.

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                                   BUSINESS

Overview

    We offer businesses a new class of Internet infrastructure services using
our Opsware technology, which automates formerly manual tasks, such as
configuring and managing a customer's operations infrastructure, thereby
reducing the amount of manual intervention required. These services, which we
call Smart Cloud services, include those required to deploy, maintain and grow
Internet operations. This fully outsourced solution enables our customers to
increase or reduce their Internet operations capacity as business needs
dictate. Our Smart Cloud services enable our customers to benefit from
reliable, high-quality Internet operations, which can grow to accommodate
increasing business needs, without undertaking the difficulty and expense
associated with building the required expertise in-house.

    We provide our Smart Cloud services through the Loudcloud Infrastructure
Network, which allows us to consistently deploy operations capacity for our
customers across multiple locations and to maintain that infrastructure
through a centralized network operations center. The Loudcloud Infrastructure
Network consists of our technology located in a number of interconnected
third-party data centers and maintained by our Opsware technology. Among other
things, the Loudcloud Infrastructure Network enables our customers to:

  .  maintain a duplicate operations infrastructure in a separate location
     to protect against loss of service in the event of a localized
     disruption;

  .  provide geographically dispersed end users with enhanced site
     performance by maintaining customers' operations in areas close to
     their end users;

  .  quickly expand their Internet presence as business opportunities arise
     in new geographies; and

  .  efficiently incorporate new functionality or technologies into their
     existing Internet operations as Internet technologies evolve.

    Central to the operation of our Loudcloud Infrastructure Network is our
Opsware technology. We believe that our Opsware technology will enable us to
deploy and service customers more quickly and efficiently and with a higher
quality of service than customers could otherwise do.

Industry Background

 Critical nature of the Internet

    The Internet is fundamentally changing the way businesses interact with
their customers, partners and other businesses and has become an important
medium for both commerce and communications. Improvements in the quality and
reliability of global telecommunications networks and common Internet
protocols permit large volumes of data to be delivered to end users over a
variety of Internet-enabled devices. Businesses are now able to access and
distribute a wide array of software services over the Internet, allowing them
to, among other things, implement supply chain management solutions and
migrate other operating functions on-line, market and sell products and
services to customers and offer web-based customer self-service programs.

    As a result, businesses are substantially increasing their investments in
Internet sites, services, software, network infrastructure, information
technology personnel and hardware to leverage the reach and efficiency of the
Internet. International Data Corporation, or IDC, estimates that worldwide
demand for Internet services was $16.2 billion in 1999 and is expected to grow
to $99.1 billion by 2004. IDC

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defines Internet services as the consulting, implementation and operation
services associated with the development, deployment and management of
Internet initiatives.

 Increasing complexity of Internet operations

    Even as companies have increased their investments in Internet
infrastructure, the complexity of successfully deploying and maintaining
Internet operations continues to increase. In particular, the software
infrastructure required to deploy and maintain large-scale Internet operations
has become increasingly complex. For example, businesses deploying large-scale
Internet operations can choose from multiple software applications with
varying levels of functionality, including transaction processing,
personalization and enterprise systems integration. A number of vendors supply
solutions addressing different components of a company's operations
infrastructure, but integrating these solutions is becoming increasingly
complex. As the number of end-user computing devices continues to increase,
businesses must ensure that their applications are accessible across each of
these devices. In addition, with increasing globalization, businesses often
must maintain their operations in multiple locations and design their
infrastructure to accommodate local standards, while remaining synchronous
with operations in other geographies.

    The in-house expertise required to meet these challenges is significant
and typically requires a host of technical specialists, including network
administrators, systems administrators, database administrators, security
experts, monitoring and management experts, project managers, software
operations specialists, troubleshooting specialists and performance engineers.
It is often difficult, time consuming and costly to hire and retain these
experts. In April 2000, the Information Technology Association of America
published a report estimating that there is a shortage of approximately
843,000 information technology workers in the United States alone. In
addition, even if businesses can effectively hire and retain these experts,
deploying this talent to maintain a business' Internet infrastructure is
inefficient as it diverts these resources from enhancing a business' core
competencies.

    At the same time, the consequences of failing to develop a robust
operations infrastructure, and therefore experiencing downtime, are serious.
Although difficult to measure, IDC estimates that the average system outage
lasts four hours and costs approximately $300,000 in lost revenue.

 Challenges of rapid deployment and scalability

    In addition to the challenges of increasing complexity, businesses face
significant hurdles to decrease the time to deployment and increase the scale
of their operations. To create a robust operations environment on their own,
businesses must take a number of steps, each of which requires a significant
time investment. They first need to develop the in-house expertise to evaluate
varied hardware, software and networking offerings from multiple vendors and
then understand and address the significant integration issues created by
implementing these offerings in a unified architecture. Once a business has
successfully designed the architecture, developed relationships with all
necessary vendors and procured data center space, bandwidth and networking and
server hardware and software, it must then iteratively test the applications
and the overall combination of technologies to ensure that the live
environment will function reliably. Next, a business must develop the in-house
expertise to monitor and maintain this architecture to prevent downtime
associated with failures at any part of the network, hardware or software
layers and to maintain the security and integrity of the system, including
evaluating and procuring appropriate back-up technology and disaster recovery
services. Finally, as upgraded versions of the software are released or as
businesses seek to add functionality, they must understand the architecture's
interdependencies to avoid performance degradations that may result from the
introduction of upgrades or new functionality into the existing environment.

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    Once a business has deployed its operational infrastructure, it must be
able to quickly scale the existing architecture to accommodate increased
activity without performance degradation. To do so effectively, businesses
must understand the architecture's ability to scale both by adding additional
hardware running identical software applications and by adding new hardware
and software applications to increase functionality, while ensuring the
architecture's reliability and security. To determine the appropriate time to
scale the architecture, businesses must be able to track the operating metrics
of the environment, understand the thresholds at which existing capacity may
be exhausted and pro-actively manage relationships with technology vendors to
ensure that additional infrastructure capacity is available in a timely
fashion. This is made even more complicated by the volatile and variable
nature of Internet traffic. For businesses with non-uniform utilization levels
-- for example, spikes in utilization that may be seasonal or temporal in
nature -- proper capacity planning may require that they maintain an expensive
technology inventory that remains under-deployed for significant periods of
time. As with upgrades, businesses must also understand the relationships
between the various elements of the architecture to be able to determine
whether scaling a single element will create performance problems.

 The need for specialized Internet infrastructure solutions

    To effectively manage the increasing complexity of Internet operations, we
believe that companies require a new set of infrastructure services to run
Internet operations on an automated and global basis. A reliable, secure,
scalable and cost-effective software infrastructure network would permit
businesses to focus on their core competencies and provide greater
functionality and flexibility than they could otherwise attain on their own.
Businesses could also access a global and robust technology infrastructure
without incurring the time or financial costs associated with building out
equivalent functionality on their own. In addition, businesses would be able
to access the operations capacity they require to efficiently run their
Internet-based software applications and to efficiently increase or reduce
that capacity as business needs dictate. The solution would also consistently
deploy and maintain businesses' Internet operations across multiple locations
via centralized network operations centers.

Our Solution

    We provide businesses Internet infrastructure services that address the
challenges associated with deploying, maintaining and growing Internet
operations for critical business functions. We offer our Smart Cloud services
through the Loudcloud Infrastructure Network to furnish our customers with
guaranteed levels of reliability and the ability to efficiently grow their
Internet operations, helping them to reduce the time it takes to build or
expand their Internet initiatives. The Loudcloud Infrastructure Network
maintains a business' Internet operations across various levels of the
Internet infrastructure, from the network layer to the application layer. It
also allows us to centrally and consistently deploy and maintain our
customers' Internet operations across multiple locations. A key element of the
Loudcloud Infrastructure Network is our Opsware technology, which automates
formerly manual tasks, thereby reducing the amount of manual intervention
required and increasing the quality and reliability of our services.

    The Loudcloud Infrastructure Network provides our customers with the
following key benefits:

    Capacity-based pricing and reduced capital investment. Our services enable
customers to access the operations capacity they require to efficiently run
their Internet operations and to increase or reduce that capacity, whether it
is storage, hardware, software or networking resources, as business needs
dictate. Our customers only make additional payments for the actual capacity
provisioned for them, which affords many customers a lower capital investment
than they could otherwise attain if they designed their own operations to
accommodate peak capacity.

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<PAGE>

    Scalability. The Loudcloud Infrastructure Network allows us to grow our
customers' operational environments as their business needs require. Our
Opsware technology automates this process by enabling us to procure and deploy
additional capacity for a customer's existing architecture in less time than
it would require to expand the architecture manually.

    Consistent operational presence across multiple locations. Because the
Loudcloud Infrastructure Network allows us to maintain our customers'
operations in multiple third-party data centers, we can provide infrastructure
capacity for our customers across multiple locations and manage that capacity
consistently through a centralized network operations center. Among other
things, this enables customers to quickly expand their operations in new
geographic areas and maintain a redundant infrastructure in a separate
location to protect against loss of access in the event of downtime in one of
its primary locations.

    Reliability. We provide our customers a 100% scheduled uptime guarantee,
as well as a performance degradation guarantee. Scheduled uptime excludes,
among other items, time required for routine maintenance of the operations
infrastructure. We are able to provide this guarantee because we deploy each
of our customers' operational environments using technologies that we have
tested extensively and in a manner designed to eliminate single points of
failure. Before any piece of software or hardware is deployed in any of our
customer environments, our research organization tests the technology in
combination with the other layers of the infrastructure with which it will be
deployed to determine whether it is sufficiently reliable, scalable and
secure. Our software engineers also program functionality into our Opsware
technology so that we can consistently deploy the newly introduced software or
hardware and continuously monitor and maintain its performance across the
Loudcloud Infrastructure Network.

    Rapid implementation. We believe our Internet infrastructure services
allow our customers to launch their Internet businesses more rapidly than they
could on their own. Because our research organization thoroughly tests and
reviews technologies, we allow our customers to avoid having to evaluate a
variety of hardware, software and networking offerings from multiple vendors.
Our solution further spares our customers the time that would otherwise be
required to design and test the architecture and hire and train resources
required to monitor and maintain the architecture.

    Ability to focus on core business. Because we maintain our customers'
Internet operations, we allow our customers to focus on building their
businesses rather than spending valuable resources maintaining their Internet
operations infrastructure. Given the difficulty of attracting and retaining
engineering talent, we believe that our services help enable our customers to
deploy their engineering resources toward application development projects
that best differentiate their businesses from their competitors, while we
focus on maintaining the underlying infrastructure most appropriate to our
customers' needs.

    In-depth technology and operations expertise. We have assembled an
operations group comprised of experts who focus exclusively on operations
technology, implementation, management and scaling. Many of our team members
were significantly involved in the management of some of the world's largest
Internet sites, including America Online, Excite@Home, Infoseek and Netscape
Netcenter. In addition, all of our customers benefit from the expertise of our
research organization, which continually evaluates new technologies to
determine which represent the best advancements in functionality and have
appropriate levels of scalability, reliability and security to be incorporated
into our service offerings. This access provides customers with timely
information on new releases of hardware, software and network systems and
advice about how the new technology might affect their operational
environments.


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Our Strategy

    Our strategy is to establish Loudcloud as the leading provider of Internet
infrastructure services that enable reliable, high-quality, scalable, global
and secure Internet operations. To achieve this strategy, we intend to:

    Expand the Loudcloud Infrastructure Network. We plan to expand the
geographic scope of the Loudcloud Infrastructure Network, both domestically
and internationally, to better serve our existing customers and to extend our
services to new customers in different locations. We currently provide our
services through third-party data centers located in the San Francisco Bay
Area, the New York metropolitan area, Virginia and the United Kingdom. We have
sales offices in multiple cities in the United States as well as in London,
Paris and Munich. We are currently considering additional facilities in the
United States and Continental Europe, as well as in the Asia-Pacific region.
We also plan to enhance the features of the Loudcloud Infrastructure Network
by adding new application functionality that can be accessed by customers
across all of our locations.

    Extend our automation technology leadership position. We intend to extend
the capabilities of our Opsware automation technology, which is central to the
operation of our Loudcloud Infrastructure Network, to further enhance our
ability to deploy, maintain and scale Internet operations across multiple
locations. We determine the priorities for incorporating additional features
into our Opsware technology based on a number of factors, including the extent
to which the features can increase customer satisfaction, increase our ability
to deploy and maintain new customers across multiple locations, decrease the
costs and time associated with deployment and maintenance of customers and
enhance our ability to integrate our Opsware technology with other parts of
our solution.

    Further broaden our service offerings. We intend to continue to invest in
the development and integration of additional services that address the
evolving needs of our customers. For example, we recently introduced several
new services, such as content distribution and access control services, based
upon feedback from existing and potential customers. Our goal is to integrate
additional service offerings into the Loudcloud Infrastructure Network that
extend the capabilities of our solution and that are broadly applicable across
a large universe of existing and potential customers. We believe that by
continuing to broaden our service offerings, we will increase the value of the
Loudcloud Infrastructure Network and increasingly be viewed by our customers
as the single and best source for all of their Internet infrastructure
services requirements.

    Expand services for our target customer segments. In addition to expanding
the scope of services that we provide, we are also developing services geared
to the needs of particular segments of our customer base. For example, we
recently announced our new application service provider, or ASP, services to
address the core infrastructure needs of ASPs. ASPs have scalability, security
and monitoring needs that are distinct from those of our other target
customers. Our new ASP services are designed to address many of these needs,
including configuration management, billing, customer monitoring and log
management. In addition, our scaling technology allows us to quickly and
automatically provision replacement servers in the event of an outage, which
enables our ASP customers to benefit from high availability solutions without
incurring the costs of full redundancy. We will continue to review the
applicability of our service offerings to our target customers and create
additional category-specific offerings based on the size of the market
segment, the functionality of our automation software and the need for scale,
global expansion and multi-site management.

    Further extend the scope of supported technologies. We plan to use the
expertise of our research organization to further extend the scope of
technologies that we support. We believe that we currently offer support for
proven technologies with significant market presence. Our research
organization determines whether to certify a given technology for use in our
operational environment

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<PAGE>

based upon a number of factors, including the ability of the technology to
scale, the stability of the technology when used in combination with other
technologies that comprise the Internet infrastructure, the size of the
customer market to which the technology is addressed and the overall costs to
purchase and maintain the technology.

Smart Cloud Service Offerings

    We provide our Smart Cloud services through the Loudcloud Infrastructure
Network, which enables us to centrally and consistently deploy and maintain
our customers' Internet operations across multiple locations. Our services
maintain a company's Internet business operations, from hardware and software
provisioning to ongoing infrastructure monitoring and scaling.

    Our Smart Cloud services incorporate the hardware, software and networking
infrastructure and the provisioning, maintenance and scaling expertise
required to support a particular layer of a customer's Internet
infrastructure. Our core services provide the functional components required
to deploy, run and maintain a highly available Internet infrastructure. Our
additional services provide functionality beyond the core configuration that
customers may desire to enhance the features or performance of their
operational environments. Each of our additional services can be purchased
separately. We price our services using a pricing schedule that varies based
upon the quantity and type of services a customer purchases and the capacity
required of each service.

    We build out the core operational environment in which we support our
customers in each of our third-party data center locations to include a robust
networking core and storage area network. In addition, we build out individual
customer compartments that include fully dedicated equipment required to
support a particular customer's operational needs. The operational environment
also includes the hardware and storage equipment required to extend the
capabilities of our Opsware technology to the customers we support in a
particular data center. We maintain a pool of servers in the operational
environment that we utilize to provide additional capacity to customers. To
utilize our Smart Cloud services, customers are not required to purchase any
software, hardware or networking equipment for use in our operational
environment. We currently support the Microsoft Windows NT, Microsoft Windows
2000, Redhat Linux and Solaris operating systems.

 Core Services

  .  Web Cloud Service. Our Web Cloud service provides a dedicated, scalable,
     secure and fully redundant web server environment. The web server
     environment provides the functionality required to manage inbound and
     outbound requests from third parties seeking to access the content and
     services of the web site. We currently support the following web server
     software: Apache, Netscape Enterprise Server, Sun Microsystems' iPlanet
     Web Server, Microsoft Internet Information Server and Stronghold Apache.

  .  Application Server Cloud Service. Our Application Server Cloud service
     provides a scalable, full-featured management and deployment environment
     for application servers. The application server environment provides the
     functionality required to evaluate business rules and serve dynamic web
     content to the end user. Features of this service include load
     balancing, which is a means of balancing traffic and information
     processing requests across multiple hardware servers, and software code
     provisioning and version control, which are the processes by which
     customer software code is deployed on servers and, as new versions of
     their code are deployed, consistency is maintained among the multiple
     versions. We currently support the following application server
     software: Allaire Cold Fusion, ATG Dynamo Application Server, BEA
     Weblogic Server, Sun Microsystems' iPlanet Application Server, Microsoft
     ASPs and Vignette Story Server.

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  .  Database Cloud Service. Our Database Cloud service provides businesses
     with a mission-critical, back-end system for the management and storage
     of data generated on the Internet. The database server environment
     provides the functionality required to process transactions requested by
     the end user, serve data stored in the database and store transaction
     history. In addition, the database environment includes a high
     availability storage environment designed to ensure that critical data
     generated by an Internet business is properly processed, stored and
     archived. We maintain, on behalf of our customers, five copies of every
     piece of transactional data and have developed three independent
     mechanisms by which we can recover their customer data in the event of a
     failure. We currently support the following database software: Oracle
     and Microsoft SQL Server.

  .  Staging Cloud Service. Our Staging Cloud service provides a smaller
     scale replica of the customer's full production environment. This
     service allows customers to deploy modifications to the environment and
     test them prior to pushing the modifications into the production version
     of the site. This service also enables customers to assess new content
     and application functionality so that they can detect and correct any
     performance problems prior to placing them into a full production
     environment. In addition, our Staging Cloud service allows a customer to
     revert to a previous version of its Internet site in the event of
     performance problems related to an application upgrade or new
     installation.

 Additional Services

  .  Access Control Cloud Service. Our Access Control Cloud service enables
     customers to utilize data stored in our Directory Cloud service to
     implement authentication and authorization services for their web sites.
     Using this service, customers can securely manage access to their web
     site resources and allow their end users to have a single sign-on, while
     centralizing the administration of privileges. Our Access Control Cloud
     service uses Netegrity's SiteMinder product.

  .  Content Distribution Cloud Service. Our Content Distribution Cloud
     service allows customers to reduce the time required to download content
     from their web sites, thereby enhancing the end-user experience. Powered
     by Akamai's FreeFlow service, our Content Distribution Cloud service can
     increase the number and diversity of users supported by a particular web
     site by routing Internet users to the closest, most available server
     from which the desired content may be accessed.

  .  Storage Cloud Service. Our Storage Cloud service includes dedicated
     content storage and is designed to meet the needs of customers whose
     content storage requirements cannot be met by the direct attached
     storage included with our standard configuration. We offer this service
     as an addition to the storage solution that we normally provide with our
     Database Cloud service. We currently support the Network Appliance Filer
     family of products.

  .  Directory Cloud Service. Our Directory Cloud service provides customers
     with the ability to centralize user and group information in a single
     directory store that can be rapidly accessed by applications deployed by
     customers. This service uses Sun Microsystems' iPlanet Directory Server
     software.

  .  Mail Cloud Service. Our Mail Cloud service provides a secure, outbound
     e-mail service that enables businesses to communicate effectively with
     their customers and partners. This service relieves customers from
     managing, securing and scaling complex Internet mail routing technology.

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  .  Stress Cloud Service. Our Stress Cloud service enables customers to
     determine and improve the reliability and scalability of their Internet
     architecture. This service simulates production-level traffic to
     customer sites for an analysis of capacity bottlenecks in the
     architecture both before and after deployment. Our Stress Cloud service
     uses Mercury Interactive's Loadrunner software.

  .  Monitoring Cloud Service. Monitoring Cloud Service, powered by Keynote
     Systems, allows customers to monitor the amount of time it takes for
     their Internet pages to load. Customers can use these metrics to
     proactively change site design and content to improve performance,
     thereby helping to maintain a positive end-user experience. Customers
     can measure performance from various geographic locations, compare
     performance to competitors or to key indices and track performance
     across various network backbones.

  .  General Support Services. We offer general support services for
     customers that want to use technology that we do not currently support.
     If a customer selects general support services, the customer is
     responsible for procuring and managing the necessary software above the
     operating system level while we physically maintain and monitor the
     server operating environment.

Technology and Infrastructure

 Opsware Technology

    Central to the operation of our Loudcloud Infrastructure Network is our
Opsware technology. This technology consists of software and systems that
automate the many tasks required to maintain the Loudcloud Infrastructure
Network. Our Opsware technology requires no modifications to existing customer
code and provides the following functionality:

  .  Deployment. We designed our Opsware technology to automate the
     deployment and configuration of our customers' operational environments.
     For example, our Opsware technology can automatically and remotely
     configure servers as needed by a particular customer. Our Opsware
     technology also consistently configures the various components of the
     operational environment to ensure, for example, that a customer's
     networking devices are configured appropriately to interact with the
     hardware running in the environment. We believe that this functionality
     allows us to configure equipment in less time and with more consistent
     quality than if the process were done manually. In addition, our Opsware
     technology permits us to deliver our services in multiple locations,
     without having to maintain a full operations presence in each location.

  .  Scaling. Our Opsware technology maintains a central repository of data
     pertaining to the operations of our customer environments. Because our
     Opsware technology maintains this customer-specific data, whenever a
     customer requires additional capacity in the environment, our Opsware
     technology can automatically deploy new servers and configure them to
     the specifications of the customer's existing environment. This
     functionality, in conjunction with our procurement process and vendor
     relationships, enables us to offer our customers the ability to deploy
     the capacity that their environment requires and adjust capacity as
     their needs change. Further, our ability to re-create a customer's
     environment allows us to consistently manage a customer's multiple sites
     across a number of geographies and to extend the Loudcloud
     Infrastructure Network by rapidly cloning installations in new
     geographies.

  .  Advanced configuration management. We have built into our Opsware
     technology advanced configuration management functionality designed to
     enhance the consistency and reliability of our Smart Cloud services. For
     example, our Opsware technology maintains a repository of customer data
     and operations configurations, as well as their cross-system

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<PAGE>

     dependencies, to enable us to re-provision a customer in a new
     environment in the event of a failure in the customer's existing
     location. This same functionality also allows us to roll back a
     customer's operational environment to a previous version in the event
     that a change to the operational environment--for example, introducing a
     new version of application server software or updating new customer
     code--adversely affects the performance of the environment.

  .  Ongoing monitoring and maintenance. Using our Opsware technology, we
     provide comprehensive monitoring and maintenance of our customers'
     environments, from the network layer through the application layer. The
     metrics that our Opsware technology monitors are designed to maintain
     and verify the integrity and quality of the infrastructure and customer
     data and to proactively detect performance problems. In addition, the
     technology assists us in preventing, detecting, responding to and
     auditing security breaches. We have designed our Opsware technology to
     extend the scope of monitoring capabilities beyond those generally
     provided by standard monitoring tools. We provide a comprehensive,
     uniform approach to monitoring across multiple levels of the Internet
     infrastructure to help identify performance bottlenecks and detect and
     diagnose failures.

 MyLoudcloud Portal

    Through the myLoudcloud portal, our customers can access a variety of
reports and services. Using the myLoudcloud portal, our customers benefit from
the following:

  .  Traffic analysis reports. These reports enable customers to view
     information about the users of their site, including the number of page
     views and user demographics, which can be helpful in determining the
     effectiveness of marketing campaigns or in understanding customer
     segmentation. The reports also enable customers to diagnose trends in
     customer behavior and track system errors as well as user performance.

  .  Device monitoring. Customers can monitor the performance of the
     infrastructure we provide for them. A customer can configure its
     myLoudcloud portal to track only those statistics of interest and with
     the desired level of detail.

  .  Maintenance. The myLoudcloud portal integrates with our maintenance
     request tracking system to provide customers with detailed reports on
     outstanding service requests. A customer can also use the myLoudcloud
     portal to order additional services.

  .  User management and access control. The myLoudcloud portal allows our
     customers to control user access to the array of the myLoudcloud portal
     services. In addition, customers can customize the views into the
     myLoudcloud portal to different levels of users.

    We have designed the myLoudcloud portal with an open software
infrastructure to enable third-party service providers to integrate their
monitoring and maintenance reports directly into the myLoudcloud portal. This
allows our customers to self-configure a single management console through
which to view their Internet operation. We are continuing to expand the
functionality of the myLoudcloud portal to enable increasingly greater levels
of customer self-service.

 Operational Environment

    We provide our services to customers through third-party data centers
located in the San Francisco Bay Area, the New York metropolitan area,
Virginia and the United Kingdom. We are currently considering additional
facilities in the United States and Europe, as well as in the Asia-Pacific
region, but we have no specific plans to offer our services in these locations
by the end of 2000. We provision bandwidth services directly through our
third-party data center providers and through third-party bandwidth providers.

                                      40
<PAGE>

    We typically procure several thousand square feet in each of the third-
party data centers in which we offer our services. We build out the core
operational environment in each of our third-party data center locations to
include a robust networking core--which includes switches, routers, firewalls
and load balancers--and a storage area network. In addition, we build out
individual customer compartments that include fully dedicated equipment
required to support a particular customer's operational needs. The operational
environment also includes the hardware and storage equipment required to
extend the capabilities of our Opsware technology to the customers we support
in the particular third-party data center. In addition, we maintain a pool of
servers in the operational environment that we utilize to provide additional
capacity to customers we serve in the third-party data center.

    All of our third-party data center locations are linked via private line
circuits to enable us to provide data replication and back-up across
facilities and to provide a single software infrastructure network through
which we can remotely manage each of our facilities.

    Each of our third-party data center locations is continuously monitored
from our Global Network Operations Center, or GNOC, which is located at our
corporate headquarters in Sunnyvale, California. We maintain continuous,
twenty-four hour staffing of our GNOC with our professional support
representatives who are trained in network diagnostics, server diagnostics and
engineering. The GNOC is designed to monitor and maintain the performance and
security of our customer's operations environments. We may add GNOCs in other
geographic areas as needs require and for redundancy.

    We provide a comprehensive, multi-level security infrastructure to help
our customers' sites remain as free as possible from security breaches. Our
multi-level approach to security avoids site dependencies on a single point of
failure that, if breached, could leave the entire site vulnerable. Our
approach provides additional levels of protection that an attacker must
penetrate before inflicting significant damage to a customer's business. Our
use of individual customer compartments further protects a customer from
exposure to security breaches in another customer's compartment. In addition
to various security prevention tactics, we also employ a number of detection,
auditing and response and repair mechanisms designed to ensure that security
problems are quickly detected and remedied.

    Once a customer has contracted for our services, a consulting engineer and
project engineer are assigned to the account to maintain full responsibility
for the successful architecture design and deployment of the customer site.
Where appropriate, the consulting engineer will involve our functional
engineering experts--for example, database administrators, network engineers,
system administrators--so that our customer's operational environments are
designed and deployed for maximum reliability and scalability.

Customers

    Our customers include established enterprises, application service
providers and Internet-based businesses. As of October 30, 2000, our customers
are:

<TABLE>
   <S>                        <C>                        <C>
   Acteva                     HealtheTech                Quinstreet
   BlackHog                   HomeGain                   Receipt City
   Britannica.com             Hopelink                   Scudder Weisel Capital
   Catapulse                  Integral Development       SkillsVillage.com
   drspock.com                Interelate                 StatementOne.com
   Eazel                      Juniper Financial          TM Digital
   eDeploy.com                Mercury Interactive        Upromise
   Epoch Partners             MetaTV                     WishSolutions
   Fannie Mae                 Nike                       Work.com
   Gx Media                   OneClip.com
</TABLE>

                                      41
<PAGE>

Industry Relationships

    We have developed a variety of relationships with a number of leading
technology companies. Among others, we have established relationships with the
following third parties:

  .  Internet Systems Integrators. We have entered into joint marketing and
     lead referral relationships with a number of Internet systems
     integrators, including AnswerThink, Cognizant Technology Solutions,
     Emerging.com, Lante, Organic, Proxicom, Razorfish and Zefer. Lead
     referral relationships are those relationships through which we
     compensate a third party for providing us a qualified sales lead. In
     addition, we have entered into an agreement with Viant through which we
     and Viant will offer integrated business management, application
     management and infrastructure services.

  .  Data Center Providers. We have contractual arrangements with the
     following data center providers: AT&T, Equinix, Exodus Communications
     and GlobalCenter. We utilize the facilities of our data center providers
     to deploy our customers.

  .  Enterprise Software and Hardware Vendors. We have entered into marketing
     or lead referral relationships with several enterprise software vendors,
     including BEA, Oracle, Sun Microsystems and Microsoft. In addition, for
     the particular technology products that our research organization has
     certified are appropriate to deploy in our customer environments, we
     have incorporated into our service offerings products from the vendors
     mentioned above, as well as from Alteon WebSystems, Art Technology
     Group, Cisco, Compaq, EMC, Hewlett-Packard, Sun Microsystems' iPlanet,
     Netegrity, Network Appliance and Vignette. We develop our Opsware
     technology to automatically provision, maintain and scale the technology
     we support.

  .  ASP Vendors. We have developed relationships with several vendors that
     offer their software services on an outsourced basis. For example, we
     have established a relationship with both E.piphany and Interelate,
     whereby Interelate will implement and host E.piphany's customer
     analytics applications in an operations environment maintained by us. In
     addition, we have a relationship with Mercury Interactive through which
     we provide their stress testing services for the benefit of our
     customers.

    We intend to continue to augment our existing relationships and create new
relationships that enable us to promote our brand, expand our customer base
and enhance the delivery of our services.

Engineering and Research

    Our engineering organization designs and develops services that we offer
to our customers and services that we use internally to streamline customer
deployment and support. Our research organization investigates and tests
products from multiple software and hardware vendors to determine whether they
have the appropriate levels of scalability, reliability and security to be
incorporated into our service offerings. Key to the engineering organization's
development of a new service offering is its ability to implement the
provisioning, configuration, monitoring and maintenance of the new service
into our technology. Our engineering organization is also responsible for the
continuous extension of our technology's capabilities.

Sales and Marketing

    We sell and market our services in the United States and Europe primarily
through a direct sales force and indirectly through our sales and marketing
channels. Our sales and marketing channels are comprised of those companies
with whom we have developed sales referral programs, including

                                      42
<PAGE>

AnswerThink, BEA, Cognizant Technology Solutions, Emerging.com, Lante,
Organic, Proxicom, Razorfish and Viant. We have a European sales office in the
United Kingdom and sales representatives located in France and Germany. Our
direct sales team targets large and emerging enterprise and electronic
commerce businesses that have Internet operations needs.

   We focus our marketing efforts on increasing brand recognition, market
awareness and lead generation. We will continue to invest in building our
brand recognition in the United States and internationally through public
relations programs, interactions with industry analysts, trade shows, and
advertising.

Competition

   The market for Internet infrastructure services is rapidly evolving and
intensely competitive. We expect competition to persist and intensify in the
future.

   In addition to in-house solutions, our primary current and prospective
competitors include:

  .  providers of co-location or web site hosting and related services;

  .  technology vendors that have recently announced their intentions to
     offer some of the services that we offer currently to a portion of our
     targeted customer base; and

  .  providers of Internet systems integration or professional services.

   Many of our competitors have longer operating histories, significantly
greater financial, technical, and other resources, or greater name recognition
than we do. Our competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements. Competition could
seriously harm our ability to sell additional services on terms favorable to
us. Competitive pressures could cause us to lose market share or to reduce the
price of our services, either of which could harm our business, financial
condition and operating results.

   We believe that the principal competitive factors in our market include:

  .  quality and reliability of services offered;

  .  scope of supported applications and technology platforms;

  .  scalability of the operational environment supported;

  .  extent to which the services offered provide a complete solution to a
     potential customer's operations requirements;

  .  engineering and technical expertise and development of automation
     software;

  .  rapid deployment of services;

  .  quality of customer service and support; and

  .  price.

   Although we believe our services compete favorably with respect to each of
these factors, the market for our services is new and rapidly evolving. We may
not be able to maintain our competitive position against current and potential
competitors, especially those with greater resources.

Intellectual Property

   We rely on a combination of trademark, trade secret, copyright and other
laws and contractual restrictions to protect the proprietary aspects of our
services. These legal provisions afford only limited protection. We

                                      43
<PAGE>

have no issued patents. It is difficult to monitor unauthorized use of our
technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States, and our competitors
may independently develop technology similar to ours. We will continue to
assess appropriate occasions for seeking intellectual property protections for
those aspects of our technology that we believe constitute innovations
providing significant competitive advantages.

   We routinely require our employees, customers and potential business
partners to enter into confidentiality and nondisclosure agreements before we
disclose any sensitive aspects of our services, technology or business plans
to them. In addition, we require employees to agree to assign to us any
proprietary information, inventions or other intellectual property they
generate while employed by us. Despite our efforts to protect our proprietary
rights through confidentiality and license agreements, unauthorized parties
may attempt to copy or otherwise obtain and use our services or technology.
These precautions may not prevent misappropriation or infringement of our
intellectual property.

Employees

   As of December 2, 2000, we had 516 full-time employees. We expect to hire
substantial numbers of new employees through 2000 and the foreseeable future.
Our future success will depend upon our ability to attract, integrate, retain
and motivate highly qualified technical and management personnel, for whom
competition is intense. None of our employees are covered by a collective
bargaining agreement. We believe our relations with our employees are good.

   We have established Loudcloud University to help ensure that all of our new
employees are properly trained and integrated into our environment, and to
provide continuing education to our existing employees. Loudcloud University
is located at our headquarters in Sunnyvale and is operated by our internal
human resources and training team. We believe that Loudcloud University will
enhance our ability to attract and retain skilled employees.

Facilities

   Our corporate headquarters are located in Sunnyvale, California, where we
occupy approximately 75,000 square feet under a lease expiring in 2010. In
addition, we have signed two leases for additional facilities consisting of
approximately 150,000 square feet in Sunnyvale, which have not yet been
occupied. These leases expire between 2002 and 2005. We have also signed a
lease for a facility consisting of approximately 22,000 square feet in
Virginia, which has not yet been occupied. This lease expires in 2005. We have
numerous operating leases and licenses for third-party data center space and
field sales offices. We believe that our facilities, in conjunction with the
additional space we are seeking to obtain, are adequate to meet current
requirements and that additional space will be available as needed to
accommodate any expansion of operations.

Legal Proceedings

   We are not a party to any material legal proceeding.

                                      44
<PAGE>

                                  MANAGEMENT

Executive Officers and Directors

    Our directors, executive officers and key employees and their ages as of
December 5, 2000 are as follows:

<TABLE>
<CAPTION>
Name                     Age Position
----                     --- --------
<S>                      <C> <C>
Marc L. Andreessen......  29 Chairman of the Board of Directors
Benjamin A. Horowitz....  34 President, Chief Executive Officer and Director
Timothy A. Howes........  37 President of Product Operations and Chief Technical Officer
In Sik Rhee.............  29 Chief Tactician
Jonathan G. Heiliger....  24 Chief Operating Officer of Product Operations
Roderick M. Sherwood
 III....................  47 Executive Vice President and Chief Financial Officer
Michael I. Green........  53 President of Field Operations
Charles J. Katz, Jr.....  52 Executive Vice President of Corporate Affairs and Secretary
William V. Campbell.....  60 Director
Michael S. Ovitz........  53 Director
Andrew S. Rachleff......  42 Director
</TABLE>

    Marc L. Andreessen is a co-founder of Loudcloud and has served as the
Chairman of our board of directors since September 1999. Prior to co-founding
Loudcloud, Mr. Andreessen served as Chief Technology Officer of America
Online, Inc., a new media company, from February 1999 to September 1999.
Mr. Andreessen was a co-founder of Netscape Communications Corporation, an
open software provider, serving in various positions from April 1994 until
March 1999, including Chief Technology Officer and Executive Vice President of
Products. He served on Netscape's board of directors from April 1994 until
March 1999. Mr. Andreessen serves on the board of directors of CacheFlow, Inc.
Mr. Andreessen holds a B.S. in computer science from the University of
Illinois at Urbana-Champaign.

    Benjamin A. Horowitz is a co-founder of Loudcloud and has served as our
President and Chief Executive Officer and as a director since September 1999.
Prior to co-founding Loudcloud, Mr. Horowitz served as Vice President and
General Manager of the E-Commerce Platform division of America Online, Inc.
from April 1999 to September 1999. From July 1995 to April 1999, Mr. Horowitz
was a vice president at Netscape Communications. Mr. Horowitz holds an M.S. in
computer science from the University of California, Los Angeles and a B.S. in
computer science from Columbia University.

    Timothy A. Howes is a co-founder of Loudcloud and has served as our Chief
Technical Officer since September 1999. Dr. Howes also served as our Senior
Vice President of Engineering from June 2000 to August 2000. He was appointed
our President of Product Operations in September 2000. Prior to co-founding
Loudcloud, Dr. Howes served as Vice President of Technology at America Online,
Inc. from April 1999 to September 1999. From February 1998 to April 1999, Dr.
Howes was Chief Technology Officer of the Server Product division at Netscape
Communications. From April 1996 to February 1998, Dr. Howes was Principal
Engineer, Directing Architect of several server products at Netscape
Communications. From September 1994 to April 1996, Dr. Howes was Project
Director, Principal Investigator and Senior Systems Research Programmer at the
University of Michigan. Dr. Howes holds a Ph.D. in computer science, a B.S.E.
in aerospace engineering and an M.S.E. in computer science and engineering
from the University of Michigan.

    In Sik Rhee is a co-founder of Loudcloud and has served as our Chief
Tactician since September 2000. Mr. Rhee also served as our Vice President of
Research and Chief Strategist from

                                      45
<PAGE>

September 1999 until September 2000. Prior to co-founding Loudcloud, Mr. Rhee
served as Chief Technology Officer of the E-Commerce Platform division at
America Online, Inc. from January 1999 to September 1999. From December 1997
to April 1999, Mr. Rhee was a development manager at Netscape Communications.
From December 1995 to December 1997, Mr. Rhee was a co-founder and software
architect  at KIVA Software Corporation, an application server software
company. Mr. Rhee holds a B.S. in electrical engineering and computer science
from the University of California, Berkeley.

    Jonathan G. Heiliger has served as our Chief Operating Officer of Product
Operations since September 2000. Mr. Heiliger also served as our Senior Vice
President of Operations from May 2000 to September 2000 and as our Vice
President of Operations from October 1999 to May 2000. Prior to joining
Loudcloud, Mr. Heiliger was a founder and Senior Vice President of Frontier
Internet Ventures, now Global Crossing Ventures, a venture capital firm, from
February 1999 to October 1999. From April 1997 to February 1999, Mr. Heiliger
was Chief Technology Officer of Global Crossing's GlobalCenter, a provider of
data center space. From July 1996 to April 1997, Mr. Heiliger was a Vice
President of Engineering and Operations of Internet Systems, Inc., a web-
hosting company.

    Roderick M. Sherwood III has served as our Executive Vice President and
Chief Financial Officer since August 2000. Prior to joining Loudcloud, Mr.
Sherwood was Senior Vice President and Chief Financial Officer of BroadStream
Corporation, a broadband wireless communications company, from July 1999 to
August 2000. From February 1998 to June 1999, Mr. Sherwood was President of
the Spaceway broadband services business at Hughes Electronics Corporation, a
communications company, and Senior Vice President and General Manager of
Spaceway at Hughes Network Systems, a subsidiary of Hughes Electronics. From
May 1997 to January 1998, Mr. Sherwood was Executive Vice President of DIRECTV
International at Hughes Electronics. From July 1996 to April 1997,
Mr. Sherwood was Senior Vice President and Chief Financial Officer of Hughes
Telecommunications and Space Company and DIRECTV International. From May 1995
to June 1996, Mr. Sherwood was Corporate Vice President and Treasurer at
Hughes Electronics. Prior to that, Mr. Sherwood occupied various financial
positions at Chrysler Corporation over a 14-year period, including Assistant
Treasurer. Mr. Sherwood holds an A.B. from Stanford University and an M.B.A.
in general management from the Harvard Graduate School of Business.

    Michael I. Green has served as our President of Field Operations since May
2000. Prior to joining Loudcloud, Mr. Green was Senior Vice President and
General Manager of Worldwide Sales at FORE Systems, Inc., a networking
products company, from April 1992 to June 1999. From April 1989 to February
1992, Mr. Green was a sales manager at Ultra Network Technologies, a systems
integration service provider. Mr. Green holds an A.B. in mathematics from
Boston University and an M.S. in numerical science from Johns Hopkins
University.

    Charles J. Katz, Jr. has served as our Executive Vice President of
Corporate Affairs since June 2000 and has served as our Secretary since
January 2000. He also served as our Executive Vice President since January
2000. Prior to joining Loudcloud, Mr. Katz was a member of the law firm
Perkins Coie LLP, where he practiced from September 1976 to December 1999. Mr.
Katz's clients included Amazon.com, Inc., McCaw Cellular Communications, Inc.,
investment banks and venture capital funds. He also serves on the board of
directors of Recreational Equipment, Inc. Mr. Katz holds an A.B from Stanford
University, an M.A. from New York University and a J.D. from the University of
Texas.

    William V. Campbell has served as a director of Loudcloud since August
2000. Mr. Campbell has served as Chairman of the Board of Intuit Inc., an
electronic finance company, since August 1998 and served as Acting Chief
Executive Officer from September 1999 until January 2000. Mr. Campbell

                                      46
<PAGE>

also served as Intuit's President and Chief Executive Officer from April 1994
through July 1998. Mr. Campbell also serves on the board of directors of
SanDisk Corporation and Apple Computer, Inc. Mr. Campbell holds both a B.A.
and an M.A. in economics from Columbia University.

    Michael S. Ovitz has served as a director of Loudcloud since July 2000.
Mr. Ovitz co-founded Creative Artists Agency, a talent representation company,
and served as its Chairman from 1975 to 1995. In January 1999, Mr. Ovitz
founded CKE Companies, which is comprised of four distinct companies: Artists
Management Group, a talent representation company, Artists Production Group, a
film production company, Artists Television Group, a television production
company and Lynx Technology Group, a technology investment and consulting
company. From January 1997 to December 1998, Mr. Ovitz was a self-employed
private investor. From October 1995 to December 1996, Mr. Ovitz was President
at The Walt Disney Company, an entertainment company. Mr. Ovitz currently
serves as Chairman of the Executive Board of the UCLA Hospital and Medical
Center. Mr. Ovitz serves on the Executive Advisory Board of the Pediatric AIDS
Foundation, the Board of Directors of D.A.R.E. America, the National Board of
Advisors for the Children's Scholarship Fund and the Board of Advisors at the
UCLA School of Theater, Film and Television. Mr. Ovitz also serves on the
Board of Trustees of the Museum of Modern Art in New York City and is a member
of the Council on Foreign Relations. Mr. Ovitz holds a B.A. in psychology from
UCLA.

    Andrew S. Rachleff has served as a director of Loudcloud since November
1999. In May 1995, Mr. Rachleff co-founded Benchmark Capital, a venture
capital firm, and has served as a general partner since that time. Prior to
co-founding Benchmark Capital, Mr. Rachleff spent ten years as a general
partner with Merrill, Pickard, Anderson & Eyre, a venture capital firm. Mr.
Rachleff also serves on the boards of directors of CacheFlow, Inc., Equinix,
Inc., NorthPoint Communications Group, Inc. and several privately held
companies. Mr. Rachleff holds a B.S. in economics from the University of
Pennsylvania and an M.B.A. from the Stanford Graduate School of Business.

    There are no family relationships among any of our directors or executive
officers.

Board Composition

    Our bylaws currently provide for a board of directors consisting of one or
more members. Our certificate of incorporation to be effective upon completion
of this offering provides for a classified board consisting of three classes
of directors, each serving staggered three-year terms. Benjamin A. Horowitz
has been designated a Class I director whose term expires at the 2001 annual
meeting of stockholders. Marc L. Andreessen and Andrew S. Rachleff have been
designated Class II directors whose terms expire at the 2002 annual meeting of
stockholders. William V. Campbell and Michael S. Ovitz have been designated
Class III directors whose terms expire at the 2003 annual meeting of
stockholders. This classification of the board of directors may delay or
prevent a change in control of our company or in our management.

Board Committees

    Our board of directors has a compensation committee and an audit
committee.

    Our compensation committee is responsible for, among other things,
determining salaries, incentives and other forms of compensation for directors
and executive officers of Loudcloud and administering various incentive
compensation and benefit plans. Prior to September 25, 2000, we did not have a
compensation committee. Our board of directors established executive
compensation levels for

                                      47
<PAGE>

2000. Marc L. Andreessen, William V. Campbell and Andrew S. Rachleff are the
current members of the compensation committee. Benjamin A. Horowitz, our Chief
Executive Officer, will participate in all discussions and decisions regarding
salary levels and incentive compensation for all non-executive employees and
consultants of Loudcloud.

    Our audit committee reviews our annual audit and meets with our
independent auditors and our Chief Financial Officer to review our internal
controls and financial management practices. William V. Campbell, Michael S.
Ovitz and Andrew S. Rachleff are the current members of the audit committee.

Compensation Committee Interlocks and Insider Participation

    No interlocking relationship exists, or has existed in the past, between
the board of directors or compensation committee and the board of directors or
compensation committee of any other company.

Board Compensation

    Except for the grant of stock options and stock purchase rights, we do not
currently compensate our directors for their services as directors. Directors
who are employees of Loudcloud are eligible to participate in our 2000
Incentive Stock Plan and our 2000 Employee Stock Purchase Plan. We also
reimburse each member of our board of directors for out-of-pocket expenses
incurred in connection with attending board and board committee meetings.

    Each of Mr. Ovitz and Mr. Campbell received an option to purchase 100,000
shares of our common stock at an exercise price of $1.80 in August 2000. Both
of these options are subject to vesting over a four-year period.

Executive Compensation

    The following table provides summary information concerning compensation
earned by or paid to our Chief Executive Officer and our four most highly
compensated executive officers for services rendered in all capacities to
Loudcloud during the period from inception on September 1999 to July 31, 2000.
These individuals are referred to as the "named executive officers." Other
than the salary and bonus described below, we did not pay any executive
officer named in the Summary Compensation Table any fringe benefits,
perquisites or other compensation in excess of 10% of that executive officer's
salary and bonus during the period from inception to July 31, 2000.

                          Summary Compensation Table

<TABLE>
<CAPTION>
                                                                   Compensation
                                                                   ------------
Name and Principal Position                                         Salary (1)
---------------------------                                        ------------
<S>                                                                <C>
Benjamin A. Horowitz..............................................   $140,000
 President and Chief Executive Officer
Timothy A. Howes..................................................   $100,000
 President of Product Operations and Chief Technical Officer
In Sik Rhee.......................................................   $100,000
 Chief Tactician
Jonathan G. Heiliger..............................................   $113,750
 Chief Operating Officer of Product Operations
Charles J. Katz, Jr...............................................   $ 90,417
 Executive Vice President of Corporate Affairs and Secretary
</TABLE>

                                      48
<PAGE>

--------
(1) Compensation information is provided for the period from inception on
    September 1999 to July 31, 2000. For the fiscal year ending January 31,
    2001, the annual base salary for the named executive officers is as
    follows: Benjamin A. Horowitz, $210,000; Timothy A. Howes, $150,000; In
    Sik Rhee, $150,000; Charles J. Katz, Jr., $155,000; and Jonathan G.
    Heiliger, $210,000. During the fiscal year ended January 31, 2000 these
    officers were paid as follows: Benjamin A. Horowitz, $35,000; Timothy A.
    Howes, $25,000; In Sik Rhee, $25,000; Jonathan G. Heiliger, $16,250 and
    Charles J. Katz, Jr., $12,917.

Option Grants in Last Fiscal Year

    No option grants were made to the named executive officers during the
period from inception to July 31, 2000. These individuals purchased an
aggregate of 26,511,440 shares of restricted stock during this period as
follows:

<TABLE>
<CAPTION>
                                      Number of Purchase Price   First Vesting
Name                                   Shares     Per Share          Date
----                                  --------- -------------- -----------------
<S>                                   <C>       <C>            <C>
Benjamin A. Horowitz................. 8,120,000     $0.001     September 9, 2000
Timothy A. Howes..................... 7,315,000     $0.001     September 9, 2000
In Sik Rhee.......................... 7,315,000     $0.001     September 9, 2000
Jonathan G. Heiliger................. 2,583,656     $0.01       October 11, 2000
Charles J. Katz, Jr. ................ 1,177,784     $0.10        January 3, 2001
</TABLE>

    Twenty-five percent of these shares vest on the date set forth in the
table above and one forty-eighth of the shares vest each month thereafter,
provided that the officer continues to be an employee on those dates.

    On November 13, 2000, Mr. Horowitz was granted an option to purchase
1,200,000 shares of common stock at an exercise price of $9.00 per share. The
option vests and becomes exercisable as to twenty-five percent of the shares
on November 13, 2001 and one forty-eighth of the shares each month thereafter.

Employee Benefit Plans

 1999 Stock Plan

    Our 1999 Stock Plan was adopted by our board of directors and our
stockholders in 1999. Our 1999 Stock Plan provides for the grant of incentive
stock options, which may provide for preferential tax treatment, to our
employees, and for the grant of nonstatutory stock options and stock purchase
rights to our employees, directors and consultants. All of our employees are
eligible to receive grants under this plan. As of October 31, 2000, no options
to purchase shares of common stock were outstanding and 121,875 shares were
available for future grant under our 1999 Stock Plan. In November 2000, our
board of directors approved an amendment, subject to stockholder approval, to
the 1999 Stock Plan increasing the total number of shares reserved for
issuance under the plan by an additional 1,200,000 shares. These 1,200,000
shares are subject to an option granted at the same time to our chief
executive officer. We will not grant any additional stock options under our
1999 Stock Plan after the effective date of this offering. Any shares reserved
for issuance under the 1999 Stock Plan as of this offering and any shares
returned to the 1999 Stock Plan will be reserved for issuance under our 2000
Incentive Stock Plan.

 2000 Stock Plan

    Our 2000 Stock Plan was adopted by our board of directors and our
stockholders in August 2000. As of October 31, 2000 options to purchase
5,693,047 shares of common stock were outstanding and

                                      49
<PAGE>


7,070,287 shares were available for future grant. All of our employees are
eligible to receive grants under this plan. We will not grant any additional
stock options under our 2000 Stock Plan after the effective date of this
offering. Options granted under this plan generally have a term of ten years.
Any shares reserved for issuance under the 2000 Stock Plan as of the effective
date of this offering and any shares returned to the 2000 Stock Plan will be
reserved for issuance under our 2000 Incentive Stock Plan. In September 2000,
our board of directors approved an amendment to the 2000 Stock Plan increasing
the total number of shares reserved for issuance under the plan by 7,000,000.
This amendment was approved by our stockholders in October 2000.

 2000 Incentive Stock Plan

    Our 2000 Incentive Stock Plan was adopted by our board of directors in
September 2000. This plan provides for the grant of incentive stock options to
our employees and nonstatutory stock options and stock purchase rights to our
employees, directors and consultants. All of our employees are eligible to
receive grants under this plan. A total of 25,000,000 shares of our common
stock plus any unissued but reserved shares under the 1999 Stock Plan and the
2000 Stock Plan as of the effective date of this offering and any shares
returned to such plans shall be reserved for issuance under the 2000 Incentive
Stock Plan. The shares may be authorized, but unissued, or reacquired common
stock.

    No options have yet been issued pursuant to the 2000 Incentive Stock Plan.
The number of shares reserved for issuance under our 2000 Incentive Stock Plan
will increase annually on the first day of the 2003 fiscal year by an amount
equal to the lesser of (i) 8%, or 6% for fiscal years beginning with fiscal
2007, of the outstanding shares of our common stock on the first day of the
year, (ii) 18,000,000 shares or (iii) a lesser amount as our board of
directors may determine.

    If an option or stock purchase right expires or become unexercisable
without having been exercised in full, or is surrendered pursuant to an option
exchange program, the unpurchased shares which were subject to the plan will
become available for future grant or sale under the plan unless the plan has
terminated. However, shares that have actually been issued under the plan,
upon exercise of either an option or stock purchase right, will not be
returned to the plan and will not be available for future distribution under
the plan except if shares of restricted stock are repurchased by us at their
original price, the repurchased shares will be available for future grant
under the plan.

    The compensation committee of our board of directors administers the 2000
Incentive Stock Plan. The administrator has the power to determine the terms
of the options or stock purchase rights granted, including: the exercise
price, the number of shares subject to each option or stock purchase right,
the vesting and exercisability of the options or stock purchase rights, the
initiation of an option exchange program, and the form of consideration
payable upon exercise. With respect to incentive stock options, the exercise
price must at least be equal to the fair market value of our common stock on
the date of grant. Additionally, the term of an incentive stock option may not
exceed ten years. The administrator determines the term of all other options.
After termination of one of our employees, directors or consultants, he or she
may exercise his or her option for the period of time stated in the option
agreement. If termination is due to death or disability, the option will
generally remain exercisable for 12 months following such termination. In all
other cases, the option will generally remain exercisable for three months.
However, an option may never be exercised later than the expiration of its
term.

    In the case of a stock purchase right, unless the administrator determines
otherwise, the restricted stock purchase agreement will grant us a repurchase
option that we may exercise upon the voluntary or involuntary termination of
the purchaser's service with us for any reason, including death or disability.
The purchase price for shares we repurchase will generally be the original
price paid by the purchaser.

                                      50
<PAGE>

The administrator determines the rate at which our repurchase option will
lapse. Our 2000 Incentive Stock Plan generally does not allow for the transfer
of options or stock purchase rights and only the optionee may exercise an
option and stock purchase right during his or her lifetime.

 Director Option Program

    The Director Option Program is part of our 2000 Incentive Stock Plan and
provides for the periodic grant of nonstatutory stock options to our non-
employee directors.

    All grants of options to our non-employee directors under the Director
Option Program are automatic. Any individual who first becomes a director
after the date of this offering shall be granted an option to purchase 50,000
shares, or 30,000 if the individual becomes a director more then six months
after this offering, when that person first becomes a non-employee director,
except for those directors who become non-employee directors by ceasing to be
employee directors. Twenty-five percent of the shares subject to the option
become exercisable on the anniversary of the date of grant, and one forty-
eighth of the shares subject to the option vest each month thereafter,
provided the individual remains an outside director on those dates.

    Each outside director shall automatically be granted an option to purchase
10,000 shares on each annual meeting of our stockholders that will occur after
the end of our fiscal year 2001, if immediately after the meeting, he or she
shall continue to serve on the board and has been a director for at least six
months prior to the annual shareholders meeting. The shares subject to the
annual options become fully vested on the one-year anniversary from the date
of grant, provided the individual remains an outside director on those dates.

    All options granted under our Director Option Program have a term of ten
years and an exercise price equal to fair market value on the date of grant.
After termination as a non-employee director with us, an optionee must
exercise an option at the time set forth in his or her option agreement. If
termination is due to death or disability, the option will remain exercisable
for 12 months. In all other cases, the option will remain exercisable for a
period of three months. However, an option may never be exercised later than
the expiration of its term. A non-employee director may not transfer options
granted under our Director Option Program other than by will or the laws of
descent and distribution. Only the non-employee director may exercise the
option during his or her lifetime.

    In the event of our merger with or into another corporation or a sale of
substantially all of our assets, all of the outstanding options granted
pursuant to the Director Option Program become fully vested and exercisable.

 2000 Employee Stock Purchase Plan

    Concurrently with this offering, we intend to establish an employee stock
purchase plan. A total of 1,200,000 shares of our common stock will be made
available for sale under the plan. In addition, our plan provides for annual
increases in the number of shares available for issuance under the plan
beginning on the first day of the 2003 fiscal year in an amount equal to the
lesser of (i) 5,000,000 shares, (ii) 2% of the outstanding shares of our
common stock on that date, or (iii) a lesser amount determined by our board of
directors. Our board of directors or a committee of our board administers the
plan. Our board of directors or its committee has full and exclusive authority
to interpret the terms of the plan and determine eligibility. All of our
employees are eligible to participate if they are customarily employed by us
or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, an employee may not be granted an
option to purchase stock under the plan if:

  .  the employee immediately after the grant would own stock possessing 5%
     or more of the total combined voting power or value of all classes of
     our capital stock, or

                                      51
<PAGE>

  .  the employee's right to purchase common stock under all of our employee
     stock purchase plans accrues at a rate that exceeds $25,000 worth of
     stock for each calendar year.

    Our plan is intended to qualify for preferential tax treatment and
contains consecutive, overlapping 24-month offering periods. Each offering
period includes four six-month purchase periods. The offering periods
generally start on the first trading day on or after       and       of each
year, except for the first offering period which will begin on the first
trading day on or after the effective date of this offering and will end on
the last trading day on or before     . All of our eligible employees will be
automatically enrolled in the first offering period.

    The plan permits participants to purchase common stock through payroll
deductions of up to 10% of their eligible compensation, which includes a
participant's base straight time gross earnings and commissions, but excludes
all other compensation paid to our employees. A participant may purchase no
more than 10,000 shares during any six-month purchase period.

    Amounts deducted and accumulated by the participant are used to purchase
shares of our common stock at the end of each six-month purchase period. The
price is 85% of the lower of the fair market value of our common stock at the
beginning of an offering period or after a purchase period ends. If the fair
market value at the end of a purchase period is less than the fair market
value at the beginning of the offering period, participants will be withdrawn
from the current offering period following their purchase of shares on the
purchase date and will be re-enrolled in the immediately following offering
period. Participants may end their participation at any time during an
offering period, and will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with us.

    A participant may not transfer rights granted under our employee stock
purchase plan other than by will, the laws of descent and distribution or as
otherwise provided under the plan.

    In the event of our merger with or into another corporation, a sale of all
or substantially all of our assets, or a change of control, a successor
corporation may assume or substitute each outstanding option. If the successor
corporation refuses to assume or substitute for each of the outstanding
options, the purchase period then in progress will be shortened by setting a
new exercise date and any offering period then in progress will end on the new
exercise date.

    Our plan will terminate in 2010. However, our board of directors has the
authority to amend or terminate our plan, except that, subject to certain
exceptions described in the plan, no amendment or termination may adversely
affect any outstanding rights to purchase stock under our plan.

Employment Agreements and Change of Control Arrangements

    We have not entered into any employment agreements with our executive
officers.

    The vesting of all shares of common stock subject to options or stock
purchase rights granted pursuant to our 1999 Stock Plan and our 2000 Stock
Plan is accelerated with respect to the first 25% of the shares subject to an
option or stock purchase right, in the event that we merge with or into
another corporation or sell substantially all of our assets prior to February
2, 2001. In addition, each of our 1999 Stock Plan, 2000 Stock Plan and 2000
Incentive Stock Plan provides that in the event of our merger with or into
another corporation or a sale of substantially all of our assets, the
successor corporation will assume or substitute each option or stock purchase
right, except for the options granted to our outside directors under the 2000
Incentive Stock Plan. If the outstanding options or stock purchase rights are
not assumed or substituted for, the optionee will be notified that his or her
options or stock purchase

                                      52
<PAGE>

rights will be fully exercisable as to all optioned stock, including shares
that would not otherwise be vested and exercisable, for a period of 15 days
from the date of such notice. The option or purchase right will terminate at
the end of the 15 day period. In the event the employee has a separate change
of control arrangement with us that is more favorable than the one in our
plans, the more favorable change of control arrangement will prevail according
to its terms, but the employee will not be entitled to any additional
acceleration.

    In October 1999, Benjamin A. Horowitz purchased 8,120,000 shares of our
common stock at a purchase price of $0.001 per share, Timothy A. Howes
purchased 7,315,000 shares of our common stock at a purchase price of $0.001
per share and In Sik Rhee purchased 7,315,000 shares of our common stock at a
purchase price of $0.001 per share pursuant to restricted stock purchase
agreements. These shares are subject to a right of repurchase that lapses over
a four-year period and lapses as to one-fourth of these shares on October 14,
2000 with the purchase right lapsing ratably monthly after that date. Upon a
change of control, the lapsing of our repurchase right will be accelerated and
at least 50% of the common stock purchased under the restricted stock purchase
agreements will not be subject to our right of repurchase. In addition, upon
an involuntary termination of employment without cause, our right of
repurchase will lapse as to all of the common stock subject to repurchase
under the restricted stock purchase agreements.

    In November 1999, Marc L. Andreessen entered into a stock restriction
agreement with us regarding his purchase of shares of Series A preferred stock
convertible into 12,250,000 shares of common stock at a purchase price of
$0.16327 per share pursuant to a stock purchase agreement. These shares are
subject to a right of repurchase that lapses ratably monthly over a two-year
period. Upon the earlier of his removal from our Board of Directors and the
completion of this offering or a change of control, our right of repurchase
will lapse as to all of the preferred stock subject to repurchase under this
stock restriction agreement.

    In January 2000, Charles J. Katz, Jr. purchased 1,177,784 shares of our
common stock at a purchase price of $0.10 per share pursuant to a restricted
stock purchase agreement. In May 2000, Michael I. Green purchased 2,200,000
shares of our common stock at a purchase price of $0.40 per share pursuant to
a restricted stock purchase agreement. In June 2000, Roderick M. Sherwood III
purchased 1,468,962 shares of our common stock at a purchase price of $0.60
per share pursuant to a restricted stock purchase agreement, and, in August
2000, he purchased 240,333 shares of common stock at a purchase price of $1.80
per share pursuant to a restricted stock purchase agreement. The shares
purchased by these officers are subject to a right of repurchase that lapses
over a four-year period and lapses as to one-fourth of these shares on the
first anniversary of the purchase date with the purchase right lapsing ratably
monthly after that date. Upon an involuntary termination of the officer's
employment without cause within twelve months of a change of control, our
right of repurchase will lapse as to all of the common stock subject to
repurchase under the restricted stock purchase agreement.

    In November 2000, Mr. Horowitz was granted an option to purchase 1,200,000
shares of common stock at an exercise price of $9.00 per share. The option
vests and becomes exercisable as to twenty-five percent of the shares on the
first anniversary of the option grant and one forty-eighth of the shares each
month thereafter. Upon a change of control, the vesting and exercisability of
the option will be accelerated as to at least 50% of the shares subject to the
option. In addition, upon an involuntary termination of employment without
cause, the vesting and exercisability of the option will be accelerated in
full.

                                      53
<PAGE>

                          RELATED PARTY TRANSACTIONS

    Since our inception, there has not been any transaction or series of
transactions to which we were or are a party in which the amount involved
exceeded or exceeds $60,000 and in which any director, executive officer,
holder of more than 5% of any class of our voting securities or any member of
the immediate family of any of the foregoing persons had or will have a direct
or indirect material interest, other than the transactions described below.

    Between November 1, 1999 and June 26, 2000, we issued and sold 52,812,203
shares of our preferred stock for an aggregate consideration of
$143,246,692.70. We issued and sold 13,760,583 shares of Series A preferred
stock at a price of $0.16327 per share on November 1, 1999. Between November
24, 1999 and January 3, 2000, we sold 24,983,344 shares of Series B preferred
stock at a price of $0.84056 per share. Between June 23, 2000 and June 26,
2000, we sold 14,068,276 shares of Series C preferred stock at a price of
$8.52983 per share. Upon completion of this offering, each share of Series A,
Series B and Series C preferred stock will convert into one share of common
stock.

Transactions with Management and Others

    The following table summarizes purchases of shares of our preferred stock
by our directors, executive officers, our 5% stockholders and their
affiliates:

<TABLE>
<CAPTION>
                                                        Number of Shares
                                                  -----------------------------
                                                                        Series
                                                   Series A   Series B     C
                                                  ---------- ---------- -------
<S>                                               <C>        <C>        <C>
Directors and Executive Officers:
Marc L. Andreessen............................... 12,250,000  4,425,620 586,178
Benjamin A. Horowitz.............................        --     356,905     --
Timothy A. Howes.................................        --     356,905  35,171
In Sik Rhee......................................        --     594,842     --
Jonathan G. Heiliger.............................        --     594,842     --
Roderick M. Sherwood III.........................        --         --  123,097
Michael I. Green.................................        --         --  234,471
Charles J. Katz, Jr. ............................        --         --  117,236
Michael S. Ovitz.................................        --         --  372,223

Other 5% Stockholders:
Entities affiliated with Benchmark Capital (1)...        --  17,845,246 586,178
</TABLE>
--------
(1) Andrew S. Rachleff, one of our directors, is a managing member of
    Benchmark Capital.

    The shares of Series A, Series B and Series C preferred stock described
above were purchased at the same price and on the same terms and conditions as
the unaffiliated investors in the private financings.

    In addition, Mr. Horowitz was granted an option to purchase 1,200,000
shares of common stock in November 2000. See "--Option Grants in Last Fiscal
Year."

Indebtedness of Management

    In June 2000, in connection with Roderick M. Sherwood III's purchase of
1,468,962 shares of our common stock, we loaned Mr. Sherwood $881,377 under a
secured full recourse promissory note with an annual interest rate of 6.25%
compounded annually. Principal and interest on the note are due and payable on
June 22, 2004. In addition, in August 2000, in connection with Mr. Sherwood's
purchase of 240,333 shares of common stock, we loaned Mr. Sherwood $432,599
under a secured full recourse

                                      54
<PAGE>

promissory note with an annual interest rate of 6.25% compounded annually.
Principal and interest on the note are due and payable on August 24, 2004. The
notes also provide that we may accelerate payment of the amounts outstanding
under the loans in the event that he ceases to be an employee or consultant of
ours.

    In June 2000, in connection with the purchase of 123,097 shares of our
Series C preferred stock by an entity affiliated with Roderick M. Sherwood
III, we loaned the entity $1,049,996 under a secured full recourse promissory
note with an annual interest rate of 6.20% compounded annually. Principal and
interest on the note were to be due and payable on June 23, 2004. Mr. Sherwood
repaid all principal and accrued interest under this note in September 2000.

    In May 2000, in connection with Michael I. Green's purchase of 2,200,000
shares of our common stock, we loaned Mr. Green $880,000 under a secured full
recourse promissory note with an annual interest rate of 6.25% compounded
annually. Principal and interest on the note become due and payable on May 10,
2004. The note also provides that we may accelerate payment of the amounts
outstanding under the loan in the event that he ceases to be an employee or
consultant of ours.

    It is our current policy that all transactions between us and our
officers, directors, 5% stockholders and their affiliates will be entered into
only if these transactions are approved by a majority of the disinterested
directors, are on terms no less favorable to us than could be obtained from
unaffiliated parties and are reasonably expected to benefit us.

                                      55
<PAGE>

                            PRINCIPAL STOCKHOLDERS

    The following table sets forth information regarding beneficial ownership
of common stock as of October 31, 2000, by:

  .   each person or entity known to us to own beneficially more than one
      percent of our common stock;

  .   each of the named executive officers;

  .   each of our directors; and

  .   all executive officers and directors as a group.

    Unless otherwise indicated, the address for the stockholders holding more
than one percent of our common stock is c/o Loudcloud, Inc., 599 N. Mathilda
Avenue, Sunnyvale, California 94086.

<TABLE>
<CAPTION>
                                                                Percentage of
                                                              Common Stock (2)
                                                              -----------------
                                            Total Shares       Before   After
Name and Address of Beneficial Owner   Beneficially Owned (1) Offering Offering
------------------------------------   ---------------------- -------- --------
<S>                                    <C>                    <C>      <C>
Directors and Executive Officers:
Marc L. Andreessen (3)................       17,221,798         18.2%    16.4%
Benjamin A. Horowitz (4)..............        8,316,905          8.8      7.9
Timothy A. Howes (5)..................        7,387,076          7.8      7.1
In Sik Rhee (6).......................        7,833,842          8.3      7.5
Jonathan G. Heiliger (7)..............        3,148,498          3.3      3.0
Michael I. Green (8)..................        2,424,471          2.6      2.3
Roderick M. Sherwood III (9)..........        1,787,392          1.9      1.7
Charles J. Katz, Jr. (10).............        1,295,020          1.4      1.2
William V. Campbell ..................                0           --       --
Michael S. Ovitz (11).................          372,223            *        *
Andrew S. Rachleff (12)...............       18,431,424         19.5     17.6
All directors and executive officers
 as a group (11 persons) (13).........       68,218,649         72.0     65.1

Other Stockholders:
Entities affiliated with Benchmark
 Capital (12).........................       18,431,424         19.5     17.6
 2480 Sand Hill Road, Suite 200
 Menlo Park, CA 94025
Entities affiliated with Capital
 Research and Management Company
 (14).................................        4,800,799          5.1      4.6
 33 South Hope Street, 55th Floor
 Los Angeles, CA 90071
Entities affiliated with Charter
 Growth Capital (15)..................        2,344,713          2.5      2.2
 525 University Avenue, Suite 1400
 Palo Alto, CA 94301
Entities affiliated with Amerindo
 Investment Advisors Inc. (16)........        1,406,828          1.5      1.3
 601 South Figueroa Street, Suite 2400
 Los Angeles, CA 90017
Entities affiliated with Integral
 Capital Partners (17)................        1,172,356          1.2      1.1
 2750 Sand Hill Road
 Menlo Park, CA 94025
Octane Capital Fund I, L.P............        1,172,356          1.2      1.1
 One Maritime Plaza, Suite 2555
 San Francisco, CA 94111
</TABLE>
--------
  *  Represents less than one percent of our outstanding stock
 (1) Beneficial ownership is determined in accordance with the rules and
     regulations of the Securities and Exchange Commission. In computing the
     number of shares beneficially owned by a person and the percentage
     ownership

                                      56
<PAGE>


    of that person, shares of common stock subject to options held by that
    person that are currently exercisable or exercisable within 60 days of
    October 31, 2000 are deemed outstanding. These shares, however, are not
    deemed outstanding for the purposes of computing the percentage ownership
    of any other person. Except as indicated in the footnotes to this table
    and pursuant to applicable community property laws, each stockholder named
    in the table has sole voting and investment power with respect to the
    shares set forth opposite that stockholder's name.

 (2) Applicable percentage ownership is based on 94,759,167 shares of common
     stock outstanding as of October 31, 2000 and 104,759,167 shares of common
     stock outstanding immediately after completion of this offering.
 (3) Represents 17,221,798 shares held by the Michael G. Mohr or Marc L.
     Andreessen (Trustees), Andreessen 1996 Living Trust.

 (4) Represents 7,746,905 shares held by Mr. Horowitz individually and 570,000
     shares held by the Horowitz Family Limited Partnership. Includes
     5,920,834 shares subject to Loudcloud's right of repurchase as of October
     31, 2000.

 (5) Includes 5,333,855 shares subject to Loudcloud's right of repurchase as
     of October 31, 2000.

 (6) Represents 7,333,842 shares held by Mr. Rhee individually and 500,000
     shares held by Golden Bear Limited Partnership. Includes 5,333,855 shares
     subject to Loudcloud's right of repurchase as of October 31, 2000.

 (7) Includes 2,861,000 shares held by Mr. Heiliger individually and 287,498
     shares held by Mr. Heiliger, Trustee of the Jonathan G. Heiliger Trust.
     Includes 1,937,742 shares subject to Loudcloud's right of repurchase as
     of October 31, 2000.

 (8) Represents 2,384,471 shares held by Mr. Green individually and 40,000
     shares held by The Green Family Irrevocable Trust. Includes 2,190,000
     shares subject to Loudcloud's right of repurchase as of October 31, 2000.

 (9) Represents 1,376,904 shares held by Mr. Sherwood individually 143,695
     shares held by the Roderick M. Sherwood III 2000 trust u/a dtd 10-21-
     2000, 123,097 shares held by Roderick M. Sherwood III & Gretchen W.
     Sherwood jointly and 143,695 shares held by the Gretchen W. Sherwood 2000
     trust u/a dtd 10-20-2000. Includes 1,664,295 shares subject to
     Loudcloud's right of repurchase as of October 31, 2000.

(10) Represents 1,107,784 shares held by Mr. Katz individually, 117,236 shares
     held by Katz Family Ventures LLC, a Washington limited liability company,
     and 70,000 shares held by Katz Family Ventures 2000 LLC, a Washington
     limited liability company. Includes 1,177,784 shares subject to
     Loudcloud's right of repurchase as of October 31, 2000.
(11) Represents 372,223 shares held by CKEI, LLC a California limited
     liability company controlled by Mr. Ovitz.
(12) Represents 18,431,424 shares of common stock held by Benchmark Capital
     Partners IV, L.P., as nominee for Benchmark Capital Partners IV, L.P.,
     Benchmark Founders' Fund IV, L.P., Benchmark Founders' Fund IV-A, L.P.
     and related individuals. Mr. Rachleff is a Managing Member of Benchmark
     Capital Management Co. IV, LLC, the general partner of Benchmark Capital
     Partners IV, L.P., Benchmark Founders' Fund IV, L.P. and Benchmark
     Founders' Fund IV-A, L.P. Mr. Rachleff disclaims beneficial ownership of
     these shares, except with respect to 553,659 shares and to the extent of
     his pecuniary interest in the Benchmark funds.

(13) Includes 23,558,365 shares subject to Loudcloud's right of repurchase as
     of October 31, 2000.
(14) Represents 3,600,799 shares held by Rescueboat & Co. and 1,200,000 shares
     held by Waterman & Co.
(15) Represents 2,227,477 shares held by Charter Growth Capital II, L.P.;
     87,927 shares held by CGC Investors II QP, L.P.; and 29,309 shares held
     by CGC Investors II A, L.P.
(16) Represents 595,392 shares held by Amerindo Technology Growth Fund II
     Inc.; 351,706 shares held by Amerindo Internet Fund PLC; 351,706 shares
     held by Emerging Technology Portfolio; 41,030 shares held by Vertex
     Capital II, LLC; 23,450 shares held by Vertex Capital III, LLC; and
     43,544 shares held by other persons affiliated with Amerindo Investment
     Advisors Inc.
(17) Represents 1,158,586 shares held by Integral Capital Partners V, L.P. and
     13,770 shares held by Integral Capital Partners V Side Fund, L.P.

                                      57
<PAGE>

                         DESCRIPTION OF CAPITAL STOCK

    Upon completion of this offering and after giving effect to the conversion
of all outstanding preferred stock into common stock, our authorized capital
stock will consist of 400,000,000 shares of common stock, $0.001 par value and
15,000,000 shares of preferred stock, $0.001 par value. The following
description assumes the filing of an amended and restated certificate of
incorporation upon the closing of this offering.

Common Stock

    Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available therefor at the
times and in the amounts as our board of directors may from time to time
determine. All dividends are non-cumulative. In the event the liquidation,
dissolution or winding up of Loudcloud, the holders of common stock are
entitled to share ratably in all assets remaining after payment of
liabilities, subject to the prior distribution rights of preferred stock, if
any, then outstanding. Each stockholder is entitled to one vote for each share
of common stock held on all matters submitted to a vote of stockholders.
Cumulative voting for the election of directors is not provided for in our
certificate of incorporation, which means that the holders of a majority of
the shares voted can elect all of the directors then standing for election.
Our board of directors is divided into three classes, with each director
serving a three-year term and one class being elected at each year's annual
meeting of stockholders. The common stock is not entitled to preemptive rights
and is not subject to conversion or redemption. There are no sinking fund
provisions applicable to our common stock. Each outstanding share of common
stock is, and all shares of common stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable.

    As of October 31, 2000 there were 94,759,167 shares of our common stock
outstanding, as adjusted to reflect the conversion of all outstanding shares
of our preferred stock into common stock on the closing of this offering, that
were held of record by approximately 375 stockholders. We will have a total of
104,759,167 shares of common stock outstanding following this offering.

Preferred Stock

    Pursuant to our certificate of incorporation, our board of directors has
the authority, without further action by the stockholders, to issue up to
15,000,000 shares of preferred stock in one or more series and to fix the
designations, powers, preferences, privileges, and relative participating,
optional or special rights as well as the qualifications, limitations or
restrictions of the preferred stock, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights of the common stock. Our board of
directors, without stockholder approval, can issue preferred stock with
voting, conversion or other rights that could adversely affect the voting
power and other rights of the holders of common stock. Preferred stock could
thus be issued quickly with terms calculated to delay or prevent a change in
control or make removal of management more difficult. Additionally, the
issuance of preferred stock may have the effect of decreasing the market price
of the common stock, and may adversely affect the voting and other rights of
the holders of common stock. At present, we have no plans to issue any
preferred stock following this offering.

Warrants

    In January 2000, in connection with our lease of office space in
Sunnyvale, California, we issued a warrant to purchase an aggregate of 10,000
shares of Series B preferred stock at an exercise price of

                                      58
<PAGE>

$0.84056 per share, subject to adjustments for stock dividends, subdivisions,
reclassifications and similar distributions. This warrant expires upon the
completion of this offering.

    In February 2000, in connection with our sale of 66,000 units consisting
of 13% senior discount notes and warrants, we issued warrants to purchase an
aggregate of 2,336,036 shares of common stock at an exercise price of $0.01
per share, subject to adjustments for stock dividends, subdivisions,
reclassifications and similar distributions. These warrants expire on February
9, 2010.

Registration Rights

    Upon completion of this offering, the holders of 75,506,341 shares of
common stock have the right to cause us to register these shares under the
Securities Act as follows:

  .  Piggyback Registration Rights. The holders of registrable securities
     may request to have their shares registered anytime we file a
     registration statement to register any of our securities for our own
     account or for the account of others subject to a full pro rata cutback
     on our initial public offering and a pro rata cutback to a minimum of
     30% of any other offering. The registration rights terminate five years
     following completion of this offering, or, with respect to each holder
     of registrable securities, when the holder can sell all of the holder's
     shares in any 90-day period under Rule 144 under the Securities Act.

  .  S-3 Registration Rights. The holders of at least 15% of registrable
     securities have the right to request registrations on Form S-3 if we
     are eligible to use Form S-3 and have not already effected such an S-3
     registration within the past six months and if the aggregate proceeds
     are at least $1,000,000. The registration rights terminate five years
     following completion of this offering, or, with respect to each holder
     of registrable securities, when the holder can sell all of the holder's
     shares in any 90-day period under Rule 144 under the Securities Act.

    In addition, upon completion of this offering, the holders of an aggregate
of $66,000,000 principal amount at maturity of our 13% Senior Discount Notes
due 2005 have the following registration rights under the Securities Act:

  .  Exchange Offer Registration Rights. We are obligated to use our best
     efforts to file an exchange offer registration statement within 21
     months after February 6, 2000 that provides for (i) the registration of
     senior discount notes containing terms substantially identical to our
     outstanding senior discount notes, and (ii) the exchange of our
     outstanding senior discount notes for the registered senior discount
     notes. We are further obligated to use our best efforts to consummate
     the exchange offer contemplated by the exchange offer registration
     statement within 60 days after the effectiveness of the registration
     statement.

  .  Shelf Registration Rights. In the event that (i) the exchange offer
     registration is not available, (ii) the exchange offer is not
     consummated within 24 months after February 6, 2000, or (iii) in the
     opinion of counsel for the holders of the notes, a registration
     statement must be filed and a prospectus delivered by the holders of
     the notes in connection with any offering or sale of the notes, we are
     obligated to use our best efforts to file a shelf registration
     statement providing for the sale of our senior discount notes by the
     holders of those notes.

                                      59
<PAGE>

    Upon completion of this offering, the holders of warrants to purchase an
aggregate of 2,336,036 shares of our common stock have the right to cause us
to register these shares under the Securities Act as follows:

  .  Piggyback Registration Rights. Holders of these warrants may request to
     have their shares registered any time we file a registration statement,
     other than pursuant to our initial public offering provided that none
     of our stockholders participates in such offering, to register any of
     our securities for our own account or for the account of another
     subject to a pro rata cutback. Holders of these warrants will be cut
     back prior to the holders of our common stock. The registration rights
     terminate when the shares have all been sold to the public pursuant to
     Rule 144 or are eligible for sale under Rule 144(k).

    Registration of shares of common stock pursuant to the exercise of
piggyback registration rights, S-3 registration rights or shelf registration
rights under the Securities Act would result in these shares becoming freely
tradable without restriction under the Securities Act immediately upon the
effectiveness of the registration statement. See "Shares Eligible for Future
Sale" and "Related Party Transactions." The exercise of exchange offer
registration rights would result in the senior discount notes becoming freely
tradable upon the consummation of the exchange offer without restriction under
the Securities Act. Loudcloud will pay all registration expenses, other than
underwriting discounts and commissions, in connection with any registration.

Section 2115

    We are currently subject to Section 2115 of the California General
Corporation Law. Section 2115 provides that, regardless of a company's legal
domicile, some provisions of California corporate law will apply to that
company if more than 50% of its outstanding voting securities are held of
record by persons having addresses in California and the majority of the
company's operations occur in California. For example, while we are subject to
Section 2115, stockholders may cumulate votes in electing directors. This
means that each stockholder may vote the number of votes equal to the number
of candidates multiplied by the number of votes to which the stockholder's
shares are normally entitled in favor of one candidate. This potentially
allows minority stockholders to elect some members of the board of directors.
When we are no longer subject to Section 2115, cumulative voting will not be
allowed and a holder of 50% or more of our voting stock will be able to
control the election of all directors. In addition, Section 2115 has the
following effects:

  .  enables removal of directors with or without cause with majority
     stockholder approval;

  .  places limitations on the distribution of dividends;

  .  extends additional rights to dissenting stockholders in any
     reorganization, including a merger, sale of assets or exchange of
     shares; and

  .  provides for information rights and required filings in the event we
     effect a sale of assets or complete a merger.

    We anticipate that our common stock will be qualified for trading as a
national market security on the Nasdaq National Market and that we will have
at least 800 stockholders of record by the record date for our 2001 annual
meeting of stockholders. If these two conditions occur, then we will no longer
be subject to Section 2115 as of the record date for our 2001 annual meeting
of stockholders.

                                      60
<PAGE>

Delaware Anti-Takeover Law and Certain Charter Provisions

 Delaware Takeover Statute

    We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to some exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder, unless:

  .  prior to this date, the board of directors of the corporation approved
     either the business combination or the transaction that resulted in the
     stockholder becoming an interested stockholder;

  .  upon consummation of the transaction that resulted in the stockholder
     becoming an interested stockholder, the interested stockholder owned at
     least 85% of the voting stock of the corporation outstanding at the
     time the transaction commenced, excluding for purposes of determining
     the number of shares outstanding those shares owned (x) by persons who
     are directors and also officers and (y) by employee stock plans in
     which employee participants do not have the right to determine
     confidentially whether shares held subject to the plan will be tendered
     in a tender or exchange offer; or

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

    In general, Section 203 defines an interested stockholder as any entity or
person who, together with affiliates and associates owns, or within three
years, did own, beneficially 15% or more of the outstanding voting stock of
the corporation. Section 203 defines business combination to include:

  .  any merger or consolidation involving the corporation and the
     interested stockholder;

  .  any sale, transfer, pledge or other disposition of 10% or more of the
     assets of the corporation involving the interested stockholder;

  .  subject to certain exceptions, any transaction that results in the
     issuance or transfer by the corporation of any stock of the corporation
     to the interested stockholder;

  .  any transaction involving the corporation that has the effect of
     increasing the proportionate share of the stock of any class or series
     of the corporation beneficially owned by the interested stockholder; or

  .  the receipt by the interested stockholder of the benefit of any loans,
     advances, guarantees, pledges or other financial benefits provided by
     or through the corporation.

 Certificate of Incorporation and Bylaws

    Undesignated Preferred Stock.  Under our certificate of incorporation the
board of directors has the power to authorize the issuance of up to 15,000,000
shares of preferred stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
further vote or action by the stockholders. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, may:

  .  delay, defer or prevent a change in control of Loudcloud;

  .  discourage bids for the common stock at a premium over the market price
     of our common stock;

                                      61
<PAGE>

  .  adversely affect the voting and other rights of the holders of our
     common stock; and

  .  discourage acquisition proposals or tender offers for our shares and, as
     a consequence, inhibit fluctuations in the market price of our shares
     that could result from actual or rumored takeover attempts.

    Election and Removal of Directors.  Under our certificate of incorporation
our board of directors is divided into three classes. The directors in each
class will serve for a three-year term, one class being elected each year by
our stockholders. This classified system may discourage a third party from
making a tender offer or otherwise attempting to obtain control of us because
it makes it more difficult for stockholders to replace a majority of the
directors.

    Advance Notice Provisions.  Our bylaws establish advance notice procedures
for stockholder proposals and nominations of candidates for election as
directors other than nominations made by or at the direction of the board of
directors or a committee of the board.

    Special Meeting Requirements.  Our bylaws provide that special meetings of
stockholders be called by the chairman of the board, the chief executive
officer or the board of directors.

    Cumulative Voting. Neither our certificate of incorporation nor our bylaws
provide for cumulative voting in the election of directors.

    The provisions described above may only be amended by approval of the
holders of at least a majority of the outstanding common stock and may have
the effect of deterring a hostile takeover or delaying a change in control.

Transfer Agent and Registrar

    The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.

Nasdaq National Market Quotation

    We have applied to have our common stock quoted on the Nasdaq National
Market under the symbol "LDCL."

                                      62
<PAGE>

                        SHARES ELIGIBLE FOR FUTURE SALE

    Prior to this offering there has been no public market for our common
stock, and we cannot predict the effect, if any, that market sales of shares
or the availability of shares for sale will have on the market price
prevailing from time to time. As described below, only a limited number of
shares will be available for sale shortly after this offering due to
contractual and legal restrictions on resale.

    Nevertheless, sales of substantial amounts of our common stock in the
public market after the restrictions lapse could cause the market price of our
common stock to decline.

    When this offering is completed, we will have a total of 104,759,167
shares of common stock outstanding. The 10,000,000 shares offered by this
prospectus will be freely tradable unless they are purchased by our
"affiliates," as defined in Rule 144 under the Securities Act. The remaining
94,759,167 shares are "restricted," which means they were originally sold in
offerings that were not subject to a registration statement filed with the
Securities and Exchange Commission. These restricted shares may be resold only
through registration under the Securities Act or under an available exemption
from registration, such as provided through Rule 144. In addition, shares
purchased by our employees under our stock plans are subject to vesting
restrictions and may not be sold until such restrictions lapse.

        Eligibility of Restricted Shares for Sale in the Public Market

<TABLE>
<CAPTION>
                                                                     Number of
                                 Date                                  Shares
                                 ----                                ----------
   <S>                                                               <C>
   On the date of this prospectus...................................    None
         , in the event 15% of the locked-up shares are released on
    the 90th day after the date of this prospectus as described
    below...........................................................  1,173,209
         , in the event an additional 20% of the locked-up shares
    are released on the 120th day after the date of this prospectus
    as described below..............................................  1,509,080
         , which is 180 days after the date of this prospectus, or
    earlier, in Goldman, Sachs & Co.'s and Morgan Stanley & Co.
    Incorporated's discretion....................................... 51,490,022
   From time to time after        , 2001............................ 40,576,855
</TABLE>

Lock-up Agreements

    All of our stockholders have entered, or will enter, into lock-up
agreements in connection with this offering. Pursuant to these lock-up
agreements our officers, directors, and most non-employee stockholders may not
offer, sell, contract to sell, grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock owned by them for a period of 180 days after the date of
this prospectus without the prior written consent of Goldman, Sachs & Co. and
Morgan Stanley & Co. Incorporated.

                                      63
<PAGE>

    Stockholders who are employees or consultants and a limited number of non-
employee stockholders have agreed or will agree to similar lock-up agreements.
However, if our stock price is greater than twice the initial public offering
price per share for the time periods set forth below, then a percentage of the
securities held by these stockholders will be released from the transfer
restrictions of the lock-up agreements at the times set forth below.

<TABLE>
<CAPTION>
      Time Period                Amount Released                Time Released
      -----------                ---------------                -------------
<S>                       <C>                           <C>
20 of the 30 consecutive  15% of all securities         The 90th day after the date
trading days ending on    subject to these lock-up      of this prospectus.
the last trading day      agreements as of the date of
preceding the 90th day    this prospectus.
after the date of this
prospectus.

20 of the 30 consecutive  An additional 20% of the      The 120th day after the date
trading days ending on    securities subject to these   of this prospectus.
the last trading day      lock-up agreements as of the
preceding the 120th day   date of this prospectus.
after the date of this
prospectus.
</TABLE>

    However, if the release of securities as described above would occur
during one of our blackout periods, the release date and other conditions may
change as described below. Our blackout periods begin on the 30th day of the
second month of our fiscal quarters and end at the close of business on the
first trading day after we announce our quarterly results. During the blackout
period, we do not allow our directors, officers and employees to trade our
stock. For those stockholders described above whose securities are eligible
for release, if the release of their securities as described above would occur
during the blackout period, the release of their securities will occur at the
close of business on the first trading day after we announce our results. Such
a release would only occur if our stock price was greater than twice the
initial public offering price per share for 20 of the 30 consecutive trading
days ending on the first trading day after we announce our quarterly results.

    Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated, who may waive
the lock-up restrictions at any time without prior notice, have advised us
that they have no present intention to release any of the shares subject to
the lock-up agreements prior to the expiration of the lock-up periods
described above.

Rule 144

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

  .  1% of the then outstanding shares of our common stock, which will equal
     approximately 1,047,592 shares upon completion of this offering; and

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

    Sales under Rule 144 are subject to restrictions relating to manner of
sale, notice and the availability of current public information about us.

                                      64
<PAGE>

Rule 144(k)

    A person who is not deemed an affiliate of ours at any time during the 90
days preceding a sale and who has beneficially owned shares for at least two
years, including the holding period of any prior owner who is not an
affiliate, would be entitled to sell shares following this offering under
Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information or notice requirements of Rule 144.

Rule 701 and Options

    Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with some restrictions, including the holding period requirement,
of Rule 144. Any employee, officer or director or consultant who purchased his
or her shares pursuant to a written compensatory plan or contract may be
entitled to rely on the resale provisions of Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell such shares in reliance on Rule 144 without having to
comply with the holding period, public information, volume limitation or
notice provisions of Rule 144. All holders of Rule 701 shares are required to
wait 90 days after the date of this prospectus before selling their shares.
However, all shares issued by us pursuant to Rule 701 are subject to lock-up
provisions and will only become eligible for sale upon the expiration of the
lock-up agreements described above.

Registration

    Following this offering, we intend to file a registration statement on
Form S-8/S-3 under the Securities Act covering shares of common stock subject
to outstanding options or issuable under our 1999 Stock Plan, our 2000 Stock
Plan, our 2000 Stock Incentive Plan and our 2000 Employee Stock Purchase Plan
and selected shares of common stock issued under our 2000 Stock Plan. Based on
the number of shares subject to outstanding options at September 30, 2000, and
currently reserved for issuance under these plans, this registration statement
would cover approximately 40,361,575 shares.

    This registration statement will automatically become effective upon
filing. Accordingly, shares registered under this registration statement will,
subject to Rule 144 volume limitations applicable to our affiliates, be
available for sale in the open market immediately after the expiration of the
lock-up agreements described above. In addition, holders of 75,506,341 shares
of common stock and holders of warrants to 2,336,036 shares of common stock
will be entitled to registration rights. See "Description of Capital Stock--
Registration Rights."

                                      65
<PAGE>

                                 UNDERWRITING

    Loudcloud, Inc. and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the
number of shares indicated in the following table. Goldman, Sachs & Co. and
Morgan Stanley & Co. Incorporated are acting as joint book-running managers
for this offering. They, along with Thomas Weisel Partners LLC and Epoch
Securities, Inc., are the representatives of the underwriters.

<TABLE>
<CAPTION>
                                                                      Number of
     Underwriters                                                       Shares
     ------------                                                     ----------
     <S>                                                              <C>
     Goldman, Sachs & Co. ...........................................
     Morgan Stanley & Co. Incorporated...............................
     Thomas Weisel Partners LLC......................................
     Epoch Securities, Inc. .........................................
                                                                      ----------
       Total......................................................... 10,000,000
                                                                      ==========
</TABLE>

    If the underwriters sell more shares than the total number set forth in
the table above, the underwriters have an option to buy up to an additional
1,500,000 shares from Loudcloud to cover such sales. They may exercise that
option for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.

    The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Loudcloud. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option
to purchase 1,500,000 additional shares.

<TABLE>
<CAPTION>
                                                           Paid by Loudcloud
                                                       -------------------------
                                                       No Exercise Full Exercise
                                                       ----------- -------------
     <S>                                               <C>         <C>
     Per Share........................................    $            $
     Total............................................    $            $
</TABLE>

    Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $   per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters
to certain other brokers or dealers at a discount of up to $   per share from
the initial public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change the offering
price and the other selling terms.

    Loudcloud, its officers, its directors and all holders of shares of
Loudcloud's common stock have agreed not to dispose of or hedge any of
Loudcloud's common stock or securities convertible into or exchangeable for
shares of common stock during the period from the date of this prospectus
continuing through the date 180 days after the date of this prospectus, except
with the prior written consent of Goldman, Sachs & Co. and Morgan Stanley &
Co. Incorporated. For Loudcloud's employees and consultants, other than
officers and directors, and a limited number of non-employee stockholders,
this restriction shall terminate as to 15% of the locked-up shares after 90
days after the date of this prospectus and an additional 20% of the locked-up
shares after 120 days after the date of this prospectus, subject to delays as
a result of the timing of Loudcloud's earnings releases and compliance with
insider trading

                                      66
<PAGE>

policies, in the event that, as of such dates, the reported last sale price of
Loudcloud's common stock on the Nasdaq National Market is greater than twice
the initial public offering price specified in this prospectus for a specified
period of time ending on such dates. Further, the restrictions do not apply to
shares of common stock that may be purchased on the open market after
completion of this offering or that may be acquired through the directed share
program described below by parties who are not subject to the reporting
requirements of Section 16 of the Securities Exchange Act of 1934 with respect
to Loudcloud. This agreement does not apply to the issuance of common stock by
Loudcloud under existing employee benefit plans. In addition, it does not
apply to any issuance of capital stock by Loudcloud in connection with an
acquisition, merger or strategic transaction that involves an amount of our
securities that is less than or equal to ten percent of our outstanding share
capital at the time such acquisition, merger or strategic transaction is
signed, provided that any persons who become holders of our capital stock as a
result of that acquisition, merger or strategic transaction shall enter into a
lock-up agreement similar to the ones our current stockholders have executed.
See "Shares Available for Future Sale" for a discussion of specific transfer
restrictions.

    Prior to the offering, there has been no public market for the shares. The
initial public offering price will be negotiated among Loudcloud and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Loudcloud's historical performance, estimates of the
business potential and earnings prospects of Loudcloud, an assessment of
Loudcloud's management and the consideration of the above factors in relation
to market valuation of companies in related businesses.

    Loudcloud has applied for a quotation on its common stock on the Nasdaq
National Market under the symbol "LDCL".

    In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include
short sales, stabilizing transactions and purchases to cover positions created
by short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in the amount not greater than the underwriters'
option to purchase additional shares from Loudcloud in this offering. The
underwriters may close out any covered short position by either exercising
their option to purchase additional shares or purchasing shares in the open
market. In determining the source of shares to close out the covered short
position, the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to the price at
which they may purchase shares through the overallotment option. "Naked" short
sales are any sales in excess of such option. The underwriters must close out
any naked short position by purchasing shares in the open market. A naked
short position is more likely to be created if the underwriters are concerned
that there may be downward pressure on the price of the common stock in the
open market after pricing that could adversely affect investors who purchase
in the offering. Stabilizing transactions consist of various bids for or
purchases of common stock made by the underwriters in the open market prior to
the completion of the offering.

    The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the
underwriting discount received by it because the representatives have
repurchased shares sold by or for the account of that underwriter in
stabilizing or short covering transactions.

    Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of
Loudcloud's stock, and together with the imposition of the

                                      67
<PAGE>

penalty bid, may stabilize, maintain or otherwise affect the market price of
the common stock. As a result, the price of the common stock may be higher
than the price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued at any time. These
transactions may be effected on the Nasdaq National Market, on the over-the-
counter market or otherwise.

    A prospectus in electronic format may be made available on the Internet
web sites maintained by one or more underwriters or securities dealers. The
representatives of the underwriters may agree to allocate a number of shares
to underwriters for sale to their online brokerage account holders. Any
Internet distribution will be allocated by the representatives to underwriters
that may make Internet distributions on the same basis as other allocations.
In addition, shares may be sold by the underwriters to securities dealers who
resell shares to online brokerage account holders.

    At the request of Loudcloud, the underwriters are reserving up to 900,000
shares of common stock for sale at the initial public offering price to our
directors, officers, employees and selected business associates and to friends
and family members of our senior management through a directed share program.
The number of shares of common stock available for sale to the general public
in the public offering will be reduced to the extent these persons purchase
these reserved shares. Any shares not so purchased will be offered by the
underwriters to the general public on the same basis as the other shares
offered hereby.

    The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.

    Loudcloud estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$1,600,000.

    Loudcloud has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.

    Some of the underwriters may provide from time to time financial advisory
and investment banking services to us, for which they will receive customary
fees and commissions.

    Morgan Stanley & Co. Incorporated is an investor in Loudcloud. On February
9, 2000, Morgan Stanley purchased 66,000 units at an aggregate purchase price
of $45,136,740. Each unit consists of a $1,000 principal amount at maturity
13% senior discount note due 2005 and a warrant to purchase 35.39448485 shares
of Loudcloud's common stock at a price of $0.01 per share, for an aggregate of
2,336,036 shares.

    Thomas Weisel Partners LLC, one of the representatives of the
underwriters, was organized and registered as a broker-dealer in December
1998. Since December 1998, Thomas Weisel Partners has been named as a lead or
co-manager on several filed and completed public offerings of equity
securities. Thomas Weisel Partners does not have any material relationship
with Loudcloud or any of its officers, directors or other controlling persons,
except with respect to its contractual relationship with Loudcloud pursuant to
the underwriting agreement entered into in connection with this offering and
that Scudder Weisel Capital, an affiliate of Thomas Weisel Partners, is a
customer of Loudcloud.

    Epoch Securities, Inc. is an investment banking firm formed in November
1999. In addition to this offering, Epoch Securities has engaged in the
business of public and private equity investing and financing and financial
advisory services since its inception. The senior investment banking team of
Epoch Securities has in excess of 40 years of experience in the securities
industry. Epoch Securities

                                      68
<PAGE>

does not have any material relationship with Loudcloud or any of our officers,
directors or other controlling persons, except for its contractual
relationship with Loudcloud under the terms of the underwriting agreement
entered into in connection with this offering and that Epoch Securities is a
customer of Loudcloud.

    The corporate parents of Charles Schwab & Co., Inc., Ameritrade (Inc.) and
TD Waterhouse Investor Services Inc. are equity investors in Epoch Securities'
corporate parent. Under the terms of Epoch Securities' distribution agreement,
Charles Schwab, Ameritrade and TD Waterhouse are entitled to receive an
allocation of any shares allocated in the offering to Epoch Securities on a
free retention basis. Until they accept this allocation, however, they are not
obligated to take any shares. If they do take shares, they are obligated to
try to sell those shares to brokerage customers who buy shares through the
Internet, a computerized system or other automated system, but they otherwise
are entitled to allocate shares following their customary practices. Charles
Schwab, Ameritrade and TD Waterhouse are not underwriters under the
underwriting agreement. Because of their current relationship to Epoch
Securities and their role in the distribution of securities, however, they may
be deemed to be underwriters as that term is defined in the Securities Act in
connection with this offering. They believe their activities fall within the
selling dealer exception to the definition and, therefore, believe that they
are not "underwriters" under the Securities Act.

                                      69
<PAGE>

                                 LEGAL MATTERS

    Selected legal matters with respect to the validity of the common stock
offered by this prospectus are being passed upon for us by Wilson Sonsini
Goodrich & Rosati, a professional corporation, Palo Alto, California.
Individual attorneys and an investment partnership affiliated with Wilson
Sonsini Goodrich & Rosati beneficially own an aggregate of 442,436 shares of
our common stock. Selected legal matters in connection with this offering will
be passed upon for the underwriters by Simpson Thacher & Bartlett, Palo Alto,
California.

                                    EXPERTS

    Ernst & Young LLP, independent auditors, have audited our financial
statements at January 31 and July 31, 2000, as set forth in their report. We
have included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.

                      WHERE YOU CAN FIND MORE INFORMATION

    We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock offered hereby. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement or the
exhibits and schedules which are part of the registration statement. For
further information with respect to Loudcloud and the common stock offered by
this prospectus, we refer you to the registration statement and the exhibits
and schedules filed as part of the registration statement. You may read and
copy any document we file at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. Our SEC filings are
also available to the public from the SEC's web site at http://www.sec.gov.

    Upon completion of this offering, we will become subject to the
information and periodic reporting requirements of the Securities Exchange
Act, as amended, and, in accordance therewith, will file periodic reports,
proxy statements and other information with the SEC. These periodic reports,
proxy statements and other information will be available for inspection and
copying at the SEC's public reference rooms and the web site of the SEC
referred to above.


                                      70
<PAGE>

                                LOUDCLOUD, INC.

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S>                                                                          <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholders' Equity.......................................... F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>

                                      F-1
<PAGE>

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Loudcloud, Inc.

    We have audited the accompanying balance sheets of Loudcloud, Inc. as of
January 31, 2000 and July 31, 2000, and the related statements of operations,
stockholders' equity, and cash flows for the period from September 9, 1999
(inception) through January 31, 2000 and for the six months ended July 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Loudcloud, Inc. at January
31, 2000 and July 31, 2000, and the results of its operations, and its cash
flows for the period from September 9, 1999 (inception) through January 31,
2000 and for the six months ended July 31, 2000, in conformity with accounting
principles generally accepted in the United States.

                                          /s/ Ernst & Young LLP

San Jose, California
September 19, 2000, except
for Note 8, as to
which the date is

November 28, 2000

                                      F-2
<PAGE>

                                LOUDCLOUD, INC.

                                 BALANCE SHEETS
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                  Unaudited Pro
                                                                      Forma
                                                                  Stockholders'
                                            January 31, July 31,    Equity at
                                               2000       2000    July 31, 2000
                                            ----------- --------  -------------
<S>                                         <C>         <C>       <C>
                  ASSETS

Current assets:
Cash and cash equivalents..................  $ 20,479   $142,591
Accounts receivable, net of allowance for
 doubtful accounts of $10 and $368 at
 January 31, and July 31, 2000,
 respectively..............................       183      2,054
Prepaids and other current assets..........       499      2,032
                                             --------   --------
    Total current assets...................    21,161    146,677
Property and equipment, net................     4,203     36,054
Restricted cash............................        --      2,274
Other assets...............................       399        415
                                             --------   --------
    Total assets...........................  $ 25,763   $185,420
                                             ========   ========

   LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable...........................  $  2,554   $ 11,127
Accrued compensation.......................       136      1,385
Accrued professional fees..................       424        479
Other accrued liabilities..................     1,650      2,713
Deferred revenue...........................       309      5,514
Capital lease obligations, current
 portion...................................        --        630
                                             --------   --------
    Total current liabilities..............     5,073     21,848
Capital lease obligations, net of current
 portion...................................        --        395
Senior discount notes......................        --     38,495
Commitments
Stockholders' equity:
Convertible preferred stock, $0.001 par
 value, issuable in series; 45,000 and
 55,000 shares authorized at January 31 and
 July 31, 2000, respectively (15,000 shares
 pro forma); 38,744 and 52,772 shares
 issued and outstanding at January 31 and
 July 31, 2000, respectively (none pro
 forma); aggregate liquidation preference
 of $143,056 at July 31, 2000 (none
 pro forma)................................        39         53    $      --
Common stock, $0.001 par value, 100,000
 shares authorized (400,000 shares pro
 forma); 32,152 and 40,822 shares issued
 and outstanding at January 31 and July 31,
 2000, respectively (93,594 shares
 pro forma)................................        32         41           94
Additional paid-in capital.................    40,747    328,985      328,985
Notes receivable from stockholders.........      (181)    (4,743)      (4,743)
Deferred stock compensation................   (14,966)   (77,700)     (77,700)
Accumulated deficit........................    (4,981)  (121,954)    (121,954)
                                             --------   --------    ---------
    Total stockholders' equity.............    20,690    124,682    $ 124,682
                                             --------   --------    =========
    Total liabilities and stockholders' eq-
     uity..................................  $ 25,763   $185,420
                                             ========   ========
</TABLE>

                            See accompanying notes.

                                      F-3
<PAGE>

                                LOUDCLOUD, INC.

                            STATEMENTS OF OPERATIONS
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                    Period from
                                                     Inception
                                                   (September 9,    Six Months
                                                      1999) to         Ended
                                                  January 31, 2000 July 31, 2000
                                                  ---------------- -------------
<S>                                               <C>              <C>
Net revenue.....................................      $     --      $    1,941
Costs and expenses:
  Cost of revenue*..............................            --          13,729
  Research and development*.....................         1,453           4,298
  Sales and marketing*..........................           710           4,292
  General and administrative*...................           760           3,454
  Amortization of deferred stock compensation...         2,208          24,364
                                                      --------      ----------
    Total costs and expenses....................         5,131          50,137
                                                      --------      ----------
Loss from operations............................        (5,131)        (48,196)
Interest and other income.......................           150           1,965
Interest and other expense......................            --          (3,212)
                                                      --------      ----------
Net loss........................................        (4,981)        (49,443)
Series C convertible preferred stock deemed non-
 cash dividend..................................            --         (67,530)
                                                      --------      ----------
Net loss applicable to common stockholders......      $ (4,981)     $ (116,973)
                                                      ========      ==========
Basic and diluted net loss per share applicable
 to common stockholders.........................      $(907.70)     $(2,285.36)
                                                      ========      ==========
Shares used in computing basic and diluted net
 loss per share applicable to common
 stockholders...................................             5              51
                                                      ========      ==========
Pro forma basic and diluted net loss per share
 applicable to common stockholders..............      $  (0.27)     $    (2.80)
                                                      ========      ==========
Shares used in computing pro forma basic and
 diluted net loss per share applicable to common
 stockholders...................................        18,516          41,703
                                                      ========      ==========
--------
* Excludes amortization of deferred stock compensation of the following:
  Cost of revenue...............................      $     --      $    6,541
  Research and development......................         1,224           3,923
  Sales and marketing...........................           361           7,981
  General and administrative....................           623           5,919
                                                      --------      ----------
    Total amortization of deferred stock
     compensation...............................      $  2,208      $   24,364
                                                      ========      ==========
</TABLE>


                            See accompanying notes.

                                      F-4
<PAGE>

                                LOUDCLOUD, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (in thousands)

<TABLE>
<CAPTION>
                           Convertible
                            Preferred                                Notes
                              Stock      Common Stock  Additional  Receivable    Deferred                   Total
                          -------------- -------------  Paid-In       From        Stock     Accumulated Stockholders'
                          Shares  Amount Shares Amount  Capital   Stockholders Compensation   Deficit      Equity
                          ------  ------ ------ ------ ---------- ------------ ------------ ----------- -------------
<S>                       <C>     <C>    <C>    <C>    <C>        <C>          <C>          <C>         <C>
Balance at Inception
 (September 9, 1999)....      --   $ --      --  $ --   $     --    $    --      $     --    $      --    $     --
Issuance of common stock
 for cash in October
 1999...................      --     --  22,750    22         --         --            --           --          22
Issuance of Series A
 convertible preferred
 stock for cash (less
 issuance costs of $29)
 in November 1999.......  13,761     14      --    --      2,204         --            --           --       2,218
Issuance of Series B
 convertible preferred
 stock for cash (less
 issuance costs of $21)
 in November 1999 and
 January 2000...........  24,983     25      --    --     20,954         --            --           --      20,979
Issuance of warrant in
 conjunction with
 building lease in
 January 2000...........      --     --      --    --          5         --            --           --           5
Exercise of options to
 purchase common stock
 by a consultant for
 cash...................      --     --     177    --          4         --            --           --           4
Exercise of options to
 purchase common stock
 for cash and notes.....      --     --   9,225    10        399       (181)           --           --         228
Deferred stock
 compensation...........             --      --    --     17,181         --       (17,181)          --          --
Amortization of deferred
 stock compensation.....      --     --      --    --         --         --         2,215           --       2,215
Net loss and
 comprehensive loss.....      --     --      --    --         --         --            --       (4,981)     (4,981)
                          ------   ----  ------  ----   --------    -------      --------    ---------    --------
Balance at January 31,
 2000...................  38,744     39  32,152    32     40,747       (181)      (14,966)      (4,981)     20,690
Issuance of Series C
 convertible preferred
 stock for cash and a
 note (less issuance
 costs of $140) in June
 2000...................  14,068     14      --    --    119,845     (1,050)           --           --     118,809
Deemed non-cash dividend
 on Series C convertible
 preferred stock........      --     --      --    --     67,530         --            --      (67,530)         --
Conversion of Series A
 convertible preferred
 stock to common stock..     (40)    --      40    --         --         --            --           --          --
Exercise of options to
 purchase common stock
 for cash and notes, net
 of repurchases ........      --     --   8,630     9      3,730     (3,524)           --           --         215
Repayment of note
 receivable.............      --     --      --    --         --         12            --           --          12
Issuance of warrants in
 conjunction with senior
 discount notes in
 February 2000..........      --     --      --    --      9,827         --            --           --       9,827
Deferred stock
 compensation...........      --     --      --    --     87,306         --       (87,306)          --          --
Amortization of deferred
 stock compensation.....      --     --      --    --         --         --        24,572           --      24,572
Net loss and
 comprehensive loss.....      --     --      --    --         --         --            --      (49,443)    (49,443)
                          ------   ----  ------  ----   --------    -------      --------    ---------    --------
Balance at July 31,
 2000...................  52,772   $ 53  40,822  $ 41   $328,985    $(4,743)     $(77,700)   $(121,954)   $124,682
                          ======   ====  ======  ====   ========    =======      ========    =========    ========
</TABLE>


                            See accompanying notes.

                                      F-5
<PAGE>

                                LOUDCLOUD, INC.

                            STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                  Period from
                                                   Inception       Six Months
                                              (September 9, 1999)     ended
                                              to January 31, 2000 July 31, 2000
                                              ------------------- -------------
<S>                                           <C>                 <C>
Operating activities:
Net loss....................................        $(4,981)        $(49,443)
Adjustments to reconcile net loss to net
 cash provided by (used in) operating
 activities:
  Depreciation and amortization.............             78            3,677
  Accretion on notes payable................             --            2,803
  Amortization of warrants related to senior
   discount notes...........................             --              382
  Charges related to stock awards to
   consultants and lessor...................             12              208
  Amortization of deferred stock
   compensation.............................          2,208           24,364
  Changes in operating assets and
   liabilities:
    Accounts receivable.....................           (183)          (1,871)
    Prepaids, other current assets and other
     assets.................................           (898)          (1,549)
    Accounts payable........................          2,554            8,573
    Accrued compensation....................            136            1,249
    Accrued professional fees...............            424               55
    Other accrued liabilities...............          1,650            1,063
    Deferred revenue........................            309            5,205
                                                    -------         --------
      Net cash provided by (used in)
       operating activities.................          1,309           (5,284)
Investing activities:
Capital expenditures........................         (4,281)         (33,798)
Increase in restricted cash.................             --           (2,274)
                                                    -------         --------
      Net cash used in investing
       activities...........................         (4,281)         (36,072)


Financing activities:
Proceeds from issuance of preferred stock,
 net of issuance costs......................         23,197          118,809
Proceeds from issuance of common stock, net
 of repurchases.............................            254              215
Proceeds from senior discount notes.........             --           45,137
Principal payments on capital lease
 obligations................................             --             (705)
Repayment of notes receivable...............             --               12
                                                    -------         --------
      Net cash provided by financing
       activities...........................         23,451          163,468
                                                    -------         --------
Net increase in cash and cash equivalents...         20,479          122,112
Cash and cash equivalents at beginning of
 period.....................................             --           20,479
                                                    -------         --------
Cash and cash equivalents at end of period..        $20,479         $142,591
                                                    =======         ========

Supplemental schedule of noncash investing
 and financing activities:
Issuance of warrants in conjunction with
 senior discount notes......................        $    --         $  9,827
Issuance of common stock in exchange for
 notes receivable...........................        $   181         $  3,524
Issuance of Series C convertible preferred
 stock in exchange for notes receivable.....        $    --         $  1,050
Equipment purchased under capital lease.....        $    --         $  1,730
Series C preferred stock deemed, non-cash
 dividend...................................        $    --         $ 67,530

Supplemental disclosures:
Cash paid for interest......................        $    --         $      5
</TABLE>

                            See accompanying notes.

                                      F-6
<PAGE>

                                LOUDCLOUD, INC.

                         NOTES TO FINANCIAL STATEMENTS

1. Summary of the Company and Significant Accounting Policies

Organization and Basis of Presentation

    Loudcloud, Inc. (the Company) was incorporated as VCellar, Inc. on
September 9, 1999 in the state of Delaware. The Company offers businesses
Internet infrastructure services. Through January 31, 2000, the Company's
activities primarily consisted of establishing its offices, conducting
research and development, recruiting management and technical personnel, and
obtaining financing. Accordingly, the Company was considered to be in the
development stage through January 31, 2000. In February 2000, the Company
deployed services for its first customer and therefore emerged from the
development stage.

Interim Financial Information

    Results for the six month period ended July 31, 2000 are not necessarily
indicative of results for the entire fiscal year or future periods.

Use of Estimates

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

Cash Equivalents

    The Company considers all highly liquid investment securities with
maturity from the date of purchase of three months or less to be cash
equivalents and investment securities with maturity from the date of purchase
of more than three months, but less than twelve months, to be short-term
investments. As of January 31, 2000, and July 31, 2000, the Company held all
cash equivalents in money market funds. The cost of these investments
approximates fair market value.

Concentrations of Credit Risk and Significant Customers

    Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents
and accounts receivable. The Company places all of its cash equivalents with
high-credit quality issuers. Carrying amounts of financial instruments held by
the Company, which include cash equivalents, accounts receivable, accounts
payable and accrued expenses, approximate fair value due to their short
duration. The Company performs ongoing credit evaluations of its customers,
generally requires customers to prepay services and maintains reserves for
potential losses. The Company's customer base is primarily composed of
businesses throughout the United States.

    For the six month period ended July 31, 2000, customers A, B, C, D and E
accounted for 16%, 15%, 13%, 13% and 10% of the Company's net revenues,
respectively. As of July 31, 2000, customers B, F and G accounted for 19%,
19%, and 13%, of the Company's accounts receivable balance, respectively.

Property and Equipment

    Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated or amortized on a
straight-line basis over the estimated useful lives of the assets ranging from
approximately two to five years or the applicable lease term, if shorter.

                                      F-7
<PAGE>

                                LOUDCLOUD, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


Revenue Recognition

    The Company generates revenue from the sale of Internet infrastructure
services. These services incorporate the hardware, software and networking
infrastructure and the provisioning, maintenance and scaling expertise
required to support Internet operations. The Company recognizes revenue
ratably over the managed services contract period as services are fulfilled,
provided the Company has evidence of an agreement, the price of the services
is fixed or determinable, all contracted services are being delivered and
payment is reasonably assured. When obligations remain after services are
delivered, revenue is only recognized after such obligations are fulfilled.
Amounts billed and/or cash received in excess of revenue recognized are
included as deferred revenue in the accompanying balance sheets.

    Some of our customers are obligated to pay incremental fees once the
Company has fulfilled its readiness obligations by preparing the Internet
infrastructure if those customers are not ready to launch the site. The
incremental fees begin a defined period of time after the operational date and
end on the launch date. The managed service period begins on the launch of the
site, and thus the fees charged during the managed service period are not
affected by the length of time or fees charged between the operational date
and launch date. The Company recognizes revenue between the operation date and
launch date, as it represents a separate and distinct earnings process,
provided it has evidence of an agreement, the price is fixed or determinable,
the Company has fulfilled its obligations and collectibility is reasonably
assured.

    The Company records bandwidth billings gross based on the indicators in
Emerging Issue Task Force No. 99-19 "Recording Revenue Gross as a Principal
versus Net as an Agent." The Company is the primary obligor as the Company's
customer service agreements identify the Company as the party responsible for
the fulfillment of bandwidth services to the Company's customers. The Company
selects the bandwidth providers from numerous potential suppliers. The Company
has inventory risk for bandwidth capacity as the Company forecasts then
purchases total bandwidth capacity for a certain period of time, in order to
secure bandwidth capacity, which may be in excess of total actual customer
demand during that period of time. The fact that bandwidth capacity is not
specifically designated to a particular customer does not mitigate the
inventory risk, since the Company forecasts and purchases total bandwidth
capacity for a future period of time. The Company has credit risk as it is
responsible for collecting the sales price from a customer, but must pay the
amount owed the bandwidth suppliers after the suppliers perform, regardless of
whether the sales price is fully collected. Bandwidth revenue and bandwidth
costs to third-party suppliers have been insignificant through July 31, 2000.

    The Company generally guarantees 100% scheduled uptime to its customers on
a monthly basis. The Company reduces revenue for credits given for estimated
unscheduled downtime on a monthly basis.

Accounting for Stock-Based Compensation

    The Company grants stock options and stock purchase rights for a fixed
number of shares to employees with an exercise price equal to the fair value
of the shares at the date of grant. As permitted under the Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123), the Company
accounts for stock option grants and stock purchase rights to employees and
directors in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No. 25) and,
accordingly, recognizes no compensation expense for stock option grants or
stock purchase rights with an exercise price equal to the fair value of the
shares at the date of grant.

                                      F-8
<PAGE>

                                LOUDCLOUD, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


Impairment of Long-Lived Assets

    The Company continually reviews the carrying value of long-lived assets,
including property and equipment to determine whether there are any
indications of impairment losses. Recoverability of long-lived assets is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.

Advertising Expenses

    All advertising costs are expensed as incurred. Advertising costs were not
material in the period from inception (September 9, 1999) to January 31, 2000
and for the six months ended July 31, 2000.

Internal Use Software

    Costs of software developed internally by the Company for use in its
operations are accounted for under the American Institute of Certified Public
Accountant's Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Corporate Software Developed or Obtained for Internal Use." Under SOP 98-1,
the Company expenses costs of research, including pre-development efforts
prior to establishing technological feasibility, and costs incurred for
training and maintenance. Software development costs are capitalized when
technological feasibility has been established, it is probable that the
project will be completed and the software will be used as intended. Costs
incurred during the application development stage were insignificant, and
accordingly no costs related to internal use software have been capitalized
through July 31, 2000.

Segment Information

    The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information",
which requires companies to report selected information about operating
segments, as well as enterprise-wide disclosures about products, services,
geographical areas and major customers. Operating segments are determined
based on the way management organizes its business for making operating
decisions and assessing performance. The Company operates solely within one
business segment, Internet infrastructure services.

Comprehensive Loss

    The Company's total comprehensive net loss was the same as its net loss
for the period from Inception (September 9, 1999) through January 31, 2000 and
for the six months ended July 31, 2000.

Income Taxes

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

Unaudited Pro Forma Stockholders' Equity

    If the offering contemplated by the Company is consummated, all of the
convertible preferred stock outstanding as of the closing date will
automatically be converted into approximately 52,772,000 shares

                                      F-9
<PAGE>

                                LOUDCLOUD, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

of common stock based on the shares of convertible preferred stock outstanding
at July 31, 2000. The unaudited pro forma stockholders' equity reflects this
conversion.

Recently Issued Accounting Standards

    In June 1998, the FASB issued Statement of Financial Accounting Standards,
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS
133). The Company is required to adopt FAS 133 for the year ending January 31,
2002. FAS 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as
other hedging activities. The Company currently holds no derivative financial
instruments and does not currently engage in hedging activities. The adoption
of FAS 133 is not expected to have any material impact on the Company's
financial position or results of operations.

    In March 2000, the FASB issued Interpretation No. 44 (FIN 44), "Accounting
for Certain Transactions Involving Stock Compensation--An Interpretation of
APB Opinion No. 25." FIN 44 clarifies the application of APB Opinion No. 25
and, among other issues, clarifies the following: the definition of an
employee for the purposes of applying APB Opinion No. 25, the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of previously fixed stock
options or awards, and the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000, but
certain conclusions in FIN 44 cover specific events that occurred after either
December 15, 1998 or January 12, 2000. The Company does not expect the
application of FIN 44 to have a material impact on the Company's financial
position or results of operations.

    In March 2000, the Emerging Issues Task Force (EITF) published its
consensus on EITF No. 00-2, Accounting for Web Site Development Costs, which
requires the following accounting for costs related to development of
websites:

  .  Costs incurred in the planning stage, regardless of whether the planning
     activities relate to software, should be expensed as incurred;

  .  Costs incurred during the development of web site applications and
     infrastructure involving, acquiring or developing hardware and software
     to operate the web site, including graphics that affect the look and
     feel of the web page should be capitalized. All costs relating to
     software used to operate a web site should be accounted for under
     Statement of Position 98-1, Accounting for the Costs of Computer
     Software Developed or Obtained for Internal Use (SOP 98-1). However, if
     a plan exists or is being developed to market the software externally,
     the costs relating to the software should be accounted for pursuant to
     SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold,
     Leased or Otherwise Marketed;

  .  Costs paid for web site hosting services generally should be expensed
     over the period of benefit; and

  .  Costs incurred in operating the web site, including training,
     administration, maintenance, and other costs, should be expensed as
     incurred. However, costs incurred in the operation stage that involved
     providing additional functions or features to the website should be
     accounted for as new software. Such costs should be capitalized or
     expensed based on the requirements of SOP 98-1, or SFAS No. 86, as
     applicable.

                                     F-10
<PAGE>

                                LOUDCLOUD, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


    The Company will be required to adopt EITF No. 00-2 in fiscal quarters
beginning after June 30, 2000. The Company's policy for accounting for costs
incurred to operate the Company's hosted services will not be impacted by
adoption of this pronouncement.

    In March 2000, the EITF published its consensus on EITF No. 00-3,
Application of AICPA Statement of Position 97-2, Software Revenue Recognition,
to Arrangements That Include the Right to Use Software Stored on Another
Entity's Hardware. EITF No. 00-3 states that a software element covered by SOP
97-2 is only present in a hosting arrangement if the customer has the
contractual right to take possession of the software at any time during the
hosting period without significant penalty and it is feasible for the customer
to either run the software on their own hardware or contract with another
party unrelated to the vendor to host the software. The Company has
historically treated its hosted services as service arrangements which is in
accordance with the guidance contained in this pronouncement. The Company
hosting arrangements generally do not allow customers the contractual right to
take possession of the software.

    In December 1999, the SEC issued Staff Accounting Bulletin 101, or SAB
101, Revenue Recognition, which outlines the basic criteria that must be met
to recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements
filed with the SEC. The Company does not believe that the adoption of SAB 101,
as currently proposed, will have a material impact on the Company's financial
position or results of operations.

2. Property and Equipment

    Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                       July
                                                          January 31,   31,
                                                             2000      2000
                                                          ----------- -------
                                                            (in thousands)
   <S>                                                    <C>         <C>
   Computer and other related equipment..................   $3,884    $28,453
   Office equipment, leasehold improvements, furniture,
    and fixtures.........................................      143      3,565
   Software..............................................      254      7,791
                                                            ------    -------
                                                             4,281     39,809
   Less accumulated depreciation and amortization........      (78)    (3,755)
                                                            ------    -------
   Property and equipment, net...........................   $4,203    $36,054
                                                            ======    =======
</TABLE>

    Depreciation and amortization expense amounted to $78,000 and $3.7 million
for the period from inception (September 9, 1999) to January 31, 2000 and for
the six months ended July 31, 2000, respectively. At July 31, 2000 property
and equipment acquired under capital leases totaled $1.7 million and had
related accumulated amortization of $65,000.

3. Senior Discount Notes

    On February 9, 2000, the Company issued 66,000 units at a per unit price
of $683.89 of 13% Senior Discount Notes (the Notes) for an aggregate amount of
$45.1 million to Morgan Stanley & Co., Inc. The Notes are due in February
2005. In connection with the issuance of these Notes, the Company also issued
detachable warrants to purchase an aggregate 2.3 million shares of common
stock at an

                                     F-11
<PAGE>

                                LOUDCLOUD, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

exercise price of $0.01 per share. Of the $45.1 million in gross proceeds,
$9.8 million was allocated to additional paid-in capital for the deemed fair
value of the warrants and recorded as a discount to the Notes. The discount on
the Notes is being amortized to interest expense, using the effective interest
method, over the life of the Notes.

    At the time of issuance the Notes were sold at a substantial discount from
their principal amount at maturity of $66.0 million. Prior to August 15, 2003,
no cash interest payments are required; instead, interest will accrete during
this period to the aggregate principal amount at maturity. From and after
February 15, 2003, the Notes will bear interest at a rate of 13% per annum
payable in cash each February 15 and August 15. The Notes are redeemable at
the option of the Company, in whole or in part, at any time, at the redemption
prices set forth in the indenture relating to the Notes, plus accrued and
unpaid interest, if any, to the date of redemption.

    The indenture relating to the Notes contains certain covenants that, among
other things, limit the ability of the Company and its Restricted Subsidiaries
(as defined in the indenture relating to the Notes) to incur indebtedness, pay
dividends, prepay subordinated indebtedness, repurchase capital stock, make
certain investments, create liens, engage in transactions with stockholders
and affiliates, sell assets, and engage in mergers and consolidations.
However, these limitations are subject to a number of important qualifications
and exceptions.

4. Commitments

    Rent expense was $95,000 and $541,000 for the period from inception
(September 9, 1999) to January 31, 2000 and for the six month period ended
July 31, 2000, respectively. The Company moved to its new headquarters in
Sunnyvale, California in May 2000. The Company issued a letter of credit in
connection with this lease which requires the Company to hold on deposit
$2.3 million with the issuer of the letter of credit. This amount is shown as
restricted cash, as of July 31, 2000, on the accompanying balance sheet.
Additionally, the Company has available $30.4 million of equipment lease
facilities from its vendors.

    Future payments under all noncancelable leases are as follows as of July
31, 2000:

<TABLE>
<CAPTION>
                                                               Capital Operating
Periods ending January 31,                                     Leases   Leases
--------------------------                                     ------- ---------
                                                                (in thousands)
<S>                                                            <C>     <C>
2001.......................................................... $  391   $10,576
2002..........................................................    615    21,850
2003..........................................................    131    11,870
2004..........................................................     --     2,892
2005..........................................................     --     2,580
Thereafter....................................................     --    15,355
                                                               ------   -------
Total minimum payments........................................  1,137   $65,123
                                                                        =======
Less amount representing interest.............................    112
                                                               ------
Present value of minimum payments.............................  1,025
Less current portion..........................................    630
                                                               ------
Long-term portion............................................. $  395
                                                               ======
</TABLE>


                                     F-12
<PAGE>

                                LOUDCLOUD, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

5. Stockholders' Equity

Common Stock

    In September 1999, the Company sold at fair market value 22.8 million
shares of common stock to founders for cash. The common stock shares vest 25%
on the first anniversary of the issuance date with the balance vesting ratably
over the remaining period of three years as specified in the purchase
agreements. All unvested shares purchased by the founders are subject to
repurchase by the Company at the original cost if the founders' employment is
terminated. At July 31, 2000, all shares were subject to repurchase. The sale
of common stock to founders at fair market value was accounted for as an
increase in equity. The measurement date of the founders stock is not changed
solely by the provision that termination of employment reduces the number of
shares of stock that may be issued.

    The Company has reserved 13.8 million, 25.0 million and 14.7 million
shares of its common stock for issuance upon conversion of its Series A, B and
C convertible preferred stock, respectively. The Company has also reserved
18.2 million common shares for issuance under the 1999 Stock Option Plan ("the
1999 Plan") of which 193,000 shares remain available for grant at July 31,
2000. The Company has also reserved 2.3 million shares of common stock for
issuance upon exercise of warrants to purchase common stock.

Convertible Preferred Stock

    In November 1999, under a stock purchase agreement, the Company sold 13.8
million shares of Series A convertible preferred stock at a price of $0.16 per
share. In November 1999 and January 2000, under a stock purchase agreement,
the Company sold 25.0 million shares of Series B convertible preferred stock
at a price of $0.84 per share. In June 2000, under a stock purchase agreement,
the Company sold 14.1 million shares of Series C convertible preferred stock
at a price of $8.53 per share.

    Each share of Series A, B and C convertible preferred stock is
convertible, at the option of the holder, into one share of common stock,
subject to certain provisions. In April 2000, a holder elected to convert
40,000 shares of Series A convertible preferred stock to common stock. The
remaining outstanding shares of convertible preferred stock automatically
convert into common stock either upon the close of business on the day
immediately preceding the closing of an underwritten public offering of common
stock under the Securities Act of 1933 in which the Company receives at least
$40 million in gross proceeds or at the election of the holders of at least
two-thirds (2/3) of each series of the outstanding shares of preferred stock
on an as-converted basis.

    Series A, B and C convertible preferred stockholders are entitled to
noncumulative dividends of $0.010, $0.067 and $0.682 per share, respectively,
per annum if and when declared by the Board of Directors. No dividends have
been declared as of July 31, 2000. The indenture related to the Notes
prohibits the Company from paying cash dividends.

    The Series A, B and C convertible preferred stockholders are entitled to
receive, upon liquidation, the sum of (i) $0.16 per share of Series A
preferred stock, $0.84 per share of Series B preferred stock and $8.53 per
share of Series C preferred stock; and (ii) all declared but unpaid dividends.
If the assets or property are not sufficient to allow full payment to the
Series A, B and C convertible preferred stockholders, the available assets
shall be distributed ratably among the Series A, B and C convertible

                                     F-13
<PAGE>

                                LOUDCLOUD, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

preferred stockholders. Thereafter, the remaining assets and funds, if any,
shall be distributed pro rata among the common stockholders.

    The Series A, B and C convertible preferred stockholders have voting
rights equal to the common shares issuable upon conversion.

Series C convertible preferred stock dividend

    In June 2000, the Company issued 14.1 million shares of Series C
convertible preferred stock for a total purchase price of $120 million. The
difference between the deemed fair value of the issuance and actual issuance
price has been accounted for as a deemed dividend totaling $67.5 million in
the six months ended July 31, 2000.

Warrants

    In January 2000, the Company issued a warrant to purchase 10,000 shares of
Series B convertible preferred stock with an exercise price of $0.84 per share
in connection with the leasing of its new office space. The warrant shall
expire upon the first to occur of the following: (i) five years from issuance;
(ii) the sale of common stock pursuant to a registration statement under the
Securities Act of 1933, as amended, that results in gross proceeds of at least
$15.0 million; or (iii) upon the acquisition of the Company. The deemed fair
value of the warrants was estimated at the date of issuance using the Black-
Sholes pricing model with the following assumptions: deemed fair market value
of the common stock of $3.90 on the day of issuance, risk free interest rate
of 6.0%, contractual life of the warrants of five years, volatility of 70%,
and a dividend rate of zero. For the period from inception (September 9, 1999)
to July 31, 2000, the Company recorded amortization of the warrant of $5,300.

    On February 9, 2000, in connection with the issuance of the Notes, the
Company issued detachable warrants to purchase an aggregate of 2.3 million
shares of common stock at an exercise price of $0.01 per share. The warrants
expire in February 2010. The deemed fair value of the warrants of $9.8 million
was estimated at the date of issuance using the Black-Scholes pricing model
with the following assumptions: deemed fair market value of the common stock
of $5.40 on the day of issuance, risk free interest rate of 6.0%, contractual
life of the warrants of ten years, volatility of 70%, and a dividend rate of
zero. The amount represents a discount to the face value of the notes and is
being amortized to interest expense, using the effective interest method, over
the life of the Notes.

Notes Receivable from Stockholders

    The Company has notes receivable outstanding of $4.7 million from
employees as of July 31, 2000, issued to finance the purchase of shares of
common and the convertible preferred stock of the Company. The notes are full
recourse notes that bear interest at a rate of approximately 6% per annum with
principal and interest due four years from the original issuance date. On
August 31, 2000, $1.1 million of these amounts related to the convertible
preferred stock were repaid to the Company.

Options to Consultants

    As of July 31, 2000, the Company had granted options to purchase 191,000
shares of common stock to consultants at a weighted average exercise price of
$0.04. These options were granted in exchange for consulting services to be
rendered and vest over a period of three to four years. These options were

                                     F-14
<PAGE>

                                LOUDCLOUD, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

exercised by the consultants, but are subject to repurchase. The Company
recorded a charge to operations related to these unvested shares of $7,000 and
$208,000 for the period from inception (September 9, 1999) to January 31, 2000
and for the six months ended July 31, 2000, respectively.

    The unvested shares held by consultants have been and will be marked-to-
market using the estimate of fair value at the end of each accounting period
pursuant to the FASB's Emerging Issues Task Force Issue No. 96-18, "Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring
or in Conjunction with Selling, Goods, or Services."

Stock-Based Compensation

    Under the 1999 Plan, which was adopted in September 1999, options or stock
purchase rights may be granted for common stock, pursuant to actions by the
Board of Directors, to eligible participants. A total of 18.2 million shares
have been reserved under the 1999 Plan. Options or stock purchase rights
granted are either incentive stock options or nonstatutory stock options and
are exercisable within the times or upon the events determined by the Board of
Directors as specified in each agreement. Options and stock purchase rights
vest over a period of time as determined by the Board of Directors, generally
four years. Options and stock purchase rights generally vest with respect to
25% of the shares one year after the option or stock purchase right grant date
and the remainder ratably over the following three years. The term of the 1999
Plan is ten years.

    The following table summarizes all stock plan activity:

<TABLE>
<CAPTION>
                                                              Stock Purchase
                                                            Rights Outstanding
                                                            --------------------
                                                                        Weighted
                                                                        Average
                                                  Shares                Exercise
                                                Available     Shares     Price
                                                ----------  ----------  --------
<S>                                             <C>         <C>         <C>
 Shares Authorized............................. 17,025,000          --       --
 Granted....................................... (9,402,105)  9,402,105  $0.0436
 Exercised.....................................             (9,402,105) $0.0436
                                                ----------  ----------  -------
Balance at January 31, 2000....................  7,622,895          --       --
 Shares Authorized.............................  1,200,000          --       --
 Granted....................................... (8,815,962)  8,815,962  $0.4317
 Exercised.....................................             (8,815,962) $0.4317
 Repurchases...................................    185,594          --  $0.3535
                                                ----------  ----------  -------
Balance at July 31, 2000.......................    192,527          --  $    --
                                                ==========  ==========  =======
 Exercisable at end of period..................                     --  $    --
                                                            ==========  =======
</TABLE>

    There were 17,984,653 unvested shares of common stock subject to
repurchase at July 31, 2000. Common stock is subject to repurchase upon
termination of the stock purchase right holder's employment. Such shares are
subject to repurchase at their original issuance prices.

    As discussed in Note 1, the Company applies APB 25 and related
interpretations in accounting for the 1999 Plan. For the period from inception
(September 9, 1999) to January 31, 2000 and for the six months ended July 31,
2000, the Company recorded $17.2 million and $87.3 million in deferred
compensation for stock purchase rights to purchase common stock granted at
exercise prices deemed to
be below the fair value of common stock. Compensation expense of $2.2 million
and $24.6 million was

                                     F-15
<PAGE>

                                LOUDCLOUD, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

recognized using the graded vesting method during the period from inception to
January 31, 2000 and for the six months ended July 31, 2000, respectively. The
Company's policy is to use the graded vesting method for recognizing
compensation cost for fixed awards with pro rata vesting. The Company
amortizes the deferred stock-based compensation on the graded vesting method
over the vesting periods of the applicable stock purchase rights, generally
four years. The graded vesting method provides for vesting of portions of the
overall awards at interim dates and results in greater vesting in earlier
years than the straight line method.

    As required under SFAS 123, the following pro forma net loss and net loss
per share presentations reflect the amortization of the fair value of the
stock purchase right grants as expense. For purposes of this disclosure, the
estimated fair value of the stock purchase rights is amortized to expense over
the options' vesting periods. The Company's pro forma information follows for
the period from inception (September 9, 1999) to January 31, 2000 and for the
six months ended July 31, 2000:

<TABLE>
<CAPTION>
                                                        Inception
                                                      (September 9, Six Months
                                                        1999) to      ended
                                                       January 31,   July 31,
                                                          2000         2000
                                                      ------------- ----------
                                                       (in thousands, except
                                                         per share amounts)
   <S>                                                <C>           <C>
   As reported net loss applicable to common
    stockholders....................................    $ (4,981)   $ (116,973)
   Pro forma net loss applicable to common
    stockholders....................................    $ (4,997)   $ (117,334)
   As reported net loss per share applicable to
    common stockholders--basic and diluted..........    $(907.70)   $(2,285.36)
   Pro forma net loss per share applicable to common
    stockholders--basic and diluted.................    $(910.62)   $(2,292.41)
</TABLE>

    The weighted average grant date fair value was $0.01 and $0.31 for stock
purchase rights granted in the period from inception (September 9, 1999) to
January 31, 2000 and for the six months ended July 31, 2000, respectively. The
fair value of stock purchase rights granted during both periods was estimated
at the date of the option grant using the Black-Scholes option pricing model
with the following assumptions: risk free interest rate of 6.0%, expected life
of the options of four years, volatility of 70% and a dividend rate of zero.

    The effects on pro forma disclosures of applying SFAS 123 are not likely
to be representative of the effects on pro forma disclosures in future years
as the periods presented include only one year of stock purchase right grants
under the 1999 Plan.

6. Income Taxes

    The difference between the provision for income taxes and the amount
computed by applying the federal statutory rate (35%) to income before taxes
is explained below:

<TABLE>
<CAPTION>
                                                        Inception
                                                      (September 9, Six Months
                                                        1999) to      ended
                                                       January 31,   July 31,
                                                          2000         2000
                                                      ------------- ----------
   <S>                                                <C>           <C>
   Tax (benefit) at federal statutory rate...........      (35)%       (35)%
   Loss for which no tax benefit is currently
    recognizable.....................................       35          35
                                                           ---         ---
   Total provision...................................       -- %        -- %
                                                           ===         ===
</TABLE>

                                     F-16
<PAGE>

                                LOUDCLOUD, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


    The Company's deferred tax assets consisted of the following:

<TABLE>
<CAPTION>
                                                           January 31, July 31,
                                                              2000       2000
                                                           ----------- --------
                                                              (in thousands)
   <S>                                                     <C>         <C>
   Net operating loss carryforwards.......................   $ 1,125   $  7,465
   Tax credit carryforwards...............................        75        275
   Non-deductible reserves and accruals...................        --      3,270
                                                             -------   --------
     Total deferred tax assets............................     1,200     11,010
   Valuation allowance....................................    (1,200)   (11,010)
                                                             -------   --------
   Net deferred tax assets................................   $    --   $     --
                                                             =======   ========
</TABLE>

    The Company's tax carryforwards will begin to expire in 2020 for federal
purposes and in 2008 for state purposes.

    Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation allowance. The
valuation allowance increased by $9.8 million from January 31, 2000 to
July 31, 2000.

    Utilization of net operating loss may be subject to a substantial annual
limitation due to ownership change limitations provided by the Internal
Revenue Service Code of 1986, as amended, and similar state provisions. The
annual limitation may result in expiration of net operating loss and tax
carryforwards before full utilization.

7. Net Loss Per Share

    The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Basic and diluted net loss per share
is computed by dividing the net loss by the weighted average number of common
shares outstanding during the period less outstanding nonvested shares.
Outstanding nonvested shares are not included in the computation of basic net
loss per share until the time-based vesting restrictions have lapsed.

<TABLE>
<CAPTION>
                                                       Period from
                                                        Inception
                                                      (September 9, Six Months
                                                        1999) to      ended
                                                       January 31,   July 31,
                                                          2000         2000
                                                      ------------- ----------
                                                       (in thousands, except
                                                         per share amounts)
<S>                                                   <C>           <C>
Net loss applicable to common stockholders
 (numerator)........................................    $ (4,981)   $ (116,973)
                                                        ========    ==========
Shares used in computing historical basic and
 diluted net loss per share applicable to common
 stockholders (denominator):
Weighted average common shares outstanding..........      20,696        36,336
Less shares subject to repurchase...................     (20,691)      (36,285)
                                                        --------    ----------
Denominator for basic and diluted net loss per
 share..............................................           5            51
Conversion of preferred stock (pro forma) ..........      18,511        41,652
                                                        --------    ----------
Denominator for pro forma basic and diluted net loss
 per share..........................................      18,516        41,703
                                                        ========    ==========
Historical basic and diluted net loss per share
 applicable to common stockholders..................    $(907.70)   $(2,285.36)
                                                        ========    ==========
Pro forma basic and diluted net loss per share
 applicable to common stockholders..................    $  (0.27)   $    (2.80)
                                                        ========    ==========
</TABLE>

                                     F-17
<PAGE>

                                LOUDCLOUD, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


    The Company has excluded the impact of all convertible preferred stock,
shares of common stock subject to repurchase, warrants for convertible
preferred stock and common stock from the calculation of historical diluted
loss per common share because all such securities are antidilutive for all
periods presented. The total number of shares excluded from the calculations
of historical diluted net loss per share was 70,896,000 and 95,854,000 for the
period from inception (September 9, 1999) to January 31, 2000 and for the six
months ended July 31, 2000, respectively.

8. Subsequent Events

2000 Stock Plan

    In August 2000, the Board of Directors adopted the 2000 Stock Plan ("2000
Plan"). Under the 2000 Plan options or stock purchase rights may be granted
for common stock, pursuant to actions by the Board of Directors, to eligible
participants. In August 2000, a total of 7.0 million shares were reserved
under the 2000 Plan. In September 2000, the Company increased the shares
reserved under the 2000 Plan by 7.0 million shares, which increase is subject
to stockholder approval. Options or stock purchase rights granted are either
incentive stock options or nonstatutory stock options and are exercisable
within the times or upon the events determined by the Board of Directors as
specified in each option agreement. Options and stock purchase rights vest
over a period of time as determined by the Board of Directors, generally four
years. The term of the 2000 Plan is ten years.

Amended and Restated Certificate of Incorporation

    In August 2000, the Company amended the Certificate of Incorporation to
increase the authorized common stock to 150 million shares.

    Immediately upon the completion of the initial public offering, the
Company will amend and restate its Certificate of Incorporation to provide for
authorized common stock of 400 million shares and undesignated preferred stock
of 15 million shares. The Board of Directors has the authority to fix the
designations, powers, preferences, privileges, and relative participating,
optional or special rights as well as the qualifications, limitations or
restrictions of the preferred stock, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights of common stock.

2000 Incentive Stock Plan

    In September 2000 the Board of Directors approved the 2000 Incentive Stock
Plan. The plan provides for the grant of incentive stock options to the
Company's employees and nonstatutory stock options and stock purchase rights
to our employees, directors and consultants. A total of 25 million shares of
our common stock plus any unissued but reserved shares under the 1999 Stock
Plan and the 2000 Stock Plan as of the effective date of the initial public
offering and any shares returned to such plans shall be reserved for issuance
under the 2000 Incentive Stock Plan. The shares may be authorized, but
unissued, or reacquired common stock.

    The number of shares reserved for issuance under the Company's 2000
Incentive Stock Plan will increase annually on the first day of the Company's
fiscal year beginning in 2003 by an amount equal to

                                     F-18
<PAGE>

                                LOUDCLOUD, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

the lesser of (i) 8% of the outstanding shares of the Company's common stock
on the first day of the year; provided, however, such percentage shall
decrease to 6% of the outstanding shares of the Company's common stock
beginning on the first day of the fiscal year beginning in 2007, (ii) 18
million shares or (iii) a lesser amount as the Company's board of directors
may determine.

    The Director Option Program is part of the Company's 2000 Incentive Stock
Plan and provides for the periodic grant of nonstatutory stock options to the
Company's non-employee directors.

2000 Employee Stock Purchase Plan

    In September the Board of Directors approved the 2000 Employee Stock
Purchase Plan. A total of 1.2 million shares of the Company's common stock
will be made available for sale under the Purchase Plan. In addition, the
Purchase Plan provides for annual increases in the number of shares available
for issuance under the Purchase Plan on the first day of the Company's fiscal
year beginning in 2001 in an amount equal to the lesser of (i) 5.0 million
shares, (ii) 2% of the outstanding shares of the Company's common stock on
that date, or (iii) a lesser amount determined by the Company's Board of
Directors. The Company's board of directors or a committee of our board
administers the plan.

    The Purchase Plan contains consecutive, overlapping 24 month offering
periods. Each offering period includes four six-month purchase periods.

    The price of common stock is 85% of the lower of the fair market value of
our common stock at the beginning of an offering period or after a purchase
period ends. If the fair market value at the end of a purchase period is less
than the fair market value at the beginning of the offering period,
participants will be withdrawn from the current offering period following
their purchase of shares on the purchase date and will be re-enrolled in the
immediately following offering period.

Registration Statement

    In September 2000, the Company's Board of Directors authorized the filing
of a registration statement with the Securities and Exchange Commission to
register shares of its common stock in connection with the proposed initial
public offering.

Stock Options and Stock Purchase Rights

    From August 1, 2000 through November 28, 2000 the Company granted, under
the 1999 Plan and 2000 Plan, 8.6 million options and stock purchase rights to
purchase common stock at a weighted average exercise price of $4.09 per share.
The Company anticipates recording deferred compensation of $66.8 million
related to these options and stock purchase rights and expects to amortize
these costs using the graded vesting method over the vesting term of the
options and stock purchase rights.

    In November 2000, the Company increased the shares reserved under the 1999
Plan by 1.2 million shares, which increase is subject to stockholder approval.


                                     F-19
<PAGE>

                                LOUDCLOUD, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

Facility Leases

    In October 2000, the Company agreed to lease 30,000 square feet for
general corporate purposes in Sunnyvale, California. The related cost of this
lease is approximately $165,000 per month. The lease expires in December 2005.
The Company expects to commence occupancy by January 2001.

    In October 2000, the Company agreed to lease 120,000 square feet for
general corporate purposes in Sunnyvale, California. The related cost of this
lease is approximately $940,000 per month. The lease expires in June 2003. The
Company expects to commence occupancy by January 2001. The Company has also
agreed to issue a letter of credit to the lessor in association with this
lease in November 2000.

    In October 2000, the Company agreed to lease 22,000 square feet for
general corporate purposes in Chantilly, Virginia. The related cost of this
lease is approximately $46,000 per month. The lease expires in December 2005.
The Company expects to commence occupancy by March 2001.

                                     F-20
<PAGE>

[Inside back cover -- Text and Graphics]

    The top of the back cover contains the following text:

  "myLoudcloud
  Customized View into the Operations Environment"

    Under this text there is a screen shot of a sample myLoudcloud web page
containing systems administration statistics. Below the picture of the
myLoudcloud web page are four columns in which the following text appears:

<TABLE>
<CAPTION>
  Traffic Analysis                                                   User Management and
       Reports          Device Monitoring         Maintenance           Access Control
  ----------------      -----------------         -----------        -------------------
<S>                   <C>                    <C>                    <C>
Customers can view    Customers can monitor  Customers can access   Customers can control
valuable information  the performance of     detailed reports on    user access to the
about the users of    the infrastructure we  outstanding service    array of the
their site.           provide for them and   requests.              myLoudcloud portal
                      configure their                               services and
                      myLoudcloud portal to                         customize their views
                      track statistics of                           into the myLoudcloud
                      interest.                                     portal to different
                                                                    levels of users.
</TABLE>

<PAGE>

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

   No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.

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

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Prospectus Summary.......................................................   3
Risk Factors.............................................................   7
Special Note Regarding Forward-Looking Statements........................  20
Use of Proceeds..........................................................  21
Dividend Policy..........................................................  21
Capitalization...........................................................  22
Dilution.................................................................  23
Selected Financial Data..................................................  24
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  25
Business.................................................................  32
Management...............................................................  45
Related Party Transactions...............................................  54
Principal Stockholders...................................................  56
Description of Capital Stock.............................................  58
Shares Eligible for Future Sale..........................................  63
Underwriting.............................................................  66
Legal Matters............................................................  70
Experts..................................................................  70
Where You Can Find More Information......................................  70
Index to Financial Statements............................................ F-1
</TABLE>

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

   Through and including       , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when
acting as an underwriter and with respect to an unsold allotment or
subscription.

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

                               10,000,000 Shares

                                Loudcloud, Inc.

                                  Common Stock

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

                              [LOGO OF LOUDCLOUD]

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

                              Goldman, Sachs & Co.

                           Morgan Stanley Dean Witter

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

                           Thomas Weisel Partners LLC

                                 Epoch Partners

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

                                    PART II

                    INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

    The following table sets forth the various expenses expected to be
incurred by the Registrant in connection with the sale and distribution of the
securities being registered hereby, other than underwriting discounts and
commissions. All amounts are estimated except the Securities and Exchange
Commission registration fee and the National Association of Securities
Dealers, Inc. filing fee.

<TABLE>
<CAPTION>
                                                                     Payable by
                                                                     Registrant
                                                                     ----------
   <S>                                                               <C>
   SEC registration fee............................................. $   39,600
   National Association of Securities Dealers, Inc. filing fee......     15,500
   Nasdaq National Market Listing Fee...............................     95,000
   Accounting fees and expenses.....................................    450,000
   Legal fees and expenses..........................................    600,000
   Printing and engraving expenses..................................    250,000
   Blue Sky and NASD fees and expenses..............................     15,000
   Registrar and Transfer Agent's fees..............................     12,500
   Miscellaneous fees and expenses..................................    122,400
                                                                     ----------
     Total.......................................................... $1,600,000
                                                                     ==========
</TABLE>

Item 14. Indemnification of Directors and Officers

    Section 145 of the Delaware General Corporation Law provides for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). Article X of the Registrant's
Amended and Restated Certificate of Incorporation (Exhibit 3.2 hereto) and
Article 6 of the Registrant's Amended and Restated Bylaws (Exhibit 3.3 hereto)
provide for indemnification of the Registrant's directors, officers, employees
and other agents to the extent and under the circumstances permitted by the
Delaware General Corporation Law. The Registrant has also entered into
agreements with its directors and officers that will require the Registrant,
among other things, to indemnify them against certain liabilities that may
arise by reason of their status or service as directors or officers to the
fullest extent not prohibited by law. The Underwriting Agreement (Exhibit 1.1)
provides for indemnification by the Underwriters of the Registrant, its
directors and officers, and by the Registrant of the Underwriters, for certain
liabilities, including liabilities arising under the Act and affords certain
rights of contribution with respect thereto.

Item 15. Recent Sales of Unregistered Securities

    1. From October 1999 to October 31, 2000, the Registrant issued and sold
    under our stock plans 19,454,733 shares of common stock to employees,
    directors and consultants at prices ranging from $0.001 to $4.00 per share
    pursuant to the exercise of stock purchase rights.

    2. In October 1999, the Registrant sold 22,750,000 shares of common stock
    to Benjamin Horowitz, Timothy Howes and In Sik Rhee at a price of $0.001
    per share pursuant to restricted stock purchase agreements.

                                     II-1
<PAGE>

    3. On November 1, 1999, the Registrant issued and sold 13,760,583 shares
    of Series A preferred stock to four investors, a trust associated with
    Marc Andreessen, two key employees of the Company and an investment entity
    associated with counsel for the Company for an aggregate purchase price of
    $2,246,690.39.

    4. From November 24, 1999 to January 3, 2000, the Registrant issued and
    sold 24,983,344 shares of Series B preferred stock, which were primarily
    purchased by a trust associated with Marc Andreessen and venture capital
    investors for an aggregate purchase price of $20,999,999.63.

    5. On February 9, 2000, the Registrant issued 66,000 Units to Morgan
    Stanley & Co. Incorporated, each Unit consisting of a $1,000 principal
    amount at maturity 13% Senior Discount Note due 2005 and a warrant to
    purchase 35.39448485 shares of the Registrant's common stock at a price of
    $0.01 per share, for an aggregate consideration to the Registrant of
    $45,136,740.

    6. From June 23, 2000 to June 26, 2000, the Registrant issued and sold
    14,068,276 shares of Series C preferred stock to a total of 30 investors,
    which consisted of 12 venture capital investors, eight investors who are
    key employees or directors of the Company, or that are trusts affiliated
    with key employees or directors of the Company, and ten other individual
    investors, for an aggregate purchase price of $120,000,002.70.

    7. On August 7, 2000 the Registrant issued and sold 39,700 shares of
    common stock to three consultants who performed recruiting services for
    the Company for an aggregate purchase price of $71,460.00.

    The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Rule 506 under Regulation D promulgated thereunder, or Rule
701 promulgated under Section 3(b) of the Securities Act, as transactions by
an issuer not involving a public offering or transactions pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients of securities in each of these transactions
represented their intention to acquire the securities for investment only and
not with view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and instruments
issued in such transactions. All recipients had adequate access, through their
relationship with the Registrant, to information about the Registrant.

Item 16. Exhibits and Financial Statement Schedules

   (a) Exhibits

<TABLE>
<CAPTION>
 Exhibit
 Number                          Description of Document
 -------                         -----------------------
 <C>     <S>
   1.1*  Form of Underwriting Agreement.

   3.1+  Amended and Restated Certificate of Incorporation.

   3.2+  Amended and Restated Certificate of Incorporation, to be effective
         upon consummation of this offering.

   3.3+  Bylaws

   3.4+  Amended and Restated Bylaws, to be effective upon consummation of this
         offering.

   5.1+  Opinion of Wilson Sonsini Goodrich & Rosati.

  10.1+  Registrant's 1999 Stock Plan.

  10.2+  Registrant's 2000 Stock Plan.
</TABLE>

                                     II-2
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                          Description of Document
 -------                         -----------------------
 <C>     <S>
 10.3+   Registrant's 2000 Incentive Stock Plan.

 10.4*   Registrant's 2000 Employee Stock Purchase Plan.

 10.5+   Form of Directors and Officers' Indemnification Agreement.

 10.6+   Investor Rights Agreement, dated June 23, 2000, by and among the
         Registrant and the parties who are signatories thereto.

 10.7+   Indenture, dated February 9, 2000, by and among the Registrant and the
         parties who are signatories thereto.

 10.8+   Warrant Agreement, dated February 9, 2000, by and among the Registrant
         and the parties who are signatories thereto.

 10.9+   Notes Registration Rights Agreement, dated February 9, 2000, by and
         among the Registrant and the parties who are signatories thereto.

 10.10+  Promissory Note dated May 10, 2000 by and among the Registrant and
         Michael I. Green.

 10.11+  Promissory Note dated June 22, 2000 by and among the Registrant and
         Roderick M. Sherwood III.

 10.12+  Promissory Note dated August 24, 2000 by and among the Registrant and
         Roderick M. Sherwood III.

 10.14   Lease between the Registrant and Maude Avenue Land Corporation, dated
         October 17, 2000.

 10.13+  Lease Agreement between the Registrant and Sequoia Del Rey, dated
         January 31, 2000.

 23.1    Consent of Ernst & Young LLP, Independent Auditors.

 24.1+   Power of Attorney.

 27.1+   Financial Data Schedule for Loudcloud, Inc.
</TABLE>
--------
* To be filed by amendment.

+ Previously filed.

   (b) Financial Statement Schedules

Schedule II--Valuation and Qualifying Accounts

    Schedules other than those referred to above have been omitted because
they are not applicable or not required or because the information is included
elsewhere in the Financial Statements or the notes thereto.

Item 17. Undertakings

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

                                     II-3
<PAGE>

    The undersigned Registrant hereby undertakes that:

    (1) For purposes of determining any liability under the Securities Act
  of 1933, as amended, the information omitted from the form of prospectus
  filed as part of this registration statement in reliance upon Rule 430A
  and contained in a form of prospectus filed by the Registrant pursuant to
  Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part
  of this registration statement as of the time it was declared effective.

    (2) For the purpose of determining any liability under the Securities
  Act of 1933, as amended, each post-effective amendment that contains a
  form of prospectus shall be deemed to be a new registration statement
  relating to the securities offered therein, and the offering of such
  securities at that time shall be deemed to be the initial bona fide
  offering thereof.

    The Registrant will provide to the underwriters at the closing(s)
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.

                                     II-4
<PAGE>

                                   SIGNATURES

    Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale,
State of California, on the 5th day of December, 2000.

                                          Loudcloud, Inc.

                                                          *
                                          By: _________________________________
                                                  Benjamin A. Horowitz
                                           President, Chief Executive Officer
                                                       and Director

    Pursuant to the requirements of the Securities Act, this Amendment to
Registration Statement has been signed by the following persons on December 5,
2000 in the capacities indicated:

<TABLE>
<CAPTION>
               Signature                                 Title
               ---------                                 -----

 <C>                                    <S>
                   *
 ______________________________________ President, Chief Executive Officer and
          Benjamin A. Horowitz           Director (Principal Executive Officer)

                   *                    Executive Vice President and Chief
 ______________________________________  Financial Officer (Principal
        Roderick M. Sherwood III         Financial and Accounting Officer)

                   *
 ______________________________________
           Marc L. Andreessen           Chairman and Director

                   *
 ______________________________________
          William V. Campbell           Director

                   *
 ______________________________________
            Michael S. Ovitz            Director

                   *
 ______________________________________
           Andrew S. Rachleff           Director
</TABLE>

    /s/ Charles J. Katz, Jr.
*By: ____________________________
       Charles J. Katz, Jr.
         Attorney-in-Fact

                                      II-5
<PAGE>

                                LOUDCLOUD, INC.

                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                                 July 31, 2000
                                 (in thousands)

<TABLE>
<CAPTION>
                                                   Additions
                                          Balance   Charged             Balance
                                           as of   to Costs              as of
                                         Beginning    and               End of
                                         of Period Expenses  Deductions Period
                                         --------- --------- ---------- -------
<S>                                      <C>       <C>       <C>        <C>
Period from inception to January 31,
 2000
  Deducted from asset accounts:
    Allowance for doubtful accounts.....  $   --    $   10      $ --    $    10
    Valuation allowance for deferred tax
     asset..............................  $   --    $1,200      $ --    $ 1,200
Six months ended July 31, 2000
  Deducted from asset accounts:
    Allowance for doubtful accounts.....  $   10    $  358      $ --    $   368
    Valuation allowance for deferred tax
     asset..............................  $1,200    $9,810      $ --    $11,010
</TABLE>

                                      S-1
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Exhibit
 Number                          Description of Document
 -------                         -----------------------
 <C>     <S>
  1.1*   Form of Underwriting Agreement.

  3.1+   Amended and Restated Certificate of Incorporation.

  3.2+   Amended and Restated Certificate of Incorporation, to be effective
         upon consummation of this offering.

  3.3+   Bylaws

  3.4+   Amended and Restated Bylaws, to be effective upon consummation of this
         offering.

  5.1+   Opinion of Wilson Sonsini Goodrich & Rosati.

 10.1+   Registrant's 1999 Stock Plan.

 10.2+   Registrant's 2000 Stock Plan.

 10.3+   Registrant's 2000 Incentive Stock Plan.

 10.4*   Registrant's 2000 Employee Stock Purchase Plan.

 10.5+   Form of Directors and Officers' Indemnification Agreement.

 10.6+   Investor Rights Agreement, dated June 23, 2000, by and among the
         Registrant and the parties who are signatories thereto.

 10.7+   Indenture, dated February 9, 2000, by and among the Registrant and the
         parties who are signatories thereto.

 10.8+   Warrant Agreement, dated February 9, 2000, by and among the Registrant
         and the parties who are signatories thereto.

 10.9+   Notes Registration Rights Agreement, dated February 9, 2000, by and
         among the Registrant and the parties who are signatories thereto.

 10.10+  Promissory Note dated May 10, 2000 by and among the Registrant and
         Michael I. Green.

 10.11+  Promissory Note dated June 22, 2000 by and among the Registrant and
         Roderick M. Sherwood III.

 10.12+  Promissory Note dated August 24, 2000 by and among the Registrant and
         Roderick M. Sherwood III.

 10.13+  Lease Agreement between the Registrant and Sequoia Del Rey, dated
         January 31, 2000.

 10.14   Lease between the Registrant and Maude Avenue Land Corporation, dated
         October 17, 2000.

 23.1    Consent of Ernst & Young LLP, Independent Auditors.

 24.1+   Power of Attorney.

 27.1+   Financial Data Schedule for Loudcloud, Inc.
</TABLE>
--------
* To be filed by amendment.

+ Previously filed.


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