TELOCITY INC
S-1/A, 2000-03-08
COMPUTER PROGRAMMING, DATA PROCESSING, ETC.
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<PAGE>   1

     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 8, 2000
                                                      REGISTRATION NO. 333-94271
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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

                                AMENDMENT NO. 2
                                       TO

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

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

<TABLE>
<S>                                  <C>                                    <C>
            CALIFORNIA                              7370                                77-0467929
    (PRIOR TO REINCORPORATION)          (PRIMARY STANDARD INDUSTRIAL                 (I.R.S. EMPLOYER
             DELAWARE                    CLASSIFICATION CODE NUMBER)              IDENTIFICATION NUMBER)
      (AFTER REINCORPORATION)
  (STATE OR OTHER JURISDICTION OF
  INCORPORATION OR ORGANIZATION)
</TABLE>

                         10355 NORTH DE ANZA BOULEVARD
                          CUPERTINO, CALIFORNIA 95014
                                 (408) 863-6600
         (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
            AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                            ------------------------

                                  SCOTT MARTIN
 EXECUTIVE VICE PRESIDENT, CHIEF ADMINISTRATIVE OFFICER AND CORPORATE SECRETARY
                         10355 NORTH DE ANZA BOULEVARD
                          CUPERTINO, CALIFORNIA 95014
                                 (408) 863-6600
           (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
                   INCLUDING AREA CODE, OF AGENT FOR SERVICE)
                            ------------------------

                                   COPIES TO:

<TABLE>
<S>                                   <C>                                   <C>
MARGARET H. KAVALARIS, ESQ.           MATTHEW J. STEPOVICH, ESQ.            MALCOLM I. ROSS, ESQ.
JOHN M. FOGG, ESQ.                    SENIOR VICE PRESIDENT, LEGAL AFFAIRS  BAKER & MCKENZIE
GRAY CARY WARE & FREIDENRICH LLP      DAVID I. FRAZEE, ESQ.                 805 THIRD AVENUE
400 HAMILTON AVENUE                   CORPORATE GENERAL COUNSEL             NEW YORK, NEW YORK 10022
PALO ALTO, CALIFORNIA 94301           10355 NORTH DE ANZA BOULEVARD         (212) 751-5700
(650) 833-2000                        CUPERTINO, CALIFORNIA 95014
                                      (408) 863-6600
</TABLE>

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

     APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
     If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
     If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
     If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
     If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
     If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
                        CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
                                                                 PROPOSED MAXIMUM
                   TITLE OF EACH CLASS OF                            AGGREGATE                AMOUNT OF
                SECURITIES TO BE REGISTERED                      OFFERING PRICE(1)       REGISTRATION FEE(2)
- ---------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                       <C>
Common Stock, $0.001 par value..............................       $151,800,000                $40,076
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Estimated pursuant to Rule 457(o) of the Securities Act of 1933 solely for
    the purpose of computing the amount of the registration fee.

(2) $39,600 has been previously paid.
                            ------------------------

     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 HEREAFTER 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 SUCH SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>   2

       THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
       MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
       THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
       NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER
       TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
       PERMITTED.

                             SUBJECT TO COMPLETION
                   PRELIMINARY PROSPECTUS DATED MARCH 8, 2000
PROSPECTUS

                               11,000,000 SHARES

                                [TELOCITY LOGO]

                                  COMMON STOCK

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

      This is Telocity, Inc.'s initial public offering. Telocity is selling all
of the shares.

      We expect the public offering price to be between $10.00 and $12.00 per
share. After pricing of the offering, we expect that the shares will trade on
the Nasdaq National Market under the symbol "TLCT."

      INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 6 OF THIS PROSPECTUS.

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

<TABLE>
<CAPTION>
                                                              PER SHARE              TOTAL
                                                              ---------              -----
<S>                                                           <C>                    <C>
Public offering price.......................................    $                     $
Underwriting discount.......................................    $                     $
Proceeds, before expenses, to Telocity......................    $                     $
</TABLE>

      The underwriters may also purchase up to an additional 1,650,000 shares at
the public offering price, less the underwriting discount, within 30 days from
the date of this prospectus to cover over-allotments.

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

      The shares will be ready for delivery on or about             , 2000.

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

MERRILL LYNCH & CO.                                   CREDIT SUISSE FIRST BOSTON
                             ----------------------
DONALDSON, LUFKIN & JENRETTE                                       WIT SOUNDVIEW
                             ----------------------

               The date of this prospectus is             , 2000.
<PAGE>   3
Page 1

[Telocity logo]

OUR BUSINESS

We intend to be a leading provider of residential high-speed Internet services
and content to and throughout the home.

OUR CUSTOMER APPEAL

[Image depicting the smiling face of a man]

Telocity customers experience the true wonder of the Internet and more. They
surf and download up to 50 times faster than dial-up users. They are
"always-connected," bypassing log-on and password delays -- virtually
eliminating the "World Wide Wait." At Telocity, we bring wonderment into
people's lives.

[Image depicting the smiling face of a woman]

OUR CONTENT PARTNERS
MEDIA / ENTERTAINMENT / E-COMMERCE
We currently offer personalized web pages. Along with our partners, we are
developing and will offer streaming audio and video, online gaming and
interactive shopping.
[Telocity logo]
[NBCi logo]
[NBC logo]
[Snap logo]
[Xoom logo]

COMMUNICATIONS
We currently offer Internet access, e-mail and remote access. We are developing
and will offer virtual private networks, enhanced voice messaging services and
chat facilities.
[Telocity logo]

UTILITY
We are developing and will offer data security systems, home networking, home
monitoring, home automation and backup services.
[Telocity logo]
[GE logo]

<PAGE>   4

PAGES 2 & 3

BROADBAND TO AND THROUGHOUT THE HOME
[Image of house]
[Image of Web page]

THE TELOCITY/NBCi PORTAL
The Telocity/NBCi portal is the first Web page a customer views when accessing
our services. From this page a customer can access the Internet as well as
services and content offered by us and NBCi, including financial information,
news and weather.

BROADBAND TO AND THROUGHOUT THE HOME
Telocity's current broadband services provide customers benefits such as always
connected, high-speed Internet access and personalized Web pages. Our future
services which we are currently developing will provide customers with addition
benefits such as data security systems, backup services, virtual private network
capabilities, home networking and home monitoring and automation, as well as
other services and content offered in partnership with NBCi such as streaming
audio and video, online gaming and interactive shopping.

RESIDENTIAL GATEWAY
[Images of Telocity gateway from two different angles - front and back]
[Identification of different ports on back of Telocity modem: Phone; USB
Host/USB Slave; Power; Ethernet and Parallel Port]

Our plug-and-play gateway is hassle-free and can be easily self-installed by
the customer. Our installation software configures a personal computer
automatically, providing immediate high-speed access to the Internet and all of
our services. Many services can be added to conform to an individual user's
preferences without requiring new equipment or an on-site visit by a technician.

MANAGED NETWORK
[Artist rendering of map of United Sates with picture of phone operator
superimposed]
We manage a nationwide network designed to be responsive and reliable. Our
managed network includes communications lines and facilities, which we lease
through network agreements, as well as our network operations center and
operational support system, which we own and operate. Through out network
operations center and operational support system, we are able to monitor our
services throughout the network to ensure a high level of support.
<PAGE>   5

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Summary.....................................................    1
Risk Factors................................................    6
Other Relevant Information..................................   21
Use of Proceeds.............................................   21
Dividend Policy.............................................   21
Capitalization..............................................   22
Dilution....................................................   23
Selected Consolidated Financial Information.................   24
Management's Discussion and Analysis of Financial Condition
  and Results of Operations.................................   25
Business....................................................   33
Management..................................................   53
Related Party Transactions..................................   67
Principal Stockholders......................................   75
Description of Capital Stock................................   79
Shares Eligible for Future Sale.............................   83
Underwriting................................................   85
Legal Matters...............................................   88
Experts.....................................................   88
Additional Information......................................   88
Index to Consolidated Financial Statements..................  F-1
</TABLE>

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

      You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.

                                        i
<PAGE>   6

                                    SUMMARY

      This summary highlights information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including the "Risk
Factors" section and the consolidated financial statements and the notes to
those statements before making an investment decision.

                                  OUR COMPANY

      Our goal is to become a leading provider of broadband access services,
content and home networking services to the residential market. To achieve this
goal, we intend to utilize the technology we have developed to deliver these
services and content over a variety of methods from a nationwide network to and
throughout the home over high-speed, or broadband, connections. These broadband
connections allow our customers to enjoy content and services that they could
not access with traditional slower speed Internet connections. We currently
develop, market and deliver interactive online services and content under the
Telocity brand. We intend to enhance these services and content in the future
through our recent strategic partnership with NBC Internet, Inc., or NBCi.

      We generate revenue primarily by selling monthly subscriptions that may
include activation and other one-time fees. Revenues from these services for the
year ended December 31, 1999 were $187,000. For a single monthly fee, a customer
receives our current basic service package, which consists of always connected
Internet access, e-mail accounts, storage space and hosting for Web pages and 60
minutes of remote access to the Internet each month when the customer is away
from home. As our business develops and we begin to offer value-added services
and content for additional recurring fees, we expect to become less dependent on
revenues from our basic service and we expect our operating margins to increase.
During 2000, we will begin offering the following additional services and
content:

      - Electronic commerce, entertainment and media services we are currently
        developing in partnership with NBCi, such as interactive shopping,
        online gaming and streaming audio and video;

      - Communication services we are currently developing such as virtual
        private networks that will enable customers to telecommute to their
        workplace securely from home, enhanced voice messaging services that
        will allow our customers to access services over the phone, as well as
        chat facilities that will allow our customers to interact with each
        other; and

      - Utility services we are currently developing such as home networking of
        multiple computers and electronic devices throughout a customer's home,
        data security systems that protect a customer's computer from
        unauthorized access through the Internet and backup services that allow
        customers to save data from a home computer to a secure site outside the
        home.

      We have developed a service deployment system, our platform, which
delivers broadband online services directly to our customers' homes. Our
platform consists of a managed network, our residential gateway, user interface
software, customer care and support services and automated billing and
provisioning systems. Our managed network includes communications lines and
facilities, which we lease through network agreements, as well as our network
operations center and operational support system, which we own and operate.
Through our network operations center and operational support system, we are
able to monitor our services throughout the network to ensure a high level of
performance. We designed our platform so that we can offer a growing number of
services that we can remotely configure from our network operations center to
address each customer's preferences. We believe our platform allows for the
rapid addition of customers while minimizing our associated costs and overhead.

      From a customer's perspective, the first component of our service
deployment platform is our proprietary residential gateway. The gateway is a
unique hardware device that combines a digital subscriber line modem, home
networking router, multiple connection ports and network monitoring software.
Our customers can conveniently install the gateway themselves simply by plugging
it into their personal computers and telephone jacks, which allows them to
connect directly to our network and the Internet. This simple, self-installable
plug-and-play solution allows us to connect large numbers of

                                        1
<PAGE>   7

residential consumers to our network. Once connected to our network, our
customers do not need to dial-up and wait to establish a connection each time
they want to gain access to the Internet or any of the other services we offer;
instead, their connections are always active -- and at speeds up to 50 times
faster than traditional dial-up Internet access.

      We have designed our service deployment platform to be flexible and
expandable. Currently, consumers may receive broadband connections to their
household through a number of local access technologies, commonly referred to as
last-mile technologies, including digital subscriber line technology, or DSL,
cable access, wireless access, and satellite access. Each of these local access
broadband technologies delivers connections much faster than traditional dial-up
Internet connections. Although we currently deliver our services to our
customers using DSL technology, we have the capability to configure our gateway
easily to support all major residential broadband access technologies. We will
choose the most reliable, flexible and cost-effective broadband access
technology available in each local market as we expand our services nationwide.

      In July 1999, we began offering services commercially in Chicago. As of
February 29, 2000, we were also offering services in more than 50 metropolitan
statistical areas in the Southeast, Northeast, upper Midwest and Mid-Atlantic
states, including Miami, Atlanta, Detroit, Philadelphia and New York City. We
currently have over 6,500 customers of which over 3,100 are receiving our
services and over 3,400 have placed orders for our services. By the end of 2000,
we expect that we will offer services in approximately 150 of the nation's
metropolitan statistical areas covering 63% of U.S. households, of which we
believe approximately 30% are DSL-capable. We also believe that in 2001 50% and
in 2002 75% of all U.S. households will be DSL-capable. Households are
DSL-capable when they meet distance and other technological requirements
necessary to deliver DSL service.

      In December 1999, we formed a strategic relationship with NBCi and its
subsidiaries, XOOM.com and Snap.com. Our agreements provide for the joint
development and design of services and content under the brand name of each
company such as entertainment, electronic commerce, gaming, search applications
and other features designed for use exclusively by broadband users. Our
customers will be able to utilize these online services through a Web portal
that we are developing jointly with NBCi. In addition, we have each agreed to
share a portion of the revenues generated from services, advertising and
electronic commerce activities offered through the portal, including the
services we currently offer. For a further discussion of our strategic
relationship with NBCi please refer to "Related Party Transactions -- Strategic
Relationship with NBCi and Affiliates."

      In February 2000, we entered into a two year master broadband services
agreement with GE and its affiliates. Under the services agreement, we will
provide our residential services to GE and its affiliates' telecommuters and
other employees at discounted rates, as well as non-employee users introduced to
us by GE. In addition, under this agreement GE will help market and promote our
services. We will work with GE to achieve milestones of 8,000 active customers
after the first year of the agreement and 20,000 at the end of the second year.
We have issued GE warrants for the contingent purchase of up to 200,000 shares
of our common stock at an exercise price of $12.00 per share based upon
achievement of these customer-based milestones during the term of the agreement.
For a further description of our relationship with GE, please refer to "Related
Party Transactions -- Master Broadband Services Agreement with GE."

      Our senior management team has extensive experience in consumer,
telecommunications and technology businesses. Our President and Chief Executive
Officer, Patti Hart, was previously the President and Chief Operating Officer of
Sprint Corporation's Long Distance Division. Peter Olson, our Executive Vice
President and Chief Technical Officer, co-founded and was Chief Technical
Officer of Octel Communications. Edward Hayes, our Executive Vice President and
Chief Financial Officer, was previously the Chief Financial Officer of Lucent
Technologies, Inc.'s Global Service Provider Business. Jim Morrissey, our
Executive Vice President and Chief Marketing Officer, was an Executive Creative
Director and Executive Vice President for Grey Advertising.

      As of January 31, 2000, investments totaling approximately $149 million in
cash and promotional services were made in our capital stock. Our investors
include NBCi; NBC; GE Capital Equity
                                        2
<PAGE>   8

Investments; ValueVision International; August Capital; Bessemer Venture
Partners; Mohr, Davidow Ventures; RRE Investors, LLC; Bessemer Holdings, L.P.;
Comdisco, Inc.; Quantum Industrial Partners LDC; and Soros Fund Management LLC.
As of January 31, 2000, we had an accumulated deficit of approximately $77.5
million.

                               MARKET OPPORTUNITY

      We believe that a substantial business opportunity exists as a result of
the following factors:

      - large, growing and underserved market;

      - large and unmet demand for residential high-speed Internet connections;

      - growing demand for broadband enabled services and content;

      - emergence of DSL and other broadband local access technologies; and

      - regulatory change that is contributing to the increase in cost-effective
        local access broadband access.

                             THE TELOCITY SOLUTION

      We believe our services address many of the residential market's unmet
data communication needs. Our solution offers:

      - broadband enabled services and content;

      - simple plug-and-play deployment;

      - flexible, always connected broadband Internet access;

      - scalable nationwide network with enhanced content delivery; and

      - service flexibility and ease-of-use.

                               BUSINESS STRATEGY

      Our goal is to exploit our advantage both as one of the first companies to
provide residential broadband services and in our proprietary technology in
order to become a provider of choice for broadband enabled services and content
both to and throughout the homes. We intend to implement the following
strategies to achieve our goal:

      - capture our early market entrant and proprietary technology advantages;

      - deliver quality broadband services both to and throughout the home;

      - extend and develop strategic partnerships;

      - expand our direct marketing and branding efforts; and

      - deliver high quality customer service and support.

      Our principal executive offices are located at 10355 North De Anza
Boulevard, Cupertino, California 95014, and our telephone number is (408)
863-6600. We maintain Web sites at www.telocity.com and www.telocity.net.
Information contained in our Web sites does not constitute a part of this
prospectus.

                                        3
<PAGE>   9

                                  THE OFFERING

<TABLE>
<CAPTION>

<S>                                            <C>
Common stock offered by Telocity:............  11,000,000 shares
Shares outstanding after the offering........  83,800,129 shares
Use of proceeds..............................  Based on an estimated offering price of
                                               $11.00, we estimate that our net proceeds
                                               from this offering without exercise of the
                                               over-allotment options will be approximately
                                               $111.2 million. We intend to use these
                                               proceeds for general corporate purposes,
                                               including:
                                               - funding working capital needs,
                                               - expanding our network, operations, and
                                               sales and marketing efforts,
                                               - repaying current and future commitments
                                               under financial leases, and
                                               - repaying outstanding notes.
Risk factors.................................  See "Risk Factors" and other information
                                               included in this prospectus for a discussion
                                               of factors you should carefully consider
                                               before deciding to invest in shares of the
                                               common stock.
Proposed Nasdaq National Market symbol.......  TLCT
</TABLE>

      The number of shares that will be outstanding after the offering is based
on 72,800,129 shares outstanding as of February 29, 2000 and excludes:

      - 1,017,652 shares of common stock issuable upon exercise of options
        outstanding at February 29, 2000 under our 2000 Stock Plan, with a
        weighted average exercise price of $5.08 per share;

      - 10,546,670 shares of common stock reserved for issuance under our 2000
        Stock Plan as of February 29, 2000;

      - 2,900,000 shares of common stock reserved for issuance under our 2000
        Employee Stock Purchase Plan and our 2000 Outside Directors Stock Plan
        immediately following the offering; and

      - 4,586,941 shares of common stock issuable through the exercise of common
        stock warrants and convertible preferred stock warrants outstanding on
        February 29, 2000 at a weighted average exercise price of $3.17 per
        share.

This number assumes that the underwriters' over-allotment options are not
exercised. If the over-allotment options are exercised in full, we will issue
and sell an additional 1,650,000 shares.

                           INFORMATION IN PROSPECTUS

      You should be aware that, except where otherwise stated, numbers in this
prospectus are based upon the capitalization of our company as of February 29,
2000. Unless specifically stated, the information in this prospectus:

      - reflects 22,136,250 shares of common stock outstanding on February 29,
        2000 and the automatic conversion of all outstanding shares of our
        Series A, B and C convertible redeemable preferred stock as of February
        29, 2000 into 50,663,879 shares of common stock upon the closing of this
        offering;

      - assumes the reincorporation of our company in Delaware prior to the
        closing of this offering; and

      - does not include any rights to purchase stock issued by us or
        repurchases of stock executed by us after February 29, 2000.

      All references to "we," "us," "our" or "Telocity" in this prospectus mean
Telocity, Inc.

                                        4
<PAGE>   10

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

<TABLE>
<CAPTION>
                                                           FOR THE
                                                         PERIOD FROM
                                                       AUGUST 18, 1997          YEAR ENDED     YEAR ENDED
                                                  (DATE OF INCORPORATION) TO   DECEMBER 31,   DECEMBER 31,
                                                      DECEMBER 31, 1997            1998           1999
                                                  --------------------------   ------------   ------------
<S>                                               <C>                          <C>            <C>
STATEMENT OF OPERATIONS DATA:
  Revenues......................................          $       --            $       --    $       187
  Loss from operations..........................                (678)               (7,438)       (42,125)
  Net loss attributable to common
     stockholders...............................                (678)               (7,590)       (60,169)
  Basic and diluted net loss per share..........          $    (0.56)           $    (1.39)   $     (7.32)
  Shares used in computing basic and diluted net
     loss per share.............................           1,219,538             5,471,617      8,219,183
  Pro forma basic and diluted net loss per share
     (unaudited)................................                                              $     (1.79)
  Shares used in computing pro forma basic and
     diluted net loss per share (unaudited).....                                               33,610,291
</TABLE>

<TABLE>
<CAPTION>
                                                                   AS OF DECEMBER 31, 1999
                                                            --------------------------------------
                                                                                        PRO FORMA
                                                                         PRO FORMA     AS ADJUSTED
                                                             ACTUAL     (UNAUDITED)    (UNAUDITED)
                                                            --------    -----------    -----------
<S>                                                         <C>         <C>            <C>
BALANCE SHEET DATA:
  Cash and cash equivalents...............................  $ 66,978      $ 66,978      $178,208
  Working capital.........................................    53,729        53,729       164,959
  Total assets............................................   140,071       140,071       251,301
  Long-term obligations, less current portion.............    12,058        12,058        12,058
  Mandatorily redeemable convertible preferred stock......   156,020            --            --
  Total stockholders' equity (deficit)....................   (48,282)      107,738       218,968
</TABLE>

      For an explanation of the determination of the number of shares used in
computing per share data refer to Note 2 of Notes to Consolidated Financial
Statements. The pro forma basis gives effect to the conversion of all
outstanding mandatorily redeemable convertible preferred stock which will be
converted automatically into common stock upon the closing of this offering. The
pro forma as adjusted amounts above give effect to the sale of the 11,000,000
shares of common stock offered hereby at an assumed public offering price of
$11.00 per share, less underwriting discounts and commissions and estimated
offering expenses. Further information can also be found in "Use of Proceeds"
and "Capitalization."

                                        5
<PAGE>   11

                                  RISK FACTORS

      Investing in our common stock involves a substantial risk. You should
consider carefully the risks and uncertainties described below before deciding
to buy our common stock. If any of the following risks or uncertainties occurs,
our business could be adversely affected. In this event, the trading price of
our common stock could decline, and you could lose all or part of your
investment.

             RISKS RELATED TO OUR OPERATIONS AND FINANCIAL RESULTS

WE HAVE AN UNPROVEN BUSINESS MODEL AND A LIMITED OPERATING HISTORY IN A NEW AND
RAPIDLY EVOLVING INDUSTRY, AND WE MAY NOT BE ABLE TO IMPLEMENT OUR BUSINESS
PLAN.

      Our business model is still in development and our limited historical
financial and operating data are not a good indication of how our business is
doing or how it is evolving. You must consider our business and prospects in
light of the risks and difficulties typically encountered by companies in new
and rapidly evolving industries such as ours. We may not adequately address
these risks, and if we do not, we may not be able to implement our business plan
as we intend. In addition, you should not expect future growth in operations,
revenue, employees or other benchmarks to be comparable to our recent
developments in those areas.

      We were incorporated in August 1997 and first began offering residential
broadband services commercially in Chicago in July 1999. We have been offering
our services on a wider basis since November 1999, when we started our rollout
in the Southeast. As a result of the expansion of our services and the
accompanying buildout of our network, we grew from 36 employees at December 31,
1998 to 256 employees at February 29, 2000. Of our entire current executive
management team of twelve, only four members were with us at December 31, 1998.

WE HAVE INCURRED NET LOSSES SINCE OUR INCEPTION AND EXPECT FUTURE LOSSES.
ACCORDINGLY, WE MAY NOT BE ABLE TO ACHIEVE PROFITABILITY, AND EVEN IF WE DO
BECOME PROFITABLE, WE MAY NOT BE ABLE TO SUSTAIN PROFITABILITY. IF WE CONTINUE
TO INCUR LOSSES, THE VALUE OF OUR STOCK COULD DECLINE, AND WE MAY NOT BE ABLE TO
RAISE SUFFICIENT CAPITAL TO FINANCE OUR BUSINESS IN THE FUTURE.

      We have incurred net losses in every quarter and annual period since our
incorporation in August 1997 and expect to continue to operate at a loss for the
foreseeable future, primarily as a result of the expansion of our network and
operations. If these losses continue, they could cause the value of our stock to
decline and they may impair our ability to raise capital. Although we intend to
increase our expenditures and operating expenses rapidly and substantially as we
expand our network and operations, we do not expect our revenues to increase as
rapidly and as substantially. We cannot forecast with any degree of accuracy
when, or if, we will become profitable. This is true because of the following:

      - we had negative cash flow from operating activities of $5.4 million in
        1998 and $29.5 million in 1999;

      - we had an annual interest and amortization expense relating to the
        expansion of our network and operations of approximately $3.2 million in
        1999 and expect this expense to increase significantly in the future;

      - we had an annual charge to earnings relating to employee stock-based
        compensation and non-employee option and warrant grants of approximately
        $3.6 million in 1999 and expect this expense to increase significantly
        in the future; and

      - as of January 31, 2000, we had an accumulated deficit of approximately
        $77.5 million.

                                        6
<PAGE>   12

OUR FAILURE TO MANAGE OUR GROWTH COULD HARM OUR ABILITY TO RETAIN AND GROW OUR
CUSTOMER BASE AND EXPAND OUR SERVICE OFFERINGS.

      We may not be able to install management information and control systems
in an efficient and timely manner, and our current or planned personnel,
systems, procedures and controls may not be adequate to support our future
operations. Failure to manage our future growth effectively could harm our
ability to retain and grow our customer base and expand our service offerings
which would materially and adversely affect our business, prospects, operating
results and financial condition. Our expansion to date has strained our
management, financial controls, operations systems, personnel and other
resources. From time to time, we have had difficulty effectively deploying our
network operations and expanding our network on extremely short deadlines while
providing adequate customer service and efficient provisioning of new customers.
For example, we experienced a 30 day delay in delivery time of network
connections in the Miami region. While this delay did not cause us to lose
existing customers, it did result in lost revenue for that 30 day period.
Although this delay did not materially harm our business, future delays may be
more severe and adversely affect our financial performance.

      Any future rapid expansion will likely increase these strains. If our
marketing strategy is successful, we may experience difficulties responding to
customer demand for services and technical support in a timely manner and in
accordance with customer expectations. Furthermore, we may make mistakes in
operating our business. We may make inaccurate sales forecasts, overtax our most
talented and capable personnel, inadequately test our network deployments or
devote insufficient resources for new markets, material planning and financial
reporting.

OUR ABILITY TO SUSTAIN OR GROW OUR BUSINESS, ESPECIALLY THE DEVELOPMENT OF OUR
CONTENT OFFERINGS, MAY BE HARMED IF WE ARE UNABLE TO MAINTAIN OUR STRATEGIC
RELATIONSHIP WITH NBCI AND ITS AFFILIATES.

      Our business, especially the development of our content offerings, is
substantially dependent upon our strategic partnership with NBCi and its
affiliates, which provides for the joint development and design of services and
content branded by both companies, such as entertainment, electronic commerce,
gaming, search applications and other features designed for broadband users. If
NBCi terminates its agreements or fails to perform its obligations under its
agreements, we may not be able to sustain or grow our business.

      - NBCi may terminate its operating agreement with us if one of a number of
        named NBC or NBCi competitors acquires more than 33% of us.

      - NBCi may terminate the promotional exclusivity provisions of the
        operating agreement if certain performance milestones are not met,
        including our failure to raise sufficient capital to launch our service
        in at least 16 markets by the end of 2000 and 26 markets by the end of
        2001, or if Ms. Hart leaves Telocity by December 2002.

      - NBCi or NBC may terminate their advertising agreements with us in the
        event of a change in control, an uncured material breach of the
        agreements or bankruptcy related events of our company.

      For a further discussion of our strategic relationship with NBCi, please
refer to "Business -- Strategic Partnership with NBCi and Affiliates" and
"Related Transactions -- Strategic Relationship with NBCi and Affiliates."

      If our relationships with NBCi or its affiliates are terminated, we will
need to seek out and develop other strategic relationships. We may not be able
to form other strategic relationships in the future, and even if we do, the
strategic agreements we enter into may not be successful. Also, the amount and
timing of resources that our strategic partners devote to our business is not
within our control. Our strategic partners may not perform their obligations as
expected. We cannot be certain that any revenue will be derived from these
strategic relationships.

                                        7
<PAGE>   13

IF WE FAIL TO MAKE SIGNIFICANT SALES OF OUR VALUE-ADDED SERVICES AND CONTENT TO
OUR CUSTOMERS, OUR OPERATING MARGINS MAY SUFFER.

      We have based our business model upon our customers purchasing not only
our basic services package but also our value-added services and content. These
value-added services and content, such as interactive shopping, online gaming,
streaming audio and video, virtual private networks, and various utility
services, will be available to our customers during 2000. The value-added
services and content will allow us to generate greater financial margins for
each customer. If our customers only pay for our basic service package, our
operating margins will suffer.

BECAUSE OUR CUSTOMER ACQUISITION COSTS ARE HIGH, IF WE FAIL TO RETAIN CUSTOMERS
LONG ENOUGH TO PAY BACK OUR UP FRONT INVESTMENT, WE MAY NOT ACHIEVE
PROFITABILITY.

      Our customer acquisition costs comprise a significant portion of our
operating costs, including advertising, order fulfillment, installation,
customer care and the cost of our residential gateway. Because of our
significant up-front investment in each customer, if our customers fail to renew
their subscriptions with us or otherwise terminate their relationships with us
before we recover our up front costs, we may fail to generate a profit. In
addition, if we fail to reduce our customer acquisition costs, including by
increasing the efficiency of our customer care organization and reducing the
costs associated with the development and production of our gateways, our
operating results will suffer.

IF WE CANNOT CONTROL THE COSTS OF GOODS AND SERVICES WE RECEIVE FROM OUR
SUPPLIERS, WE MAY INCUR LOSSES OR PASS ALONG HIGHER COSTS TO OUR CUSTOMERS.

      We expand significant capital on our residential gateway, on the
installation charges for our customers who cannot self install their residential
gateway on their existing telephone lines and on the order fulfillment fees that
we pay to our DSL access providers. If we fail to reduce the overall
manufacturing and components costs, installation fees and order fulfillment
expenses charged to us by our suppliers, we may be forced either to accept
greater operating losses over a longer period of time than currently estimated
or pass along greater up front activation and other installation fees to our
customers, which would harm our ability to compete in our market.

OUR MANAGEMENT TEAM IS NEW, AND IF THEY ARE UNABLE TO WORK TOGETHER EFFECTIVELY,
OUR BUSINESS COULD BE SERIOUSLY HARMED.

      Our productivity and the quality of our services and content may be
adversely affected if our team does not learn to work together quickly and
effectively. We employed only four members of our current management team at the
beginning of 1999. In particular, Patti Hart, our President and CEO, joined us
in June 1999, Jim Morrissey, our Executive Vice President and Chief Marketing
Officer, joined us in September 1999, Scott Martin, our Executive Vice President
and Chief Administrative Officer, joined us in December 1999 and Edward Hayes,
our Executive Vice President of Finance and Chief Financial Officer, joined us
in January 2000. These individuals have not previously worked together as a
management team and have had only limited experience managing a rapidly growing
company.

OUR GROWTH DEPENDS ON OUR ABILITY TO HIRE AND RETAIN HIGHLY QUALIFIED EMPLOYEES
AND SENIOR EXECUTIVES.

      The loss of the services of any of our senior management team, all but one
of whom are at-will employees, or the failure to attract and retain additional
key employees could harm the continued deployment of our services and content,
the marketing of our services and the development of new services, our brand and
our strategy. Our future growth and ability to sustain this growth depend upon
the continued service of our executive officers and other key engineering,
sales, operations, marketing and support personnel. Competition for qualified
personnel in our industry and in the San Francisco Bay Area, as well as the
other geographic markets in which we recruit, is extremely intense and
characterized by rapidly increasing salaries and equity positions, which may
increase our operating expenses or hinder our ability to recruit qualified
candidates. Furthermore, we must compete with companies in earlier stages of

                                        8
<PAGE>   14

their development, that can offer substantially greater equity positions to
current and potential employees. For these reasons, we may be unable to retain
or recruit qualified candidates, much less the most highly qualified.

WE MAY EXPERIENCE DIFFICULTIES IN THE INTRODUCTION OF OUR NEXT-GENERATION
GATEWAY AND IN OUR DEVELOPMENT OF NEW OR ENHANCED TECHNOLOGIES THAT COULD DELAY
THE LAUNCH OF NEW SERVICES THEREBY INCREASING EXPENSES AND DECREASING REVENUE.

      The introduction of our next-generation gateway during 2000 will require
us to manage a transition from older equipment and technology, minimize
disruption in customer ordering patterns and ensure that adequate supplies of
new equipment can be delivered to meet anticipated customer demand. Despite
testing, our next-generation residential gateway may contain undetected or
unresolved errors when it is first released. These errors could result in:

      - delays in or loss of market acceptance and sales;

      - diversion of development resources;

      - injury to our reputation; and

      - increased service, warranty and other operating expenses.

      In general, the development of new or enhanced equipment, systems,
services and content, such as electronic commerce, communications, and utility
services, is a complex and uncertain process requiring the accurate anticipation
of technological and market trends, as well as precise technological execution.
We may experience in the future design, development, implementation or other
difficulties that could delay or prevent our introduction of new or enhanced
services or content. These delays could cause our expense to increase and our
revenues to decline.

OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY FROM PERIOD TO
PERIOD WHICH MAY CAUSE OUR STOCK PRICE TO BE EXTREMELY VOLATILE. WE MAY ALSO
FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS,
CAUSING OUR STOCK PRICE TO DECLINE.

      Our operating results are likely to fluctuate significantly in the future
on a quarterly and an annual basis due to a number of factors, many of which are
outside our control. If we experience such fluctuation, we may fail to meet or
exceed the expectations of securities analysts or investors, causing our stock
price to decline or be extremely volatile.

      In addition, most of our operating costs are fixed and based on our
revenue expectations. Therefore, if we have lower revenues than we were
expecting, we may be unable to reduce our expenses in the same period in which
the operating costs were incurred, resulting in lower quarterly operating
results for that period. For example, during 1999 we hired approximately 150
employees, moved into significantly larger facilities and greatly increased our
operating expenses in anticipation of an increase in revenue; however, we do not
know whether our business will grow rapidly enough to absorb these costs.

IF SALES FORECASTED FOR A PARTICULAR PERIOD ARE NOT REALIZED IN THAT PERIOD DUE
TO THE LENGTHY DEVELOPMENT AND TESTING CYCLES OF OUR TECHNOLOGIES AND SERVICES,
OUR OPERATING RESULTS FOR THAT PERIOD WOULD BE ADVERSELY AFFECTED.

      We cannot forecast with any degree of accuracy our revenues in future
periods or how quickly customers will select our services, if at all. In view of
these factors, we may not be able to achieve or sustain profitability which
could cause our stock price to decline. Our ability to achieve profitable
operations on a continuing basis will depend on a number of factors, many of
which are beyond our control.

                                        9
<PAGE>   15

WE MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL IN THE FUTURE TO SUPPORT OUR
GROWTH, AND EVEN IF WE ARE ABLE TO RAISE ADDITIONAL CAPITAL, IT MAY BE ON
UNACCEPTABLE TERMS, MAY DILUTE YOUR OWNERSHIP OR MAY RESTRICT OUR FLEXIBILITY IN
RUNNING OUR BUSINESS.

      We intend to seek substantial additional financing in the future to fund
the growth of our operations, including funding the significant capital
expenditures and working capital requirements necessary for us to complete our
nationwide rollout. This rollout calls for us to expand our services across the
United States, beginning with major markets, and provide services in our
targeted markets. In order to accomplish this nationwide rollout, we must expand
our network into geographic areas throughout the country, beginning with major
markets, establish relationships with local access providers in those areas and
launch targeted marketing campaigns in those regions. If we are unable to raise
additional capital or are able to raise capital only on unfavorable terms, we
may not be able to complete our network's coverage across the country, develop
or enhance our gateway and services, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements, any or all of
which could hurt our ability to support our growth. We expect that our existing
capital resources coupled with the proceeds of this initial public offering will
be sufficient to meet our cash requirements through September 2001. However, we
have a limited operating history on which to base these estimates. As a result,
these estimates may not be accurate.

      If additional capital is raised through the issuance of equity securities
or by incurring convertible debt, the percent ownership of our existing
stockholders will be reduced and those stockholders may experience dilution in
net book value per share. Any debt financing, if available, may involve
covenants limiting or restricting our operations or future opportunities or
pledging our assets as security for borrowings.

             RISKS RELATED TO OUR INDUSTRY, TECHNOLOGY AND NETWORK

OUR SERVICES ARE NEW AND CUSTOMERS MAY NOT ACCEPT THESE SERVICES. IF OUR
SERVICES DO NOT GAIN BROAD MARKET ACCEPTANCE, WE WILL NOT BE ABLE TO INCREASE
OUR REVENUES AND BUILD OUR BUSINESS AS ANTICIPATED.

      Residential broadband Internet access and the related services we support
through our platform is a new and emerging business, and we cannot guarantee
that our services will attract widespread demand or market acceptance. If this
market fails to develop or develops more slowly than anticipated, we will not be
able to increase our revenues and build our business as anticipated.

THE SCALABILITY, RELIABILITY AND SPEED OF OUR NETWORK REMAIN LARGELY UNPROVEN
AND MAY NOT SATISFY CUSTOMER DEMAND.

      We may not be able to scale our network and operational support system to
meet our projected customer numbers while achieving and maintaining superior
performance. This risk will continue to exist as long as we expand our services
geographically to increasing numbers of customers. Our failure to achieve or
maintain high-speed digital transmissions would significantly reduce customer
demand for our services, resulting in decreased revenues and the inability to
build our business as planned. To date, we have deployed our network in more
than 50 metropolitan statistical areas in the Southeast, Northeast, upper
Midwest and Mid-Atlantic states. Most of this deployment has taken place in the
last few months. By the end of 2000, we expect that we will offer services in
approximately 150 of the nation's metropolitan statistical areas covering 63% of
U.S. households, of which we believe approximately 30% are DSL-capable. We also
believe that in 2001 50% and in 2002 75% of all U.S. households will be
DSL-capable. The ability of our network and operational support system to
connect and manage a substantial number of online customers at high speeds on a
national scale is still unknown.

                                       10
<PAGE>   16

FACTORS OUTSIDE OF OUR CONTROL MAY ADVERSELY AFFECT OUR TRANSMISSION SPEED.
LOWER SPEEDS MAY RESULT IN CUSTOMER DISSATISFACTION AND ULTIMATELY A LOSS OF
CUSTOMERS.

      Peak digital data transmission speeds currently offered across our
networks when utilizing DSL are 1.5 megabits per second. However, the actual
data transmission speeds over our networks can be significantly slower. These
slower speeds may result in customer dissatisfaction and ultimately in the loss
of customers and revenues. The speeds over our networks depend on a variety of
factors, many of which are out of our control, including:

      - the distance an end-user is located from a central office;

      - the configuration of the telecommunications line being used;

      - the quality of the telephone lines provisioned by traditional telephone
        companies;

      - the inside wiring of our customers' homes; and

      - the limitations of our customers' computers.

WE FACE INTENSE COMPETITION FROM, AMONG OTHERS, PROVIDERS OF ONLINE SERVICES,
INTERNET SERVICE PROVIDERS, CABLE MODEM SERVICE PROVIDERS AND TELECOMMUNICATIONS
SERVICE PROVIDERS WHICH COULD LIMIT THE NUMBER OF CUSTOMERS WHO CHOOSE AND PAY
US FOR OUR SERVICES.

      We experience strong competition in all of our target service areas,
including from providers of online services, Internet service providers, cable
modem service providers, interactive television providers, Internet portal or
content sites, telecommunications service providers, wireless and satellite
service providers, and consumer electronics and appliance manufacturers. We
expect this competition to intensify and we may be unable to generate a
significant number of new customers or retain existing customers. Many of these
competitors have longer operating histories, greater name recognition, better
strategic relationships and significantly greater financial, technical or
marketing resources than we do. As a result, these competitors:

      - may be able to develop and adopt new or emerging technologies and
        respond to changes in customer requirements or devote greater resources
        to the development, promotion and sale of their products and services;

      - may form new alliances to rapidly acquire significant market share; and

      - may be able to undertake more extensive marketing campaigns, adopt more
        aggressive pricing policies and devote substantially more resources to
        developing high-speed broadband services.

      For example, telecommunications service providers, including traditional
telephone companies and competitive carriers, have an established brand name and
reputation for high quality in their service areas, possess sufficient capital
to deploy DSL equipment rapidly, have their own telephone lines and can bundle
digital data services with their existing analog voice services to achieve
economies of scale in serving customers. Cable modem service providers such as
Excite@Home, and AOL through its merger with Time Warner, may have the ability
to leverage their existing positions in their service markets to exclude
competition. For a further discussion of the competition we face, please refer
to "Business -- Competition."

OUR FAILURE TO ENHANCE OUR EXISTING GATEWAY, DEVELOP OUR NEW GATEWAYS OR TO
DEVELOP AND INTRODUCE NEW SERVICES AND CONTENT THAT MEET CHANGING CUSTOMER
REQUIREMENTS AND EMERGING INDUSTRY STANDARDS WOULD LIMIT OUR ABILITY TO ATTRACT
AND RETAIN CUSTOMERS.

      The market for high-speed broadband access is characterized by rapidly
changing customer demands and short life cycles for services and content. If
enhancements to our existing services, such as broadband Internet access, e-mail
and storage for web pages, or development of new services, including electronic
commerce, communications and utility services, take longer than planned, the
delay would adversely affect our ability to sell our services and our results of
operations and financial condition would
                                       11
<PAGE>   17

suffer. In addition, because technical innovations and enhancements are
inherently complex and require long development cycles, we will have to incur
most research and development expenses before the technical feasibility or
commercial viability of enhanced or new services can be ascertained. Our
revenues from future or enhanced services may not be sufficient to recover our
associated development costs.

WE DEPEND ON SINGLE AND LIMITED SOURCE SUPPLIERS FOR KEY COMPONENTS OF OUR
GATEWAY WHICH MAKES US SUSCEPTIBLE TO SUPPLY SHORTAGES OR PRICE FLUCTUATIONS
THAT COULD ADVERSELY AFFECT OUR OPERATING RESULTS.

      We rely on Wellex Corporation to produce our proprietary residential
gateway device and we will not have another supplier for at least three months.
In the event of any significant delay, disruption, capacity constraint or
quality control problem in its manufacturing operations, gateway shipments to
our customers could be delayed, which would negatively affect our net revenues,
competitive position and reputation. Should Wellex cease to be our contract
supplier for any reason, we would then need to qualify a new gateway supplier
and we may be unable to find a gateway supplier that meets our needs or that can
source components as cost-effectively as Wellex. Qualifying a new gateway
supplier and commencing volume production is expensive and time consuming.
Transferring production operations can significantly disrupt gateway supply. If
we are required or choose to change gateway suppliers, we may lose sales and may
experience increased production or component costs, and our customer
relationships may suffer.

      If any of our sole-source manufacturers delays or halts production of any
of the components or equipment that we use in our residential gateway we would
be unable to manufacture and ship our gateway, and, as a result, our revenues
and operating results would decline and our customer relationships may suffer.
Furthermore, we expect to incorporate additional sole-source components into our
next-generation gateways planned for release during 2000, thereby increasing our
sole-source supplier risks. We currently depend on single source suppliers for a
number of key components, such as chipsets, processors and unique tooled
plastics. For example, there is only one supplier available for our processor
and our chip set is a specific model which we have designed and is built by a
single manufacturer. Should either of these suppliers become unavailable, we
will be required to undertake a redesign of our gateways such as the layout of
the board or the pin connections.

      There are a number of other risks associated with our dependence on a
single third party supplier, including the following:

      - reduced control over delivery schedules and quality assurance;

      - manufacturing yields and costs;

      - the potential lack of adequate capacity during periods of excess demand;

      - limited warranties on products supplied to us;

      - increases in prices; and

      - the potential misappropriation of our intellectual property.

IF WE FAIL TO PREDICT ACCURATELY OUR SUPPLY REQUIREMENTS, WE COULD INCUR
ADDITIONAL COSTS OR EXPERIENCE DELAYS WHICH COULD RESULT IN A SIGNIFICANT
DECREASE IN OUR REVENUES AND GROSS MARGINS.

      We provide Wellex with rolling forecasts of our gateway requirements based
on anticipated orders. Wellex uses these forecasts to purchase components for
our gateway. Our component requirement forecasts may not be accurate. If we
overestimate our component requirements, Wellex may have excess inventory, which
would increase our costs. Also, because lead times for materials and components
that we require vary significantly and depend on a variety of factors, if we
underestimate our requirements, Wellex may have inadequate inventory, which
could interrupt their manufacturing of our gateways and result in delays in
system shipments. Any of these events could harm our business and results of
operations.

                                       12
<PAGE>   18

AT PRESENT, WE CANNOT PROVIDE OUR SERVICES UNLESS DSL ACCESS PROVIDERS SUPPLY US
WITH DSL CONNECTIONS AND COOPERATE WITH US FOR THE TIMELY PROVISION OF DSL
CONNECTIONS FOR OUR CUSTOMERS.

      We must obtain DSL connections from traditional telephone companies and
new competitive carriers and have their continuing cooperation for the timely
provision of DSL connections for our customers in order for us to provide our
services. DSL operates over local telephone lines, which are under the control
of traditional telephone companies and new competitive carriers and requires a
special connection from our network to the telephone lines. We rely on them to
provide us with these DSL connections, and if we were unable to use these
connections, we would not be able to provide our services. In addition, we
depend on traditional telephone companies and new competitive carriers to test
and maintain the quality of the DSL connections that we use. An inability to
obtain adequate and timely access to DSL connections on acceptable terms and
conditions from traditional telephone companies and competitive carriers and to
gain their cooperation in the timely provision of DSL connections for our
customers could harm our business, as could their failure to properly maintain
the DSL connection we use.

WE WILL COMPETE WITH OUR DSL ACCESS PROVIDERS IN PROVIDING BROADBAND INTERNET
ACCESS, WHICH MAY CAUSE DELAYS OR INCREASE EXPENSES.

      Because in some instances our DSL access providers will also provide
broadband Internet access and other services, we will compete with them.
Although our DSL access providers are required to provide DSL connections to us
on a non-discriminatory basis under the Telecommunications Act of 1996, they may
nevertheless be reluctant to cooperate with us. Compelling these DSL access
providers to meet the regulatory requirements may be expensive and time
consuming and could result in delays and increased expenses associated with
providing our services and content on a wider scale, which in turn could harm
our business.

OUR SERVICES MAY NOT BE DELIVERED EFFECTIVELY, OR AT ALL, BECAUSE OF DISTANCE
SENSITIVITY OF DSL TECHNOLOGY, THE PHYSICAL LIMITATIONS OF OUR CUSTOMERS'
TELEPHONE LINES, OR BECAUSE THE TELEPHONE LINES WE RELY UPON MAY BE UNAVAILABLE
OR IN POOR CONDITION.

      Because DSL technology is distance sensitive and operates over local
telephone lines, we will not be able to provide services to customers whose
homes are outside a maximum distance.

      Our ability to provide services to potential customers using DSL
connections through the telephone network over which DSL must operate depends on
the length of our customers' local telephone lines. It also depends on the
quality, physical condition, availability and maintenance of those telephone
lines, all of which are within the control of traditional telephone companies.
DSL technology is distance sensitive and, in many cases, the homes of our
potential customers may be located outside the maximum distance from the
telephone company central switching office for the proper function of the DSL
technologies we currently use. Our existing customers are all within this
maximum distance, as we cannot provide our services to customers beyond this
maximum distance. Currently, 70% of U.S. homes are not DSL-capable, meaning they
do not meet distance or other technological requirements necessary to deliver
DSL service. Many traditional telephone companies are rapidly deploying
additional equipment in central offices and we work with our DSL access
providers to identify new locations in which we would like to offer our
services. Nevertheless, our DSL access providers may fail to expand their
equipment. If the homes of a significant number of customers that desire our
service continue to be located beyond this maximum distance, it could materially
inhibit our ability to deploy our broadband services to those homes, which would
harm our business. Although we work with our DSL access providers to identify in
advance of accepting orders those customers who are close enough to a central
office, we sometimes find that the information given to us is inaccurate. If we
cannot reduce the numbers of these false positive customer identifications, we
will incur significant expenses that will harm our operating results.

                                       13
<PAGE>   19

      If the telephone lines of our customers are in poor condition, we may not
be able to provide our services to those customers.

      The current condition of local telephone lines may be inadequate to permit
us to provide our services to all of our customers utilizing current DSL
technologies. The copper telephone lines that we rely upon to provide service to
our customers' homes may not be of sufficient quality or they may not be
adequately maintained by the traditional telephone company for proper DSL
functionality, which could significantly inhibit our ability to deploy our
broadband services to those homes, which would harm our business.

      Our ability to provide services to customers whose homes are connected to
telephone networks that do not use copper lines may be limited because DSL-based
services might not be available to those customers.

      Some telephone companies use technologies other than copper lines to
provide telephone services between the traditional telephone company central
switching office and the customer's residence and DSL-based services might not
be available to those customers. If a significant number of the homes of
customers that desire our service are connected to the telephone network with
non-copper local access connection, it could materially inhibit our ability to
deploy our broadband services to those homes and would harm our business.

ALWAYS CONNECTED INTERNET SERVICES, SUCH AS OURS, MAY BE SUBJECT TO ADDITIONAL
SECURITY RISKS WHICH COULD CAUSE US TO LOSE EXISTING CUSTOMERS, DETER POTENTIAL
CUSTOMERS AND HARM OUR REPUTATION.

      Since our services allow customers to be connected to the Internet at all
times, unauthorized users may have a greater ability to access information
stored in our customers' computer systems. Always connected Internet services
may give unauthorized users, or hackers, more and longer opportunities to break
into a customer's computer or access, misappropriate, destroy or otherwise alter
data through the Internet. We are currently developing data security systems
that protect a customer's computer from unauthorized access through the
Internet, but we cannot ensure that the security risks will be eliminated.

A SYSTEM FAILURE OR BREACH OF NETWORK SECURITY COULD CAUSE DELAYS OR
INTERRUPTIONS OF SERVICE TO OUR CUSTOMERS WHICH COULD HURT OUR BRAND IMAGE, LEAD
TO A LOSS OF CUSTOMERS AND RESULT IN A SIGNIFICANT DECREASE OF REVENUES.

      Although we have not experienced any system failures or breaches of
network security that materially affected us, if we experience one or more of
the problems described below in the future, our financial performance and
results of operations could be materially affected at that time.

      Our operations depend on our ability to avoid damages from fires,
earthquakes, floods, power losses, excessive sustained or peak user demand,
telecommunications failures, network software flaws, transmission cable cuts and
similar events. The occurrence of a natural disaster or other unanticipated
problem at our network operations center, our managed high capacity fiber
network or any metropolitan hubs or collocation facilities could cause
interruptions in the services provided by us and these interruptions could
result in the loss of customers and the attendant reduction of revenue.
Additionally, if a traditional telephone company, new competitive carrier or
other service provider fails to provide the communications capacity we require,
as a result of a natural disaster, operational disruption or any other reason,
then this failure could interrupt our services.

      Our network may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Providers of Internet services, including us, have in
the past experienced, and may in the future experience, interruptions in service
as a result of accidental or intentional actions of Internet users, current and
former employees and others. For example, we have experienced unintentional down
time as a result of upgrading our services and equipment. Other technologies
similar to our own have been subject to service outages. The consequence of
these interruptions in service may be that some customers terminate our service
and that some potential customers to reject our service. Moreover, we may be
required to give

                                       14
<PAGE>   20

discounts to customers who experience service interruption. Interruptions of
service may therefore result in decreased revenues and customer base.
Unauthorized access could also potentially jeopardize the security of
confidential information stored in the computer systems of our customers, which
might cause us to be liable to our customers, and also might deter potential
customers. Eliminating computer viruses and alleviating other security problems,
including problems created by our or a vendor's employee, may require
interruptions, delays or cessation of service to our customers.

                      OTHER RISKS RELATED TO OUR BUSINESS

A GENERAL ECONOMIC DOWNTURN COULD RESULT IN CUSTOMERS CANCELING OUR SERVICES AND
CONTENT OR THE DECISION BY PROSPECTIVE CUSTOMERS NOT TO USE OUR SERVICE.

      To the extent the general economic health of the United States or of
certain regions in which many of our customers reside declines from recent
historically high levels, or to the extent customers fear a decline is imminent,
these customers may reduce expenditures for services such as ours. Any decline
or concern about an imminent decline could also delay decisions among certain of
our customers to renew our services or to add new services or could delay
decisions by prospective customers to make initial evaluations of our services.
Since many consumers may perceive our services as unnecessary or as a "luxury"
item, we could be particularly hard hit by an economic downturn. Any reduction
of or delays in expenditures would harm our business.

OUR BUSINESS IS SIGNIFICANTLY AFFECTED BY THE LEGISLATIVE, REGULATORY AND
JUDICIAL RULES APPLICABLE TO TELECOMMUNICATIONS SERVICES AND THE BROADBAND
MARKETPLACE.

      Changes in existing laws and regulations applicable to our business may
not be favorable to us and may require us to direct time and money toward legal
and regulatory matters. Since 1996, telecommunications laws have been in a state
of particularly rapid change. We rely on our ability to purchase DSL access from
both traditional telephone companies and new competitive carriers, vendor
channels that may not remain open to use, or for which prices may rise, if the
regulatory status of these service providers changes in the future. In order to
protect our market options and business flexibility, we may also be required to
participate in legislative, regulatory and judicial proceedings, or proceedings
may be instituted against us by competitors seeking to harm our business, all of
which could entail the diversion of substantial funds and management attention.

      We may be prevented from or delayed in providing asymmetric digital
subscriber line, or ADSL, access to our customers if the FCC does not grant our
application for a waiver from compliance with the requirements for connecting
ADSL equipment to the public telephone network.

      On February 28, 2000, the FCC set forth guidelines streamlining the
process for obtaining waivers from compliance with the requirements for
connecting ADSL equipment to the public telephone network. We have submitted our
application for a waiver and expect to receive this waiver in the near future.
However, we cannot assure you that we will obtain this waiver, and if we do not
obtain this waiver, we may be prevented from or delayed in providing ADSL access
to our customers.

      Our services might be determined to be subject to price regulation at the
federal or state level and may affect our pricing structure and decrease our
profits.

      If the current laws and regulations governing our business change, we may
become subject to price regulation at the state or federal level. Such price
regulation could adversely impact our profitability.

      Federal, state, local or foreign governments may impose taxation on the
Internet and the services we offer, which would decrease our revenues and harm
our operating results.

      Future legislation affecting our business could subject us to taxation due
to the services we provide. This taxation may decrease our revenues and harm our
operating results.

                                       15
<PAGE>   21

      The competition among our DSL providers could be adversely affected by
changes in existing laws and regulations and that could increase our costs and
lower our profit margin.

      If existing laws and regulations change, the competition among our DSL
providers that we rely on to maintain efficiently priced and high quality DSL
connections, could be adversely affected. In addition, if the Telecommunications
Act of 1996 and recent decisions by the Federal Communications Commission
implementing portions of the Act that have opened the existing telephone network
to competition are stayed, reversed or modified by appellate courts, if the laws
and decisions requiring traditional telephone companies and competitive carriers
to sell DSL connections to companies like our are changed or vacated, or if new
regulatory mandates degrade competition, our costs will increase and we will
have lower profit margins.

AS A PROVIDER OF CONTENT-BASED INTERNET SERVICES, WE MAY FACE POTENTIAL LEGAL
EXPOSURE BECAUSE OF THE NATURE OF SOME OF THE CONTENT WE PROVIDE.

      We may be subject to claims for defamation, negligence, copyright or
trademark infringement, including contributory infringement, or other claims
relating to the information contained on our Internet sites, whether written by
us or third parties which could cause us to make unexpected legal expenditures
and significantly increase our costs. These types of claims have been brought
against providers of online services in the past and can be costly to defend
regardless of the merit of the lawsuit. Although recent federal legislation
protects online services from some claims when the material is written by third
parties, this protection is limited. Furthermore, the law in this area remains
in flux and varies from state to state, and from country to country.

      We may also face potential legal exposure associated with the provision of
content-based Internet services in such areas as obscenity and indecency,
advertising, gaming, privacy, child Internet privacy, the use of personal
information gathered online and trademark or copyright infringement. Many of the
rules in these areas are ambiguous and rapidly evolving, making definitive
assessment of legal risks difficult. For a discussion of the regulatory
environment in which we operate, please see the section entitled "Business --
Government Regulation."

OUR INTELLECTUAL PROPERTY PROTECTION MAY BE INADEQUATE TO PROTECT OUR
PROPRIETARY RIGHTS WHICH COULD ALLOW COMPETITORS TO DEVELOP TECHNOLOGY SUPERIOR
TO OUR OWN AND ATTRACT CUSTOMERS AWAY FROM US.

      The steps we have taken to protect our technology or other intellectual
property may be inadequate. As a result, competitors may develop technology
superior to our own and attract customers away from us. We may be unable to use
intellectual property protection to prevent other companies from competing with
us. While we have developed some proprietary techniques and expertise, we
believe that many of our activities and systems are not protectable as
proprietary intellectual property. Accordingly, we may be unable to prevent
third parties from developing techniques that are similar or superior to our
technology. Likewise, we may be unable to prevent third parties from designing
around our copyrights, patents and trade secrets, or from utilizing our
intellectual property without detection or without adequate remedy.

      We claim common law trademark protection for a limited number of marks and
have applied for federal registrations for only two. Our trademark strategy has
shifted in the past and may again in the future as we choose to abandon old
marks and utilize new ones, which might have the effect of diluting our branding
strategy or confusing our customers. Because we have had no systematic process
in the past for the identification of patentable inventions, we may have
overlooked important technologies that could have been, but have not yet been
patented by us. Some of these inventions may no longer be patentable. We have
not undertaken any patent searches to determine whether key patents exist that
might prevent us from manufacturing, selling or using our gateway devices or
other services. We therefore might infringe patents of third parties. We also
rely on unpatented trade secrets and know-how to maintain our competitive
positions, which we seek to protect, in part, by confidentiality agreements,
strategic alliances and contracts with employees, consultants and others. The
steps we have taken may not have been adequate to protect these trade secrets.

                                       16
<PAGE>   22

WE ARE VULNERABLE TO CLAIMS THAT ANY ELEMENT OF OUR SERVICE DEPLOYMENT PLATFORM
INFRINGES THIRD PARTY INTELLECTUAL PROPERTY RIGHTS, AND ANY RESULTING CLAIMS
AGAINST US COULD BE COSTLY TO DEFEND OR SUBJECT US TO SIGNIFICANT DAMAGES.

      Infringement claims could materially harm our business. From time to time,
we may receive notice of claims of infringement of third parties' proprietary
rights. The fields of telecommunications and Internet communications are filled
with patents, both pending and issued. We may unknowingly infringe such a
patent. We may be exposed to future litigation based on claims that our platform
infringes the intellectual property rights of others, especially patent rights.
Someone, including a competitor, might file a suit with little merit, in order
to harm us commercially, to force us to re-allocate resources to defending such
a claim, or extract a large settlement. In addition, our employees might utilize
proprietary and trade secret information from their former employers without our
knowledge, even though we prohibit these practices.

      Any litigation, with or without merit, could be time consuming to defend,
result in high litigation costs, divert our management's attention and resources
or cause us to delay deployment of related technology. A jury or judge may
decide against us even if we had not in fact infringed. If we lose or are forced
to settle, we could be required to remove or replace allegedly infringing
technology, to develop non-infringing technology or to enter into royalty or
licensing arrangements. These royalty or licensing arrangements, if required,
may not be available on terms acceptable to us, or at all.

ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION.

      We may make investments in complementary companies, products or
technologies. Should we do so, our failure to successfully manage future
acquisitions could seriously harm our operating results. In the event of any
future purchases, we will face additional financial and operational risks,
including:

      - difficulty in assimilating the operations, technology and personnel of
        acquired companies;

      - disruption in our business because of the allocation of resources to
        consummate these transactions and the diversion of management's
        attention from our core business;

      - difficulty in retaining key technical and managerial personnel from
        acquired companies;

      - dilution of our stockholders, if we issue equity to fund these
        transactions;

      - assumption of operating losses, increased expenses and liabilities; and

      - our relationships with existing employees, customers and business
        partners may be weakened or terminated as a result of these
        transactions.

OUR HEADQUARTERS AND SUPPLIERS ARE ALL LOCATED IN NORTHERN CALIFORNIA WHERE
NATURAL DISASTERS MAY OCCUR WHICH COULD DAMAGE OUR FACILITIES AND RENDER US
UNABLE TO PROVIDE SERVICES TO OUR CUSTOMERS.

      Currently, our corporate headquarters, network operations center and the
only manufacturer of our residential gateway are all located in Northern
California. Northern California historically has been vulnerable to natural
disasters and other risks, such as earthquakes, fires and floods, which at times
have disrupted the local economy and posed physical risks to our property and
the property of the manufacturer of our residential gateway. In the event of
such disaster, our business would suffer. We presently do not have redundant,
multiple site capacity in the event of a natural disaster.

                         RISKS RELATED TO THIS OFFERING

WE MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT INCREASE OUR
PROFITS OR MARKET VALUE.

      We have broad discretion in the use of the net proceeds of this offering
and could spend the net proceeds in ways that do not yield a favorable return or
to which stockholders object. Until we need to use the proceeds of this
offering, we may place them in investments that do not produce income or that
lose value. You can read more about our planned use of the net proceeds from
this offering in the section entitled "Use of Proceeds."

                                       17
<PAGE>   23

INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER US AFTER THIS OFFERING
AND COULD DELAY OR PREVENT OUR ENGAGING IN A CHANGE OF CONTROL TRANSACTION AND
AN OPPORTUNITY FOR YOU TO SELL YOUR STOCK AT A PREMIUM TO ITS THEN CURRENT
MARKET VALUE.

      After this offering, we anticipate that our officers, directors and five
percent or greater stockholders will beneficially own or control, directly or
indirectly, approximately 60,747,952 shares of common stock, which in the
aggregate will represent approximately 72.2% of the outstanding shares of common
stock. These stockholders, if acting together, will have the ability to control
all matters submitted to our stockholders for approval, including the election
and removal of directors and the approval of any business combinations. You can
read more about the ownership of common stock by our executive officers,
directors and principal stockholders in the section entitled "Principal
Stockholders."

OUR RELATIONSHIP WITH NBCI COULD DELAY OR PREVENT A CHANGE IN OUR ENGAGING IN A
CHANGE OF CONTROL TRANSACTION AND YOUR ABILITY TO REALIZE A PREMIUM ON YOUR
STOCK.

      Provisions in our agreements with NBCi and its affiliates could delay or
prevent a change in our control, including a change that shareholders might find
beneficial. As part of our relationship with NBCi, we entered into an investor
rights agreement that provides, among other things, that if we receive an offer
to buy 20% or more of our outstanding shares or we receive a third party offer
to buy all or substantially all of our assets, so long as either NBC or NBCi own
at least 2,500,000 shares of our common stock, we will negotiate exclusively
with either NBC or NBCi with respect to the offer for a period of 30 days and
may not sell our company or our assets to a third party on terms that are more
favorable to us than those last offered by NBC and NBCi. Furthermore, NBCi may
terminate its operating agreement with us if one of a number of named NBCi
competitors acquires more than 33% of us, and NBCi or NBC may terminate their
advertising agreements with us in the event of a change in control of our
company. These provisions may deter someone from acquiring or merging with us,
including a transaction that results in stockholders receiving a premium over
the market price for the shares of common stock held by them.

PROVISIONS OF OUR CHARTER DOCUMENTS MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD
PREVENT A CHANGE IN OUR CONTROL AND YOUR ABILITY TO REALIZE A PREMIUM ON OUR
STOCK.

      Provisions of our amended and restated certificate of incorporation and
bylaws in effect after completion of this offering, and Delaware law, could make
it more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders. These provisions include:

      - authorizing the issuance of blank check preferred stock;

      - providing for a classified Board of Directors with staggered, three-year
        terms; and

      - requiring a super-majority stockholder vote to effect certain
        amendments.

      In addition, provisions of the Delaware General Corporation Law may deter
someone from acquiring or merging with us, including a transaction that results
in stockholders receiving a premium over the market price for the shares of
common stock held by them. Section 203 of the Delaware General Corporation Law
also imposes certain restrictions on mergers and other business combinations
between us and any holder of more than 15% and less than 85% of our common
stock. For more details about these provisions, please see the section entitled
"Description of Capital Stock -- Delaware Anti-Takeover Law and Certain Charter
and Bylaw Provisions."

YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
SHARES.

      The initial public offering price is substantially higher than the book
value per share of our outstanding common stock immediately after the offering.
Dilution in net tangible book value per share represents the difference between
the amount per share paid by purchasers of shares of common stock in this
offering and the net tangible book value per share of common stock immediately
after the completion of this offering. Accordingly, based on an assumed offering
price of $11.00 per share, if you purchase common stock in the offering, you
will incur immediate dilution of approximately $8.33 in the net tangible

                                       18
<PAGE>   24

book value per share of our common stock from the price you pay for our common
stock. For additional information on this calculation, see "Dilution."

OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT
OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.

      The initial public offering price for our common stock will be determined
through negotiations between the underwriters and us. This initial public
offering price may vary from the market price of our common stock after the
offering. If you purchase shares of common stock, you may not be able to resell
those shares at or above the initial public offering price.

      If an active public market for our common stock does not develop, the
liquidity of your investment may be limited, and our stock price may fluctuate
or decline below our initial public offering price. The market price of our
common stock may fluctuate significantly in response to factors, some of which
are beyond our control, include the following:

      - actual or anticipated fluctuations in our operating results;

      - changes in market valuations of other Internet and technology companies;

      - announcements by us or our competitors of significant technical
        innovations, contracts, acquisitions, strategic partnerships, joint
        ventures or capital commitments;

      - additions or departures of key personnel;

      - future sales of common stock;

      - any deviations in net revenues or in losses from levels expected by
        securities analysts; and

      - trading volume fluctuations, which are particularly common among highly
        volatile securities of Internet-related companies.

      You should read the "Underwriting" section for a more complete discussion
of the factors which were considered in determining the initial public offering
price of our common stock.

THE PRICE OF OUR COMMON STOCK MAY DECLINE DUE TO SHARES ELIGIBLE FOR FUTURE
SALE.

      Sales of substantial amounts of common stock in the public market
following this offering, or the appearance that a large number of shares is or
will be available for sale, could adversely affect the market price for our
common stock. The number of shares of common stock available for sale in the
public market is limited by lock-up agreements that were entered into in
connection with our initial public offering. Under such lock-up agreements, the
holders of over 95% of our outstanding shares of common stock agreed not to sell
or otherwise dispose of any of their shares until 180 days after the date of
this offering. However, Merrill Lynch may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
such lock-up agreements. In addition to the adverse effect a price decline could
have on holders of common stock, that decline would likely impede our ability to
raise capital through the issuance of additional shares of common stock or other
equity securities. Please see "Description of Capital Stock -- Registration
Rights" and "Shares Eligible for Future Sale."

WE HAVE NOT PAID AND DO NOT INTEND TO PAY DIVIDENDS.

      We have not paid any dividends, and we do not intend to pay cash dividends
in the foreseeable future.

IF WE ARE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY, WE WOULD BECOME SUBJECT
TO SUBSTANTIAL REGULATION WHICH WOULD INTERFERE WITH OUR ABILITY TO CONDUCT OUR
BUSINESS ACCORDING TO OUR BUSINESS PLAN.

      If the Investment Company Act required us to register as an investment
company, we would become subject to substantial regulation with respect to our
capital structure, management, operations, transactions with affiliated persons
and other matters. Application of the provisions of the Investment Company Act
to us would harm our business. As a result of this offering and our previous
financings, we

                                       19
<PAGE>   25

have substantial cash, cash equivalents and short-term investments. We plan to
continue investing the excess proceeds of these financings in short-term
instruments consistent with prudent cash management and not primarily for the
purpose of achieving investment returns.

      Investment in securities primarily for the purpose of achieving investment
returns could result in our being treated as an investment company under the
Investment Company Act of 1940. The Investment Company Act requires the
registration of companies that are primarily in the business of investing,
reinvesting or trading securities or that fail to meet certain statistical tests
regarding their composition of assets and sources of income even though they
consider themselves not to be primarily engaged in investing, reinvesting or
trading securities.

      We believe that we are primarily engaged in a business other than
investing in or trading securities and, therefore, are not an investment company
within the meaning of the Investment Company Act.

                                       20
<PAGE>   26

                           OTHER RELEVANT INFORMATION

      We use market data and industry forecasts throughout this prospectus,
which we have obtained from internal surveys, market research, publicly
available information and industry publications. Industry publications generally
state that the information they provide has been obtained from sources believed
to be reliable, but that the accuracy and completeness of such information is
not guaranteed. Similarly, we believe that the surveys and market research we or
others have performed are reliable, but we have not independently verified this
information. Neither we nor any of the underwriters represents that this
information is accurate.

      We claim common law trademark protection for TELOCITY, TELOCITY TIME,
TELOCITY HIGH-VELOCITY INTERNET, YOU HAVEN'T SEEN THE NET UNTIL YOU'VE SEEN IT
IN TELOCITY TIME and our logo. We have applied for federal trademark
registrations for TELOCITY and our logo.

                                USE OF PROCEEDS

      We estimate that we will receive net proceeds from the sale of 11,000,000
shares in this offering of approximately $111.2 million (approximately $128.1
million if the underwriters' over-allotment option is exercised in full), at an
assumed initial public offering price of $11.00 per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses.

      We intend to use the net proceeds from this offering as follows:

      - $83.8 million for working capital and general corporate purposes,
        including expanding our sales and marketing efforts and expanding our
        network;

      - $22.0 million for the payment of current and future commitments under
        finance leases; and

      - $5.4 million for the repayment of notes outstanding at February 29,
        2000.

      We will retain broad discretion in the allocation of the net proceeds of
this offering. In addition, we may use a portion of the net proceeds to acquire
complementary products, technologies or businesses. Pending use of the net
proceeds of this offering, we intend to invest the net proceeds in interest
bearing, investment-grade securities to the extent permitted by the Investment
Company Act.

                                DIVIDEND POLICY

      We have never declared or paid any dividends on our common stock. We
currently intend to retain any future earnings, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Future dividends, if any, will depend on, among other
things, our results of operations, capital requirements, restrictions in
then-existing loan agreements and on such other factors as our Board of
Directors may, in its discretion, consider relevant.

                                       21
<PAGE>   27

                                 CAPITALIZATION

      The following table sets forth our capitalization at December 31, 1999:

      - on an actual basis;

      - on a pro forma basis to give effect to the conversion of all shares of
        our preferred stock into 50,663,879 shares of common stock and the
        conversion of our preferred stock warrants to common stock warrants
        automatically upon completion of this offering; and

      - on a pro forma as adjusted basis to give effect to the sale of
        11,000,000 shares of common stock at an assumed initial offering price
        of $11.00 per share, less estimated underwriting discounts and
        commissions and estimated offering expenses.

      You should read this table in conjunction with our Consolidated Financial
Statements and the accompanying Notes, Selected Financial Information, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this prospectus.

<TABLE>
<CAPTION>
                                                                        DECEMBER 31, 1999
                                                              --------------------------------------
                                                                                          PRO FORMA
                                                                           PRO FORMA     AS ADJUSTED
                                                               ACTUAL     (UNAUDITED)    (UNAUDITED)
                                                              --------    -----------    -----------
                                                                          (IN THOUSANDS
                                                                 EXCEPT SHARE AND PER SHARE DATA)
<S>                                                           <C>         <C>            <C>
Long-term obligations, net of current portion...............  $ 12,058      $ 12,058      $ 12,058
                                                              --------      --------      --------
Mandatorily redeemable preferred stock, no par value:
  55,253,124 authorized shares; 50,663,879 shares issued and
  outstanding, (actual); no shares issued and outstanding
  (pro forma and pro forma as adjusted).....................   147,350            --            --
Series A, B and C Preferred Stock warrants..................     8,670            --            --
                                                              --------      --------      --------
                                                               156,020            --            --
                                                              --------      --------      --------
Stockholders' equity (deficit):
  Preferred stock, $0.001 par value: none authorized (actual
     and pro forma) 10,000,000 authorized (pro forma as
     adjusted); no shares outstanding (actual, pro forma and
     pro forma as adjusted).................................        --            --            --
  Common stock, $0.001 par value: 90,000,000 shares
     authorized (actual and pro forma); 250,000,000 shares
     authorized (pro forma as adjusted); 20,282,270 issued
     and outstanding (actual); 70,946,149 issued and
     outstanding (pro forma); 81,946,149 issued and
     outstanding (pro forma as adjusted)....................        17            68            79
Additional paid-in capital..................................    39,478       195,447       306,666
Receivable from stockholders................................    (5,457)       (5,457)       (5,457)
Unearned stock-based compensation...........................   (13,883)      (13,883)      (13,883)
Accumulated deficit.........................................   (68,437)      (68,437)      (68,437)
                                                              --------      --------      --------
     Total stockholders' equity (deficit)...................   (48,282)      107,738       218,968
                                                              --------      --------      --------
     Total capitalization...................................  $119,796      $119,796      $231,026
                                                              ========      ========      ========
</TABLE>

      The data in the table above excludes:

      - 1,873,442 shares of common stock issuable upon exercise of options
        outstanding at December 31, 1999, with a weighted average exercise price
        of $2.26 per share;

      - 1,494,860 shares of common stock reserved for issuance under our 1998
        Stock Plan as of December 31, 1999;

      - 2,900,000 additional shares of common stock reserved for issuance under
        our 2000 Employee Stock Purchase Plan and our 2000 Outside Directors
        Stock Plan immediately following the offering; and

      - 4,375,274 shares of common stock issuable through the exercise of common
        stock warrants and convertible preferred stock warrants outstanding on
        December 31, 1999 at a weighted average price of $2.76 per share.

      For additional information regarding these shares, see
"Management -- Stock Plans," "Related Party Transactions," "Description of
Capital Stock" and Notes 2, 7 and 8 of Notes to Consolidated Financial
Statements.

                                       22
<PAGE>   28

                                    DILUTION

      If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
common stock after this offering. Our pro forma net tangible book value as of
December 31, 1999 was $107.4 million or $1.51 per share of common stock. The pro
forma net tangible book value per share represents the amount of our pro forma
total tangible assets less pro forma total liabilities, divided by the pro forma
number of shares of common stock outstanding. Dilution in pro forma net tangible
book value per share represents the difference between the amount per share paid
by purchasers of shares 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 11,000,000 shares of
common stock in this offering at an assumed public offering price of $11.00 per
share, less underwriting discounts and commissions and estimated offering
expenses, our pro forma as adjusted net tangible book value as of December 31,
1999 would have been $218.6 or approximately $2.67 per share. This represents an
immediate increase in net tangible book value of $1.16 per share to existing
stockholders and an immediate dilution in net tangible book value of $8.33 per
share to new investors, or approximately 76% of the initial public offering
price of $11.00 per share. The following table illustrates this per share
dilution:

<TABLE>
<S>                                                           <C>      <C>
Assumed initial public offering price per share.............           $11.00
  Pro forma net tangible book value per share at December
     31, 1999...............................................  $1.51
  Increase per share attributable to this offering..........  $1.16
                                                              -----
Pro forma as adjusted net tangible book value per share
  after this offering.......................................           $ 2.67
                                                                       ------
Dilution per share to new investors.........................           $ 8.33
                                                                       ======
</TABLE>

      The following table shows, on a pro forma basis as of December 31, 1999
and after giving effect to this offering, the differences between the existing
holders of common stock and the new investors with respect to the number of
shares of common stock purchased from us, the total consideration paid to us and
the average price per share paid (based on an assumed initial public offering
price of $11.00 per share, before deducting the estimated underwriting discounts
and commissions and estimated offering expenses) (in thousands, except share and
per share data):

<TABLE>
<CAPTION>
                                                 SHARES PURCHASED     TOTAL CONSIDERATION
                                               --------------------   --------------------   AVERAGE PRICE
                                                 NUMBER     PERCENT    AMOUNT     PERCENT      PER SHARE
                                               ----------   -------   ---------   --------   -------------
<S>                                            <C>          <C>       <C>         <C>        <C>
Existing stockholders........................  70,946,149       87%   $148,575        55%       $ 2.09
New investors................................  11,000,000       13%    121,000        45%        11.00
                                               ----------    -----    --------     -----
     Total...................................  81,946,149      100%   $269,575       100%
                                               ==========    =====    ========     =====
</TABLE>

      The discussion and table above are based on actual shares outstanding on
December 31, 1999, giving effect to the issuance of shares after December 31,
1999 and our receipt of the net proceeds. The foregoing discussion assumes no
exercise of any stock options and warrants outstanding as of December 31, 1999.
As of December 31, 1999, there were options and warrants outstanding to purchase
6,248,716 shares of common and convertible preferred stock at a weighted average
exercise price of $2.61 per share. To the extent any of these options are
exercised, there will be further dilution to investors. See "Capitalization,"
"Management -- Stock Plans," "Description of Capital Stock" and Notes 7 and 8 of
Notes to Consolidated Financial Statements.

                                       23
<PAGE>   29

                  SELECTED CONSOLIDATED FINANCIAL INFORMATION

      The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The statement of operations
data for the period from August 18, 1997, the date of incorporation, to December
31, 1997 and the years ended December 31, 1998 and 1999 and the balance sheet
data at December 31, 1998 and 1999 are derived from our consolidated financial
statements included elsewhere in this prospectus, that have been audited by
PricewaterhouseCoopers LLP, independent accountants. The balance sheet data at
December 31, 1997 are derived from our audited consolidated balance sheet not
included in this prospectus.

<TABLE>
<CAPTION>
                                                                   FOR THE
                                                                 PERIOD FROM
                                                               AUGUST 18, 1997            YEAR ENDED
                                                              (INCORPORATION) TO         DECEMBER 31,
                                                                 DECEMBER 31,      ------------------------
                                                                     1997             1998         1999
                                                              ------------------   ----------   -----------
                                                                     (IN THOUSANDS, EXCEPT SHARE AND
                                                                             PER SHARE DATA)
<S>                                                           <C>                  <C>          <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
  Revenues..................................................      $       --       $       --   $       187
  Operating expenses:
    Network and product costs...............................              --               --         2,080
    Sales and marketing.....................................               5              252        13,571
    General and administrative..............................             335            2,018         7,683
    Research and development................................             327            4,744        16,723
    Depreciation and amortization...........................              11              424         2,253
                                                                  ----------       ----------   -----------
        Total operating expenses............................             678            7,438        42,312
                                                                  ----------       ----------   -----------
  Loss from operations......................................            (678)          (7,438)      (42,125)
  Interest expense..........................................              --             (187)       (1,448)
  Interest income...........................................              --               35           379
  Other income/(expense), net...............................              --               --          (225)
                                                                  ----------       ----------   -----------
  Net loss..................................................            (678)          (7,590)      (43,419)
  Deemed dividend and accretion on mandatorily redeemable
    convertible preferred stock.............................              --               --       (16,750)
                                                                  ----------       ----------   -----------
  Net loss attributable to common stockholders..............      $     (678)      $   (7,590)  $   (60,169)
                                                                  ==========       ==========   ===========
  Net loss per share basic and diluted......................      $    (0.56)      $    (1.39)  $     (7.32)
                                                                  ==========       ==========   ===========
  Shares used in computing net loss per share basic and
    diluted.................................................       1,219,538        5,471,617     8,219,183
                                                                  ==========       ==========   ===========
  Pro forma net loss per share -- basic and diluted
    (unaudited).............................................                                    $     (1.79)
                                                                                                ===========
  Shares used in computing pro forma net loss per
    share -- basic and diluted (unaudited)..................                                     33,610,291
                                                                                                ===========
OTHER CONSOLIDATED FINANCIAL DATA:
Net cash flows provided by (used in):
      Operating activities..................................      $     (677)      $   (5,356)  $   (29,524)
      Investing activities..................................            (303)          (1,026)       (9,104)
      Financing activities..................................           1,001            7,763       104,204
EBITDA(1)...................................................            (667)          (6,869)      (37,002)
Capital expenditures(2).....................................             303            2,830        22,196
</TABLE>

<TABLE>
                                                                           AS OF DECEMBER 31,
                                                              ---------------------------------------------
                                                                   1997               1998         1999
                                                              ------------------   ----------   -----------
<S>                                                           <C>                  <C>          <C>
CONSOLIDATED BALANCE SHEET DATA:
  Cash and cash equivalents.................................      $       21       $    1,402   $    66,978
  Working capital (deficit).................................              31           (1,204)       53,729
  Total assets..............................................             423            4,697       140,071
  Long-term obligations, less current
    portion.................................................           1,000            3,490        12,058
  Mandatorily redeemable convertible preferred stock........              --            6,671       156,020
  Total stockholders' deficit...............................            (677)          (8,107)      (48,282)
</TABLE>

- ------------------------
(1) EBITDA is the acronym for earnings before interest, taxes, depreciation and
    amortization. EBITDA consists of the net loss excluding net interest,
    depreciation and amortization of capital assets and deferred compensation
    expense. EBITDA is presented to enhance an understanding of our operating
    results and is not intended to represent cash flow or results of operations
    in accordance with generally accepted accounting principles for the period
    indicated and may be calculated differently than EBITDA for other companies.

(2) Total of property and equipment acquired for cash and under capital lease.

      For an explanation of the determination of the weighted average common and
common equivalent shares used to compute net loss per share refer to Note 2 of
Notes to Consolidated Financial Statements.

                                       24
<PAGE>   30

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

      The following discussion and analysis should be read in conjunction with
Selected Financial Information and our consolidated financial statements and the
related notes included elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of certain factors including the risks discussed in "Risk
Factors" and elsewhere in this prospectus.

OVERVIEW

      Our goal is to become a leading nationwide provider of broadband access
services, content and home networking services to the residential market. To
achieve this goal, we intend to utilize the technology we have developed to
deliver these services and content over a variety of methods from a nationwide
network to and throughout the home over high-speed, or broadband, connections.
These broadband connections allow our customers to enjoy content and services
that they could not access with traditional slower speed Internet connections.
We currently develop, market and deliver interactive online services and content
under the Telocity brand. We intend to enhance these services and content in the
future through our recent strategic partnership with NBC Internet, Inc., or
NBCi.

      In July 1999, we began offering services commercially in Chicago. As of
February 29, 2000, we were also offering services in more than 50 metropolitan
statistical areas in the Southeast, Northeast, upper Midwest and Mid-Atlantic
states, including Miami, Atlanta, Detroit, Philadelphia and New York City. We
currently have over 6,500 customers of which over 3,100 are receiving our
services and over 3,400 have placed orders for our services. By the end of 2000,
we expect that we will offer services in approximately 150 of the nation's
metropolitan statistical areas covering 63% of U.S. households, of which we
believe 30% are DSL-capable. We also believe that in 2001 50% and in 2002 75% of
all U.S. households will be DSL-capable. Households are DSL-capable when they
meet distance and other technological requirements necessary to deliver DSL
service.

      Since our incorporation in August 1997, our primary activities have
consisted of:

      - developing our residential broadband gateway technology;

      - obtaining space and locations for our network equipment;

      - deploying and installing our network;

      - developing and integrating our operational support system and other back
        office systems;

      - negotiating and executing network agreements with traditional telephone
        companies and new competitive carriers;

      - launching service in target markets;

      - developing a marketing and branding strategy;

      - building our customer service organization;

      - negotiating agreements for broadband content;

      - hiring management and other personnel; and

      - raising capital.

      We have incurred operating losses, net losses and negative earnings before
interest, taxes, amortization of stock-based compensation, depreciation and
amortization, or EBITDA, for each month since our formation. As of December 31,
1999, we had revenues of $187,000 and an accumulated deficit of $68.4 million.
We intend to increase substantially our capital expenditures and will incur
higher operating expenses in an effort to build our customer base and our brand
rapidly, as well as expand our

                                       25
<PAGE>   31

infrastructure and network services. We expect to incur substantial operating
losses, net losses and negative EBITDA as we expand our operations.

      We incur network and product costs, sales and marketing expenses and
capital expenditures when we enter a new market. Once we have developed our
network in a market, we incur incremental expenditures as we connect new
customers. These incremental expenditures primarily include local access costs
and gateway device costs. In addition to the capital expenditures, we will be
required to fund our operating and cash flow and working capital deficits as we
build our customer base.

RESULTS OF OPERATIONS

      Revenues. Initially, we expect to derive a majority of our revenues from
broadband access services. We bill our customers a monthly rate for our
services. In the future we expect to bill our customers for monthly recurring
charges based on the type of access speed and services and content selected by
the customer. We offer our services directly to our customers. In addition to
monthly service fees, our customers are billed for nonrecurring service
activation, gateway and installation charges. To encourage potential customers
to adopt our services, we may in some instances offer reduced monthly prices for
an initial period of time or reduced service activation, gateway, or
installation charges.

      As our business develops and we begin to offer additional value-added
services and content, we expect to become less dependent on broadband access
revenues. By providing additional services and content, we expect to enhance our
overall operating margins by adding additional revenues with minimal incremental
fixed costs. We also believe that these additional services will enable us to
build customer loyalty and minimize customer turnover.

      We seek to price our services competitively in each market. We typically
enter into a customer service agreement and offer our basic services package for
$49.95 per month with no additional per-minute usage charges and a $99
activation fee which may be waived or modified in selected circumstances. We
also charge a $199 cancellation fee to customers who cancel their subscription
before they have paid for a full year of service. The customer agreement also
provides information on commencement of the service, billing payments, pricing,
system requirements and service termination. Following the commercial release of
our jointly developed Web portal, which we currently expect to be in June 2000,
we will also earn revenue from an advertising and revenue sharing agreement with
NBCi. During the past several years, market prices for many telecommunications
services have been declining. We expect that, as a result of competition, prices
for broadband access will decline over time. However, we intend to provide
additional value-added services and content to our customers so as to maintain
and potentially increase our price levels.

      Our future financial performance and our ability to achieve positive
operating cash flow will depend on a number of factors, some of which we cannot
control. We believe that improvements in our financial performance depend
largely on our ability to:

     - deploy our network rapidly and cost-effectively;

     - provide high quality services at competitive prices;

     - offer additional value-added services and applications;

     - acquire customers in a cost-effective manner;

     - reduce the costs associated with the production of our gateway;

     - attract qualified personnel;

     - minimize customer turnover;

     - manage increased sales and marketing and general and administrative
       expenses; and

     - identify and integrate the necessary administrative and operations
       support systems to manage our growth effectively.
                                       26
<PAGE>   32

      Network and Product Costs. Our network expenses consist of nonrecurring
and monthly recurring charges for the transport elements we choose to lease
rather than own. As we expand our network and our revenue base, we expect that
these costs will increase significantly in the future. Nonrecurring network
expenses include installation fees related to transport and local loop circuits.
We expect these costs will be largely related to the activation of new
customers. Monthly recurring network expenses include transport and backbone
fees, facility rent, power and other fees charged by traditional telephone
companies and new competitive carriers and other providers. As our customer base
grows, we expect the largest element of network expenses to be carrier charges
for local access, which are approximately $35 per customer per month, depending
on the provider, location and type of local access connectivity. Product costs
will be incurred as our business develops and we begin to offer additional value
added services and content.

      Sales and marketing expenses. Our sales and marketing expenses consist
primarily of expenses related to the acquisition of customers and the
development of promotional materials, advertising and branding. We expect that
our marketing expenses will grow significantly as we enter new markets and offer
our services on a nationwide basis.

      General and administrative expenses. Our general and administrative
expenses consist primarily of costs related to personnel, customer service,
finance, administrative services, recruiting and legal services. We expect that
our general and administrative costs will grow significantly as we expand our
operations. However, we expect these expenses to decline as a percentage of our
revenue as we build our customer base and the number of customers connected to
our network increases.

      Research and development expenses. Research and development expenses
consist primarily of costs related to engineering personnel engaged in research
and development activities, and, to a lesser extent, costs of materials relating
to these activities. We expense research and development costs as we incur them.

      Depreciation and amortization expenses. Depreciation and amortization
expenses include: depreciation of network and computer equipment, depreciation
of furniture and fixtures, and the amortization of completed technology and
leasehold improvements. We expect depreciation and amortization expense to
increase significantly as more of our network becomes operational and as we
increase capital expenditures to expand our operations. Depreciation and
amortization is computed on a straight-line basis over estimated useful lives
ranging from two to seven years.

      Interest expense. Interest expense arose as a result of our capital lease
lines, notes payable and bridge loan financing.

      Stock-based compensation expenses. Stock-based compensation arose as a
result of granting stock awards to employees with purchase or exercise prices
per share subsequently determined to be below the fair values at the purchase or
grant dates. In addition, stock-based compensation arose as a result of stock
option and warrant grants to non-employees in return for services and financing
arrangements. The employee stock-based compensation is being amortized over the
applicable option vesting period (generally four years). The fair value of
non-employee options and warrant grants are amortized over the service period.
In connection with employee stock option grants during the year ended December
31, 1998 and the year ended December 31, 1999, we recorded unearned stock-based
compensation totaling $328,000 and $15.2 million, respectively. Amortization of
stock based compensation awarded to employees and non-employees was $145,000 and
$3.1 million for the periods ended December 31, 1998 and December 31, 1999,
respectively.

      Taxation. We have not generated any taxable income to date and therefore
have not paid any federal income taxes since inception. We expect to generate
significant operating loss carryforwards. Use of our net operating loss
carryforwards may be subject to limitations under Section 382 of the Internal
Revenue Code of 1986, as amended. We have recorded a full valuation allowance on
our deferred tax asset, consisting primarily of net operating loss
carryforwards, because of uncertainty regarding its recoverability.

                                       27
<PAGE>   33

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

      Revenues. During the year ended December 31, 1999, we continued the
development of our business operations, commencing commercial service in the
Chicago market in July. We recorded revenues of $187,000 during this period,
which was from service and installation charges net of discounts given to
customers. We did not offer commercial services in 1998 and, as a result, did
not record any revenues in 1998.

      Network and product costs. For the year ended December 31, 1999, we
recorded network and product costs of $2.1 million. Since we did not offer
commercial services in 1998, we did not record any network and product costs in
1998. We expect network and product costs to increase significantly in future
periods as we expand our network into additional markets and we believe that
these costs will exceed revenue for the next twelve months.

      Sales and marketing expenses.  Sales and marketing expenses increased from
$252,000 for the year ended December 31, 1998 to $13.6 million for the year
ended December 31, 1999 inclusive of stock-based compensation of $12,000 and
$490,000, respectively. This increase was primarily due to a $9.3 million
increase in advertising and promotion costs related to the launch of our service
deployment platform in July 1999 and a $2.7 million increase in employee costs.
We expect sales and marketing expenses to increase significantly as we incur
additional expenses to develop our marketing program and increase brand
awareness and add personnel.

      General and administrative expenses.  General and administrative expenses
increased from $2.0 million for the year ended December 31, 1998 to $7.7 million
for the year ended December 31, 1999 inclusive of stock-based compensation of
$112,000 and $1.8 million, respectively. This increase was primarily due an
incremental charge of $3.1 million for the addition of personnel performing
general corporate and customer service and a $2.5 million increase in rent and
associated overhead expense. We expect general and administrative expenses to
increase as we add personnel and incur additional expenses related to the
anticipated growth of our business and our operation as a public company.

      Research and development expenses.  Research and development expenses
increased from $4.7 million for the year ended December 31, 1998 to $16.7
million for the year ended December 31, 1999 inclusive of stock-based
compensation of $21,000 and $825,000, respectively. This increase was primarily
due to an incremental charge of $10.1 million for the hiring of additional
engineers and consultants involved in increased research and development
activities associated with the development of our service development platform
and associated services. We expect to continue to make substantial investments
in research and development and anticipate that these expenses will continue to
increase.

      Depreciation and amortization expenses.  Depreciation and amortization
expenses increased from $424,000 for the year ended December 31, 1998 to $2.3
million for the year ended December 31, 1999. This increase was primarily due to
additional capital expenditures arising from the build out of our managed
network.

      Interest expense.  Interest expense increased from $187,000 for the year
ended December 31, 1998 to $1.4 million for the year ended December 31, 1999
inclusive of noncash interest expenses of $12,000 and $492,000, respectively.
This increase was due to increased borrowings.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO PERIOD FROM AUGUST 18, 1997
(INCORPORATION) TO DECEMBER 31, 1997

      Revenues and network and product costs.  There were no revenues or network
and product costs recognized for the periods ended December 31, 1997 and 1998.

      Sales and marketing expenses.  Sales and marketing expenses increased from
$5,000 in the period ended December 31, 1997 to $252,000, inclusive of
stock-based compensation of $12,000, for the year ended December 31, 1998. This
increase was due to an increase in market research, personnel and associated
overhead costs of $82,000, $66,000 and $99,000, respectively.

                                       28
<PAGE>   34

      General and administrative expenses.  General and administrative expenses
increased from $335,000 in the period ended December 31, 1997 to $2.0 million,
inclusive of stock-based compensation of $112,000, for the year ended December
31, 1998. These increases were due to an increase in employees, facilities and
associated overhead expenses of $501,000, $397,000 and $785,000, respectively.

      Research and development expenses.  Research and development expenses
increased from $327,000 in the period ended December 31, 1997 to $4.7 million,
inclusive of stock-based compensation of $21,000, for the year ended December
31, 1998. This increase in research and development expenses was primarily due
to an incremental charge of $3.3 million for the hiring of additional engineers
and consultants involved in research and development activities associated with
the development of our broadband platform and associated services.

      Depreciation and amortization expenses.  Depreciation and amortization
expenses increased from $11,000 in the period ended December 31, 1997 to
$424,000 for the year ended December 31, 1998. This increase was due to
additional capital expenditures.

      Interest expense.  We had no interest expense in 1997. Interest expense
for the year ended December 31, 1998 was $187,000, inclusive of stock-based
compensation of $12,000, and arose from borrowings to finance our operations.

LIQUIDITY AND CAPITAL RESOURCES

      From incorporation through December 31, 1999, we financed our operations
primarily through private placements of equity of approximately $149 million in
cash and promotional services, the use of operating equipment leases totaling
$14.7 million and borrowings under notes payable of $11.9 million. Principal due
under notes payable at December 31, 1999 totalled $5.4 million. The notes are
payable to Comdisco, Inc. and MMC/GATX partnership #1, are collateralized by all
of our tangible assets, bear interest at a weighed average rate of 11.1% and are
repayable in installments by January 2002. We intend to use the proceeds of this
offering to pay off these notes prior to their maturity. As of December 31,
1999, we had an accumulated deficit of $68.4 million and cash and cash
equivalents of $67.0 million.

      During the year ended December 31, 1999, the year ended December 31, 1998
and for the period from August 18, 1997 (date of incorporation) to December 31,
1997 the net cash used in our operating activities was $29.5 million, $5.4
million and $677,000, respectively. This cash was used for a variety of
operating purposes, including salaries, consulting and legal expenses, network
operations and overhead expense. Our net cash used for investing activities for
the year ended December 31, 1999, the year ended December 31, 1998 and for the
period from August 18, 1997 (date of incorporation) to December 31, 1997 was
$9.1 million, $1.0 million and $303,000, respectively, and was used primarily
for purchases of property and equipment. Net cash provided by financing
activities for the year ended December 31, 1999, the year ended December 31,
1998 and for the period from August 18, 1997 (date of incorporation) to December
31, 1997 was $104.2 million, $7.8 million and $1.0 million, respectively, and
primarily came from the issuance of preferred stock and notes payable.

      At December 31, 1999 we had mandatorily redeemable preferred stock with a
liquidation value of approximately $148.6 million that is redeemable at the
option of the preferred stockholders at any time on or after December 1, 2004.
All of the outstanding preferred stock will be converted to common stock upon
the closing of this offering.

      We believe that the net proceeds from this offering, together with our
existing cash balances, will be sufficient to fund our operating losses, capital
expenditures, lease payments and working capital requirements until September
2001. We expect our operating losses and capital expenditures to increase
substantially as we expand our network. We expect that additional financing will
be required in the future.

                                       29
<PAGE>   35

We may attempt to finance our future capital needs through some combination of
commercial bank borrowings, leasing, vendor financing and the sale of additional
equity or debt securities.

      Our capital requirements will vary based upon the timing and success of
implementation of our business plan and as a result of competitive,
technological and regulatory developments, or if:

      - demand for our services or our cash flow from operations varies from
        projections;

      - our development plans or projections change or prove to be inaccurate;

      - we make any acquisitions; or

      - we accelerate deployment of our network or otherwise alter the schedule
        or targets of our business plan implementation.

      We will be required to raise additional capital to complete our network
deployment. There can be no assurance that additional capital will be available
on terms acceptable to us, or at all. While we would be able to sustain some
level of operations throughout 2000 absent additional capital, including the
proceeds from this offering, we would be required to scale back significantly
our operations and delay the expansion of our network. This would have a
material adverse effect on our business, financial condition and results of
operations.

RECENT ACCOUNTING PRONOUNCEMENTS

      In March 1998, the Accounting Standards Executive Committee, or AcSEC
issued Statement of Position, or SOP, No. 98-1, Software for Internal Use, which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. We adopted SOP 98-1 on
January 1, 1999. The adoption of the SOP did not have a material impact on our
consolidated financial statements.

      In April 1998, AcSEC issued SOP 98-5, Reporting on the Costs of Start-Up
Activities. This SOP provides guidance on the financial reporting of start-up
costs and organization costs. It requires the costs of start-up activities and
organization costs to be expensed as incurred. The SOP is effective for
financial statements for fiscal years beginning after December 15, 1998. We
adopted SOP 98-5 on January 1, 1999. We have not capitalized such costs, the
adoption of the SOP did not have an impact on our consolidated financial
statements.

      In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
133 requires that all derivatives be recognized at fair value in the statement
of financial position, and that the corresponding gains or losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. SFAS 133, as amended,
will be effective for fiscal years beginning after June 15, 2000. We do not
currently hold derivative instruments or engage in hedging activities.

      In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 or SAB 101, Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the Commission. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. We believe
that the impact of SAB 101 will not have a material effect on our financial
position or results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET INTEREST RATE SENSITIVITY

      The primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities that
we may invest in may be subject to market risk. This means that a change in
prevailing

                                       30
<PAGE>   36

interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, government and non-government debt securities. In general,
money market funds are not subject to market risk because the interest paid on
such funds fluctuates with the prevailing interest rate. As of December 31,
1999, all of our cash and cash equivalents were in money market and checking
funds.

FORWARD-LOOKING STATEMENTS

      This prospectus includes forward-looking statements. These forward-looking
statements address, among other things:

      - our platform rollout plans and strategies;

      - development and management of our business;

      - our ability to attract, retain and motivate qualified personnel;

      - success of our strategic partnerships;

      - our ability to attract and retain customers;

      - the extent of acceptance of our services;

      - the market opportunity and trends in the markets for our services;

      - our ability to upgrade our technologies;

      - prices of telecommunication services;

      - the nature of regulatory requirements that apply to us, our
        telecommunications vendors and competitors;

      - our ability to obtain any required governmental authorizations;

      - our future capital expenditures and needs;

      - our ability to obtain financing on commercially reasonable terms;

      - our ability to compete; and

      - the extent and nature of competition.

      These statements may be found in this section, in the front inside cover
of this prospectus, in the sections of this prospectus entitled "Summary," "Risk
Factors," "Use of Proceeds" and "Business" and in this prospectus generally.

      We have based these forward-looking statements on our current expectations
and projections about future events. However, our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of risks facing us, including risks stated in "Risk Factors," or faulty
assumptions on our part. For example, assumptions that could cause actual
results to vary materially from future results include, but are not limited to:

      - our ability to market our services successfully to current and new
        customers;

      - our ability to generate customer demand for our services in our target
        markets;

      - the development of our target market and market opportunities;

      - market pricing for our services and for competing services;

      - the extent of increasing competition;

                                       31
<PAGE>   37

      - our ability to acquire funds to expand and enhance our platform;

      - the ability of our equipment and service supplies to meet our needs;

      - trends in regulatory, legislative and judicial developments;

      - our ability to manage growth of our operations; and

      - our ability to access regions and enter into suitable interconnection
        agreements with traditional telephone companies.

      In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this prospectus might not occur.

                                       32
<PAGE>   38

                                    BUSINESS

BUSINESS OVERVIEW

      Our goal is to become a leading provider of broadband access services,
content and home networking services to the residential market. To achieve this
goal, we intend to utilize the technology we have developed to deliver these
services and content over a variety of methods from a nationwide network to and
throughout the home over high-speed, or broadband, connections. These broadband
connections allow our customers to enjoy content and services that they could
not access with traditional slower speed Internet connections. We currently
develop, market and deliver interactive online services and content under the
Telocity brand. We intend to enhance these services and content in the future
through our recent strategic partnership with NBC Internet, Inc., or NBCi.

      We generate revenue primarily by selling monthly subscriptions that may
include activation and other one-time fees. Revenues from these services for the
year ended December 31, 1999 were $187,000. For a single monthly fee, a customer
will receive our current basic service package, which consists of always
connected Internet access, e-mail accounts, storage space and hosting for Web
pages and 60 minutes of remote access to the Internet each month when the
customer is away from home. As our business develops and we begin to offer
value-added services and content for additional recurring fees, we expect to
become less dependent on revenues from our basic service and we expect our
operating margins to increase. During 2000, we will begin offering the following
additional services and content:

      - Electronic commerce, entertainment and media services we are currently
        developing and will offer in partnership with NBCi such as interactive
        shopping, online gaming and streaming audio and video;

      - Communication services we are currently developing such as virtual
        private networks that will enable customers to telecommute to their
        workplace securely from home, enhanced voice messaging services that
        will allow our customers to access services over the phone, as well as
        chat facilities that will allow our customers to interact with each
        other; and

      - Utility services we are currently developing such as home networking of
        multiple computers and electronic devices throughout a customer's home,
        data security systems that protect a customer's computer from
        unauthorized access through the Internet and backup services that allow
        customers to save data from a home computer to a secure site outside the
        home.

      We have developed a service deployment system, our platform, which
delivers broadband online services directly to our customers' homes. Our
platform consists of a managed network, our residential gateway, user interface
software, customer care and support services and automated billing and
provisioning systems. Our managed network includes communications lines and
facilities, which we lease through network agreements, as well as our network
operations center and operational support system, which we own and operate.
Through our network operations center and operational support system we are able
to monitor our services throughout the network to ensure a high level of
performance. We designed our platform so that we can offer a growing number of
services that we can remotely configure from our network operations center to
address each customer's preferences. We believe our platform allows for the
rapid addition of customers while minimizing our associated costs and overhead.

      From a customer's perspective, the first component of our service
deployment platform is our proprietary residential gateway. The gateway is a
unique hardware device that combines a digital subscriber line modem, home
networking router, multiple connection ports and network monitoring software.
Our customers can conveniently install the gateway themselves simply by plugging
it into their personal computers and telephone jacks which allows them to
connect directly to our network and the Internet. This simple, self-installable
plug-and-play solution allows us to connect large numbers of residential
consumers to our network. Once connected to our network, our customers do not
need to dial-up and wait to establish a connection each time they want to gain
access to the Internet or any of the other services we offer; instead, their
connections are always active -- and at speeds up to 50 times faster than
traditional dial-up Internet access.

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      We have designed our service deployment platform to be flexible and
expandable. Currently, consumers may receive broadband connections to their
household through a number of local access technologies, commonly referred to as
last-mile technologies, including digital subscriber line technology, or DSL,
cable access, wireless access, and satellite access. Each of these local access
broadband technologies delivers connections much faster than traditional dial-up
Internet connections. Although we currently deliver our services to our
customers using DSL technology, we have the capability to configure our gateway
easily to support all major residential broadband access technologies. We will
choose the most reliable, flexible and cost-effective broadband access
technology available in each local market as we expand our services nationwide.

      In July 1999, we began offering services commercially in Chicago. As of
February 29, 2000, we were also offering services in more than 50 metropolitan
statistical areas in the Southeast, Northeast, upper Midwest and Mid-Atlantic
states, including Miami, Atlanta, Detroit, Philadelphia and New York City. We
currently have over 6,500 customers of which over 3,100 are receiving our
services and over 3,400 have placed orders for our services. By the end of 2000,
we expect that we will offer services in approximately 150 of the nation's
metropolitan statistical areas covering 63% of U.S. households, of which we
believe approximately 30% are DSL-capable. We also believe that in 2001 50% and
in 2002 75% of U.S. households will be DSL capable. Households are DSL capable
when they meet distance and other technological requirements necessary to
deliver DSL service.

      In December 1999, we formed a strategic relationship with NBCi and its
subsidiaries, XOOM.com and Snap.com. Our agreements provide for the joint
development and design of services and content under the brand name of each
company such as entertainment, electronic commerce, gaming, search applications
and other features designed for use exclusively by broadband users. Our
customers will be able to utilize these online services through a Web portal
that we are developing jointly with NBCi. In addition, we have each agreed to
share a portion of the revenues generated from services, advertising and
electronic commerce activities offered through the portal, including the
services we currently offer. For a further discussion of our strategic
relationship with NBCi please refer to "Related Party Transactions -- Strategic
Relationship with NBCi and Affiliates."

      In February 2000, we entered into a two year master broadband services
agreement with GE and its affiliates. Under the services agreement, we will
provide our residential services to GE and its affiliates' telecommuters and
other employees at discounted rates, as well as non-employee users introduced to
us by GE. In addition, under this agreement GE will help market and promote our
services. We will work with GE to achieve milestones of 8,000 active customers
after the first year of the agreement and 20,000 at the end of the second year.
We have issued GE warrants for the contingent purchase of up to 200,000 shares
of our common stock at an exercise price of $12.00 per share based upon
achievement of these customer-based milestones during the term of the agreement.
For a further description of our relationship with GE, please refer to "Related
Party Transactions -- Master Broadband Services Agreement with GE."

      Our senior management team has extensive experience in consumer,
telecommunications and technology businesses. Our President and Chief Executive
Officer, Patti Hart, was previously the President and Chief Operating Officer of
Sprint Corporation's Long Distance Division. Peter Olson, our Executive Vice
President and Chief Technical Officer, co-founded and was Chief Technical
Officer of Octel Communications. Edward Hayes, our Executive Vice President and
Chief Financial Officer, was previously the Chief Financial Officer of Lucent
Technologies, Inc.'s Global Service Provider Business. Jim Morrissey, our
Executive Vice President and Chief Marketing Officer, was an Executive Creative
Director and Executive Vice President for Grey Advertising.

      As of January 31, 2000, investments totaling approximately $149 million in
cash and promotional services were made in our capital stock. Our investors
include NBCi; NBC; GE Capital Equity Investments; ValueVision International;
August Capital; Bessemer Venture Partners; Mohr, Davidow Ventures; RRE
Investors, LLC; Bessemer Holdings, L.P.; Comdisco, Inc.; Quantum Industrial
Partners

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<PAGE>   40

LDC; and Soros Fund Management LLC. As of January 31, 2000 we had an accumulated
deficit of approximately $77.5 million.

MARKET OPPORTUNITY

      We believe that a substantial business opportunity exists as a result of
the following factors:

      - large, growing and underserved market;

      - large and unmet demand for residential high-speed Internet connections;

      - growing demand for broadband enabled services and content;

      - emergence of DSL and other broadband local access technologies; and

      - regulatory change that is contributing to the increase in cost-effective
        broadband local access.

  Large, Growing and Underserved Market

      The Internet is experiencing significant growth and is emerging as a
global medium for communications, entertainment and commerce. According to IDC,
from 1999 through 2003, the annual growth of U.S. households with Internet
access is projected to be 16%, with over 65 million users by the end of 2003. To
date, most of this growing market has been served by Internet service providers,
many of which simply provide narrowband Internet access with limited features
and customer service. We believe that residential users will increasingly demand
advanced telecommunications services and content from a provider that can offer
broadband access, integrate these services for the customer and provide high
quality customer care and support.

  Large and Unmet Demand for Residential High-Speed Internet Connections

      Demand for high-speed Internet connections is fueled by the demand for
data and Internet services and content. However, unlike business users,
residential users are generally limited to relatively slow dial-up modems or
integrated services digital network, or ISDN, lines to access the Internet and
remote local area networks. For example, according to Jupiter Communications,
97.2% of consumer online subscriptions currently utilize dial-up connections.
Traditional dial-up modems create a bottleneck for the end-user because the data
transfer capacity of the fastest commercially available dial-up modem is only 56
kilobits per second, while the maximum capacity of an integrated services
digital network line is 128 kilobits per second. In addition, although
integrated services digital network technology provides improved capacity
relative to dial-up modems, the cost and complexity of integrated services
digital network connectivity is often prohibitive. As a result, most consumers
spend significant time inefficiently waiting for data transfer during the
dial-up process and once they are online. These access limitations have created
a significant opportunity to provide cost-effective, broadband value-added
communications services to home users, whom we believe increasingly demand the
type of high-speed Internet performance to which many have become accustomed in
the workplace.

  Growing Demand for Broadband Enabled Services and Content

      Much of the growth of the Internet is expected to result from increased
consumer demand for bandwidth intensive e-mail, electronic commerce and
streaming audio and video services, as well as entertainment and productivity
enhancing services. According to industry sources, it is estimated that data
traffic will exceed voice traffic by a factor of 30 by 2003. IDC predicts that
consumer purchases of goods and services over the Internet will increase from
$26 billion in 1999 to approximately $119 billion in 2003. Additionally,
according to Forrester Research, consumer devices with enhanced feature sets
including Internet access, or ePliances, are expected to reach more than 25
million households in five years. As consumers continue to expand their usage of
advanced services and content provided by the Internet, broadband access and
associated services will become increasingly important to serve their needs.

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  Emergence of DSL and Other Broadband Local Access Technologies

      DSL technology has emerged as a cost-effective means of providing
high-speed, digital communication capabilities. According to IDC, the total DSL
capable access lines in the U.S. will grow from an estimated 20.8 million in
1999 to 67.2 million in 2003. Because DSL technology uses existing telephone
lines, a broad network deployment can be implemented rapidly. In addition to
DSL, alternative broadband local access technologies such as wireless, fixed
wireless, cable modem, fiber and satellite are being deployed nationwide. These
technologies are available to bring broadband Internet content and associated
services to the home.

  Regulatory Change that is Contributing to the Increase in Cost-Effective
Broadband Local Access

      The Telecommunications Act of 1996 has fostered competition among the
suppliers of broadband local access connections, such as DSL, provided by
traditional and competitive carriers. In the past, a limited number of
traditional telephone companies controlled the telephone lines and facilities
that were available to provide broadband connections to homes. The
Telecommunications Act requires the traditional telephone companies to make
these lines and facilities available to new competitive telephone companies so
that these carriers may offer competitive services including broadband
connections to the home. Broadband companies, like us, can now lease these
broadband connections to the home, commonly known as last mile connections, from
either traditional telephone companies or one of a number of these new
competitive carriers. For a further discussion of recent regulatory changes
please refer to "-- Government Regulation."

      The Federal Communications Commission's recent decisions implementing
various portions of the Telecommunications Act, for instance its December 9,
1999 decision implementing line sharing continues to remove barriers to
competition among our suppliers. By allowing for increased competition, these
decisions should make the pricing, functionality and availability of local
access broadband connections more favorable. The FCC's policy of encouraging the
rapid availability of residential broadband and other advanced consumer
telecommunications services may also increase pressure for open competition
among the broadband technologies not yet addressed under the Telecommunications
Act, such as wireless and cable, although there can be no assurance that either
wireless or cable access will become subject to the Telecommunications Act or
similar legislation.

THE TELOCITY SOLUTION

      We believe our current services address many of the residential market's
unmet data communication needs. In addition, through our service deployment
platform and our co-development activities with our partners, including NBCi, we
plan to offer our customers an appealing combination of media, entertainment and
electronic commerce services, communication services and utility services. Our
solution offers:

  Broadband Enabled Services and Content

      We have designed our service deployment platform to provide our customers
with a growing number of broadband services and content that they could not
access with traditional slower speed Internet connections. Our current service
offering includes our basic services package consisting of high-speed always
connected Internet access, e-mail, personalized Web pages and remote Internet
access. As part of our future offerings, we intend to develop value-added
content and additional broadband enabled services on our own and in partnership
with NBCi in the following areas: media, entertainment and electronic commerce,
communications and utility. Specifically, in 2000 we intend to independently
develop and offer virtual private networks, enhanced voice messaging services,
home networking, home monitoring and automation, data security and chat
facilities. In addition, in 2000 we also intend to develop in partnership with
NBCi and offer to our customers online gaming, streaming audio and video and
interactive shopping. All of these services will only be available to our
customers through our gateway and many will only be available through our
next-generation gateway. We intend to develop, augment and refine our broadband

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enabled services and content continually to allow our customers to improve their
productivity and enhance their broadband experience at home.

  Simple Plug-and-Play Deployment

      We developed our service deployment platform to be scalable,
cost-effective and convenient. Our broadband platform allows our customers to
sign up through either our Web page or our toll-free number. Via this automated
signup, we obtain a customer profile, verify service qualification, authenticate
credit information, schedule and track the provisioning of the network elements
and arrange for the shipment of our residential gateway and associated
installation software. At the installation stage, we typically avoid additional
cost and complexity because the gateway can be easily self-installed by the
customer. Additionally, the installation software configures a customer's
personal computer automatically, providing immediate access to the Internet and
all of our services. Furthermore, because we can configure a gateway in a
customer's home through our network operations center, new services and features
can be added to conform to an individual user's preferences, typically without
requiring new equipment or an on-site visit by a technician. The combination of
these deployment features allows us to add customers rapidly with minimal human
intervention.

  Flexible, Always Connected Broadband Internet Access

      We have designed our service deployment platform to be easily configurable
to support the delivery of services and content over a variety of high-speed
local access technologies such as wireless, fixed wireless, cable modem, fiber
and satellite. In each of our markets we will utilize the most reliable,
flexible and cost-effective broadband access technology available to deliver our
services to our customers. In our current markets, we provide our services using
DSL technology over existing standard copper telephone lines to deliver
high-speed always connected local access to the home. Our gateway currently
supports three DSL technologies: asymmetric digital subscriber line, or ADSL,
symmetric digital subscriber line, or SDSL and G.Lite. In the majority of our
markets, we intend to use multiple providers of broadband local access in our
network infrastructure, as they become available.

  Scalable Nationwide Network with Enhanced Content Delivery

      We have deployed, and will continue to expand, a managed nationwide
Internet protocol-based network. Our managed network includes communications
lines and facilities, which we lease through network agreements, as well as our
network operations center and operational support system, which we own and
operate. Our network is designed to be reliable, responsive and redundant to
ensure effective deployment and to provide superior service. Through our
operational support system and network operations center, we are able to monitor
our service throughout the network to ensure a high level of support. We intend
to implement a differentiated-services protocol throughout this network which
will allow either us or our customers to prioritize the use of available
bandwidth among the services we provide. For example, a customer will be able to
prioritize the viewing of video streams over the downloading of less
time-sensitive data. Additionally, we reduce redundant data traffic on the
network and speed data delivery to our customers, by duplicating and storing
frequently accessed content locally at network hubs via satellite
communications. This system distributes content rapidly and cost-effectively
throughout our nationwide network.

  Service Flexibility and Ease-of-Use

      We designed our service deployment platform to be adaptable and responsive
to the needs of our customers. For example, the deployment, configuration and
management of each customer feature and application is fully automated, allowing
for ease of installation and use. This ease-of-use, along with our remote
configuration capabilities, enhances our ability to provide flexible service and
high quality customer care. Additionally, because the residential gateway
remains connected to our network at all times, we can directly monitor and
address service needs in a timely fashion. Finally, we have implemented
comprehensive customer care and support systems to address customers' needs that
cannot be resolved remotely.
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BUSINESS STRATEGY

      Our goal is to exploit our advantage as both one of the first companies to
provide residential broadband services and in our proprietary technology in
order to become a provider of choice for broadband enabled services and content
both to and throughout the home. We intend to implement the following strategies
to achieve our goal:

  Capture Our Early Market Entrant and Proprietary Technology Advantage

      Currently, most consumers who have Internet connections experience slow
dial-up access, non-customized narrowband content and limited customer service.
The deployment of broadband access technology and content addresses those
limitations. However, most broadband providers must invest significant time and
capital to extend or upgrade their network in order to provide this access
technology and content to consumers. We believe that we have a significant
time-to-market advantage over those broadband providers because our service
deployment platform is designed to be easily configurable to support any
currently available broadband access technology. We designed our proprietary
gateway device to be fully configurable, self-installable, interoperable with
multiple technologies and easily upgradable. In addition, because our customers
can easily install our residential gateway and because our service deployment
platform is flexible, we can add new customers rapidly on a nationwide basis.

  Deliver Quality Broadband Services Both to and throughout the Home

      We have designed our service deployment platform to deliver high-speed,
always connected Internet access along with associated broadband services and
content such as online gaming, streaming audio and video, interactive shopping,
chat facilities, virtual private networks and enhanced voice messaging services,
all of which are currently scheduled for release during 2000. In addition, we
intend to extend our services and content to devices throughout the home. For
example, we designed the next-generation residential gateway to provide home
networking capabilities by allowing a customer's personal computer and other
home appliances to connect with the gateway through wireless technology or
through the existing home phone wiring. This functionality will allow us to
provide our customers with additional services to be offered in 2000, including
home monitoring, home automation and data security features, and will allow our
customers to access services from multiple computers and other devices within
the home.

  Extend and Develop Strategic Partnerships

      We intend to utilize our strategic partnership with NBCi, as well as other
potential strategic partnerships, to accelerate the development and enhance the
breadth and availability of our content offerings and to promote marketing and
branding of our services. Our partnership with NBCi provides for, among other
things: access to multimedia broadband content, development of new online
services and applications, joint development of a Web portal branded by both
companies, promotion of brand awareness and revenue sharing. In addition, we
expect to enter into other strategic relationships both to augment our product
portfolio and to expand our distribution channels.

  Expand our Direct Marketing and Branding Efforts

      We intend to expand our targeted direct marketing and branding efforts to
attract additional customers. We expect to use a mix of print, direct mail,
radio, television and online advertising media specifically tailored for each
local market. We have designed this marketing program to increase the number of
customers we serve and to build an identifiable nationwide brand. In addition,
we intend to increase our revenue per customer by promoting premium value-added
services and by cross-promoting services.

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  Deliver High Quality Customer Service and Support

      We have established a network operations center and a customer support
system in order to provide our customers with high quality service, support and
care. From our network operations center, we are able to install or upgrade
remotely a customer's desired service and to address any performance inquiries.
Our customer support system provides technical support through an automated
interactive voice response system, a live telephone support line, direct chat
system, online instructions for our product features and e-mail. These systems
enable 24-hour-a-day, 7-day-a-week proactive monitoring and management of our
entire network as well as customer service and technical support. All of these
systems have been designed with significant flexibility and scalability. We
believe that by providing high quality customer service and support we will
enhance the overall customer experience and foster customer loyalty.

STRATEGIC PARTNERSHIP WITH NBCI AND AFFILIATES

      In December 1999, we formed a strategic relationship with NBC, NBCi and
their affiliates, XOOM.com and Snap.com. Our operational agreements with NBC and
NBCi provide for, among other things:

      - access to multimedia content;

      - development of new online services and content;

      - joint development of a Web portal branded by both companies;

      - promotion of brand awareness; and

      - revenue sharing.

      Our operating agreement with NBCi provides for the joint development of
services branded by both companies, portal design, content offerings and
associated software and utilities, as well as the joint development of
interfaces to deliver services and content to other devices throughout the home.
The operating agreement also provides that NBCi will be our exclusive provider
of Internet content in the areas of utility, communications, media and
entertainment. If NBCi does not provide content that we request within these
categories, we may obtain this content from a third party other than a
competitor identified by NBCi; however, if the desired content is only available
from a sole provider, we may obtain the content from that sole provider, even if
it is a competitor identified by NBCi. By virtue of this relationship, we will
be able to provide a dynamic multimedia experience to our customers that they
can only access over a broadband connection. Specifically, we will provide
features such as streaming audio and video, utilizing a full suite of NBCi
entertainment offerings. In addition, we intend to develop with NBCi new online
services and content for electronic commerce, gaming, search applications and
other utility features designed for broadband users. This relationship will
allow for significant time-to-market advantages for our content, services and
applications.

      Under the operating agreement, we will jointly develop and design a Web
portal branded by both companies from which our customers can access the
Internet, as well as services and content offered by us and NBCi. The term of
the operating agreement is 15 years, however, NBCi may terminate the operating
agreement if we become insolvent or if a competitor identified by NBCi acquires
more than a 33% interest in us and either party may terminate the agreement for
an uncured material breach. During the term of the operating agreement, we will
work with NBCi to develop a consistent user experience, whether the customer is
using the co-branded portal or other Telocity services. We expect to extend
NBCi's state-of-the-art technologies so that our interfaces feature common
elements across different devices within and throughout the home. In connection
with the operating agreement, we issued NBCi a warrant to purchase 1,039,122
shares of our common stock and NBC a warrant to purchase 850,191 shares of our
Series C Preferred Stock. These warrants terminate in December 2004 and have an
exercise price of $5.24 per share.

      The operating agreement also provides that between December 1999 and
December 2002 NBCi will provide us with online advertising of our services
valued at $5 million. The related advertising
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agreements provide that between January 2000 and January 2003 NBC and NBCi will
provide us with $28 million of promotional time on the NBC television network
valued at discounted rates of which $13 million must be used to air co-branded
advertising spots. Additionally, NBCi has agreed that until December 2002, it
will not use television within its control to promote broadband services
provided by any of the competitors we identified to NBCi. These promotional
services and our association with the NBC brand will allow us to penetrate the
residential marketplace faster and more efficiently.

      We have agreed with NBCi to share a portion of the revenues that are
generated from our respective services, advertising and electronic commerce
activities provided through the co-branded portal. At the official commercial
release of the jointly developed Web portal which we currently expect will take
place in June 2000, NBCi will pay us 40% of net revenues received by any NBCi
entity from advertising to our customers, as well as from e-mail commerce,
subscription and pay-per-view media, including revenues derived from direct
marketing e-mail solicitations to our customers and advertising placed on the
co-branded version of the Snap.com portal. NBCi will receive 10% of the net
revenues generated from subscription fees, value-added services and applications
for which NBCi does not offer a similar service or content. If both parties
offer similar services or content, each has agreed to pay the other party 40% of
the net revenue generated from its similar service or content. Finally, the
operating agreement provides that we will pay NBCi 40% of the net revenues
generated from the placement of content provided by third parties.

      For a further discussion of our strategic relationship with NBCi please
refer to "Related Transactions -- Strategic Relationship with NBCi and
Affiliates."

SERVICES AND CONTENT

      Our service deployment platform is capable of delivering a comprehensive
suite of broadband services and content, including high-speed Internet
connections and related value-added services to residential customers through a
variety of local access technologies.

      We seek to price our services competitively in each of our markets. We
typically enter into a customer service agreement and charge a monthly fee for
our basic service package with no additional per minute charges. The customer
service agreement also provides information on commencement of the service,
billing, payments, pricing, system requirements and service termination. As our
business develops and we begin to offer value-added services and content for
additional recurring fees, we expect to become less dependent on revenues from
this basic service and we expect our operating margins to increase.

      Our service currently provides data transfer speeds ranging from 144
kilobits per second to 1.5 megabits per second; however, we are capable of
providing service at data transfer speeds up to 7.5 megabits per second. The
speeds we offer in any given market are based upon the speed of connectivity we
purchase from our local access provider. Additionally, our platform allows our
ADSL customers to use a single phone line for multiple purposes at once, so that
a customer may have a voice conversation, browse the Internet and download
information simultaneously, thereby eliminating the need for a second phone
line.

      A customer who subscribes to our service receives our residential gateway
device that, in addition to providing high-speed Internet access, allows us to
provide our basic package of services:

      - Always Connected Broadband Access.  This feature eliminates many
        disadvantages of dial-up connections, including busy signals and the
        slow dial-up process. Always connected broadband access to the home
        significantly enhance various customer-configured information services,
        such as instant messaging, e-mail and content related services featuring
        information such as stock quotes, real time news, sports and weather.

      - Unlimited Access.  We provide our customers unlimited access to the
        Internet and our services with no per-minute usage charges.

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      - E-Mail Accounts.  We provide our customers three e-mail accounts as part
        of our service. If our customers require additional e-mail accounts, we
        can provide them for a minimal additional charge.

      - Personalized Web Pages.  Our service provides up to 10 megabytes of
        storage space for each customer to store e-mails or design and host
        individual Web pages.

      - Remote Access.  Our service allows our customers to access the Internet,
        their e-mail accounts and other services remotely by using a toll-free
        dial-up connection. We provide this service to our customers at no
        additional charge for the first 60 minutes of use each month and charge
        an incremental fee for each additional minute. This remote access
        feature ensures that our customers will be able to connect to the
        Internet away from home.

      The flexible architecture of our platform enables us to add new functions
and features. Some of these new functions and features will be offered through
upgrades or the addition of new technology to our networks while others will
require the utilization of our next-generation residential gateway, which we
expect to release during 2000. We are currently developing the following
value-added services which will require customers to upgrade the gateway
software or to upgrade to our next-generation gateway:

      - Data Security Systems.  We intend to have embedded data access intrusion
        detection and prevention technology that will enable us to configure and
        monitor a customer's firewall through our operational support system.
        This process will be accomplished without any intervention required on
        the part of a customer. As a result, a customer without technical
        expertise will be able to request protection through our advanced
        security and firewall services.

      - Backup Services.  Through our platform we intend to offer secure backup
        of the data located on a customer's personal computer. This feature
        allows our customers to backup data automatically to a secure remote
        site. We believe this feature is more cost-effective than substitutes
        such as tape and disk drives, and has the additional protection of being
        stored offsite.

      - Virtual Private Networks.  Through our platform we intend to automate
        and manage virtual private networks for customers who wish to
        telecommute to their workplace from home utilizing high-speed access.
        Virtual private networks provide a convenient and secure remote access
        capability allowing customers secure access to third party networks for
        services such as telecommuting, electronic commerce and online banking.
        Our next software release for our residential gateway includes
        standards-based functionality and encryption technology that will
        automate delivery of virtual private networks service.

      - Home Networking.  Our next-generation broadband gateway will be
        compatible with, and able to communicate with, peripheral devices and
        products through in-house wiring and wireless technology. These devices
        will include flat panel displays, additional personal computers,
        cellular phones and personal digital assistants. This feature will allow
        our customers to have Internet access from, and distribute information
        to, multiple locations within their homes. Different members of the same
        family will be able to browse the Internet simultaneously at different
        personal computers in their home while digitally displaying other
        information elsewhere in their home.

      - Home Monitoring and Automation.  Because our service is always
        connected, the gateway provides a simple home monitoring and automation
        solution. This functionality can give the customer, among other things,
        a secure password protected Web page where the customer can access
        images from a gateway-connected video camera anytime and from remote
        locations. The gateway can also be utilized to manage other devices
        throughout the home, including lights, thermostats and other electronic
        devices.

      - Enhanced Voice Messaging Services.  Through our network, our customers
        will be able to receive our services through their phones or through the
        gateway over Internet protocol functionalities.

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        This feature will include access to services such as e-mail or home
        automation controls. Likewise, the gateway can automatically report
        problems to our customer care and support system.

      In addition, through our partnership with NBCi, we intend to provide
dynamic multimedia broadband content to and facilitate secure online
transactions and services for all of our customers during 2000. Customers will
be able to access this content and complete these transactions exclusively
through the Web portal we are developing with NBCi. We expect that the Web
portal will initially emphasize media, entertainment and electronic commerce
services such as online gaming and interactive shopping. We will also provide
features such as streaming audio and video, utilizing a full suite of NBCi's
entertainment offerings, as well as financial information, news and weather
through this portal.

      We intend to take advantage of our broadband platform and strategic
partnerships to deliver additional value-added services and content. Our goal is
to capitalize on our early market entrant advantage in the residential broadband
services market and our proprietary technological advantage in our gateway
device to become the provider of choice for broadband enabled services and
content both to and throughout the home.

OUR BROADBAND SERVICE DEPLOYMENT PLATFORM

      We designed our broadband service deployment platform to provide reliable,
high-performance Internet access and to alleviate Internet bottlenecks through
an easily deployed scalable architecture with end-to-end network management
capabilities. Through our platform we will continue to offer a growing number of
services and content offering that we can remotely configure to each customer's
needs. Our broadband service deployment platform consists of the proprietary
residential gateway device, our managed network, our user interface software,
our customer care and support services and our automated billing and
provisioning systems.

  Our Residential Gateway

      We believe that customers find our broadband service easy to use primarily
because of the proprietary device we refer to as our residential gateway. The
gateway combines a DSL modem, a home networking router, multiple connection
ports and network monitoring software in a device that simplifies installation,
customer support and service upgrades. The residential gateway is a standalone
unit that operates independently of the computer's operating system and that
does not require a network interface card to be installed in the computer.

      We believe the current version of our residential gateway is the first
integrated device that provides all of the following features:

      - always connected, high-speed broadband access to the Internet without
        the need to establish a dial-up connection;

      - flexible personal computer connectivity with parallel, Ethernet and
        universal serial bus, or USB, ports;

      - Web-based service management and configuration by the customer;

      - Web-based access to account and service information by the customer;

      - automated gateway software downloading, which facilitates delivery of
        advanced application and service offerings;

      - a self-installable, fully configurable modem that is interoperable with
        industry standard DSL technologies for asymmetric digital subscriber
        line, or ADSL, symmetric digital subscriber line, or SDSL, and G.Lite;
        and

      - speeds from 144 kilobits per second to 1.5 megabits per second for SDSL,
        and up to 7.5 megabits per second for ADSL.

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      We are currently developing our next-generation gateway which we expect to
release during 2000. In addition to supporting our basic service package, our
next-generation gateway will incorporate several new hardware components that
will enable us to support additional value-added services. For example, we are
adding technology to our next-generation gateway that will enable home
networking through existing telephone wiring, wireless home networking, home
monitoring and automation and will facilitate voice-enabled services.

  Our Managed Network

      Our managed network includes communications lines and facilities, which we
lease through network agreements, as well as our network operations center and
operational support system, which we own and operate. We have based our network
architecture on the operational goals of responsiveness, reliability and
redundancy. Our network begins with the connection of a customer's personal
computer, or home network of computers, to our residential gateway. In our
current markets the connection to the customer is routed to DSL equipment owned
either by the local telephone company or by a competitive local exchange carrier
and located in the local central office which we lease through network
agreements. In the future, we expect our local access connectivity to utilize a
variety of local access technologies in addition to DSL, including wireless and
cable solutions. We aggregate our customer traffic through dedicated circuits
into our leased local metropolitan hubs currently located in: Atlanta, Miami,
Orlando, Los Angeles, Dallas, McLean (Virginia), New York City, Chicago, Denver,
Philadelphia, Boston and San Diego. These dedicated circuits are located in
secure data-centers where we lease facilities. Between metropolitan hubs, our
customer traffic travels on a leased high capacity fiber network which is
interconnected to the Internet and to other network providers at Internet
exchange points via private and public peering arrangements. Network peering is
the process of connecting to other networks at the closest point, thereby
ensuring the least number of connection points in the delivery of data.

      Our managed network has been designed to be secure and reliable. We
provide network monitoring and management 24-hours-a-day, 7-days-a-week from our
network operations center in Cupertino, California. We have engineered our
network to minimize the likelihood of service interruptions via our redundant
leased optical carrier 3 network. This secure high capacity fiber link has the
capacity to transmit 145 megabits of data per second in two directions
throughout the network. We intend to upgrade the transmission capacity of this
backbone as dictated by our customers' requirements to ensure that we continue
to provide best-in-class service. If a failure occurs in either of these fiber
links, the other link will transmit the data with no service loss to our
customers. In addition, we have configured our network to have two domain name
system servers and two e-mail servers in each metropolitan hub. If any of these
servers are down, our network will automatically deliver data to the closest
server that is functioning. Furthermore, we place the Internet protocol
addresses for domain name system servers and e-mail servers on switches that
redirect traffic to the nearest available server.

      In order to improve network performance and minimize both delays and
bandwidth availability problems, we move data closer to our customers. We have
implemented this strategy by developing a network architecture that uses Inktomi
technology and CacheFlow caching servers customized for use with our network.
These caching servers are connected not only via the Internet but also via our
satellite content feeds. Additionally, our network directs each customer's data
request to the closest available server containing the requested content,
service or application. This close proximity enhances the delivery of data to
our customers.

      Our network design anticipates that not all data is equally important to a
customer or requires the same urgency for delivery. In most cases, data is
transmitted across the Internet on a first in, first out basis. However, to
prioritize time-sensitive or other high priority data traffic our managed
network will implement a differentiated services protocol from the customer's
gateway across our nationwide network. This differentiated services protocol
will allow either us or our customers to prioritize the use of available
bandwidth among the services we provide. For example, our managed network will
identify less time-sensitive traffic, such as file transfer protocol, and then
prioritize this data delivery based upon a customer's, or content provider's,
preference.
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  Our User Interface Software

      We believe that customers will use our services more frequently and more
effectively if we create an easy-to-use interface that is common to all of our
services. We therefore agreed with our strategic partner NBCi to co-develop a
consistent user experience across all of our combined services. Initially, this
will result in a common user interface whether the customer is using the Web
portal we developed in partnership with NBCi or any of our other services. In
the future along with NBCi we intend to expand this interface capability to
other devices beyond the personal computer, such as televisions, flat panel
displays and other information appliances.

  Our Customer Care and Support Services

      A high level of continuing service and support is critical to our
objective of developing long-term customer relationships. We emphasize customer
service and technical support to provide our customers with the knowledge and
resources to utilize our online services and content successfully.

      We offer customer support 24-hours-a-day, 7-days-a-week. We believe it is
critical to our success to have available the resources necessary to support our
customers through the entire enrollment and fulfillment process, a vital
formative period in each customer's relationship with us. We focus on pre-sales,
loop qualification, technical assistance, phone company provisioning, gateway
shipment and billing to address our customers' needs. Our objective in serving
our customers is to have enough customer service consultants to ensure that our
customers are not placed on hold when they need assistance.

      We employ Telamon-IMS Corporation, a subsidiary of Telamon Corporation, an
experienced company in telecommunications provisioning, as our pre-sales and
enrollment group. Telamon has the ability to scale as our needs for consultants
change. We also employ Sutherland, a technical support help center company, to
respond to and assist our customers with technical issues. Sutherland's call
center processes, technical expertise and scalability help us to provide our
customers with real-time assistance. Telamon and Sutherland ensure that there is
ample coverage during peak hours regardless of where our customers live.

      In addition to supporting our customers, Telamon and Sutherland also
assist us in actively monitoring and reviewing customer calls. We combine this
feedback with comments we receive directly, including through our Website, to
address and prevent the recurrence of problems experienced by our customers. We
have our own in-house customer care staff that helps to service the more complex
needs of our customers. We also have a customer recovery unit to address
critical complaints that cannot be solved by Telamon or Sutherland. We have also
implemented an internal technical support unit that responds to technical
difficulties that cannot be resolved by Sutherland. We believe these initiatives
will reduce customer turnover and will increase customer satisfaction. We
actively monitor comments by customers and respond by incorporating their
suggestions into our customer care policies.

  Our Automated Billing and Provisioning Systems

      We have built our service deployment platform to perform metering and
billing tasks in the gateway. This functionality allows us to automate, monitor
and conveniently bill for each customer's services and products with minimal
human intervention. This functionality and minimal human intervention also
provides us with scalability for a number of services. We intend to expand the
metering and billing functionality as a part of our strategic relationship with
NBCi.

      We developed our billing and provisioning system as a customer focused,
Web-enabled process that ties together all of our customer related processes,
including sales, customer service, marketing, billing, accounting, loop
qualification and order fulfillment. Using our automated back office process,
customers can subscribe to a service without the intervention of a service
representative. Once an order has been placed, the customer information is
disseminated in real-time to all of our key information technology systems. This
reduces costs and helps eliminate service errors. In addition, this real-time
information

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<PAGE>   50

system provides us with a significant competitive advantage because it helps us
offer new services quickly and respond to changes in our market.

SALES AND MARKETING

      Our key sales and marketing objective is to be the leading provider of
broadband services and content to residential customers.

      We intend to leverage our platform to capitalize on multiple methods to
attract customers. We are currently undertaking a targeted direct marketing
effort and are formulating private label programs with distribution partners. We
are also undertaking programs with channel partners, including affinity
programs, through which other companies market and sell our services, and
employee and telecommuter programs, through which companies may provide our
services to their workers who have a business need for high-speed Internet
access at home. For example, in February 2000 we signed our first agreement with
a channel partner, GE. For a further description of our relationship with GE
please refer to "Related Party Transactions -- Master Broadband Services
Agreement with GE."

      Our targeted direct marketing and branding effort uses a mix of print,
direct mail, radio, television and online advertising media specifically
tailored for each local market. We do not employ a salesforce in this marketing
effort. We also attract customers by offering our services and content to
partners under private label programs. Through these programs we will provide
all aspects of the service including use of the network, ordering, installation,
billing, customer care and the delivery of the gateway. A small salesforce is
supporting this distribution method.

SUPPLIERS AND VENDORS

      Our engineers are responsible for prototype development of our residential
gateway. However, we outsource the manufacturing of the gateway. Our
manufacturing partner provides materials planning and procurement, final
assembly, testing and quality control under our supervision. Our manufacturing
process enables us to configure our products to meet a wide variety of customer
requirements and respond to future technological and industry developments. We
currently employ Wellex Corporation as the sole contract manufacturer of our
gateway, but we are in negotiations so that we can increase the number of
manufacturers in the near term.

COMPETITION

      The business of broadband and Internet services is highly competitive with
frequent new market entrants, many of whom may be rivals. The principal bases of
competition in our markets include:

      - price;

      - performance, including breadth of service availability, reliability of
        service;

      - ease of access and use;

      - network security;

      - availability and desirability of content;

      - customer support;

      - brand recognition and market penetration; and

      - capital resources.

      We anticipate that over the next few years the high-speed broadband market
will become increasingly commoditized, thereby standardizing the price of
broadband access. We believe that those providers who will differentiate
themselves will do so on the basis of value-added services.

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<PAGE>   51

      We believe America Online, especially after its announced merger with Time
Warner, and Excite@Home represent our most direct source of competition and that
we will face direct and indirect competition from:

      - providers of online services;

      - Internet service providers;

      - cable modem service providers;

      - interactive television providers;

      - Internet portal or content sites;

      - telecommunications service providers;

      - wireless and satellite service providers; and

      - consumer electronics and appliance manufacturers.

      Although our competitors provide many of the elements of our service, we
believe that we are currently the only company that combines all of these
elements into a unified service offering tailored for the residential market.

      We manage data traffic over the network, lease and utilize
telecommunications lines and facilities and operate our own network operations
center. We have designed and supply our own proprietary gateway device, which we
have customized to provide our current and which will enable us to provide our
future services. We provide content and services to our subscribers, many of
which we have customized for high-speed Internet access. In addition, our
service delivery system, or platform, allows us to provision customers quickly
and cost-effectively, as does our simple plug-and-play residential gateway
device. While many of our competitors offer some of these products or services,
we combine them all and offer them primarily to the residential market. Our
unified service offering provides us with flexibility and scalability. And,
unlike some of our competitors, we are not dependent upon a single local access
technology to deliver our services, but have designed our platform to be easily
configurable to support technologies other than DSL.

  Online Service Providers

      Online service providers include companies such as AOL, currently in the
process of merging with Time Warner, Excite@Home, MSN and WebTV, both
subsidiaries of Microsoft. These companies provide services and content over the
Internet and on proprietary online services ranging from news and sports to
video conferencing. In addition, these companies provide Internet connectivity,
ease-of-use and consistency of environment, especially through the development
of their own access networks. After its merger with Time Warner, AOL will have
access to content for its broadband access customers similar to the services we
will provide.

  Internet Service Providers

      Internet service providers include both national and regional providers,
independent Internet service providers and Internet service providers affiliated
with a telecommunications carrier or a data-centric competitive carrier.
Internet service providers such as Earthlink Networks, which is in the process
of acquiring another Internet services provider, Mindspring, Concentric Network,
which is being acquired by Nextlink, Verio, Flashcom and PSINet provide Internet
access to residential customers, generally using the existing telephone network.
Many Internet service providers have begun offering DSL-based services.

      These competitors have traditionally distinguished themselves from the
online service companies because they provide only Internet access rather than a
collection of proprietary content and services. This distinction has diminished
recently because major online services companies also offer access while many
portal sites actively compete for the chance to provide proprietary content
services to the subscribers of

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<PAGE>   52

major Internet service providers. Of the thousands of Internet service providers
in the United States, the majority are relatively small, localized providers.

  Cable Modem Service Providers

      Providers such as Excite@Home, High Speed Access, SoftNet and RoadRunner
and their respective cable partners are deploying high-speed Internet access
services over hybrid fiber coaxial cable networks. In addition, AT&T in
connection with its acquisition of TCI and Media One has announced that it
intends to become a cable modem service provider as well. Where deployed, these
networks provide similar speed, and when handling a limited amount of traffic,
higher speed, Internet access than we provide through DSL. A number of cable
modem service providers have existing local and regional monopolies in their
service markets. In addition, cable modem service providers and their partners
have more direct ties to desirable traditional media and entertainment content,
as well as the size and financial resources to execute exclusive deals for this
content.

  Interactive Television Providers

      Several companies are developing technologies relevant to interactive
television. For example, Wink and Liberate are software developers that are
working to create interactive television solutions. Microsoft has been active in
many areas of interactive television. Microsoft's wholly-owned subsidiary,
WebTV, offers set-top boxes with Internet access, interactive program listings
and simultaneous television and Internet usage. EchoStar offers WebTV to its
subscribers. Microsoft has also acquired equity interests in several network
operators. These investments give Microsoft influence in the network operator's
choice of interactive software. With its financial, technical and marketing
resources, Microsoft will be a strong competitor in the market for interactive
television operating systems. In addition, many of these companies are working
on standards for interactive television, and we do not know whether our products
will be compatible with the standards developed in the future.

  Internet Portal Sites

      Internet portal sites such as Yahoo! and Lycos are specialized Websites
that offer an aggregation of content and services either directly or through
hyperlinks to other sites. Internet portal sites typically offer search engines,
navigational aids, directories, chat facilities, classified ads, message boards,
e-mail and other customized content and services. Many sites derive a majority
of their revenues from the display of advertising on the site, but may also
generate revenue from product promotions or redirection of Internet traffic from
the portal to specific sites.

  Wireline Telecommunications Service Providers

      Telecommunications service providers, including new competitive
telecommunications companies, traditional telephone companies, and traditional
and new long distance carriers all pose competition to us because many currently
offer DSL services.

      - Traditional Telephone Companies.  All of the largest traditional
        telephone companies in our target markets have begun offering DSL
        services or have announced their intention to provide DSL services in
        the near term. The traditional telephone companies have an established
        brand name in their service areas, possess sufficient capital to deploy
        DSL equipment rapidly, own the local lines themselves and can bundle
        digital data services with their existing voice services to achieve
        economies of scale in serving their customers. Certain of the
        traditional telephone companies have aggressively priced their consumer
        DSL services as low as $30-$40 per month, placing pricing pressure on
        our service.

      - New Competitive Telecommunications Companies.  Many competitive carriers
        such as Covad, Rhythms NetConnections and NorthPoint Communications
        offer high-speed DSL based services. Companies such as RCN, McLeodUSA
        and some subsidiaries of utility companies currently offer or are
        beginning to offer voice and data service to the residential market.
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<PAGE>   53

      - National Long Distance Carriers.  Interexchange carriers, such as AT&T,
        Sprint and MCI WorldCom, who have announced an agreement to merge, GTE
        and Qwest, which is in the process of acquiring U S West have deployed
        large-scale Internet access and ATM networks, sell connectivity to
        businesses and residential customers, and have brand recognition. They
        also have interconnection agreements with many of the traditional
        telephone companies and a number of spaces in central offices from which
        they are currently offering or could begin to offer competitive DSL
        services.

  Wireless and Satellite Telecommunications Service Providers

      Wireless and satellite telecommunications service providers utilize
wireless and satellite-based networks to provide Internet connectivity. We may
face increasing competition from terrestrial wireless services, including 2
Gigahertz (Ghz) and 28 Ghz wireless cable systems (multi-channel multipoint
distribution system and local multipoint distribution system), and 24 Ghz and 38
Ghz point-to-point microwave systems. For example, the FCC has adopted new rules
to permit multi-channel multipoint distribution system licensees to use their
systems to offer two-way services, including high-speed data, rather than solely
to provide one-way video services. The FCC also recently auctioned spectrum for
local multipoint distribution system services in all markets. This spectrum is
expected to be used for wireless cable and telephony services, including
high-speed digital services. The FCC has announced that it plans to auction off
additional spectrum from time to time for other wireless services. In addition,
companies such as Teligent Inc., Advanced Radio Telecom Corp. and WinStar
Communications, Inc., which are targeted to the business market hold
point-to-point microwave licenses to provide fixed wireless services such as
voice, data and videoconferencing. We also may face increasing competition from
satellite-based systems. Motorola Satellite Systems, Inc., Hughes Communications
(a subsidiary of General Motors Corporation), Teledesic and others have filed
applications with the FCC for global satellite networks which can be used to
provide broadband voice and data services, and the FCC has authorized several of
these applicants to operate their proposed networks.

  Consumer Electronics and Appliance Manufacturers

      Our service deployment platform will support a number of consumer
electronic devices and appliances, including cellular phones, flat panel
displays and personal digital assistants. Consumer electronics companies and
manufacturers of appliances may, in the future, decide to compete with us by
bundling their own software with their hardware products, or by entering into
exclusive alliances with a competitor. In both instances, they might create
products that are incompatible with our systems.

NETWORK AGREEMENTS

      The gateway used by our customers is connected to a telephone line and
from there to DSL equipment. This equipment is owned by the traditional
telephone company or the new competitive carrier and is located in the local
central office. We currently have agreements for DSL connectivity with ACI
Corp., a subsidiary of Rhythms NetConnections, Inc., BellSouth, Bell Atlantic
Network Services and Southwestern Bell, Pacific Bell and Nevada Bell.

      In June 1999, we entered into a one-year provisioning agreement with ACI
Corp. for DSL lines and connections between our points of presence and ACI Corp.
in the metropolitan Chicago area. This agreement is non-exclusive and gives us
the right to purchase services or products from other providers for the Chicago
area, although we must offer to purchase certain products and services from
Rhythms first on the same terms. The agreement provides that we may purchase up
to 3,000 lines at costs fixed in the agreement.

      In September and October 1999, we entered into a number of non-exclusive
agreements with BellSouth. We entered into a market development agreement with
BellSouth Business Systems, Inc. in which we agreed to market asymmetrical
digital subscriber line service in areas in which BellSouth has asymmetrical
digital subscriber line service available. We also entered into a series of
agreements with

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<PAGE>   54

BellSouth Telecommunications, Inc. in which we agreed to purchase asymmetrical
digital subscriber line and related telecommunications services from BellSouth
pursuant to its FCC tariffs. The commitments and terms of our agreements for
telecommunications services are for 36 months.

      In September 1999, we entered into a five-year agreement with Bell
Atlantic Network Services, Inc. to purchase asymmetrical digital subscriber line
services pursuant to Bell Atlantic's FCC tariffs. In October 1999, we entered
into a 54-month agreement to purchase asymmetrical digital subscriber line
services from Southwestern Bell, Pacific Bell and Nevada Bell pursuant to
applicable FCC tariffs.

      In each of the metropolitan hubs of our networks we aggregate our customer
traffic through dedicated circuits. We have agreements for dedicated circuits,
collocation, backbone and peering agreements with Level 3 Communications, LLC
and MCI WorldCom. In October 1999, we entered into agreements with Level 3
terminating in September 2002 that provide us with optical carrier 3, digital
signal, level 1, digital signal, level 3 and other circuits, collocation
throughout the country at Level 3's facilities, roof rights for the location of
our caching satellite dishes, remote hands services and peering arrangements.
Through Level 3, we currently have collocation space in Atlanta, Miami, Orlando,
Los Angeles, Dallas, McLean (Virginia), New York City, Chicago, Denver,
Philadelphia, Boston and San Diego. In October 1999, we entered into agreements
with MCI WorldCom terminating in September 2002 that provide us with optical
carrier 3, digital signal, level 1, digital signal, level 3 and other circuits
as well as collocation space and peering arrangements. In 2000, we expect to add
collocation space through both Level 3 and MCI WorldCom.

      In October 1999, we entered into a three year agreement with Telecordia
Technologies, Inc. for the testing and qualification of local telephone lines.
We terminated this agreement in March 2000. Telecordia has disputed this
termination. We are currently negotiating a new agreement with Telecordia for
these services.

GOVERNMENT REGULATION

      Many of the services and content that we offer are subject to varying
degrees of federal, state and local regulation. Future regulations and
legislation may be less favorable to us than current regulation and legislation.
In addition, we may expend significant financial and managerial resources to
participate in proceedings setting rules at either the federal or state level,
without achieving a favorable result.

  Communications Regulation

      The Telecommunications Act of 1996 substantially departs from prior
legislation in the telecommunications industry by establishing local
telecommunications competition as a national policy. The Telecommunications Act
removes state regulatory barriers to competition and overrules state and local
laws restricting competition for telecommunications services. In general, by
accelerating competitive entry into the telecommunications market, including new
DSL services offered by competitive carriers, the Telecommunications Act
establishes a market structure in which the network infrastructure and services
we purchase are now available from a variety of providers in addition to
traditional telephone companies. As a result, our business options and choice of
vendors, along with the quality and price of facilities and services we buy from
telecommunications carriers, are becoming more favorable and yet are
substantially dependent on successful implementation of the Telecommunications
Act by the FCC and other regulatory agencies.

      Although some of the Telecommunications Act is self-executing, the FCC has
issued a variety of regulations upon which we and other broadband competitors
rely. We believe that the FCC's regulations and decisions have generally favored
competition and the wide availability of DSL connectivity which we purchase in
order to provide broadband services to our customers. However, these regulations
and decisions may be appealed by one or more traditional telephone companies or
other parties, which may lead to uncertainty and delays in implementation of
regulations favorable to us, or which may adversely affect our business and
financial prospects.

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      In November 1998, the FCC ruled that DSL services provided as dedicated
access services in connection with Internet access are interstate services
subject to the FCC's jurisdiction. Since early 1998, the FCC has been
considering broad issues related to competition in the advanced services market.
Several former Bell companies petitioned the FCC to be relieved of certain
regulatory requirements applicable to their own DSL services, including
obligations to unbundle DSL facilities and services, and to resell DSL
connectivity to companies like ours. In October 1998, the FCC denied the former
Bells' petitions, ruling that DSL services are telecommunications services
subject to the unbundling and resale requirements of the Telecommunications Act.
These decisions favored competition among our local access suppliers. However,
they are subject to appeal. The final outcome of these appeals, along with
subsequent FCC proceedings interpreting the requirements of the
Telecommunications Act could significantly affect our business.

      Most recently, on December 9, 1999, the FCC mandated line sharing, which
allows a competitive carrier to simultaneously provide DSL-based services over
the same telephone line being used by the traditional telephone companies for
basic telephone service. Prior to the line sharing decision, only the
traditional telephone companies could provide broadband service on the existing
line. Line sharing removes a significant barrier to competition among our
suppliers. The line sharing decision also addressed the control of technical
standards for the DSL solutions that we purchase from our local access
suppliers. The line sharing decision removed the discretion that many
traditional telephone companies had exercised to prevent the operation of some
DSL technologies on their local telephone loops. Under the FCC's ruling, a DSL
provider may now select the DSL technology it wishes so long as the technology:

      - complies with existing industry standards,

      - is approved by an industry standards body, the FCC, or any state
        commission, or

      - has been successfully deployed by any carrier without significantly
        degrading the performance of other services.

However, the order specifically determines that SDSL, a symmetrical digital
subscriber line technology used by some of our vendors, while available to
deliver broadband connectivity, is not eligible for line-sharing because it uses
the frequencies devoted to voice transmissions. Moreover, this decision remains
to be implemented and is subject to reconsideration and appeal.

      DSL and broadband services have also been addressed in two recent
proceedings in which the FCC required SBC, Ameritech and Bell Atlantic to
establish separate affiliates for the provision of DSL and other advanced
telecommunications services. The FCC established specific criteria for the
nondiscriminatory availability to competitive carriers of information and
ordering processes necessary for the purchase of unbundled DSL-capable loops. We
believe that the establishment of separate subsidiaries through which DSL
connectivity will be sold to companies like ours will increase the FCC's
ability, as well as that of the state public utilities commissions, to monitor
compliance with the requirements of Telecommunications Act upon which companies
like ours rely. Broadband issues are also the subject of a number of proposed
bills introduced in the U.S. Congress. To varying degrees, proposed legislation
would either reduce or increase open access to the traditional Bell carrier
networks as well as to the cable networks which have yet to be opened to the
type of competition that exists in the telephone network. Many of the largest
providers of broadband and Internet services, including America Online, AT&T and
the Bell companies, have been significantly involved in lobbying for and against
this proposed legislation. Although none of the proposed bills has as yet been
voted out of committee, if enacted, this legislation may affect our business and
financial prospects.

      For several years, traditional telecommunications carriers have argued
that the FCC should repeal rules treating Internet service providers as
unregulated providers of enhanced information services. Under this regulatory
paradigm, Internet service providers have been subject to a lesser degree of
regulation and taxation than traditional telephone service providers which is
favorable to us. The FCC has to date resisted all efforts to modify the
unregulated treatment of Internet service providers. However, there may be
increased legal and political pressure on the FCC to modify these policies.
While there is no indication

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<PAGE>   56

that a major change in the FCC's policies is imminent, the imposition on
Internet service providers of access charges, universal service fees and other
elements of traditional telecommunications regulation would require us to review
and possibly change our financial and business models.

  Internet Content Regulation

      Government regulation of communications and commerce on the Internet
varies greatly from country to country. The United States has not adopted many
laws and regulations applicable to online communications and commerce. However,
it is possible that a number of laws and regulations may be adopted covering
issues such as user privacy, freedom of expression, pricing, content and quality
of products and services, taxation, advertising, gaming, intellectual property
rights, enforceability of contracts and information security.

      Recently, sections of the Communications Decency Act of 1996, or the CDA,
that proposed criminal penalties for distributing indecent material to minors
over the Internet were held to be unconstitutional. Other provisions of the CDA
remain in effect, however, and Congress has since passed the Child Online
Protection Act, or COPA, in an effort to remedy the deficiencies the Supreme
Court identified in the CDA. It is unclear whether COPA will survive
constitutional challenges that have been raised. However, indecency legislation
and other government efforts to regulate Internet content could subject us or
our customers to potential liability, which in turn could affect our business.
The adoption of these laws or regulations might also decrease the rate of growth
of Internet use, which in turn could decrease the demand for our services or
increase the cost of doing business or otherwise harm, results of operations,
and financial condition. Likewise, the applicability to the Internet of
traditional property ownership, copyright, taxation, libel and obscenity law is
uncertain.

      Likewise, the impact of ongoing discussions of privacy issues and the
Internet remains uncertain. Several U.S. states have proposed, and the European
Union has adopted, limitations on the use of personal information gathered
online. Pursuant to negotiations with the European Union and the United States,
the United States may decide to adopt restrictive laws on the subject of
privacy. The Federal Trade Commission, or FTC, has initiated action and obtained
a consent decree against at least one online service provider regarding the
manner in which personal information is collected from users and provided to
third parties. In 1998, Congress enacted the Child Online Privacy Protection Act
(COPPA) protecting the privacy of children on the Internet and limiting the
information that can be collected from and disseminated to children over the
Internet without parental consent. The FTC promulgated broad new rules
implementing COPPA in late 1999. Changes to existing laws or the passage of new
laws intended to address online privacy and related issues may create
uncertainty in the marketplace or could affect the manner in which we do
business.

      We may also be subject to claims for defamation, negligence, copyright or
trademark infringement (including contributory infringement) based upon
information available through our Internet sites, including content created by
third parties. Although recent federal legislation protects online services from
some claims, the law in this area remains in flux and varies by jurisdiction. It
is not possible to develop a business plan that can definitively protect us
against liability for our Internet content, including content on our sites that
we have not written or created. This uncertainty is likely to prevail for some
time, as the laws continue to develop.

EMPLOYEES

      As of February 29, 2000 we had 256 full-time employees, all of whom are
based in the United States. We also from time to time employ part-time employees
and have hired a number of independent contractors. Our employees are not
represented by any collective bargaining agreement, and we have never
experienced a work stoppage.

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PROPERTIES

      Our corporate headquarters facility of approximately 60,000 square feet is
located in Cupertino, California. We occupy our corporate headquarters facility
pursuant to a lease that expires in June 2005. In early 2000, we will expand
into a second facility of approximately 66,000 square feet located in San Jose,
California. The lease for this additional facility will expire in November 2004.
In addition, we continue to lease our prior facility in San Jose, California
under a lease that expires in October 2002. We intend to continue subleasing
this 13,200 square foot facility through the expiration of the lease term.

INTELLECTUAL PROPERTY RIGHTS

      We claim common law trademark protection for TELOCITY, TELOCITY TIME,
TELOCITY HIGH-VELOCITY INTERNET, YOU HAVEN'T SEEN THE NET UNTIL YOU'VE SEEN IT
IN TELOCITY TIME and our logo. We have applied for federal trademark
registrations for TELOCITY and our logo. We currently have no patents but we
have three patent applications pending. We also rely on unpatented trade secrets
and know-how to maintain our competitive position, which we seek to protect, in
part, by confidentiality agreements, strategic alliances and contracts with
employees, consultants and others. The steps we have taken may not be sufficient
to protect our technology or other intellectual property.

      Our products and services consist primarily of commodity hardware and
software components in combination. While we have developed some proprietary
techniques and expertise, most of our activities and systems are not protectable
as proprietary intellectual property. In general, therefore, we have taken only
limited steps to protect our intellectual property. Accordingly, we may be
unable to use our intellectual property rights to prevent other companies from
competing with us. In addition, we may be unable to prevent third parties from
developing techniques that are similar or superior to our technology, or from
designing around our copyrights, patents and trade secrets, or from
misappropriating our intellectual property without detection or without adequate
remedy. Failure to protect our intellectual property could materially harm our
business.

      Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets, or to determine the validity and
scope of the proprietary rights of others. Litigation could result in
substantial costs and diversion of our resources and could materially harm our
business. From time to time, we may receive notice of claims that we have
infringed proprietary rights of third parties. Infringement or other claims
could be asserted against us in the future, and it is possible that these
assertions or prosecutions could harm our business. Any claims of this kind,
with or without merit, could be time-consuming, result in costly litigation and
diversion of technical and management personnel, cause delays in the development
and release of our products, or require us to develop non-infringing technology
or enter into royalty or licensing arrangements. These royalty or licensing
arrangements, if required, may not be available on terms acceptable to us, or at
all. For these reasons, infringement claims could materially harm our business.

LEGAL PROCEEDINGS

      From time to time, we may be involved in litigation that arises in the
normal course of our business operations. As of the date of this prospectus, we
are not a party to any litigation that we believe could adversely affect our
business relationships and our financial results.

                                       52
<PAGE>   58

                                   MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

      The following table sets forth certain information with respect to our
directors, executive officers and other key employees as of March 7, 2000.

<TABLE>
<CAPTION>
                   NAME                     AGE                     POSITION
                   ----                     ---                     --------
<S>                                         <C>    <C>
Patti Hart................................  43     President, Chief Executive Officer and
                                                   Director
Peter Olson...............................  57     Executive Vice President, Chief Technical
                                                   Officer and Director
Edward Hayes..............................  44     Executive Vice President and Chief
                                                   Financial Officer
Scott Martin..............................  43     Executive Vice President, Chief
                                                   Administrative Officer and Corporate
                                                   Secretary
Jim Morrissey.............................  50     Executive Vice President and Chief
                                                   Marketing Officer
Kevin Grundy..............................  42     Senior Vice President, Engineering
Thomas Obenhuber..........................  44     Senior Vice President, Corporate
                                                   Development
James Rohrer..............................  58     Senior Vice President, Customer Service
Matthew Stepovich.........................  36     Senior Vice President, Legal and
                                                   Regulatory Affairs
Regina Wiedemann..........................  38     Senior Vice President, Business
                                                   Development
Andrew Robinson...........................  32     Vice President, Operations
David Cowan...............................  33     Director
Andrew Rappaport..........................  42     Director
Edmond Sanctis............................  37     Director
Michael Solomon...........................  47     Director
Randall Strahan...........................  47     Director
</TABLE>

      Patti Hart has served as our President, Chief Executive Officer and as a
member of our Board of Directors since June 1999. From February 1994 through
April 1999 Ms. Hart was at Sprint Corporation, where she most recently served as
President and Chief Operating Officer of Sprint Corporation's Long Distance
Division. At Sprint, Ms. Hart also served as President of Sprint Business,
President of Sales and Marketing, and President of the Business Services Group.
Ms. Hart is a member of the board of directors of Vantive Corp. and Premisys
Corp.

      Peter Olson, one of our founders, has served as our Executive Vice
President and Chief Technical Officer since July 1998. Previously, Mr. Olson
served as our President and Chief Executive Officer from our incorporation in
August 1997 until July 1998. From June 1982 through December 1994 Mr. Olson
served as Chief Technical Officer of Octel Communications Corporation, a company
he co-founded. Mr. Olson is a member of the board of directors of Flycast
Communications Corp., IMP, Inc. and Netpulse Communications, Inc.

      Edward Hayes has served as our Executive Vice President and Chief
Financial Officer since January 2000. From July 1996 through December 1999, Mr.
Hayes worked at Lucent Technologies Inc., where from July 1997 he served as
Financial Vice President and Chief Financial Officer of Lucent's Global Service
Provider Business. From July 1995 through July 1996, Mr. Hayes worked at Unisys
Corporation, where from November 1995 he served as Vice President, Chief
Financial Officer and Chief Information Officer of Unisys' Global Professional
Services Division. From April 1990 through July 1995 Mr. Hayes worked at ASEA
Brown Boveri (ABB), Inc. the U.S. subsidiary of the joint venture between ASEA
and BBC Brown Boveri, where from September 1993 he served at Vice President,
Chief Financial Officer and Chief Information Officer of ABB Nuclear Operations.

      Scott Martin has served as our Chief Administrative Officer, Executive
Vice President and Corporate Secretary since December 1999. From October 1982
through August 1999 Mr. Martin held

                                       53
<PAGE>   59

various positions at Van Kampen Investments Inc., including Senior Vice
President and Deputy General Counsel from January 1995.

      Jim Morrissey has served as our Executive Vice President and Chief
Marketing Officer since September 1999. From January 1980 through September 1999
Mr. Morrissey held various positions at Grey Advertising, including Executive
Creative Director and Executive Vice President from December 1995.

      Kevin Grundy, one of our founders, has served as our Senior Vice
President, Engineering since December 1997. From February 1997 through November
1997 Mr. Grundy served as President and CEO of Aspen Internet Systems, Inc., a
DSL modem company. From June 1995 through August 1997 Mr. Grundy served as Vice
President of Engineering and Operations at Minerva Systems, an MPEG encoder
company. From June 1994 through June 1995 Mr. Grundy was Director of Engineering
at Auspex Systems, Inc., a high reliability network data storage company.
Previously, Mr. Grundy worked at NeXT, Incorporated as Executive Director,
Manufacturing Engineering and Production, where he was responsible for all
hardware engineering, manufacturing and support.

      Thomas Obenhuber, one of our founders, has served as our Senior Vice
President, Corporate Development since February 2000. From August 1997 to
February 2000, Mr. Obenhuber served as Senior Vice President, Business and
Product Planning. From January 1995 through July 1997 Mr. Obenhuber served as
Vice President, Operations and Engineering at Genuity, a national backbone
Internet service provider that he co-started. From July 1990 through January
1995 Mr. Obenhuber worked at Sun Microsystems where he most recently served as
Director, System Architecture.

      James Rohrer has served as our Senior Vice President, Customer Service
since August 1999. From January 1996 through August 1998 Mr. Rohrer served as
Chief Operating Officer of Innovative Services of America, a customer service
outsourcing firm specializing in customer care for large companies. From
November 1967 through December 1995 Mr. Rohrer worked at Sears Roebuck & Co.,
where he most recently served as Vice President of Customer Satisfaction and
Vice President, Automotive Division. Mr. Rohrer is a member of the board of
directors of Alpine Access, L.L.C., a customer care outsourcing company.

      Matthew Stepovich, one of our founders, has served as our Senior Vice
President, Legal and Regulatory Affairs since our incorporation in August 1997.
From October 1996 through April 1997 Mr. Stepovich served as Co-Founder and
Executive Vice President at Media Lane Development Group, an Internet commerce
design and implementation firm. From December 1995 through September 1996 Mr.
Stepovich was a corporate lawyer with Weissburg and Aronson, Inc. From August
1991 through November 1995 Mr. Stepovich was a corporate and regulatory lawyer
with Gray Cary Ware & Freidenrich LLP.

      Regina Wiedemann has served as our Senior Vice President, Business
Development since October 1999. From June 1999 through September 1999 Ms.
Wiedemann served as Vice President of Business Development for Notify Technology
Corp., a consumer telephony and Internet notification device company. From
August 1997 through October 1998 Ms. Wiedemann was Vice President of Commercial
Services for Infonet, a global data communications company. From January 1996
through July 1997 Ms. Wiedemann served as Vice President of Sales and Channel
Management at Pacific Bell Internet. From February 1988 through December 1995
Ms. Wiedemann worked at Sprint, where her most recent position was Executive
Assistant to the President of Multimedia.

      Andrew Robinson joined us in March 1999 as Director of ISP Services and
Business Development and was promoted to Vice President of Operations in
September 1999. From April 1998 to March 1999 Mr. Robinson was the Chief
Operating Officer for Creative Net Internet Services, an Internet service
provider. From December 1996 through March 1998, Mr. Robinson served as
President and Chief Operating Officer of Grin Net, an Internet service provider
he founded. Mr. Robinson is a charter member of the Internet Service Provider
Consortium.

      David Cowan has served on the board of directors since July 1998. Mr.
Cowan is the Managing General Partner of Bessemer Venture Partners, which he
joined in August 1992. From August 1996 through May 1997 he served as Chief
Executive Officer of Visto Corporation, an Internet-based personal information
company. From March 1995 through December 1996 he served as Chairman and Chief
                                       54
<PAGE>   60

Financial Officer of VeriSign, Inc. Mr. Cowan is a member of the boards of
directors of Flycast Communications Corp., Keynote Systems, Inc., VeriSign,
Inc., Worldtalk Communications Corp., and several private companies.

      Andrew Rappaport has served on our Board of Directors since October 1997.
Mr. Rappaport has been a general partner at August Capital since August 1996.
From August 1984 through July 1996 Mr. Rappaport was President of The Technology
Research, Inc. Mr. Rappaport is a member of the board of directors of Silicon
Image, Inc. and MMC Networks, Inc., as well as several private corporations.

      Edmond Sanctis has served on our Board of Directors since December 1999.
Mr. Sanctis has served as President and Chief Operating Officer of NBC Internet,
Inc. since October 1999. From July 1998 to October 1999 Mr. Sanctis served as
the Chief Operating Officer of Snap.com. Prior to that, Mr. Sanctis held several
positions at NBC, including Senior Vice President and General Manager of Digital
Productions from September 1996 to July 1998, Senior Vice President and
Executive Producer of Digital Productions from November 1995 through September
1996, and Director of Business Development from May 1994 through November 1995.

      Michael Solomon, one of our founders, has served on our Board of Directors
since we were incorporated in August 1997 and served as our Interim CEO from
June 1998 through July 1999. Mr. Solomon has been at Mohr, Davidow Ventures
since March 1996. From July 1994 through September 1999 Mr. Solomon also worked
as an advisor and consultant. Mr. Solomon is a member of the board of directors
of Flycast Communications Corp. and several private corporations.

      Randall Strahan has served on our Board of Directors since December 1998.
From January 1999 through December 1999 Mr. Strahan served as President and
Chief Executive Officer of Telmax Communications Corporation, a DSL equipment
company, and is currently chairman of its board of directors. Since November
1999 Mr. Strahan has served as a Venture Partner at Mohr, Davidow Ventures. From
November 1978 through January 1998, Mr. Strahan was at Pacific Bell, where he
most recently held the position of President, Service Operations.

BOARD OF DIRECTORS

      Our Board of Directors currently consists of seven members. Each director
holds office until his or her term expires or until his or her successor is duly
elected and qualified. Upon completion of this offering, our amended and
restated certificate of incorporation and bylaws provide that our Board of
Directors will be divided into three classes. The terms of each class will
expire at different times. The three classes will be comprised of the following
directors:

      - Class I consists of Mr. Olson, Mr. Cowan, and Mr. Solomon, who will
        serve until the annual meeting of stockholders to be held in 2000;

      - Class II consists of Ms. Hart, Mr. Rappaport, and Mr. Strahan, who will
        serve until the annual meeting of stockholders to be held in 2001; and

      - Class III consists of Mr. Sanctis, who will serve until the annual
        meeting of stockholders to be held in 2002.

      Messrs. Cowan, Rappaport, Solomon and Strahan are independent directors
and Mr. Sanctis serves as the director designated by NBCi.

      At each annual meeting of stockholders beginning with the 2000 annual
meeting, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election and until their successors have been duly
elected and qualified. Any additional directorships resulting from an increase
in the number of directors will be distributed among the three classes so that,
as nearly as possible, each class will consist of an equal number of directors.
Our non-employee directors devote such time to our affairs as is necessary to
discharge their duties. There are no family relationships among any of our
directors, officers or key employees.

                                       55
<PAGE>   61

  Board Committees

      Our Board of Directors has an audit committee and a compensation
committee. The audit committee consists of Messrs. Rappaport and Strahan. The
audit committee reviews our internal accounting procedures, consults with and
reviews the services provided by our independent accountants and makes
recommendations to the Board of Directors regarding the selection of independent
accountants. The compensation committee consists of Messrs. Cowan, Sanctis and
Solomon. The compensation committee reviews and recommends to the Board of
Directors the salaries, incentive compensation and benefits of our officers and
employees and administers our stock plans and employee benefit plans.

  Compensation Committee Interlocks and Insider Participation

      Our Board of Directors established the compensation committee in December
1999. Prior to establishing the compensation committee, our Board of Directors
as a whole performed the functions delegated to the compensation committee. No
member of our compensation committee has served as a member of the Board of
Directors or compensation committee of any entity that has one or more executive
officers serving as a member of our Board of Directors or compensation
committee. Since the formation of the compensation committee, none of its
members has been our officer or employee.

  Compensation of Directors

      In December 1999, our Board of Directors approved compensation guidelines
for directors who are not our officers or employees. The compensation guidelines
provide that these directors will be reimbursed for expenses they incur in
attending any Board of Directors or committee meeting. Directors who are also
our officers or employees will not receive reimbursement for expenses incurred
in attending Board of Directors or committee meetings. Effective upon the
closing of this offering, our non-employee directors also will be eligible to
participate in our 2000 Outside Directors Stock Plan. Employee directors,
including Ms. Hart and Mr. Olson, are eligible to participate in our 2000
Employee Stock Purchase Plan and to receive discretionary grants under our 1998
Stock Plan.

EXECUTIVE OFFICERS

      Our executive officers are appointed by our Board of Directors and serve
until their successors are elected or appointed.

SUMMARY COMPENSATION INFORMATION

      The following table sets forth all compensation paid or accrued during the
year ended December 31, 1999 to all individuals serving as our President and
Chief Executive Officer, and each of our four other most highly compensated
officers whose compensation exceeded $100,000 for the period. The compensation
described in this table does not include perquisites and other personal benefits
received by the executive officers named in the table below which do not exceed
$50,000 or 10% of the total salary and bonus reported for these officers,
whichever is lower. For the individuals then employed by us, the table also
includes the same information for 1998 and 1997, the year in which we were
founded.

<TABLE>
<CAPTION>
                                                                                     LONG TERM
                                                       ANNUAL COMPENSATION          COMPENSATION
                                                ---------------------------------   ------------
                                                                       OTHER         SECURITIES
                                                                      ANNUAL         UNDERLYING     ALL OTHER
NAME AND PRINCIPAL POSITIONS                    YEAR    SALARY    COMPENSATION(1)     OPTIONS      COMPENSATION
- ----------------------------                    ----   --------   ---------------   ------------   ------------
<S>                                             <C>    <C>        <C>               <C>            <C>
Patti Hart....................................  1999   $140,000      $  3,097        3,226,274       $150,000(2)
  President and CEO (began June 1999)
Michael Solomon...............................  1999         --        70,665(3)             0             --
  Interim President and CEO (ended              1998         --        80,000(3)             0             --
  June 1999)
Jim Morrissey.................................  1999     77,211        80,939(4)       800,000        357,992(5)
  Executive Vice President and
  Chief Marketing Officer
</TABLE>

                                       56
<PAGE>   62

<TABLE>
<CAPTION>
                                                                                     LONG TERM
                                                       ANNUAL COMPENSATION          COMPENSATION
                                                ---------------------------------   ------------
                                                                       OTHER         SECURITIES
                                                                      ANNUAL         UNDERLYING     ALL OTHER
NAME AND PRINCIPAL POSITIONS                    YEAR    SALARY    COMPENSATION(1)     OPTIONS      COMPENSATION
- ----------------------------                    ----   --------   ---------------   ------------   ------------
<S>                                             <C>    <C>        <C>               <C>            <C>
Peter Olson...................................  1999    223,333         9,961            7,714             --
  Executive Vice President and                  1998    135,000         7,485           82,286             --
  Chief Technology Officer                      1997     75,000            --                0             --
Kevin Grundy..................................  1999    161,667         7,854                0             --
  Senior Vice President, Engineering            1998    170,000         7,493                0             --
                                                1997     10,000           613                0             --
Thomas Obenhuber..............................  1999    161,667         2,284            5,142             --
  Senior Vice President, Corporate              1998     90,000         2,129           54,858             --
  Development                                   1997     50,000           428                0             --
</TABLE>

- ---------------
(1) Includes only health insurance premiums paid by us unless otherwise noted.

(2) We paid Ms. Hart a $150,000 signing bonus pursuant to her employment
    agreement.

(3) We paid these amounts to Mr. Solomon as our Interim President and CEO
    pursuant to a consulting arrangement.

(4) Includes $1,422 in health insurance premiums paid by us. Also includes
    $79,517 in debt forgiveness pursuant to Mr. Morrissey's employment
    agreement.

(5) We paid Mr. Morrissey a $150,000 signing bonus pursuant to his employment
    agreement. Also includes $147,992 payment for closing costs related to the
    sale of Mr. Morrissey's house, which includes a $66,918 gross up component
    to cover Mr. Morrissey's additional taxes and $60,000 in contingent
    compensation for an allowance that Mr. Morrissey will repay to us if our
    stock trades at $20 or more per share on October 1, 2001, all of which we
    paid pursuant to Mr. Morrissey's employment agreement.

OPTION GRANTS IN 1999

      The following table sets forth information concerning grants of stock
options to the executive officers named in the summary compensation table above
who received stock options during 1999. All options granted to executive
officers in the last fiscal year were granted under the 1998 Stock Plan. The
percent of the total options set forth below is based on an aggregate of
10,595,660 options granted to employees during the period ended December 31,
1999. All options were granted at the fair market value as determined by our
Board of Directors on the date of grant and were exercised on that date.

      Potential realizable value represents hypothetical gains that could be
achieved for the options if exercised at the end of the option term assuming
that the fair market value of our common stock appreciates at 5% and 10% over
the option term of ten years based on an assumed initial public offering price
of $11.00 and that the option is exercised and sold on the last day of its
option term for the appreciated stock price. The assumed 5% and 10% rates of
stock price appreciation are provided in accordance with rules of the SEC and do
not represent our estimate or projection of our future common stock price.

<TABLE>
<CAPTION>
                                               INDIVIDUAL GRANT                       POTENTIAL REALIZABLE
                              ---------------------------------------------------       VALUE AT ASSUMED
                              NUMBER OF     % OF TOTAL                                   ANNUAL RATES OF
                              SECURITIES      OPTIONS                                  STOCK APPRECIATION
                              UNDERLYING    GRANTED TO     EXERCISE                      FOR OPTION TERM
                               OPTIONS       EMPLOYEES       PRICE     EXPIRATION   -------------------------
NAME                           GRANTED     DURING PERIOD   PER SHARE      DATE          5%            10%
- ----                          ----------   -------------   ---------   ----------   -----------   -----------
<S>                           <C>          <C>             <C>         <C>          <C>           <C>
Patti Hart..................  3,226,274         30.4%       $0.350      4/30/09     $56,678,655   $90,920,159
Jim Morrissey...............    800,000          7.5         0.750      9/10/09      13,734,269    22,224,932
Peter Olson.................      7,714           --         0.575      6/25/09         133,783       215,654
Thomas Obenhuber............      5,142           --         0.575      6/25/09          89,177       143,751
</TABLE>

                                       57
<PAGE>   63

OPTION EXERCISES IN 1999 AND VALUES AT DECEMBER 31, 1999

      The following table sets forth information concerning option exercises in
1999 by the executive officers named in the summary compensation table above.
The options for Ms. Hart and Mr. Morrissey vest over four years, while the
options to Messrs. Olson and Obenhuber are all fully vested. All options
otherwise generally conform to the terms of our 1998 Stock Plan. The value
realized upon exercise of the options is based on an assumed initial public
offering price of $11.00, less the exercise price. As of December 31, 1999,
these officers had exercised all of their options.

<TABLE>
<CAPTION>
                                                                   NUMBER OF
                                                             SECURITIES UNDERLYING         VALUE OF UNEXERCISED
                                                              UNEXERCISED OPTIONS          IN-THE-MONEY OPTIONS
                                                             AT DECEMBER 31, 1999          AT DECEMBER 31, 1999
                          SHARES ACQUIRED      VALUE      ---------------------------   ---------------------------
                            ON EXERCISE      REALIZED     EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
                          ---------------   -----------   -----------   -------------   -----------   -------------
<S>                       <C>               <C>           <C>           <C>             <C>           <C>
Patti Hart..............     3,226,274      $34,359,818       --             --             --             --
Jim Morrissey...........       800,000        8,200,000       --             --             --             --
Peter Olson.............         7,714           80,418       --             --             --             --
Thomas Obenhuber........         5,142           53,605       --             --             --             --
</TABLE>

EMPLOYMENT AGREEMENTS

      We have entered into employment agreements with all of our current
executive officers. All of our executive officers have signed employee
inventions and proprietary rights assignment agreements that provide, among
other things, that the officer will not solicit any of our employees for two
years after their employment with us.

      On May 5, 1999, we entered into an at will employment agreement with Ms.
Hart, under which Ms. Hart receives a salary of $300,000 per year. Ms. Hart also
received a signing bonus of $150,000 and is guaranteed a bonus of $100,000 at
the end of her first year of service as our Chief Executive Officer. After two
years of service as our Chief Executive Officer and for each year of employment
with us after that, Ms. Hart is eligible under her agreement to earn a
performance bonus in accordance with a performance bonus plan. The agreement
also provides for a stock grant pursuant to our 1998 Stock Plan for the purchase
of up to 3,226,274 shares of our common stock, which Ms. Hart exercised in full
on June 22, 1999 at a price of $0.35 per share. Ms. Hart's exercise of her
option is subject to our right to repurchase her shares at the exercise price, a
right that lapses as the shares vest at a rate of 1/48 per month. Upon Ms.
Hart's resignation for good cause upon a change of control, Ms. Hart shall vest
one half of any unvested shares. If we terminate Ms. Hart's employment without
cause, she will receive a severance package, as described in her employment
agreement.

      Effective January 1, 1998, we entered into at will employment agreements
with Messrs. Olson, Obenhuber and Stepovich, under which they were to receive
salaries of $180,000, $120,000 and $96,000 per year, respectively; their current
salaries are $280,000, $200,000 and $150,000 per year. In addition, under their
agreements, Messrs. Olson, Obenhuber, and Stepovich are each eligible for a
performance bonus for each year based upon achievement of performance
objectives. The amount of these bonuses, is to be negotiated annually. If we
terminate Messrs. Olson, Obenhuber or Stepovich without cause or if any of them
resign for good reason, the individual will receive his compensation, including
pro-rated bonuses, and benefits for three months following termination, plus
continued vesting of shares for six months. Effective February 25, 1998, we
entered into an employment agreement with Mr. Grundy with the same major
conditions, except that Mr. Grundy was to receive a salary of $120,000 per year.
Mr. Grundy's current salary is $200,000. We also entered into founder stock
purchase agreements with each of these employees, which contain change of
control provisions, as described below.

      On December 10, 1999, we entered into an at will employment agreement with
Mr. Hayes, under which Mr. Hayes receive a salary of $250,000 per year. Within
30 days of the signing of the agreement, we will pay Mr. Hayes a signing bonus
of $325,000. The agreement also provides for a stock option grant pursuant to
our 1998 Stock Plan for the purchase of up to 370,000 shares of our common
stock.

                                       58
<PAGE>   64

Mr. Hayes exercised all his options on January 5, 2000 at a price of $3.00 per
share. Mr. Hayes' exercise of his option is subject to our right to repurchase
his shares at the exercise price, a right that lapses as the shares vest. Mr.
Hayes' shares vest 1/4 after 12 months, then subsequently at a rate of 1/48 of
the original grant per month. If we terminate Mr. Hayes without cause or he
resigns for good reason, as both terms are defined in his agreement, we will pay
Mr. Hayes a lump sum severance payment equal to 12 months of salary and target
incentive bonus, remove any vesting cliff and immediately vest the greater of
one half of his unvested stock options or an amount equivalent to an additional
six months vesting or accelerate his vesting six months.

      On September 14, 1999, we entered into an at will employment agreement
with Mr. Morrissey, under which Mr. Morrissey receives a salary of $275,000 per
year. Mr. Morrissey received a signing bonus of $150,000. On January 4, 2000,
Mr. Morrissey received an additional bonus of $150,000 as required by his
employment agreement. Upon our initial public offering or our acquisition, Mr.
Morrissey will receive a bonus of $150,000, provided that certain objectives
have been met. In the event of certain payments under his agreement, Mr.
Morrissey is entitled to receive gross up payments. The agreement also provides
for a stock option grant pursuant to our 1998 Stock Plan for the purchase of up
to 800,000 shares of our common stock. Mr. Morrissey exercised all of his
options on September 14, 1999 at a price of $0.75 per share. Mr. Morrissey's
exercise of his option is subject to our right to repurchase his shares at the
exercise price, a right that lapses as the shares vest. Mr. Morrissey's shares
vest 1/4 after one year, then subsequently at a rate of 1/48 of the original
grant per month. In order to leave his previous employment, Mr. Morrissey was
required to make payments to his former employer. To facilitate his departure,
we loaned Mr. Morrissey $2 million: on December 6, 1999 we provided him with a
$900,000 loan and on January 5, 2000 we provided him with a $1,100,000 loan, the
principal and interest of both we will forgive at a rate of 1/36 per month over
three years beginning on September 20, 1999 and January 1, 2000, respectively.
Under Mr. Morrissey's agreement we provide to him a monthly housing allowance of
$20,000 for 24 months beginning on October 1, 1999. If our stock trades at $20
or more on October 1, 2001, then Mr. Morrissey will repay the allowance;
otherwise, we will forgive his allowance. Upon Mr. Morrissey's termination for
cause or his voluntary resignation other than for good reason, the loans become
due within 90 days. If we terminate Mr. Morrissey without cause or he resigns
with good reason, he will receive his base salary for one year, continued
payment of his housing allowance for one year, discharge of any of his
obligations to repay loans or his housing allowance to us, and removal of any
vesting cliff plus six months acceleration of his option vesting. Upon a change
of control (which includes Ms. Hart's termination as our CEO), within one year,
Mr. Morrissey will also receive additional accelerated vesting.

      On August 24, 1999, we entered into a one year employment agreement with
Mr. Rohrer, under which Mr. Rohrer was to receive a salary of $160,000 per year.
Mr. Rohrer's current salary is $180,000. The agreement also provides for a stock
grant pursuant to our 1998 Stock Plan for the purchase of up to 100,000 shares
of our common stock. Mr. Rohrer exercised all of his options on September 20,
1999 at a price of $0.75 per share. We subsequently granted to Mr. Rohrer an
option for an additional 100,000 shares, which he exercised on December 2, 1999
at a price of $1.50 per share. Mr. Rohrer's exercise of his options is subject
to our right to repurchase his shares at the exercise price, a right that lapses
as the shares vest. Mr. Rohrer's 200,000 shares vest 1/8 six months after
commencement of his employment, then subsequently at a rate of 1/48 of the total
grant per month. Mr. Rohrer's initial option grant will fully vest upon the
completion of milestones described in his employment agreement. Mr. Rohrer's
employment agreement is for one year, during which time we can only terminate
Mr. Rohrer for cause. If we terminate Mr. Rohrer without cause during this time,
the options he would have received through the first year fully vest. Either
party may terminate the agreement at the end of one year.

      On December 8, 1999, we entered into an at will employment agreement with
Mr. Martin, under which Mr. Martin receives a salary of $190,000 per year.
Within 30 days of the signing of the agreement, we will pay Mr. Martin a signing
bonus of $150,000, which he will repay if he resigns within one year for other
than good reason. The agreement also provides for a stock option grant pursuant
to our 1998 Stock Plan for the purchase of 245,000 shares of our common stock.
Mr. Martin exercised all his options on December 16, 1999 at a price of $3.00
per share. Mr. Martin's exercise of his option is subject to our right

                                       59
<PAGE>   65

to repurchase his shares at the exercise price, a right that lapses as the
shares vest. Mr. Martin's shares vest 1/8 after six months, then subsequently at
a rate of 1/48 of the original grant per month. Upon a change in control, if we
terminate Mr. Martin without cause, or he resigns for good reason, we will
continue to pay Mr. Martin his base salary for six months, remove any vesting
cliff and immediately vest one half of his unvested stock options. If we
terminate Mr. Martin without cause or he resigns for good reason without a
change in control, we will remove any vesting cliff, pay Mr. Martin a lump sum
of $150,000 and make continued medical and dental benefits to Mr. Martin for six
months.

      On September 13, 1999, we entered into an at will employment agreement
with Ms. Wiedemann, under which Ms. Wiedemann was to receive a salary of
$140,000 per year. Ms. Wiedemann's current salary is $180,000. The agreement
also provides for a stock grant pursuant to our 1998 Stock Plan for the purchase
of up to 240,000 shares of our common stock. Ms. Wiedemann exercised all of her
options on October 26, 1999 at a price of $1.50 per share. Ms. Wiedemann's
exercise of her option is subject to our right to repurchase her shares at the
exercise price, a right that lapses as the shares vest. Ms. Wiedemann's shares
vest 1/8 after six months, then subsequently at a rate of 1/48 of the original
grant per month. If, following a change of control, we terminate Ms. Wiedemann
or she resigns for good cause, Ms. Wiedemann shall receive an additional six
months of salary, benefits and vesting, including removal of the one year
vesting cliff, if applicable.

      On April 1, 1999, we entered into an at will employment agreement with Mr.
Robinson, under which Mr. Robinson was to receive a salary of $130,000 per year.
Mr. Robinson's current salary is $150,000. Mr. Robinson also will receive a
one-time stock bonus of 10,000 shares and a $20,000 bonus at the conclusion of
his first year of service provided that certain milestones have been met. The
agreement also provides for a stock grant pursuant to our 1998 Stock Plan for
the purchase of up to 100,000 shares of our common stock. We subsequently
granted to Mr. Robinson an option to purchase an additional 100,000 shares of
our common stock. Mr. Robinson's exercise of his options is subject to our right
to repurchase his shares at the exercise price, a right that lapses as the
shares vest. Mr. Robinson's shares vest 1/4 after one year of the date of grant,
then subsequently at a rate of 1/48 of the original grant per month. Mr.
Robinson exercised his options for all 200,000 shares on June 18, October 22 and
December 9, 1999 at an average price per share of $0.925. We had previously
granted to Mr. Robinson an option to purchase 20,000 shares of our common stock
for his performance of consulting work before he was our employee. Mr. Robinson
exercised his option to purchase these shares on June 23, 1999 at a price of
$0.175 per share. All 20,000 of these shares were fully vested on the grant
date. We also paid Mr. Robinson $40,000 for moving expenses.

INCENTIVE BONUS PROGRAM

      We have established an incentive bonus program which began in 2000 in
order to reward our employees for their contributions. We will distribute
bonuses quarterly, in January, April, July and October. Executive officers,
including Ms. Hart, all executive vice presidents, senior vice presidents, vice
presidents and all director-level managers are eligible for a yearly accumulated
bonus of up to 50% of annual salary. For these employees, we will award
incentive bonuses based 70% upon our performance as a company and 30% upon the
accomplishment of predetermined, specific individual objectives.

LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION

      Our amended and restated certificate of incorporation to be filed prior to
completion of this offering limits the liability of our directors to the maximum
extent permitted by Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except liability associated with any of the
following:

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

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

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

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

                                       60
<PAGE>   66

      The limitation of our director's liability does not apply to liabilities
arising under the federal securities laws and does not affect the availability
of equitable remedies such as injunctive relief or rescission.

      Our amended and restated certificate of incorporation and bylaws also
provide that we shall indemnify our directors and executive officers and may
indemnify our other officers and employees and other agents to the fullest
extent permitted by law. We believe that indemnification under our bylaws covers
at least negligence and gross negligence on the part of indemnified parties. Our
bylaws also permit us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
his or her capacity, regardless of whether our bylaws would permit
indemnification.

      We have entered into indemnification agreements with each of our officers
and directors containing provisions that require us to, among other things,
indemnify our officers and directors against liabilities that may arise by
reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to cover our directors and officers under any of
our liability insurance policies applicable to our directors and officers. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.

STOCK PLANS

  2000 Equity Incentive Plan

      Our 2000 Equity Incentive Plan was adopted by our Board of Directors in
January 2000 as an amendment and restatement of our 1998 Stock Option Plan,
originally approved by the Board in January 1998 and our stockholders in
February 1998. We anticipate stockholder approval of the 2000 Equity Incentive
Plan in March 2000. A total of 24,000,000 shares of our common stock are
authorized and reserved for issuance under the 2000 Equity Incentive Plan,
including 13,950,000 shares that were authorized and reserved under our 1998
Stock Option Plan prior to its restatement. As of December 31, 1999, options to
purchase 1,873,442 shares of common stock were outstanding under the 1998 Stock
Option Plan, 10,581,698 shares had been issued upon exercise of options, net of
repurchases, and 1,494,860 shares were available for future grant. The
cumulative number of shares authorized for issuance under the 2000 Equity
Incentive Plan will be increased automatically on January 1, 2001 and each
January 1 thereafter during the term of the plan by an amount equal to the
lesser of:

      - 5% of the outstanding shares of our common stock on the immediately
        preceding December 31; or

      - a lesser amount determined by our Board of Directors.

      However, the portion of each annual increase that may be issued upon the
exercise of incentive stock options may not exceed 5,000,000 shares. Appropriate
adjustments will be made to the foregoing limits and to awards outstanding under
the plan in the event of any change in our capital structure. If any award
granted under the 2000 Equity Incentive Plan expires or terminates or if we
repurchase any shares issued pursuant to an award, the shares subject to the
terminated portion and any repurchased shares will again become available for
issuance under the plan.

      The 2000 Equity Incentive Plan is administered by our Board of Directors
or by a committee of the Board, who determine, consistent with the provisions of
the plan, the persons to whom awards are granted and all of the terms and
conditions of those awards. The administrator has the authority to construe and
interpret the terms of the plan and the awards granted under it and has the
authority to amend or terminate the plan, subject to stockholder approval of any
amendment increasing the maximum number of shares issuable under the plan or as
otherwise required by law. Generally, no amendment or termination may adversely
affect any outstanding award without the consent of the affected participant.
Unless terminated sooner by the Board of Directors, the 2000 Equity Incentive
Plan will terminate automatically in 2010 on the tenth anniversary of its
adoption by the Board.

                                       61
<PAGE>   67

      The 2000 Equity Incentive Plan authorizes the administrator to grant
awards in the form of incentive stock options, within the meaning of Section 422
of the United States tax code, nonstatutory stock options, restricted stock
purchase rights and bonuses, performance shares and performance units. While
incentive stock options may be granted only to employees, including officers and
employee directors, all other awards may be granted to employees, consultants
and non-employee directors.

      The exercise price per share of incentive stock options granted under the
2000 Equity Incentive Plan must be at least equal to the fair market value of a
share of our common stock on the date of grant, while the exercise price per
share of nonstatutory stock options must be at least 85% of such fair market
value. However, the exercise price per share of an incentive stock option
granted to any participant who owns stock possessing more than 10% of the voting
power of all classes of our outstanding capital stock or that of any subsidiary
corporation must equal at least 110% of the fair market value of a share of our
common stock on the grant date, and the term of such incentive stock option must
not exceed five years. The terms of all other options granted under the 2000
Equity Incentive Plan may not exceed ten years. The aggregate fair market value
(determined as of the date of grant) of our common stock for which incentive
stock options may become exercisable for the first time by any optionee may not
exceed $100,000 in any calendar year. The administrator has the discretion to
determine the vesting provisions and exercise requirements, if any, of all
options granted under the plan. Unless longer periods are authorized by the
administrator, options granted under the 2000 Equity Incentive Plan generally
must be exercised, if at all, within six months after an optionee's termination
of service due to death or disability and otherwise within 30 days after an
optionee's termination of service, but in no event later than the expiration of
the option's term. Options granted under the plan generally are not transferable
by an optionee other than by will or the laws of descent and distribution,
except that, with the consent of the administrator, an optionee may transfer a
nonstatutory stock option to certain family members or entities established for
their benefit.

      Awards of restricted stock may be made under the 2000 Equity Incentive
Plan either in the form of a restricted stock purchase right or a restricted
stock bonus. Restricted stock purchase rights are exercisable at prices
determined by the administrator, while restricted stock bonuses are granted in
consideration of services rendered to us. Awards of restricted stock may be made
subject to vesting restrictions and other conditions as established by the
administrator and are not transferable by the participant until vested. Vesting
may be based on the participant's continued service with us or the attainment of
one or more performance goals established by the administrator, similar to those
described below in connection with performance shares and units. While the
participant will have voting rights and the right to receive dividends or other
distributions paid with respect to the restricted stock, any dividends or
distributions paid in stock are subject to the same vesting restrictions as the
original award. Unless otherwise provided by the administrator, if a
participant's service with us terminates for any reason, the participant will
forfeit any then unvested shares acquired as a restricted stock bonus, and we
will have the option to repurchase for the amount of the participant's original
purchase price any then unvested shares acquired by exercise of a restricted
stock purchase right.

      The administrator may grant performance shares and performance units under
the 2000 Equity Incentive Plan that are subject to the attainment of such
performance goals measured over such periods as the administrator determines. A
performance share is an unfunded bookkeeping entry generally having an initial
value equal to the fair market value of one share of our common stock, while a
performance unit is an unfunded bookkeeping entry generally having an initial
value of $100. The final value of an award of performance shares or units is
determined by the administrator at the end of the specified performance period
on the basis of the extent to which one or more predetermined performance goals
have been attained. In granting a performance share or unit award, the
administrator establishes the performance goals applicable to the award based on
certain measures of business performance specified in the 2000 Equity Incentive
Plan, such as revenue, operating income, gross margin, cash flow or numbers of
customers. To the extent earned, performance share and unit awards may be
settled in cash, shares of our common stock (including restricted stock) or any
combination of these. Payments may be made in lump sum or on a deferred basis.
If payments are to be made on a deferred basis, the administrator may provide
for the payment of dividend equivalents or interest during the deferral period.
Unless otherwise determined

                                       62
<PAGE>   68

by the administrator, if a participant's service terminates due to death or
disability prior to completion of the applicable performance period, the final
award value is determined at the end of the period on the basis of the
performance goals attained during the entire period, but payment is prorated for
the portion of the period during which the participant remained in service.
Except as otherwise provided by the plan, if a participant's service terminates
for any other reason, the participant's performance shares or units are
forfeited. Prior to their payment, performance share and unit awards are not
transferable by a participant other than by will or the laws of descent and
distribution.

      In the event of our merger with another corporation or another change in
control event, the surviving corporation may assume outstanding awards or
substitute new awards of equivalent value. The 2000 Equity Incentive Plan
authorizes the administrator to grant stock options providing for the
acceleration of vesting and exercisability to such extent and upon such terms as
the administrator determines if the surviving corporation refuses to assume or
substitute for the options or if, within a specified period of time following
the change in control, the optionee is terminated without cause or resigns for
good reason, as defined in the award. Any stock options not assumed by the
surviving corporation or exercised prior to a change in control will terminate
upon the change in control. The plan further authorizes the administrator to
provide in any restricted stock award for acceleration of vesting in connection
with a change in control to such extent and upon as terms as the administrator
determines. In addition, the administrator may provide in any performance share
or unit award that in the event of a change in control, the award will become
payable in full.

  2000 Employee Stock Purchase Plan

      Our 2000 Employee Stock Purchase Plan was adopted by our Board of
Directors in January 2000, and we anticipate stockholder approval in March 2000.
A total of 2,500,000 shares of our common stock are authorized and reserved for
issuance under the plan, cumulatively increased on January 1, 2001 and each
January 1 thereafter through January 1, 2010 by an amount equal to the lesser
of:

      - 1% of the outstanding shares of our common stock on the immediately
        preceding December 31;

      - 1,000,000 shares; or

      - a lesser amount determined by our Board of Directors.

      Appropriate adjustments will be made to these limits and to purchase
rights outstanding under the plan in the event of any change in our capital
structure. If any purchase right granted under the 2000 Employee Stock Purchase
Plan expires or terminates, the shares subject to the unexercised portion will
again become available for issuance under the plan.

      The 2000 Employee Stock Purchase Plan is intended to qualify under Section
423 of the United States tax code. It will be administered by our Board of
Directors or by a committee of the Board, who have the authority to interpret
and apply its provisions. The plan will generally be implemented through
consecutive six-month offering periods, although offering periods of up to 27
months are permitted. Offering periods generally start on the first trading day
on or after May 1 and December 1 of each year, except that the first offering
period will commence on the effective date of this offering and end on or about
November 30, 2000.

      Employees, including officers and employee directors, are eligible to
participate in the 2000 Employee Stock Purchase Plan if they are customarily
employed by us or any participating subsidiary for more than 20 hours per week
and more than five months in any calendar year. However, any employee who
immediately after receiving the grant of a purchase right would own or hold
options to purchase stock possessing 5% or more of the total combined voting
power or value of all classes of our capital stock may not be granted a purchase
right under the plan. Furthermore, no employee may accrue rights to purchase
shares under the plan at a rate that exceeds $25,000 worth of stock, measured at
the beginning of the offering period, for each calendar year in which the
purchase right is outstanding at any time. Purchase rights granted under the
2000 Employee Stock Purchase Plan are not transferable by a participant other
than by will or the laws of descent and distribution.
                                       63
<PAGE>   69

      The plan permits participants to purchase common stock through payroll
deductions of up to 20% of the participant's base salary and commissions. Such
amounts are applied to the purchase from us of shares of our common stock at the
end of each offering period at a price which is generally 85% of the lower of
the fair market value of the common stock on either the first or last day of the
offering period. The maximum number of shares a participant may purchase in any
six-month offering period is the lesser of 1,000 shares or a number of shares
determined by dividing $12,500 by the fair market value of a share of our common
stock at the beginning of the offering period. Participants may voluntarily end
their participation at any time during an offering period, and participation
ends automatically upon termination of employment with us.

      The plan provides that, in the event of our merger with another
corporation or another change in control event, each outstanding purchase right
may be assumed by the surviving corporation. If the surviving corporation
refuses to assume the outstanding purchase rights, the offering period then in
progress will be shortened and a new purchase date will be set prior to the
change in control. The 2000 Employee Stock Purchase Plan will terminate when all
of the authorized shares have been issued, unless terminated earlier by our
Board of Directors. The Board of Directors has the authority to amend or
terminate the plan, subject to stockholder approval of any amendment increasing
the maximum number of shares issuable under the plan or as otherwise required by
law. Generally, no amendment or termination of the plan may adversely affect any
outstanding purchase right without the consent of the affected participant.

  2000 Outside Directors Stock Plan

      Our 2000 Outside Directors Stock Plan was adopted by our Board of
Directors in January 2000, and we anticipate stockholder approval in March 2000.
The purpose of the plan is to attract and retain the best available non-employee
directors, to provide them additional incentives and, therefore, to promote the
success of our business. A total of 400,000 shares of our common stock are
authorized and reserved for issuance under the plan, cumulatively increased on
January 1, 2001 and each January 1 thereafter by an amount equal to the lesser
of:

      - 0.20% of the outstanding shares of our common stock on the immediately
        preceding December 31;

      - 150,000 shares; or

      - a lesser amount determined by our Board of Directors.

      Appropriate adjustments will be made to these limits, to the award
formulas described below and to awards outstanding under the plan in the event
of any change in our capital structure. If any award granted under the 2000
Outside Directors Stock Plan expires or terminates, or if we repurchase any
shares issued pursuant to an award, the shares subject to the terminated portion
and any repurchased shares will again become available for issuance under the
plan. No awards will be made under the 2000 Outside Directors Stock Plan prior
to the effective date of this offering.

      The 2000 Outside Directors Stock Plan establishes an initial, automatic
grant of an option to purchase 40,000 shares of our common stock to each
non-employee director who is first elected to our Board of Directors after the
effective date of this offering. The plan also provides that upon the date of
each annual stockholders' meeting, each non-employee director who has been a
member of our Board of Directors for at least six months, including our current
non-employee directors, will receive an automatic grant of an option to purchase
10,000 shares of our common stock. Each initial and annual option will have an
exercise price per share equal to the fair market value of a share of our common
stock on the date of grant and will have a term of ten years. Initial options
granted to newly elected non-employee directors will vest and become exercisable
in four equal annual installments, while annual options granted to continuing
non-employee directors will vest and become exercisable in full on the day
immediately preceding the date of the first annual stockholders' meeting
following the date of grant. All options granted under the 2000 Outside
Directors Stock Plan will be nonstatutory stock options. They must be exercised,
if

                                       64
<PAGE>   70

at all, within 12 months after a non-employee director's termination service
with us by reason of death or disability and otherwise within six months after
termination of service, but in no event later than the expiration of the
option's term.

      In addition to the foregoing automatic stock option grants, the 2000
Outside Directors Stock Plan permits each non-employee director to elect to
receive additional equity awards in lieu of from 25% to 100% of the cash
compensation otherwise payable to the director for service on our Board of
Directors, beginning with the first full calendar quarter commencing after the
effective date of this offering. Non-employee directors' elections generally
must be made prior to the beginning of each calendar year, with exceptions for
initial elections by newly-elected non-employee directors and the commencement
of the plan. These additional equity awards may take the form of either a stock
option or a grant of stock units, as determined by the non-employee director's
prior election. The awards are granted automatically on the last day of each
calendar quarter in lieu of payment of that portion of a non-employee director's
cash compensation earned during the quarter and previously designated by the
director's election.

      Stock options granted in lieu of a non-employee director's quarterly cash
compensation will be for a number of shares determined by dividing the amount of
such compensation by 50% of the fair market value of a share of our common stock
on the date of grant and will have an exercise price equal to 50% of such fair
market value. These options will have a term of ten years and will be
immediately vested and exercisable in full.

      Each stock unit granted in lieu of a non-employee director's quarterly
cash compensation will represent the right to receive, without further payment,
one share of our common stock within 30 days following the earlier of a date
specified in the director's advance election or the director's termination of
service with us. The number of stock units subject to an award will be
determined by dividing the amount of the non-employee director's quarterly cash
compensation in lieu of which the stock units are awarded by the fair market
value of a share of our common stock on the date of grant. These stock units
will be fully vested upon grant. If we pay a cash dividend on our common stock,
a director who has previously received stock units will receive dividend
equivalents in the form of additional whole and fractional stock units. The
number of such additional stock units will be determined by dividing the amount
of the cash dividend that would be paid on the number of shares of common stock
represented by the director's stock units by the fair market value of a share of
our common stock on the dividend payment date. Upon settlement, the fair market
value of any fractional stock unit will be paid in cash.

      Stock options and stock units granted under the 2000 Outside Directors
Stock Plan generally are not transferable by a director other than by will or
the laws of descent and distribution, except that, with the consent of our Board
of Directors, a director may transfer stock options to certain family members or
entities established for their benefit. In the event of our merger with another
corporation or another change in control event, each outstanding initial and
annual option will become fully vested and exercisable. The plan provides that
the surviving corporation may assume outstanding awards or substitute new awards
of equivalent value. However, if the acquiring corporation refuses to assume or
substitute for outstanding awards, then outstanding stock units will be settled
in shares of our common stock immediately prior to the change in control and
outstanding options will terminate upon the change in control to the extent not
previously exercised.

      The 2000 Outside Directors Stock Plan will be administered by our Board of
Directors or by a committee of the Board in a manner intended to permit
non-employee director awards to be exempt from Section 16(b) of the Securities
Exchange Act of 1934 in accordance with Rule 16b-3 thereunder. The administrator
will approve forms of award agreements for use under the plan, determine the
terms and conditions of awards consistent with the requirements of the plan, and
construe and interpret the terms of the plan and awards granted under it.

      Unless terminated sooner by our Board of Directors, the 2000 Outside
Directors Stock Plan terminates automatically when all shares available for
issuance under the plan have been issued. Our Board of Directors has the
authority to amend or terminate the plan, subject to stockholder approval of any
amendment increasing the maximum number of shares issuable under the plan or as
otherwise
                                       65
<PAGE>   71

required by law. Generally, no amendment or termination may adversely affect any
outstanding award without the consent of the affected director.

  Consultants Stock Option Plan

      Our Consultants Stock Option Plan was adopted by our Board of Directors in
January 1998 and approved by stockholders in February 1998. A total of 220,000
shares of our common stock are authorized and reserved for issuance under the
plan. Appropriate adjustments will be made to the share reserve and to options
outstanding under the plan in the event of any change in our capital structure.
If any option granted under the Consultants Stock Option Plan expires or
terminates, or if we repurchase any shares issued upon exercise of an option,
the shares subject to the terminated portion and any repurchased shares will
again become available for issuance under the plan. As of December 31, 1999,
options to purchase 100,972 shares of common stock were outstanding under the
Consultants Stock Option Plan, 20,000 shares had been issued upon exercise of
options, net of repurchases, and 119,028 shares were available for future grant.

      The Consultants Stock Option Plan is administered by our Board of
Directors or by a committee of the Board, who determine, consistent with the
provisions of the plan, the persons to whom awards are granted and all of the
terms and conditions of such awards. The administrator has the authority to
construe and interpret the terms of the plan and awards granted under it and to
amend or terminate the plan, subject to stockholder approval of any amendment
for which such approval is required by law. Generally, no amendment or
termination may adversely affect any outstanding option without the consent of
the optionee. Unless terminated sooner by the Board of Directors, the
Consultants Stock Option Plan will terminate automatically in 2008 on the tenth
anniversary of its adoption by the Board.

      The Consultants Stock Option Plan authorizes the grant of nonstatutory
stock options to persons engaged by us as independent contractors and not as
employees. The exercise price of any option and its vesting and exercise terms
are established in the sole discretion of the administrator. Unless otherwise
determined by the administrator, an option granted under the plan will have a
term of ten years. Subject to earlier termination as provided by the plan or as
otherwise provided by the administrator, options granted under the Consultants
Stock Option Plan generally must be exercised, if at all, within one month
following an optionee's termination of service with us. Options granted under
the plan are not assignable or transferable by the optionee.

      In the event of our merger with another corporation or another change in
control event, the surviving corporation may assume options outstanding under
the Consultants Stock Option Plan or substitute new options of equivalent value.
However, if the acquiring corporation refuses to assume or substitute for the
outstanding options, then the outstanding options will terminate upon the change
in control to the extent not previously exercised.

  401(k) Plan

      We have established an employee savings and retirement plan commonly known
as a 401(k) plan. The 401(k) plan provides that each participant may contribute
between 1% and 20% of her or his pre-tax gross compensation, up to a statutorily
prescribed annual limit of $10,500 in 2000. The 401(k) plan is intended to
qualify under Section 401(k) of the United States tax code, so that
contributions to the 401(k) plan by employees or by us and the investment
earnings on those contributions are not taxable to the employees until
withdrawn. Employees are eligible to participate on the first day of the first
month following commencement as an employee. All amounts contributed by employee
participants and earnings on these contributions are fully vested at all times.
Employee participants may elect to invest their contributions in various
established funds. While we have the option of matching our employee's
contributions with a discretionary employer contribution, we currently do not do
so. If our 401(k) plan qualifies under Section 401(k) of the United States tax
code, any contributions we make will be deductible by us.

                                       66
<PAGE>   72

                           RELATED PARTY TRANSACTIONS

      Other than compensation agreements and other arrangements, which are
described in the section entitled "Employment Agreements" under the heading
"Management," and the transactions described below, since we were formed, there
has not been nor is there currently proposed, any transaction or series of
similar transactions to which we were or will be a party:

      - in which the amount involved exceeded or will exceed $60,000; and

      - in which any director, executive officer, holder of more than 5% or our
        common stock on an as-converted basis or any member of their immediate
        family had or will have a direct or indirect material interest.

      We believe that each of the transactions described below were on terms no
less favorable than could have been obtained from unaffiliated third parties.
All future transactions between us and any director or executive officer will be
subject to approval by a majority of the disinterested members of our Board of
Directors.

PREFERRED STOCK SALES TO DIRECTORS, OFFICERS AND 5% STOCKHOLDERS

      On July 8, 1998, we sold an aggregate of 13,150,000 shares of our series A
preferred stock at a purchase price of $0.50 per share. On February 16 and March
26, 1999, we sold an aggregate of 13,181,818 shares of our series B preferred
stock at a purchase price of $1.10 per share. On December 13, 1999 we sold an
aggregate of 24,332,061 shares of our series C preferred stock at a purchase
price of $5.24 per share. The following officers, directors and 5% stockholders
purchased shares in these financings:

<TABLE>
<CAPTION>
                                                       SHARES OF         SHARES OF         SHARES OF
PURCHASER                                            SERIES A STOCK    SERIES B STOCK    SERIES C STOCK
- ---------                                            --------------    --------------    --------------
<S>                                                  <C>               <C>               <C>
NBC and General Electric Entities(1):
  National Broadcasting Company, Inc...............           --                --         6,679,389
  GE Capital Equity Investments, Inc...............           --                --         1,049,618
NBC Internet, Inc.(2)..............................           --                --         5,343,511
August Capital, L.P. Entities(3):
  August Capital, L.P..............................    6,539,100         3,229,838           618,321
  August Capital Strategic Partners, L.P...........      227,200           112,220                --
  August Capital Associates, L.P...................      333,700           164,824                --
  August Capital II, L.P...........................           --                --         1,908,397
Bessemer Venture Partners Entities(4):
  Bessemer Venture Partners IV L.P.................    2,633,900         1,172,716           870,229
  Bessec Ventures IV L.P...........................    1,686,100           746,272           580,153
  Bessemer Venture Investors L.P...................      480,000           213,220                --
Mohr, Davidow Ventures Entities(5):
  Mohr, Davidow Ventures V, L.P....................           --         4,227,274           354,961
  Mohr, Davidow Ventures V, L.P. (6)...............           --           318,182            26,718
  Mohr, Davidow Ventures V-L, L.P..................           --                --         1,717,558
  Michael Solomon..................................      410,000           139,662                --
Patti Hart.........................................           --                --           381,679
Peter Olson........................................      320,000                --           588,022
Kevin Grundy.......................................       70,000                --             1,908
</TABLE>

- ---------------
(1) National Broadcasting Company, Inc. and GE Capital Equity Investments, Inc.
    are affiliated entities and are together considered a 5% stockholder.

                                       67
<PAGE>   73

(2) NBC Internet, Inc. is a 5% stockholder. Mr. Sanctis, one of our directors,
    is President and Chief Operating Officer of NBC Internet, Inc.

(3) August Capital, L.P., August Capital Strategic Partners, L.P. and August
    Capital Associates, L.P. are affiliated entities and are together considered
    a 5% stockholder. Mr. Rappaport, one of our directors, is a member of August
    Capital Management and has shared voting and investment power over these
    entities.

(4) Bessemer Venture Partners IV L.P., Bessec Ventures IV L.P., Bessemer Venture
    Investors L.P., Besstel LLC and Bessemer Capital are all affiliated entities
    and are together considered a 5% stockholder. Mr. Cowan, one of our
    directors, is the Managing General Partner of Bessemer Venture Partners.

(5) Mohr, Davidow Ventures V, L.P., MDV Entrepreneurs' Network Fund II (A),
    L.P., MDV Entrepreneurs' Network Fund II (B), L.P., and Mr. Solomon are
    affiliated entities and are together considered a 5% stockholder. Mr.
    Solomon, one of our directors and our former CEO and President, is a member
    of Fifth MDV Partners, the General Partner of Mohr, Davidow Ventures V, L.P.
    Mr. Strahan, one of our directors, is a Venture Partner at Mohr, Davidow.

(6) Includes those shares held by Mohr, Davidow Ventures V, L.P. as nominee for
    MDV Entrepreneurs' Network Fund II (A), L.P. and MDV Entrepreneurs' Network
    Fund II (B), L.P.

STRATEGIC RELATIONSHIP WITH NBCI

      In December 1999, we entered into a number of strategic agreements with
NBCi and its affiliates. These agreements include:

      - an operating agreement;

      - two advertising agreements;

      - a Series C Preferred Stock Purchase Agreement; and

      - an investor rights agreement.

      Our operating agreement with NBCi provides for the joint development of
services branded by both companies, portal design, content offerings and
associated software and utilities, as well as the joint development of
interfaces to deliver services and content to other devices throughout the home.
The operating agreement also provides that NBCi will be our exclusive provider
of Internet content in the areas of utility, communications, media and
entertainment. If NBCi does not provide content that we request within these
categories, we may obtain this content from a third party other than a
competitor of NBCi; however, if the desired content is only available from a
sole provider, we may obtain the content from that sole provider, even if it is
a competitor of NBCi. The operating agreement also provides that we must
negotiate with GE Americom for a period of 30 days before we negotiate with any
other satellite connectivity provider. The term of the operating agreement is 15
years; however, either party may terminate the agreement for an uncured material
breach and NBCi may terminate the operating agreement if we become insolvent or
if an NBCi competitor listed in the agreement acquires more than a 33% interest
in us.

      At the official commercial release of the jointly developed Web portal,
NBCi will pay us 40% of net revenues received by any NBCi entity from
advertising to our customers, as well as from e-mail commerce, subscription and
pay-per-view media, including revenues derived from direct marketing e-mail
solicitations to our customers and advertising placed on the co-branded version
of the Snap.com portal. NBCi will receive 10% of the gross revenues generated
from subscription fees, value-added services and applications for which NBCi
does not offer a similar service or content. If both parties offer similar
services or content, each has agreed to pay the other party 40% of the net
revenue generated from its similar service or content. Finally, the operating
agreement provides that we will pay NBCi 40% of the revenues generated from the
placement of content provided by third parties.

                                       68
<PAGE>   74

      The operating agreement also provides that between December 1999 and
December 2002 NBCi will provide us with online advertising of our services
valued at $5 million. The related advertising agreements provide that during
calendar years 2000, 2001 and 2002 NBC and NBCi will provide us with $28 million
in promotional time on the NBC television network at discounted rates of which
$13 million must be used to air co-branded advertising spots. Additionally, NBCi
has agreed that until December 2002, it will not use television within its
control to promote broadband services provided by any of the competitors we
identified to NBCi. NBCi has the right to terminate this promotional exclusivity
if we fail to launch our service in at least 16 markets by the end of 2000 and
26 markets by the end of 2001, if Patti Hart leaves Telocity or if we fail to
obtain sufficient financing to support our expansion plans by June 2001. In
addition, if either the promotional exclusivity or the operating agreement is
terminated, NBCi may terminate its advertising agreement with us and provide us
with cash for the unused portion of advertising or provide us with advertising
credit for spots that do not have to be co-branded.

      In connection with the operating agreement, we issued NBCi a warrant to
purchase 1,039,122 shares of our common stock and NBC a warrant to purchase
850,191 shares of our Series C Preferred Stock. These warrants terminate in
December 2004 and have an exercise price of $5.24 per share. In addition, in
connection with this transaction we entered into a stock purchase agreement
pursuant to which we issued to GE Capital, NBC, NBCi and ValueVision, an
affiliate of NBCi, a total of 13,454,198 shares of our Series C Preferred Stock
in exchange for a cash payment of $37.5 million and $33 million in advertising
credit provided through the operating agreement and the advertising agreements.

      In connection with the sale of our stock we entered into an amended and
restated investor rights agreement that provides for registration rights for all
of our preferred stockholders, including NBCi and its affiliates. The investor
rights agreement also provides that for a period of two years following the
closing of this offering our founders and preferred stockholders agree to vote
their shares to elect a designee of NBC to the Board of Directors, so long as
NBC holds at least two-thirds of the shares which it initially purchased, and a
designee of NBCi to the Board of Directors. In addition, so long as NBC or NBCi
and their affiliates collectively own at least 2,500,000 shares of our common
stock and neither party has terminated the operating agreement, we have agreed
to negotiate exclusively with either NBC or NBCi for a period of 30 days for the
purchase of Telocity if we decide to sell our company or we receive a third
party offer to buy a 20% or greater interest in our company and we may not sell
our company or our assets to a third party on terms that are more favorable to
us than those last offered by NBC or NBCi.

MASTER BROADBAND SERVICES AGREEMENT WITH GE

      In February 2000, we entered into a two year master broadband services
agreement with GE and its affiliates. Under the services agreement, we will
provide our services to GE and its affiliates' telecommuters, other employees
and affinity users.

      - Telecommuter Program. GE and its affiliates will make available our
        services to some of their employees who telecommute or otherwise need
        high-speed Internet access at home for a business purpose. Through this
        program, we will offer our current services and a few advanced services,
        including virtual private network, data security and backup services to
        telecommuters. GE and its affiliates will be financially responsible to
        us for the fees and other costs generated by these telecommuting users,
        which we will provide at discounted rates. GE and its affiliates will
        pay to us a fee if a telecommuter terminates service with us before the
        completion of a 24-month term.

      - Employee Program. Employees of GE and its affiliates who are not
        eligible for the telecommuter program may nonetheless order, at their
        own expense, our regular services available to consumers at discounted
        rates.

      - Affinity Program. GE and its affiliates may sell our services to
        non-employee users through special marketing and promotional offers. The
        fees we will charge affinity users will be the same as for our regular
        consumers. We will track affinity users through special affinity codes
        unique to GE and its affiliates. GE and its affiliates will have no
        liability, financial or otherwise, to us for affinity users. Employees
        whose job status changes may convert to the affinity program.
                                       69
<PAGE>   75

      GE will cooperate with us in providing some marketing and promotional
efforts, including an initial press release announcing the agreement. GE will
serve as a reference account for us and will respond to calls from potential
business customers, investors and analysts. We may name GE as a customer in our
marketing and promotional materials, subject to GE's approval. GE will also
provide us with information so that we can contact GE's affiliates directly to
market and promote our services. Furthermore, provided that we comply with our
obligations under the services agreement, GE will prominently post details of
Telocity's services on its corporate intranet for its employees and will work
with us to facilitate links to each other's Websites.

      In connection with the services agreement, we also issued to GE four
warrants to purchase an aggregate of 200,000 shares of our common stock, which
may only be exercised upon GE's meeting pre-determined subscriber milestones.
The four warrants are for the purchase of up to 40,000, 40,000, 60,000 and
60,000 shares. Telecommuters, other employees and affinity users from GE and all
its affiliates under the services agreement will count toward these overall
active subscriber milestones.

<TABLE>
<CAPTION>
                                                               TARGET FOR ACHIEVING MILESTONE
                                                        --------------------------------------------
                                                        6 MONTHS   12 MONTHS   18 MONTHS   24 MONTHS
                                                        --------   ---------   ---------   ---------
<S>                                                     <C>        <C>         <C>         <C>
Cumulative Subscribers................................    4,000      8,000       14,000      20,000
Cumulative Shares.....................................   40,000     80,000      140,000     200,000
</TABLE>

      GE must exercise a warrant within 12 months of meeting the milestone for
that warrant. All warrants whose milestones have not yet been achieved will
expire upon the termination of the services agreement. Although we and GE will
work together to meet subscriber milestones by the 6, 12, 18, and 24 month
targets, GE has a total of 30 months in which to meet the active subscriber
milestones, so that all warrants will expire no later than 42 months. GE has
registration rights for shares exercised limited only to inclusion in any
registration statements we otherwise would file with the SEC.

      Under the services agreement, a GE affiliate, meaning any company at least
20% owned by GE, may accept and be bound by the terms of the agreement so long
as GE consents. If GE does not consent to the participation of an affiliate, we
may sign a separate agreement with that company. The services agreement does not
supersede or alter any pre-existing relationship we have with any GE affiliate,
including NBC and NBCi. As part of the services agreement, we also agreed to
participate in quality improvement programs that GE has developed for itself and
its affiliates.

      Under the services agreement, we will work with GE and its affiliates to
develop timelines and procedures for deploying our services to telecommuters,
including placing our equipment at GE and its affiliates' network facilities so
that we can connect telecommuters to GE and its affiliates' networks through our
virtual private network service. We will also provide technical support to GE's
help desk to resolve problems experienced by telecommuters. In addition, the
services agreement outlines a procedure for the creation of jointly developed
intellectual property during the term of the agreement.

      At the end of two years, the services agreement will automatically renew
for successive one year periods unless a party provides the other notice that it
wishes to terminate. Either party may terminate the services agreement for
uncured material breach or the insolvency of the other party. In addition, GE
may terminate the services agreement if we fail to develop adequate procedures
to ensure quality service, if we terminate services to a large number of GE
telecommuters or if our service offering fails to remain competitive with other
service offerings that are in all material respects similar to ours.

LOANS TO OFFICERS AND DIRECTORS

      The following officers and directors have executed Recourse Promissory
Note and Pledge Agreements in order to finance the exercise of their stock
options. As collateral, the holder of the shares of

                                       70
<PAGE>   76

stock purchased through each Note pledges the stock to us. Each Note represents
a debt to us that the holder must repay, with interest, and the interest accrues
and shall be payable to us on the anniversary date of the Note. Except for Ms.
Hart and Mr. Morrissey, each holder must repay us by the earliest of:

      - the maturity date of the Note,

      - the termination of the holder's employment with us,

      - a default in the payment of any installment of principal or interest
        when due,

      - a sale of the stock pledged as collateral or

      - any other such acceleration reasonably necessary for us to comply with
        any regulations promulgated by the Board of Governors of the Federal
        Reserve System affecting the extension of credit in connection with our
        securities.

      The terms of the Notes with Ms. Hart and Mr. Morrissey provide that they
must repay us by the earliest of:

      - the maturity date of the Note,

      - the date of termination of their employment with us for any reason or

      - the date occurring 12 months after they are first eligible to sell
        shares of our stock following an initial public offering, provided,
        however, that should they be terminated without cause, as that term is
        defined in their Notes, they would not be required to repay upon their
        termination, but instead upon the earlier occurrence of conditions (a)
        or (c).

<TABLE>
<CAPTION>
                                                                               PLEDGED STOCK     MATURITY DATE
NOTE HOLDER                  DATE OF NOTE         AMOUNT       INTEREST RATE   AS COLLATERAL        OF NOTE
- -----------               ------------------   -------------   -------------   -------------   ------------------
<S>                       <C>                  <C>             <C>             <C>             <C>
Patti Hart.............        June 22, 1999   $1,029,196.00       5.22%         2,940,560            May 5, 2004
                               June 22, 1999       99,999.90       5.22            285,714            May 5, 2004
Edward Hayes...........      January 5, 2000    1,010,001.00       5.82            336,667        January 5, 2005
                             January 5, 2000       99,999.00       5.82             33,333        January 5, 2005
Jim Morrissey..........   September 21, 1999      500,001.00       5.82            666,668        October 1, 2004
                          September 21, 1999       99,999.00       5.82            133,332        October 1, 2004
Scott Martin...........    December 16, 1999      635,001.00       5.82            211,667      December 16, 2004
                           December 16, 1999       99,999.00       5.82             33,333      December 16, 2004
Regina Wiedemann.......     October 26, 1999      360,000.00       5.82            240,000       October 26, 2004
James Rohrer...........   September 20, 1999       75,000.00       5.82            100,000     September 20, 2004
                            December 2, 1999      150,000.00       5.82            100,000       December 2, 2004
Andrew Robinson........        June 18, 1999       35,000.00       4.51            100,000          June 18, 2004
                               June 23, 1999        3,500.00       4.51             20,000          June 23, 2004
                            October 22, 1999       30,000.00       5.82             20,000       October 22, 2004
                            December 9, 1999      120,000.00       5.82             80,000       December 9, 2004
Thomas Obenhuber.......    February 14, 2000       1,350,000       6.20            150,000      February 14, 2005
Kevin Grundy...........    February 23, 2000       1,350,000       6.20            150,000      February 23, 2005
</TABLE>

      In addition, pursuant to our employment agreement with Mr. Morrissey, we
make a monthly home allowance of $20,000 to him for a period of 24 months
beginning October 1, 1999. Also pursuant to his employment agreement, on
December 6, 1999 and January 5, 2000, we loaned him $900,000 and $1,100,000,
respectively, at the AFR, the applicable federal interest rate determined by the
United States

                                       71
<PAGE>   77

Internal Revenue Service. The terms of these loans, including forgiveness and
repayment, are described above in "Management -- Employment Agreements."

INVESTOR RIGHTS AGREEMENT

      We have entered into an agreement with the preferred stockholders
described above pursuant to which these and other preferred stockholders will
have registration rights with respect to their shares of common stock following
this offering. For a description of these registration rights, see "Description
of Capital Stock." Upon the completion of this offering, all shares of our
outstanding preferred stock will be automatically converted into an equal number
of shares of common stock.

STOCK OPTION GRANTS TO DIRECTORS AND OFFICERS

      During 1999 and 2000, we granted the following options to purchase our
common stock to our officers, directors and stockholders who beneficially own 5%
or more of our common stock. These options were granted under the 1998 Stock
Plan, which is more fully described in the section entitled "Management -- Stock
Plans."

<TABLE>
<CAPTION>
                                                                                EXERCISE PRICE
NAME                                          DATE OF GRANT        OPTIONS        PER SHARE
- ----                                        ------------------    ----------    --------------
<S>                                         <C>                   <C>           <C>
Patti Hart................................      April 30, 1999     3,226,274       $ 0.350
Peter Olson...............................       June 25, 1999         7,714         0.575
Edward Hayes..............................   December 15, 1999       370,000         3.000
Jim Morrissey.............................  September 10, 1999       800,000         0.750
Kevin Grundy..............................    January 26, 2000       150,000         9.000
James Rohrer..............................     August 26, 1999       100,000         0.750
                                             November 15, 1999       100,000         1.500
Scott Martin..............................   December 15, 1999       245,000         3.000
Thomas Obenhuber..........................       June 25, 1999         5,142         0.575
                                              January 26, 2000       150,000         9.000
Regina Wiedemann..........................  September 28, 1999       240,000         1.500
Andrew Robinson...........................      March 12, 1999        20,000         0.175
                                                April 30, 1999       100,000         0.350
                                            September 28, 1999        20,000         1.500
                                             November 15, 1999        80,000         1.500
Randall Strahan...........................    January 20, 1999       200,000         0.050
                                             February 29, 2000        50,000        12.000
</TABLE>

FOUNDER STOCK PURCHASE AND REPURCHASE AGREEMENTS

      On December 23, 1997, we entered into founder stock purchase agreements
with Messrs. Olson, Solomon, Obenhuber and Stepovich. In these agreements, the
founders agreed to purchase shares of our common stock at a price of $0.0005 per
share, as set forth in the table below. Each founder's purchase of his shares is
subject to our right to repurchase his shares at the exercise price, which right
lapses as the shares vest. 11/32 of each of the founder's shares vested
immediately for Messrs. Olson and Solomon and 1/8 of each of the founder's
shares vested immediately for Messrs. Stepovich and Obenhuber; the remaining
shares for each vest subsequently at a rate of 1/42 per month of the remaining
total so long as the founder is continuously employed by us or, in the case of
Mr. Solomon, so long as he continues to act as an advisor to us. Our option to
repurchase the unvested options may terminate upon a transfer of control, as
defined and set forth in the agreements. The agreements give us a right of first
refusal before a founder may transfer or sell any of his shares. The agreements
also provide each founder piggyback registration rights as set forth in the
agreements.

      In order to reallocate our founders' stock, we entered into agreements to
repurchase, then redistribute certain founders' shares. On June 1, 1998, we
entered into founder stock repurchase
                                       72
<PAGE>   78

agreements with Mr. Olson and Mr. Solomon to repurchase 2,662,000 shares of our
common stock from Mr. Olson at a price of $0.0005 per share and 154,000 shares
of our common stock from Mr. Solomon at a price of $0.0005 per share. The table
below sets forth the adjusted grants to Mr. Olson and Mr. Solomon, which gives
effect to our repurchase of some of their shares. On June 10, 1998, we entered
into supplemental founder stock purchase agreements with Messrs. Obenhuber,
Grundy and Stepovich, whereby each was granted shares of our common stock. In
these agreements, Messrs. Obenhuber, Grundy and Stepovich agreed to purchase
shares of our common stock at a price of $0.005 per share, as also set forth in
the table below. Each founder's purchase of his shares is subject to our right
to repurchase his shares at the exercise price, which right lapses as the shares
vest. 7/48 of each of the supplemental founders' shares vested immediately and
the remaining subsequently at a rate of 1/42 per month of the remaining total so
long as the founder is continuously employed by us. Our option to repurchase the
unvested options may terminate upon a transfer of control, as defined and set
forth in the supplemental agreements. The supplemental agreements give us a
right of first refusal before a founder may transfer or sell any of his shares.
The supplemental agreements also provide each founder piggyback registration
rights as set forth in the agreements.

<TABLE>
<CAPTION>
                                                                                              REMAINING
                                                                                               MONTHLY
                            TOTAL SHARES AND PRICE          INITIAL SHARE VESTING           SHARE VESTING
                           ------------------------   ---------------------------------   -----------------
                                                       INITIAL     PORTION     NUMBER     PORTION   NUMBER
                           TOTAL NUMBER   PRICE PER    VESTING     VESTED      VESTED     VESTING   VESTING
                            OF SHARES       SHARE       DATE      INITIALLY   INITIALLY   MONTHLY   MONTHLY
                           ------------   ---------   ---------   ---------   ---------   -------   -------
<S>                        <C>            <C>         <C>         <C>         <C>         <C>       <C>
Michael Solomon..........   1,400,000      $0.0005     10/3/97     11/32       481,250     1/42     21,876
Peter Olson..............   2,000,000       0.0005     10/3/97     11/32       687,500     1/42     31,250
Kevin Grundy.............   1,600,000       0.0050     12/3/97      7/48       233,328     1/42     33,328
Thomas Obenhuber.........     480,000       0.0005     12/3/97       1/8        60,000     1/42     10,000
                            1,120,000       0.0050     12/3/97      7/48       163,332     1/42     23,334
Matthew Stepovich........     144,000       0.0005     12/3/97       1/8        18,000     1/42      3,000
                              356,000       0.0050     12/3/97      7/48        51,916     1/42      7,416
</TABLE>

ACQUISITION OF TECHNOLOGY AND INTELLECTUAL PROPERTY OF ASPEN INTERNET SYSTEMS,
INC.

      On October 3, 1997, we entered into a common stock purchase agreement with
Aspen Internet Systems, Inc. in which we granted to Aspen the option to purchase
504,000 shares of our common stock at a price of $0.0005 per share in exchange
for the execution of a patent license agreement. In the first quarter of 1998 we
acquired assets constituting certain completed technology that has been
incorporated in our residential gateway in exchange for the following
consideration:

      - promissory notes with an aggregate principal amount of $405,000 bearing
        a 6.0% annual interest rate;

      - an aggregate of 40,572 shares of our common stock;

      - cash in the amount of $80,000; and

      - options to purchase 280,000 shares of our common stock.

      Mr. Grundy was a founder of Aspen and had served as its President and
Chief Executive Officer until our acquisition of Aspen. Mr. Grundy currently
holds the positions of President, Secretary and Chief Financial Officer of
Aspen. Mr. Olson and Mr. Solomon both had served on the board of directors of
Aspen until April 2, 1998, when Mr. Stepovich became its sole director.

BRIDGE LOANS

      On November 15, 1999, in advance of the closing of our Series C preferred
stock financing, we entered into convertible bridge loan transactions with Ms.
Hart and Mr. Olson. Each bridge loan was

                                       73
<PAGE>   79

made at an annual interest rate of 12.0%, due within 60 days, required 5.0%
warrant coverage and was to be converted upon the close of our Series C
preferred stock financing. Ms. Hart's loan was for $2,000,000 and Mr. Olson's
loan was for $3,000,000. When we closed our Series C preferred stock financing
on December 13, 1999, Ms. Hart's loan was converted into 381,679 shares of
Series C preferred stock and Mr. Olson's loan was converted into 572,519 shares
of Series C preferred stock. In connection with the loans we paid $21,041 and
$31,562 in interest to Ms. Hart and Mr. Olson, respectively. In addition to the
5.0% warrant coverage, Ms. Hart and Mr. Olson own warrants for 19,084 shares and
28,626 shares, respectively, for the purchase of our preferred stock at an
exercise price of $5.24 per share.

                                       74
<PAGE>   80

                             PRINCIPAL STOCKHOLDERS

      The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of February 29, 2000 and as adjusted
to reflect the sale of common stock offered hereby by the following:

      - each stockholder known by us to own beneficially more than 5% of our
        common stock;

      - each of our executive officers named in the compensation table in the
        section entitled "Management;"

      - each of our directors; and

      - all directors and executive officers as a group.

      The address for those individuals for which an address is not otherwise
indicated is 10355 North De Anza Boulevard, Cupertino, California 95014.

      The number of shares beneficially owned and the percent of shares
outstanding are based on (a) 72,800,129 shares outstanding as of February 29,
2000 and (b) 83,800,129 shares outstanding after completion of this offering,
assuming no exercise of the underwriters' over-allotment option. Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities. All shares of
common stock subject to options exercisable within 60 days following February
29, 2000 are deemed to be outstanding and beneficially owned by the person
holding those options for the purpose of computing the number of shares
beneficially owned and the percent of ownership of that person. They are not,
however, deemed to be outstanding and beneficially owned for the purpose of
computing the percent ownership of any other person. Except as indicated in the
other footnotes to the table and subject to applicable community property laws,
based on information provided by the persons named in the table, these persons
have sole voting and investment power with respect to all shares of the common
stock shown as beneficially owned by them.

<TABLE>
<CAPTION>
                                                                  PERCENT OF SHARES
                                                    SHARES           OUTSTANDING         SHARES SUBJECT
                                                 BENEFICIALLY    --------------------     TO RIGHT OF
                                                 OWNED PRIOR     PRIOR TO     AFTER      REPURCHASE AS
NAME OR GROUP OF BENEFICIAL OWNERS               TO OFFERING     OFFERING    OFFERING      OF 2/29/00
- ----------------------------------               ------------    --------    --------    --------------
<S>                                              <C>             <C>         <C>         <C>
DIRECTORS AND EXECUTIVE OFFICERS
David Cowan(1).................................    9,050,088       12.4%       10.8%
  Bessemer Ventures Partners
  535 Middlefield Road, Suite 245
  Menlo Park, California 94025
Patti Hart.....................................    3,599,037        4.9         4.3        2,688,565
Peter Olson....................................    2,426,648        3.3         2.9          440,392
Andrew Rappaport(2)............................   15,026,102       20.6        17.9
  August Capital
  2480 Sand Hill Road, Suite 101
  Menlo Park, California 94025
Edmond Sanctis(3)..............................    6,382,632        8.8         7.6
  NBC Internet, Inc.
  225 Bush Street
  San Francisco, California 94104
Michael Solomon(4).............................    8,538,355       11.7        10.2
  Mohr, Davidow Ventures
  2775 Sand Hill Road
  Menlo Park, California 94025
</TABLE>

                                       75
<PAGE>   81

<TABLE>
<CAPTION>
                                                                  PERCENT OF SHARES
                                                    SHARES           OUTSTANDING         SHARES SUBJECT
                                                 BENEFICIALLY    --------------------     TO RIGHT OF
                                                 OWNED PRIOR     PRIOR TO     AFTER      REPURCHASE AS
NAME OR GROUP OF BENEFICIAL OWNERS               TO OFFERING     OFFERING    OFFERING      OF 2/29/00
- ----------------------------------               ------------    --------    --------    --------------
<S>                                              <C>             <C>         <C>         <C>
Randall Strahan(5).............................    6,956,193        9.5         8.3
  Mohr, Davidow Ventures
  2775 Sand Hill Road
  Menlo Park, California 94025
Kevin Grundy...................................    1,768,908        2.4         2.1          650,144
Jim Morrissey..................................      800,000        1.0           *          800,000
Thomas Obenhuber...............................    1,734,300        2.3         2.1          659,984
All directors and officers as a group (16
  persons)(6)..................................   51,968,754       71.2        61.9        7,103,259
5% STOCKHOLDERS:
Entities affiliated with August Capital,
  L.P.(2)......................................   15,026,102       20.6        17.9
  2480 Sand Hill Road, Suite 101
  Menlo Park, California 94025
NBC Internet, Inc.(3)..........................    6,382,632        8.8         7.6
  225 Bush Street
  San Francisco, California 94104
Entities affiliated with National Broadcasting
  Company Inc.(7)..............................    8,779,198       12.0        10.5
  30 Rockefeller Plaza
  New York, NY 10112
Entities affiliated with Bessemer Venture
  Partners(1)..................................    9,050,088       12.4        10.8
  1400 Old Country Road, Suite 407
  Westbury, New York 11590
Entities affiliated with Mohr, Davidow
  Ventures(8)..................................    8,849,815       12.1        10.6
  2775 Sand Hill Road
  Menlo Park, California 94025
</TABLE>

- ---------------
* Less than 1.0%.

 (1) Includes:

     - 5,043,123 shares held by Bessemer Venture Partners IV L.P.;

     - 3,246,997 shares held by Bessec Ventures IV L.P.; and

     - 759,968 shares held by Bessemer Venture Investors L.P.

     The general partner of Bessemer Venture Partners IV L.P. is David Cowan. In
     this capacity, Mr. Cowan, through an executive committee, exercises sole
     voting and investment power with respect to all shares held of record by
     the named investment partnerships; individually, no stockholder, director
     or officer of Bessemer Venture Partners IV L.P. has or shares such voting
     or investment power. Mr. Cowan disclaims beneficial ownership of shares
     held by these entities except to the extent of his pecuniary interest in
     these entities.

 (2) Includes:

     - 12,130,253 shares held by August Capital, L.P.;

     - 399,980 shares held by August Capital Strategic Partners, L.P.;

     - 587,472 shares held by August Capital Associates, L.P.; and

     - 1,908,397 shares held by August Capital II, L.P.

     The general partner of August Capital L.P. is Andrew Rappaport. In this
     capacity, Mr. Rappaport, through an executive committee, exercises sole
     voting and investment power with respect to all

                                       76
<PAGE>   82

     shares of record by the named investment partnerships; individually, no
     stockholder, director or officer of August Capital L.P. has or shares such
     voting or investment power. Mr. Rappaport disclaims beneficial ownership of
     shares held by these entities except to the extent of his pecuniary
     interest in these entities.

 (3) Includes 5,343,510 shares held by NBC Internet, Inc. Also includes warrants
     to purchase 1,039,122 shares held by NBC Internet, Inc., all of which are
     exercisable at $5.24 a share. Mr. Sanctis disclaims beneficial ownership of
     these shares except to the extent of his pecuniary interest in NBC
     Internet, Inc.

 (4) Includes 4,582,235 shares held by Mohr, Davidow Ventures V, L.P., 344,900
     shares held by Mohr, Davidow Ventures V, L.P. as nominee for MDV
     Entrepreneurs' Network Fund II (A), L.P. and MDV Entrepreneurs' Network
     Fund II (B), L.P. and 1,717,558 shares held by Mohr, Davidow Ventures V-L,
     L.P.

     Mr. Solomon is a member of Fifth MDV Partners, the General Partner of Mohr,
     Davidow Ventures V, L.P. In this capacity, Mr. Solomon, through an
     executive committee, exercises sole voting and investment power with
     respect to all shares held of record by the named investment partnerships;
     individually, no stockholder, director or officer of Mohr Davidow Ventures
     V L.P. has or shares such voting or investment power. Mr. Solomon disclaims
     beneficial ownership of shares held by these entities except to the extent
     of his pecuniary interest therein. In addition to the 6,644,693 shares held
     by the entities affiliated with Mohr, Davidow Ventures, Mr. Solomon
     personally also beneficially owns 1,893,662 shares, which includes 306,222
     shares subject to our right of repurchase as of February 29, 2000, which
     lapses over time so long as Mr. Solomon continues to serve as an advisor to
     us.

 (5) Includes:

     - 4,582,235 shares held by Mohr, Davidow Ventures V, L.P., 344,900 shares
       held by Mohr, Davidow Ventures V, L.P. as nominee for MDV Entrepreneurs'
       Network Fund II (A), L.P. and MDV Entrepreneurs' Network Fund II (B),
       L.P.; and

     - 1,717,558 shares held by Mohr, Davidow Ventures V-L, L.P. Mr. Strahan is
       a Venture Partner with Mohr, Davidow Ventures.

     In this capacity, Mr. Strahan, through an executive committee, exercises
     sole voting and investment power with respect to all shares held of record
     by the named investment partnerships; individually, no stockholder,
     director or officer of Mohr Davidow Ventures has or shares such voting or
     investment power. Mr. Strahan disclaims beneficial ownership of shares held
     by these entities except to the extent of his pecuniary interest therein.
     In addition to the 6,644,693 shares held by the entities affiliated with
     Mohr, Davidow Ventures, Mr. Strahan personally also beneficially owns
     311,500 shares, including 50,000 options exercisable within 60 days.
     187,500 of these shares are subject to our right of repurchase which lapses
     over time.

 (6) Includes the shares beneficially owned by the persons and entities
     described in footnotes (1), (2), (3), (4) and (5). Also includes 600,000
     shares over which Mr. Stepovich holds voting and investment power solely as
     Trustee of the Olson 1999 Childrens Trust; Mr. Stepovich disclaims
     beneficial ownership of these shares.

 (7) Includes:

     - 6,679,389 shares held by NBC-TLCT Holding, Inc. and

     - 1,049,618 shares held by GE Capital Equity Investments, Inc.

     Also includes warrants to purchase 850,191 shares held by NBC-TLCT Holding,
     Inc., all of which are exercisable at $5.24 a share and warrants to
     purchase 200,000 shares held by General Electric Company, all of which are
     exercisable at $12.00 a share.

                                       77
<PAGE>   83

 (8) Includes:

     - 4,582,235 shares held by Mohr, Davidow Ventures V, L.P.;

     - 344,900 shares held by Mohr, Davidow Ventures V, L.P. as nominee for MDV
       Entrepreneurs' Network Fund II (A), L.P. and MDV Entrepreneurs' Network
       Fund II (B), L.P.; and

     - 1,717,558 shares held by Mohr, Davidow Ventures V-L, L.P.

     Also includes 1,893,662 shares held by Mr. Solomon personally and 311,500
     shares held by Mr. Strahan personally.

                                       78
<PAGE>   84

                          DESCRIPTION OF CAPITAL STOCK

      Upon the completion of this offering, we will be authorized to issue
260,000,000 shares, $0.001 par value per share, to be divided into two classes
to be designated common stock and preferred stock. Of the shares authorized,
250,000,000 shares shall be designated as common stock and 10,000,000 shares
shall be designated as preferred stock. The following description of our capital
stock is only a summary. You should refer to our certificate of incorporation
and bylaws as in effect upon the closing of this offering, which are included as
exhibits to the registration statement of which this prospectus forms a part,
and by the provisions of applicable Delaware law.

COMMON STOCK

      As of February 29, 2000, there were 72,800,129 shares of common stock
outstanding which were held of record by approximately 360 stockholders. There
will be 83,800,129 shares of common stock outstanding (assuming no exercise of
the underwriters' over-allotment option and no exercise of outstanding options
after February 29, 2000) after giving effect to the sale of our common stock in
this offering. There are outstanding unexercised options to purchase a total of
1,017,652 shares of our common stock.

      The holders of our common stock are entitled to one vote per share held of
record on all matters submitted to a vote of the stockholders. Our amended and
restated certificate of incorporation to be filed concurrently with completion
of this offering does not provide for cumulative voting in the election of
directors. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by our Board of
Directors out of funds legally available for that purpose. In the event of our
liquidation, dissolution or winding up, holders of our common stock are entitled
to share ratably in all assets remaining after payment of liabilities, subject
to prior distribution rights of preferred stock, if any, then outstanding.
Holders of our common stock have no preemptive or other subscription or
conversion rights. There are no redemption or sinking fund provisions applicable
to our common stock.

PREFERRED STOCK

      Upon the completion of this offering and filing of our amended and
restated certificate of incorporation, our Board of Directors will be
authorized, without action by the stockholders, to issue 10,000,000 shares of
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions of these shares. These rights, preferences and
privileges may include dividend rights, conversion rights, voting rights, terms
of redemption, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of any series, all or any of
which may be greater than the rights of the common stock. It is not possible to
state the actual effect of the issuance of all shares of preferred stock upon
the right of holders of our common stock until our Board of Directors determines
the specific rights of the holders of any preferred stock that may be issued.
However, the effect might include, among other things:

      - restricting dividends on the common stock,

      - diluting the voting power of the common stock,

      - impairing the liquidation rights of the common stock and

      - delaying or preventing a change in our control without further action by
        the stockholders.

      Upon the closing of this offering, no shares of preferred stock will be
outstanding and we have no present plans to issue any shares of preferred stock.

                                       79
<PAGE>   85

REGISTRATION RIGHTS

      The holders of approximately 50,663,879 shares of preferred stock have the
right to require us to register their shares with the Securities and Exchange
Commission so that those shares may be publicly resold or to include their
shares in any registration statement we file.

  Demand registration rights

      - At any time after the earlier of February 16, 2002 and six months after
        the closing of this offering the holders of at least 10% of the shares
        having registration rights have the right to demand on four separate
        occasions that we file a registration statement on a form other than
        Form S-3 so that they can publicly sell their shares, as long as the
        aggregate market value of the shares to be sold under the registration
        statement exceeds $5 million. The underwriters of any underwritten
        offering will have the right to limit the number of shares to be
        included in the registration.

      - If we are eligible to file a registration statement on Form S-3, holders
        of at least 10% of the shares having registration rights have the right
        to demand at any time more than six months following the closing of a
        registration that we file a registration statement on Form S-3, as long
        as the aggregate market value of the shares to be sold under the
        registration statement exceeds $1 million. The underwriters of any
        underwritten offering will have the right to limit the number of shares
        to be included in the registration.

  Piggyback registration rights

      If we register any shares for public sale, stockholders with registration
rights will have the right to include their shares in the registration. The
underwriters of any underwritten offering will have the right to limit the
number of shares to be included in the registration; provided that the number of
shares to be included by holders with registration rights in the registration
shall not be reduced below 50% of the total number of shares to be included in
the registration. In addition, the underwriters of this offering have the right
to exclude all shares held by holders with registration rights.

  Expenses of registration

      We will pay all expenses relating to any demand or piggyback registration.
However, we will not pay for the expenses of any demand registration if the
request is subsequently withdrawn by the holders of a majority of the shares
having registration rights, subject to very limited exceptions.

  Expiration of registration rights

      The registration rights described above will expire seven years after this
offering is completed. The registration rights will terminate earlier for a
particular stockholder if that holder can resell all of its shares pursuant to
Rule 144 of the Securities Act.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS

      Certain provisions of Delaware law and our certificate of incorporation
and bylaws could make our acquisition more difficult by means of a tender offer,
a proxy contest or otherwise and could also make the removal of incumbent
officers and directors more difficult. These provisions, summarized below, are
expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
us to first negotiate with us. We believe that the benefits of increased
protection of our potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure us outweighs the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms. The
amendment of any of the following provisions would require approval by holders
of at least 66 2/3% of our outstanding common stock.

                                       80
<PAGE>   86

BOARD OF DIRECTORS

      Effective with the first annual meeting of stockholders following
completion of this offering, our amended and restated bylaws provide for the
division of our Board of Directors into three classes, as nearly equal in number
as possible, with the directors in each class serving for a three-term, and one
class being elected each year by our stockholders. This system of electing and
removing directors may tend to discourage a third party from making a tender
offer or otherwise attempting to obtain control of us and may maintain the
incumbency of the Board of Directors, as it generally makes it more difficult
for stockholders to replace a majority of the directors. Further, our amended
and restated certificate of incorporation filed in connection with this offering
and restated bylaws do not provide for cumulative voting in the election of
directors.

STOCKHOLDER MEETINGS

      Under our amended and restated certificate of incorporation and amended
and restated bylaws, only our Board of Directors, Chairman of the Board or Chief
Executive Officer, and the holders of shares entitled to cast not less than ten
percent of the votes at the meeting may call special meetings of stockholders.
Our restated bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination 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 of Directors.

UNDESIGNATED PREFERRED STOCK

      The authorization of undesignated preferred stock makes it possible for
the Board of Directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to effect a change of
control of us. These and other provisions may have the effect of deferring
hostile takeovers or delaying changes in control or management.

SECTION 203

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

      - prior to the 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's
        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 those shares owned by persons who
        are directors and also officers, and 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 the 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 two-thirds of the outstanding voting stock that is not owned by
        the interested stockholder.

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 involving the interested
        stockholder of 10% or more of the assets of the corporation;

                                       81
<PAGE>   87

      - subject to exceptions, any transaction that results in the issuance or
        transfer by the corporation of any stock of the corporation to 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.

In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.

TRANSFER AGENT AND REGISTRAR

      The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C.

NASDAQ STOCK MARKET NATIONAL MARKET LISTING

      We have applied to have our common stock quoted on The Nasdaq Stock
Market's National Market under the symbol "TLCT."

                                       82
<PAGE>   88

                        SHARES ELIGIBLE FOR FUTURE SALE

      Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of our common stock in the
public market could adversely affect the market price of our common stock.

      Upon completion of this offering, based on shares outstanding as of
February 29, 2000, we will have outstanding 83,800,129 shares of common stock,
assuming (1) the issuance of 11,000,000 shares of common stock in this offering,
(2) no exercise of the underwriters' over-allotment option, and (3) no exercise
of options after February 29, 2000.

      All of the 11,000,000 shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act. However,
the sale of any of these share if purchased by "affiliates" as that term is
defined in Rule 144 are subject to certain limitations and restrictions that are
described below.

      The remaining 72,800,129 shares of common stock and mandatorily redeemable
convertible preferred stock held by existing stockholders were issued and sold
by us in reliance on exemptions from the registration requirements of the
Securities Act. These shares are "restricted shares" as that term is defined in
Rule 144 and therefore may not be sold publicly unless they are registered under
the Securities Act or are sold pursuant to Rule 144 or another exemption from
registration. In addition, our directors and officers as well as other
stockholders and optionholders have entered into "lock-up agreements" with the
underwriters. These lock-up agreements provide that, except under limited
exceptions, the stockholder may not offer, sell, contract to sell, pledge or
otherwise dispose of any of our common stock or securities that are convertible
into or exchangeable for, or that represent the right to receive, our common
stock for a period of 180 days after the date of this prospectus. Merrill Lynch,
Pierce, Fenner & Smith Incorporated, however, may in its sole discretion, at any
time without notice, release all or any portion of the shares subject to lock-up
agreements. Accordingly, of the remaining 72,800,129 shares, 48,468,068 shares
will become eligible for sale 180 days after the effective date subject to Rules
144 and 701.

      As of February 29, 2000, there were a total of 1,017,652 shares of common
stock subject to outstanding options, 157,571 of which were vested, and nearly
all of which are subject to lock-up agreements. Immediately after the completion
of the offering, we intend to file registration statements on Form S-8 under the
Securities Act to register all of the shares of common stock issued or reserved
for future issuance under our 1998 Stock Plan, our 2000 Employee Stock Purchase
Plan and our 2000 Outside Directors Stock Plan. On the date 180 days after the
effective date of the offering, the date that the lock-up agreements expire, a
total of 183,992 shares of our common stock subject to outstanding options will
be vested. After the effective dates of the registration statements on Form S-8,
shares purchased upon exercise of options granted pursuant to our 1998 Stock
Plan, our 2000 Employee Stock Purchase Plan and our 2000 Outside Directors Stock
Plan generally would be available for resale in the public market.

RULE 144

      In general, under Rule 144 beginning 90 days after the date of this
prospectus, a person who has beneficially owned shares of our common stock for
at least one year would be entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of:

      - 1% of the number of shares of common stock then outstanding, which will
        equal approximately 838,001 shares immediately after this offering; or

      - the average weekly trading volume of the common stock on the Nasdaq
        Stock Market's National Market during the four calendar weeks preceding
        the filing of a notice on Form 144 with respect to such sale.

      Sales under Rule 144 are also subject to certain other requirements
regarding the manner of sale, notice filing and the availability of current
public information about us.

                                       83
<PAGE>   89

RULE 144(K)

      Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
generally including the holding period of any prior owner other than an
"affiliate," is entitled to sell such shares without complying with the manner
of sale, notice filing, volume limitation or notice provisions of Rule 144.
Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately
upon the completion of this offering.

RULE 701

      In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to resell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with certain restrictions, including the holding period, contained in
Rule 144.

      The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of such options (including exercises after the date of this
prospectus). Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual lock-up restrictions described above, beginning
90 days after the date of this prospectus, may be sold by persons other than
"affiliates," as defined in Rule 144, subject only to the manner of sale
provisions of Rule 144. Securities issued in reliance on Rule 701 may be sold by
"affiliates" under Rule 144 without compliance with its one-year minimum holding
period requirement.

                                       84
<PAGE>   90

                                  UNDERWRITING

GENERAL

      We intend to offer our common stock in the United States through a number
of underwriters. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit
Suisse First Boston Corporation, Donaldson, Lufkin & Jenrette Securities
Corporation and SoundView Technology Group, Inc. are acting as representatives
of each of the underwriters named below. Subject to the terms and conditions set
forth in a purchase agreement among our company and the underwriters, we have
agreed to sell to the underwriters, and each of the underwriters severally and
not jointly has agreed to purchase from us, the number of shares of common stock
set forth opposite its name below:

<TABLE>
<CAPTION>
                                                                  NUMBER
                        UNDERWRITER                             OF SHARES
- ------------------------------------------------------------    ----------
<S>                                                             <C>
Merrill Lynch, Pierce, Fenner & Smith
             Incorporated...................................
Credit Suisse First Boston Corporation......................
Donaldson, Lufkin & Jenrette Securities Corporation.........
SoundView Technology Group, Inc. ...........................
                                                                ----------
             Total..........................................    11,000,000
                                                                ----------
</TABLE>

      In the purchase agreement, the underwriters have agreed to purchase all of
the shares being sold if any of the shares being sold are purchased. In the
event of a default by an underwriter, the purchase agreement provides that, in
certain circumstances, the purchase commitments by the nondefaulting
underwriters may be increased or the purchase agreement may be terminated.

      We have agreed to indemnify the underwriters against some liabilities
under the Securities Act, or to contribute to payments the underwriters may be
required to make in respect of those liabilities.

      The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and certain
other conditions. The underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part.

      A prospectus in electronic format is being made available on a web site
maintained by Wit SoundView's affiliate, Wit Capital Corporation. In addition,
all dealers purchasing shares from Wit SoundView in this offering have agreed to
make a prospectus in electronic format available on web sites maintained by each
of those dealers.

COMMISSIONS AND DISCOUNTS

      The representatives have advised us that the underwriters propose
initially to offer the shares of common stock to the public at the public
offering price set forth on the cover page of this prospectus, and to certain
dealers at such price less a concession not in excess of $          per share of
common stock. The underwriters may allow, and such dealers may reallow, a
discount not in excess of $          per share of common stock to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.

                                       85
<PAGE>   91

      The following table shows the per share and the total public offering
price, the underwriting discount to be paid by us to the underwriters and the
proceeds before expenses to us. This information is presented assuming either no
exercise or full exercise by the underwriters of their over-allotment options.

<TABLE>
<CAPTION>
                                             PER SHARE    WITHOUT OPTION    WITH OPTION
                                             ---------    --------------    -----------
<S>                                          <C>          <C>               <C>
Public offering price......................      $             $                $
Underwriting discount......................      $             $                $
Proceeds, before expenses, to Telocity.....      $             $                $
</TABLE>

      The expenses of the offering, exclusive of the underwriting discount, are
estimated at $          million and are payable by us.

OVER-ALLOTMENT OPTION

      We have granted an option to the underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of 1,650,000
additional shares of our common stock at the public offering price set forth on
the cover page of this prospectus, less the underwriting discount. The
underwriters may exercise this option solely to cover over-allotments, if any,
made on the sale of our common stock offered hereby. To the extent that the
underwriters exercise this option, each underwriter will be obligated, subject
to certain conditions, to purchase a number of additional shares of our common
stock proportionate to such underwriter's initial amount reflected in the
foregoing table.

RESERVED SHARES

      At our request, the underwriters have reserved for sale, at the initial
public offering price, up to      % of the shares offered by this prospectus to
be sold to some of our employees, officers, directors and their immediate family
members. The number of shares of our common stock available for sale to the
general public will be reduced to the extent that those persons purchase the
reserved shares. Any reserved shares which are not orally confirmed for purchase
within one day of the pricing of the offering will be offered by the
underwriters to the general public on the same terms as the other shares offered
by this prospectus.

NO SALES OF SIMILAR SECURITIES

      We and our executive officers and directors and all of our existing
stockholders have agreed, with certain exceptions, without the prior written
consent of Merrill Lynch on behalf of the underwriters for a period of 180 days
after the date of this prospectus, not to directly or indirectly

      - offer, pledge, sell, contract to sell, sell any option or contract to
        purchase, purchase any option or contract to sell, grant any option,
        right or warrant for the sale of, lend or otherwise dispose of or
        transfer any shares of our common stock or securities convertible into
        or exchangeable or exercisable for or repayable with our common stock,
        whether now owned or later acquired by the person executing the
        agreement or with respect to which the person executing the agreement
        later acquires the power of disposition, or file a registration
        statement under the Securities Act relating to any shares of our common
        stock; or

      - enter into any swap or other agreement that transfers, in whole or in
        part, directly or indirectly, the economic consequence of ownership of
        our common stock whether any such swap or transaction is to be settled
        by delivery of our common stock or other securities, in cash or
        otherwise.

QUOTATION ON THE NASDAQ NATIONAL MARKET

      We expect the shares to be approved for quotation on the Nasdaq National
Market under the symbol "TLCT."

                                       86
<PAGE>   92

      Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through negotiations
between us and the representatives. Among the factors considered in determining
the initial public offering price, in addition to prevailing market conditions,
were the valuation multiples of publicly traded companies that the
representatives believed to be comparable to us, certain of our financial
information, the history of, and the prospects for, our company and the industry
in which we compete, and an assessment of our management, our past and present
operations, the prospects for, and timing of, future revenue of our company, the
present state of our development, and the above factors in relation to market
values and various valuation measures of other companies engaged in activities
similar to ours. There can be no assurance that an active trading market will
develop for our common stock or that our common stock will trade in the public
market subsequent to the offering at or above the initial public offering price.

      The underwriters have advised us that they do not expect sales of the
common stock to any accounts over which they exercise discretionary authority to
exceed 5% of the number of shares being offered in this offering.

PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS

      Until the distribution of our common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
certain selling group members to bid for and purchase our common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of our common stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of our common stock.

      If the underwriters create a short position in our common stock in
connection with the offering, i.e., if they sell more shares of our common stock
than are set forth on the cover page of this prospectus, the representatives may
reduce that short position by purchasing our common stock in the open market.
The representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option described above.

      The representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares of
our common stock in the open market to reduce the underwriters' short position
or to stabilize the price of our common stock, they may reclaim the amount of
the selling concession from the underwriters and selling group members who sold
those shares as part of the offering.

      In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of our common stock to the extent that it
discourages resales of our common stock.

      Neither our company nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of our common stock. In
addition, neither our company nor any of the underwriters makes any
representation that the representatives will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.

      Some of the underwriters and their affiliates may engage in other
transactions with, and perform services for, our company in the ordinary course
of business and have engaged, and may in the future engage, in commercial
banking and investment banking transactions with our company, for which they may
receive customary compensation.

                                       87
<PAGE>   93

                                 LEGAL MATTERS

      The validity of the common stock we offer will be passed upon for us by
Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Legal matters will be
passed upon for the underwriters by Baker & McKenzie, New York, New York. As of
the date of this prospectus, Gray Cary Ware & Freidenrich LLP, GCWF Investment
Partners, an investment partnership composed of some current and former members
of and persons associated with Gray Cary Ware & Freidenrich LLP, and some
individual members of Gray Cary Ware & Freidenrich LLP, beneficially own an
aggregate of 98,168 shares of our common stock. Regulatory matters will be
passed upon for us by Patton Boggs LLP, Washington, D.C. As of the date of this
prospectus, one member of Patton Boggs LLP owns an aggregate of 1,051 shares of
our common stock.

                                    EXPERTS

      The financial statements as of December 31, 1998 and 1999, and for the
period August 18, 1997, (date of incorporation) to December 31, 1997 and the
year ended December 31, 1998 and 1999 included in this prospectus are included
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on their authority as experts in auditing and accounting.

                             ADDITIONAL INFORMATION

      We have filed with the Securities and Exchange Commission, Washington,
D.C., a registration statement on Form S-1 under the Securities Act with respect
to the shares of common stock offered hereby. This prospectus does not contain
all the information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and our common
stock, reference is made to the registration statement and to the exhibits and
schedules filed therewith. Statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of the contract or
other document filed as an exhibit to the registration statement. A copy of the
registration statement may be inspected by anyone without charge at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of all or any portion of the
registration statement may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
prescribed fees. The Commission maintains a Website at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.

                                       88
<PAGE>   94

                                 TELOCITY, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                       F-1
<PAGE>   95

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
  Telocity, Inc.

      The reincorporation described in Note 1 to the consolidated financial
statements has not been consummated at January 28, 2000. When it has been
consummated, we will be in a position to furnish the following report assuming
that from January 28, 2000 to the date of such reincorporation, no other
material events have occurred that would affect the accompanying consolidated
financial statements or require disclosure therein:

          "In our opinion, the accompanying consolidated balance sheets and the
     related consolidated statements of operations, of stockholders' deficit and
     of cash flows present fairly, in all material respects, the financial
     position of Telocity, Inc. at December 31, 1998 and 1999, and the results
     of their operations and their cash flows for the period from August 18,
     1997 (date of incorporation) to December 31, 1997, the year ended December
     31, 1998 and the year ended December 31, 1999 in conformity with accounting
     principles generally accepted in the United States. 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 of these statements in accordance
     with auditing standards generally accepted in the United States, which
     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, assessing the
     accounting principles used and significant estimates made by management,
     and evaluating the overall financial statement presentation. We believe
     that our audits provide a reasonable basis for the opinion expressed
     above."

San Jose, California
January 28, 2000

                                       F-2
<PAGE>   96

                                 TELOCITY, INC.

                          CONSOLIDATED BALANCE SHEETS
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                     PRO FORMA
                                                                 DECEMBER 31,      DECEMBER 31,
                                                              ------------------       1999
                                                               1998       1999     (SEE NOTE 12)
                                                              -------   --------   -------------
                                                                                    (UNAUDITED)
<S>                                                           <C>       <C>        <C>
ASSETS
Current assets:
    Cash and cash equivalents...............................  $ 1,402   $ 66,978     $ 66,978
    Accounts receivable.....................................       --         13           13
    Prepaid expenses and other current assets...............       37      7,013        7,013
                                                              -------   --------     --------
         Total current assets...............................    1,439     74,004       74,004
Property and equipment, net.................................    2,740     22,272       22,272
Intangibles, net............................................      467        380          380
Other assets................................................       51     43,415       43,415
                                                              -------   --------     --------
         Total assets.......................................  $ 4,697   $140,071     $140,071
                                                              -------   --------     --------
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
    Accounts payable........................................    1,588      9,141        9,141
    Accrued liabilities.....................................      130      4,383        4,383
    Deferred revenue........................................       --         33           33
    Notes payable, current..................................      562      2,292        2,292
    Capital lease obligations, current......................      363      4,426        4,426
                                                              -------   --------     --------
         Total current liabilities..........................    2,643     20,275       20,275
Notes payable, net of current portion.......................    2,139      3,135        3,135
Capital lease obligations, net of current portion...........    1,351      8,859        8,859
Other liabilities...........................................       --         64           64
                                                              -------   --------     --------
         Total liabilities..................................    6,133     32,333       32,333
                                                              -------   --------     --------
Mandatorily redeemable convertible preferred stock:
  Series A; no par value, 13,553,126 authorized shares;
    issued and outstanding: 13,150,000 in 1998 and 1999 and
    zero pro forma (unaudited) (Liquidation value:
    $6,575).................................................    6,565      6,567           --
  Series A warrants.........................................      106        106           --
  Series B; no par value, 14,699,998 authorized shares;
    issued and outstanding: zero in 1998, 13,181,818 in 1999
    and zero pro forma (unaudited) (Liquidation value:
    $14,500)................................................       --     14,490           --
  Series B warrants.........................................       --      1,431           --
  Series C; no par value, 27,000,000 authorized shares;
    issued and outstanding: zero in 1998, 24,332,061 in 1999
    and zero pro forma (unaudited) (Liquidation value:
    $127,500)...............................................       --    126,293           --
  Series C warrants.........................................       --      7,133           --
                                                              -------   --------     --------
         Total mandatorily redeemable convertible preferred
          stock.............................................    6,671    156,020           --
                                                              -------   --------     --------
Commitments (Note 6)
Stockholders' equity (deficit):
  Common Stock: $0.001 par value, 40,000,000 shares
    authorized 1998; 90,000,000 shares authorized in 1999;
    issued and outstanding: 11,877,506 in 1998 and
    20,282,270 in 1999 and 70,946,149 pro forma
    (unaudited).............................................        8         17           68
  Additional paid-in capital................................      586     39,478      195,447
  Receivable from stockholders..............................     (118)    (5,457)      (5,457)
  Unearned stock-based compensation.........................     (315)   (13,883)     (13,883)
  Accumulated deficit.......................................   (8,268)   (68,437)     (68,437)
                                                              -------   --------     --------
         Total stockholders' equity (deficit)...............   (8,107)   (48,282)     107,738
                                                              -------   --------     --------
         Total liabilities, mandatorily redeemable
          convertible preferred stock and stockholders'
          equity (deficit)..................................  $ 4,697   $140,071     $140,071
                                                              =======   ========     ========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-3
<PAGE>   97

                                 TELOCITY, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                              FOR THE
                                                            PERIOD FROM
                                                            AUGUST 18,
                                                           1997 (DATE OF
                                                          INCORPORATION)
                                                                TO           YEAR ENDED      YEAR ENDED
                                                           DECEMBER 31,     DECEMBER 31,    DECEMBER 31,
                                                               1997             1998            1999
                                                          ---------------   ------------   ---------------
<S>                                                       <C>               <C>            <C>
Revenues................................................    $       --       $       --      $       187
Operating expenses:
  Network and product costs.............................            --               --            2,080
  Sales and marketing...................................             5              252           13,571
  General and administrative............................           335            2,018            7,683
  Research and development..............................           327            4,744           16,725
  Depreciation and amortization.........................            11              424            2,253
                                                            ----------       ----------      -----------
          Total operating expenses......................           678            7,438           42,312
                                                            ----------       ----------      -----------
Loss from operations....................................          (678)          (7,438)         (42,125)
Interest expense........................................            --             (187)          (1,448)
Interest income.........................................            --               35              379
Other income/(expense), net.............................            --               --             (225)
                                                            ----------       ----------      -----------
Net loss................................................          (678)          (7,590)         (43,419)
Deemed dividend and accretion on mandatorily redeemable
  convertible preferred stock...........................            --               --          (16,750)
                                                            ----------       ----------      -----------
Net loss attributable to common stockholders............    $     (678)      $   (7,590)     $   (60,169)
                                                            ==========       ==========      ===========
Net loss per share -- basic and diluted.................    $    (0.56)      $    (1.39)     $     (7.32)
                                                            ==========       ==========      ===========
Shares used in computing basic and diluted net loss per
  share.................................................     1,219,538        5,471,617        8,219,183
                                                            ==========       ==========      ===========
Pro forma net loss per share -- basic and diluted
  (unaudited)...........................................                                     $     (1.79)
                                                                                             ===========
Shares used in computing pro forma net loss per share
  basic and diluted (unaudited).........................                                      33,610,291
                                                                                             ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-4
<PAGE>   98

                                 TELOCITY, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                        COMMON STOCK       ADDITIONAL    RECEIVABLE      UNEARNED                       TOTAL
                                    --------------------    PAID-IN         FROM       STOCK-BASED    ACCUMULATED   STOCKHOLDERS'
                                      SHARES      AMOUNT    CAPITAL     STOCKHOLDERS   COMPENSATION     DEFICIT        DEFICIT
                                    -----------   ------   ----------   ------------   ------------   -----------   -------------
<S>                                 <C>           <C>      <C>          <C>            <C>            <C>           <C>
Issuance of common stock at
  $0.0005 per share in October
  1997............................    2,560,000    $ 1      $    --       $    --        $     --      $     --       $      1
Issuance of common stock at
  $0.0005 for completed technology
  in October 1997.................      504,000     --           --            --              --            --             --
Issuance of common stock at
  $0.0005 per share in December
  1997............................    6,840,000      3           --            (3)             --            --             --
Net loss..........................           --     --           --            --              --          (678)          (678)
                                    -----------    ---      -------       -------        --------      --------       --------
Balances, December 31, 1997.......    9,904,000      4           --            (3)             --          (678)          (677)
Warrants issued for services in
  September 1998..................           --     --           92            --              --            --             92
Issuance of common stock for
  purchase acquisition at $0.0005
  per share in March 1998.........       40,572     --           --            --              --            --             --
Issuance of common stock options
  for purchase acquisition in
  March 1998......................           --     --            7            --              --            --              7
Repurchase of common stock for
  completed technology in March
  1998............................     (504,000)    --           --            --              --            --             --
Issuance of common stock at $0.005
  per share in June 1998..........    3,076,000      3           12           (15)             --            --             --
Repurchase of common stock at
  $0.0005 per share in June
  1998............................   (2,816,000)    (1)          --             1              --            --             --
Issuance of common stock upon
  exercise of stock options.......    2,176,934      2          107          (101)             --            --              8
Common stock options issued for
  services in July to December
  1998............................           --     --           40            --              --            --             40
Unearned stock-based
  compensation....................           --     --          328            --            (328)           --             --
Amortization of stock-based
  compensation....................           --     --           --            --              13            --             13
Net loss..........................           --     --           --            --              --        (7,590)        (7,590)
                                    -----------    ---      -------       -------        --------      --------       --------
Balances, December 31, 1998.......   11,877,506      8          586          (118)           (315)       (8,268)        (8,107)
Warrants issued in connection with
  property lease in March and
  November 1999...................           --     --           85            --              --            --             85
Warrants issued for services in
  June 1999.......................           --     --          247            --              --            --            247
Warrants issued in connection with
  licensing agreement in November
  1999............................           --     --           79            --              --            --             79
Issuance of common stock upon
  exercise of stock options.......    9,693,062     10        5,628        (5,455)             --            --            183
Common stock options issued for
  services in January to December
  1999............................           --     --        1,097            --            (177)           --            920
Repurchase of common stock........   (1,288,298)    (1)        (115)          116              --            --             --
Unearned stock-based
  compensation....................           --     --       15,195            --         (15,195)           --             --
Amortization of stock-based
  compensation....................           --     --           --            --           1,804            --          1,804
Deemed dividend on issuance of
  Series C preferred stock in
  December 1999...................           --     --       16,676            --              --       (16,676)            --
Accretion on mandatorily
  redeemable convertible preferred
  stock...........................           --     --           --            --              --           (74)           (74)
Net loss..........................           --     --           --            --              --       (43,419)       (43,419)
                                    -----------    ---      -------       -------        --------      --------       --------
Balances, December 31, 1999.......   20,282,270    $17      $39,478       $(5,457)       $(13,883)     $(68,437)      $(48,282)
                                    ===========    ===      =======       =======        ========      ========       ========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-5
<PAGE>   99

                                 TELOCITY, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 FOR THE
                                                               PERIOD FROM
                                                                AUGUST 18,
                                                              1997 (DATE OF
                                                              INCORPORATION)
                                                                    TO          YEAR ENDED     YEAR ENDED
                                                               DECEMBER 31,    DECEMBER 31,   DECEMBER 31,
                                                                   1997            1998           1999
                                                              --------------   ------------   ------------
<S>                                                           <C>              <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss..................................................      $ (678)        $(7,590)       $(43,419)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
    Depreciation and amortization...........................          11             424           2,253
    Amortization of stock-based compensation................          --              13           1,804
    Issuance of common stock options in exchange for
      services..............................................          --              40             920
    Warrant related non-cash interest expense...............          --              12             492
    Warrant related non-cash general and administrative
      expense...............................................          --              92             332
    Warrant related non-cash sales and marketing expense....          --              --              39
    Loss on sale of fixed assets............................          --              --             225
    Change in operating assets and liabilities:
      Accounts receivable...................................          --              --             (13)
      Prepaid expenses and other assets.....................        (110)             73           1,584
      Other assets..........................................          --             (51)          2,487
      Accounts payable......................................         100           1,487           7,553
      Accrued liabilities...................................          --             144           4,264
      Deferred revenue......................................          --              --              33
      Other liabilities.....................................          --              --              64
                                                                  ------         -------        --------
         Net cash used in operating activities..............        (677)         (5,356)        (29,524)
                                                                  ------         -------        --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from sales of assets.............................          --              --             288
  Acquisition of intangibles................................          --              --             (15)
  Acquisition of subsidiary, net of cash acquired...........          --             (51)             --
  Purchase of property and equipment........................        (303)           (975)         (9,377)
                                                                  ------         -------        --------
         Net cash used in investing activities..............        (303)         (1,026)         (9,104)
                                                                  ------         -------        --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of mandatorily redeemable
    convertible preferred stock, net of issuance costs......          --           4,050          96,876
  Proceeds from exercise of common stock options............          --               8             183
  Proceeds from issuance of common stock....................           1              --              --
  Proceeds from issuance of warrants for preferred stock....          --              67              --
  Proceeds from the issuance of notes payable...............       1,000           3,924          13,000
  Repayment of notes payable................................          --            (178)         (4,757)
  Principal payments on capital lease obligations...........          --            (108)           (818)
  Restriction of cash related to letter of credit...........          --              --            (280)
                                                                  ------         -------        --------
         Net cash provided by financing activities..........       1,001           7,763         104,204
                                                                  ------         -------        --------
Net increase in cash and cash equivalents...................          21           1,381          65,576
Cash and cash equivalents, beginning of period..............          --              21           1,402
                                                                  ------         -------        --------
Cash and cash equivalents, end of period....................      $   21         $ 1,402        $ 66,978
                                                                  ======         =======        ========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-6
<PAGE>   100

                                 TELOCITY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- FORMATION AND BUSINESS OF THE COMPANY:

      Telocity, Inc. (the "Company") develops, markets, integrates and delivers
interactive online services to the residential market over high-speed, or
broadband, connections. The Company has a single operating segment and has no
organizational structure dictated by product lines, geography or customer type.
All revenues earned to date have been generated from U.S. based customers.

      The Company was in the development stage at December 31, 1998. The Company
began offering services commercially in Chicago in July 1999 and in January
2000, its commercial services were extended to more than 40 metropolitan
statistical areas in the Southeast, Northeast, upper Midwest and Mid-Atlantic
states, including Atlanta, Miami, Detroit, Philadelphia and New York City.

      In January 2000, the Company approved the reincorporation of the Company
from California to Delaware. The reincorporation to Delaware will result in a
change in par value and an increase in authorized shares. All share data and
stock option plan information in the consolidated financial statements and notes
herein have been restated to reflect the reincorporation.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  Principles of consolidation

      These consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant intercompany balances
and transactions have been eliminated.

  Use of estimates

      Preparation of the accompanying financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.

  Cash and cash equivalents

      The Company considers all highly liquid investments with original or
remaining maturities of three months or less at the date of purchase to be cash
equivalents. The Company has restricted cash of $279,585 related to a letter of
credit facility with a finance company, which has a term of six years. This
amount has been included in other assets.

  Certain risks and concentrations

      The Company's financial instruments that are exposed to concentration of
credit risk consist primarily of cash and cash equivalents and accounts
receivable.

      The Company's cash and cash equivalents are deposited with major financial
institutions in the United States. At times, such deposits may be in excess of
the amount of insurance provided on such deposits. The Company has not
experienced any losses on its deposits of cash and cash equivalents.

      The Company performs ongoing credit evaluations but does not require
collateral. Five customers account for 35%, 16%, 14%, 13% and 11% of total
revenues, respectively.

      The success of the Company's business is substantially dependent upon its
ability to develop strategic partnerships for content, develop a recognizable
brand, secure distribution channels for its subscriber-based broadband services
and the continued supply of gateways from its sole contract manufacturer.

                                       F-7
<PAGE>   101
                                 TELOCITY, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Fair value of financial instruments

      The fair value of the Company's cash and cash equivalents, accounts
receivable, accounts payable and notes payable approximate their carrying value
due to the short maturity or market rate structure of those instruments.

  Property and equipment

      Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets,
generally two to seven years. Leasehold improvements are amortized over the
related lease term or the useful life of the improvement.

  Intangibles

      Intangible assets consist of completed technology. These assets are being
amortized using the straight-line method over their estimated useful life of
five years.

  Accounting for long-lived assets

      The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" ("SFAS 121"). SFAS 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets.

  Revenue recognition

      The Company generates revenue from the provision of broadband services and
applications. Revenues are derived from an initial non-recurring charge and
monthly recurring charges for services. The initial charge is related to the
provision of a residential gateway, a high speed digital subscriber line and
service activation. All revenues, including the initial and monthly service
charges, are recognized ratably over the term of the service. Following the
launch of a co-developed interface, which is expected in June 2000, the Company
will recognize revenue from an advertising and revenue sharing agreement with
NBCi. Revenue will be recognized upon notification from NBCi, which will be
quarterly.

  Research and development

      Research and development costs are expensed as incurred, except for
certain software development costs. In January 1999, the Company adopted
Statement of Position ("SOP") 98-1, which requires software development costs
associated with internal use software to be charged to operations until certain
capitalization criteria are met. For the year ended December 31, 1999, software
development costs of approximately $1,342,000 were capitalized and included in
property and equipment.

  Advertising costs

      Advertising costs are expensed the first time the advertising takes place.
Included in prepaid expenses and other current assets and other assets at
December 31, 1999 is $38,823,530 related to advertising to be received in the
future. There was no advertising expense for the period from August 18, 1997
(date of incorporation) to December 31, 1997. Advertising expense for the years
ended December 31, 1998 and 1999 was $44,000 and $7,941,000.

                                       F-8
<PAGE>   102
                                 TELOCITY, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Stock-based compensation

      The Company has elected to continue accounting for stock-based
compensation issued to employees using the intrinsic value method of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and, accordingly, presents disclosure of pro forma information required under
Financial Accounting Standards Board Statement No. 123 or SFAS 123, "Accounting
for Stock-Based Compensation." Stock and other equity instruments issued to
non-employees have been accounted for in accordance with SFAS No. 123 and
Emerging Issues Task Force Issue No. 96-18 and valued using the Black-Scholes
model.

  Income taxes

      The Company accounts for its income taxes in accordance with the liability
method. Under this method, deferred tax assets and liabilities are determined
based on temporary differences between the financial reporting and tax basis of
assets and liabilities, measured at tax rates that will be in effect for the
year in which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.

  Comprehensive income (loss)

      The Company has adopted the provisions of SFAS No. 130, or SFAS 130,
"Reporting Comprehensive Income." SFAS 130 establishes standards for reporting
comprehensive income (loss) and its components in financial statements.
Comprehensive income (loss), as defined, includes all changes in equity during a
period from non-owner sources. There has been no difference between the
Company's net loss and its total comprehensive loss through December 31, 1999.

  Stock split

      On October 13, 1999, the Company effected a 2:1 common and preferred stock
split. All share information in the consolidated financial statements and notes
has been restated to reflect the stock split.

                                       F-9
<PAGE>   103
                                 TELOCITY, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Net loss per common share

      Basic net loss per common share is computed by dividing the net loss
available to common stockholders for the period by the weighted average number
of common shares outstanding for the period net of common shares subject to
repurchase. Diluted net loss per common share is computed by dividing the net
loss for the period by the weighted average number of common and common
equivalent shares outstanding during the period net of common shares subject to
repurchase. Common equivalent shares, composed of common shares issuable upon
exercise of stock options and warrants and upon conversion of Series A, Series B
and Series C mandatorily redeemable convertible preferred shares are included in
the diluted net loss per share computation to the extent such shares are
dilutive. A reconciliation of the numerator and denominator used in the
calculation of basic and diluted net loss per common share follows (in
thousands, except share and per share data):

<TABLE>
<CAPTION>
                                                 FOR THE
                                               PERIOD FROM
                                               AUGUST 18,
                                              1997 (DATE OF
                                             INCORPORATION)
                                                   TO            YEAR ENDED      YEAR ENDED
                                              DECEMBER 31,      DECEMBER 31,    DECEMBER 31,
                                                  1997              1998            1999
                                             ---------------    ------------    ------------
<S>                                          <C>                <C>             <C>
Numerator:
  Net loss attributable to common
     stockholders..........................    $     (678)      $    (7,590)    $   (60,169)
                                               ==========       ===========     ===========
Denominator:
  Weighted average common shares -- basic
     and diluted...........................     1,924,333        10,111,750      17,792,602
  Weighted average shares subject to
     repurchase............................      (704,795)       (4,640,133)     (9,573,419)
                                               ----------       -----------     -----------
  Denominator for basic and diluted
     calculation...........................     1,219,538         5,471,617       8,219,183
                                               ==========       ===========     ===========
  Net loss per common share-basic and
     diluted...............................    $    (0.56)      $     (1.39)    $     (7.32)
                                               ==========       ===========     ===========
</TABLE>

      Diluted net loss per share does not include the effect of the following
antidilutive common equivalent shares:

<TABLE>
<CAPTION>
                                                  FOR THE
                                                PERIOD FROM
                                                AUGUST 18,
                                               1997 (DATE OF
                                              INCORPORATION)
                                                    TO            YEAR ENDED      YEAR ENDED
                                               DECEMBER 31,      DECEMBER 31,    DECEMBER 31,
                                                   1997              1998            1999
                                              ---------------    ------------    ------------
<S>                                           <C>                <C>             <C>
Common stock options and warrants...........        --             1,858,363       2,992,316
Convertible preferred stock.................        --            13,150,000      50,663,878
Convertible preferred stock warrants........        --               403,125       3,256,400
                                                     --           ----------      ----------
                                                    --            15,411,488      54,912,594
                                                     ==           ==========      ==========
</TABLE>

  Recent accounting pronouncements

      In April 1998, AcSEC issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP provides guidance on the financial reporting of start-up
costs and organization costs. It requires the costs of start-up activities and
organization costs to be expensed as incurred. The SOP is effective for

                                      F-10
<PAGE>   104
                                 TELOCITY, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

financial statements for fiscal years beginning after December 15, 1998. The
Company adopted SOP 98-5 on January 1, 1999. As the Company has not capitalized
such costs, the adoption of the SOP did not have an impact on its consolidated
financial statements.

      In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
133 requires that all derivatives be recognized at fair value in the statement
of financial position, and that the corresponding gains or losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. SFAS 133, as amended,
will be effective for fiscal years beginning after June 15, 2000. The Company
does not currently hold derivative instruments or engage in hedging activities.

      In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 or SAB 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. Management
believes that the impact of SAB 101 will not have a material effect on the
financial position or results of operations of the Company.

NOTE 3 -- ACQUISITIONS AND RELATED PARTY TRANSACTIONS:

      On March 27, 1998 the Company acquired Aspen Internet Systems, Inc., in
which two of the Company's founders held a minority interest, for an aggregate
purchase price of $509,000. This constituted an asset acquisition of completed
technology that has been incorporated into the Company's residential gateway.

NOTE 4 -- BALANCE SHEET COMPONENTS:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              ---------------
                                                              1998     1999
                                                              ----    -------
                                                              (IN THOUSANDS)
<S>                                                           <C>     <C>
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
  Prepaid advertising.......................................  $--     $ 5,220
  Other prepaid expenses....................................   31       1,362
  Other receivables.........................................    6         431
                                                              ---     -------
                                                              $37     $ 7,013
                                                              ===     =======
</TABLE>

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               1998      1999
                                                              ------    -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
PROPERTY AND EQUIPMENT, NET:
  Network software and equipment............................  $2,727    $18,104
  Furniture and fixtures....................................     130        495
  Leasehold improvements....................................     276        762
  Subscriber based broadband gateways.......................      --      5,455
                                                              ------    -------
                                                               3,133     24,816
  Less: accumulated depreciation and amortization...........    (393)    (2,544)
                                                              ------    -------
                                                              $2,740    $22,272
                                                              ======    =======
</TABLE>

      Property and equipment includes $1,855,203 and $14,674,318 under capital
leases at December 31, 1998 and December 31, 1999. Accumulated amortization of
assets under capital leases totaled $245,476

                                      F-11
<PAGE>   105
                                 TELOCITY, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and $1,326,483 at December 31, 1998 and 1999. Depreciation and amortization
expense for the period from August 18, 1997 (date of incorporation) to December
31, 1997 and the years ended December 31, 1998 and 1999 was $10,906, $382,577
and $2,150,959, respectively.

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              ---------------
                                                              1998      1999
                                                              -----    ------
                                                              (IN THOUSANDS)
<S>                                                           <C>      <C>
Intangibles, net:
  Completed technology......................................  $509     $ 524
  Less: accumulated amortization............................   (42)     (144)
                                                              ----     -----
                                                              $467     $ 380
                                                              ====     =====
</TABLE>

      Amortization expense for the years ended December 31, 1998 and 1999 was
$41,808 and $101,767, respectively.

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              ---------------
                                                              1998     1999
                                                              ----    -------
                                                              (IN THOUSANDS)
<S>                                                           <C>     <C>
Other assets:
  Prepaid advertising.......................................  $--     $33,604
  Deferred warrant costs....................................   --       6,993
  Other prepaid expenses and deferred costs.................   51       2,538
  Restricted cash...........................................   --         280
                                                              ---     -------
                                                              $51     $43,415
                                                              ===     =======
</TABLE>

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              --------------
                                                              1998     1999
                                                              ----    ------
                                                              (IN THOUSANDS)
<S>                                                           <C>     <C>
Accrued liabilities:
  Accrued advertising.......................................  $  9    $1,453
  Other accrued liabilities.................................   121     2,930
                                                              ----    ------
                                                              $130    $4,383
                                                              ====    ======
</TABLE>

NOTE 5 -- BORROWINGS:

      During the period ended December 31, 1997, the Company issued a $1,000,000
convertible note payable for cash to August Capital, L.P. This unsecured note
bore interest at an annual rate of 6% and there were no fixed terms of payment.
In August 1998, the note payable was converted into Series A mandatorily
redeemable convertible preferred stock.

      During the years ended December 31, 1998 and 1999, the Company issued
notes payable to Comdisco, Inc., and MMC/GATX Partnership #1, with detachable
warrants to acquire Series A and Series B mandatorily redeemable convertible
preferred stock. The notes are collateralized by all tangible assets owned by
the Company, bear interest at a weighted average rate of 11.1% and are repayable
in installments between May 1998 and January 2002.

                                      F-12
<PAGE>   106
                                 TELOCITY, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

      Aggregate principal payments due under these notes subsequent to December
31, 1999 are as follows: (in thousands):

<TABLE>
<CAPTION>
                  YEARS ENDED DECEMBER 31,
                  ------------------------
<S>                                                           <C>
2000........................................................  $ 2,879
2001........................................................    2,724
2002........................................................    1,372
                                                              -------
Total principal payments....................................    6,975
Less: amount representing finance costs.....................   (1,548)
                                                              -------
Total notes payable.........................................    5,427
Less: current portion.......................................   (2,292)
                                                              -------
                                                              $ 3,135
                                                              =======
</TABLE>

  Line of credit

      The Company has a $1,000,000 working capital line of credit which bears
interest at a premium of 7.3% over the U.S. dollar risk free interest rate which
expires 36 months from each advance date. No amounts were outstanding at
December 31, 1999.

  Bridge financing

      In October 1999, the Company entered into a bridge loan transaction with a
financing company for $4,000,000 which bears interest at 12% with a term of 60
days. This loan was repaid in December 1999.

      In November 1999, the Company entered into convertible bridge loan
transactions with two of its officers for a combined total of $5,000,000. Each
loan was made at an annual interest rate of 12%. The loans were converted into a
combined total of 954,198 shares of Series C mandatorily redeemable preferred
stock in December 1999.

  Capital leases

      Future minimum lease payments under capital leases as of December 31, 1999
are as follows (in thousands):

<TABLE>
<CAPTION>
                  YEARS ENDED DECEMBER 31,
                  ------------------------
<S>                                                           <C>
2000........................................................  $ 5,521
2001........................................................    5,372
2002........................................................    4,169
2003........................................................      693
                                                              -------
Total principal payments....................................   15,755
Less: amount representing finance costs.....................   (2,470)
                                                              -------
                                                               13,285
Less: current portion.......................................   (4,426)
                                                              -------
                                                              $ 8,859
                                                              =======
</TABLE>

NOTE 6 -- COMMITMENTS:

  Leases

      The Company leased additional office space and equipment under
non-cancelable operating leases and entered into certain non-cancelable service
agreements. These agreement have various expiration dates

                                      F-13
<PAGE>   107
                                 TELOCITY, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

through June 2005. The Company also sublet certain property for the period from
August 1999 to October 2002. Rent expense for the periods ended December 31,
1997, 1998 and 1999 was $50,471, $258,142 and $939,715, respectively.

      Future minimum lease payments under noncancelable operating and service
agreements including future minimum sublease rental receipts under noncancelable
operating lease, entered into during 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                          OPERATING
                                                          LEASES AND
                                                           SERVICE      SUBLEASE
                YEARS ENDED DECEMBER 31,                  AGREEMENTS     INCOME
                ------------------------                  ----------    --------
<S>                                                       <C>           <C>
2000....................................................   $10,199        $332
2001....................................................    14,797         339
2002....................................................    13,531         287
2003....................................................     4,771          --
2004....................................................     1,808          --
2005....................................................       913          --
                                                           -------        ----
Total minimum lease and service payments and sublease
  income................................................   $46,019        $958
                                                           =======        ====
</TABLE>

  Operating agreement

      On December 10, 1999, the Company entered into a fifteen year operating
agreement with NBC Internet, Inc ("NBCi"). The agreement provides for the joint
development, design services and content to be owned and branded by both
Companies. The services and content include entertainment, electronic commerce,
games, search applications and other features designed for use exclusively by
broadband users. The Company's customers will be able to utilize these online
services through a Web portal user interface that the Company will develop
jointly with NBCi.

      After the general commercial launch of the co-developed interface, which
is expected by June 2000, the Company and NBCi have agreed to share a portion of
revenues that are generated from respective services, advertising and electronic
commerce activities provided through the co-branded portal. The Company will
receive a percentage of net revenues received by any NBCi entity from
advertising placed on the co-branded version of the Snap.com portal, e-commerce,
subscription and pay-per-view media from the Company's customers. The Company
will share gross revenues it generates from subscription fees, less cost of
goods sold, to subscribers from value-added services and applications with NBCi.
The percentage of revenues shared depends on whether NBCi offers a similar
service or application. The Company will also share a percentage of revenues it
generates from the placement of content provided by third parties. The amount
due to NBCi will be recorded in network and product costs.

      In December 1999, in connection with the operating agreement, the Company
issued warrants to acquire 1,039,122 and 850,191 shares of Series C preferred
stock to NBC and NBCi, respectively. The fair value of the warrants has been
included in long term other assets and will be amortized over the term of the
operating agreement and included in sales and marketing expenses.

NOTE 7 -- MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:

      Under the Company's Articles of Incorporation, the Company's preferred
stock is issuable in series and the Company's Board of Directors is authorized
to determine the rights, preferences and terms of each

                                      F-14
<PAGE>   108
                                 TELOCITY, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

share. At December 31, 1999, the amounts and liquidation values of Series A,
Series B and Series C preferred stock are as follows (in thousands, except share
data):

<TABLE>
<CAPTION>
                                                                  SHARES
                                                    SHARES      ISSUED AND     LIQUIDATION
                                                  AUTHORIZED    OUTSTANDING       VALUE
                                                  ----------    -----------    -----------
<S>                                               <C>           <C>            <C>
Series A........................................  13,553,126    13,150,000      $  6,575
Series B........................................   1,469,998    13,181,818      $ 14,500
Series C........................................  27,000,000    24,332,060      $127,500
</TABLE>

      On February 16, 1999 and March 26, 1999, the Company issued 10,727,274
shares and 2,454,544 shares, respectively, of Series B preferred stock at a
purchase price of $1.10 per share.

      On December 13, 1999, the Company issued 18,034,351 shares of its Series C
preferred stock at a purchase price of $5.24 per share for cash of $89,500,000
and the conversion of bridge loans with two officers totaling $5,000,000. The
Series C convertible preferred stock converts into common stock on a one for one
basis. The difference between the fair value of the common shares at the date of
grant of $6.16 per share and the purchase price resulted in a beneficial
conversion feature equal to $16,676,470. Under EITF 98-5, the beneficial
conversion feature results in a preferred stock dividend of $16,676,470 for the
year ended December 31, 1999.

      The Company also issued 6,297,709 shares of its Series C preferred stock
in exchange for advertising and promotional commitments with a fair value of
$38,823,530 provided by two of the Company's strategic investors, NBC and NBCi.

      The rights, preferences and privileges of the preferred shareholders are
as follows:

  Dividends

      The holders of Series A, Series B and Series C preferred stock are
entitled to receive noncumulative dividends at an annual rate of $0.025 per
share, $0.055 per share and $0.262 per share, respectively, when, and if
declared by the Board of Directors. After payment of the above dividends,
additional dividends declared are to be paid pro-rata to both the holders of
common stock and preferred stock (treated as if converted). No dividends have
been declared through December 31, 1999.

  Liquidation

      The holders of the Series A, Series B and Series C preferred stock are
entitled to a distribution in preference to common shareholders of $0.50, $1.10
and $5.24 per share, respectively, plus any declared but unpaid dividends. After
the payment has been made to the holders of preferred stock for the full amount
to which they are entitled, the holders of the common stock and Series C
preferred stock shall be entitled to share ratably in all remaining assets,
until the holders of Series C preferred stock have received a cumulative amount
of $7.86 per share, if the liquidation event closes on or before June 30, 2000
or $10.48 per share, if the liquidation event closes after June 30, 2000.
Thereafter, holders of common stock will receive any remaining assets.

  Conversion

      The Series A, Series B and Series C preferred stock is convertible, at the
option of the holder, into common stock on a one-for-one basis, subject to
adjustment for dilution. Conversion is automatic upon the closing of a firm
commitment underwritten public offering of the Company's common stock at an
aggregate offering price of not less that $30,000,000 and at a price per share
of not less than $7.86 if such offering closes on or before June 30, 2000 or
$10.48 if such offering closes after June 30, 2000. In addition, preferred
stockholders have certain registration rights and the right to participate in
future
                                      F-15
<PAGE>   109
                                 TELOCITY, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

issuances of the Company's stock. A total of 53,920,278 shares of common stock
have been reserved for issuance upon the conversion of mandatorily redeemable
preferred stock.

  Voting

      Each share of Series A, Series B and Series C preferred stock has voting
rights equal to an equivalent number of shares of Common Stock into which it is
convertible and votes together as one class with the Common Stock.

  Redemption

      At anytime on or after December 1, 2004, each holder of mandatorily
redeemable convertible preferred stock has the right to cause the Company to
redeem all of the shares held by such stockholder. The redemption price of the
Series A, Series B and Series C preferred stock is $0.50, $1.10 and $5.24 per
share, respectively, plus any declared but unpaid dividends and shall be paid in
three equal annual installments.

  Warrants for convertible preferred stock

      The Company has issued warrants, the fair value of which has been
estimated using the Black-Scholes pricing model at the date of grant, using the
term of the warrant and the following assumptions: Risk-free rate of 4.6% - 5.6%
and 5.8% - 6.2% in 1998 and 1999, respectively, no expected dividends and
volatility of 60%.

<TABLE>
<CAPTION>
                                                           NUMBER OF
                                                          SHARES UNDER      EXERCISE        FAIR
           ISSUANCE DATE              EXPIRATION DATE     THE WARRANTS        PRICE        VALUE
           -------------              ----------------    ------------    -------------    ------
                                            (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S>                                   <C>                 <C>             <C>              <C>
March and September 1998............  September 2008         403,125      $0.50 - $0.80    $  106
May, August, October and December
  31, 1999..........................  November 2004 to       833,498      $1.10 - $5.13     1,197
                                      December 2009
August 1999.........................  August 2009             38,126          $1.10           120
October 1999........................  October 2002            44,628          $4.48           114
December 1999.......................  December 2004           47,710          $5.24           121
December 1999.......................  December 2004        1,889,313          $5.24         7,012
</TABLE>

      In connection with notes payable and capital leases, the Company issued
warrants to purchase 403,125 shares of Series A mandatorily redeemable
convertible preferred stock in March 1998 and September 1998, respectively. The
fair value of the warrants is being amortized over the term of the notes and
capital leases. The Company recognized $11,881 and $31,520 as interest expense
associated with these warrants for the year ended December 31, 1998 and 1999
respectively.

      In May, August, October, November and December 1999, in connection with
notes payable and capital leases, the Company issued warrants to purchase
833,498 shares of Series B mandatorily redeemable convertible preferred stock.
The fair value of the warrants will be amortized to interest expense over the
term of the notes and capital leases. The Company recognized $218,404 as
interest expense associated with these warrants for the year ended December 31,
1999.

      In August 1999, in connection with a line of credit, the Company issued
warrants to purchase 38,126 shares of Series B mandatorily redeemable
convertible preferred stock. The fair value of the warrants will be amortized to
interest expense over the term of the letter of credit. The Company

                                      F-16
<PAGE>   110
                                 TELOCITY, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recognized $6,875 as interest expense associated with these warrants for the
year ended December 31, 1999.

      In October 1999, in connection with a bridge loan the Company issued
warrants to purchase 44,628 shares of Series B mandatorily redeemable
convertible preferred stock. The fair value of the warrants will be amortized to
interest expense over the term of the bridge financing. The Company recognized
$114,021 as interest expense associated with these warrants for the year ended
December 31, 1999.

      In December 1999, in connection with bridge loans received from two of its
directors, the Company issued warrants to purchase 47,710 shares of Series C
mandatorily redeemable preferred stock. The fair value of the warrants will be
amortized to interest expense over the term of the bridge loan. The Company
recognized $120,933 as interest expense associated with these warrants for the
year ended December 31, 1999.

      In December 1999, in connection with an operating agreement the Company
issued warrants to acquire 1,039,122 and 850,191 shares of Series C preferred
stock to NBCi and NBC, respectively. The fair value of the warrants will be
amortized over the term of the agreement. The Company recognized $19,478 as
sales and marketing expenses associated with these warrants for the year ended
December 31, 1999.

NOTE 8 -- COMMON STOCK:

      The Company's Articles of Incorporation, as amended, authorize the Company
to issue 90,000,000 shares of common stock. A portion of the shares sold are
subject to a right of repurchase by the Company subject to vesting, which is
generally over a four year period from the earlier of grant date or employee
hire date, as applicable, until vesting is complete. At December 31, 1997, 1998
and 1999, there were 5,169,730, 5,284,148 and 12,814,213 shares subject to
repurchase, respectively.

      In December 1999, the Company approved the issuance and sale of shares of
common stock in an initial public offering.

  Common stock warrants

      The Company has issued warrants, the fair value of which has been
estimated using the Black-Sholes pricing model at the date of grant, using the
term of the warrant and the following assumptions: Risk-free interest rate of
4.6% and 5.1% - 6.0% in 1998 and 1999, respectively, no expected dividends and
60% volatility.

<TABLE>
<CAPTION>
                                                            NUMBER OF
                                                           SHARES UNDER      EXERCISE       FAIR
       ISSUANCE DATE                EXPIRATION DATE        THE WARRANTS        PRICE        VALUE
       -------------                ---------------        ------------      --------       -----
                                         (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S>                             <C>                        <C>             <C>              <C>
September 1998..............    November 2003                765,018           $0.05        $ 91
March and November 1999.....    March and November 2004       65,000       $1.10 - $1.50    $ 85
June 1999...................    June 2006                    268,856           $0.35        $247
November 1999...............    November 2009                 20,000           $1.50        $ 79
</TABLE>

      The Company issued a warrant to purchase 765,018 shares of common stock in
September to a company with which they were considering developing a strategic
relationship. The Company recognized $91,067 as general and administrative
expenses associated with these warrants for the year ended December 31, 1998.

      In March and November 1999, in connection with facility lease financing,
the Company issued warrants to purchase 65,000 shares of common stock. The fair
value of the warrants will be amortized to

                                      F-17
<PAGE>   111
                                 TELOCITY, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

interest expense over the term of the capital leases. The Company recognized
$84,521 as rent expense in general and administrative expenses associated with
these warrants for the year ended December 31, 1999.

      In June, in connection with professional services received, the Company
issued warrants to purchase 268,856 shares of common stock. The fair value of
the warrants will be recognized as general and administrative expense. The
Company recognized $247,309 as general and administrative expense associated
with these warrants for the year ended December 31, 1999.

      In November 1999, in connection with a license agreement, the Company
issued warrants to purchase 20,000 shares of common stock. The fair value of the
warrants will be recognized as sales and marketing expense over the term of the
license agreement. The Company recognized $19,692 as sales and marketing expense
associated with these warrants for the year ended December 31, 1999.

  Stock option plans

      In January 1998, the Company adopted the 1998 Stock Option Plan and
Consultants Stock Option Plan (the "Plans"). The Plans provide for the granting
of stock options to employees and consultants of the Company. Options granted
under the Plans may be either incentive stock options or nonqualified stock
options. Incentive stock options ("ISO") may be granted only to Company
employees (including officers and directors who are also employees).
Nonqualified stock options ("NSO") may be granted to Company employees and
consultants. At December 31, 1998 and December 31, 1999, the Company has
reserved 3,530,000 and 13,950,000 shares of Common Stock for issuance under the
Plans, respectively.

      Options under the Plans may be granted for a period of up to ten years and
at prices no less than 85% of the estimated fair value of shares on the date of
grant as determined by the Board of Directors, provided, however, that (i) the
exercise price of an ISO and NSO shall not be less that 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and (ii)
the exercise price of an ISO and NSO granted to a 10% stockholder shall not be
less than 110% of the estimated fair value of the shares on the date of grant,
respectively. Options are exercisable immediately, subject to repurchase options
held by the Company which lapse over a maximum period of ten years at such times
and under such conditions as determined by the Board of Directors. To date,
options granted generally vest over four years. The following table summarizes
activity under the Plans (in thousands, except share and per share data):

<TABLE>
<CAPTION>
                                                     SHARES
                                                    AVAILABLE       OPTIONS      EXERCISE
                                                    FOR GRANT     OUTSTANDING     PRICE
                                                   -----------    -----------    --------
<S>                                                <C>            <C>            <C>
Shares reserved at plan inception................    1,624,000            --
Additional shares authorized.....................    1,906,000            --
Options granted..................................   (3,270,278)    3,270,278      $0.05
Options exercised................................                 (2,176,934)     $0.05
                                                   -----------    ----------
Outstanding and exercisable at December 31,
  1998...........................................      259,722     1,093,344      $0.05
Options authorized...............................   10,420,000            --
Options granted..................................  (10,595,660)   10,595,660      $0.93
Options exercised................................                 (9,693,062)     $0.58
Options cancelled................................     (122,500)      122,500      $0.55
Exercised options forfeited and returned to
  plans..........................................    1,288,298            --      $0.09
                                                   -----------    ----------
Balances, December 31, 1999......................    1,494,860     1,873,442      $2.26
                                                   ===========    ==========
</TABLE>

                                      F-18
<PAGE>   112
                                 TELOCITY, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

      The options outstanding, and currently exercisable by exercise price at
December 31, 1999, are as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                WEIGHTED
                                                AVERAGE
                                               REMAINING      WEIGHTED
        EXERCISE      NUMBER       NUMBER     CONTRACTUAL     AVERAGE
         PRICE      OUTSTANDING    VESTED     LIFE (YEARS)     PRICE
        --------    -----------    -------    ------------    --------
        <S>         <C>            <C>        <C>             <C>
         $0.05          17,158      17,158        8.75         $0.05
         $0.18          12,000          --        9.21         $0.18
         $0.35          96,000      24,000        9.44         $0.35
         $0.75         188,000      46,667        9.67         $0.75
         $1.50         411,250      17,499        9.85         $1.50
         $3.00       1,149,034      17,834        9.96         $3.00
                     ---------     -------
                     1,873,442     123,158        9.86         $2.26
                     =========     =======
</TABLE>

      At December 31, 1998, 243,000 of the options outstanding were vested.

      Options granted include options to acquire 240,538 and 392,758 shares of
common stock issued to consultants and other service providers of the Company
during the year ended December 31, 1998 and 1999, respectively. The fair value
of the common stock options was estimated to be $40,062 and $1,096,805 for 1998
and 1999, respectively, using the Black-Scholes pricing model at the date of
grant, the expected term of the option and the following assumptions: Risk free
rate of 4.5%-4.6% and 4.6%-5.2% in 1998 and 1999, respectively, no expected
dividends and volatility of 60%. Stock-based compensation related to stock
options granted to consultants is recognized as earned. At each reporting date,
the Company re-values the stock-based compensation using the Black-Scholes
pricing model. As a result, the stock-based compensation expense will fluctuate
as the fair market value of our common stock fluctuates. In connection with the
grant of stock options to consultants and other service providers, the Company
recorded stock-based compensation expense of $40,062 and $920,198 for the year
ended December 31, 1998 and 1999, respectively. Future stock-based compensation
expense from these options is estimated to be $176,600 at December 31, 1999.

      In connection with certain stock option grants to employees during the
year ended December 31, 1998 and 1999, the Company recorded unearned stock-based
compensation totaling $328,374 and $15,285,155, respectively, which is being
amortized over the vesting periods of the related options which is generally
four years using the method set out in FASB Interpretation No. 28 ("FIN 28").
Under the FIN 28 method, each vested tranche of options is accounted for as a
separate option grant awarded for past services. Accordingly, the compensation
expense is recognized over the period during which the services have been
provided. This method results in higher compensation expense in the earlier
vesting periods of the related options. Amortization of this stock-based
compensation recognized during the year ended December 31, 1998 and 1999,
totaled approximately $13,000 and $1,804,000, respectively.

      Stock-based compensation for employees was allocated across the relevant
functional expense categories within operating expenses as follows (in
thousands):

<TABLE>
<CAPTION>
                                                              1997    1998     1999
                                                              ----    ----    ------
<S>                                                           <C>     <C>     <C>
Sales and marketing.........................................   $--    $ 12    $  490
General and administrative..................................   --      112     1,780
Research and development....................................   --       21       825
                                                               --     ----    ------
                                                               $--    $145    $3,095
                                                               ==     ====    ======
</TABLE>

                                      F-19
<PAGE>   113
                                 TELOCITY, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Pro forma stock-based compensation

      The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock based
Compensation," ("SFAS No. 123") for option grants to employees. Had compensation
cost been determined based on the fair value at the grant date for the awards in
1998 and 1999 consistent with the provisions of SFAS No. 123, the Company's net
loss for 1998 and 1999 would have been as follows (in thousands):

<TABLE>
<CAPTION>
                                                               1998        1999
                                                              -------    --------
<S>                                                           <C>        <C>
Net loss -- as reported.....................................  $(7,590)   $(60,169)
Net loss -- pro forma.......................................  $(7,613)   $(60,499)
Net loss per common share -- basic and diluted as
  reported..................................................  $ (1.39)   $  (7.32)
Net loss per common share -- basic and diluted pro forma....  $ (1.39)   $  (7.36)
</TABLE>

      Such pro forma disclosures may not be representative of future
compensation cost because options vest over several years and additional grants
are made each year.

      The weighted average fair value of options issued during 1998 was $0.11
and during 1999 was $1.77. The fair value of each option grant is estimated on
the date of grant using the minimum value method with the following assumptions
used for grants:

<TABLE>
<S>                                                           <C>
Risk-free interest rate.....................................  4.221-6.020%
Expected life of option.....................................       5 years
Expected dividends..........................................            0%
</TABLE>

NOTE 9 -- 401(k):

      The Company sponsors an employee savings and retirement plan intended to
qualify under section 401(k) of the Internal Revenue Code. All eligible
employees may contribute up to 20% of compensation, subject to annual
limitations, which are fully vested at all times. The Company retains the
options of matching employees' contributions with a discretionary employer
contribution. To date, no employer contributions have been made.

NOTE 10 -- INCOME TAXES:

      No provisions for income taxes have been recorded as the Company has
incurred net losses since inception.

      The Company's effective tax rate varies from the statutory rate as
follows:

<TABLE>
<CAPTION>
                                                           1997      1998      1999
                                                          ------    ------    -------
<S>                                                       <C>       <C>       <C>
U.S. Federal income tax rate..........................    (34.00)%  (34.00)%   (34.00)%
State taxes, net of federal tax benefit...............     (5.84)    (5.84)     (5.84)
Permanent differences.................................        --      0.07       9.06
Other.................................................        --        --      (1.91)
Valuation allowance...................................     39.84     39.77      32.69
                                                          ------    ------    -------
                                                              --        --         --
                                                          ======    ======    =======
</TABLE>

                                      F-20
<PAGE>   114
                                 TELOCITY, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

      The components of the net deferred tax asset as of December 31, 1998 and
1999 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                               1998        1999
                                                              -------    --------
<S>                                                           <C>        <C>
Deferred tax assets:
  Net operating loss carryforwards..........................  $ 3,305    $ 21,626
  Other.....................................................        7       1,394
                                                              -------    --------
                                                                3,312      23,020
Valuation allowance.........................................   (3,236)    (22,448)
                                                              -------    --------
Net deferred tax asset......................................       76         572
Deferred tax liabilities:
  Depreciation..............................................  $   (76)   $   (572)
                                                              -------    --------
Net deferred tax assets.....................................       --          --
                                                              =======    ========
</TABLE>

      At December 31, 1999, the Company had approximately $54,290,000 of federal
and state net operating loss carryforwards available to offset future taxable
income which expire in varying amounts beginning in 2012 and 2005, respectively.
Under the Tax Reform Act of 1986, the amounts of and benefits from net operating
loss carryforwards may be impaired or limited in certain circumstances. Such
amount, if any, has not been determined. Events which cause limitations in the
amount of net operating losses that the Company may utilize in any one year
include, but are not limited to, a cumulative ownership change of more than 50%,
as defined, over a three year period.

      Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance has been recorded.
For the periods ended December 31, 1997, 1998 and 1999, the valuation allowance
increased by approximately $325,000, $2,911,000 and $19,212,000, respectively.

                                      F-21
<PAGE>   115
                                 TELOCITY, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11 -- SUPPLEMENTAL CASH FLOW INFORMATION:

<TABLE>
<CAPTION>
                                                                FOR THE PERIOD
                                                             FROM AUGUST 18, 1997     FOR THE YEAR ENDED
                                                            (DATE OF INCORPORATION)      DECEMBER 31,
                                                                TO DECEMBER 31,       ------------------
                                                                     1997              1998       1999
                                                            -----------------------   -------   --------
                                                                                        (IN THOUSANDS)
<S>                                                         <C>                       <C>       <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
  Cash paid for interest..................................            $--             $  109    $   831
                                                                      --              ------    -------
SUPPLEMENTAL NON CASH INVESTING AND FINANCING ACTIVITY:
  Acquisition of subsidiary...............................            $--             $  509    $    --
  Less notes payable issued for acquisition...............            --                (405)        --
  Less common stock options issued in acquisition.........            --                  (7)        --
  Net cash payment........................................            --                 (51)        --
                                                                      --              ------    -------
  Liabilities assumed on acquisition of subsidiary........            $--             $   46    $    --
                                                                      --              ------    -------
  Property and equipment acquired under capital leases....            $--             $1,855    $12,819
                                                                      --              ------    -------
  Conversion of convertible promissory notes into
     mandatorily redeemable preferred stock...............            $--             $2,455    $ 5,000
                                                                      --              ------    -------
  Conversion of accrued interest on convertible promissory
     notes into mandatorily redeemable preferred stock....            $--             $   60    $    11
                                                                      --              ------    -------
  Issuance of warrants in connection with capital
     leases...............................................            $--             $   39    $   547
                                                                      --              ------    -------
  Issuance of warrants in connection with borrowings......            $--             $   --    $ 1,005
                                                                      --              ------    -------
  Issuance of warrants in connection with facilities lease
     and other services...................................            $--             $   92    $   411
                                                                      --              ------    -------
  Issuance of warrants in connection with operating
     agreement............................................            $--             $   --    $ 7,012
                                                                      --              ------    -------
  Advertising received for Series C mandatorily
     convertible redeemable preferred stock...............            $--             $   --    $38,824
                                                                      --              ------    -------
  Deemed dividend on issuance Series C preferred stock....            $--             $   --    $16,676
                                                                      --              ------    -------
  Accretion of mandatorily redeemable convertible
     preferred stock......................................            $--             $   --    $    74
                                                                      --              ------    -------
  Unearned stock-based compensation related to common
     stock option grants to employees, net of
     cancellations........................................            $--             $  328    $15,195
                                                                      --              ------    -------
  Grant of common stock options for services..............            $--             $   40    $ 1,097
                                                                      --              ------    -------
</TABLE>

NOTE 12 -- UNAUDITED PRO FORMA NET LOSS PER COMMON SHARE AND PRO FORMA
           CONSOLIDATED BALANCE SHEET

      Upon the closing of the Company's initial public offering, all outstanding
mandatorily redeemable convertible preferred stock will be converted
automatically into common stock and warrants to acquire mandatorily redeemable
convertible preferred stock will be converted automatically into warrants to
acquire common stock. The pro forma effect of this conversion has been presented
as a separate column in the Company's consolidated balance sheet, assuming the
conversion had occurred as of December 31, 1999. Pro forma basic and diluted net
loss per common share have been computed as described in Note 2 and also give
effect to common equivalent shares from preferred stock that will automatically
convert upon the closing of the Company's initial public offering (using the
"as-if-converted method") for the year ended December 31, 1999.

                                      F-22
<PAGE>   116
                                 TELOCITY, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

      A reconciliation of the numerator and denominator used in the calculation
of pro forma basic and fully diluted net loss per common share follows (in
thousands, except share and per share data):

<TABLE>
<CAPTION>
                                                               YEAR ENDED
                                                              DECEMBER 31,
                                                                  1999
                                                              ------------
                                                              (UNAUDITED)
<S>                                                           <C>
Net loss attributable to common stockholders................  $   (60,169)
                                                              ===========
Shares used in computing basic and diluted net loss per
  share.....................................................    8,219,183
Adjusted to reflect the effect of the assumed conversion of
  all convertible preferred stock from date of issuance.....   25,391,108
                                                              -----------
Weighted average shares used in computing pro forma basic
  and diluted net loss per share............................   33,610,291
                                                              -----------
Pro forma basic and diluted net loss per share..............  $     (1.79)
                                                              ===========
</TABLE>

NOTE 13 -- SUBSEQUENT EVENTS (UNAUDITED)

  Stock option plans

      In January 2000, the Company's Board of Directors approved, subject to
shareholder approval, the 2000 Equity Incentive Plan, the 2000 Employee Stock
Purchase Plan and the 2000 Outside Directors Stock Plan. Each plan will be
administered by the Board or by a committee of the Board.

      A total of 24,000,000 shares of common stock are authorized and reserved
for issuance under the 2000 Equity Incentive Plan ("Equity Incentive Plan"),
including 13,950,000 shares that were authorized and reserved under our 1998
Stock Option Plan prior to its restatement. As of December 31, 1999, options to
purchase 1,873,442 shares of Common Stock were outstanding under the 1998 Stock
Option Plan, 10,581,698 shares had been issued upon exercise of options, net of
repurchases, and 1,494,860 shares available for future grant. The cumulative
number of shares authorized for issuance will be increased automatically on
January 1, 2001 and each January 1 thereafter. The Equity Incentive Plan allows
awards to be granted in the form of incentive stock options, nonstatutory stock
options, restricted stock purchase rights and bonuses, performance shares and
performance units. Unless terminated sooner by the Board, the Equity Incentive
Plan will terminate automatically in 2009 on the tenth anniversary of its
adoption by the Board.

      A total of 2,500,000 shares of common stock are reserved for issuance
under the 2000 Employee Stock Purchase Plan ("ESPP"), cumulatively increased on
January 1, 2001 and each January 1, thereafter. The ESPP permits employees,
including officers and employee directors, to purchase common stock through
payroll deductions of up to 20% of the participant's base salary and
commissions, but not to exceed the established maximum. Such amounts are applied
to the purchase from the Company of shares of common stock at the end of each
offering period at a price which is generally 85% of the lower of the fair
market value of the common stock on either the first or last of the offering
period.

      A total of 400,000 shares of common stock are authorized and reserved for
issuance under the 2000 Outside Directors Stock Plan ("Outside Directors Stock
Plan"), cumulatively increased on January 1, 2001 and each January 1 thereafter.
The Outside Directors Stock Plan establishes an initial, automatic grant of an
option to purchase 20,000 shares of our common stock to each non-employee
director who is first elected to our Board of Directors after the effective date
of this offering. The Outside Directors Stock Plan also permits each
non-employee director to elect to receive additional equity awards in lieu of
between 25% to 100% of the cash compensation otherwise payable to the director
for service on the Board.

                                      F-23
<PAGE>   117
                                 TELOCITY, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Stock options

      During 2000 the Company issued the following stock options:

      - In January 2000, the Company issued options to purchase 864,080 shares
        of common stock to employees and 117,500 to consultants and other
        service providers with an exercise price of $9.00 per share. The Company
        will record unearned stock based compensation for option grants to
        employees of $3.5 million and this will be amortized over the vesting
        period. The fair value of options issued to consultants and other
        service providers estimated using the Black-Scholes pricing model at the
        date of grant is $936,000 and will be recognized as earned.

      - In February 2000, the Company issued options to purchase 58,000 shares
        of common stock to employees and 338,360 to consultants and other
        service providers with an exercise price of $12.00 per share. The
        Company will record unearned stock based compensation for option grants
        to employees of $174,000 and this will be amortized over the vesting
        period. The fair value of options issued to consultants and other
        service providers estimated using the Black-Scholes pricing model at the
        date of grant is $2.9 million and will be recognized as earned.

  Financing agreements

      In February, 2000 in connection with a line of credit, the Company issued
warrants to acquire 11,667 shares of common stock to Comdisco, Inc. with an
exercise price of $9.00 per share. The fair value of the warrants of $137,000
has been estimated using the Black-Scholes pricing model at the date of grant,
using the terms of the warrant and the following assumptions: Risk free rate of
6%, no expected dividends and 60% volatility. The fair value of the warrants
will be amortized to interest expense over the term of the line of credit.

  Sales agreement

      In February 2000, the Company entered into a two year master broadband
services agreement with GE and its affiliates. Under the services agreement, the
Company will provide residential services to GE and its affiliates'
telecommuters, other employees at discounted rates, as well as non-employee
users introduced to the Company by GE. In addition, under this agreement GE will
help market and promote the Company services. The Company has issued GE warrants
for the contingent purchase of up to 200,000 shares of our common stock at an
exercise price of $12.00 per share based upon achievement of certain
customer-based milestones during the term of the agreement.

      GE must meet these milestones within 30 months and the warrants must be
exercised within 12 months of reaching the associated milestone. The warrants
will be valued using the Black-Scholes pricing model and revalued at each
reporting date until the milestones are met. The fair value attributable to
these warrants will be recorded when it is probable that the milestone will be
met.

                                      F-24
<PAGE>   118
BACK COVER:

NATIONWIDE MANAGED NETWORK
We currently provide service to customers in more than 50 metropolitan
statistical areas in the Southeast, Northeast, upper Midwest and mid-Atlantic
states. By the end of 2000, our network will grow to cover approximately 150
metropolitan statistical areas throughout the nation which we estimate will
allow us to provide service to at least 20% of all U.S. households.
[Image of light blue US network map]
[Image of satellite]

SATELLITE COMMUNICATIONS
By duplicating and storing frequently accessed content locally at metropolitan
hubs via satellite communications, we reduce redundant data traffic on the
network and speed data delivery to our customers.
[Image of three network operations personnel]

NETWORK OPERATIONS CENTER
We manage and monitor customer activity 24-hours-a-day, 7-days-a-week,
providing secure, reliable service.

DEDICATED CIRCUITS
Customer traffic is brought together through dedicated, secure circuits into our
local metropolitan hubs.
[Telocity logo]

METROPOLITAN HUBS
We aggregate customer traffic in metropolitan hubs, which are data distribution
centers in each metropolitan area. Our network directs each customer's data
request to the closest available server containing the requested content or
service.

MANAGED NETWORK
HIGH CAPACITY NETWORK
Between metropolitan hubs, customer traffic travels on a high capacity network,
which is interconnected to the Internet and to other network providers at
Internet exchange points.
[Image of mother and daughter at a computer]

PERSONAL COMPUTER
The network begins with the connection of a customer's personal computer, or
home network of computers, to our residential gateway.

THE RESIDENTIAL GATEWAY
[Image of Residential Gateway]
[Image of telephone prong and wall jack]

SERVICES TO THE HOME
We have the capability to configure our gateway easily to support many
high-speed local access technologies, including wireless, cable and satellite,
although we currently deliver our services and content using digital subscriber
line technology.
<PAGE>   119

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

        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 the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

                               11,000,000 SHARES

                                [TELOCITY LOGO]

                                  COMMON STOCK

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

                              MERRILL LYNCH & CO.
                           CREDIT SUISSE FIRST BOSTON
                          DONALDSON, LUFKIN & JENRETTE
                                 WIT SOUNDVIEW

                                           , 2000

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>   120

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

      The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Telocity, Inc. in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.

<TABLE>
<S>                                                             <C>
SEC registration fee........................................    $   39,600
NASD filing fee.............................................        10,500
Nasdaq National Market listing fee..........................        95,000
Printing and engraving costs................................       325,000
Legal fees and expenses.....................................       365,000
Accounting fees and expenses................................       425,000
Blue Sky fees and expenses..................................        10,000
Transfer Agent and Registrar fees...........................         5,000
Miscellaneous expenses......................................        24,900
                                                                ----------
          Total.............................................    $1,300,000
                                                                ==========
</TABLE>

ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS

      Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.

      The Eighth Article of the Registrant's Restated Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.

      Article VIII of the Registrant's Amended and Restated Bylaws provides for
the indemnification of officers, directors and third parties acting on behalf of
the Registrant if such person acted in good faith and in a manner reasonably
believed to be in and not opposed to the best interest of the Registrant, and,
with respect to any criminal action or proceeding, the indemnified party had no
reason to believe his or her conduct was unlawful.

      The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Amended and Restated Bylaws, and intends to enter into
indemnification agreements with any new directors and executive officers in the
future.

ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES

      Since inception, we have issued unregistered securities to a limited
number of persons as described below. For additional information concerning
these equity investment transactions, reference is made to the information
contained under the caption "Related Party Transactions" in the form of
prospectus included herein.

      The sales of the following securities were deemed to be exempt from
registration in reliance on Rule 701 promulgated under Section 3(b) under the
Securities Act as transactions pursuant to a compensatory benefit plan or a
written contract relating to compensation.

       (1) From July 1998 through February 29, 2000, the Registrant granted
           stock options to purchase an aggregate of 15,243,878 shares of common
           stock to employees and consultants with aggregate exercise prices
           ranging from $0.05 to $12.00 per share pursuant to the Registrant's
           stock option plan. As of February 29, 2000, 13,981,226 shares of
           common stock have been issued upon exercise of options.

                                      II-1
<PAGE>   121

       (2) An aggregate of 7,100,000 shares of our common stock in December 1997
           and June 1998 to Messrs. Olson, Solomon, Obenhuber, Grundy and
           Stepovich in connection with Founder Stock Purchase Agreements. The
           consideration received for such shares was $17,392.

      The sales of the following securities were deemed to be exempt from
registration in reliance on Section 4(2) of the Securities Act as transactions
by an issuer not involving any public offering. The Registrant believes that the
transactions were exempt because the recipients of securities in each such
transaction represented their intention to acquire the securities for investment
only and not with a view to or for sale in connection with any distribution
thereof and appropriate legends were affixed to the share certificates and other
instruments issued in such transactions. All recipients either received adequate
information about Telocity or had access, through employment or other
relationships, to such information.

       (1) An aggregate of 2,560,000 shares of common stock was issued in a
           private placement in October 1997 to August Capital Associates L.P.
           and August Capital Strategic Partners, L.P. in connection with the
           Registrant's initial funding. The consideration received for such
           shares was $1,280.

       (2) An aggregate of 504,000 shares of our common stock in October 1997 to
           Aspen Internet Systems, Inc. in exchange for the execution of a
           patent license agreement. The consideration received for such shares
           was $252.

       (3) An aggregate of 13,150,000 shares of Series A preferred stock in a
           private placement in July 1999 to entities affiliated with August
           Capital L.P. and Bessemer Venture Partners, as well as other
           qualified purchasers pursuant to a Series A preferred stock Purchase
           Agreement. The consideration received for such shares was $6,575,000.

       (4) An aggregate of 13,181,818 shares of Series B preferred stock in a
           private placement in February and March 1999 to entities affiliated
           with August Capital L.P., Bessemer Venture Partners, Mohr, Davidow
           Ventures and RRE Investors, LLC, as well as other qualified
           purchasers pursuant to Series B preferred stock Purchase Agreement.
           The consideration received for such shares was $14,500,000.

       (5) An aggregate of 24,332,061 shares of Series C preferred stock in a
           private placement in December 1999 to entities affiliated with NBC
           Internet, Inc., August Capital L.P., Bessemer Venture Partners, Mohr,
           Davidow Ventures and RRE Investors, LLC, as well as other qualified
           purchasers pursuant to a Series C preferred stock Purchase Agreement.
           The consideration for such shares was $127,500,000.

       (6) From March 1998 through December 1999 the Registrant issued to
           Comdisco, Inc. warrants to purchase an aggregate of 1,054,506 shares
           of preferred stock with an average exercise price of $1.23 per share
           in connection with an equipment lease financing.

       (7) In September 1998, the Registrant issued to Citizen's Telecom
           Services Company LLC a warrant to purchase 765,018 shares of common
           stock at an exercise price of $0.05 per share in connection with a
           letter of intent to engage in a joint development effort.

       (8) In March 1999, the Registrant issued to Vidovich-Cupertino Limited
           Partnership a warrant to purchase 50,000 shares of common stock at an
           exercise price of $0.11 per share in connection with a real property
           lease.

       (9) In May 1999 the Registrant issued to Meier Mitchell & Company a
           warrant to purchase 252,272 shares of preferred stock at an exercise
           price of $1.10 per share in connection with an equipment lease
           financing.

      (10) In June 1999, the Registrant issued to Heidrick & Struggles, Inc. a
           warrant to purchase 268,856 shares of common stock at an exercise
           price of $0.35 per share in connection with an executive search.

                                      II-2
<PAGE>   122

      (11) In November 1999, the Registrant issued to Ranbach Music, Ltd. a
           warrant to purchase 20,000 shares of common stock at a price of $1.50
           per share in connection with a license for the Registrant to use
           certain music in connection with its marketing and other efforts.

      (12) In November 1999, the Registrant issued to The Sobrato Group a
           warrant to purchase 15,000 shares of common stock at an exercise
           price of $1.50 per share in connection with a real property lease.

      (13) In November 1999, in connection with bridge loans in advance of the
           close of the Registrant's Series C preferred stock financing, the
           Registrant issued to Ms. Hart and Mr. Olson warrants for 19,084
           shares and 28,626 shares of preferred stock, respectively, with an
           exercise price of $5.24 per share.

      (14) In November 1999 the Registrant issued to Point Financial, Inc. a
           warrant to purchase 32,599 shares of preferred stock at an exercise
           price of $4.91 per share in connection with an equipment lease
           financing.

      (15) In December 1999 the Registrant issued to the National Broadcasting
           Company, Inc. and NBC Internet, Inc. warrants for 850,191 shares and
           1,039,122 shares of preferred stock, respectively, with an exercise
           price of $5.24 per share.

      (16) In February 2000, the Registrant issued to Comdisco, Inc. a warrant
           to purchase 11,667 shares of common stock at an exercise price of
           $9.00 per share in connection with a letter of credit.

      (17) In February 2000, the Registrant issued to General Electric Company
           warrants to purchase an aggregate of 200,000 shares of common stock
           at an exercise price of $12.00 per share in connection with a Master
           Broadband Services Agreement.

ITEM 16.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

      (A) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S>        <C>
 1.1       Form of Underwriting Agreement
 3.1       Restated Certificate of Incorporation of Registrant, as
           amended, to be in effect after the offering
 3.2**     Bylaws of Registrant
 4.1*      Specimen of stock certificates
 5.1**     Opinion of Gray Cary Ware & Freidenrich LLP
 5.2*      Opinion of Patton Boggs, LLP
10.1**     Form of Indemnification Agreement between Registrant and
           each of its directors and officers
10.2**     2000 Equity Incentive Plan and form of agreements thereunder
10.3**     2000 Employee Stock Purchase Plan
10.4**     2000 Outside Directors Stock Plan and form of agreements
           thereunder
10.5+**    Lease between Registrant and Vidovich-Cupertino Limited
           Partnership
10.6+**    Lease between Registrant and Lee Li Chun Koo
10.7+**    Lease between Registrant and The Sobrato Group
10.8**     Second Amended and Restated Investors' Rights Agreement
</TABLE>

                                      II-3
<PAGE>   123

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S>        <C>
10.9+**    Product Manufacturing Agreement between Registrant and
           Wellex Corporation
10.10+**   Agreement for Services between Registrant and Telamon-IMS,
           Inc.
10.11+**   Agreement for Services between Registrant and the Sutherland
           Group, Ltd.
10.12**    Employment Agreement between Registrant and Patti Hart
10.13**    Employment Agreement between Registrant and Peter Olson
10.14**    Employment Agreement between Registrant and Jim Morrissey
10.15**    Employment Agreement between Registrant and Thomas Obenhuber
10.16**    Employment Agreement between Registrant and James Rohrer
10.17**    Employment Agreement between Registrant and Matthew
           Stepovich
10.18**    Employment Agreement between Registrant and Regina Wiedemann
10.19**    Employment Agreement between Registrant and Kevin Grundy
10.20**    Employment Agreement between Registrant and Jef Raskin
10.21**    Employment Agreement between Registrant and Andrew Robinson
10.22**    Employment Agreement between Registrant and Edward Hayes
10.23**    Employment Agreement between Registrant and Scott Martin
10.24**    Consultants Stock Option Plan and form of agreements
           thereunder
10.25+**   Market Development Agreement between Registrant and
           BellSouth Business Systems, Inc.
10.26+**   Private Line Service Level Agreement between Registrant and
           Level 3 Communications, LLC
10.27+**   Private Line Service Agreement between Registrant and MCI
           WorldCom Communications, Inc.
10.28+**   Operating Agreement between Registrant and NBC Internet,
           Inc.
10.29+**   Advertising Agreement between Registrant and the National
           Broadcasting Company, Inc.
10.30+**   Advertising Agreement between Registrant and NBC Internet,
           Inc.
10.31**    Founder Stock Purchase Agreement between Registrant and
           Peter Olson dated December 23, 1997
10.32**    Founder Stock Purchase Agreement between Registrant and
           Michael Solomon dated December 23, 1997
10.33**    Founder Stock Purchase Agreement between Registrant and
           Thomas Obenhuber dated December 23, 1997
10.34**    Founder Stock Purchase Agreement between Registrant and
           Matthew Stepovich dated December 23, 1997
10.35**    Founder Stock Repurchase Agreement between Registrant and
           Peter Olson dated June 1, 1998
10.36**    Founder Stock Repurchase Agreement between Registrant and
           Michael Solomon dated June 1, 1998
10.37**    Founder Stock Purchase Agreement between Registrant and
           Kevin Grundy dated June 10, 1998
10.38**    Founder Stock Purchase Agreement between Registrant and
           Thomas Obenhuber dated June 10, 1998
10.39**    Founder Stock Purchase Agreement between Registrant and
           Matthew Stepovich dated June 10, 1998
10.40      Secured Promissory Note between Registrant and Comdisco,
           Inc. dated March 27, 1998
10.41      Secured Promissory Note between Registrant and Comdisco,
           Inc. dated November 10, 1998
</TABLE>

                                      II-4
<PAGE>   124

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S>        <C>
10.42      Secured Promissory Note between Registrant and Comdisco,
           Inc. dated December 24, 1998
10.43      Subordinated Promissory Note between Registrant and
           Comdisco, Inc. dated September 3, 1999
10.44      Subordinated Promissory Note between Registrant and
           Comdisco, Inc. dated September 9, 1999
10.45      Subordinated Promissory Note between Registrant and
           Comdisco, Inc. dated September 24, 1999
10.46      Subordinated Promissory Note between Registrant and
           Comdisco, Inc. dated September 24, 1999
10.47      Subordinated Promissory Note between Registrant and
           Comdisco, Inc. dated October 19, 1999
10.48      Subordinated Promissory Note between Registrant and MMC/GATX
           Partnership No. 1 dated September 30, 1999
10.49*+    Master Broadband Network Services Agreement and Form of
           Warrant Agreement between Registrant and General Electric
           Company
21.1**     Subsidiaries of the Registrant
23.1       Consent of PricewaterhouseCoopers LLP, Independent
           Accountants
23.2**     Consent of Counsel (see Exhibit 5.1)
24.1**     Power of Attorney
27.1**     Financial Information Schedules
</TABLE>

- ---------------
 + Confidential treatment has been requested for certain portions of this
   exhibit. The omitted portions have been separately filed with the Commission.

 * To be filed by amendment.

** Previously filed.

      (B) FINANCIAL STATEMENT SCHEDULES

      None.

      Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.

ITEM 17.  UNDERTAKINGS

      The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.

      Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement 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 Securities 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 a director,
officer or controlling person in connection with the securities being registered
hereunder, 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 Securities Act and will be governed by the final
adjudication of such issue.

                                      II-5
<PAGE>   125

      The undersigned Registrant hereby undertakes that:

          (1) For purposes of determining any liability under the Securities
     Act, 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 Securities 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, 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.

                                      II-6
<PAGE>   126

                                   SIGNATURES

      Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Cupertino,
State of California, on the 8th day of March 2000.

                                          Telocity, Inc.

                                          By: /s/ EDWARD HAYES
                                            ------------------------------------
                                          Edward Hayes, Executive Vice President
                                          and
                                          Chief Financial Officer

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

<TABLE>
<CAPTION>
                  SIGNATURE                                     TITLE                       DATE
                  ---------                                     -----                       ----
<S>                                              <C>                                    <C>

               /s/ PATTI HART*                   President, Chief Executive Officer     March 8, 2000
- ---------------------------------------------      and Director (Principal Executive
                 Patti Hart                        Officer)

              /s/ EDWARD HAYES                   Executive Vice President and Chief     March 8, 2000
- ---------------------------------------------      Financial Officer (Principal
                Edward Hayes                       Financial and Accounting Officer)

              /s/ DAVID COWAN*                   Director                               March 8, 2000
- ---------------------------------------------
                 David Cowan

              /s/ PETER OLSON*                   Executive Vice President, Chief        March 8, 2000
- ---------------------------------------------      Technical Officer and Director
                 Peter Olson

            /s/ ANDREW RAPPAPORT*                Director                               March 8, 2000
- ---------------------------------------------
              Andrew Rappaport

             /s/ EDMOND SANCTIS*                 Director                               March 8, 2000
- ---------------------------------------------
               Edmond Sanctis

            /s/ MICHAEL SOLOMON*                 Director                               March 8, 2000
- ---------------------------------------------
               Michael Solomon

            /s/ RANDALL STRAHAN*                 Director                               March 8, 2000
- ---------------------------------------------
               Randall Strahan

            *By: /s/ EDWARD HAYES
   ---------------------------------------
                Edward Hayes
              Attorney-in-Fact
</TABLE>

                                      II-7
<PAGE>   127

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S>       <C>
 1.1      Form of Underwriting Agreement
 3.1      Restated Certificate of Incorporation of Registrant, as
          amended, to be in effect after the offering
 3.2**    Bylaws of Registrant
 4.1*     Specimen of stock certificates
 5.1**    Opinion of Gray Cary Ware & Freidenrich LLP
 5.2*     Opinion of Patton Boggs, LLP
10.1**    Form of Indemnification Agreement between Registrant and
          each of its directors and officers
10.2**    2000 Equity Incentive Plan and form of agreements thereunder
10.3**    2000 Employee Stock Purchase Plan
10.4**    2000 Outside Directors Stock Plan and form of agreements
          thereunder
10.5+**   Lease between Registrant and Vidovich-Cupertino Limited
          Partnership
10.6+**   Lease between Registrant and Lee Li Chun Koo
10.7+**   Lease between Registrant and The Sobrato Group
10.8**    Second Amended and Restated Investors' Rights Agreement
10.9+**   Product Manufacturing Agreement between Registrant and
          Wellex Corporation
10.10+**  Agreement for Services between Registrant and Telamon-IMS,
          Inc.
10.11+**  Agreement for Services between Registrant and the Sutherland
          Group, Ltd.
10.12**   Employment Agreement between Registrant and Patti Hart
10.13**   Employment Agreement between Registrant and Peter Olson
10.14**   Employment Agreement between Registrant and Jim Morrissey
10.15**   Employment Agreement between Registrant and Thomas Obenhuber
10.16**   Employment Agreement between Registrant and James Rohrer
10.17**   Employment Agreement between Registrant and Matthew
          Stepovich
10.18**   Employment Agreement between Registrant and Regina Wiedemann
10.19**   Employment Agreement between Registrant and Kevin Grundy
10.20**   Employment Agreement between Registrant and Jef Raskin
10.21**   Employment Agreement between Registrant and Andrew Robinson
10.22**   Employment Agreement between Registrant and Edward Hayes
10.23**   Employment Agreement between Registrant and Scott Martin
10.24**   Consultants Stock Option Plan and form of agreements
          thereunder
10.25+**  Market Development Agreement between Registrant and
          BellSouth Business Systems, Inc.
10.26+**  Private Line Service Level Agreement between Registrant and
          Level 3 Communications, LLC
10.27+**  Private Line Service Agreement between Registrant and MCI
          WorldCom Communications, Inc.
10.28+**  Operating Agreement between Registrant and NBC Internet,
          Inc.
10.29+**  Advertising Agreement between Registrant and the National
          Broadcasting Company, Inc.
10.30+**  Advertising Agreement between Registrant and NBC Internet,
          Inc.
10.31**   Founder Stock Purchase Agreement between Registrant and
          Peter Olson dated December 23, 1997
10.32**   Founder Stock Purchase Agreement between Registrant and
          Michael Solomon dated December 23, 1997
</TABLE>
<PAGE>   128

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S>       <C>
10.33**   Founder Stock Purchase Agreement between Registrant and
          Thomas Obenhuber dated December 23, 1997
10.34**   Founder Stock Purchase Agreement between Registrant and
          Matthew Stepovich dated December 23, 1997
10.35**   Founder Stock Repurchase Agreement between Registrant and
          Peter Olson dated June 1, 1998
10.36**   Founder Stock Repurchase Agreement between Registrant and
          Michael Solomon dated June 1, 1998
10.37**   Founder Stock Purchase Agreement between Registrant and
          Kevin Grundy dated June 10, 1998
10.38**   Founder Stock Purchase Agreement between Registrant and
          Thomas Obenhuber dated June 10, 1998
10.39**   Founder Stock Purchase Agreement between Registrant and
          Matthew Stepovich dated June 10, 1998
10.40     Secured Promissory Note between Registrant and Comdisco,
          Inc. dated March 27, 1998
10.41     Secured Promissory Note between Registrant and Comdisco,
          Inc. dated November 10, 1998
10.42     Secured Promissory Note between Registrant and Comdisco,
          Inc. dated December 24, 1998
10.43     Subordinated Promissory Note between Registrant and
          Comdisco, Inc. dated September 3, 1999
10.44     Subordinated Promissory Note between Registrant and
          Comdisco, Inc. dated September 9, 1999
10.45     Subordinated Promissory Note between Registrant and
          Comdisco, Inc. dated September 24, 1999
10.46     Subordinated Promissory Note between Registrant and
          Comdisco, Inc. dated September 24, 1999
10.47     Subordinated Promissory Note between Registrant and
          Comdisco, Inc. dated October 19, 1999
10.48     Subordinated Promissory Note between Registrant and MMC/GATX
          Partnership No. 1 dated September 30, 1999
10.49*+   Master Broadband Network Services Agreement and Form of
          Warrant Agreement between Registrant and General Electric
          Company
21.1**    Subsidiaries of the Registrant
23.1      Consent of PricewaterhouseCoopers LLP, Independent
          Accountants
23.2**    Consent of Counsel (see Exhibit 5.1)
24.1**    Power of Attorney
27.1**    Financial Information Schedules
</TABLE>

- ---------------
 + Confidential treatment has been requested for certain portions of this
   exhibit. The omitted portions have been separately filed with the Commission.

 * To be filed by amendment.

** Previously filed.

<PAGE>   1
                                                                     EXHIBIT 1.1


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

                                 TELOCITY, INC.


                            (a Delaware corporation)


                       [_________] Shares of Common Stock


                               PURCHASE AGREEMENT


Dated:  _____________, 2000

================================================================================
<PAGE>   2
                                TABLE OF CONTENTS

<TABLE>
<S>           <C>                                                                                      <C>
SECTION 1.    Representations and Warranties...........................................................    3
              (a)    Representations and Warranties by the Company.....................................    3
                     (i)      Compliance with Registration Requirements................................    3
                     (ii)     Independent Accountants..................................................    4
                     (iii)    Financial Statements.....................................................    4
                     (iii)    No Material Adverse Change in Business...................................    4
                     (v)      Good Standing of the Company.............................................    4
                     (vi)     Good Standing of Subsidiaries............................................    4
                     (vii)    Capitalization...........................................................    5
                     (viii)   Authorization of Agreement...............................................    5
                     (ix)     Authorization and Description of Securities..............................    5
                     (x)      Absence of Defaults and Conflicts........................................    5
                     (xi)     Absence of Labor Dispute.................................................    6
                     (xii)    Absence of Proceedings...................................................    6
                     (xiii)   Accuracy of Exhibits.....................................................    6
                     (xiv)    Possession of Intellectual Property......................................    7
                     (xv)     Absence of Further Requirements..........................................    7
                     (xvi)    Possession of Licenses and Permits.......................................    7
                     (xvii)   Title to Property........................................................    7
                     (xviii)  Compliance with Cuba Act.................................................    8
                     (xix)    Investment Company Act...................................................    8
                     (xx)     Environmental Laws.......................................................    8
                     (xxi)    Registration Rights......................................................    8
                     (xxii)   Tax Returns..............................................................    9
                     (xxiii)  Insurance................................................................    9
                     (xxiv)   Internal Accounting Controls.............................................    9
              (b)    Officer's Certificates............................................................    9

SECTION 2.    Sale and Delivery to Underwriters; Closing...............................................    9
              (a)    Initial Securities................................................................    9
              (b)    Option Securities.................................................................   10
              (c)    Payment...........................................................................   10
              (d)    Denominations; Registration.......................................................   11

SECTION 3.    Covenants of the Company.................................................................   11
              (a)    Compliance with Securities Regulations and Commission Requests....................   11
              (b)    Filing of Amendments..............................................................   11
              (c)    Delivery of Registration Statements...............................................   11
              (d)    Delivery of Prospectuses..........................................................   12
              (e)    Continued Compliance with Securities Laws.........................................   12
              (f)    Blue Sky Qualifications...........................................................   12
              (g)    Rule 158..........................................................................   13
              (h)    Use of Proceeds...................................................................   13
              (i)    Listing...........................................................................   13
              (j)    Restriction on Sale of Securities.................................................   13
</TABLE>


                                      (i)
<PAGE>   3
<TABLE>
<S>           <C>                                                                                      <C>
              (k)    Reporting Requirements............................................................   13
              (l)    Compliance with NASD Rules........................................................   14
              (m)    Compliance with Rule 463..........................................................   14

SECTION 4.    Payment of Expenses......................................................................   14
              (a)    Expenses..........................................................................   14
              (b)    Termination of Agreement..........................................................   14

SECTION 5.    Conditions of Underwriters' Obligations..................................................   15
              (a)    Effectiveness of Registration Statement...........................................   15
              (b)    Opinions of Counsel for Company...................................................   15
              (c)    Opinion of Counsel for Underwriters...............................................   15
              (d)    Officers' Certificate.............................................................   16
              (e)    Accountant's Comfort Letter.......................................................   16
              (f)    Bring-down Comfort Letter.........................................................   16
              (g)    Approval of Listing...............................................................   16
              (h)    No Objection......................................................................   16
              (i)    Lock-up Agreements................................................................   16
              (j)    Waivers of Notice of Registration Rights..........................................   16
              (k)    Conditions to Purchase of Option Securities.......................................   17
                     (i)      Officers' Certificate....................................................   17
                     (ii)     Opinion of Counsel for Company...........................................   17
                     (iii)    Opinion of Counsel for Underwriters......................................   17
                     (iv)     Bring-down Comfort Letter................................................   17
              (l)    Additional Document...............................................................   17
              (m)    Termination of Agreement..........................................................   17

SECTION 6.    Indemnification..........................................................................   18
              (a)    Indemnification of Underwriters...................................................   18
              (b)    Indemnification of Company, Directors and Officers................................   19
              (c)    Actions against Parties; Notification.............................................   19
              (d)    Settlement without Consent if Failure to Reimburse................................   20
              (e)    Indemnification for Reserved Securities...........................................   20

SECTION 7.    Contribution.............................................................................   20

SECTION 8.    Representations, Warranties and Agreements to Survive Delivery...........................   21

SECTION 9.    Termination of Agreement.................................................................   21
              (a)    Termination; General..............................................................   21
              (b)    Liabilities.......................................................................   22

SECTION 10.   Default by One or More of the Underwriters...............................................   22

SECTION 11.   Default by the Company...................................................................   23

SECTION 12.   Notices..................................................................................   23

SECTION 13.   Parties..................................................................................   23

SECTION 14.   Governing Law And Time...................................................................   23

SECTION 15.   Effect of Headings.......................................................................   23
</TABLE>


                                      (ii)
<PAGE>   4

<TABLE>
<S>                                                                                                         <C>
SCHEDULES
         SCHEDULE A - List of Underwriters................................................................  Sch A-1
         SCHEDULE B - Number of Initial Securities to be Sold and Maximum
           Number of Option Securities to be Sold.........................................................  Sch B-1
         SCHEDULE C - Public Offering Price per Share of Common Stock.....................................  Sch C-1
         SCHEDULE D - List of Persons and Entities Subject to Lock-up.....................................  Sch D-1

EXHIBITS
         Exhibit A-1A - FORM OF OPINION OF GRAY, CARY, WARE & FRIEDENRICH L.L.P., COMPANY COUNSEL.........   A-1A-1
         Exhibit A-1B - FORM OF OPINION OF PATTON BOGGS L.L.P. - SPECIAL
                          COMPANY REGULATORY COUNSEL......................................................   A-1B-1
         Exhibit A-2 -  FORM OF OPINION OF UNDERWRITERS' COUNSEL..........................................   A-2-1
         Exhibit B -    FORM OF LOCK-UP...................................................................   B-1
</TABLE>


                                     (iii)
<PAGE>   5
                                                     Draft of January 14, 2000

                                TELOCITY, INC.

                           a Delaware corporation)

                     [__________] Shares of Common Stock

                         (Par Value $0.001 Per Share)

                              PURCHASE AGREEMENT

                                                               ___________, 2000

MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
           Incorporated
Credit Suisse First Boston
Donaldson, Lufkin & Jenrette
as Representatives of the several Underwriters
c/o  Merrill Lynch & Co.
     Merrill Lynch, Pierce, Fenner & Smith
                Incorporated
North Tower
World Financial Center
New York, New York  10281-1209

Ladies and Gentlemen:

      Telocity, Inc., a Delaware corporation (the "Company"), confirms its
agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and each of the other Underwriters named in
Schedule A hereto (collectively, the "Underwriters", which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, Credit Suisse First Boston and Donaldson,
Lufkin & Jenrette are acting as representatives (in such capacity, the
"Representatives"), with respect to (i) the sale by the Company and the purchase
by the Underwriters, acting severally and not jointly, of the respective numbers
of shares of Common Stock, par value $0.001 per share, of the Company ("Common
Stock") set forth in Schedules A and B hereto and (ii) the grant by the Company
to the Underwriters, acting severally and not jointly, of the option described
in Section 2(b) hereof to purchase all or any part of [__________] additional
shares of Common Stock to cover over-allotments, if any. The aforesaid
[__________] shares of Common Stock (the "Initial Securities") to be purchased
by the Underwriters and all or any part of the [__________] shares of Common
Stock subject to the option described in Section 2(b) hereof (the "Option
Securities") are hereinafter called, collectively, the "Securities".


                                       1
<PAGE>   6
      The Company understand that the Underwriters propose to make a public
offering of the Securities as soon as the Representatives deems advisable after
this Agreement has been executed and delivered.

      The Company and the Underwriters agree that up to _______ shares of the
Securities to be purchased by the Underwriters (the "Reserved Securities") shall
be reserved for sale by the Underwriters to certain eligible employees and
persons having business relationships with the Company, as part of the
distribution of the Securities by the Underwriters, subject to the terms of this
Agreement, the applicable rules, regulations and interpretations of the National
Association of Securities Dealers, Inc. and all other applicable laws, rules and
regulations. To the extent that such Reserved Securities are not orally
confirmed for purchase by such eligible employees and persons having business
relationships with the Company by the end of the first business day after the
date of this Agreement, such Reserved Securities may be offered to the public as
part of the public offering contemplated hereby.

      The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-94271) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in such prospectus or in such Term Sheet, as the case may
be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to the
Underwriters for use in connection with the offering of the Securities is herein
called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall
refer to the preliminary prospectus dated ___________, 2000 together with the
Term Sheet and all references in this Agreement to the date of the Prospectus
shall mean the date of the Term Sheet. For purposes of this Agreement, all
references to the Registration Statement, any preliminary prospectus, the
Prospectus or any Term Sheet or any amendment or supplement to any of the
foregoing shall be deemed to include the copy filed with the Commission pursuant
to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").


                                       2
<PAGE>   7
      SECTION 1. Representations and Warranties.

      (a) Representations and Warranties by the Company. The Company represents
and warrants to each Underwriter as of the date hereof, as of the Closing Time
referred to in Section 2(c) hereof, and as of each Date of Delivery (if any)
referred to in Section 2(b) hereof, and agrees with each Underwriter, as
follows:

            (i) Compliance with Registration Requirements. Each of the
      Registration Statement and any Rule 462(b) Registration Statement has
      become effective under the 1933 Act and no stop order suspending the
      effectiveness of the Registration Statement or any Rule 462(b)
      Registration Statement has been issued under the 1933 Act and no
      proceedings for that purpose have been instituted or are pending or, to
      the knowledge of the Company, are contemplated by the Commission, and any
      request on the part of the Commission for additional information has been
      complied with.

            At the respective times the Registration Statement, any Rule 462(b)
      Registration Statement and any post-effective amendments thereto became
      effective and at the Closing Time (and, if any Option Securities are
      purchased, at the Date of Delivery), the Registration Statement, the Rule
      462(b) Registration Statement and any amendments and supplements thereto
      complied and will comply in all material respects with the requirements of
      the 1933 Act and the 1933 Act Regulations and did not and will not contain
      an untrue statement of a material fact or omit to state a material fact
      required to be stated therein or necessary to make the statements therein
      not misleading, and the Prospectus, any preliminary prospectus and any
      supplement thereto or prospectus wrapper prepared in connection therewith,
      at their respective times of issuance and at the Closing Time, complied
      and will comply in all material respects with any applicable laws or
      regulations of foreign jurisdictions in which the Prospectus and such
      preliminary prospectus, as amended or supplemented, if applicable, are
      distributed in connection with the offer and sale of Reserved Securities.
      Neither the Prospectus nor any amendments or supplements thereto
      (including any prospectus wrapper), at the time the Prospectus or any such
      amendment or supplement was issued and at the Closing Time (and, if any
      Option Securities are purchased, at the Date of Delivery), included or
      will include an untrue statement of a material fact or omitted or will
      omit to state a material fact necessary in order to make the statements
      therein, in the light of the circumstances under which they were made, not
      misleading. If Rule 434 is used, the Company will comply with the
      requirements of Rule 434 and the Prospectus shall not be "materially
      different", as such term is used in Rule 434, from the prospectus included
      in the Registration Statement at the time it became effective. The
      representations and warranties in this subsection shall not apply to
      statements in or omissions from the Registration Statement or Prospectus
      made in reliance upon and in conformity with information furnished to the
      Company in writing by any Underwriter through Merrill Lynch expressly for
      use in the Registration Statement or Prospectus.

            Each preliminary prospectus and the prospectus filed as part of the
      Registration Statement as originally filed or as part of any amendment
      thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when
      so filed in all material respects with the 1933 Act Regulations and each
      preliminary prospectus and the Prospectus delivered to


                                       3
<PAGE>   8
      the Underwriters for use in connection with this offering was identical to
      the electronically transmitted copies thereof filed with the Commission
      pursuant to EDGAR, except to the extent permitted by Regulation S-T.

            (ii) Independent Accountants. The accountants who certified the
      financial statements and supporting schedules included in the Registration
      Statement are independent public accountants as required by the 1933 Act
      and the 1933 Act Regulations.

            (iii) Financial Statements. The financial statements included in the
      Registration Statement and the Prospectus, together with the related
      schedules and notes, present fairly the financial position of the Company
      and its consolidated subsidiaries at the dates indicated and the statement
      of operations, stockholders' equity and cash flows of the Company and its
      consolidated subsidiaries for the periods specified; said financial
      statements have been prepared in conformity with generally accepted
      accounting principles ("GAAP") applied on a consistent basis throughout
      the periods involved. The supporting schedules included in the
      Registration Statement present fairly in accordance with GAAP the
      information required to be stated therein. The selected financial data and
      the summary financial information included in the Prospectus present
      fairly the information shown therein and have been compiled on a basis
      consistent with that of the audited financial statements included in the
      Registration Statement.

            (iv) No Material Adverse Change in Business. Since the respective
      dates as of which information is given in the Registration Statement and
      the Prospectus, except as otherwise stated therein, (A) there has been no
      material adverse change in the condition, financial or otherwise, or in
      the earnings, business affairs or business prospects of the Company and
      its subsidiaries considered as one enterprise, whether or not arising in
      the ordinary course of business (a "Material Adverse Effect"), (B) there
      have been no transactions entered into by the Company or any of its
      subsidiaries, other than those in the ordinary course of business, which
      are material with respect to the Company and its subsidiaries considered
      as one enterprise, and (C) there has been no dividend or distribution of
      any kind declared, paid or made by the Company on any class of its capital
      stock.

            (v) Good Standing of the Company. The Company has been duly
      organized and is validly existing as a corporation in good standing under
      the laws of the State of Delaware and has corporate power and authority to
      own, lease and operate its properties and to conduct its business as
      described in the Prospectus and to enter into and perform its obligations
      under this Agreement; and the Company is duly qualified as a foreign
      corporation to transact business and is in good standing in each other
      jurisdiction in which such qualification is required, whether by reason of
      the ownership or leasing of property or the conduct of business, except
      where the failure so to qualify or to be in good standing would not result
      in a Material Adverse Effect.

            (vi)  Good Standing of Subsidiaries.  DPO Communications, Inc., a
      California corporation and Aspen Internet Systems, Inc., a California
      corporation (each a "Subsidiary" and, collectively, the "Subsidiaries")
      are the only subsidiaries of the


                                       4
<PAGE>   9
      Company. Each Subsidiary has been duly organized and is validly existing
      as a corporation in good standing under the laws of the jurisdiction of
      its incorporation, has corporate power and authority to own, lease and
      operate its properties and to conduct its business as described in the
      Prospectus and is duly qualified as a foreign corporation to transact
      business and is in good standing in each jurisdiction in which such
      qualification is required, whether by reason of the ownership or leasing
      of property or the conduct of business, except where the failure so to
      qualify or to be in good standing would not result in a Material Adverse
      Effect; except as otherwise disclosed in the Registration Statement, all
      of the issued and outstanding capital stock of each such Subsidiary has
      been duly authorized and validly issued, is fully paid and non-assessable
      and is owned by the Company, directly or through subsidiaries, free and
      clear of any security interest, mortgage, pledge, lien, encumbrance, claim
      or equity; none of the outstanding shares of capital stock of any
      Subsidiary was issued in violation of the preemptive or similar rights of
      any securityholder of such Subsidiary. Each of the Subsidiaries is listed
      on Exhibit 21 to the Registration Statement.

            (vii) Capitalization. The authorized, issued and outstanding capital
      stock of the Company is as set forth in the Prospectus in the column
      entitled "Actual" under the caption "Capitalization" (except for
      subsequent issuances, if any, pursuant to this Agreement, pursuant to
      reservations, agreements or employee benefit plans referred to in the
      Prospectus or pursuant to the exercise of convertible securities or
      options referred to in the Prospectus). The shares of issued and
      outstanding capital stock have been duly authorized and validly issued and
      are fully paid and non-assessable; none of the outstanding shares of
      capital stock was issued in violation of the preemptive or other similar
      rights of any securityholder of the Company.

            (viii) Authorization of Agreement. This Agreement has been duly
      authorized, executed and delivered by the Company.

            (ix) Authorization and Description of Securities. The Securities to
      be purchased by the Underwriters from the Company have been duly
      authorized for issuance and sale to the Underwriters pursuant to this
      Agreement and, when issued and delivered by the Company pursuant to this
      Agreement against payment of the consideration set forth herein, will be
      validly issued and fully paid and non-assessable;] the Common Stock
      conforms to all statements relating thereto contained in the Prospectus
      and such description conforms to the rights set forth in the instruments
      defining the same; no holder of the Securities will be subject to personal
      liability by reason of being such a holder; and the issuance of the
      Securities is not subject to the preemptive or other similar rights of any
      securityholder of the Company.

            (x) Absence of Defaults and Conflicts. Neither the Company nor any
      of its subsidiaries is in violation of its charter or by-laws or in
      default in the performance or observance of any obligation, agreement,
      covenant or condition contained in any contract, indenture, mortgage, deed
      of trust, loan or credit agreement, note, lease or other agreement or
      instrument to which the Company or any of its subsidiaries is a party or
      by which it or any of them may be bound, or to which any of the property
      or assets of the Company or any subsidiary is subject (collectively,
      "Agreements and Instruments")


                                       5
<PAGE>   10
      except for such defaults that would not result in a Material Adverse
      Effect; and the execution, delivery and performance of this Agreement and
      the consummation of the transactions contemplated herein and in the
      Registration Statement (including the issuance and sale of the Securities
      and the use of the proceeds from the sale of the Securities as described
      in the Prospectus under the caption "Use of Proceeds") and compliance by
      the Company with its obligations hereunder have been duly authorized by
      all necessary corporate action and do not and will not, whether with or
      without the giving of notice or passage of time or both, conflict with or
      constitute a breach of, or default or Repayment Event (as defined below)
      under, or result in the creation or imposition of any lien, charge or
      encumbrance upon any property or assets of the Company or any subsidiary
      pursuant to, the Agreements and Instruments (except for such conflicts,
      breaches or defaults or liens, charges or encumbrances that would not
      result in a Material Adverse Effect), nor will such action result in any
      violation of the provisions of the charter or by-laws of the Company or
      any subsidiary or any applicable law, statute, rule, regulation, judgment,
      order, writ or decree of any government, government instrumentality or
      court, domestic or foreign, having jurisdiction over the Company or any
      subsidiary or any of their assets, properties or operations. As used
      herein, a "Repayment Event" means any event or condition which gives the
      holder of any note, debenture or other evidence of indebtedness (or any
      person acting on such holder's behalf) the right to require the
      repurchase, redemption or repayment of all or a portion of such
      indebtedness by the Company or any subsidiary.

            (xi) Absence of Labor Dispute. No labor dispute with the employees
      of the Company or any subsidiary exists or, to the knowledge of the
      Company, is imminent, and the Company is not aware of any existing or
      imminent labor disturbance by the employees of any of its or any
      subsidiary's principal suppliers, manufacturers, customers or contractors,
      which, in either case, may reasonably be expected to result in a Material
      Adverse Effect.

            (xii) Absence of Proceedings. There is no action, suit, proceeding,
      inquiry or investigation before or brought by any court or governmental
      agency or body, domestic or foreign, now pending, or, to the knowledge of
      the Company, threatened, against or affecting the Company or any
      subsidiary, which is required to be disclosed in the Registration
      Statement (other than as disclosed therein), or which might reasonably be
      expected to result in a Material Adverse Effect, or which might reasonably
      be expected to materially and adversely affect the properties or assets
      thereof or the consummation of the transactions contemplated in this
      Agreement or the performance by the Company of its obligations hereunder;
      the aggregate of all pending legal or governmental proceedings to which
      the Company or any subsidiary is a party or of which any of their
      respective property or assets is the subject which are not described in
      the Registration Statement, including ordinary routine litigation
      incidental to the business, could not reasonably be expected to result in
      a Material Adverse Effect.

            (xiii) Accuracy of Exhibits. There are no contracts or documents
      which are required to be described in the Registration Statement or the
      Prospectus or to be filed as exhibits thereto which have not been so
      described and filed as required.


                                       6
<PAGE>   11
            (xiv) Possession of Intellectual Property. The Company and its
      subsidiaries own or possess, or can acquire on reasonable terms, adequate
      patents, patent rights, licenses, inventions, copyrights, know-how
      (including trade secrets and other unpatented and/or unpatentable
      proprietary or confidential information, systems or procedures),
      trademarks, service marks, trade names or other intellectual property
      (collectively, "Intellectual Property") necessary to carry on the business
      now operated by them, and neither the Company nor any of its subsidiaries
      has received any notice or is otherwise aware of any infringement of or
      conflict with asserted rights of others with respect to any Intellectual
      Property or of any facts or circumstances which would render any
      Intellectual Property invalid or inadequate to protect the interest of the
      Company or any of its subsidiaries therein, and which infringement or
      conflict (if the subject of any unfavorable decision, ruling or finding)
      or invalidity or inadequacy, singly or in the aggregate, would result in a
      Material Adverse Effect.

            (xv) Absence of Further Requirements. No filing with, or
      authorization, approval, consent, license, order, registration,
      qualification or decree of, any court or governmental authority or agency
      is necessary or required for the performance by the Company of its
      obligations hereunder, in connection with the offering, issuance or sale
      of the Securities hereunder or the consummation of the transactions
      contemplated by this Agreement, except (i) such as have been already
      obtained or as may be required under the 1933 Act or the 1933 Act
      Regulations or state securities laws and (ii) such as have been obtained
      under the laws and regulations of jurisdictions outside the United States
      in which the Reserved Securities are offered.

            (xvi) Possession of Licenses and Permits. The Company and its
      subsidiaries possess such permits, licenses, approvals, consents and other
      authorizations (collectively, "Governmental Licenses") issued by the
      appropriate federal, state, local or foreign regulatory agencies or bodies
      necessary to conduct the business now operated by them; the Company and
      its subsidiaries are in compliance with the terms and conditions of all
      such Governmental Licenses, except where the failure so to comply would
      not, singly or in the aggregate, have a Material Adverse Effect; all of
      the Governmental Licenses are valid and in full force and effect, except
      when the invalidity of such Governmental Licenses or the failure of such
      Governmental Licenses to be in full force and effect would not have a
      Material Adverse Effect; and neither the Company nor any of its
      subsidiaries has received any notice of proceedings relating to the
      revocation or modification of any such Governmental Licenses which, singly
      or in the aggregate, if the subject of an unfavorable decision, ruling or
      finding, would result in a Material Adverse Effect.

            (xvii) Title to Property. The Company and its subsidiaries have good
      and marketable title to all real property owned by the Company and its
      subsidiaries and good title to all other properties owned by them, in each
      case, free and clear of all mortgages, pledges, liens, security interests,
      claims, restrictions or encumbrances of any kind except such as (a) are
      described in the Prospectus or (b) do not, singly or in the aggregate,
      materially affect the value of such property and do not interfere with the
      use made and proposed to be made of such property by the Company or any of
      its subsidiaries; and all of the leases and subleases material to the
      business of the Company and its subsidiaries, considered as one
      enterprise, and under which the Company or any of its subsidiaries


                                       7
<PAGE>   12
      holds properties described in the Prospectus, are in full force and
      effect, and neither the Company nor any subsidiary has any notice of any
      material claim of any sort that has been asserted by anyone adverse to the
      rights of the Company or any subsidiary under any of the leases or
      subleases mentioned above, or affecting or questioning the rights of the
      Company or such subsidiary to the continued possession of the leased or
      subleased premises under any such lease or sublease.

            (xviii) Compliance with Cuba Act. The Company has complied with, and
      is and will be in compliance with, the provisions of that certain Florida
      act relating to disclosure of doing business with Cuba, codified as
      Section 517.075 of the Florida statutes, and the rules and regulations
      thereunder (collectively, the "Cuba Act") or is exempt therefrom.

            (xix) Investment Company Act. The Company is not, and upon the
      issuance and sale of the Securities as herein contemplated and the
      application of the net proceeds therefrom as described in the Prospectus
      will not be, an "investment company" or an entity "controlled" by an
      "investment company" as such terms are defined in the Investment Company
      Act of 1940, as amended (the "1940 Act").

            (xx) Environmental Laws. Except as described in the Registration
      Statement and except as would not, singly or in the aggregate, result in a
      Material Adverse Effect, (A) neither the Company nor any of its
      subsidiaries is in violation of any federal, state, local or foreign
      statute, law, rule, regulation, ordinance, code, policy or rule of common
      law or any judicial or administrative interpretation thereof, including
      any judicial or administrative order, consent, decree or judgment,
      relating to pollution or protection of human health, the environment
      (including, without limitation, ambient air, surface water, groundwater,
      land surface or subsurface strata) or wildlife, including, without
      limitation, laws and regulations relating to the release or threatened
      release of chemicals, pollutants, contaminants, wastes, toxic substances,
      hazardous substances, petroleum or petroleum products (collectively,
      "Hazardous Materials") or to the manufacture, processing, distribution,
      use, treatment, storage, disposal, transport or handling of Hazardous
      Materials (collectively, "Environmental Laws"), (B) the Company and its
      subsidiaries have all permits, authorizations and approvals required under
      any applicable Environmental Laws and are each in compliance with their
      requirements, (C) there are no pending or threatened administrative,
      regulatory or judicial actions, suits, demands, demand letters, claims,
      liens, notices of noncompliance or violation, investigation or proceedings
      relating to any Environmental Law against the Company or any of its
      subsidiaries and (D) there are no events or circumstances that might
      reasonably be expected to form the basis of an order for clean-up or
      remediation, or an action, suit or proceeding by any private party or
      governmental body or agency, against or affecting the Company or any of
      its subsidiaries relating to Hazardous Materials or any Environmental
      Laws.

            (xxi) Registration Rights. There are no persons with registration
      rights or other similar rights to have any securities registered pursuant
      to the Registration Statement or otherwise registered by the Company under
      the 1933 Act.


                                       8
<PAGE>   13
            (xxii) Tax Returns. The Company and each of the Subsidiaries have
      filed all federal, state, local and foreign tax returns that are required
      to be filed or have duly requested extensions thereof and have paid all
      taxes required to be paid by any of them and any related assessments,
      fines or penalties, except for any such tax, assessment, fine or penalty
      that is being contested in good faith and by appropriate proceedings, and
      adequate charges, accruals and reserves have been provided for in the
      financial statements referred to in Section 1(a)(iii) above in respect of
      all federal, state, local and foreign taxes for all periods as to which
      the tax liability of the Company or any of the Subsidiaries has not been
      finally determined or remains open to examination by applicable taxing
      authorities, except for such failures to file, request extensions, make
      payments and provide for adequate charges, accruals and reserves as would
      not, singly or in the aggregate, result in a Material Adverse Effect.

            (xxiii) Insurance. The Company and each of the Subsidiaries
      maintains insurance covering its properties, operations, personnel and
      business. Such insurance insures against such losses and risks as are
      adequate in accordance with customary industry practice to protect the
      Company, each of the Subsidiaries and their businesses. Neither the
      Company nor any of the Subsidiaries has received notice from any insurer
      or agent of such insurer that substantial capital improvement or other
      expenditures will have to be made in order to continue such insurance. All
      such insurance is outstanding and duly in force on the date hereof.

            (xxiv) Internal Accounting Controls. The Company maintains a system
      of internal accounting controls sufficient to provide reasonable
      assurances that (A) transactions are executed in accordance with
      management's general or specific authorization; (B) transactions are
      recorded as necessary to permit preparation of financial statements in
      conformity with GAAP and to maintain accountability for assets; (C) access
      to assets is permitted only in accordance with management's general or
      specific authorization; and (D) the recorded accountability for assets is
      compared with existing assets at reasonable intervals and appropriate
      action is taken with respect to any differences.

      (b) Officer's Certificates. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to the Representatives or to
counsel for the Underwriters shall be deemed a representation and warranty by
the Company to each Underwriter as to the matters covered thereby.

      SECTION 2. Sale and Delivery to Underwriters; Closing.

      (a) Initial Securities. On the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company agrees to sell to each Underwriter, severally and not jointly, and each
Underwriter, severally and not jointly, agrees to purchase from the Company at
the price per share set forth in Schedule C, that proportion of the number of
Initial Securities set forth in Schedule B opposite the name of the Company,
which the number of Initial Securities set forth in Schedule A opposite the name
of such Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof, bears to the total number of Initial


                                       9
<PAGE>   14
Securities, subject, in each case, to such adjustments among the Underwriters as
the Representatives in their sole discretion shall make to eliminate any sales
or purchases of fractional securities.

      (b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the Underwriters, severally
and not jointly, to purchase up to an additional [__________] shares of Common
Stock, as set forth in Schedule B, at the price per share set forth in Schedule
C, less an amount per share equal to any dividends or distributions declared by
the Company and payable on the Initial Securities but not payable on the Option
Securities. The option hereby granted will expire 30 days after the date hereof
and may be exercised in whole or in part from time to time only for the purpose
of covering over-allotments which may be made in connection with the offering
and distribution of the Initial Securities upon notice by the Representatives to
the Company setting forth the number of Option Securities as to which the
several Underwriters are then exercising the option and the time and date of
payment and delivery for such Option Securities. Any such time and date of
delivery (a "Date of Delivery") shall be determined by the Representatives, but
shall not be later than seven full business days after the exercise of said
option, nor in any event prior to the Closing Time, as hereinafter defined. If
the option is exercised as to all or any portion of the Option Securities, each
of the Underwriters, acting severally and not jointly, will purchase that
proportion of the total number of Option Securities then being purchased which
the number of Initial Securities set forth in Schedule A opposite the name of
such Underwriter bears to the total number of Initial Securities, subject in
each case to such adjustments as the Representatives in their discretion shall
make to eliminate any sales or purchases of fractional shares.

      (c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Baker
McKenzie, 805 Third Avenue, New York, New York 10022, or at such other place as
shall be agreed upon by the Representatives and the Company, at 9:00 A.M.
(Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M.
(Eastern time) on any given day) business day after the date hereof (unless
postponed in accordance with the provisions of Section 10), or such other time
not later than ten business days after such date as shall be agreed upon by the
Representatives and the Company (such time and date of payment and delivery
being herein called "Closing Time").

      In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives
and the Company, on each Date of Delivery as specified in the notice from the
Representatives to the Company.

      Payment shall be made to the Company by wire transfer of immediately
available funds to [a] bank account(s) designated by the Company against
delivery to the Representatives for the respective accounts of the Underwriters
of certificates for the Securities to be purchased by them. It is understood
that each Underwriter has authorized the Representatives, for its account, to
accept delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase. Merrill Lynch, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment


                                       10
<PAGE>   15
of the purchase price for the Initial Securities or the Option Securities, if
any, to be purchased by any Underwriter whose funds have not been received by
the Closing Time or the relevant Date of Delivery, as the case may be, but such
payment shall not relieve such Underwriter from its obligations hereunder.

      (d) Denominations; Registration. Certificates for the Initial Securities
and the Option Securities, if any, shall be in such denominations and registered
in such names as the Representatives may request in writing at least one full
business day before the Closing Time or the relevant Date of Delivery, as the
case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.

      SECTION 3. Covenants of the Company. The Company covenants with each
Underwriter as follows:

            (a) Compliance with Securities Regulations and Commission Requests.
      The Company, subject to Section 3(b), will comply with the requirements of
      Rule 430A or Rule 434, as applicable, and will notify the Representatives
      immediately, and confirm the notice in writing, (i) when any
      post-effective amendment to the Registration Statement shall become
      effective, or any supplement to the Prospectus or any amended Prospectus
      shall have been filed, (ii) of the receipt of any comments from the
      Commission, (iii) of any request by the Commission for any amendment to
      the Registration Statement or any amendment or supplement to the
      Prospectus or for additional information, and (iv) of the issuance by the
      Commission of any stop order suspending the effectiveness of the
      Registration Statement or of any order preventing or suspending the use of
      any preliminary prospectus, or of the suspension of the qualification of
      the Securities for offering or sale in any jurisdiction, or of the
      initiation or threatening of any proceedings for any of such purposes. The
      Company will promptly effect the filings necessary pursuant to Rule 424(b)
      and will take such steps as it deems necessary to ascertain promptly
      whether the form of prospectus transmitted for filing under Rule 424(b)
      was received for filing by the Commission and, in the event that it was
      not, it will promptly file such prospectus. The Company will make every
      reasonable effort to prevent the issuance of any stop order and, if any
      stop order is issued, to obtain the lifting thereof at the earliest
      possible moment.

            (b) Filing of Amendments. The Company will give the Representatives
      notice of its intention to file or prepare any amendment to the
      Registration Statement (including any filing under Rule 462(b)), any Term
      Sheet or any amendment, supplement or revision to either the prospectus
      included in the Registration Statement at the time it became effective or
      to the Prospectus, will furnish the Representatives with copies of any
      such documents a reasonable amount of time prior to such proposed filing
      or use, as the case may be, and will not file or use any such document to
      which the Representatives or counsel for the Underwriters shall object.

            (c) Delivery of Registration Statements. The Company has furnished
      or will deliver to the Representatives and counsel for the Underwriters,
      without charge, signed


                                       11
<PAGE>   16
      copies of the Registration Statement as originally filed and of each
      amendment thereto (including exhibits filed therewith or incorporated by
      reference therein) and signed copies of all consents and certificates of
      experts, and will also deliver to the Representatives, without charge, a
      conformed copy of the Registration Statement as originally filed and of
      each amendment thereto (without exhibits) for each of the Underwriters.
      The copies of the Registration Statement and each amendment thereto
      furnished to the Underwriters will be identical to the electronically
      transmitted copies thereof filed with the Commission pursuant to EDGAR,
      except to the extent permitted by Regulation S-T.

            (d) Delivery of Prospectuses. The Company has delivered to each
      Underwriter, without charge, as many copies of each preliminary prospectus
      as such Underwriter reasonably requested, and the Company hereby consents
      to the use of such copies for purposes permitted by the 1933 Act. The
      Company will furnish to each Underwriter, without charge, during the
      period when the Prospectus is required to be delivered under the 1933 Act
      or the Securities Exchange Act of 1934 (the "1934 Act"), such number of
      copies of the Prospectus (as amended or supplemented) as such Underwriter
      may reasonably request. The Prospectus and any amendments or supplements
      thereto furnished to the Underwriters will be identical to the
      electronically transmitted copies thereof filed with the Commission
      pursuant to EDGAR, except to the extent permitted by Regulation S-T.

            (e) Continued Compliance with Securities Laws. The Company will
      comply with the 1933 Act and the 1933 Act Regulations so as to permit the
      completion of the distribution of the Securities as contemplated in this
      Agreement and in the Prospectus. If at any time when a prospectus is
      required by the 1933 Act to be delivered in connection with sales of the
      Securities, any event shall occur or condition shall exist as a result of
      which it is necessary, in the opinion of counsel for the Underwriters or
      for the Company, to amend the Registration Statement or amend or
      supplement the Prospectus in order that the Prospectus will not include
      any untrue statements of a material fact or omit to state a material fact
      necessary in order to make the statements therein not misleading in the
      light of the circumstances existing at the time it is delivered to a
      purchaser, or if it shall be necessary, in the opinion of such counsel, at
      any such time to amend the Registration Statement or amend or supplement
      the Prospectus in order to comply with the requirements of the 1933 Act or
      the 1933 Act Regulations, the Company will promptly prepare and file with
      the Commission, subject to Section 3(b), such amendment or supplement as
      may be necessary to correct such statement or omission or to make the
      Registration Statement or the Prospectus comply with such requirements,
      and the Company will furnish to the Underwriters such number of copies of
      such amendment or supplement as the Underwriters may reasonably request.

            (f) Blue Sky Qualifications. The Company will use its best efforts,
      in cooperation with the Underwriters, to qualify the Securities for
      offering and sale under the applicable securities laws of such states and
      other jurisdictions (domestic or foreign) as the Representatives may
      designate and to maintain such qualifications in effect for a period of
      not less than one year from the later of the effective date of the
      Registration Statement and any Rule 462(b) Registration Statement;
      provided, however, that the Company shall not be obligated to file any
      general consent to service of process or to qualify as a foreign


                                       12
<PAGE>   17
      corporation or as a dealer in securities in any jurisdiction in which it
      is not so qualified or to subject itself to taxation in respect of doing
      business in any jurisdiction in which it is not otherwise so subject. In
      each jurisdiction in which the Securities have been so qualified, the
      Company will file such statements and reports as may be required by the
      laws of such jurisdiction to continue such qualification in effect for a
      period of not less than one year from the effective date of the
      Registration Statement and any Rule 462(b) Registration Statement.

            (g) Rule 158. The Company will timely file such reports pursuant to
      the 1934 Act as are necessary in order to make generally available to its
      securityholders as soon as practicable an earnings statement for the
      purposes of, and to provide the benefits contemplated by, the last
      paragraph of Section 11(a) of the 1933 Act.

            (h) Use of Proceeds. The Company will use the net proceeds received
      by it from the sale of the Securities in the manner specified in the
      Prospectus under "Use of Proceeds".

            (i) Listing. The Company will use its best efforts to effect and
      maintain the quotation of the Securities on the Nasdaq National Market and
      will file with the Nasdaq National Market all documents and notices
      required by the Nasdaq National Market of companies that have securities
      that are traded in the over-the-counter market and quotations for which
      are reported by the Nasdaq National Market.

            (j) Restriction on Sale of Securities. During a period of 180 days
      from the date of the Prospectus, the Company will not, without the prior
      written consent of Merrill Lynch, (i) directly or indirectly, offer,
      pledge, sell, contract to sell, sell any option or contract to purchase,
      purchase any option or contract to sell, grant any option, right or
      warrant to purchase or otherwise transfer or dispose of any share of
      Common Stock or any securities convertible into or exercisable or
      exchangeable for Common Stock or file any registration statement under the
      1933 Act with respect to any of the foregoing or (ii) enter into any swap
      or any other agreement or any transaction that transfers, in whole or in
      part, directly or indirectly, the economic consequence of ownership of the
      Common Stock, whether any such swap or transaction described in clause (i)
      or (ii) above is to be settled by delivery of Common Stock or such other
      securities, in cash or otherwise. The foregoing sentence shall not apply
      to (A) the Securities to be sold hereunder, (B) any shares of Common Stock
      issued by the Company upon the exercise of an option or warrant or the
      conversion of a security outstanding on the date hereof and referred to in
      the Prospectus, (C) any shares of Common Stock issued or options to
      purchase Common Stock granted pursuant to existing employee benefit plans
      of the Company referred to in the Prospectus or (D) any shares of Common
      Stock issued pursuant to any non-employee director stock plan or dividend
      reinvestment plan.

            (k) Reporting Requirements. The Company, during the period when the
      Prospectus is required to be delivered under the 1933 Act or the 1934 Act,
      will file all documents required to be filed with the Commission pursuant
      to the 1934 Act within the time periods required by the 1934 Act and the
      rules and regulations of the Commission thereunder.


                                       13
<PAGE>   18
            (l) Compliance with NASD Rules. The Company hereby agrees that it
      will ensure that the Reserved Securities will be restricted as required by
      the National Association of Securities Dealers, Inc. (the "NASD") or the
      NASD rules from sale, transfer, assignment, pledge or hypothecation for a
      period of three months following the date of this Agreement. The
      Underwriters will notify the Company as to which persons will need to be
      so restricted. At the request of the Underwriters, the Company will direct
      the transfer agent to place a stop transfer restriction upon such
      securities for such period of time. Should the Company release, or seek to
      release, from such restrictions any of the Reserved Securities, the
      Company agrees to reimburse the Underwriters for any reasonable expenses
      (including, without limitation, legal expenses) they incur in connection
      with such release.

            (m) Compliance with Rule 463. The Company will file with the
      Commission such information as may be required pursuant to Rule 463 of the
      1933 Act Regulations.

      SECTION 4. Payment of Expenses.

            (a) Expenses. The Company will pay or cause to be paid all expenses
      incident to the performance of their obligations under this Agreement,
      including (i) the preparation, printing and filing of the Registration
      Statement (including financial statements and exhibits) as originally
      filed and of each amendment thereto, (ii) the preparation, printing and
      delivery to the Underwriters of this Agreement, any Agreement among
      Underwriters and such other documents as may be required in connection
      with the offering, purchase, sale, issuance or delivery of the Securities,
      (iii) the preparation, issuance and delivery of the certificates for the
      Securities to the Underwriters, including any stock or other transfer
      taxes and any stamp or other duties payable upon the sale, issuance or
      delivery of the Securities to the Underwriters, (iv) the fees and
      disbursements of the Company's counsel, accountants and other advisors,
      (v) the qualification of the Securities under securities laws in
      accordance with the provisions of Section 3(f) hereof, including filing
      fees and the reasonable fees and disbursements of counsel for the
      Underwriters in connection therewith and in connection with the
      preparation of the Blue Sky Survey and any supplement thereto, (vi) the
      printing and delivery to the Underwriters of copies of each preliminary
      prospectus, any Term Sheets and of the Prospectus and any amendments or
      supplements thereto, (vii) the preparation, printing and delivery to the
      Underwriters of copies of the Blue Sky Survey and any supplement thereto,
      (viii) the fees and expenses of any transfer agent or registrar for the
      Securities and (ix) the filing fees incident to, and the reasonable fees
      and disbursements of counsel to the Underwriters in connection with, the
      review by the National Association of Securities Dealers, Inc. (the
      "NASD") of the terms of the sale of the Securities, (x) the fees and
      expenses incurred in connection with the inclusion of the Securities in
      the Nasdaq National Market and (xi) all costs and expenses of the
      Underwriters, including the fees and disbursements of counsel for the
      Underwriters, in connection with matters related to the Reserved
      Securities which are designated by the Company for sale to employees and
      others having a business relationship with the Company.

            (b) Termination of Agreement. If this Agreement is terminated by the
      Representatives in accordance with the provisions of Section 5, Section
      9(a)(i) or Section


                                       14
<PAGE>   19
      11 hereof, the Company shall reimburse the Underwriters for all of their
      out-of-pocket expenses, including the reasonable fees and disbursements of
      counsel for the Underwriters.

      SECTION 5. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company or any subsidiary of the Company
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:

            (a) Effectiveness of Registration Statement. The Registration
      Statement, including any Rule 462(b) Registration Statement, has become
      effective and at Closing Time no stop order suspending the effectiveness
      of the Registration Statement shall have been issued under the 1933 Act or
      proceedings therefor initiated or threatened by the Commission, and any
      request on the part of the Commission for additional information shall
      have been complied with to the reasonable satisfaction of counsel to the
      Underwriters. A prospectus containing the Rule 430A Information shall have
      been filed with the Commission in accordance with Rule 424(b) (or a
      post-effective amendment providing such information shall have been filed
      and declared effective in accordance with the requirements of Rule 430A)
      or, if the Company has elected to rely upon Rule 434, a Term Sheet shall
      have been filed with the Commission in accordance with Rule 424(b).

            (b) Opinions of Counsel for Company. At Closing Time, the
      Representatives shall have received the favorable opinion, dated as of
      Closing Time, of Gray Cary Ware & Freidenrich LLP, counsel for the
      Company, to the effect set forth in Exhibit A-1A hereto and to such
      further effect as counsel to the Underwriters may reasonably request, and
      of Patton Boggs LLP, special regulatory counsel for the Company, to the
      effect set forth in Exhibit A-1B and to such further effect as counsel to
      the Underwriters may reasonably request, each in form and substance
      satisfactory to counsel for the Underwriters, together with signed or
      reproduced copies of such letter for each of the other Underwriters to the
      effect set forth in Exhibits A-1A and A-1B hereto and to such further
      effect as counsel to the Underwriters may reasonably request.

            (c) Opinion of Counsel for Underwriters. At Closing Time, the
      Representatives shall have received the favorable opinion, dated as of
      Closing Time, of Baker & McKenzie, counsel for the Underwriters, to the
      effect set forth in Exhibit A-2 hereto, together with signed or reproduced
      copies of such letter for each of the other Underwriters. In giving such
      opinion such counsel may rely, as to all matters governed by the laws of
      jurisdictions other than the law of the State of New York, the federal law
      of the United States and the General Corporation Law of the State of
      Delaware, upon the opinions of counsel satisfactory to the
      Representatives. Such counsel may also state that, insofar as such opinion
      involves factual matters, they have relied, to the extent they deem
      proper, upon certificates of officers of the Company and its subsidiaries
      and certificates of public officials.


                                       15
<PAGE>   20
            (d) Officers' Certificate. At Closing Time, there shall not have
      been, since the date hereof or since the respective dates as of which
      information is given in the Prospectus, any material adverse change in the
      condition, financial or otherwise, or in the earnings, business affairs or
      business prospects of the Company and its subsidiaries considered as one
      enterprise, whether or not arising in the ordinary course of business, and
      the Representatives shall have received a certificate of the President or
      a Vice President of the Company and of the chief financial or chief
      accounting officer of the Company, dated as of Closing Time, to the effect
      that (i) there has been no such material adverse change, (ii) the
      representations and warranties in Section 1(a) hereof are true and correct
      with the same force and effect as though expressly made at and as of
      Closing Time, (iii) the Company has complied with all agreements and
      satisfied all conditions on its part to be performed or satisfied at or
      prior to Closing Time, and (iv) no stop order suspending the effectiveness
      of the Registration Statement has been issued and no proceedings for that
      purpose have been instituted or are pending or are contemplated by the
      Commission.

            (e) Accountant's Comfort Letter. At the time of the execution of
      this Agreement, the Representatives shall have received from
      PricewaterhouseCoopers a letter dated such date, in form and substance
      satisfactory to the Representatives, together with signed or reproduced
      copies of such letter for each of the other Underwriters containing
      statements and information of the type ordinarily included in accountants'
      "comfort letters" to underwriters with respect to the financial statements
      and certain financial information contained in the Registration Statement
      and the Prospectus.

            (f) Bring-down Comfort Letter. At Closing Time, the Representatives
      shall have received from PricewaterhouseCoopers a letter, dated as of
      Closing Time, to the effect that they reaffirm the statements made in the
      letter furnished pursuant to subsection of this Section (f), except that
      the specified date referred to shall be a date not more than three
      business days prior to Closing Time.

            (g) Approval of Listing. At Closing Time, the Securities shall have
      been approved for inclusion in the Nasdaq National Market, subject only to
      official notice of issuance.

            (h)   No Objection.  The NASD has confirmed that it has not
      raised any objection with respect to the fairness and reasonableness of
      the underwriting terms and arrangements.

            (i)   Lock-up Agreements.   At the date of this Agreement, the
      Representatives shall have received an agreement substantially in the
      form of Exhibit B hereto signed by the persons listed on Schedule D
      hereto.

            (j) Waivers of Notice of Registration Rights. At the date of this
      Agreement, the Representatives shall have received waivers of notice of
      registration rights in the form reasonably acceptable to Underwriters'
      Counsel signed by all of the parties accorded notice rights under the
      Investors' Rights Agreement in connection with the offering of Securities
      pursuant to this Agreement.


                                       16
<PAGE>   21
            (k) Conditions to Purchase of Option Securities. In the event that
      the Underwriters exercise their option provided in Section 2(b) hereof to
      purchase all or any portion of the Option Securities, the representations
      and warranties of the Company contained herein and the statements in any
      certificates furnished by the Company and any subsidiary of the Company
      hereunder shall be true and correct as of each Date of Delivery and, at
      the relevant Date of Delivery, the Representatives shall have received:

            (i) Officers' Certificate. A certificate, dated such Date of
      Delivery, of the President or a Vice President of the Company and of the
      chief financial or chief accounting officer of the Company confirming that
      the certificate delivered at the Closing Time pursuant to Section 5(e)
      hereof remains true and correct as of such Date of Delivery.

            (ii) Opinion of Counsel for Company. The favorable opinion of Gray
      Cary Ware & Freidenrich LLP, counsel for the Company, together with the
      favorable opinion of Patton Boggs, L.L.P., special regulatory counsel for
      the Company, each in form and substance satisfactory to counsel for the
      Underwriters, dated such Date of Delivery, relating to the Option
      Securities to be purchased on such Date of Delivery and otherwise to the
      same effect as the opinion required by Section 5(b) hereof.

            (iii) Opinion of Counsel for Underwriters. The favorable opinion of
      Baker & McKenzie, counsel for the Underwriters, dated such Date of
      Delivery, relating to the Option Securities to be purchased on such Date
      of Delivery and otherwise to the same effect as the opinion required by
      Section 5(d) hereof.

            (iv) Bring-down Comfort Letter. A letter from
      PricewaterhouseCoopers, in form and substance satisfactory to the
      Representatives and dated such Date of Delivery, substantially in the same
      form and substance as the letter furnished to the Representatives pursuant
      to Section 5(g) hereof, except that the "specified date" in the letter
      furnished pursuant to this paragraph shall be a date not more than five
      days prior to such Date of Delivery.

            (l) Additional Documents. At Closing Time and at each Date of
      Delivery counsel for the Underwriters shall have been furnished with such
      documents and opinions as they may require for the purpose of enabling
      them to pass upon the issuance and sale of the Securities as herein
      contemplated, or in order to evidence the accuracy of any of the
      representations or warranties, or the fulfillment of any of the
      conditions, herein contained; and all proceedings taken by the Company in
      connection with the issuance and sale of the Securities as herein
      contemplated shall be satisfactory in form and substance to the
      Representatives and counsel for the Underwriters.

            (m) Termination of Agreement. If any condition specified in this
      Section shall not have been fulfilled when and as required to be
      fulfilled, this Agreement, or, in the case of any condition to the
      purchase of Option Securities on a Date of Delivery which is after the
      Closing Time, the obligations of the several Underwriters to purchase the
      relevant Option Securities, may be terminated by the Representatives by
      notice to the Company at any time at or prior to Closing Time or such Date
      of Delivery, as the case may be, and


                                       17
<PAGE>   22
      such termination shall be without liability of any party to any other
      party except as provided in Section 4 and except that Sections 1, 6, 7 and
      8 shall survive any such termination and remain in full force and effect.

      SECTION 6. Indemnification.

      (a) Indemnification of Underwriters. The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act to the extent and in the manner set forth in clauses (i), (ii),
(iii) and (iv) below as follows:

            (i) against any and all loss, liability, claim, damage and expense
      whatsoever, as incurred, arising out of any untrue statement or alleged
      untrue statement of a material fact contained in the Registration
      Statement (or any amendment thereto), including the Rule 430A Information
      and the Rule 434 Information, if applicable, or the omission or alleged
      omission therefrom of a material fact required to be stated therein or
      necessary to make the statements therein not misleading or arising out of
      any untrue statement or alleged untrue statement of a material fact
      included in any preliminary prospectus or the Prospectus (or any amendment
      or supplement thereto), or the omission or alleged omission therefrom of a
      material fact necessary in order to make the statements therein, in the
      light of the circumstances under which they were made, not misleading;

            (ii) against any and all loss, liability, claim, damage and expense
      whatsoever, as incurred, arising out of (A) the violation of any
      applicable laws or regulations of foreign jurisdictions where Reserved
      Securities have been offered and (B) any untrue statement or alleged
      untrue statement of a material fact included in the supplement or
      prospectus wrapper material distributed in [Insert Applicable
      Jurisdiction(s)] in connection with the reservation and sale of the
      Reserved Securities to eligible employees and ______________ of the
      Company or the omission or alleged omission therefrom of a material fact
      necessary to make the statements therein, when considered in conjunction
      with the Prospectus or preliminary prospectus, not misleading;

            (iii) against any and all loss, liability, claim, damage and expense
      whatsoever, as incurred, to the extent of the aggregate amount paid in
      settlement of any litigation, or any investigation or proceeding by any
      governmental agency or body, commenced or threatened, or of any claim
      whatsoever based upon any such untrue statement or omission, or any such
      alleged untrue statement or omission or in connection with any violation
      of the nature referred to in Section 6(a)(ii)(A) hereof; provided that
      (subject to Section 6(d) below) any such settlement is effected with the
      written consent of the Company; and

            (iv) against any and all expense whatsoever, as incurred (including
      the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
      incurred in investigating, preparing or defending against any litigation,
      or any investigation or proceeding by any governmental agency or body,
      commenced or threatened, or any claim whatsoever based upon any such
      untrue statement or omission, or any such alleged untrue statement or
      omission or in connection with any violation of the nature referred to in


                                       18
<PAGE>   23
      Section 6(a)(ii)(A) hereof, to the extent that any such expense is not
      paid under (i)(ii) or (iii) above;

provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto).

      (b) Indemnification of Company, Directors and Officers. Each Underwriter
severally agrees to indemnify and hold harmless the Company, its directors, each
of its officers who signed the Registration Statement, and each person, if any,
who controls the Company within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act, against any and all loss, liability, claim, damage
and expense, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through Merrill Lynch expressly for use in the Registration Statement (or any
amendment thereto) or such preliminary prospectus or the Prospectus (or any
amendment or supplement thereto).

      (c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii)


                                       19
<PAGE>   24
does not include a statement as to or an admission of fault, culpability or a
failure to act by or on behalf of any indemnified party.

      (d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) Section 6(a)(1)(iii) effected without its written consent if
(i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.

      (e) Indemnification for Reserved Securities. In connection with the offer
and sale of the Reserved Securities, the Company agrees, promptly upon a request
in writing, to indemnify and hold harmless the Underwriters from and against any
and all losses, liabilities, claims, damages and expenses incurred by them as a
result of the failure of eligible employees and _________________ of the Company
to pay for and accept delivery of Reserved Securities which, by the end of the
first business day following the date of this Agreement, were subject to a
properly confirmed agreement to purchase.

      SECTION 7. Contribution. If the indemnification provided for in Section 6
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other hand from the offering of the Securities
pursuant to this Agreement or (ii) if the allocation provided by clause (i) is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company on the one hand and of the Underwriters on the
other hand in connection with the statements or omissions, or in connection with
any violation of the nature referred to in Section 6(a)(ii)(A) hereof, which
resulted in such losses, liabilities, claims, damages or expenses, as well as
any other relevant equitable considerations.

      The relative benefits received by the Company on the one hand and the
Underwriters on the other hand in connection with the offering of the Securities
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Securities
pursuant to this Agreement (before deducting expenses) received by the Company
and the total underwriting discount received by the Underwriters, in each case
as set forth on the cover of the Prospectus, or, if Rule 434 is used, the
corresponding location on the Term Sheet bear to the aggregate initial public
offering price of the Securities as set forth on such cover.

      The relative fault of the Company on the one hand and the Underwriters on
the other hand shall be determined by reference to, among other things, whether
any such untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company or by the Underwriters and the parties' relative


                                       20
<PAGE>   25
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission or any violation of the nature referred to in Section
6(a)(ii)(A) hereof.

      The Company, and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.

      Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.

      No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.

      For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their
respective names in Schedule A hereto and not joint.

      The provisions of this Section shall not affect any agreement among the
Company with respect to contribution.

      SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company or any of its subsidiaries submitted
pursuant hereto, shall remain operative and in full force and effect, regardless
of any investigation made by or on behalf of any Underwriter or controlling
person, or by or on behalf of the Company and shall survive delivery of the
Securities to the Underwriters.

      SECTION 9. Termination of Agreement.

      (a) Termination; General. The Representatives may terminate this
Agreement, by notice to the Company), at any time at or prior to Closing Time
(i) if there has been, since the time of execution of this Agreement or since
the respective dates as of which information is given in the


                                       21
<PAGE>   26
Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Representatives, impracticable to market the Securities or to
enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or materially limited by the
Commission or the Nasdaq National Market, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or in the Nasdaq National
Market has been suspended or materially limited, or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices have been required, by
any of said exchanges or by such system or by order of the Commission, the
National Association of Securities Dealers, Inc. or any other governmental
authority, or (iv) if a banking moratorium has been declared by either Federal
or New York authorities.

      (b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 6,
7 and 8 shall survive such termination and remain in full force and effect.

      SECTION 10. Default by One or More of the Underwriters. If one or more of
the Underwriters shall fail at Closing Time or a Date of Delivery to purchase
the Securities which it or they are obligated to purchase under this Agreement
(the "Defaulted Securities"), the Representatives shall have the right, within
24 hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth; if, however, the Representatives shall not have
completed such arrangements within such 24-hour period, then:

      (a) if the number of Defaulted Securities does not exceed 10% of the
number of Securities to be purchased on such date, each of the non-defaulting
Underwriters shall be obligated, severally and not jointly, to purchase the full
amount thereof in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or

      (b) if the number of Defaulted Securities exceeds 10% of the number of
Securities to be purchased on such date, this Agreement or, with respect to any
Date of Delivery which occurs after the Closing Time, the obligation of the
Underwriters to purchase and of the Company to sell the Option Securities to be
purchased and sold on such Date of Delivery shall terminate without liability on
the part of any non-defaulting Underwriter.

      No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.


                                       22
<PAGE>   27
      In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the (i) Representatives or (ii) the Company shall
have the right to postpone Closing Time or the relevant Date of Delivery, as the
case may be, for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements. As used herein, the term "Underwriter" includes any
person substituted for an Underwriter under this Section 10.

      SECTION 11. Default by the Company. If the Company shall fail at Closing
Time or at the Date of Delivery to sell the number of Securities that it is
obligated to sell hereunder, then this Agreement shall terminate without any
liability on the part of any nondefaulting party; provided, however, that the
provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect.
No action taken pursuant to this Section shall relieve the Company from
liability, if any, in respect of such default.

      SECTION 12. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at North Tower, World
Financial Center, New York, New York 10281-1201, attention of o; notices to the
Company shall be directed to it at o, attention of o;

      SECTION 13. Parties. This Agreement shall each inure to the benefit of and
be binding upon the Underwriters, the Company and their respective successors.
Nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any person, firm or corporation, other than the Underwriters,
the Company and their respective successors and the controlling persons and
officers and directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the Underwriters, the Company and their respective
successors, and said controlling persons and officers and directors and their
heirs and legal representatives, and for the benefit of no other person, firm or
corporation. No purchaser of Securities from any Underwriter shall be deemed to
be a successor by reason merely of such purchase.

      SECTION 14. Governing Law And Time. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.

      SECTION 15. Effect of Headings. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.


                                       23
<PAGE>   28
      If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
among the Underwriters, the Company in accordance with its terms.

                                          Very truly yours,

                                          TELOCITY, INC.

                                          By
                                             -----------------------------------
                                             Title:

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

CONFIRMED AND ACCEPTED,
      as of the date first above
      written:


MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
               INCORPORATED
NAME(S) OF CO-REPRESENTATIVES
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
                     INCORPORATED

By
   ------------------------------------------
               Authorized Signatory

For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.


                                       24
<PAGE>   29
                                  SCHEDULE A

<TABLE>
<CAPTION>
                                                                   Number of
   Name of Underwriter                                        Initial Securities
   -------------------                                        ------------------
<S>                                                          <C>
Merrill Lynch, Pierce, Fenner & Smith
                      Incorporated....................
Credit Suisse First Boston............................
Donaldson, Lufkin & Jenrette..........................



                                                                  -----------
      Total...........................................            [_________]
                                                                  ===========
</TABLE>


                                    Sch A-1
<PAGE>   30
                                  SCHEDULE B

<TABLE>
<CAPTION>
                               Number of Initial         Maximum Number of Option
                             Securities to be Sold         Securities to Be Sold
                             ---------------------       ------------------------
<S>                          <C>                         <C>
Telocity, Inc.

</TABLE>


                                    Sch B-1
<PAGE>   31
                                   SCHEDULE C

                                 TELOCITY, INC.
                       [__________] Shares of Common Stock
                          (Par Value $0.001 Per Share)

      1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $[_________].

      2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $[_________], being an amount equal to the initial
public offering price set forth above less $[_________] per share; provided that
the purchase price per share for any Option Securities purchased upon the
exercise of the over-allotment option described in Section 2(b) shall be reduced
by an amount per share equal to any dividends or distributions declared by the
Company and payable on the Initial Securities but not payable on the Option
Securities.


                                    Sch C-1
<PAGE>   32
                                   SCHEDULE D

                          List of Persons and Entities
                               Subject to Lock-up




                                    Sch D-1
<PAGE>   33
                                                                    Exhibit A-1A


            FORM OF OPINION OF GRAY, CARY, WARE & FRIEDENRICH LLP,
                               COMPANY COUNSEL

                   TO BE DELIVERED PURSUANT TO SECTION 5(b)

      (i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.

      (ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Purchase
Agreement.

      (iii) The Company is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a Material Adverse Effect.

      (iv) The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus in the column entitled "Actual" under the
caption "Capitalization" (except for subsequent issuances, if any, pursuant to
the Purchase Agreement or pursuant to reservations, agreements or employee
benefit plans referred to in the Prospectus or pursuant to the exercise of
convertible securities or options referred to in the Prospectus); the shares of
issued and outstanding capital stock of the Company have been duly authorized
and validly issued and are fully paid and non-assessable; and none of the
outstanding shares of capital stock of the Company was issued in violation of
the preemptive or other similar rights of any securityholder of the Company.

      (v) The Securities to be purchased by the Underwriters from the Company
have been duly authorized for issuance and sale to the Underwriters pursuant to
the Purchase Agreement and, when issued and delivered by the Company pursuant to
the Purchase Agreement against payment of the consideration set forth in the
Purchase Agreement, will be validly issued and fully paid and non-assessable and
no holder of the Securities is or will be subject to personal liability by
reason of being such a holder.

      (vi) The issuance and sale of the Securities by the Company is not subject
to the preemptive or other similar rights of any securityholder of the Company.

      (vii) Each Subsidiary has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus and is
duly qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required, whether
by reason


                                  Exh. A-1 A-1
<PAGE>   34
of the ownership or leasing of property or the conduct of business, except where
the failure so to qualify or to be in good standing would not result in a
Material Adverse Effect; except as otherwise disclosed in the Registration
Statement, all of the issued and outstanding capital stock of each Subsidiary
has been duly authorized and validly issued, is fully paid and non-assessable
and, to the best of our knowledge, is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equity; none of the outstanding shares of capital stock of
any Subsidiary was issued in violation of the preemptive or similar rights of
any securityholder of such Subsidiary.

      (viii) The Purchase Agreement has been duly authorized, executed and
delivered by the Company.

      (ix) The Registration Statement, including any Rule 462(b) Registration
Statement, has been declared effective under the 1933 Act; any required filing
of the Prospectus pursuant to Rule 424(b) has been made in the manner and within
the time period required by Rule 424(b); and, to the best of our knowledge, no
stop order suspending the effectiveness of the Registration Statement or any
Rule 462(b) Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or threatened
by the Commission.

      (x) The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectus, and each amendment or supplement to the Registration
Statement and Prospectus, as of their respective effective or issue dates (other
than the financial statements and supporting schedules included therein or
omitted therefrom, as to which we need express no opinion) complied as to form
in all material respects with the requirements of the 1933 Act and the 1933 Act
Regulations.

      (xi) If Rule 434 has been relied upon, the Prospectus was not "materially
different," as such term is used in Rule 434, from the prospectus included in
the Registration Statement at the time it became effective.

      (xii) The form of certificate used to evidence the Common Stock complies
in all material respects with all applicable statutory requirements, with any
applicable requirements of the charter and by-laws of the Company and the
requirements of the Nasdaq National Market.

      (xiii) To the best of our knowledge, there is not pending or threatened
any action, suit, proceeding, inquiry or investigation, to which the Company or
any subsidiary is a party, or to which the property of the Company or any
subsidiary is subject, before or brought by any court or governmental agency or
body, domestic or foreign, which might reasonably be expected to result in a
Material Adverse Effect, or which might reasonably be expected to materially and
adversely affect the properties or assets thereof or the consummation of the
transactions contemplated in the Purchase Agreement or the performance by the
Company of its obligations thereunder.

      (xiv) The information in the Prospectus under "Description of Capital
Stock", "Business--Properties", "Business--Intellectual Property Rights",
"Business--Legal Proceedings", and in the Registration Statement under Item 14,
to the extent that it constitutes


                                  Exh. A-1 A-2
<PAGE>   35
matters of law, summaries of legal matters, the Company's charter and bylaws or
legal proceedings, or legal conclusions, has been reviewed by us and is correct
in all material respects.

      (xv) To the best of our knowledge, there are no statutes or regulations
that are required to be described in the Prospectus that are not described as
required.

      (xvi) All descriptions in the Registration Statement of contracts and
other documents to which the Company or its subsidiaries are a party are
accurate in all material respects; to the best of our knowledge, there are no
franchises, contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed or incorporated by reference as exhibits thereto,
and the descriptions thereof or references thereto are correct in all material
respects.

      (xvii) To the best of our knowledge, neither the Company nor any
subsidiary is in violation of its charter or by-laws and no default by the
Company or any subsidiary exists in the due performance or observance of any
material obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other agreement or
instrument that is described or referred to in the Registration Statement or the
Prospectus or filed or incorporated by reference as an exhibit to the
Registration Statement.

      (xviii) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act and the
1933 Act Regulations, which have been obtained, or as may be required under the
securities or blue sky laws of the various states, as to which we need express
no opinion) is necessary or required in connection with the due authorization,
execution and delivery of the Purchase Agreement or for the offering, issuance,
sale or delivery of the Securities.

      (xix) The execution, delivery and performance of the Purchase Agreement
and the consummation of the transactions contemplated in the Purchase Agreement
and in the Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities as
described in the Prospectus under the caption "Use Of Proceeds") and compliance
by the Company with its obligations under the Purchase Agreement do not and will
not, whether with or without the giving of notice or lapse of time or both,
conflict with or constitute a breach of, or default or Repayment Event (as
defined in Section 1(a)(x) of the Purchase Agreement) under or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any subsidiary pursuant to any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or any other
agreement or instrument, known to us, to which the Company or any subsidiary is
a party or by which it or any of them may be bound, or to which any of the
property or assets of the Company or any subsidiary is subject (except for such
conflicts, breaches or defaults or liens, charges or encumbrances that would not
have a Material Adverse Effect), nor will such action result in any violation of
the provisions of the charter or by-laws of the Company or any subsidiary, or
any applicable law, statute, rule, regulation, judgment, order, writ or decree,
known to [us] [me], of any government, government instrumentality or court,
domestic or foreign, having jurisdiction over the Company or any subsidiary or
any of their respective properties, assets or operations.


                                  Exh. A-1 A-3
<PAGE>   36
      (xx) To the best of our knowledge, there are no persons with registration
rights or other similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Company under the 1933
Act.

      (xxi) The Company is not an "investment company" or an entity "controlled"
by an "investment company," as such terms are defined in the 1940 Act.

      (xxii) Nothing has come to our attention that would lead us to believe
that the Registration Statement or any amendment thereto, including the Rule
430A Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time such Registration
Statement or any such amendment became effective, contained an untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus or any amendment or supplement thereto (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time the Prospectus
was issued, at the time any such amended or supplemented prospectus was issued
or at the Closing Time, included or includes an untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.

      In rendering such opinion, such counsel may rely as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials. Such
opinion shall not state that it is to be governed or qualified by, or that it is
otherwise subject to, any treatise, written policy or other document relating to
legal opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991).


                                  Exh. A-1 A-4
<PAGE>   37
                                                                    EXHIBIT A-1B


                   FORM OF OPINION OF PATTON BOGGS L.L.P.,
                      SPECIAL COMPANY REGULATORY COUNSEL

                   TO BE DELIVERED PURSUANT TO SECTION 5(b)

            (i) Appendix A-1 to such counsel's opinion accurately and completely
      lists all federal, state and municipal telecommunications licenses held by
      the Company and its subsidiaries on the date of the Closing (the
      "Licenses"). Appendix A-2 to such counsel's opinion accurately and
      completely lists all applications for any federal, state, or municipal
      telecommunications licenses that have not yet been granted. The Company
      and the Subsidiaries have all Licenses required by the Communications Act,
      the rules, regulations and orders of the FCC and all state statutes
      governing intrastate telecommunications, and the rules, regulations and
      orders of state regulatory commissions (the "State Commissions")
      (collectively, "State Telecommunications Laws") for the provision of
      services by the Company or its subsidiaries in the jurisdictions in which
      the Company and its subsidiaries are presently offering commercial
      services and in the manner described in the Prospectus. All such Licenses
      either have no expiration date or are renewable by their terms or in the
      ordinary course of business without the need to comply with any special
      qualification procedures not generally applicable to the renewals of such
      Licenses or to pay any amounts other than routine filing fees. All such
      Licenses are held free and clear of any liens, charges, encumbrances, and
      adverse claims. All such Licenses were properly and validly issued to the
      Company or its subsidiaries by an order that is no longer subject to
      administrative reconsideration or review or judicial review. Except for
      the indirect interests of the Company's shareholders, no partner, officer,
      employee, or former employee of the Company or any of its subsidiaries or
      any other person, firm, or corporation owns or has any proprietary,
      financial, or other interest (direct or indirect) in any License which the
      Company or any of its subsidiaries holds. Neither the Company nor its
      subsidiaries are in violation of any of the terms and conditions of any of
      the Licenses, or are in violation of any FCC rules and regulations.

            (ii) No judgments, decrees, or orders have been issued by the FCC or
      any State Commission in connection with the Licenses. Neither the Company
      nor any of its subsidiaries is subject to any pending complaint,
      investigation or proceeding before the FCC or any State Commission to
      revoke or restrict the Licenses or, to such counsel's knowledge, any
      threatened complaint, inquiry, investigation or proceeding before the FCC
      or any State Commission. No event has occurred which, with the giving of
      notice or the lapse of time or both, could reasonably be expected to
      result in the revocation or termination of any License or the impairment
      of the rights of the holder thereof.

            (iii) Each of the Licenses set forth in Appendix A to such counsel's
      opinion is (a) outstanding, (b) in full force and effect except where the
      failure to be in full force and


                                  Exh. A-1 B-1
<PAGE>   38
      effect would not have, singly or in the aggregate, a Material Adverse
      Effect, and (c) not subject to any conditions not applicable generally to
      other licensees (i) holding licenses comparable to the Licenses and (ii)
      offering services comparable to those offered by the Company or its
      subsidiaries pursuant to the Licenses.

            (iv) The Company has not, to such counsel's knowledge and based upon
      contacting officials at the FCC, the State Commissions and local
      telecommunications counsel to the Company in each of the Operating
      Locations, failed to file in a timely manner with the FCC or the State
      Commissions any reports, tariffs and other documents required to be filed
      by the Company on or as of the date hereof under the Communications Act or
      the State Telecommunications Laws.

            (v) The statements in the Registration Statement under the headings
      "Risk Factors - Our business is significantly affected by the legislative,
      regulatory, and judicial rules applicable to telecommunications services
      and the broadband marketplace"; "Risk Factors - We cannot provide services
      and applications unless DSL connectivity providers supply us with DSL
      connections and cooperate with us for the timely provision of DSL
      connections for our customers"; "Business - Regulatory Change that is
      Contributing to the Increase in Cost-Effective Last Mile Broadband
      Access"; "Business - Competition"; "Business - Government Regulation"; and
      "Business - Legal Proceedings" insofar as such statements constitute a
      summary of matters or proceedings of the FCC and the State Commissions
      with respect to telecommunications matters referred to therein, are
      accurate in all material respects.

            (vi) All tariffs applicable to the Company's and its subsidiaries'
      local exchange and interexchange operations in the Operating Locations
      (the "Tariffs") are in full force and effect in accordance with their
      terms. To the best of such counsel's knowledge and based on such counsel's
      review with officers of the Company and local regulatory counsel to the
      Company, there is no outstanding notice of suspension, cancellation or
      termination or any threatened suspension, cancellation or termination with
      respect to any of the Tariffs. Except as disclosed in the Prospectus, the
      Company is not subject to any restrictions or conditions applicable to the
      Tariffs that limit the operations of the Company. Neither the Company nor
      any of its subsidiaries are presently required to file a tariff with the
      FCC. No other tariffs are effective or required on and as of the date
      hereof other than the Tariffs for the Company and its subsidiaries to
      provide the commercial services presently offered by the Company and its
      subsidiaries in the Operating Locations.

            (vii) The Company and its subsidiaries have executed agreements with
      incumbent or competitive local exchange carriers for the provision of
      telecommunications services in the Operating Locations as of the date of
      the Closing (the "DSL Connectivity Agreements"), and Appendix C to such
      counsel's opinion contains a list of the DSL Connectivity Agreements. The
      Company and its subsidiaries have made all filings with, and have obtained
      all approvals from, the State Commissions that are necessary with respect
      to the DSL Connectivity Agreements to enable the subsidiaries to provide
      telecommunications services in the Operating Locations as of the date of
      the Closing, and the DSL Connectivity Agreements are in full force and
      effect in accordance


                                  Exh. A-1 B-2
<PAGE>   39
      with their terms on and as of such date. There is no outstanding notice of
      suspension, cancellation or termination or, to such counsel's knowledge
      and based upon contacting local telecommunications counsel to the Company,
      any threatened suspension, cancellation or termination with respect to any
      of the DSL Connectivity Agreements, and, to such counsel's knowledge, no
      default by the Company or any of its subsidiaries exists in the due
      performance or observance of any obligation, agreement, covenant or
      condition contained in such DSL Connectivity Agreements, except for such
      defaults that would not result in a Material Adverse Effect.

            (viii) There are no consents and approvals of the FCC or the State
      Commissions required to be obtained by the Company or any of its
      subsidiaries for the sale and issuance of the Securities to the
      Underwriters on the Closing Date.

            (ix) Neither the execution of the Purchase Agreement by the Company
      nor the performance by the Company of its obligations under the Purchase
      Agreement which are required to be performed on the Closing Date will (a)
      violate the Communications Act, any rules, regulations or orders of the
      FCC or the State Telecommunications Laws; (b) violate any judgment, order,
      writ, injunction, decree or award of any court, arbitrator, or government
      or regulatory official, body or authority of which we are aware based on
      the factual inquiry described herein which is applicable to the Company,
      its subsidiaries, or any of their assets by virtue of the Licenses, or (c)
      constitute a breach or default under any of the DSL Connectivity
      Agreements. None of the Licenses will be adversely affected by
      consummation of the transactions contemplated in the Purchase Agreement.

            (x) To such counsel's knowledge and based upon a review of available
      public files at the FCC and the State Commissions: (a) there is no
      unsatisfied adverse FCC or State Commission order, decree or ruling
      outstanding against the Company or any of its subsidiaries or the Licenses
      held by the Company and its subsidiaries on the date of the Closing, (b)
      neither the Company nor any of its subsidiaries has been the subject of
      any final order, decree or ruling of the FCC or any State Commission or
      any municipality which has (i) denied any application by the Company or
      any of its subsidiaries to obtain a certification, authorization or
      franchise, (ii) limited or prohibited any of the Company's or any of its
      subsidiary's operations at the Operating Locations and as offered by the
      Company or any of its subsidiaries, respectively, as of the date of the
      Closing, and/or (iii) resulted in any monetary fine or forfeiture by the
      Company or any of its subsidiaries which would result in a Material
      Adverse Effect.

      In rendering such opinion, such counsel may rely as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials. Such
opinion shall not state that it is to be governed or qualified by, or that it is
otherwise subject to, any treatise, written policy or other document relating to
legal opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991).


                                  Exh. A-1 B-3
<PAGE>   40
                                                                     EXHIBIT A-2


                   FORM OF OPINION OF UNDERWRITERS' COUNSEL

                   TO BE DELIVERED PURSUANT TO SECTION 5(c)

      (i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.

      (ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Purchase
Agreement.

      (iii) The Securities to be purchased by the Underwriters from the Company
have been duly authorized for issuance and sale to the Underwriters pursuant to
the Purchase Agreement and, when issued and delivered by the Company pursuant to
the Purchase Agreement against payment of the consideration set forth in the
Purchase Agreement, will be validly issued and fully paid and non-assessable and
no holder of the Securities is or will be subject to personal liability by
reason of being such a holder.

      (iv) The issuance and sale of the Securities by the Company is not subject
to the preemptive or other similar rights of any securityholder of the Company
arising by operation of law or under the charter or by-laws of the Company.

      (v) The Purchase Agreement has been duly authorized, executed and
delivered by the Company.

      (vi) The Registration Statement, including any Rule 462(b) Registration
Statement, has been declared effective under the 1933 Act; any required filing
of the Prospectus pursuant to Rule 424(b) has been made in the manner and within
the time period required by Rule 424(b); and, to the best of such counsel's
knowledge, no stop order suspending the effectiveness of the Registration
Statement or any Rule 462(b) Registration Statement has been issued under the
1933 Act and no proceedings for that purpose have been instituted or are pending
or threatened by the Commission.

      (vii) The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectus, and each amendment or supplement to the Registration
Statement and Prospectus, as of their respective effective or issue dates (other
than the financial statements and supporting schedules included therein or
omitted therefrom, as to which such counsel need express no opinion) complied as
to form in all material respects with the requirements of the 1933 Act and the
1933 Act Regulations.


                                   Exh. A-2-1
<PAGE>   41
      (viii) The form of certificate used to evidence the Common Stock complies
in all material respects with all applicable statutory requirements, with any
applicable requirements of the charter and by-laws of the Company and the
requirements of the Nasdaq National Market.

      (ix) The information in the Prospectus under "Description of Capital
Stock--Common Stock", to the extent that it constitutes matters of law,
summaries of legal matters, the Company's charter and bylaws or legal
proceedings, or legal conclusions, has been reviewed by such counsel and is
correct in all material respects.

      (x) Nothing has come to such counsel's attention that would lead such
counsel to believe that the Registration Statement or any amendment thereto,
including the Rule 430A Information and Rule 434 Information (if applicable)
(except for financial statements and schedules and other financial data included
therein or omitted therefrom, as to which such counsel need make no statement),
at the time such Registration Statement or any such amendment became effective,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus or any amendment or supplement thereto
(except for financial statements and schedules and other financial data included
therein or omitted therefrom, as to which such counsel need make no statement),
at the time the Prospectus was issued, at the time any such amended or
supplemented prospectus was issued or at Closing Time, included or includes an
untrue statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.

      In rendering such opinion, such counsel may rely, as to all matters
governed by the laws of jurisdictions other than the law of the State of New
York, the federal law of the United States and the General Corporation Law of
the State of Delaware, upon the opinions of counsel satisfactory to the
Representatives. Such counsel may also state that, insofar as such opinion
involves factual matters, they have relied, to the extent they deem proper, upon
certificates of officers of the Company and its subsidiaries and certificates of
public officials.


                                   Exh. A-2-2
<PAGE>   42
                                                                       EXHIBIT B

[FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO
SECTION 5(k)]

                              _______________, 2000

MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
           Incorporated,
Credit Suisse First Boston
Donaldson, Lufkin & Jenrette
   as Representatives of the several
   Underwriters to be named in the
   within-mentioned Purchase Agreement
c/o  Merrill Lynch & Co.
    Merrill Lynch, Pierce, Fenner & Smith
               Incorporated
North Tower
World Financial Center
New York, New York  10281-1209

      Re: Proposed Public Offering by Telocity, Inc.

Dear Sirs:

      The undersigned, a stockholder [and an officer and/or director] of
Telocity, Inc., a Delaware corporation (the "Company"), understands that Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch"), Credit Suisse First Boston and Donaldson, Lufkin & Jenrette proposes to
enter into a Purchase Agreement (the "Purchase Agreement") with the Company
providing for the public offering of shares (the "Securities") of the Company's
common stock, par value $0.001 per share (the "Common Stock"). In recognition of
the benefit that such an offering will confer upon the undersigned as a
stockholder [and an officer and/or director] of the Company, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the undersigned agrees with each underwriter to be named in the
Purchase Agreement that, during a period of 180 days from the date of the
Purchase Agreement, the undersigned will not, without the prior written consent
of Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant for the sale of, or otherwise
dispose of or transfer any shares of the Company's Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or hereafter acquired by the undersigned or with respect to
which the undersigned has or hereafter acquires the power of disposition, or
file any registration statement under the Securities Act of 1933, as amended,
with respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or


                                    Exh. B-1
<PAGE>   43
indirectly, the economic consequence of ownership of the Common Stock, whether
any such swap or transaction is to be settled by delivery of Common Stock or
other securities, in cash or otherwise.

                                Very truly yours,

                                Signature:
                                            ------------------------------------

                                Print Name:
                                            ------------------------------------


                                    Exh. B-2

<PAGE>   1
                                                                     EXHIBIT 3.1



                                     FORM OF
                AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
                                       OF
                             TELOCITY DELAWARE, INC.

    (Pursuant to Sections 242 and 245 of the General Corporation Law of the
                               State of Delaware)

      Telocity Delaware, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware on January 14, 2000, (the
"Corporation") certifies as follows:

      1. The Corporation's Restated Certificate of Incorporation was duly
adopted by the Board of Directors and sole stockholder by written consent in
accordance with Sections 242 and 245 of the General Corporation Law.

      2. The Corporation's Certificate of Incorporation is restated to read in
full as follows:

      FIRST:      The name of the Corporation is Telocity, Inc.

      SECOND:     The address of the registered office of the Corporation in the
                  State of Delaware is Incorporating Services, Ltd., 15 East
                  North Street, in the City of Dover, County of Kent. The name
                  of the registered agent at that address is Incorporating
                  Services, Ltd.

      THIRD:      The purpose of the Corporation is to engage in any lawful
                  act or activity for which a corporation may be organized
                  under the General Corporation Law of Delaware.

      FOURTH:

      A.          The total number of shares of all classes of stock which
                  the Corporation shall have authority to issue is
                  314,701,478 consisting of 250,000,000 shares of Common
                  Stock, par value one-tenth of one cent ($0.001) per share
                  (the "Common Stock") and shares of 64,701,478 Preferred
                  Stock, par value one-tenth of one cent ($0.001) per share
                  (the "Preferred Stock").

      B.          The Board of Directors is authorized, subject to any
                  limitations prescribed by law, to provide for the issuance of
                  the shares of Preferred Stock in series, and by filing a
                  certificate pursuant to the applicable law of the State of
                  Delaware, to establish from time to time the number of shares
                  to be included in each such series, and to fix the
                  designation, powers,



                                       1
<PAGE>   2
                  preferences, and rights of the shares of each such series and
                  any qualifications, limitations or restrictions thereon. The
                  number of authorized shares of Preferred Stock may be
                  increased or decreased (but not below the number of shares
                  thereof then outstanding) by the affirmative vote of the
                  holders of a majority of the Common Stock without a vote of
                  the holders of the Preferred Stock, or of any series thereof,
                  unless a vote of any such holders is required pursuant to the
                  certificate or certificates establishing the series of
                  Preferred Stock.

      FIFTH:      The following provisions are inserted for the management of
                  the business and the conduct of the affairs of the
                  Corporation, and for further definition, limitation and
                  regulation of the powers of the Corporation and of its
                  directors and stockholders:

      A.          The business and affairs of the Corporation shall be
                  managed by or under the direction of the Board of
                  Directors.  In addition to the powers and authority
                  expressly conferred upon them by statute or by this
                  Certificate of Incorporation or the Bylaws of the
                  Corporation, the directors are hereby empowered to exercise
                  all such powers and do all such acts and things as may be
                  exercised or done by the Corporation.

      B.          The directors of the Corporation need not be elected by
                  written ballot unless the Bylaws so provide.

      C.          Unless otherwise provided by law, any action which may
                  otherwise be taken at any meeting of the stockholders may
                  be taken without a meeting and without prior notice, if a
                  written consent describing such action or actions is signed
                  by the holders of outstanding shares having not less than
                  the minimum number of votes which would be necessary to
                  authorize or take such action at a meeting at which all
                  shares entitled to vote thereon were present and voted.

      D.          Special meetings of stockholders of the Corporation may be
                  called only by (1) the Board of Directors pursuant to a
                  resolution adopted by a majority of the total number of
                  authorized directors (whether or not there exist any
                  vacancies in previously authorized directorships at the
                  time any such resolution is presented to the Board for
                  adoption) or (2) by the holders of not less than ten
                  percent (10%) of all of the shares entitled to cast votes
                  at the meeting.



                                       2
<PAGE>   3
      SIXTH:

      A.          The number of directors shall initially be set at seven (7)
                  and, thereafter, shall be fixed from time to time exclusively
                  by the Board of Directors pursuant to a resolution adopted by
                  a majority of the total number of authorized directors
                  (whether or not there exist any vacancies in previously
                  authorized directorships at the time any such resolution is
                  presented to the Board for adoption). Upon the closing of a
                  firmly underwritten Initial Public Offering (the "IPO"), the
                  directors shall be divided into three classes with the term of
                  office of the first class (Class I) to expire at the first
                  annual meeting of the stockholders following the IPO; the term
                  of office of the second class (Class II) to expire at the
                  second annual meeting of stockholders held following the IPO;
                  the term of office of the third class (Class III) to expire at
                  the third annual meeting of stockholders; and thereafter for
                  each such term to expire at each third succeeding annual
                  meeting of stockholders after such election. Subject to the
                  rights of the holders of any series of Preferred Stock then
                  outstanding, a vacancy resulting from the removal of a
                  director by the stockholders as provided in Article SIXTH,
                  Section C below may be filled at a special meeting of the
                  stockholders held for that purpose. All directors shall hold
                  office until the expiration of the term for which elected, and
                  until their respective successors are elected, except in the
                  case of the death, resignation, or removal of any director.

      B.          Subject to the rights of the holders of any series of
                  Preferred Stock then outstanding, newly created
                  directorships resulting from any increase in the authorized
                  number of directors or any vacancies in the Board of
                  Directors resulting from death, resignation or other cause
                  (other than removal from office by a vote of the
                  stockholders) may be filled only by a majority vote of the
                  directors then in office, though less than a quorum, and
                  directors so chosen shall hold office for a term expiring
                  at the next annual meeting of stockholders at which the
                  term of office of the class to which they have been elected
                  expires, and until their respective successors are elected,
                  except in the case of the death, resignation, or removal of
                  any director.  No decrease in the number of directors
                  constituting the Board of Directors shall shorten the term
                  of any incumbent director.

      C.          Subject to the rights of the holders of any series of
                  Preferred Stock then outstanding, any directors, or the entire
                  Board of Directors, may be removed from office at any time,
                  with or without cause, but only by the affirmative vote of the
                  holders of at least a majority of the voting power of all of
                  the then outstanding shares of capital stock of the
                  Corporation entitled to vote generally in the election of
                  directors, voting together as a single class. Vacancies in the
                  Board of Directors resulting from such removal may be filled
                  by a majority of the directors then in office, though less
                  than a quorum, or by the stockholders as provided in Article
                  SIXTH,



                                       3
<PAGE>   4

                  Section A above. Directors so chosen shall hold office for a
                  term expiring at the next annual meeting of stockholders at
                  which the term of office of the class to which they have been
                  elected expires, and until their respective successors are
                  elected, except in the case of the death, resignation, or
                  removal of any director.

      SEVENTH:    The Board of Directors is expressly empowered to adopt, amend
                  or repeal Bylaws of the Corporation. Any adoption, amendment
                  or repeal of Bylaws of the Corporation by the Board of
                  Directors shall require the approval of a majority of the
                  total number of authorized directors (whether or not there
                  exist any vacancies in previously authorized directorships at
                  the time any resolution providing for adoption, amendment or
                  repeal is presented to the Board). The stockholders shall also
                  have power to adopt, amend or repeal the Bylaws of the
                  Corporation. Any adoption, amendment or repeal of Bylaws of
                  the Corporation by the stockholders shall require, in addition
                  to any vote of the holders of any class or series of stock of
                  the Corporation required by law or by this Certificate of
                  Incorporation, the affirmative vote of the holders of at least
                  sixty-six and two-thirds percent (66-2/3%) of the voting power
                  of all of the then outstanding shares of the capital stock of
                  the Corporation entitled to vote generally in the election of
                  directors, voting together as a single class.

      EIGHTH:     A director of the Corporation shall not be personally liable
                  to the Corporation or its stockholders for monetary damages
                  for breach of fiduciary duty as a director, except for
                  liability (i) for any breach of the director's duty of loyalty
                  to the Corporation or its stockholders, (ii) for acts or
                  omissions not in good faith or which involved intentional
                  misconduct or a knowing violation of law, (iii) under Section
                  174 of the Delaware General Corporation Law, or (iv) for any
                  transaction from which the director derived an improper
                  personal benefit.

                  If the Delaware General Corporation Law is hereafter amended
                  to authorize the further elimination or limitation of the
                  liability of a director, then the liability of a director of
                  the Corporation shall be eliminated or limited to the fullest
                  extent permitted by the Delaware General Corporation Law, as
                  so amended.

                  Any repeal or modification of the foregoing provisions of this
                  Article EIGHTH by the stockholders of the Corporation shall
                  not adversely affect any right or protection of a director of
                  the Corporation existing at the time of such repeal or
                  modification.



                                       4
<PAGE>   5
      NINTH:      The Corporation reserves the right to amend or repeal any
                  provision contained in this Certificate of Incorporation in
                  the manner prescribed by the laws of the State of Delaware and
                  all rights conferred upon stockholders are granted subject to
                  this reservation; provided, however, that, notwithstanding any
                  other provision of this Certificate of Incorporation or any
                  provision of law which might otherwise permit a lesser vote or
                  no vote, but in addition to any vote of the holders of any
                  class or series of the stock of this Corporation required by
                  law or by this Certificate of Incorporation, the affirmative
                  vote of the holders of at least 60% of the voting power of all
                  of the then outstanding shares of the capital stock of the
                  Corporation entitled to vote generally in the election of
                  directors, voting together as a single class, shall be
                  required to amend or repeal this Article NINTH, Article FIFTH,
                  Article SIXTH, Article SEVENTH or Article EIGHTH.

      IN WITNESS WHEREOF, the Corporation has caused this Restated
Certificate to be signed by a duly authorized officer on this ____ day of
____________, 2000.


                                    TELOCITY DELAWARE, INC.


                                    By:
                                        ----------------------------------------
                                        Scott Martin
                                        Vice President and Secretary



                                       5
<PAGE>   6

                            CERTIFICATE OF AMENDMENT
                                       OF
                      RESTATED CERTIFICATE OF INCORPORATION
                                       OF
                                 TELOCITY, INC.


     Telocity Inc., a Delaware corporation (the "Corporation"), hereby
certifies:

     1.   That the Corporation's Board of Directors has duly adopted the
following resolutions:

     RESOLVED, that the first paragraph of Article FOURTH of the Restated
     Certificate of Incorporation is hereby amended to read in full as follows:

          FOURTH: The Corporation is authorized to issue a total of 260,000,000
          shares of stock in two classes designated respectively "Preferred
          Stock" and "Common Stock." The total number of shares of all series of
          Preferred Stock that the Corporation shall have the authority to issue
          is 10,000,000 and the total number of shares of Common Stock that the
          Corporation shall have the authority to issue is 250,000,000. All of
          the authorized shares shall have a par value of $0.001.

     2.   That the proposed amendment has been duly adopted by the Corporation's
Board of Directors and sole stockholder in accordance with the provisions of
Sections 242 and 228 of the General Corporation Law of the State of Delaware.

     IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment of Restated Certificate of Incorporation to be signed by a duly
authorized officer on this _____day of ______, 2000.


                                   TELOCITY, INC.


                                   By:
                                      ------------------------------------------
                                      Scott Martin, Vice President and Secretary

<PAGE>   1
                                                                   EXHIBIT 10.40

                            SECURED PROMISSORY NOTE




$335,887.94                                                Date:  March 27, 1998

                                                           Due:   April 1, 2001


FOR VALUE RECEIVED, MachOne Communications, Inc. a California corporation (the
"Borrower") hereby promises to pay to the order of Comdisco, Inc., a Delaware
corporation (the "Lender") at P.O. Box 91744, Chicago, IL 60693 or such other
place of payment as the holder of this Secured Promissory Note (this "Note") may
specify from time to time in writing, in lawful money of the United States of
America, the principal amount of THREE HUNDRED THIRTY-FIVE THOUSAND EIGHT
HUNDRED EIGHTY-SEVEN and 94/100 Dollars ($335,887.94) together with interest at
eight percent (8.0%) per annum from the date of this Note to maturity of each
installment on the principal hereof remaining from time to time unpaid, such
principal and interest to be paid in 36 equal monthly installments of $10,534.80
each, commencing May 1, 1998 and on the same day of each month thereafter to and
including April 1, 2001 and an additional final installment of $50,383.19
("Balloon Payment") to be paid on April 1, 2001, such installments to be applied
first to accrued and unpaid interest and the balance to unpaid principal.
Interest shall be computed on the basis of a year consisting of twelve months of
thirty days each.

This Note is the Note referred to in, and is executed and delivered in
connection with, that certain Loan and Security Agreement of even date herewith
by and between Borrower and Lender (as the same may from time to time be
amended, modified or supplemented in accordance with its terms, the "Loan
Agreement"), and is entitled to the benefit and security of the Loan Agreement
and the other Loan Documents (as defined in the Loan Agreement), to which
reference is made for a statement of all of the terms and conditions thereof.
All terms defined in the Loan Agreement shall have the same definitions when
used herein, unless otherwise defined herein.

The Borrower waives presentment and demand for payment, notice of dishonor,
protest and notice of protest and any other notice as permitted under the UCC or
any applicable law.





                                      -1-
<PAGE>   2
This Note has been negotiated and delivered to Lender and is payable in the
State of Illinois, and shall not become effective until accepted by Lender in
the State of Illinois. This Note shall be governed by and construed and enforced
in accordance with, the laws of the State of Illinois, excluding any conflicts
of law rules or principles that would cause the application of the laws of any
other jurisdiction.

       BORROWER:                   MACHONE COMMUNICATIONS, INC.
                                   992 S. DE ANZA BLVD.
                                   SAN JOSE, CA 95129

                                   Signature:   /s/ [Signature Illegible]
                                             -------------------------------

                                   Print Name:  [Illegible}
                                             -------------------------------

                                   Title:       Secretary
                                             -------------------------------






                                      -2-

<PAGE>   1
                                                                   EXHIBIT 10.41

                            SECURED PROMISSORY NOTE

$1,250,000                                               DATE: NOVEMBER 10, 1998

                                                         DUE:  NOVEMBER 1, 2001

FOR VALUE RECEIVED, MachOne Communications, Inc., a California corporation (the
"Borrower") hereby promises to pay to the order of Comdisco, Inc., a Delaware
corporation (the "Lender") at P.O. Box 91744, Chicago, IL 60693 or such other
place of payment as the holder of this Secured Promissory Note (this "Note")
may specify from time to time in writing, in lawful money of the United States
of America, the principal amount of ONE MILLION TWO HUNDRED FIFTY THOUSAND and
00/100 Dollars ($1,250,000) together with interest at Nine percent (9%) per
annum from the date of this Note to maturity of each installment on the
principal hereof remaining from time to time unpaid, such principal and
interest to be paid in 6 equal monthly installments of interest only, the first
monthly installment in the amount of $6,562.50, commencing December 1, 1998,
followed by 5 monthly installments of $9,375.00 each, commencing January 1,
1999 and on the same day of each month thereafter to and including May 1, 1999,
followed by 30 equal monthly installments of principal and interest in the
amount of $46,685.20 each, commencing June 1, 1999 and on the same day of each
month thereafter to and including November 1, 2001 such installments to be
applied first to accrued and unpaid interest and the balance to unpaid
principal. Interest shall be computed on the basis of a year consisting of
twelve months of thirty days each.

This Note is the Note referred to in, and is executed and delivered in
connection with, that certain Loan and Security Agreement dated as of September
10, 1998 by and between Borrower and Lender (as the same may from time to time
be amended, modified or supplemented in accordance with its terms, the "Loan
Agreement"), and is entitled to the benefit and security of the Loan Agreement
and the other Loan Documents (as defined in the Loan Agreement), to which
reference is made for a statement of all of the terms and conditions thereof.
All terms defined in the Loan Agreement shall have the same definitions when
used herein, unless otherwise defined herein.

The Borrower waives presentment and demand for payment, notice of dishonor,
protest and notice of protest and any other notice as permitted under the UCC
or any applicable law.

                                      -1-
<PAGE>   2
This Note has been negotiated and delivered to Lender and is payable in the
State of Illinois, and shall not become effective until accepted by Lender in
the State of Illinois. This Note shall be governed by and construed and enforced
in accordance with, the laws of the State of Illinois, excluding any conflicts
of law rules or principles that would cause the application of the laws of any
other jurisdiction.

          BORROWER:              MACHONE COMMUNICATIONS, INC.
                                 992 SOUTH DE ANZA BLVD.
                                 CUPERTINO, CA 95129

                                 Signature:   /s/ [Signature Illegible]
                                              ---------------------------------

                                 Print Name:  [Illegible]
                                              ---------------------------------

                                 Title:       V.P. Legal & Regulatory Affairs
                                              ---------------------------------



                                      -2-
<PAGE>   3
MACHONE COMMUNICATIONS

Prepared by G. Gillen

Loan Amount:   1,250,000.00
Interest Rate        9.000%
Payment           46,685.20


<TABLE>
<CAPTION>
Payment Number      Date                Principal                     Interest                 Payment                   Balance
- --------------      ----                ---------                     ---------               ---------                ------------
<S>                 <C>                 <C>                           <C>                     <C>                      <C>
                    11/10/98                                                                                           1,250,000.00
 1                  12/01/98                 0.00                      6,562.50                6,562.50                1,250,000.00
 2                  01/01/99                 0.00                      9,375.00                9,375.00                1,250,000.00
 3                  02/01/99                 0.00                      9,375.00                9,375.00                1,250,000.00
 4                  03/01/99                 0.00                      9,375.00                9,375.00                1,250,000.00
 5                  04/01/99                 0.00                      9,375.00                9,375.00                1,250,000.00
 6                  05/01/99                 0.00                      9,375.00                9,375.00                1,250,000.00
 7                  06/01/99            37,310.20                      9,375.00               46,685.20                1,212,689.80
 8                  07/01/99            37,590.03                      9,095.17               46,685.20                1,175,099.77
 9                  08/01/99            37,871.95                      8,813.25               46,685.20                1,137,227.82
10                  09/01/99            38,155.99                      8,529.21               46,685.20                1,099,071.83
11                  10/01/99            38,442.16                      8,243.04               46,685.20                1,060,629.66
12                  11/01/99            38,730.48                      7,954.72               46,685.20                1,021,899.19
13                  12/01/99            39,020.96                      7,664.24               46,685.20                  982,878.23
14                  01/01/00            39,313.61                      7,371.59               46,685.20                  943,564.61
15                  02/01/00            39,608.47                      7,076.73               46,685.20                  903,956.15
16                  03/01/00            39,905.53                      6,779.67               46,685.20                  864,050.62
17                  04/01/00            40,204.82                      6,480.38               46,685.20                  823,845.80
18                  05/01/00            40,506.36                      6,178.84               46,685.20                  783,339.44
19                  06/01/00            40,810.16                      5,875.05               46,685.20                  742,529.28
20                  07/01/00            41,116.23                      5,568.97               46,685.20                  701,413.05
21                  08/01/00            41,424.60                      5,260.60               46,685.20                  659,988.45
22                  09/01/00            41,735.29                      4,949.91               46,685.20                  618,253.16
23                  10/01/00            42,048.30                      4,636.90               46,685.20                  576,204.86
24                  11/01/00            42,363.66                      4,321.54               46,685.20                  533,841.20
25                  12/01/00            42,681.39                      4,003.81               46,685.20                  491,159.80
26                  01/01/01            43,001.50                      3,683.70               46,685.20                  448.158.30
27                  02/01/01            43,324.01                      3,361.19               46,685.20                  404,834.29
28                  03/01/01            43,648.94                      3,036.26               46,685.20                  361,185.34
29                  04/01/01            43,976.31                      2,708.89               46,685.20                  317,209.03
30                  05/01/01            44,306.13                      2,379.07               46,685.20                  272.902.90
31                  06/01/01            44,638.43                      2,046.77               46,685.20                  228,264.47
32                  07/01/01            44,973.22                      1,711.98               46,685.20                  183,291.25
33                  08/01/01            45,310.52                      1,374.68               46,685.20                  137,980.74
34                  09/01/01            45,650.35                      1,034.86               46,685.20                   92,330.39
35                  10/01/01            45,992.72                        692.48               46,685.20                   46,337.67
36                  11/01/01            46,337.67                        347.53               46,685.20                       (0.00)

</TABLE>

<PAGE>   1


                                                                   EXHIBIT 10.42

                            SECURED PROMISSORY NOTE

$1,250,000                                               Date: December 24, 1998

                                                            Due: January 1, 2002

FOR VALUE RECEIVED, MachOne Communications, Inc.,  a California corporation (the
"Borrower") hereby promises to pay to the order of Comdisco, Inc., a Delaware
corporation (the "Lender") at P.O. Box 91744, Chicago, IL 60693 or such other
place of payment as the holder of this Secured Promissory Note (this "Note") may
specify from time to time in writing, in lawful money of the United States of
America, the principal amount of One Million Two Hundred Fifty Thousand and
00/100 Dollars ($1,250,000) together with interest at Eight and Three Quarter
percent (8.75%) per annum from the date of this Note to maturity of each
installment on the principal hereof remaining from time to time unpaid, such
principal and interest to be paid in 6 equal monthly installments of interest
only, the first monthly installment of interest only of $11,241.32, commencing
February 1, 1999, followed by 5 monthly installments of interest only of
$9,114.58 each, commencing March 1, 1999 and on the same day of each month
thereafter to and including July 1, 1999, followed by 30 equal monthly
installments of principal and interest in the amount of $46,541.10 each,
commencing August 1, 1999 and on the same day of each month thereafter to and
including January 1, 2002 such installments to be applied first to accrued and
unpaid interest and the balance to unpaid principal. Interest shall be computed
on the basis of a year consisting of twelve months of thirty days each.

This Note is the Note referred to in, and is executed and delivered in
connection with, that certain Loan and Security Agreement dated as of September
10, 1998 by and between Borrower and Lender (as the same may from time to time
be amended, modified or supplemented in accordance with its terms, the "Loan
Agreement"), and is entitled to the benefit and security of the Loan Agreement
and the other Loan Documents (as defined in the Loan Agreement), to which
reference is made for a statement of all of the terms and conditions thereof.
All terms defined in the Loan Agreement shall have the same definitions when
used herein, unless otherwise defined herein.

The Borrower waives presentment and demand for payment, notice of dishonor,
protest and notice of protest and any other notice as permitted under the UCC or
any applicable law.




                                      -1-
<PAGE>   2


This Note has been negotiated and delivered to Lender and is payable in the
State of Illinois, and shall not become effective until accepted by Lender in
the State of Illinois. This Note shall be governed by and construed and enforced
in accordance with, the laws of the State of Illinois, excluding any conflicts
of law rules or principles that would cause the application of the laws of any
other jurisdiction.


       BORROWER:                  MACHONE COMMUNICATIONS, INC.
                                  992 South De Anza Blvd.
                                  Cupertino, CA 95129


                                  Signature:  /s/ PETER D. OLSON
                                             ---------------------------------

                                  Print Name: Peter D. Olson

                                  Title: Chief Technical Officer







                                      -2-
<PAGE>   3
MACHONE COMMUNICATIONS

Prepared by V. Tonga & Revised by G. Gillen

<TABLE>
<CAPTION>
<S>               <C>
Loan Amount:      1,250,000.00
                  ==============
Interest Rate             8.750%
                  ==============
Payment              46,541.10
</TABLE>

<TABLE>
<CAPTION>
Payment
Number      Date        Principal     Interest      Payment         Balance
- ------      ----        ---------     --------      -------         -------
<S>       <C>           <C>           <C>           <C>           <C>
          12/24/98                                                1,250,000.00
   1      02/01/99           0.00     11,241.32     11,241.32     1,250,000.00
   2      03/01/99           0.00      9,114.58      9,114.58     1,250,000.00
   3      04/01/99           0.00      9,114.58      9,114.58     1,250,000.00
   4      05/01/99           0.00      9,114.58      9,114.58     1,250,000.00
   5      06/01/99           0.00      9,114.58      9,114.58     1,250,000.00
   6      07/01/99           0.00      9,114.58      9,114.58     1,250,000.00
   7      08/01/99      37,426.52      9,114.58     46,541.10     1,212,573.48
   8      09/01/99      37,699.42      8,841.68     46,541.10     1,174,874.06
   9      10/01/99      37,974.31      8,566.79     46,541.10     1,136,899.75
  10      11/01/99      38,251.21      8,289.89     46,541.10     1,098,648.54
  11      12/01/99      38,530.12      8,010.98     46,541.10     1,060,118.42
  12      01/01/00      38,811.07      7,730.03     46,541.10     1,021,307.35
  13      02/01/00      39,094.07      7,447.03     46,541.10       982,213.28
  14      03/01/00      39,379.13      7,161.97     46,541.10       942,834.15
  15      04/01/00      39,666.27      6,874.83     46,541.10       903,167.88
  16      05/01/00      39,955.50      6,585.60     46,541.10       863,212.38
  17      06/01/00      40,246.84      6,294.26     46,541.10       822,965.53
  18      07/01/00      40,540.31      6,000.79     46,541.10       782,425.22
  19      08/01/00      40,835.92      5,705.18     46,541.10       741,589.30
  20      09/01/00      41,133.68      5,407.42     46,541.10       700,455.62
  21      10/01/00      41,433.61      5,107.49     46,541.10       659,022.01
  22      11/01/00      41,735.73      4,805.37     46,541.10       617,286.28
  23      12/01/00      42,040.06      4,501.05     46,541.10       575,246.22
  24      01/01/01      42,346.60      4,194.50     46,541.10       532,899.63
  25      02/01/01      42,655.38      3,885.73     46,541.10       490,244.25
  26      03/01/01      42,966.40      3,574.70     46,541.10       447,277.85
  27      04/01/01      43,279.70      3,261.40     46,541.10       403,998.15
  28      05/01/01      43,595.28      2,945.82     46,541.10       360,402.86
  29      06/01/01      43,913.16      2,627.94     46,541.10       316,489.70
  30      07/01/01      44,233.36      2,307.74     46,541.10       272,256.34
  31      08/01/01      44,555.90      1,985.20     46,541.10       227,700.44
  32      09/01/01      44,880.79      1,660.32     46,541.10       182,819.65
  33      10/01/01      45,208.04      1,333.06     46,541.10       137,611.61
  34      11/01/01      45,537.68      1,003.42     46,541.10        92,073.93
  35      12/01/01      45,869.73        671.37     46,541.10        46,204.20
  36      01/01/02      46,204.20        336.91     46,541.10             0.00
</TABLE>

<PAGE>   1
                                                                   EXHIBIT 10.43

                          SUBORDINATED PROMISSORY NOTE

$500,000                                                 Date: September 3, 1999

                                                         Due:  September 1, 2002



FOR VALUE RECEIVED, Telocity, Inc., a California corporation (the "Borrower")
hereby promises to pay to the order of Comdisco, Inc., a Delaware corporation
(the "Lender") at P.O. Box 91744, Chicago, IL 60693 or such other place of
payment as the holder of this Secured Promissory Note (this "Note") may specify
from time to time in writing, in lawful money of the United States of America,
the principal amount of Five Hundred Thousand and 00/100 Dollars ($500,000.00)
together with interest at twelve and one-half percent (12.5%) per annum from the
date of this Note to maturity of each installment on the principal hereof
remaining from time to time unpaid, such principal and interest to be paid in 36
equal monthly installments of $16,715.32 each, commencing October 1, 1999 and on
the same day of each month thereafter to and including September 1, 2002, such
installments to be applied first to accrued and unpaid interest and the balance
to unpaid principal. Interest shall be computed on the basis of a year
consisting of twelve months of thirty days each.

This Note is the Note referred to in, and is executed and delivered in
connection with, that certain Subordinated Loan and Security Agreement dated May
6, 1999 by and between Borrower and Lender (as the same may from time to time be
amended, modified or supplemented in accordance with its terms, the "Loan
Agreement"), and is entitled to the benefit and security of the Loan Agreement
and the other Loan Documents (as defined in the Loan Agreement), to which
reference is made for a statement of all of the terms and conditions thereof.
All terms defined in the Loan Agreement shall have the same definitions when
used herein, unless otherwise defined herein.

THIS NOTE IS EXPRESSLY SUBJECT TO THE TERMS OF THAT CERTAIN SUBORDINATION
AGREEMENT BY AND BETWEEN LENDER AND BORROWER FOR THE BENEFIT OF SENIOR CREDITOR.
IN THE EVENT OF ANY CONTRADICTION OR INCONSISTENCY BETWEEN THIS NOTE AND THE
SUBORDINATION AGREEMENT, THE TERMS OF THE SUBORDINATION AGREEMENT SHALL CONTROL.

The Borrower waives presentment and demand for payment, notice of dishonor,
protest and notice of protest and any notice as permitted under the UCC or any
applicable law.


                                      -1-

<PAGE>   2
This Note has been negotiated and delivered to Lender and is payable in the
State of Illinois, and shall not become effective until accepted by Lender in
the State of Illinois. This Note shall be governed by and construed and
enforced in accordance with, the laws of the State of Illinois, excluding any
conflicts of law rules or principles that would cause the application of the
laws of any other jurisdiction.

          BORROWER:              TELOCITY, INC.
                                 10355 N. DE ANZA BLVD.
                                 SAN JOSE, CA 95129

                                 Signature:   /s/ KAREN NORTHUP
                                              -------------------------------

                                 Print Name:  Karen Northup
                                              -------------------------------

                                 Title:       Controller
                                              -------------------------------



                                      -2-
<PAGE>   3
TELOCITY, INC.

Prepared by V. Tonga

Loan Amount:        500,000.00
                    ==========
Interest Rate           12.500%
                    ==========
Payment              16,715.32
                    ==========

<TABLE>
<CAPTION>
Payment
Number      Date         Principal      Interest        Payment       Balance
- ------    --------       ---------      --------       ---------     ----------
<S>       <C>            <C>            <C>            <C>           <C>
          09/03/99                                                   500,000.00
   1      10/01/99       11,854.21      4,861.11       16,715.32     488,145.79
   2      11/01/99       11,630.46      5,084.85       16,715.32     476,515.33
   3      12/01/99       11,751.62      4,963.70       16,715.32     464,763.71
   4      01/01/00       11,874.03      4,841.29       16,715.32     452,889.69
   5      02/01/00       11,997.72      4,717.60       16,715.32     440,891.97
   6      03/01/00       12,122.69      4,592.62       16,715.32     428,769.28
   7      04/01/00       12,248.97      4,466.35       16,715.32     416,520.31
   8      05/01/00       12,376.56      4,338.75       16,715.32     404,143.75
   9      06/01/00       12,505.49      4,209.83       16,715.32     391,638.26
  10      07/01/00       12,635.75      4,079.57       16,715.32     379,002.51
  11      08/01/00       12,767.37      3,947.94       16,715.32     366,235.13
  12      09/01/00       12,900.37      3,814.95       16,715.32     353,334.77
  13      10/01/00       13,034.75      3,680.57       16,715.32     340,300.02
  14      11/01/00       13,170.52      3,544.79       16,715.32     327,129.50
  15      12/01/00       13,307.72      3,407.60       16,715.32     313,821.78
  16      01/01/01       13,446.34      3,268.98       16,715.32     300,375.44
  17      02/01/01       13,586.41      3,128.91       16,715.32     286,789.03
  18      03/01/01       13,727.93      2,987.39       16,715.32     273,061.10
  19      04/01/01       13,870.93      2,844.39       16,715.32     259,190.17
  20      05/01/01       14,015.42      2,699.90       16,715.32     245,174.75
  21      06/01/01       14,161.41      2,553.90       16,715.32     231,013.34
  22      07/01/01       14,308.93      2,406.39       16,715.32     216,704.41
  23      08/01/01       14,457.98      2,257.34       16,715.32     202,246.43
  24      09/01/01       14,608.58      2,106.73       16,715.32     187,637.85
  25      10/01/01       14,760.76      1,954.56       16,715.32     172,877.09
  26      11/01/01       14,914.51      1,800.80       16,715.32     157,962.58
  27      12/01/01       15,069.87      1,645.44       16,715.32     142,892,71
  28      01/01/02       15,226.85      1,488.47       16,715.32     127,665.85
  29      02/01/02       15,385.46      1,329.85       16,715.32     112,280.39
  30      03/01/02       15,545.73      1,169.59       16,715.32      96,734.66
  31      04/01/02       15,707.66      1,007.65       16,715.32      81,027.00
  32      05/01/02       15,871.29        844.03       16,715.32      65,155.71
  33      06/01/02       16,036.61        678.71       16,715.32      49,119.10
  34      07/01/02       16,203.66        511.66       16,715.32      32,915.44
  35      08/01/02       16,372.45        342.87       16,715.32      16,542.99
  36      09/01/02       16,542.99        172.32       16,715.32          (0.00)
</TABLE>

                                     Page 1



<PAGE>   1
                                                                   EXHIBIT 10.44

SUBORDINATED PROMISSORY NOTE

$500,000                                                 Date: September 9, 1999
                                                         Due:  September 1, 2002


FOR VALUE RECEIVED, Telocity, Inc., a California corporation (the "Borrower")
hereby promises to pay to the order of Comdisco, Inc., a Delaware corporation
(the "Lender") at P.O. Box 91744, Chicago, IL 60693 or such other place of
payment as the holder of this Secured Promissory Note (this "Note") may specify
from time to time in writing, in lawful money of the United States of America,
the principal amount of Five Hundred Thousand and 00/100 Dollars ($500,000.00)
together with interest at twelve and one-half percent (12.5%) per annum from the
date of this Note to maturity of each installment on the principal hereof
remaining from time to time unpaid, such principal and interest to be paid in 36
equal monthly installments of $16,680.83 each, commencing October 1, 1999 and on
the same day of each month thereafter to and including September 1, 2002, such
installments to be applied first to accrued and unpaid interest and the balance
to unpaid principal. Interest shall be computed on the basis of a year
consisting of twelve months of thirty days each.

This Note is the Note referred to in, and is executed and delivered in
connection with, that certain Subordinated Loan and Security Agreement dated May
6, 1999 by and between Borrower and Lender (as the same may from time to time be
amended, modified or supplemented in accordance with its terms, the "Loan
Agreement"), and is entitled to the benefit and security of the Loan Agreement
and the other Loan Documents (as defined in the Loan Agreement), to which
reference is made for a statement of all of the terms and conditions thereof.
All terms defined in the Loan Agreement shall have the same definitions when
used herein, unless otherwise defined herein.

THIS NOTE IS EXPRESSLY SUBJECT TO THE TERMS OF THAT CERTAIN SUBORDINATION
AGREEMENT BY AND BETWEEN LENDER AND BORROWER FOR THE BENEFIT OF SENIOR CREDITOR.
IN THE EVENT OF ANY CONTRADICTION OR INCONSISTENCY BETWEEN THIS NOTE AND THE
SUBORDINATION AGREEMENT, THE TERMS OF THE SUBORDINATION AGREEMENT SHALL CONTROL.

The Borrower waives presentment and demand for payment, notice of dishonor,
protest and notice of protest and any notice as permitted under the UCC or any
applicable law.


                                      -1-


<PAGE>   2
This Note has been negotiated and delivered to Lender and is payable in the
State of Illinois, and shall not become effective until accepted by Lender in
the State of Illinois. This Note shall be governed by and construed and
enforced in  accordance with, the laws of the State of Illinois, excluding any
conflicts of law rules or principles that would cause the application of the
laws of any other jurisdiction.

   BORROWER:           TELOCITY, INC.
                       10355 N. DE ANZA BLVD.
                       SAN JOSE, CA 95129

                       Signature:   /s/ MATT STEPOVICH
                                    --------------------------------------------

                       Print Name:  Matt Stepovich
                                    --------------------------------------------

                       Title:       Vice President, Legal and Regulatory Affair
                                    --------------------------------------------



                                      -2-
<PAGE>   3
TELOCITY, INC.


Prepared by C. Fera

Loan Amount:          500,000.00
                      ==========
Interest Rate            12.500%
                      ==========
Payment                16,680.83

<TABLE>
<CAPTION>
Payment Number   Date       Principal     Interest      Payment       Balance
- --------------------------------------------------------------------------------
<S>              <C>        <C>           <C>           <C>           <C>
                 09/09/99                                             500,000.00
             1   10/01/99   12,861.38     3,819.44      16,680.83     487,138.62
             2   11/01/99   11,606.47     5,074.36      16,680.83     475,532.15
             3   12/01/99   11,727.37     4,953.46      16,680.83     463,804.78
             4   01/01/00   11,849.53     4,831.30      16,680.83     451,955.25
             5   02/01/00   11,972.96     4,707.87      16,680.83     439,982.29
             6   03/01/00   12,097.68     4,583.15      16,680.83     427,884.61
             7   04/01/00   12,223.70     4,457.13      16,680.83     415,660.91
             8   05/01/00   12,351.03     4,329.80      16,680.83     403,309.89
             9   06/01/00   12,479.68     4,201.14      16,680.83     390,830.20
            10   07/01/00   12,609.68     4,071.15      16,680.83     378,220.52
            11   08/01/00   12,741.03     3,939.80      16,680.83     365,479.49
            12   09/01/00   12,873.75     3,807.08      16,680.83     352,605.74
            13   10/01/00   13,007.85     3,672.98      16,680.83     339,597.89
            14   11/01/00   13,143.35     3,537.48      16,680.83     326,454.54
            15   12/01/00   13,280.26     3,400.57      16,680.83     313,174.28
            16   01/01/01   13,418.60     3,262.23      16,680.83     299,755.68
            17   02/01/01   13,558.37     3,122.46      16,680.83     286,197.31
            18   03/01/01   13,699.61     2,981.22      16,680.83     272,497.70
            19   04/01/01   13,842.31     2,838.52      16,680.83     258,655.39
            20   05/01/01   13,986.50     2,694.33      16,680.83     244,668.89
            21   06/01/01   14,132.19     2,548.63      16,680.83     230,536.69
            22   07/01/01   14,279.40     2,401.42      16,680.83     216,257.29
            23   08/01/01   14,428.15     2,252.68      16,680.83     201,829.14
            24   09/01/01   14,578.44     2,102.39      16,680.83     187,250.70
            25   10/01/01   14,730.30     1,950.53      16,680.83     172,520.40
            26   11/01/01   14,883.74     1,797.09      16,680.83     157,636.66
            27   12/01/01   15,038.78     1,642.05      16,680.83     142,597.88
            28   01/01/02   15,195.43     1,485.39      16,680.83     127,402.45
            29   02/01/02   15,353.72     1,327.11      16,680.83     112,048.73
            30   03/01/02   15,513.65     1,167.17      16,680.83      96,535.07
            31   04/01/02   15,675.25     1,005.57      16,680.83      80,859.82
            32   05/01/02   15,838.54       842.29      16,680.83      65,021.28
            33   06/01/02   16,003.52       677.30      16,680.83      49,017.75
            34   07/01/02   16,170.23       510.60      16,680.83      32,847.53
            35   08/01/02   16,338.67       342.16      16,680.83      16,508.86
            36   09/01/02   16,508.86       171.97      16,680.83           0.00
</TABLE>


                                     Page 1

<PAGE>   1
                                                                   EXHIBIT 10.45

                          SUBORDINATED PROMISSORY NOTE


$500,000                                                DATE: SEPTEMBER 24, 1999

                                                        DUE:  OCTOBER 1, 2002


FOR VALUE RECEIVED, Telocity, Inc., a California corporation (the "Borrower")
hereby promises to pay to the order of Comdisco, Inc., a Delaware corporation
(the "Lender") at P.O. Box 91744, Chicago, IL 60693 or such other place of
payment as the holder of this Secured Promissory Note (this "Note") may specify
from time to time in writing, in lawful money of the United States of America,
the principal amount of Five Hundred Thousand and 00/100 Dollars ($500,000.00)
together with interest at twelve and one-half percent (12.5%) per annum from
the date of this Note to maturity of each installment on the principal hereof
remaining from time to time unpaid, such principal and interest to be paid in
36 equal monthly installments of $16,767.05 each, commencing November 1, 1999
and on the same day of each month thereafter to and including October 1, 2002,
such installments to be applied first to accrued and unpaid interest and the
balance to unpaid principal. Interest shall be computed on the basis of a year
consisting of twelve months of thirty days each.

The Note is the Note referred to in, and is executed and delivered in
connection with, that certain Subordinated Loan and Security Agreement dated
May 6, 1999 by and between Borrower and Lender (as the same may from time to
time be amended, modified or supplemented in accordance with its terms, the
"Loan Agreement"), and is entitled to the benefit and security of the Loan
Agreement and the other Loan Documents (as defined in the Loan Agreement), to
which reference is made for a statement of all of the terms and conditions
thereof. All terms defined in the Loan Agreement shall have the same
definitions when used herein, unless otherwise defined herein.

THIS NOTE IS EXPRESSLY SUBJECT TO THE TERMS OF THAT CERTAIN SUBORDINATION
AGREEMENT BY AND BETWEEN LENDER AND BORROWER FOR THE BENEFIT OF SENIOR
CREDITOR. IN THE EVENT OF ANY CONTRADICTION OR INCONSISTENCY BETWEEN THIS NOTE
AND THE SUBORDINATION AGREEMENT, THE TERMS OF THE SUBORDINATION AGREEMENT SHALL
CONTROL.

The Borrower waives presentment and demand for payment, notice of dishonor,
protest and notice of protest and any other notice as permitted under the UCC
or any applicable law.



                                      -1-
<PAGE>   2
This Note has been negotiated and delivered to Lender and is payable in the
State of Illinois, and shall not become effective until accepted by Lender in
the State of Illinois. This Note shall be governed by and construed and enforced
in accordance with, the laws of the State of Illinois, excluding any conflicts
of law rules or principles that would cause the application of the laws of any
other jurisdiction.

          BORROWER:              TELOCITY, INC.
                                 10355 N. De Anza Blvd.
                                 San Jose, CA 95129

                                 Signature:   /s/ KAREN NORTHUP
                                              -------------------------------

                                 Print Name:  Karen Northup
                                              -------------------------------

                                 Title:       Controller
                                              -------------------------------



                                      -2-
<PAGE>   3
TELOCITY, INC.

Prepared by V. Tonga

Loan Amount:        500,000.00 Subordinated Loan & Security Agmt. dtd 5/6/99
                    ==========
Interest Rate           12.500%
                    ==========
Payment              16,767.05
                    ==========

<TABLE>
<CAPTION>
Payment
Number      Date         Principal      Interest        Payment       Balance
- ------    --------       ---------      --------       ---------     ----------
<S>       <C>            <C>            <C>            <C>           <C>
          09/24/99                                                    500,00.00
   1      11/01/99       10,343.44      6,423.61       16,767.05      489,656.56
   2      12/01/99       11,666.46      5,100.59       16,767.05      477,990.10
   3      01/01/00       11,787.99      4,979.06       16,767.05      466,202.12
   4      02/01/00       11,910.78      4,856.27       16,767.05      454,291.34
   5      03/01/00       12,034.85      4,732.20       16,767.05      442,256.49
   6      04/01/00       12,160.21      4,606.84       16,767.05      430,096.28
   7      05/01/00       12,286.88      4,480.17       16,767.05      417,809.40
   8      06/01/00       12,414.87      4,352.18       16,767.05      405,394.53
   9      07/01/00       12,544.19      4,222.86       16,767.05      392,850.34
  10      08/01/00       12,674.86      4,092.19       16,767.05      380,175.49

  11      09/01/00       12,806.89      3,960.16       16,767.05      367,368.60
  12      10/01/00       12,940.29      3,826.76       16,767.05      354,428.31
  13      11/01/00       13,075.09      3,691.96       16,767.05      341,353.22
  14      12/01/00       13,211.29      3,555.76       16,767.05      328,141.93
  15      01/01/01       13,348.90      3,418.15       16,767.05      314,793.03
  16      02/01/01       13,487.96      3,279.09       16,767.05      301,305.07
  17      03/01/01       13,628.45      3,138.59       16,767.05      287,676.62
  18      04/01/01       13,770.42      2,996.63       16,767.05      273,906.20
  19      05/01/01       13,913.86      2,853.19       16,767.05      259,992.34
  20      06/01/01       14,058.80      2,708.25       16,767.05      245,933.55

  21      07/01/01       14,205.24      2,561.81       16,767.05      231,728.30
  22      08/01/01       14,353.21      2,413.84       16,767.05      217,375.09
  23      09/01/01       14,502.73      2,264.32       16,767.05      202,872.37
  24      10/01/01       14,653.80      2,113.25       16,767.05      188,218.57
  25      11/01/01       14,806.44      1,960.61       16,767.05      173,412.13
  26      12/01/01       14,960.67      1,806.38       16,767.05      158,451.46
  27      01/01/02       15,116.51      1,650.54       16,767.05      143,334.95
  28      02/01/02       15,273.98      1,493.07       16,767.05      128,060.97
  29      03/01/02       15,433.08      1,333.97       16,767.05      112,627.89

  30      04/01/02       15,593.84      1,173.21       16,767.05       97,034.05
  31      05/01/02       15,756.28      1,010.77       16,767.05       81,277.77
  32      06/01/02       15,920.41        846.64       16,767.05       65,357.36
  33      07/01/02       16,086.24        680.81       16,767.05       49,271.12
  34      08/01/02       16,253.81        513.24       16,767.05       33,017.31
  35      09/01/02       16,423.12        343.93       16,767.05       16,594.19
  36      10/01/02       16,594.19        172.86       16,767.05            0.00
</TABLE>

                                     Page 1


<PAGE>   1
                                                                   EXHIBIT 10.46

                          SUBORDINATED PROMISSORY NOTE


$1,500,000                                             DATE: SEPTEMBER 24, 1999

                                                       DUE:  OCTOBER 1, 2002


FOR VALUE RECEIVED, Telocity, Inc., a California corporation (the "Borrower")
hereby promises to pay to the order of Comdisco, Inc., a Delaware corporation
(the "Lender") at P.O. Box 91744, Chicago, IL 60693 or such other place of
payment as the holder of this Secured Promissory Note (this "Note") may specify
from time to time in writing, in lawful money of the United States of America,
the principal amount of One Million Five Hundred Thousand and 00/100 Dollars
($1,500,000.00) together with interest at twelve and one-half percent (12.5%)
per annum from the date of this Note to maturity of each installment on the
principal hereof remaining from time to time unpaid, such principal and interest
to be paid in 36 equal monthly installments of $50,301.15 each, commencing
November 1, 1999 and on the same day of each month thereafter to and including
October 1, 2002, such installments to be applied first to accrued and unpaid
interest and the balance to unpaid principal. Interest shall be computed on the
basis of a year consisting of twelve months of thirty days each.

This Note is the Note referred to in, and is executed and delivered in
connection with, that certain Subordinated Loan and Security Agreement dated
May 6, 1999 by and between Borrower and Lender (as the same may from time to
time be amended, modified or supplemented in accordance with its terms, the
"Loan Agreement"), and is entitled to the benefit and security of the Loan
Agreement and the other Loan Documents (as defined in the Loan Agreement), to
which reference is made for a statement of all of the terms and conditions
thereof. All terms defined in the Loan Agreement shall have the same
definitions when used herein, unless otherwise defined herein.

THIS NOTE IS EXPRESSLY SUBJECT TO THE TERMS OF THAT CERTAIN SUBORDINATION
AGREEMENT BY AND BETWEEN LENDER AND BORROWER FOR THE BENEFIT OF SENIOR
CREDITOR. IN THE EVENT OF ANY CONTRADICTION OR INCONSISTENCY BETWEEN THIS NOTE
AND THE SUBORDINATION AGREEMENT, THE TERMS OF THE SUBORDINATION AGREEMENT SHALL
CONTROL.

The Borrower waives presentment and demand for payment, notice of dishonor,
protest and notice of protest and any other notice as permitted under the UCC
or any applicable law.

                                      -1-
<PAGE>   2
This Note has been negotiated and delivered to Lender and is payable in the
State of Illinois, and shall not become effective until accepted by Lender in
the State of Illinois. This Note shall be governed by and construed and
enforced in  accordance with, the laws of the State of Illinois, excluding any
conflicts of law rules or principles that would cause the application of the
laws of any other jurisdiction.

          BORROWER:              TELOCITY, INC.
                                 10355 N. De Anza Blvd.
                                 San Jose, CA 95129

                                 Signature:
                                              -------------------------------

                                 Print Name:
                                              -------------------------------

                                 Title:
                                              -------------------------------



                                      -2-
<PAGE>   3
TELOCITY, INC.


Prepared by V. Tonga

Loan Amount:                      500,000.00
                               ===============
Interest Rate                        12.500%
                               ===============
Payment                            16,715.32



Payment Number    Date       Principal     Interest     Payment       Balance
- --------------------------------------------------------------------------------
                  09/03/99                                           500,000.00
             1    10/01/99    11,854.21     4,861.11    16,715.32    488,145.79
             2    11/01/99    11,630.46     5,084.85    16,715.32    476,515.33
             3    12/01/99    11,751.62     4,963.70    16,715.32    464,763.71
             4    01/01/00    11,874.03     4,841.29    16,715.32    452,889.69
             5    02/01/00    11,997.72     4,717.60    16,715.32    440,891.97
             6    03/01/00    12,122.69     4,592.62    16,715.32    428,769.28
             7    04/01/00    12,248.97     4,466.35    16,715.32    416,520.31
             8    05/01/00    12,376.56     4,338.75    16,715.32    404,143.75
             9    06/01/00    12,505.49     4,209.83    16,715.32    391,638.26
            10    07/01/00    12,635.75     4,079.57    16,715.32    379,002.51
            11    08/01/00    12,767.37     3,947.94    16,715.32    366,235.13
            12    09/01/00    12,900.37     3,814.95    16,715.32    353,334.77
            13    10/01/00    13,034.75     3,680.57    16,715.32    340,300.02
            14    11/01/00    13,170.52     3,544.79    16,715.32    327,129.50
            15    12/01/00    13,307.72     3,407.60    16,715.32    313,821.78
            16    01/01/01    13,446.34     3,268.98    16,715.32    300,375.44
            17    02/01/01    13,586.41     3,128.91    16,715.32    286,789.03
            18    03/01/01    13,727.93     2,987.39    16,715.32    273,061.10
            19    04/01/01    13,870.93     2,844.39    16,715.32    259,190.17
            20    05/01/01    14,015.42     2,699.90    16,715.32    245,174.75
            21    06/01/01    14,161.41     2,553.90    16,715.32    231,013.34
            22    07/01/01    14,308.93     2,406.39    16,715.32    216,704.41
            23    08/01/01    14,457.98     2,257.34    16,715.32    202,246.43
            24    09/01/01    14,608.58     2,106.73    16,715.32    187,637.85
            25    10/01/01    14,760.76     1,954.56    16,715.32    172,877.09
            26    11/01/01    14,914.51     1,800.80    16,715.32    157,962.58
            27    12/01/01    15,069.87     1,645.44    16,715.32    142,892.71
            28    01/01/02    15,226.85     1,488.47    16,715.32    127,665.85
            29    02/01/02    15,385.46     1,329.85    16,715.32    112,280.39
            30    03/01/02    15,545.73     1,169.59    16,715.32     96,734.66
            31    04/01/02    15,707.66     1,007.65    16,715.32     81,027.00
            32    05/01/02    15,871.29       844.03    16,715.32     65,155.71
            33    06/01/02    16,036.61       678.71    16,715.32     49,119.10
            34    07/01/02    16,203.66       511.66    16,715.32     32,915.44
            35    08/01/02    16,372.45       342.87    16,715.32     16,542.99
            36    09/01/02    16,542.99       172.32    16,715.32         (0.00)


                                     Page 1

<PAGE>   1
                                                                   EXHIBIT 10.47

                          SUBORDINATED PROMISSORY NOTE

$500,000                                                  DATE: OCTOBER 19, 1999

                                                          DUE: NOVEMBER 1, 2002


FOR VALUE RECEIVED, Telocity, Inc., a California corporation (the "Borrower")
hereby promises to pay to the order of Comdisco, Inc., a Delaware corporation
(the "Lender") at P.O. Box 91744, Chicago, IL 60693 or such other place of
payment as the holder of this Secured Promissory Note (this "Note") may specify
from time to time in writing, in lawful money of the United States of America,
the principal amount of Five Hundred Thousand and 00/100 Dollars ($500,000.00)
together with interest at twelve and one-half percent (12.5%) per annum from the
date of this Note to maturity of each installment on the principal hereof
remaining from time to time unpaid, such principal and interest to be paid in 36
equal monthly installments of $16,796.79 each, commencing December 1, 1999 and
on the same day of each month thereafter to and including November 1, 2002, such
installments to be applied first to accrued and unpaid interest and the balance
to unpaid principal. Interest shall be computed on the basis of a year
consisting of twelve months of thirty days each.

This Note is the Note referred to in, and is executed and delivered in
connection with, that certain Subordinated Loan and Security Agreement dated
May 6, 1999 by and between Borrower and Lender (as the same may from time to
time be amended, modified or supplemented in accordance with its terms, the
"Loan Agreement"), and is entitled to the benefit and security of the Loan
Agreement and the other Loan Documents (as defined in the Loan Agreement), to
which reference is made for a statement of all of the terms and conditions
thereof. All terms defined in the Loan Agreement shall have the same
definitions when used herein, unless otherwise defined herein.

THIS NOTE IS EXPRESSLY SUBJECT TO THE TERMS OF THAT CERTAIN SUBORDINATION
AGREEMENT BY AND BETWEEN LENDER AND BORROWER FOR THE BENEFIT OF SENIOR
CREDITOR. IN THE EVENT OF ANY CONTRADICTION OR INCONSISTENCY BETWEEN THIS NOTE
AND THE SUBORDINATION AGREEMENT, THE TERMS OF THE SUBORDINATION AGREEMENT SHALL
CONTROL.

The Borrower waives presentment and demand for payment, notice of dishonor,
protest and notice of protest and any other notice as permitted under the UCC
or any applicable law.


                                      -1-

<PAGE>   2
This Note has been negotiated and delivered to Lender and is payable in the
State of Illinois, and shall not become effective until accepted by Lender in
the State of Illinois. This Note shall be governed by and construed and enforced
in accordance with, the laws of the State of Illinois, excluding any conflicts
of law rules or principles that would cause the application of the laws of any
other jurisdiction.

      BORROWER:         TELOCITY, INC.
                        103 N. De Anza Blvd.
                        San Jose, CA 95014



                        Signature:  /s/ KAREN NORTHUP
                                    ---------------------------

                        Print Name: Karen Northup
                                    ---------------------------

                        Title:      Acting CFO
                                    ---------------------------









                                      -2-










<PAGE>   3
TELOCITY, INC.

Prepared by V. Tonga

Loan Amount:     500,000.00 Final Draw to Subordinated Loan & Security
                 ========== Agmt dtd 5/6/99
Interest Rate       12.500%
                 ==========
Payment           16,795.79


<TABLE>
<CAPTION>
Payment No.  Date       Principal    Interest     Payment      Balance
- -------------------------------------------------------------------------
       <S>   <C>        <C>          <C>          <C>          <C>
             10/19/99                                          500,000.00
         1   12/01/99    9,504.12     7,291.67    16,795.79    490,495.88
         2   01/01/00   11,686.46     5,109.33    16,795.79    478,809.42
         3   02/01/00   11,808.19     4,987.60    16,795.79    467,001.23
         4   03/01/00   11,931.19     4,864.60    16,795.79    455,070.04
         5   04/01/00   12,055.48     4,740.31    16,795.79    433,014,56
         6   05/01/00   12,181.05     4,614.73    16,795.79    430,833.50
         7   06/01/00   12,307.94     4,487.85    16,795.79    418,525.56
         8   07/01/00   12,436,15     4,359.64    16,795.79    406,089.42
         9   08/01/00   12,565.69     4,230.10    16,795.79    393,523.73
         10  09/01/00   12,696.58     4,099.21    16,795.79    380,827.14
         11  10/01/00   12,828.84     3,966.95    16,795.79    367,998.30
         12  11/01/00   12,962.47     3,833.32    16,795.79    355,035.83
         13  12/01/00   13,097.50     3,698.29    16,795.79    341,938.33
         14  01/01/01   13,233.93     3,561.86    16,795.79    328,704.40
         15  02/01/01   13,371.79     3,424.00    16,795.79    315,332.61
         16  03/01/01   13,511.07     3,284.71    16,795.79    301,821.54
         17  04/01/01   13,651.81     3,143.97    16,795.79    288,169.72
         18  05/01/01   13,794.02     3,001.77    16,795.79    274,375.70
         19  06/01/01   13,937.71     2,858.08    16,795.79    260,437.99
         20  07/01/01   14,082.89     2,712.90    16,795.79    246,355.10
         21  08/01/01   14,229.59     2,566.20    16,795.79    232,125.51
         22  09/01/01   14,337.82     2,417.97    16,795.79    217,747.69
         23  10/01/01   14,527.58     2,268.21    16,795.79    203.220.11
         24  11/01/01   14,678.91     2,116.88    16,795.79    188.541.19
         25  12/01/01   14,831.82     1,963.97    16,795.79    173,709.38
         26  01/01/02   14,986.32     1,809.47    16,795.79    158,723.06
         27  02/01/02   15,142.42     1,653.37    16,795.79    143,580.64
         28  03/01/02   15,300.16     1,495.63    16,795.79    128.280.48
         29  04/01/02   15,459.53     1,336.24    16,795.79    112,820.94
         30  05/01/02   15,620.57     1,175.22    16,795.79     97,200.37
         31  06/01/02   15,783.29     1,012.50    16,795.79     81,417.09
         32  07/01/02   15,947.69       848.09    16,795.79     65,469.39
         33  08/01/02   16,113.82       681.97    16,795.79     49,355.58
         34  09/01/02   16,281.67       514.12    16,795.79     33,073.91
         35  10/01/02   16,451.27       344.52    16,795.79     16,622.64
         36  11/01/02   16,622.64       173.15    16,795.79         (0.00)
</TABLE>


                                     Page 1










<PAGE>   1


                                                                   EXHIBIT 10.48

                                   EXHIBIT A

                          SUBORDINATED PROMISSORY NOTE


$1,000,000                                             Date:  September 30, 1999

                                                 Maturity Date:  October 1, 2002

FOR VALUE RECEIVED, Telocity, Inc. (f/k/a/ MachOne Communications, Inc.), a
California corporation (the "Borrower") herby promises to pay to the order of
MMC/GATX Partnership No. 1 (the "Lender"), in lawful money of the United States
of America, the principal amount of ONE MILLION DOLLARS ($1,000,000) together
with interest at twelve and ninety-nine one hundredths percent (12.99%) per
annum from the date of this Subordinated Promissory Note (the "Note") to
maturity of each installment on the principal hereof remaining from time to time
unpaid, such principal and interest to be paid in 36 equal monthly installments
of $33,689.14 each, commencing November 1, 1999 and on the same day of each
month thereafter to and including October 1, 2002 (the "Maturity Date"), such
installments to be applied first to accrued and unpaid interest and the balance
to unpaid principal. Interest shall be computed on the basis of a year
consisting of twelve months of thirty days each.

This Note is the Note referred to in, and is executed and delivered in
connection with, that certain Subordinated Loan and Security Agreement dated May
28, 1999 by and between Borrower and Lender (as the same may from time to time
be amended, modified or supplemented in accordance with its terms, the "Loan
Agreement"), and is entitled to the benefit and security of the Loan Agreement
and the other Loan Documents (as defined in the Loan Agreement), to which
reference is made for a statement of all of the terms and conditions thereof.
All terms defined in the Loan Agreement shall have the same definitions when
used herein, unless otherwise defined herein.

THIS NOTE IS EXPRESSLY SUBJECT TO THE TERMS OF THAT CERTAIN SUBORDINATION
AGREEMENT BY AND BETWEEN LENDER AND BORROWER FOR THE BENEFIT OF SENIOR CREDITOR.
IN THE EVENT OF ANY CONTRADICTION OR INCONSISTENCY BETWEEN THIS NOTE AND THE
SUBORDINATION AGREEMENT, THE TERMS OF THE SUBORDINATION AGREEMENT SHALL CONTROL.

The Borrower waives presentment and demand for payment, notice of dishonor,
protest and notice of protest and any other notice as permitted under the UCC or
any applicable law.

<PAGE>   2
This Note shall be governed by and construed and enforced in accordance with the
laws of the State of California, excluding any conflicts of law rules or
principles that would cause the application of the laws of any other
jurisdiction.

      BORROWER:                           TELOCITY, INC. (F/K/A MACHONE
                                          COMMUNICATIONS, INC.)
                                          992 S. De Anza Blvd.
                                          San Jose, CA 95129


                                          By: /s/ KAREN NORTHUP
                                             ----------------------------------

                                          Name: Karen Northup
                                               --------------------------------

                                          Title: Controller
                                                -------------------------------


                                       2
<PAGE>   3
                      ANNEX B TO LOAN AGREEMENT SUPPLEMENT
                 Telocity, Inc. - Venture Loan - Schedule No. 5

NOTE AMOUNT                         1,000,000.00
INTEREST RATE                             12.99%
LOAN FACTOR:                             3.3689%
SCHEDULED PAYMENT AMOUNT (note 1): $   33,689.14

INTERIM PAYMENT AMOUNT:                    $0.00

FINAL PAYMENT AMOUNT:      An additional amount equal to 0% of the Original Loan
                           shall be paid on the Maturity Date with respect to
                           such Loan.

<TABLE>
<CAPTION>
                                                                                   STIPULATED
PAYMENT             PAYMENT                                                        LOSS VALUE
NUMBER               DATE               PAYMENT TO  MMC/GATX                        (Note 2)
- -------            ----------           --------------------                       ----------
<S>                <C>                 <C>                                          <C>
 1                 01-Oct-99                $0.00                                   100.00%
 2                 01-Nov-99           $33,689.14                                   100.00%
 3                 01-Dec-99           $33,689.14                                    98.26%
 4                 01-Jan-00           $33,689.14                                    95.86%
 5                 01-Feb-00           $33,689.14                                    93.43%
 6                 01-Mar-00           $33,689.14                                    90.97%
 7                 01-Apr-00           $33,689.14                                    88.48%
 8                 01-May-00           $33,689.14                                    85.97%
 9                 01-Jun-00           $33,689.14                                    83.43%
10                 01-Jul-00           $33,689.14                                    80.86%
11                 01-Aug-00           $33,689.14                                    78.27%
12                 01-Sep-00           $33,689.14                                    75.65%
13                 01-Oct-00           $33,689.14                                    73.00%
14                 01-Nov-00           $33,689.14                                    70.32%
15                 01-Dec-00           $33,689.14                                    67.61%
16                 01-Jan-01           $33,689.14                                    64.87%
17                 01-Feb-01           $33,689.14                                    62.10%
18                 01-Mar-01           $33,689.14                                    59.30%
19                 01-Apr-01           $33,689.14                                    56.47%
20                 01-May-01           $33,689.14                                    53.62%
21                 01-Jun-01           $33,689.14                                    50.73%
22                 01-Jul-01           $33,689.14                                    47.81%
23                 01-Aug-01           $33,689.14                                    44.85%
24                 01-Sep-01           $33,689.14                                    41.87%
25                 01-Oct-01           $33,689.14                                    38.85%
26                 01-Nov-01           $33,689.14                                    35.80%
27                 01-Dec-01           $33,689.14                                    32.72%
28                 01-Jan-02           $33,689.14                                    29.60%
29                 01-Feb-02           $33,689.14                                    26.45%
30                 01-Mar-02           $33,689.14                                    23.27%
31                 01-Apr-02           $33,689.14                                    20.05%
32                 01-May-02           $33,689.14                                    16.80%
33                 01-Jun-02           $33,689.14                                    13.51%
34                 01-Jul-02           $33,689.14                                    10.19%
35                 01-Aug-02           $33,689.14                                     6.83%
36                 01-Sep-02           $33,689.14                                     3.43%
37                 01-Oct-02           $33,689.14                                     0.00%
38                                          $0.00                                     0.00%
39                                          $0.00                                     0.00%
40                                          $0.00                                     0.00%
41                                          $0.00                                     0.00%
42                                          $0.00                                     0.00%
43                                          $0.00                                     0.00%
44                                          $0.00                                     0.00%
45                                          $0.00                                     0.00%
46                                          $0.00                                     0.00%
47                                          $0.00                                     0.00%
48                                          $0.00                                     0.00%
49                                          $0.00                                     0.00%
</TABLE>

NOTE 1    The amount of such Scheduled Payment will change as the Loan Amount
          changes.
NOTE 2    Each Stipulated Loss Value amount assumes payment of all Scheduled
          Payments due on or before the Indicated Payment Date.


<PAGE>   1
                                                                    Exhibit 23.1

                       CONSENT OF INDEPENDENT ACCOUNTANTS

     We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated January 28, 2000 relating to the consolidated financial
statements of Telocity, Inc., which appear in such Registration Statement. We
also consent to the reference to us under the headings "Experts" and "Selected
Financial Data" in such Registration Statement.


/s/ PricewaterhouseCoopers LLP

San Jose, California
March 7, 2000


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