<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                                    FORM 10-Q

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

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000

                        Commission file number: 333-94271

                             TELOCITY DELAWARE, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                       <C>
                    DELAWARE                                    77-0467929
 (State or other jurisdiction of incorporation               (I.R.S. Employer
                or organization)                          Identification Number)

10355 N. DEANZA BOULEVARD CUPERTINO, CALIFORNIA                    95014
             (Address of principal                              (Zip Code)
               executive offices)
</TABLE>

                                 (408) 863-6600
              (Registrant's telephone number, including area code)


     Indicate by check mark whether the registrant (1) has filed all reports
required to be filled by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 30 days. Yes X No _

As of September 30, 2000, 84,025,480 shares of Registrants Common Stock, $0.001
par value, were issued and outstanding.

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

<PAGE>   2

                             TELOCITY DELAWARE, INC.
                                      INDEX

<TABLE>
<CAPTION>
                                                                             PAGE NO.
<S>       <C>                                                                   <C>
PART I.   FINANCIAL INFORMATION

Item 1.   Condensed Consolidated Financial Statements (Unaudited)
          Condensed Consolidated Balance Sheets as of September 30, 2000
          and December 31, 1999..................................................3
          Condensed Consolidated Statements of Operations for the Three
          and Nine Months Ended September 30, 2000 and 1999......................4
          Condensed Consolidated Statements of Cash Flows for the Nine
          Months Ended September 30, 2000 and 1999...............................5
          Notes to Condensed Consolidated Financial Statements...................6

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

Item 3.   Qualitative and quantitative disclosures about market risk............16

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings.....................................................21

Item 2.   Changes in Securities.................................................21

Item 6.   Exhibits and Reports on Form 8-K......................................21


          SIGNATURES............................................................21
          INDEX TO EXHIBITS.....................................................22
</TABLE>



                                       2
<PAGE>   3

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                             TELOCITY DELAWARE, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS
             (AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                       SEPTEMBER 30,    DECEMBER 31,
                                                                           2000             1999
                                                                        (UNAUDITED)       (NOTE 2)
                                                                       -------------    ------------
<S>                                                                      <C>             <C>
ASSETS
Current assets:
     Cash and cash equivalents .......................................   $  75,694       $  66,978
     Accounts receivable, net ........................................         240              13
     Prepaid expenses and other current assets .......................       5,628           7,013
                                                                         ---------       ---------
           Total current assets ......................................      81,562          74,004
Property and equipment, net ..........................................      39,717          22,272
Intangibles, net .....................................................         303             380
Other assets .........................................................      46,752          43,415
                                                                         ---------       ---------
           Total assets ..............................................   $ 168,334       $ 140,071
                                                                         =========       =========

LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
     Accounts payable ................................................   $   8,649       $   9,141
     Accrued liabilities and other current liabilities ...............      24,389           4,383
     Deferred revenue ................................................         626              33
     Notes payable, current ..........................................          --           2,292
     Capital lease obligations, current ..............................       5,584           4,426
                                                                         ---------       ---------
           Total current liabilities .................................      39,248          20,275
Notes payable, net of current portion ................................          --           3,135
Capital lease obligations, net of current portion ....................       8,048           8,859
Other liabilities ....................................................         214              64
                                                                         ---------       ---------
          Total liabilities ..........................................      47,510          32,333
                                                                         ---------       ---------
Mandatorily redeemable convertible preferred stock ...................          --         156,020
                                                                         ---------       ---------

Stockholders' equity (deficit):
     Common Stock: $0.001 par value, 250,000,000 shares
     authorized; issued and outstanding: 84,025,480 in 2000
     and 20,282,270 in 1999 ..........................................          81              17
     Additional paid-in capital ......................................     333,789          39,478
     Receivable from stockholders ....................................     (17,390)         (5,457)
     Unearned stock-based compensation ...............................     (12,283)        (13,883)
     Accumulated deficit .............................................    (183,373)        (68,437)
                                                                         ---------       ---------
           Total stockholders' equity (deficit) ......................     120,824         (48,282)
                                                                         ---------       ---------
           Total liabilities, mandatorily redeemable convertible
           preferred stock and stockholders' equity (deficit).........   $ 168,334       $ 140,071
                                                                         =========       =========
</TABLE>

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



                                       3
<PAGE>   4

                             TELOCITY DELAWARE, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
             (AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED                 NINE MONTHS ENDED
                                                                  SEPTEMBER 30,                      SEPTEMBER 30,
                                                             2000             1999             2000              1999
                                                         -----------       ----------       -----------       ----------
<S>                                                        <C>             <C>              <C>                <C>
Consolidated Statement of Operations:
Revenues ..............................................  $     2,851       $       57       $     4,692       $       57
                                                         -----------       ----------       -----------       ----------
     Operating Expenses:
     Network and product costs ........................        8,228              200            19,026              200
     Sales and marketing ..............................        5,657            1,677            34,770            2,911
     General and administrative .......................       12,700            1,351            31,354            2,975
     Research and development .........................        4,873            4,189            14,090           10,073
     Amortization of stock-based compensation (*) .....        6,607              684            12,092            1,015
     Depreciation and amortization ....................        4,811              544            10,115            1,257
                                                         -----------       ----------       -----------       ----------
           Total operating expenses ...................       42,876            8,645           121,447           18,431
                                                         -----------       ----------       -----------       ----------
Loss from operations ..................................      (40,025)          (8,588)         (116,755)         (18,374)
Interest income/(expense), net ........................        1,379             (329)            2,160             (525)
Other income/(expense), net ...........................           --              137              --                (79)
                                                         -----------       ----------       -----------       ----------

Net loss ..............................................      (38,646)          (8,780)         (114,595)         (18,978)
Accretion on mandatorily redeemable convertible
     preferred stock ..................................           --               --               341               --
                                                         -----------       ----------       -----------       ----------
Net loss attributable to common stockholders             $   (38,646)      $   (8,780)      $  (114,936)      $  (18,978)
                                                         ===========       ==========       ===========       ==========

Net loss per share, basic and diluted .................  $     (0.51)      $    (1.00)      $     (2.11)      $    (2.36)
Shares used in computing net loss per share,
     basic and diluted ................................   75,529,306        8,755,519        54,445,121        8,052,979


(*) Amortization of stock based compensation
             Network and product costs ................  $        49       $       --       $       316       $       --
             Sales and marketing ......................        5,178              142             6,352              195
             General and administrative ...............        1,019              408             4,319              560
             Research and Development .................          361              134             1,105              260
                                                         -----------       ----------       -----------       ----------
   Total ..............................................  $     6,607       $      684       $    12,092       $    1,015
                                                         ===========       ==========       ===========       ==========
</TABLE>

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




                                       4
<PAGE>   5

                             TELOCITY DELAWARE, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
             (AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                     NINE MONTHS ENDED
                                                                        SEPTEMBER 30,
                                                                 -------------------------
                                                                    2000            1999
                                                                 ---------       ---------
<S>                                                              <C>             <C>
     Net cash used in operating activities ...................   $ (74,937)      $ (15,882)
                                                                 ---------       ---------

Cash flow from investing activities:
   Proceeds from the sale of assets ..........................          21             288
   Acquisition of intangibles ................................          --             (15)
   Purchase of property and equipment ........................     (23,916)         (2,985)
                                                                 ---------       ---------
    Net cash used in investing activities ....................     (23,895)         (2,712)
                                                                 ---------       ---------

Cash flows from financing activities:
    Proceeds from issuance of mandatorily redeemable
    convertible preferred stock, net of issuance costs .......          --          14,477
    Proceeds from issuance of common stock, net ..............     120,438              20
    Proceeds from issuance of warrants for common stock ......         624              --
    Proceeds from issuance of warrants for preferred stock....          --             650
    Proceeds from issuance of notes payable ..................          --           2,850
    Repayments of notes payable ..............................      (5,976)           (323)
    Principal payments on capital lease obligations ..........      (3,392)           (303)
    Restriction of cash related to letters of credit .........      (4,146)             --
                                                                 ---------       ---------
       Net cash provided by financing activities .............     107,548          17,371
                                                                 ---------       ---------
Net increase in cash and cash equivalents ....................       8,716          (1,223)
Cash and cash equivalents, beginning of period ...............      66,978           1,402
                                                                 ---------       ---------
Cash and cash equivalents, end of period .....................   $  75,694       $     179
                                                                 =========       =========
</TABLE>

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




                                       5
<PAGE>   6

                             TELOCITY DELAWARE, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.   DESCRIPTION OF BUSINESS

     Telocity Delaware, 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.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of presentation

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amount reported in the financial statements. Actual
results may differ from those estimates. The consolidated financial statements
of the Company include the accounts of all its wholly owned subsidiaries.

     The consolidated financial statements at September 30, 2000 and for the
three and nine month periods ended September 30, 2000 are unaudited, but include
all adjustments (consisting only of recurring adjustments) which, in the opinion
of management, are necessary for a fair presentation of financial position and
operating results. Operating results for the three and nine-month periods ended
September 30, 2000 and 1999 are not necessarily indicative of results that may
be expected for any future periods.

     The Company has been successful in completing several rounds of financing
with its last round arising from its initial public offering in March 2000 that
raised approximately $122.8 million. However, the Company has incurred
substantial losses and negative cash flows from operations in every fiscal
period since inception. For the year ended December 31, 1999, the Company
incurred a loss from operations of approximately $42.1 million and negative cash
flows from operations of $29.5 million. For the nine months ended September 30,
2000, the Company incurred a loss from operations of approximately $116.8
million and negative cash flows from operations of $74.9 million. As of December
31, 1999, and September 30, 2000, the Company had accumulated deficits of
approximately $68.4 million and $183.4 million, respectively. Management expects
operating losses and negative cash flows to continue for the foreseeable future
and anticipates that losses will increase significantly from current levels
because of additional costs and expenses related to subscriber acquisition.
Failure to raise additional capital or reduce certain discretionary spending
would have a material adverse effect on the Company's ability to continue as a
going concern and to achieve its intended business objectives.

     The consolidated balance sheet at December 31, 1999 has been derived from
the audited consolidated financial statements at that date, but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.

     The information included in this report should be read in conjunction with
the Company's audited consolidated financial statements and notes thereto
included on Form S-1 declared effective on March 29, 2000 by the Securities
Exchange Commission ("SEC").

     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




                                       6
<PAGE>   7

equivalents. At September 30, 2000, the Company had restricted cash of
approximately $4.1 million related to letter of credit facilities with a bank,
which had terms in excess of one year. This amount has been included in other
assets.

     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 nine-months ended September 30, 2000 and 1999,
software development costs of approximately $2.4 million and zero, respectively,
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
September 30, 2000 and December 31, 1999 is $34.1 million and $38.8 million,
respectively, related to advertising to be received in the future, primarily
from our strategic investors, National Broadcasting Company, Inc. and NBC
Internet, Inc. Advertising expense for the nine-months ended September 30, 2000
and 1999 was $22.2 million and $611,000, respectively.

3.   NET LOSS PER SHARE

     Basic and diluted net loss per share have been computed using the
weighted-average number of shares of common stock outstanding during the period,
less shares subject to repurchase. Diluted net loss per share includes common
equivalent shares outstanding during the period, if dilutive.

     The following table represents the calculation of basic and diluted net
loss per share (in thousands, except share and per share amounts):

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED                      NINE MONTHS ENDED
                                                              SEPTEMBER 30,                          SEPTEMBER 30,
                                                         2000               1999               2000               1999
                                                     ------------       ------------       ------------       ------------
<S>                                                  <C>                <C>                <C>                <C>
Numerator:
  Net loss .......................................   $    (38,646)      $     (8,780)      $   (114,595)      $    (18,978)
  Accretion on mandatorily redeemable preferred
       stock .....................................             --                 --                341                 --
                                                     ------------       ------------       ------------       ------------
  Net loss attributable to common stockholders....   $    (38,646)      $     (8,780)      $   (114,936)      $    (18,978)
                                                     ============       ============       ============       ============

Denominator:
  Weighted-average common shares - basic
       and diluted ...............................     84,409,696         17,334,671         64,707,423         14,895,322
  Weighted-average shares subject to repurchase...     (8,880,390)        (8,579,152)       (10,262,302)        (6,842,343)
                                                     ------------       ------------       ------------       ------------
Denominator for basic and diluted calculation ....     75,529,306          8,755,519         54,445,121          8,052,979
                                                     ============       ============       ============       ============
Basic and diluted net loss per share .............   $      (0.51)      $      (1.00)      $      (2.11)      $      (2.36)
                                                     ============       ============       ============       ============
</TABLE>

     Options to purchase 4,110,751 and 2,305,144 shares of Common Stock at an
average exercise price of $4.87 and $1.12 per share, respectively, and warrants
to purchase 4,388,270 and 1,519,197 shares of Common or Convertible Preferred
Stock at an average exercise price of $6.32 and $0.83 per share, respectively,
and zero and



                                       7
<PAGE>   8

26,331,818 of convertible preferred stock outstanding, have not been included in
the computation of diluted net loss per share for the nine month periods ended
September 30, 2000 and 1999, respectively, as their effect would have been
anti-dilutive.

4.   STOCK PLANS

     In January and February 2000, the Company granted options to purchase
981,580 and 398,360 shares of Common Stock at an exercise price of $9.00 and
$12.00 per share and subsequently recorded deferred stock compensation expense
of approximately $4.0 million and $1.2 million, respectively, related to the
issuance of these options. Since February 2000, no additional deferred stock
compensation expense has been recorded related to the granting of stock options
to employees.

     In January 2000, the Board of Directors approved the adoption of the 2000
Stock Incentive Plan ("2000 Plan") and reserved 24,000,000 common shares for
issuance under this Plan. Shares not yet issued under the 1998 Stock Plan will
also be available under the 2000 Plan. The 2000 Plan allows the grant of ISO,
NSO and restricted stock to employees, non-employee board members and
consultants.

     In January 2000, the Board of Directors approved the adoption of the 2000
Employee Stock Purchase Plan and reserved 2,500,000 shares of Common Stock for
issuance under this Plan.

     In January 2000, The Board of Directors approved the adoption of the 2000
outside Directors' Stock Plan and reserved 400,000 shares of Common Stock for
issuance under this Plan.

5.   INITIAL PUBLIC OFFERING

     On March 29, 2000, the Company completed its initial public offering in
which it sold 11 million shares of Common Stock at $12.00 per share. The net
proceeds of approximately $122.8 million were remitted to the Company on April
3, 2000.

     Upon the closing of the offering, all the Company's Preferred Stock
converted to Common Stock. After the offering, the Company's authorized capital
consisted of 250,000,000 shares of Common Stock, of which 84,025,480 shares were
outstanding at September 30, 2000, and 10,000,000 shares of preferred stock,
none of which was issued or outstanding at September 30, 2000.

6.   COMPREHENSIVE INCOME

     To date, the Company has not had any transactions that are required to be
reported in comprehensive income.

7.   NEW ACCOUNTING PRONOUNCEMENT

     In June 1998, Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). The new standard requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Under FAS 133, gains or losses resulting from changes in the values
of derivatives are to be reported in the statement of operations or as a
deferred item, depending on the use of the derivatives and whether they qualify
for hedge accounting. The key criterion for hedge accounting is that the
derivative must be highly effective in achieving offsetting changes in fair
value or cash flows of the hedged items during the term of the hedge. The
Company is required to adopt FAS 133 in the first quarter of 2001. To date, the
Company has not engaged in any foreign currency or interest hedging activities
and does not expect adoption of this new standard to have a significant impact
on the Company.




                                       8
<PAGE>   9

     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. The
implementation of SAB 101 did not have a material effect on our financial
position or results of operations.

     In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" an interpretation of APB Opinion No. 25 ("FIN 44"). This
Interpretation clarifies the definition of employee for purposes of applying
Accounting Practice Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), the criteria for determining whether a plan qualifies as a
non-compensatory plan, the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
Interpretation was effective July 1, 2000 and did not have a material impact on
the financial statements.

8.   RELATED PARTY TRANSACTIONS:

     A former executive of the Company was also a member of the Board of
Directors and a shareholder of a supplier of outsourced sales support services
to the Company. This commercial relationship commenced in March 2000. During the
executive's period of service expenses of $507,000 were attributable to this
supplier.

9.   COMMITMENTS

     GE 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's 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 the 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; on the basis of the current level of demand, the Company has not recorded
the fair value of any of these warrants.

     Citi f/I Sales Agreement

     In April 2000, the Company entered into a 27-month affinity agreement with
Citi f/i, the online virtual bank from Citibank and Citicorp Investment
Services. Under the agreement, Citi f/i will promote the use of the Company's
residential services among its on-line banking customers. The Company has issued
warrants for the contingent purchase of up to 1,250,000 shares of our common
stock at an exercise price of $12.00, per share, based upon the achievement of
certain customer-based milestones during the term of the agreement. In July
2000, Citi f/I was disbanded and rolled up into Citibank's online banking
initiative. The Company is involved in ongoing discussions with Citibank to
explore the future commercial application of this agreement.



                                       9
<PAGE>   10

     Citibank must meet these milestones within 27 months and the warrants must
be exercised within 6 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; on the basis of the current level of demand, the Company has not recorded
the fair value of any of these warrants.

     Early extinguishment of debt

     In May 2000, the Company prepaid notes payable to Comdisco, Inc. and
MMC/GATX Partnership #1 with an outstanding principal value of approximately
$6.0 million. These notes were collateralized by all tangible assets owned by
the company, bore interest at a weighted average rate of 11.1% and were
repayable in installments through January 2002. The loss arising from the early
extinguishment of this debt was $564,000.

     Lease

     In June 2000, the Company entered into a ten-year facility lease for 51,667
square feet in Chicago, Illinois. The lease term commences on December 1, 2000
and the following is a schedule, by year ending December 31, of future minimum
rental payments (in thousands):

<TABLE>
<S>                              <C>
     2000                            $70
     2001                           $877
     2002                          1,354
     2003                          1,370
     2004                          1,410
     Later years                   9,171
                                 -------
                                 $14,252
                                 =======
</TABLE>

     Future lease payments are collateralized, in part, by a $2.1 million
irrevocable letter of credit issued by Wells Fargo Bank.



                                       10
<PAGE>   11

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

     The discussion in this report on Form 10-Q contains forward-looking
statements that involve risks and uncertainties. The statements contained in
this Report that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding our expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in this document
are based on information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements. Our actual results
could differ materially from those described in our forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, our ability to raise additional capital in the future; our unproven
business model and a limited operating history in a new and rapidly evolving
industry; our ability to implement our business plan; and our ability to manage
our growth, retain and grow our customer base and expand our service offerings.

     Additional risk factors are discussed under the heading "Risk Factors" both
below and in our Registration Statement on Form S-1 declared effective on March
29, 2000 by the Securities and Exchange Commission (File No. 333-94271).

OVERVIEW

     We develop, market, integrate and deliver to the residential market
interactive online services and content designed for use over high-speed, or
broadband, connections. These broadband connections allow our customers to enjoy
services and content that they could not access with traditional slower speed
internet connections. We deliver our services using our intelligent "plug and
play" gateway device which simplifies internet access; and both enables us to
monitor and configure basic services and remotely extend revenue generating
value added service offerings to our subscriber base.

     Through our set of agreements, NBC Internet, Inc., or NBCi, currently
provides all of the content offered on our jointly developed website, the
Telocity/NBCi portal, which is the first Web page a customer views when
accessing our services. Additionally, under these agreements NBCi and we have
each agreed to develop new services and content to be offered and sold over this
website and to share the revenue associated with those sales. We also intend to
develop or acquire additional content if it is not available through NBCi from
other third parties. To date we have not earned any revenue from our agreements
with NBCi and, further, we do not anticipate earning meaningful revenue until we
have scaled our subscriber base beyond the tens of thousand level.

     Although we currently deliver our services to customers using digital
subscriber line, or DSL, technology, in the future we intend to utilize the
technology we have developed to deliver these services and content over a
variety of broadband technologies, including wireless, cable and satellite, from
a managed nationwide network to and throughout the home. Our goal is to become a
leading provider of broadband access services, content and home networking
services to the residential market.

     In July 1999, we began offering services commercially in Chicago. As of
September 30, 2000, our broadband footprint encompassed more than 140
metropolitan statistical areas with coverage in such major U.S. cities as
Atlanta, Boston, Chicago, Detroit, Los Angeles, Miami, New York, Philadelphia
and San Francisco. At September 30, 2000 we had approximately 30,700 customers
of which 23,500 were receiving our services and 7,200 pre-qualified customers
had placed orders for our services. Based on our limited historical experience
we estimate that approximately 75% of those placing orders will actually be
converted into customers receiving our services. The major causes of fall out
include customers being unable to receive DSL service due to "false positive"
loop qualification status, customers' in-house



                                       11
<PAGE>   12

wiring may not be of an adequate quality to support DSL service and
pre-installation customer churn. By the end of 2000, we expect that we will
offer services in over 150 of the nation's 349 metropolitan statistical areas
which we estimate will allow us to make our services available to at least 20%
of all U.S. households. Our maximum potential market is limited by the number of
homes that are DSL-capable, meaning homes that are within approximately 2 1/2
and 3 miles from a local telephone office that has equipment necessary to
support DSL service and have voice grade copper telephone lines that are in good
condition. We believe that currently greater than 1.4% of all U.S. households
receive DSL service and in excess of 30% of all U.S. households are DSL-capable,
with the percent of DSL-capable households growing to 50% in 2001 and 75% in
2002.

     In the future we plan to introduce value added services to our customer
base, which may include firewall and other internet safety features; multiple
computer support; unified messaging; and consumer created content and voice
services. While we expect to begin deploying the first of these services before
the end of calendar year 2000, we do not anticipate earning revenues from these
services until early 2001.

     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 and provisioning organizations;

     -    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. 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 infrastructure and network services. We expect to incur
substantial operating losses, net losses and negative EBITDA as we expand our
operations. At our current cash burn rate, we anticipate that without a
substantial capital infusion we have sufficient cash to carry us until March
2001.

     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.

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1999



                                       12
<PAGE>   13

     Revenues. During the three months ended September 30, 2000, we continued
the development of our business operations, with the expansion of our national
broadband footprint to over 140 metropolitan statistical areas from
approximately 125 metropolitan statistical areas as of June 2000. The initiation
of last mile coverage with SBC and Northpoint together with an expansion of our
geographical coverage with Rhythms contributed to the increase. Subscriber
revenues, net of certain deferred revenues, for the three and nine months ended
September 30, 2000, were $2.9 million and $4.7 million, respectively, compared
to $57,000 for the three and nine months ended September 30, 1999. As 1999's
revenues were limited to a trial launch of service in the Chicago area in July
of that year, the increase in revenues over the prior periods is consistent with
the growth of our subscriber base.

     Network and product costs. For the three and nine months ended September
30, 2000, we recorded network and product costs of $8.2 million and $19.0
million, respectively, compared to $200,000 for the three and nine months ended
September 30, 1999. As 1999's network and operation costs were limited to a
trial launch of service in the Chicago area in July of that year, the increase
in the expenses over the prior periods is consistent with the development of our
commercial operations. We expect network and product costs to increase
significantly in future periods as our subscriber base grows and we expand our
network into additional markets. We believe that these costs will exceed revenue
for the next twelve months.

     Sales and marketing expenses. Sales and marketing expenses increased from
$1.7 million for the three months ended September 30, 1999 to $5.7 million for
the three months ended September 30, 2000. For the nine months ended September
30, 1999 and 2000, sales and marketing expenses increased from $2.9 million to
$34.8 million, respectively. The overall increase in expenditure is consistent
with the development of our business. Following the commercial trial of our
service deployment platform in Chicago in July 1999, we have rapidly expanded
our geographical service areas with commercial launches in the Southeast and
Midwest in November 1999; the Northeast in March 2000; Northern and Southern
California in April 2000; the mountain states in July 2000; and Texas in August
2000. The table below sets out the primary areas of increased expenditure for
the three and the nine-month periods ended September 30, 2000 compared to the
respective, prior year, periods (in thousands):

<TABLE>
<CAPTION>
                                   THREE MONTHS ENDED   NINE MONTHS ENDED
                                            SEPTEMBER 30, 2000
<S>                                     <C>                  <C>
Incremental advertising and
promotional costs                       $1,433               $24,533

Incremental employee costs              $2,444                $7,425
</TABLE>

     We implemented a planned reduction in cash based advertising during the
slow consumer buying months of the summer resulting in an overall reduction in
marketing expenditures in the third quarter 2000, compared to the second quarter
2000. We do, however, expect sales and marketing expenses to increase in future
periods as we incur additional expenses to develop our marketing program and
increase brand awareness and add personnel. Sales and marketing expenses in the
third quarter 2000 is net of the utilization of $4.5 million of our NBC and NBCi
advertising credits which were used in September 2000 to launch a nationwide
television and radio advertising campaign, coincident with our nationwide
network deployment. We expect the value of stock-based compensation attributable
to advertising will increase in the coming quarters as we continue to utilize
our remaining $34.1 million of NBC and NBCi prepaid advertising through our
multimedia national marketing campaign.

     General and administrative expenses. General and administrative expenses
increased from $1.4 million for the three months ended September 30, 1999 to
$12.7 million for the three months ended September 30, 2000. For the nine months
ended September 30, 1999 and 2000, general and administrative expenses increased
from $3.0 million to $31.4 million, respectively. The increased level of
expenditures reflects the growth in the volume and complexity of our underlying
business as we have evolved from an enterprise primarily focused on research and
development to a commercial operating company following our commercial trial of
service in Chicago in July 1999 and the ongoing expansion of commercial
operations to over 140 metropolitan statistical areas by September 30, 2000. The
table below sets out the



                                       13
<PAGE>   14

primary areas of increased expenditure for the three and nine-month periods
ended September 30, 2000 compared to the respective, prior year, periods (in
thousands):

<TABLE>
<CAPTION>
                                        THREE MONTHS ENDED   NINE MONTHS ENDED
                                                  SEPTEMBER 30, 2000
<S>                                           <C>                 <C>
Incremental customer delivery and
  support expenditure                         $5,542              $12,383
Incremental executive and general
  corporate expenditure                       $3,996              $10,596
Incremental facilities expenditure            $  893              $ 3,712
</TABLE>

     We expect general and administrative expenses to increase as we add
personnel and incur additional expenses related to the planned growth of our
business and our operation as a public company.

     Research and development expenses. Research and development expenses
increased from $4.2 million for the three months ended September 30, 1999 to
$4.9 million for the three months ended September 30, 2000. For the nine months
ended September 30, 1999 and 2000, research and development expenses increased
from $10.1 million to $14.1 million, respectively. These increases are primarily
due to incremental charges, over the comparative periods of the prior year, of
$546,000 and $2.8 million for the three and nine months ended September 30,
2000, respectively, for the hiring of additional engineers and consultants
involved in increased research and development activities associated with our
service development platform and associated services. In future periods, we
expect to continue to make investments in research and development at current
rates.

     Stock-based compensation. Stock-based compensation increased from $684,000
for the three months ended September 30, 1999, to $6.6 million for the three
months ended September 30, 2000, and from $1.0 million for the nine months ended
September 30, 1999 to $12.1 million for the nine months ended September 30,
2000. The increase in stock-based compensation expense is primarily attributable
to the utilization of $4.5 million of prepaid advertising received from NBC and
NBCi as part of our Series C round of financing and an increased level of
employee stock-based compensation that arose from the issuance of option grants
prior to our initial public offering at exercise prices less than fair market
value.

     Depreciation and amortization expenses. Depreciation and amortization
expenses increased from $544,000 for the three months ended September 30, 1999
to $4.8 million for the three months ended September 30, 2000, and from $1.3
million for the nine months ended September 30, 1999 to $10.1 million for the
nine months ended September 30, 2000. This increase was primarily due to
additional capital expenditures arising both from the build out of our managed
network and the increase in our subscriber base.

     Interest income/(expense). Net interest income for the three months ended
September 30, 2000 was $1.4 million compared to a net expense of $329,000 for
the three months ended September 30, 1999. For the nine months ended September
30, 2000 net interest income was $2.2 million compared to a net expense of
$525,000 for the nine months ended September 30, 1999. Interest income for the
nine months ended September 30, 2000, is net of a prepayment penalty of $564,000
arising from the early extinguishment of debt. The increase in net interest
income, after adjusting for the early repayment penalty, is consistent with
movements in our cash, debt and shareholder receivable balances.

LIQUIDITY AND CAPITAL RESOURCES

     From inception through September 30, 2000, we financed our operations
primarily through the proceeds of our initial public offering, net of
underwriting commissions, of $122.8 million; private placements of equity of
approximately $149 million in cash and promotional services; the use of
operating equipment leases totaling $18.3 million; and borrowings under notes
payable of $11.9 million. As of September 30, 2000, we had an accumulated
deficit of $183.4 million, cash and cash equivalents of $75.7 million and
restricted cash of $4.1 million.

     During the nine months ended September 30, 2000, the net cash used in our
operating activities was $74.9 million. This cash was used for a variety of



                                       14
<PAGE>   15

operating purposes, including salaries; consulting and legal expenses; network
operations; marketing; customer care; and overhead expense. Net cash used for
operating activities is inclusive of a $227,000 increase in accounts receivable.
This increase is primarily attributable to our increase in revenues and a
limited market trial whereby subscribers were able to pay for services by check
as opposed to credit card. Due to the resource requirements and the costs needed
to administer a check payment option, we are in the process of converting these
trial subscribers from check to credit card payment over the next few months.

     Our net cash used for investing activities for the nine months ended
September 30, 2000, was $23.9 million and was used for purchases of property and
equipment.

     Net cash provided by financing activities for the nine months ended
September 30, 2000 was $107.5 million and came from initial public offering
proceeds, net of underwriting commissions, legal, accounting and sundry other
expenses, of $120.4 million and $624,000 from the exercise of warrants,
partially offset by $6.0 million in the prepayment and repayment of notes, $3.4
million of principal payments under capital lease obligations and $4.1 million
of restricted cash related to letters of credit. Notes were prepaid in May 2000
in order to remove restrictive liens over the Company's assets.

     Upon the closing of our initial public offering on March 29, 2000,
mandatorily redeemable preferred stock with a liquidation value of approximately
$148.6 million was converted to common stock.

     While we believe that our existing cash balances will be sufficient to fund
our operating losses, capital expenditures, lease payments and working capital
requirements through at least March 2001, we may make appropriate mid-course
actions to stretch our cash position beyond this point. We expect our operating
losses and capital expenditures to increase substantially as our customer base
ramps, and we expect to record substantial losses for the foreseeable future. As
a result, additional financing will be required for us to maintain operations.
We are attempting to finance our future capital needs through some combination
of leasing, vendor financing and the sale of additional equity or debt
securities. However, there has been a significant contraction in the
availability of debt and equity financing in the telecommunication sector in
which we operate. This situation is compounded by the early stage of our
commercial operations. There can be no assurance that additional capital will be
available on terms acceptable to us, or at all. Failure to raise sufficient
additional capital would have a material adverse effect on our ability to
operate as a going concern or to achieve our business objectives.

     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.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). The new standard requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Under FAS 133, gains or losses resulting from changes in the values of
derivatives are to be reported in the statement of operations or as a deferred
item, depending



                                       15
<PAGE>   16

on the use of the derivatives and whether they qualify for hedge accounting. The
key criterion for hedge accounting is that the derivative must be highly
effective in achieving offsetting changes in fair value or cash flows of the
hedged items during the term of the hedge. The Company is required to adopt FAS
133 in the first quarter of 2001. To date, the Company has not engaged in any
foreign currency or interest hedging activities and does not expect adoption of
this new standard to have a significant impact on the Company.

     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. The
implementation of SAB 101 did not have a material effect on our financial
position or results of operations.

     In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" an interpretation of APB Opinion No. 25 ("FIN 44"). This
Interpretation clarifies the definition of employee for purposes of applying
Accounting Practice Board Opinion No. 25, Accounting for Stock Issued to
Employees (`APB 25'), the criteria for determining whether a plan qualifies as a
non-compensatory plan, the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
Interpretation was effective July 1, 2000, and did not have a material effect on
the financial position or results of operations of the Company.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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
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 September 30,
2000, all of our cash and cash equivalents were in money market and checking
funds.

OTHER RISK FACTORS

FAILURE TO RAISE ADDITIONAL CAPITAL WILL HAVE A MATERIAL ADVERSE EFFECT ON OUR
ABILITY TO OPERATE AS A GOING CONCERN

     We are seeking substantial additional financing to fundthe continuation and
growth of our operations, including funding the significant capital expenditures
and working capital requirements necessary for us to capitalize on our
nationwide rollout of service. We believe we have sufficient capital to fund our
operations through March 2001. We are attempting to finance our future capital
needs through some combination of leasing, vendor financing and the sale of
additional equity or debt securities. However, there has been a significant
contraction in the availability of debt and equity financing in the
telecommunication sector in which we operate. This situation is compounded by
the early stage of our commercial operations. There can be no assurance that
additional capital will be available on terms acceptable to us, or at all.
Failure to raise sufficient additional capital



                                       16
<PAGE>   17

would have a material adverse effect on our ability to operate as a going
concern or to achieve our business objectives.

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, INCREASE EXPENSES, OR ADVERSELY IMPACT OUR
MARGINS.

     Because in some instance 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. In view of the comparative size of the traditional telephone
companies, we may also be vulnerable to predatory pricing which could force us
to either forgo orders because we operate at a comparative price disadvantage,
or reduce our prices, thereby adversely impacting our margins and our long-term
profitability.

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.

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

     We are currently developing a range of value added services which include
firewall and other internet safety features; multiple computer support; unified
messaging; and consumer related content and voice services. Broadband services
are a new and emerging business, and we cannot guarantee that these 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, build our business or improve our margins as anticipated.



                                       17
<PAGE>   18

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 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.

OUR ABILITY TO REDUCE THE COST OF RESIDENTIAL GATEWAY IS DEPENDENT UPON
ACHIEVING A SUFFICIENT VOLUME OF PRODUCTION. IF WE FAIL TO ACHIEVE THE REQUIRED
LEVEL OF PRODUCTION THEN WE MAY BE UNABLE TO REALIZE THE COST REDUCITONS THAT WE
ARE ANTICIPATING, THEREBY REDUCING OUR FUTURE PROFITABILITY.

     Anticipated reductions in the cost of our residential gateway are largely
dependent upon our ability to continue to grow our subscriber base at current
rates. If we are unable to grow our subscriber base at current rates then we
will be unable to secure the forecast cost reductions in our gateway, thereby
adversely impacting our future anticipated operating results.

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, the failure to attract and retain additional

key employees, or the ability to maintain the morale and enthusiasm of our
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, morale and enthusiasm of our executive officers and other key
engineering, sales, operations, marketing and support personnel.

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 STOCK PRICE COULD ALSO BE ADVERSLY
AFFECTED BY THE LAPSE OF SELLING RESTRICTIONS ON STOCK HELD BY OUR PRE-INITIAL
PUBLIC OFFERING INVESTORS

     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. A significant proportion of our stock
is subject to selling restrictions that do not lapse until December 2000. If the
investors who are subject to these restrictions were to dispose of their
restricted stock in the public market then the additional supply of stock after
this time could cause our stock price to decline.

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, for a number of reasons including the
reliability and inter-operability of our network equipment, would significantly
reduce customer demand for our services, resulting in decreased revenues and the
inability to build our business as planned.



                                       18
<PAGE>   19

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.

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 operational support system, our
managed network of leased communication lines 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.

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.



                                       19
<PAGE>   20

     Additional risk factors are discussed under the heading "Risk Factors" in
our Registration Statement on Form S-1 declared effective on March 29, 2000 by
the Securities and Exchange Commission (File No. 333-94271).



                                       20
<PAGE>   21

PART II. OTHER INFORMATION

Item 1.  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 filing, we are
not party to any litigation that we believe could adversely affect our business
relationship and our financial results.

Item 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

     In March 2000, we commenced and completed a firm commitment underwritten
initial public offering of 11,000,000 shares of our common stock, at a price of
$12.00 per share. The shares were registered with the Securities and Exchange
Commission pursuant to a registration on Form S-1 (File No. 333-94271), which
was declared effective on March 29, 2000. The public offering was underwritten
by a syndicate of underwriters led by Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Credit Suisse First Boston Corporation, Donaldson, Lufkin &
Jenrette Securities Corporation and Wit Sound View Corporation, as their
representatives. After deducting underwriting discounts and commissions of $9.2
million, we received net proceeds of $122.8 million on April 3, 2000.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     a.   Exhibits:

<TABLE>
<CAPTION>
Exhibit Number      Description of Exhibit
--------------      ----------------------
<S>                 <C>
    27.1            Financial Data Schedule for the nine months ended
                    September 30, 2000.
</TABLE>
------------

     b.   Reports on Form 8-K

     There have been no reports on Form 8-K filed during the quarter ended
September 30, 2000.


                                   SIGNATURES

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

                                       TELOCITY DELAWARE, INC.


Date: November 3, 2000                 BY: /s/ Edward Hayes
                                           -------------------------------------
                                           Edward Hayes
                                           Executive Vice President and
                                           Chief Financial Officer


                                           /s/ David Wilson
                                           -------------------------------------
                                           David Wilson
                                           Vice President, Financial Services
                                           and Chief Accounting Officer




                                       21
<PAGE>   22

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit Number      Description of Exhibit
--------------      ----------------------
<S>                 <C>
    27.1            Financial Data Schedule for the nine months ended
                    September 30, 2000.
</TABLE>



                                       22