<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-Q


(Mark One)
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934
           For the quarterly period ended March 31, 2001 OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934
           For the transition period from______to ______

                         Commission file number 0-31263

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


          Delaware                                          94-3360232
----------------------------------                 ----------------------------
(State or other jurisdiction of                          (I.R.S. Employer
incorporation or organization)                          Identification No.)

      2175 N. California Blvd,
             Suite 150
          Walnut Creek, CA                                     94596
----------------------------------                 ----------------------------
    (Address of principal office)                            (Zip Code)

                                (925) 952-5600
-------------------------------------------------------------------------------
             (Registrant's telephone number, including area code)

                                      N/A
-------------------------------------------------------------------------------
  (Former name, former address and former fiscal year, if changed since last
                                    report)

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

Yes   X                                   No
---------                                 -------
Number of shares of common stock
outstanding as of May 7, 2001             12,727,154
<PAGE>

PRELIMINARY STATEMENT

     VelocityHSI, Inc. ("we", "VelocityHSI" or the "Company"), a provider of
high-speed Internet access service to the multifamily industry, became a
publicly traded company when it was spun-off from BRE Properties, Inc., a real
estate investment trust ("BRE"), on August 7, 2000.  We commenced operations in
March 1999 with limited revenue generating activities conducted mainly on a
part-time basis by several employees of BRE.  On January 1, 2000, BRE formed a
division with separate reporting and accounting from BRE's other activities.  We
were formed as a Delaware corporation in April 2000.  On August 7, 2000, BRE
entered into an agreement with VelocityHSI to provide up to $10 million in funds
through September 30, 2001 to finance our operating expenses and the costs of
installing equipment at properties not owned by BRE.  BRE also agreed to provide
us with funds through September 30, 2001, without limitation on amount, to
finance the installation of our equipment at properties owned by BRE.  We refer
to this credit commitment by BRE as the "BRE Line".

     In December 2000, in response to adverse changes in the capital and credit
markets and our inability to obtain additional financing, we adopted a modified
business plan and as part of the plan, we laid off approximately 50% of our
workforce and announced the deferral of our efforts to expand service to other
apartment properties until such time as we were able to obtain additional
financing.  In April 2001, we announced the elimination of an additional eight
positions; we subsequently eliminated another three positions in order to
further conserve capital.

     As of April 30, 2001, BRE had extended $8,361,112, excluding accrued
interest of $308,240, under the BRE Line. BRE has included, as a reserve or a
deduction against available funds under the BRE Line,  contracts entered into by
BRE on behalf of VelocityHSI which primarily consist of leases for equipment and
office space and T-1 service agreements.  As a result of these reserves, the
remaining amount available to us under the BRE Line as of April 30, 2001 was
$478,863.  BRE has indicated that it does not intend to increase its level of
committed funding beyond its original commitment.  As of April 30, 2001, we have
no external debt facility or source of funds other than the BRE Line and cash on
hand of $2,748,983, including the proceeds from the issuance of  preferred stock
(discussed below). An analysis of the amount available under the BRE Line
follows (excludes accrued interest of $308,240 which accrues separately from the
BRE Line):

                                                            As of April 30,
                                                                  2001
                                                                  ----
        Basic amount                                          $10,000,000
        Additional amount available for cost of
          installations at BRE owned communities                1,239,975
        Reserve for BRE commitments                            (2,400,000)
        Advances to April 30, 2001                             (8,361,112)
                                                              -----------
        Net available for future borrowing under the BRE
          Line as of April 30, 2001                           $   478,863
                                                              ===========

     We have previously stated that in light of the available amount under the
BRE Line and our current lack of other funding sources, our cash will likely
become insufficient to permit continued operations beyond the second quarter of
2001, although there can be no assurance in this regard.  In order to continue
operations beyond that period, we will require an additional substantial capital
infusion.  On April 23, 2001, we completed a private placement of Series A
Convertible Preferred Stock to Banc of America Mortgage Capital Corporation
("BAMCC") resulting in gross proceeds to the Company of $2,500,000.  The private
placement resolves all issues between BAMCC and the Company with respect to
earlier financing arrangements between them that were not consummated.
Although this funding will assist us to continue operating while seeking
strategic alternatives, we do not expect this funding to allow continued
operations beyond the second quarter of 2001.

                                       2
<PAGE>

     We are actively exploring strategic alternatives, which might include a
merger, asset sale, or another comparable transaction or a financial
restructuring.  However, in the event we are unsuccessful in completing one of
these strategic alternatives, we will likely be required to cease operations
during the second quarter of 2001.  In that case, our common stock is expected
to have no value.  In addition, potential investors in our securities should
consider the risk that, even if we are successful in completing a strategic
transaction as described above, our common stock may nonetheless have no value.
Further, even if we are able to complete a financing through the issuance of
equity, equity-linked or debt securities, those securities may have rights,
preferences or privileges senior to those of the rights of our common stock and
our stockholders will likely experience significant dilution.

     The accompanying financial statements have been prepared assuming that
VelocityHSI will continue as a going concern.  However, the  Report of
Independent Auditors included in our Report on Form 10-K for the year ended
December 31, 2000 states that we have experienced recurring losses from
operations and have a working capital deficiency which have adversely affected
our liquidity and that these conditions raise substantial doubt about our
ability to continue as a going concern.  The accompanying financial statements
do not include any adjustments to reflect the possible future effect on the
recoverability and classification of assets or the amount and classification of
liabilities that may result from the outcome of this uncertainty.

     Any person considering an investment in our securities is urged to consider
both the risk that we may cease operations during the second quarter of 2001,
and the risk that our securities will be worthless even assuming completion of a
strategic transaction.  All of the statements set forth in this report are
qualified by reference to those facts.  Please see "Item 2 --  Management's
Discussion and Analysis of Financial Condition and Results of Operations".

                                       3
<PAGE>

                               VELOCITYHSI, INC.

                               INDEX TO FORM 10-Q

                                 March 31, 2001
                                 --------------

<TABLE>
<CAPTION>
                                                                                              Page No.
                                                                                              --------
<S>                                                                                           <C>
Part I         FINANCIAL INFORMATION

               ITEM 1:

               Balance Sheets - March 31, 2001 (unaudited) and December 31, 2000                 5


               Statements of Operations - three months ended March 31, 2001
               and 2000 (unaudited)                                                              6

               Statements of Cash Flows - three months ended March 31, 2001
               and 2000 (unaudited)                                                              7

               Notes to Financial Statements                                                     8

               ITEM 2:
               Management's Discussion and Analysis of Financial Condition and
               Results of Operations                                                            11

               ITEM 3:
               Quantitative and Qualitative Disclosures about Market Risk                       15

PART II        OTHER INFORMATION

               ITEM 1:
               Legal Proceedings                                                                16

               ITEM 2:
               Changes in Securities and Use of Proceeds                                        16

               ITEM 3:
               Defaults Upon Senior Securities                                                  16

               ITEM 4:
               Submission of Matters to a Vote of Security Holders                              16

               ITEM 5:
               Other Information                                                                16

               ITEM 6:
               Exhibits and Reports on Form 8-K                                                 16
</TABLE>

                                       4
<PAGE>

PART I   FINANCIAL INFORMATION
ITEM 1 - Financial Statements
-------------------------------------------------------------------------------
                               VELOCITYHSI, INC.

                                 BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                      March 31,
                                                                                        2001               December 31,
                                                                                     (Unaudited)               2000
                                                                                    ------------           ------------
  <S>                                                                               <C>                    <C>
  ASSETS

  Current assets:
  Cash                                                                              $    321,394           $    556,410
  Inventory of equipment                                                                 177,801                417,680
  Other current assets                                                                   565,293                935,417
                                                                                    ------------           ------------
  Total current assets                                                                 1,064,488              1,909,507
                                                                                    ------------           ------------

  On-site equipment                                                                      795,919              1,430,262
  Office equipment                                                                     1,005,580              1,022,884
  Software                                                                                92,726                 95,164
                                                                                    ------------           ------------
                                                                                       1,894,225              2,548,310
  Less accumulated depreciation and amortization                                        (564,413)              (421,539)
                                                                                    ------------           ------------
                                                                                       1,329,812              2,126,771
  Other assets                                                                           128,660                128,660
                                                                                    ------------           ------------

  TOTAL ASSETS                                                                      $  2,522,960           $  4,164,938
                                                                                    ============           ============

  LIABILITIES AND SHAREHOLDERS' DEFICIT

  Current liabilities:
  Accounts payable and accrued expenses                                             $  5,894,355           $  6,586,932
  Advances from BRE Properties, Inc.                                                   8,390,422              7,270,376
                                                                                    ------------           ------------
  Total current liabilities                                                           14,284,777             13,857,308
                                                                                    ------------           ------------

  Shareholders' equity :
  Preferred stock, $0.01 par value; 50,000,000 shares authorized.                              -                      -
     No shares issued or outstanding at March 31, 2001 and
     December 31, 2000, respectively
  Common stock,  $0.01 par value;  100,000,000 shares authorized.                        127,271                127,271
     Shares issued and outstanding:  12,727,154 at March 31, 2001 and
     December 31, 2000
  Additional paid in capital                                                          15,255,289             15,279,083
  Deferred compensation                                                                 (499,626)              (597,655)
  Accumulated deficit                                                                (26,644,751)           (24,501,069)
                                                                                    ------------           ------------
  Total shareholders' deficit                                                        (11,761,817)            (9,692,370)
                                                                                    ------------           ------------

  TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                                       $  2,522,960           $  4,164,938
                                                                                    ============           ============
</TABLE>

                       See Notes to Financial Statements

                                       5
<PAGE>

                               VELOCITYHSI, INC.

                            STATEMENTS OF OPERATIONS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                    Three months               Three months
                                                                       ended                        ended
                                                                      March 31,                   March 31,
                                                                        2001                        2000
                                                                    ------------                -----------
<S>                                                                 <C>                         <C>
Revenues
Subscription fees                                                   $    169,577                $    77,441
                                                                    ------------                -----------
Operating expenses
Cost of services (including depreciation of $104,150
    and $135,091, respectively)                                          830,875                    329,570
Sales and marketing                                                       96,279                    151,714
General and administrative (including $83,919 and
  $0 of depreciation and amortization, respectively)                   1,066,436                    104,160
Amortization of deferred compensation and other
   stock compensation expense                                            161,818                          -
                                                                    ------------                -----------
Total operating expenses                                               2,155,408                    585,444
                                                                    ------------                -----------
Operating loss                                                        (1,985,831)                  (508,003)
Other expense
Interest to BRE Properties, Inc.                                         157,851                          -
                                                                    ------------                -----------
Net loss                                                            $ (2,143,682)               $  (508,003)
                                                                    ============                ===========

Basic and diluted net loss per share                                $      (0.19)                       N/A
                                                                    ============                ===========
Weighted average common shares used in
computing basic and diluted net loss per share                        11,070,400                        N/A
                                                                    ============                ===========

</TABLE>

                       See Notes to Financial Statements

                                       6
<PAGE>

                               VELOCITYHSI, INC.

                           STATEMENTS OF CASH FLOWS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                    Three months          Three months
                                                                       ended                 ended
                                                                   March 31, 2001        March 31, 2000
                                                                   --------------        --------------
<S>                                                                <C>                   <C>
Operating Activities:                                                 $(2,143,682)          $  (508,003)
Net loss
Adjustments to reconcile net loss to net cash used in
 operating activities:
  Depreciation and amortization                                           188,069               135,091
  Loss on sale                                                             46,605
  Amortization and other non-cash expenses                                161,819                     -
  Changes in operating assets and liabilities:
    Decrease  in other assets                                             302,447                     -
    Decrease in accounts payable and accrued expenses                     (65,332)                    -
    Increase in prepaid transaction costs                                       -              (613,790)
                                                                      -----------           -----------
Net Cash Used in Operating Activities                                  (1,510,074)             (986,702)
                                                                      -----------           -----------

Investing Activities:
  Purchases of on-site equipment                                                -            (1,181,685)
  Purchases of inventory of equipment and software costs                        -               (67,124)
                                                                      -----------           -----------
Net Cash Used in Investing Activities                                           -            (1,248,809)
                                                                      -----------           -----------

Financing Activities:
  Increase in advances from BRE Properties, Inc.                        1,275,058                     -
  Proceeds from intracompany advances                                           -             2,235,511
                                                                      -----------           -----------
Net Cash Provided by Financing Activities                               1,275,058             2,235,511
                                                                      -----------           -----------
Net decrease in cash                                                     (235,016)                    -
Cash at beginning of period                                               556,410                     -
                                                                      -----------           -----------
Cash at end of period                                                 $   321,394           $         -
                                                                      ===========           ===========
</TABLE>
                       See Notes to Financial Statements

                                       7
<PAGE>

VelocityHSI, Inc.
NOTES TO FINANCIAL STATEMENTS (unaudited)
--------------------------------------------------------------------------------
March 31, 2001


1. Basis of Presentation

     The accompanying unaudited financial statements have been prepared by
VelocityHSI, Inc. ("we", "the Company" or "VelocityHSI") in accordance with the
instructions to Form 10-Q and should be read in conjunction with the Company's
audited financial statements included in the Annual Report on Form 10-K for the
year ended December 31, 2000.  In the opinion of management, all adjustments
(consisting of normal recurring adjustments only) have been made that are
necessary for a fair statement of the financial position and the results for the
interim periods presented herein.  Interim results are not necessarily
indicative of results for a full fiscal year.  Certain reclassifications have
been made from the prior period's presentation to conform to the current
period's presentation.

     The business referred to as VelocityHSI commenced operations as "Project
Velocity" in March 1999 by several employees of BRE Properties, Inc. ("BRE") on
a part-time basis.  On January 1, 2000, BRE formed a division with separate
reporting and accounting from BRE's other activities.  For convenience in these
financial statements, both the division known as Project Velocity and its legal
successor, VelocityHSI, Inc., are referred to herein as VelocityHSI.  In April
2000, BRE formed a Delaware corporation, VelocityHSI, Inc., which had no assets
or liabilities until August 7, 2000. On August 7, 2000, the operations and
assets of the Project Velocity were transferred from BRE to VelocityHSI, Inc. in
exchange for VelocityHSI stock. Some employees of BRE then joined VelocityHSI.
On August 15, 2000, BRE distributed approximately 87% of the shares received
from VelocityHSI to BRE common shareholders and retained the balance.  BRE also
agreed to provide us with $10,000,000 in funding plus the cost of the
installation of our equipment at properties owned by BRE (without limitation on
amount) through September 30, 2001.  We refer to this credit commitment by BRE
as the "BRE Line."

     The financial statements of VelocityHSI, prior to August 7, 2000, reflect
an activity of a division of BRE prepared on a stand-alone basis. Included
herein, for that period, are charges by BRE to the activity or division for
direct and indirect costs which, in the opinion of management, reflect all costs
of VelocityHSI doing business on such basis.

     The accompanying financial statements are presented on the basis that the
Company is a going concern.  The Company has incurred net losses of $26,644,741
since inception and has negative working capital of $13,220,289 as of March 31,
2001. This condition raises substantial doubt about the Company's ability to
continue as a going concern. The Company plans to finance its continuing
operations with a combination of debt and/or equity financing.  However, there
can be no assurance that such financing will be available on terms acceptable by
the Company, if at all. The accompanying financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.

2. Company

     VelocityHSI provides high-speed Internet access to the multifamily
apartment industry.

     For the three months ended March 31, 2001, nearly all of the revenues of
VelocityHSI were generated from residents located in communities owned by BRE or
communities owned by entities in which BRE is a minority partner.  The loss of
residents of apartments owned by BRE as a source of revenues would have a
material adverse effect on VelocityHSI's financial condition and results of
operations.

                                       8
<PAGE>

     In December 2000, in response to adverse changes in the capital and credit
markets and the failure to obtain additional financing, the Company adopted a
modified business plan and, as part of the plan, the Company laid off
approximately 50% of its workforce and announced the deferral of its efforts to
expand service to other apartment properties until such time as the Company is
able to obtain additional financing.

     As of March 31, 2001, BRE had extended $8,140,078, excluding accrued
interest of $250,344, under the BRE Line. BRE has included, as a reserve or a
deduction against available funds under the BRE Line, contracts entered into by
BRE on behalf of VelocityHSI which primarily consist of leases for equipment and
office space and T-1 service agreements. As a result of these reserves, the
remaining amount available to us under the BRE Line as of April 30, 2001 was
$693,180. BRE has indicated that it does not intend to increase its level of
committed funding beyond its original commitment. As of March 31, 2001 the
Company had no external debt facility or source of funds other than the BRE
Line. An analysis of the amount available under the BRE Line follows (excludes
accrued interest of $250,344 which accrues separately from the BRE Line):

                                                              As of March 31,
                                                                   2001
                                                                   ----
       Basic amount                                            $10,000,000
       Additional amount available for cost of
         installations at BRE owned communities                  1,233,258
       Reserve for BRE commitments                              (2,400,000)
       Advances to March 31, 2001                               (8,140,078)
                                                               -----------
       Net available for future borrowing under the BRE
         Line as of March 31, 2001                             $   693,180
                                                               ===========

     The Company has previously stated that in light of the available amount
under the BRE Line and its current lack of other funding sources, its cash will
likely become insufficient to permit continued operations beyond the second
quarter of 2001, although there can be no assurance in this regard. In order to
continue operations beyond that period, the Company will require an additional,
substantial capital infusion. See also note 5.

     The Company is actively exploring strategic alternatives, which might
include a merger, asset sale, or another comparable transaction or a financial
restructuring. However, in the event the Company is unsuccessful in completing
one of these strategic alternatives, the Company will likely be required to
cease operations during the second quarter of 2001. In that case, the Company's
common stock is expected to have no value. In addition, potential investors in
the Company's securities should consider the risk that, even if the Company is
successful in completing a strategic transaction as described above, the
Company's common stock may nonetheless have no value. Further, even if the
Company is able to complete a financing through the issuance of equity, equity-
linked or debt securities, those securities may have rights, preferences or
privileges senior to those of the rights of the Company's common stock and the
Company's stockholders will likely experience significant dilution.

3. Commitments and Contingencies

     The Company is involved in a number of legal proceedings, including
employment and vendor related claims. After accounting for amounts recorded as
liabilities as of March 31, 2001, the Company does not believe that such legal
proceedings will have, individually or in the aggregate, any additional material
adverse effect on its financial condition or operating results as of and for the
three months ended March 31, 2001. However, the Company may encounter additional
legal proceedings in light of its cash flow, liquidity and operating constraints
as further discussed in note 2.

                                       9
<PAGE>

4. Related Party Transactions

     Prior to August 7, 2000, BRE incurred direct and indirect costs and
expenses on behalf of VelocityHSI. These costs and expenses, attributable to
VelocityHSI operations, including payroll costs, have been included in these
financial statements for the three months ended March 31, 2000. Where
appropriate, costs and expenses were allocated to VelocityHSI by BRE based on
BRE's cost, which reflects management's estimate of what the expenses would have
been on a stand-alone basis. In the opinion of management, the allocation method
is reasonable and appropriate.

     Effective August 7, 2000 and under an Internet Services Agreement,
VelocityHSI is required to pay or accrue to BRE 10% of revenues generated from
services provided to residents of communities owned by BRE. For the three months
ended March 31, 2001, the amount expensed relating to BRE's share of revenue was
$14,064.

     On behalf of VelocityHSI, BRE entered into a lease agreement on April 24,
2000 for the rental of office space in Walnut Creek, California. The term of the
lease is through July 1, 2005 and all monthly lease payments are required to be
made by VelocityHSI. The monthly base rent payments for the lease range between
$26,112 and $28,201. An amendment to this office lease was entered into by BRE
on October 31, 2000, providing for additional office space. The term of the
lease amendment is through November 1, 2003 and monthly base rent payments range
between $7,885 and $8,516. BRE has also entered into agreements for the lease of
office furniture and equipment for VelocityHSI's use, with lease terms through
December 2003 and monthly base rent payments totaling approximately $8,000.
Thereafter, monthly base rent payments of $3,533 continue through July 2005. The
future obligations have been included in the reserve, reducing funds available
on the BRE Line as of March 31, 2001 (see note 2).

     On August 7, 2000, VelocityHSI entered into an Administrative Services and
Reimbursement Agreement with BRE pursuant to which BRE provides VelocityHSI with
office space and administrative services in connection with the business
operations as reasonably required of VelocityHSI.  This agreement contains the
BRE Line, wherein BRE agreed to provide VelocityHSI with up to $10,000,000 in
funds through September 30, 2001, to finance operating expenses and the costs of
installing equipment at properties which are not owned by BRE.  BRE further
agreed to provide VelocityHSI with funds through September 30, 2001 to finance
the installation of equipment at properties owned by BRE. Funds advanced by BRE
to VelocityHSI subsequent to BRE's contribution of net assets to VelocityHSI on
August 7, 2000, must be repaid by VelocityHSI on or before September 30, 2001
together with interest on periodic unpaid balances at the rate of 9% per year
(see note 2).  For the three months ended March 31, 2001, the Company incurred
interest expense on the BRE Line of $157,851.  Pursuant to the terms of the BRE
Line, this amount was accrued and not paid.

5. Subsequent Events

     On April 23, 2001, the Company issued 2,083,333 shares of Series A
Convertible Preferred Stock at a price of $1.20 per share to Banc of America
Mortgage Capital Corporation ("BAMCC") resulting in gross proceeds to the
Company of $2,500,000. The net proceeds from this equity issuance will be used
for general corporate purposes. The private placement resolves all issues
between BAMCC and the Company with respect to earlier financing arrangements
between them that were not consummated. Although this funding assists the
Company to continue operating while seeking strategic alternatives, the Company
does not expect this funding to allow continued operations beyond the second
quarter of 2001.

                                       10
<PAGE>

ITEM 2 - Management's Discussion and Analysis of Financial
         Condition and Results of Operations
-------------------------------------------------------------------------------
March 31, 2001


Overview

     We commenced operations in March 1999 with limited revenue generating
activities conducted mainly on a part-time basis by several BRE employees. On
January 1, 2000, BRE formed a division with accounting and reporting separate
and discrete from all of BRE's other activities and referred to as "Project
Velocity." In April 2000, BRE formed a Delaware corporation, VelocityHSI, Inc.,
which had no assets or liabilities until August 7, 2000, when the operations and
assets of Project Velocity were transferred to VelocityHSI, Inc. in exchange for
10,430,061 shares of common stock of VelocityHSI transferred to BRE.   BRE also
agreed to provide us with $10,000,000 in funding plus the cost of the
installation of our equipment at properties owned by BRE (without limitation on
amount) through September 30, 2001.

     Monthly subscriber fees comprised 100% of revenues for the three months
ended March 31, 2001 and 2000. As of March 31, 2001, nearly all of our
subscribers were residents of apartment communities either owned by BRE or owned
by entities in which BRE is a minority partner.

     Subscribers pay subscription fees for our Internet services on a monthly
basis. The subscriber can terminate our service upon 30 days notice. Our
subscribers are not required to sign written contracts to pay for our
subscription fees for any minimum length of time. These subscription fees are
recognized as income is earned. As part of our marketing plan, we may reduce the
charges to potential subscribers as part of special promotions. During the first
quarter of 2001, we implemented a new billing and collection system.  In the
process of implementing this system, more stringent procedures were introduced,
and subscribers were effectively required to sign up for the service a second
time.  The new billing procedures resulted in a decrease in subscribers from
previous levels. As of March 31, 2001, we had approximately 1,700 subscribers in
40 apartment communities.

Recent Developments

     In December 2000, in response to adverse changes in the capital and credit
markets and our inability to obtain additional financing, we adopted a modified
business plan and as part of the plan, we laid off approximately 50% of our
workforce and announced the deferral of our efforts to expand service to other
apartment properties until such time as we are able to obtain additional
financing.  In April 2001, we announced that we eliminated an additional eight
positions and we subsequently eliminated another three positions in order to
further conserve capital.

     As of April 30, 2001, BRE had extended $8,361,112, excluding accrued
interest of $308,240, under the BRE Line. BRE has included, as a reserve or a
deduction against available funds under the BRE Line, contracts entered into by
BRE on behalf of VelocityHSI which primarily consist of leases for equipment and
office space and T-1 service agreements. After taking these reserves into
account, the remaining amount available to us under the BRE Line as of April 30,
2001 was $478,863. BRE has indicated that it does not intend to increase its
level of committed funding beyond its original commitment of the BRE Line. As of
April 30, 2001, we have no external debt facility or source of funds other than
the BRE Line and cash on hand of $2,748,430, including the proceeds from the
issuance of preferred stock. An analysis of the amount available under the BRE
Line follows (excludes accrued interest of $308,240 which accrues separately
from the BRE Line):

                                       11
<PAGE>

                                                           As of April 30,
                                                                2001
                                                                ----
       Basic amount                                         $10,000,000
       Additional amount available for cost of
         installations at BRE owned communities               1,239,975
       Reserve for BRE commitments                           (2,400,000)
       Advances to April 30, 2001                            (8,361,112)
                                                            -----------
       Net available for future borrowing under the BRE
         Line as of April 30, 2001                          $   478,863
                                                            ===========

     We have previously stated that in light of the available amount under the
BRE Line and our current lack of other funding sources, our cash will become
insufficient to permit continued operations beyond the second quarter of 2001,
although there can be no assurance in this regard. In order to continue
operations beyond that period, we will require an additional, substantial
capital infusion. On April 23, 2001, we completed a private placement of Series
A Convertible Preferred Stock to Banc of America Mortgage Capital Corporation
("BAMCC") resulting in gross proceeds to the Company of $2,500,000. The private
placement resolves all issues between BAMCC and the Company with respect to
earlier financing arrangements between them that were not consummated. Although
this funding will assist us to continue operating while seeking strategic
alternatives, the we do not expect this funding to allow continued operations
beyond the second quarter of 2001.

     We are actively exploring strategic alternatives, which might include a
merger, asset sale, or another comparable transaction or a financial
restructuring.  However, in the event we are unsuccessful in completing one of
these strategic alternatives, we will likely be required to cease operations
during the second quarter of 2001.  In that case, our common stock is expected
to have no value.  In addition, potential investors in our securities should
consider the risk that, even if we are successful in completing a strategic
transaction as described above, our common stock may nonetheless have no value.
Further, even if we are able to complete a financing through the issuance of
equity, equity-linked or debt securities, those securities may have rights,
preferences or privileges senior to those of the rights of our common stock and
our stockholders will likely experience significant dilution.

     The accompanying financial statements have been prepared assuming that
VelocityHSI will continue as a going concern.  However, the  Report of
Independent Auditors  included in our Report on Form 10-K for the year ended
December 31, 2000 states that we have experienced recurring losses from
operations and have a working capital deficiency which have adversely affected
our liquidity and that these conditions raise substantial doubt about our
ability to continue as a going concern.  The accompanying financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

RESULTS OF OPERATIONS
Comparison of the three months ended March 31, 2001 and 2000.

     Revenues totaled $169,577 and $77,441 for the three months ended March 31,
2001 and 2000, respectively. This increase was due to an increased number of
subscribers and apartment communities served. Revenues consist solely of
subscription fees from subscribers to our monthly Internet access service.
Subscription fees vary in amount based on the level of service a subscriber
chooses.

      Cost of services totaled $830,875 for the three months ended March 31,
2001, as compared to $329,570 for the same period in 2000. The increase of
$501,305 resulted from the addition of new apartment communities as customers
and the addition of more subscribers in the three months ended March 31, 2001.
The costs, excluding depreciation, for the three months ended March 31, 2001
consisted of $203,720 in charges for wiring, setup and repair of equipment, T-1
access charges of $364,719 and, to a lesser extent, commissions to on-site
personnel for new subscriptions. For the three months ended March 31, 2000,
costs, excluding depreciation, consisted primarily of $108,000 in charges for
wiring, setup and

                                       12
<PAGE>

installation of apartment infrastructures performed by an independent contractor
and T-1 access charges of $77,000.

     Sales and marketing expense totaled $96,279 for the three months ended
March 31, 2001. For the three months ended March 31, 2000, sales and marketing
expenses totaled $151,714. The decrease in sales and marketing expenses of
$55,435 is primarily the result of our modified business plan adopted in
December 2000 pursuant to which we do not currently plan to install VelocityHSI
service in any new apartment communities.

     General and administrative expenses totaled $1,066,436 for the three months
ended March 31, 2001, an increase of $962,276 over the $104,160 expense for the
three months ended March 31, 2000. The increase resulted from direct and
indirect personnel costs of executive and administrative officers and support
personnel, facility and equipment costs and expenses for office supplies,
telecommunications and travel incurred in connection with the operation of the
VelocityHSI business.

     Amortization of deferred compensation and other stock compensation expense
totaled $161,818 for the three months ended March 31, 2001.  No such costs were
incurred for the same period in 2000.  This amortization is the result of the
issuance of shares of restricted common stock to certain employees of
VelocityHSI and BRE in August 2000.

     Total operating expenses were $2,155,408 for the three months ended March
31, 2001 and $585,444 for the three months ended March 31, 2000, due primarily
to the increase in the Company's operations in 2001.

     Operating loss of $1,985,831 for the three months ended March 31, 2001 an
increase of $1,477,828 compared to $508,003 for the three months ended March 31,
2000  primarily due to a significant increase in our operations and related cost
of services and general and administrative expenses.

     Interest expense was $157,851 for the three months ended March 31, 2001
from borrowings on the BRE Line. There was no such expense or liability for the
three months ended March 31, 2000.

     Net losses of $2,143,682 and $508,003 for the three months ended March 31,
2001 and 2000, respectively, resulted from cost of services, sales and marketing
and general and administrative expenses exceeding revenues generated from
subscriber service fees.

Liquidity and Capital Resources

     Cash used in operating activities, primarily for the payment of operating
expenses, was $1,510,074 and $986,702 for the three months ended March 31, 2001
and 2000, respectively.   In the event that we are able to obtain additional
capital to continue operations beyond  the second quarter of 2001, we expect to
experience substantial negative cash flow from operating activities for the
foreseeable future. Our future cash requirements as well as our revenues,
assuming we commence installations of VelocityHSI service at new apartment
communities, will depend on a number of factors including the number of
multifamily apartment properties with which we contract to provide services, the
terms of contracts with the multifamily apartment property owners, subscriber
penetration within the multifamily apartment property, monthly subscription
rates, variable installation and setup costs at each multifamily apartment
property and marketing costs.

     We incur both infrastructure deployment costs (i.e. system installation
costs to place equipment in service at each property) and incremental
installation costs to set up each new subscriber with VelocityHSI service.
Consistent with our modified business plan, we have stopped installing new
subscribers as of April 2001, although this policy is subject to change. Since
we do not charge the property owner or subscribers for these installation costs,
and the monthly subscriber fees generated from VelocityHSI service are earned
over a period of time, we experience negative cash flows initially upon
installation.

                                       13
<PAGE>

     Net cash used in investing activities was $0 and $1,248,809 for the three
months ended March 31, 2001 and 2000, respectively.  The lack of investing
activity in 2001 reflects the our modified business plan pursuant to which
installation of VelocityHSI service in new apartment communities was suspended
until we are able to obtain adequate capital.

     Net cash provided by financing activities was $1,275,058 and $2,235,511 for
the three months ended March 31, 2001 and 2000, respectively.  The amount in
2001 was  provided pursuant to the BRE Line and the amount in 2000 represents
the intracompany equity account funding of the Velocity division by BRE.  Our
expenses and capital expenditures prior to our August 7, 2000 spin-off from BRE
were financed with funds advanced from BRE as part of the intracompany equity
account.

     On April 23, 2001 we issued 2,083,333 shares of convertible preferred stock
for $2,500,000.  This amount, our existing cash (including the proceeds from the
preferred stock issuance) on hand of $2,748,429 and the remaining amount
available on the BRE Line represent, as of April 30, 2001, our sole current
sources of funding for our business.  BRE has not committed to provide us with
funds in addition to the BRE Line or make any change in the repayment date of
September 30, 2001.  An analysis of the BRE Line follows:

<TABLE>
<CAPTION>
                                                        As of March 31,    As of April 30,
                                                              2001               2001
                                                              ----               ----
       <S>                                              <C>                <C>
       Basic amount                                       $10,000,000        $10,000,000
       Additional amount available for cost  of             1,233,258          1,239,975
         installations at BRE owned communities
       Reserve for BRE commitments                         (2,400,000)        (2,400,000)
                                                          -----------        -----------
               Subtotal                                     8,833,258          8,839,975
       Advances to March 31, 2001 and
         April 30, 2001, respectively                      (8,140,078)        (8,361,112)
                                                          -----------        -----------
       Net available for future borrowing                 $   693,180        $   478,863
                                                          ===========        ===========
</TABLE>

     The cost of installation at BRE owned properties may increase due to
additional capital expenditures at such communities.  The reserve for BRE
commitments may increase or decrease depending on whether such obligations are
paid or additional charges assessed.  The above advances exclude accrued
interest of $250,344 and $308,240 at March 31, 2001 and April 30, 2001,
respectively.  We must repay, on or before September 30, 2001, all of the funds
advanced to us by BRE under the agreement, together with accrued interest on
unpaid balances.

     In December 2000, in response to adverse changes in the capital and credit
markets and our inability to obtain financing, we adopted a modified business
plan and, as part of the plan, we laid off approximately 50% of our workforce
and announced the deferral of our efforts to expand service to other apartment
properties until such time as we are able to obtain additional financing.  In
April 2001, we announced the elimination of an additional eight positions; we
subsequently eliminated another three positions in order to further conserve
capital.  We also entered into discussions with vendors to reduce invoiced
amounts. The invoiced amounts of certain other vendors are under dispute or we
have proposed the return of the equipment (due to warranty or other reasons) for
credit against the invoiced amount.  At March 31, 2001, amounts owed to a vendor
primarily associated with the infrastructure equipment totaled approximately
$2,900,000.  Currently, we are actively engaged in discussions with this vendor
concerning warranty returns and the vendor has filed an action against us in the
Superior Court of Contra Costa County, California.  There can be no assurance
that we will be successful in negotiating a settlement or other reduction of the
invoiced amounts or defending against this or other lawsuits (see Item 3, "Legal
Proceedings").  If we are successful in returning this equipment for credit, we
may reduce the reserve for our estimate of the net realizable value of the
equipment accordingly.  The invoiced amounts for all of our vendors have been
reflected in our financial statements as liabilities at March  31, 2001.  The
liabilities we have recorded at March 31, 2001 are well in excess of funding
available under the BRE Line.  In addition, even after our reductions in
staffing, we believe that we will continue to experience significant negative
cash flow from our operations in 2001. Accordingly, we are not currently able
and, unless we are able to obtain significant amounts of additional capital,
will not able to pay the full amount, if any, of liabilities.

                                       14
<PAGE>

     We have previously stated that in light of  cash on hand and proceeds from
the issuance of  preferred stock and the available amount under the BRE Line and
our current lack of other funding sources, we expect that our cash will become
insufficient to permit continued operations beyond the second quarter of 2001,
although there can be no assurance in this regard.  In order to continue
operations beyond that period, we will require an additional substantial capital
infusion.

     We are actively exploring strategic alternatives, which might include a
merger, asset sale, or another comparable transaction or a financial
restructuring.  However, in the event we are unsuccessful in completing one of
these strategic alternatives, we will likely be required to cease operations
during the second quarter of 2001.  In that case, our common stock is expected
to have no value.  In addition, potential investors in our securities should
consider the risk that, even if we are successful in completing a strategic
transaction as described above, our common stock may nonetheless have no value.
Further, even if we are able to complete a financing through the issuance of
equity, equity-linked or debt securities, those securities may have rights,
preferences or privileges senior to those of the rights of our common stock and
our stockholders will likely experience significant dilution.

     The accompanying financial statements have been prepared assuming that
VelocityHSI will continue as a going concern.  See our discussion under the
section entitled "Preliminary Statement".

Cautionary Statement Regarding Forward-Looking Statements

     This Form 10-Q contains forward-looking statements that involve a number of
risks and uncertainties which may cause actual results to differ from those
expressed in such forward-looking statements. Forward-looking statements can be
identified by the use of forward-looking words such as "believes," "expects,"
"may," "will," "plan," "intends," "estimates," "could," "should," "would,"
"continue," "seeks," "pro forma" or "anticipates," or other similar words
(including their use in the negative), or by discussions of strategies, plans or
intentions. These statements include but are not limited to statements under the
captions "Management's Discussion and Analysis of Financial Condition and
Results of Operations" as well as other sections in this Form 10-Q. A number of
factors could cause results to differ materially from those anticipated by the
forward-looking statements, including those discussed under "Management's
Discussion and Analysis of Financial Condition and Results of Operations".  Our
forward-looking statements are dependent upon assumptions and estimates that may
prove to be incorrect. Although we believe that the assumptions and estimates
reflected in the forward-looking statements are reasonable, our plans,
intentions or expectations may not be achieved.  The cautionary statements made
in this Form 10-Q are intended to be applicable to all related forward-looking
statements wherever they may appear in this Form 10-Q.

ITEM 3:  Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------------------

     As of March 31, 2001, the Company's debt structure only included short-
term, fixed rate debt. Although the Company did not have any long-term debt
outstanding at March 31, 2001, the Company is still exposed to indirect market
risk for changes in interest rates. However, the Company does not expect any
material loss attributable to these risks or significant changes in its business
prospects.

                                       15
<PAGE>

PART II - OTHER INFORMATION

ITEM 1.  Legal Proceedings

     In March 2001, VelocityHSI received notice that Nancye Miller had submitted
a request for arbitration of a claim against VelocityHSI for breach of contract.
Ms. Miller was terminated by VelocityHSI for cause in January 2001. She claims
that she was terminated without cause and that she is entitled to damages in the
amount of approximately $345,000. To date, no date has been set for the
arbitration. We believe that the claims asserted by Ms. Miller are without
merit, and we intend to vigorously defend against the claim. While it is not
feasible to predict or determine the ultimate outcome of this matter, in the
opinion of management, this action will not have a material adverse effect on
the Company.

     At March 31, 2001, amounts invoiced (and included as a liability in the
accompanying financial statements) by Tut Systems, Inc. ("Tut"), a vendor
primarily associated with the infrastructure equipment, totaled approximately
$2,900,000.  VelocityHSI has been actively engaged in discussions with Tut
concerning warranty returns.  On March 23, 2001, Tut filed a complaint against
VelocityHSI in the Superior Court of Contra Costa County, California, alleging
breach of contract for non-payment and damages of no less than $2,487,736.62
plus costs and interest.  We intend to vigorously defend this action.

     At March 31, 2001, amounts invoiced (and included as a liability in the
accompanying financial statements) by TAD Telecom, Inc. ("TAD"), a vendor
primarily associated with the installation of VelocityHSI service to our
subscribers totaled approximately $200,000.  VelocityHSI has been actively
engaged in settlement discussions with TAD.  On May 8, 2001, TAD and TAD
Telecom, LLC filed a complaint against VelocityHSI in the Superior Court of
Contra Costa County, California, alleging breach of contract for non-payment and
damages of $204,174.56 plus interest and costs.  We intend to defend this
action.

     We believe that we will increasingly become subject to claims, lawsuits and
other comparable collection procedures such as those described above due to the
fact that our cash will likely become insufficient to permit continued
operations beyond the second quarter of 2001.  After such period, we would be
required to cease operations unless we are able to consummate a strategic
transaction or financial restructuring.  In addition, unless we are able to
obtain a substantial capital infusion, we expect that we will be unable to pay
our vendors' invoices as they become due.  While it is not feasible to predict
or determine the ultimate outcome of any claims such as those discussed above,
these and other similar actions would likely have a material adverse effect on
the Company.

ITEM 2.   Changes in Securities and Use of Proceeds
          None.

ITEM 3.   Defaults upon Senior Securities
          None.

ITEM 4.   Submission of Matters to a Vote of Security Holders
          None.

ITEM 5.   Other Information
          None

ITEM 6.   Exhibits and Reports on Form 8-K

   (a) Exhibits:

  INDEX TO EXHIBITS

       Exhibit

                                       16
<PAGE>

       Number      Description of Exhibit
       ------      ----------------------

        3.1        Amended and Restated Certificate of Incorporation of
                   VelocityHSI, Inc.*

        3.2        Certificate of Designation of the Registrant filed with the
                   Secretary of State of Delaware on October 27, 2000 ****

        3.3        Amended Certificate of Designation of Series A Convertible
                   Preferred Stock of the Registrant filed with the Secretary of
                   State of Delaware on April 23, 2001****

        3.4        Amended and Restated Bylaws of VelocityHSI, Inc.**

        3.5        Form of Common Stock Certificate of VelocityHSI, Inc.*

        10.1       Contribution and Distribution Agreement dated as of August 7,
                   2000 between VelocityHSI, Inc. and BRE Properties, Inc.**

        10.2       Administrative Services and Reimbursement Agreement dated as
                   of August 7, 2000 between VelocityHSI, Inc. and BRE
                   Properties, Inc.**

        10.3       VelocityHSI, Inc. 2000 Equity Incentive Plan**

        10.4       Service Agreement dated as of August 7, 2000 between
                   VelocityHSI, Inc. and BRE Properties, Inc.**

        10.5       Registration Rights Agreement dated as of August 7, 2000
                   between VelocityHSI, Inc. and BRE Properties, Inc.**

        10.6       Tax Allocation Agreement dated as of August 7, 2000 between
                   VelocityHSI, Inc. and BRE Properties, Inc.**

        10.7       Employment Agreement of Stephen E. Carlson*

        10.8       Employment Agreement of William C. Vinck**

        10.9       Warrant Agreement between VelocityHSI, Inc. and Banc of
                   America Mortgage Capital Corporation dated August 15, 2000**

        10.10      Form of Indemnification Agreement***

        10.11      Office Lease dated as of April 24, 2000 between Metropolitan
                   Life Insurance Company and BRE Properties, Inc. ***

        10.12      First Amendment to Office Lease dated as of October 31, 2000
                   between Metropolitan Life Insurance Company and BRE
                   Properties, Inc.***

        10.13      Warrant Agreement between VelocityHSI, Inc. and Banc of
                   America Mortgage Capital Corporation dated October 12,
                   2000***


        *    Incorporated herein by reference from the Company's Registration
             Statement on Form S-1 (File No. 333-36162).
        **   Incorporated herein by reference from the Company's Quarterly
             Report on Form 10-Q for the quarter ended September 30, 2000.
        ***  Incorporated herein by reference from the Company's Annual Report
             on Form 10-K for the year ended December 31, 2000.
        **** Incorporated herein by reference from the Company's Current Report
             on Form 8-K filed with the Securities and Exchange Commission on
             April 27, 2001.

        (b)  Reports on Form 8-K:
             None.

                                       17
<PAGE>

SIGNATURES


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

                                      VELOCITYHSI, INC.
                                      (Registrant)



Date:  May 14, 2001                   /s/  Charles P. Wingard
       -----------------              -------------------------------
                                      Charles P. Wingard
                                      Senior Vice President,
                                      Chief Financial Officer

                                       18