<Page>


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20459

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

                                    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, 2001

                             Commission file number:
                                    333-39646
                                -----------------

                                 VELOCITA CORP.
             (Exact name of Registrant as specified in its charter)

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

                DELAWARE                                     52-2197932
(State or other jurisdiction of incorporation  (IRS Employer Identification No.)
              or organization)

                        2941 FAIRVIEW PARK DR., SUITE 200
                          FALLS CHURCH, VIRGINIA 22042
                    (Address of principle executive offices)

                                 (703) 564-7200
                (Company's telephone number, including area code)

         Indicate by check mark whether Registrant (1) has filed all reports 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 Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.   YES [X]  NO [ ]

         The Company had 80,000,000 shares of common stock, $.01 par value,
outstanding at October 31, 2001.


<Page>


                                 VELOCITA CORP.
                                    FORM 10-Q
                               SEPTEMBER 30, 2001
                                      INDEX


                         PART I - FINANCIAL INFORMATION

     Item 1.  Unaudited Financial Statements

                Condensed Consolidated Balance Sheets..........................1
                Condensed Consolidated Statements of Operations................2
                Condensed Consolidated Statements of Cash Flows................3
                Notes To Condensed Consolidated Financial Statements...........4

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

     Item 3.  Quantitative and Qualitative Disclosures About Market Risk......21


                           PART II - OTHER INFORMATION

     Item 6.  Exhibits and Current Reports on Form 8-K........................23



         ALL REFERENCES IN THIS REPORT TO "WE", "US", "OUR" OR THE "COMPANY" ARE
TO VELOCITA CORP. AND ITS SUBSIDIARIES.

     This report contains forward-looking statements and information that are
based on the beliefs of management as well as assumptions made by and
information currently available to us. Forward-looking statements can be
identified by such words as "anticipates," "believes," "plans," "estimates,"
"scheduled" and "expects" or similar expressions. Such statements reflect our
current views with respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described in this document.


<Page>


                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                         VELOCITA CORP. AND SUBSIDIARIES
                          (A DEVELOPMENT STAGE COMPANY)

                      CONDENSED CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>

                                                                                  SEPTEMBER 30,   DECEMBER 31,
                                                                                      2001            2000
                                                                                   -----------    -----------
(Dollars in thousands, except share data)                                          (UNAUDITED)
<S>                                                                                <C>            <C>
                                     ASSETS

CURRENT ASSETS:
  Cash and cash equivalents ...........................................            $   186,830    $    76,325
  Accounts receivable, net of allowance of $200 and $0 ................                 31,230         31,888
  Prepaid expenses and other current assets ...........................                 10,363          5,148
                                                                                   -----------    -----------
      Total current assets  ...................................................        228,423        113,361

Property and equipment, net ...................................................        734,974        343,078
Network capacity and services .................................................         62,699             --
Deferred financing costs, net .................................................         26,920         19,941
Other assets ..................................................................          4,120            361
                                                                                   -----------    -----------
                                                                                   $ 1,057,136    $   476,741
                                                                                   ===========    ===========

<Caption>

                      LIABILITIES AND STOCKHOLDERS' DEFICIT

<S>                                                                                <C>            <C>
CURRENT LIABILITIES:
  Accounts payable  ...........................................................    $    26,809    $    37,065
  Accrued liabilities .........................................................         87,895         36,612
  Accrued interest payable ....................................................         15,068          5,209
  Fiber-optic network obligation ..............................................             --          7,279
  Contract liability ..........................................................             --         11,153
  Current portion of borrowings under credit facility .........................          5,000             --
  Current portion of deferred revenue .........................................          6,958         14,221
  Current portion of construction retainage and other .........................         13,025          5,693
                                                                                   -----------    -----------
      Total current liabilities ...............................................        154,755        117,232

Deferred revenue ..............................................................         98,379             --
Other liabilities .............................................................         10,987          8,957
Borrowings under credit facility ..............................................        299,052             --
Long-term debt, net of debt discount of $45,725 and $49,708 ...................        179,275        175,293
Note payable to affiliate .....................................................             --         11,749
Commitments and contingencies  ................................................             --             --
Series A redeemable convertible senior preferred stock, 1,250,000 shares
  authorized; 10% cumulative convertible; stated value $100 per share; 1,250,000
  shares issued and outstanding; stated at liquidation preference of $151,111
  and $140,320, net of financing costs of $7,378 and $8,032 ...................        143,733        132,288
 Series B redeemable convertible senior preferred stock, 2,000,000 shares
  authorized; 10% cumulative convertible; stated value $100 per share; 2,000,000
  shares issued and outstanding; stated at liquidation preference of $207,112,
  net of financing costs of $1,080 ............................................        206,032             --
Put warrants ..................................................................         94,300         71,300
Stockholders' deficit:
  Common stock $.01 par value, 400,000,000 shares authorized;
    80,000,000 shares issued and outstanding ..................................            800            800
  Additional paid-in capital ..................................................         38,811         57,077
  Unearned compensation .......................................................         (2,230)        (2,992)
  Deficit accumulated during development stage ................................       (166,758)       (94,963)
                                                                                   -----------    -----------
      Total stockholders' deficit .............................................       (129,377)       (40,078)
                                                                                   -----------    -----------
                                                                                   $ 1,057,136    $   476,741
                                                                                   ===========    ===========
</Table>



     See accompanying notes to condensed consolidated financial statements.


                                       1
<Page>


                         VELOCITA CORP. AND SUBSIDIARIES
                          (A DEVELOPMENT STAGE COMPANY)

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<Table>
<Caption>

                                                                 THREE MONTHS ENDED              NINE MONTHS ENDED
                                              INCEPTION TO          SEPTEMBER 30,                   SEPTEMBER 30,
                                              SEPTEMBER 30, ----------------------------    ----------------------------
(Dollars in thousands, except per share data)     2001          2001            2000             2001            2000
                                              ------------  ------------    ------------    ------------    ------------
<S>                                         <C>             <C>             <C>             <C>             <C>
Revenue .................................   $      7,321    $      4,549    $         63    $      6,991    $        105
Operating expenses:
   Cost of revenue ......................         13,533           6,562             232          11,332             311
   Selling, general, and administrative
      expenses ..........................         64,093          10,009           9,563          29,694          14,000
   Depreciation and amortization ........          2,708             850             160           1,722             317
                                            ------------    ------------    ------------    ------------    ------------
     Total operating expenses ...........         80,334          17,421           9,955          42,748          14,628
                                            ------------    ------------    ------------    ------------    ------------
Loss from operations ....................        (73,013)        (12,872)         (9,892)        (35,757)        (14,523)
(Increase) decrease in fair value of put
    warrants ............................        (68,536)          3,100              --         (23,000)        (42,236)
Interest income .........................         15,603           1,097           2,775           3,796           7,408

Interest expense, net ...................        (40,786)        (11,566)         (3,130)        (16,819)        (14,345)
                                            ------------    ------------    ------------    ------------    ------------
Loss before income taxes ................       (166,732)        (20,241)        (10,247)        (71,780)        (63,696)


Provision for income taxes ..............            (26)            (16)             --             (15)             --
                                            ------------    ------------    ------------    ------------    ------------
Net loss ................................       (166,758)        (20,257)        (10,247)        (71,795)        (63,696)
Accretion of preferred stock dividends
    and offering costs ..................        (34,982)         (8,975)         (3,789)        (18,601)        (11,907)
                                            ------------    ------------    ------------    ------------    ------------
Net loss applicable to common stock .....   $   (201,740)   $    (29,232)   $    (14,036)   $    (90,396)   $    (75,603)
                                            ============    ============    ============    ============    ============
Basic and diluted net loss per share ....   $      (3.15)   $      (0.37)   $      (0.18)   $      (1.13)   $      (0.95)
                                            ============    ============    ============    ============    ============
Basic and diluted weighted average shares
    outstanding (in thousands) ..........         64,020          80,000          80,000          80,000          80,000
                                            ============    ============    ============    ============    ============
</Table>



         See accompanying notes to condensed consolidated financial statements.


                                       2
<Page>


                         VELOCITA CORP. AND SUBSIDIARIES
                          (A DEVELOPMENT STAGE COMPANY)

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<Table>
<Caption>

                                                                      INCEPTION       NINE MONTHS ENDED
                                                                  (NOVEMBER 30, 1998)    SEPTEMBER 30,
                                                                   TO SEPTEMBER 30,   --------------------
(Dollars in thousands)                                                    2001         2001         2000
                                                                       ---------      -------    ---------

<S>                                                                    <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net cash (used in) provided by operating activities ............   $    (337)   $  (3,445)   $  13,915


CASH FLOWS USED IN INVESTING ACTIVITIES:
   Purchase of property and equipment ..............................    (752,491)    (436,548)    (192,030)


CASH FLOWS FROM FINANCING ACTIVITIES:
   Cash paid for deferred financing fees ...........................     (34,262)      (9,677)      (8,617)
   Contribution of capital .........................................       1,490           --           --
   Proceeds from bridge loan obligation and warrants ...............      66,700           --           --
   Payment of bridge loan obligation ...............................     (66,700)          --      (66,700)
   Proceeds from units offering and warrants .......................     225,000           --      225,000
   Proceeds from issuance of preferred stock, net ..................     314,789      198,881       80,263
   Proceeds from term loans ........................................     229,052      229,052           --
   Proceeds from revolving loan ....................................     125,000      125,000           --
   Payment on revolving loan .......................................     (50,000)     (50,000)          --
   Payment of note payable to affiliate ............................     (12,394)     (12,394)          --
   Proceeds received under cost sharing agreement ..................     140,983       69,636       12,965
                                                                       ---------    ---------    ---------

       Net cash provided by financing activities ...................     939,658      550,498      242,911
                                                                       ---------    ---------    ---------

INCREASE IN CASH AND CASH EQUIVALENTS ..............................     186,830      110,505       64,796
CASH AND CASH EQUIVALENTS, beginning of period .....................          --       76,325      107,598
                                                                       ---------    ---------    ---------

CASH AND CASH EQUIVALENTS, end of period ...........................   $ 186,830    $ 186,830    $ 172,394
                                                                       =========    =========    =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
    Cash paid for interest .........................................   $  52,272    $  25,668    $   8,672
                                                                       =========    =========    =========

SCHEDULE OF NONCASH INVESTING AND FINANCING TRANSACTIONS:
Increase in network construction-in-progress paid for by affiliates    $   5,109    $      --    $      --
                                                                       =========    =========    =========
Issuance of warrants in connection with construction of network ....   $  25,764    $      --    $      --
                                                                       =========    =========    =========
Contractual obligation incurred for network construction-in-progress   $  10,000    $      --    $      --
                                                                       =========    =========    =========
Increase in accounts receivable and reduction in property
  and equipment ....................................................   $ 130,524    $  58,117    $  30,268
                                                                       =========    =========    =========
Reduction in property and equipment and the fiber-optic
  network obligation ...............................................   $  30,032    $   7,279    $  22,753
                                                                       =========    =========    =========
Net increase in property and equipment reflected in accounts payable
  and other liabilities ............................................   $ 116,688    $  41,200    $  27,800
                                                                       =========    =========    =========
Increase in other current assets and reduction in property
  and equipment ....................................................   $   6,455    $   3,349    $     902
                                                                       =========    =========    =========
Net increase in deferred financing costs, accounts payable
  and accrued liabilities ..........................................   $   1,238    $      38    $      --
                                                                       =========    =========    =========
</Table>


     See accompanying notes to condensed consolidated financial statements.


                                       3
<Page>


                         VELOCITA CORP. AND SUBSIDIARIES
                          (A DEVELOPMENT STAGE COMPANY)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         BASIS OF PRESENTATION - The condensed consolidated financial statements
         include the accounts of Velocita Corp. and subsidiaries in which it has
         control (collectively, the "Company" or "Velocita"), which are engaged
         in enterprises primarily related to communications and information
         services. All significant intercompany accounts and transactions have
         been eliminated.

         The accompanying unaudited condensed consolidated financial statements
         have been prepared in accordance with generally accepted accounting
         principles for interim financial information and with the instructions
         to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
         include all of the information and footnotes required for complete
         financial statement presentation by accounting principles generally
         accepted in the United States of America.

         The interim financial data as of and for the three-month and nine-month
         periods ended September 30, 2001 and 2000, and for the period from
         November 30, 1998 (date of inception) through September 30, 2001, is
         unaudited. The information reflects all adjustments, consisting of only
         normal recurring adjustments that, in the opinion of management, are
         necessary to present fairly the financial position and results of
         operations of the Company for the periods presented. The Company's
         accounting policies and certain other disclosures are set forth in the
         notes to the consolidated financial statements contained in the
         Company's Annual Report on Form 10-K for the year ended December 31,
         2000, filed with the Securities and Exchange Commission on March 30,
         2001. These condensed consolidated financial statements should be read
         in conjunction with the Company's audited consolidated financial
         statements and notes thereto.

         The preparation of these condensed consolidated financial statements in
         conformity with generally accepted accounting principles requires
         management to make estimates and assumptions that affect the reported
         amount of assets and liabilities, disclosure of contingent assets and
         liabilities and the reported amount of revenue and expense during the
         period presented. Actual results could differ from those estimates.

         Results of operations for the interim periods are not necessarily
         indicative of the results of operations expected for the full year.
         Where appropriate, items within the condensed consolidated financial
         statements have been reclassified from the previous period to conform
         to the current period presentation.

         ACQUIRED NETWORK ASSETS - The Company records acquisitions of dark
         fiber and conduit indefeasible rights of use ("IRUs") as acquired
         network assets within property and equipment. The Company will record
         depreciation expense on a straight-line basis over the shorter of the
         IRU term or the asset's useful life, beginning when the asset is placed
         in service.

         NETWORK CAPACITY AND SERVICES - The Company records the cost of
         broadband capacity and related services, where applicable, as network
         capacity and services. The Company will recognize network capacity
         expense over the term of the service agreement or as the capacity is
         utilized.

         SERVICES REVENUE - The Company's revenue to date relates to the resale
         of private line communications services and construction services. The
         Company records revenue from communications services as the services
         are provided. Amounts billed in advance of the service period,
         including relevant setup fees, are deferred. Revenue from construction
         service contracts to develop fiber-optic systems or related equipment
         for others is determined on the percentage-of-completion basis over the
         period of construction. Revenue recognized in excess of billings will
         be recorded as unbilled


                                        4
<Page>


                         VELOCITA CORP. AND SUBSIDIARIES
                          (A DEVELOPMENT STAGE COMPANY)

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

         revenue. Billings are generally rendered on the achievement of certain
         construction milestones. Provisions are made for all potential losses
         as soon as they become evident.

         DARK FIBER SALES/IRU REVENUE - In June 1999, the Financial Accounting
         Standards Board ("FASB") issued Interpretation No. 43 (FIN 43), REAL
         ESTATE SALES, AN INTERPRETATION OF FASB STATEMENT NO. 66, which is
         effective for transactions entered into after June 30, 1999. FIN 43
         required that sales of integral equipment, including fiber and conduit,
         should be treated the same as sales of real estate. Prior to the
         issuance of FIN 43, IRUs were evaluated for sales-type lease
         accounting, which may result in certain lease transactions being
         accounted for as sales at the time of acceptance of fiber by the
         customer. IRUs that did not meet the criteria for a sales-type lease
         were accounted for as an operating lease, and the cash received was
         recognized as revenue over the term of the IRU. In May 2000, the
         Emerging Issues Task Force (EITF) reached a tentative conclusion on
         EITF 00-11, MEETING THE OWNERSHIP TRANSFER REQUIREMENTS OF FASB
         STATEMENT NO. 13 FOR LEASES OF REAL ESTATE. This tentative conclusion
         stated that transfers of title should be determined using the guidance
         set forth in Article 2 of the Uniform Commercial Code. In July 2001,
         the EITF reached a consensus that integral equipment subject to a
         lease should be evaluated as real estate. Further, a consensus was
         reached that for integral equipment or property improvements for
         which no statutory title registration system exists, the lessor must
         execute and deliver such documents that transfer ownership by the
         end of the lease term. The effect of EITF 00-11 was to allow the use
         of sales-type lease accounting for IRUs.

         LOSS PER COMMON SHARE - The Company calculates basic and diluted loss
         per share pursuant to Statement of Financial Accounting Standard
         ("SFAS") No. 128, EARNINGS PER SHARE. Basic and diluted loss per share
         amounts have been computed using the weighted average number of shares
         outstanding during each period. The Company had a net loss during the
         three and nine month periods ended September 30, 2001 and 2000 and
         therefore, common stock equivalents consisting of warrants, stock
         options and convertible preferred stock totaling approximately 100.9
         million shares and 79.3 million shares as of September 30, 2001 and
         2000, respectively, have been excluded from the calculation of diluted
         loss per share, as their impact is anti-dilutive.

         SEGMENT REPORTING - The Company has adopted SFAS No. 131, DISCLOSURES
         ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which defines
         how operating segments are determined and requires disclosures about
         products, services, major customers and geographic areas. The Company
         currently intends to be a facilities-based provider of fiber-optic
         network infrastructure that the Company believes to be one business
         segment with an anticipated group of similar products.

         RECENT ACCOUNTING PRONOUNCEMENTS - In June 1998, the FASB issued
         Statement of Financial Accounting Standard ("SFAS") No. 133, ACCOUNTING
         FOR DERIVATIVES AND HEDGING ACTIVITIES. This statement, as amended by
         SFAS Nos. 137 and 138, establishes accounting and reporting standards
         for derivative instruments and for hedging activities. It requires that
         an entity recognize all derivatives as either assets or liabilities in
         the statement of financial position and measure those instruments at
         fair value. We were required to adopt SFAS No. 133 on January 1, 2001
         and its adoption did not have a significant impact on our financial
         position or results of operations. The Company will record gains and
         losses on derivatives related to cash flow hedges of interest rate
         payments on variable rate debt through interest expense upon expiration
         of the underlying interest rate cap agreements. As discussed in Note 7,
         the Company entered into two interest rate cap agreements during
         September 2001. The notional principal amounts of interest rate cap
         agreements outstanding were $75 million at September 30, 2001.

         The cash requirements of the Company's financial instruments
         approximate their fair value. Cash flows associated with these
         financial instruments will be classified consistent with the cash
         flows of the transactions being hedged. Derivative financial
         instruments involve, to a varying degree, elements of market and
         credit risk not recognized in the consolidated financial statements.
         The market risk associated with these instruments resulting from
         interest rate fluctuations is expected to offset the market risk of
         the underlying transactions, assets and liabilities being hedged.

         The counterparties to the agreements relating to the Company's interest
         rate instruments are major international financial institutions with
         high credit ratings. The Company does not believe that there is
         significant risk of nonperformance by these counterparties because the
         Company limits the amount of financial exposure and the amount of
         agreements entered into with any one financial institution. While the
         contract or notional amounts of derivative financial instruments
         provide one measure of the volume of these transactions, they do not
         represent the amount of the Company's exposure to credit risk. The
         amounts potentially subject to credit risk (arising from the inability
         of the counterparties to meet the terms of their contracts) are
         generally limited to the amounts, if any, by which the counterparty's
         obligations under the contracts exceed the obligations of the Company
         to the counterparties.

         On March 31, 2000, the FASB issued Interpretation No. 44, ACCOUNTING
         FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AN
         INTERPRETATION OF ACCOUNTING PRINCIPLES BOARD OPINION NO. 25. This
         interpretation modifies the current practice of accounting for certain
         stock award agreements and is generally effective beginning July 1,
         2000. The initial impact of this interpretation on our results of
         operations and financial position was not material, but its application
         may have a material impact on future accounting for stock based
         compensation transactions.

         Effective June 30, 2001, the FASB issued SFAS No. 141, BUSINESS
         COMBINATIONS. This statement requires that all business combinations
         initiated after June 30, 2001, be accounted for using the purchase
         method. The FASB also issued SFAS No. 142, GOODWILL AND OTHER
         INTANGIBLE ASSETS. Under SFAS No. 142, goodwill is no longer subject to
         amortization over its estimated useful life. Rather,


                                       5
<Page>


                         VELOCITA CORP. AND SUBSIDIARIES
                          (A DEVELOPMENT STAGE COMPANY)

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

         goodwill will be subject to at least an annual assessment for
         impairment by applying a fair-value based test. The provisions of these
         statements are required to be adopted by the Company for its fiscal
         year beginning January 1, 2002. The Company does not currently have
         goodwill or acquired intangible assets; therefore, management does not
         believe the adoption of the new statements will have a material impact
         on the Company's financial condition or results of operations.

         During June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
         RETIREMENT OBLIGATIONS. This statement establishes the accounting for
         legal obligations associated with the retirement of long-lived assets
         that result from the acquisition, construction, development and/or the
         normal operation of a long-lived asset, except for certain obligations
         of lessees. This statement is effective for fiscal periods beginning
         after June 30, 2002. The Company does not believe the adoption of this
         statement will have a material impact on the Company's financial
         condition or results of operations.

         Effective August 31, 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR
         THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. This statement
         superceded SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
         ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF and established a
         single accounting framework for the disposal of a segment of a business
         or other long-lived asset to be disposed of through a sale. Initial
         adoption of this statement is not expected to have a material impact on
         the Company's financial position or results of operations.

2.       PROPERTY AND EQUIPMENT, NET

         The Company continues to construct approximately 6,400 miles of its
         total network. Costs associated directly with the uncompleted routes on
         the network are capitalized and interest expense incurred during
         construction is capitalized based on the weighted average accumulated
         construction expenditures and the interest rates related to borrowings
         associated with the construction. Upon completion of routes on the
         network, these assets will be placed in service and depreciated over
         their estimated useful lives ranging from three to 25 years.
         Capitalized business support systems and network construction costs
         that have not been placed in service have been classified as
         construction in progress within property and equipment below.

<Table>
<Caption>

                                                        DEPRECIABLE        SEPTEMBER 30,        DECEMBER 31,
         (Dollars in thousands)                            LIVES               2001                2000

<S>                                                     <C>                <C>                  <C>
         Land                                                       --     $    4,164           $   2,108
                                                         5-10 years or
         Facility and leasehold improvements            the lease term          1,934                  67
         Furniture, fixtures and office equipment              7 years          2,382                 306
         Computer equipment                                  3-5 years          7,706               3,569
         Acquired network assets                              20 years         42,177              11,153
         Construction-in-progress                                   --        678,900             326,442
                                                                           ----------           ---------

                                                                              737,263             343,645
         Less accumulated depreciation                                         (2,289)               (567)
                                                                           ----------           ---------

         Property and equipment, net                                       $  734,974           $ 343,078
                                                                           ==========           =========
</Table>

         Acquired network assets as of September 30, 2001 consist primarily of
         prepayments for the acquisition of dark fiber pursuant to IRUs with
         certain other telecommunications providers.


                                       6
<Page>


                         VELOCITA CORP. AND SUBSIDIARIES
                          (A DEVELOPMENT STAGE COMPANY)

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


3.       COMMITMENTS AND CONTINGENCIES

         In March 2001, the Company purchased network capacity and colocation
         services from Winstar Wireless, Inc. ("Winstar"). The Company paid $25
         million to Winstar in connection with the execution of the agreement,
         which has been recorded in the accompanying financial statements as
         network capacity and services. In March 2001, the Company sold Winstar
         conduits under a 20-year IRU for $25 million in cash and an additional
         $25 million to be paid in May 2001. The Company received $25 million in
         cash that has been recorded as deferred revenue.

         On April 18, 2001, Winstar filed for protection under Chapter 11 of the
         U.S. Bankruptcy Code. The Company has held various discussions with
         Winstar related to utilization of the services purchased from Winstar;
         however, the Company cannot determine what impact, if any, the
         bankruptcy filing will have on Winstar's ability to provide these
         services. Should these services be undeliverable or the agreement
         rejected as part of Winstar's bankruptcy proceeding, the Company may
         have an impairment charge of up to $25 million for the write-off of the
         recorded network capacity. The services agreement provided for the
         Company to pay an additional $25 million to Winstar in May 2001. On
         July 23, 2001, Winstar filed an action in the U.S. Bankruptcy Court
         seeking payment of the additional $25 million. Management does not
         believe the Company is obligated to pay additional amounts and intends
         to vigorously defend itself against this claim.

         On July 25, 2001, Winstar filed a motion in the U.S. Bankruptcy Court
         to reject the contract for the purchase of conduit from the Company as
         described above. The Company has objected to this motion and believes
         it has meritorious defenses against Winstar's motion to reject the
         conduit purchase contract without also rejecting the capacity and
         colocation agreement. Hearings before the bankruptcy court are pending.
         The Company will account for any write-offs of assets and deferred
         revenue when the rulings of the Bankruptcy Court related to these
         contracts with Winstar are made. Resolution of these matters is not
         expected to have a material adverse effect on the Company.

         LITIGATION - The Company is a party to various claims involving
         employee related matters. Management believes that the claims are
         without merit and the Company intends to vigorously defend itself
         against them. The Company is a party to various other legal proceedings
         arising in the ordinary course of business, including issues related to
         obtaining rights of way and construction liens. In addition, the
         Company has also been a party to bankruptcy proceedings involving
         select customers and vendors. Although a number of uncertainties exist
         in any bankruptcy and the rights and obligations of the counter party
         and its creditors will be determined in the bankruptcy court, the
         Company does not believe these proceedings, or other legal claims, will
         have a material adverse effect on the Company's financial condition or
         results of operations.

         EQUIPMENT SUPPLY AGREEMENT - On April 12, 2001, PF.Net Corp., a wholly
         owned subsidiary of the Company entered into an agreement (the "Supply
         Agreement") with Cisco Systems, Inc. ("Cisco") pursuant to which Cisco
         will supply optronics equipment, data internetworking equipment and
         other specified services for the Company's network. Under the Supply
         Agreement, the Company has committed to purchase at least $225 million
         of equipment and services through May 24, 2003.

         LEASE COMMITMENTS - During August 2001, the Company moved to its new
         headquarters location in the Washington, DC metropolitan area
         pursuant to a ten-year operating lease with average annual lease
         payments of approximately $2.8 million. In addition, as the Company
         has continued to build its network, obligations under operating
         leases related primarily to POP sites have grown to an average
         annual amount of approximately $6 million over lease terms of at
         least ten years.

         OTHER AGREEMENTS - During 2001, the Company entered into agreements for
         the acquisition of telecommunications capacity, local interconnection,
         private line and other services from other telecommunications
         providers. The non-cancelable agreements require us to purchase
         approximately $33.6 million of capacity and services from 2001 through
         April 2004.



                                       7
<Page>


                         VELOCITA CORP. AND SUBSIDIARIES
                          (A DEVELOPMENT STAGE COMPANY)

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

         EMPLOYMENT AGREEMENT - As of October 1, 2001, the Company entered into
         an agreement with its Executive Chairman of the Board of Directors,
         Mr. Robert Annunziata. The agreement provides that Mr. Annunziata's
         term will extend through December 31, 2002, unless it is mutually
         agreed to extend the term. The agreement entitles Mr. Annunziata to
         annual compensation consisting of a base compensation of $500,000 and a
         minimum bonus of $500,000 during 2002. He will also receive a signing
         bonus of $2.5 million payable in equal installments during October 2001
         and January 2002. The agreement entitles Mr. Annunziata to bonuses in
         connection with certain transactions, as defined in the agreement,
         which may be entered into by the Company during the term of the
         agreement. As a result of the agreement, on October 1, 2001, Mr.
         Annunziata forfeited 4.2 million options to purchase the Company's
         common stock. Upon termination during the term of the agreement,
         Mr. Annunziata will receive his base compensation and any other
         payments due him under the Company's policies, through the effective
         date of termination. If Mr. Annunziata is terminated by the Company
         without "Cause" or he terminates the agreement with "Good Reason",
         both as defined in the agreement, he will receive his base
         compensation through December 31, 2002, or twelve months, if greater
         and the annual bonus for the year of termination.

         Also as of October 1, 2001, Mr. Annunziata entered into an agreement
         with the Company's current shareholders pursuant to which he will be
         eligible to receive 5% of the "Profit" of each shareholder upon the
         completion of a transaction or series of related transactions, as
         defined in the agreement. Mr. Annunziata will only receive the payment
         if he fulfills his obligations under the agreement described above and
         he is serving as the Executive Chairman of the Company at the time of
         execution of the transaction, subject to certain termination provisions
         contained in the agreement. The amount of payment received by Mr.
         Annunziata under this agreement is subject to adjustment based on
         conditions as specified in the agreement.

4.       SERIES B REDEEMABLE CONVERTIBLE SENIOR PREFERRED STOCK

         On May 24, 2001, the Company issued 2,000,000 shares of its Series B
         Senior Cumulative Convertible Preferred Stock (the "Series B Preferred
         Stock") for gross proceeds of $200 million. The Series B Preferred
         Stock has an initial liquidation preference of $100 per share.
         Dividends on the Series B Preferred Stock are cumulative from the date
         of issuance at an annual rate equal to the liquidation preference
         multiplied by 10% compounded quarterly, payable in increases in the
         liquidation preference of the Series B Preferred Stock. Holders of the
         Series B Preferred Stock may convert their shares, in whole or in part,
         into common stock by dividing the sum of the liquidation preference
         plus accrued dividends by the conversion price of $8.50 per share. The
         Series B Preferred Stock will automatically convert to common stock
         upon the consummation of certain transactions. The Series B Preferred
         Stock provides for mandatory redemption on August 15, 2010 at a price
         in cash equal to the liquidation preference amount plus accumulated and
         unpaid dividends through the date of redemption.

         The holder of the Series B Preferred Stock is entitled to vote on all
         matters submitted to a vote of the holders of the Company's capital
         stock as if all shares of Series B Preferred Stock were converted into
         common shares. The Preferred Stock is senior to the Company's common
         stock with respect to dividend distributions and distributions on
         liquidation.

         In connection with the issuance of the Series B Preferred Stock, the
         Company granted to the holder of the Series B Preferred Stock
         contingent anti-dilution warrants to purchase shares of common stock at
         a price of $0.01 per share. The anti-dilution warrants vest and become
         exercisable from time to time in connection with the vesting of other
         contingent warrants previously issued by the Company (the "Prior
         Contingent Warrants") for a number of shares of common stock that will
         cause the percentage of the common stock held by such holder, after
         giving effect to the exercise of the anti-dilution warrants and the
         Prior Contingent Warrants, to equal the percentage of the common stock
         held by such holder immediately prior to such exercise. The Company
         will record the fair value of the anti-dilution warrants, if any, when
         the issuance of the anti-dilution warrants is probable and the number
         of shares is reasonably determinable.

         In connection with the issuance of the Series B Preferred Stock, the
         Company issued contingent Performance Warrants to the holder of the
         Series B Preferred Stock to purchase 5,000,000 shares of the Company's
         common stock at an exercise price of $0.01 per share. The Performance
         Warrants will vest and become exercisable on (a) the date of any equity
         issuance at a price per share that is less than the holder's effective
         cost per share, except for certain exempt issuances as defined in the
         warrant agreement or (b) June 30, 2003, in the event of a failure to
         reach certain revenue and earnings before interest, income taxes,
         depreciation and amortization (EBITDA) targets, as defined in the
         agreement, or to complete a sale of the Company or public offering at
         specified valuations. The Company will record the fair value of the
         Performance Warrants, if any, when the issuance of the Performance
         Warrants is probable and the number of shares to be issued is
         reasonably determinable.

         The issuance of the Series B Preferred Stock relieved the Company of
         its contingent obligation to issue additional warrants under the terms
         of its high yield debt offering in 2000. Additionally, according to the


                                       8
<Page>


                         VELOCITA CORP. AND SUBSIDIARIES
                          (A DEVELOPMENT STAGE COMPANY)

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

         terms of the Company's note payable to affiliate, approximately $12.4
         million in principal and interest was repaid as a result of the
         issuance of the Series B Preferred Stock.

5.       PUT WARRANTS

         In connection with a network development agreement with AT&T, in
         October 1999 the Company issued warrants to AT&T (the "Put Warrants")
         to purchase 14,141,414 shares of the Company's common stock at a price
         of $2.8125 per share, the estimated fair value of the Company's common
         stock at the date of grant. In the event that the Company does not
         complete an initial public offering by October 29, 2004, the holder of
         the warrants shall have the right to require the Company to repurchase
         the unexercised shares at the difference between the warrant exercise
         price and the fair market price of the Company's common stock on the
         date of repurchase. The Put Warrants expire October 29, 2004 or, in the
         event the Company has not completed an initial public offering by
         October 29, 2004, they will expire on October 29, 2006.

         The Company recorded the initial fair value of these warrants upon
         issuance, approximately $25.8 million, as construction-in-progress and
         a corresponding amount to Put Warrants. The Company recognizes changes
         to the fair market value of the Put Warrants in earnings. The Company
         recognized non-cash charges totaling $23 million for the nine months
         ended September 30, 2001, and $42.2 million for the nine months ended
         September 30, 2000, to reflect the increase in the value of the Put
         Warrants.

6.       STOCK COMPENSATION

         The Company granted approximately 3.2 million nonqualified stock
         options ("NQSO") to employees during the nine months ended September
         30, 2001 at a weighted-average exercise price of $6.83 per share. The
         compensation expense recognized for the three and nine months ended
         September 30, 2001 in accordance with Accounting Principles Board
         Opinion No. 25 was approximately $464,000 and $1.1 million,
         respectively. As of September 30, 2001, the Company has approximately
         $2.2 million of unamortized compensation expense within stockholders'
         equity that will be recorded as compensation expense through
         approximately April 2004.

         The Company recognized $437,000 and $887,099 of compensation expense
         for the three and nine months ended September 30, 2000, respectively,
         for NQSOs granted in 1999 and 2000.

7.       CREDIT FACILITY

         On May 24, 2001, the Company's credit facility with First Union
         National Bank was amended (the "Credit Facility") to provide for an
         additional $297.4 million in vendor financing to be provided by Cisco
         Systems Capital Corporation in the amount of $285 million and by an
         affiliate in the amount of $12.4 million. The amendment to the Credit
         Facility results in total borrowing capacity of $647.4 million.

         The amended Credit Facility provides for term notes under Tranche A and
         a revolving facility. The Tranche A facility provides for borrowings of
         up to approximately $497.4 million, and the revolving facility provides
         for borrowings of up to $150 million. The Tranche A facility is
         comprised of three subfacilities (i) $160 million available for the
         purchase of vendor products and services used in the construction of
         the network, (ii) $40 million available to finance general capital
         expenditures and operating expenses associated with development of our
         network, as defined, and (iii) $297.4 million available for the
         purchase of specified vendor products and services used in the
         construction of the network. The revolving facility provides for
         borrowings for general capital expenditures and operating expenses
         associated with the development of the network and working capital
         needs.

         During the nine months ended September 30, 2001, the Company borrowed
         amounts totaling $304.1 million, net of $50 million in repayments,
         under the Credit Facility. The current borrowings under the Credit
         Facility bear interest at the three-month or six-month LIBOR plus a
         spread of 4.75 percent. The weighted average interest rate for the
         borrowings as of September 30, 2001 is approximately 8.0%.



                                       9
<Page>


                         VELOCITA CORP. AND SUBSIDIARIES
                          (A DEVELOPMENT STAGE COMPANY)

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


         The Credit Facility is subject to certain restrictive covenants
         including minimum route mile completion in accordance with the
         Company's network development agreement with AT&T, minimum revenue and
         operating results before interest, income taxes, depreciation and
         amortization and certain debt to equity ratios. In connection with the
         amendment to the Credit Facility, certain financial covenants were
         revised. The Company was in compliance with all debt covenants as of
         September 30, 2001.

         The Credit Facility requires the Company to hedge the risks related to
         interest rate movements through the use of interest rate protection
         agreements or other derivative instruments and as necessary to ensure
         that at least 50% of the Company's consolidated indebtedness either
         bears interest at a fixed rate or is protected against interest rate
         fluctuations by a hedging agreement that fixes or limits the
         Company's interest cost. As a result of this requirement and our
         additional borrowings under the Credit Facility during the third
         quarter, the Company entered into two interest rate cap agreements
         to fix the rate of interest on $75 million of the outstanding
         variable rate debt. The terms of the agreements provide that the net
         interest expense related to $75 million of the borrowings under the
         Credit Facility will not exceed 12%. The agreements therefore cap
         the LIBOR portion of the interest rate at 7.25%. At September 30,
         2001, the Company had $300 million of fixed rate debt bearing interest
         ranging from 7.375% to 13.75%; however, the debt currently bearing
         interest at 7.375% could potentially increase to the cap amount of
         12% in the future. The cash requirements of the Company's financial
         instruments approximate their fair value.

         As of September 30, 2001, the Company has a total of approximately
         $339.4 million (net of $3.9 million in outstanding letters of credit)
         available under the Credit Facility, assuming the Company meets
         certain spending requirements with respect to our network and the
         equipment purchased from Cisco for use on our network.

         The Credit Facility is secured by substantially all of the assets of
         PF.Net Corp. (a wholly-owned subsidiary of the Company) and its
         subsidiaries.

8.       AMENDMENT TO NETWORK DEVELOPMENT AGREEMENT

         On July 27, 2001, the Company and AT&T amended the original network
         development agreement initially entered into during October 1999 and
         amended in December 2000, related to the construction of the Company's
         network. The Company also amended the dark fiber purchase agreement
         entered into during December 2000 related to the purchase of fiber from
         AT&T. The Company will reduce its overall capital expenditures by
         approximately $47 million as a result of the amendment to the network
         development agreement and will receive approximately $15 million less
         from AT&T for AT&T's share of the constructed routes.

         The amendments to the network development agreement and the dark
         fiber purchase agreement will result in an overall increase in
         route miles to the current network of approximately 1,450 miles. The
         total purchase commitment under the amended dark fiber purchase
         agreement remains substantially the same as the original commitment.
         The Company is now purchasing an average of 12 fibers over 9,000
         route miles, as compared to an average of 15 fibers over 7,155 miles
         as per the original agreement. In addition, the Company now has the
         right to accept up to half the fiber count on route segments through
         2006, which will allow the Company to defer approximately $68 million
         of payments into 2003 and beyond.

         In summary, through these two amendments and other minor mileage
         adjustments, the Company has been able to reduce overall capital
         expenditures while at the same time increasing total network route
         miles to more than 20,000.


                                       10
<Page>


                         VELOCITA CORP. AND SUBSIDIARIES
                          (A DEVELOPMENT STAGE COMPANY)

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

9.       OTHER MATTERS

         Effective September 7, 2001, Mr. David Duncan resigned as the Koch
         Telecom designee on our Board of Directors. Mr. Duncan was replaced by
         Mr. Tim Cesarek as the Koch Telecom designee and John Warta was elected
         as a PF Telecom designee on the Board of Directors effective September
         24, 2001.

10.      MAJOR CUSTOMERS

         The Company is currently in the development stage with revenue from two
         customers amounting to 66% and 25%, respectively, of total revenue for
         the three months ended September 30, 2001. For the nine months ended
         September 30, 2001, these customers represented 43% and 34%,
         respectively, of total revenue.



                                       11
<Page>


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

         The following discussion should be read in conjunction with the
Company's condensed consolidated financial statements (including the notes
thereto), included elsewhere herein.

         This Report on Form 10-Q contains forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, Rule 175 under the Securities Act, Rule 3b-6 under the
Exchange Act and Securities Act Release No. 6084 (June 25, 1979). These
forward-looking statements may be affected by risks and uncertainties, including
without limitation, our ability to (i) remain in compliance with our current
debt agreements and indenture covenants; (ii) obtain additional capital and
financing, as required, at reasonable costs and on satisfactory terms and
conditions; (iii) effectively and efficiently manage the completion and lighting
of the route segments of our fiber-optic network through construction and
swapping; and (iv) access markets and enter into contracts to sell or swap dark
fiber or lease high-volume capacity on our fiber-optic network. These
forward-looking statements also depend on the timely performance by third-party
contractors and our swap partners of their obligations. There can be no
assurance that we will remain in compliance with our current debt agreements or
indenture covenants, obtain additional capital and financing as required,
successfully manage construction and lighting of our network or sell fiber and
capacity to additional customers. A failure of any of the foregoing may
significantly delay or prevent completion of our fiber-optic network, which
would have a material adverse effect on our financial condition and results of
operations. In light of such risks and uncertainties, our actual results could
differ materially from such forward-looking statements. We do not undertake any
obligation to publicly release any revisions to any forward-looking statements
contained herein to reflect events and circumstances occurring after the date
hereof or to reflect the occurrence of unanticipated events.

OVERVIEW

         Our goal is to become a leading facilities-based provider of
technologically advanced, high-capacity fiber-optic network infrastructure,
private networks and communications services throughout the continental United
States. We intend to pursue a broadband carrier strategy by connecting many of
the highest volume telecommunications markets and customers in the United States
to each other and to the Internet. Our services will include data, video and
voice transmission to Internet service providers, telecommunications carriers,
corporate and governmental entities and other datacentric buyers of network
capacity. Through joint construction arrangements and fiber and conduit swaps,
sales and purchases, we intend to assemble a low-cost, upgradeable nationwide
fiber-optic network consisting of approximately 20,000 miles, of which we
currently expect to light at least 16,500 miles through 2002. Through our own
constructed and partner provided points of presence (POPs), our network will
have access to over 175 metropolitan areas in the continental United States and
all of the top 20 MSAs.

         We are currently planning to construct approximately 6,400 miles of our
network and to acquire an additional 13,500 miles through a swap agreement with
Touch America for approximately 4,500 miles and a fiber acquisition agreement
with AT&T Corp. ("AT&T") for approximately 9,000 miles. The constructed portion
of our network will include substantial fiber and empty conduit. We may expand
our network over time through swaps and sales of fiber and conduit, fiber and
conduit purchases and additional joint construction arrangements.

         On October 29, 1999, we entered into an agreement with AT&T to build
approximately one-half of the outsourced segments of AT&T's state-of-the-art
fiber optic network. The construction contemplated by the AT&T network
development agreement, as amended on December 9, 2000 and again on July 27,
2001, now represents approximately 6,100 miles of the total 6,400-mile
constructed portion of our network, connecting major metropolitan areas along
AT&T's network. We believe that this agreement will provide us with many
business, operational and marketing advantages. AT&T is now paying us an
aggregate of approximately $285 million for our construction services, including
approximately $9 million for construction related to optical amplifier sites,
thus reducing our overall network construction costs. In addition, we will
design and construct this portion of the network to AT&T's specifications, which
will ensure network quality and reliability and provide us with a key marketing
advantage in offering our


                                       12
<Page>

services. AT&T has also agreed to provide its private rights of way for use on
the AT&T portion of our network. We and AT&T intend to jointly dispose of up to
96 dark fibers along these 6,100 route miles, which will further reduce our
overall network construction costs. We will each contribute up to 48 fibers to
these joint dispositions.

         On February 25, 2000, we entered into a conduit and fiber swap
agreement with Touch America, a subsidiary of Montana Power, that will provide
us with a combination of fiber and conduit over approximately 4,500 route miles
of its network and approximately $48.5 million in cash in exchange for a
combination of fiber and conduit over approximately 5,900 route miles of our
network. Touch America is constructing most of these route miles pursuant to a
joint construction agreement with AT&T similar to our agreement with AT&T and is
currently scheduled to complete the majority of this project during 2002 with
the remaining portion during 2003. The total payments from Touch America are
subject to adjustment based on the final route miles exchanged. We do not expect
the adjustment to be greater than 20% of the original contract estimate.

         We are a development stage company and, accordingly, we have a limited
operating history. The development, construction and expansion of our network
will require substantial amounts of capital to be invested before any
significant recurring revenue is generated. We expect to continue to incur
significant and increasing operating losses and negative earnings before
interest, income taxes, depreciation and amortization ("EBITDA") while we
construct our network and develop our customer base. We do not anticipate
significant revenue from sales of broadband services until 2002. In order for us
to meet our strategic objectives, we must complete the constructed portion of
our network according to our build schedule and generate a substantial volume of
traffic on our network. In addition, we will rely upon Touch America and AT&T
for timely completion and delivery of their network obligations.

RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1998, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES.
This statement, as amended by SFAS Nos. 137 and 138, establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. We were required to adopt SFAS No. 133 on January 1, 2001 and its
adoption did not have a significant impact on our financial position or results
of operations.

         The cash requirements of the Company's financial instruments
approximate their fair value. Cash flows associated with these financial
instruments will be classified consistent with the cash flows of the
transactions being hedged. Derivative financial instruments involve, to a
varying degree, elements of market and credit risk not recognized in the
consolidated financial statements. The market risk associated with these
instruments resulting from interest rate fluctuations is expected to offset
the market risk of the underlying transactions, assets and liabilities being
hedged.

         The counterparties to the agreements relating to the Company's interest
rate instruments are major international financial institutions with high
credit ratings. The Company does not believe that there is significant risk of
nonperformance by these counterparties because the Company limits the amount of
financial exposure and the amount of agreements entered into with any one
financial institution. While the contract or notional amounts of derivative
financial instruments provide one measure of the volume of these transactions,
they do not represent the amount of the Company's exposure to credit risk. The
amounts potentially subject to credit risk (arising from the inability of the
counterparties to meet the terms of their contracts) are generally limited to
the amounts, if any, by which the counterparty's obligations under the
contracts exceed the obligations of the Company to the counterparties.

         In June 1999, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 43 (FIN 43), REAL ESTATE SALES, AN INTERPRETATION
OF FASB STATEMENT NO. 66, which is effective for transactions entered into
after June 30, 1999. FIN 43 required that sales of integral equipment,
including fiber and conduit, should be treated the same as sales of real
estate. Prior to the issuance of FIN 43, IRUs were evaluated for sales-type
lease accounting, which may result in certain lease transactions being
accounted for as sales at the time of acceptance of fiber by the customer.
IRUs that did not meet the criteria for a sales-type lease were accounted for
as an operating lease, and the cash received was recognized as revenue over
the term of the IRU. In May 2000, the Emerging Issues Task Force (EITF)
reached a tentative conclusion on EITF 00-11, MEETING THE OWNERSHIP TRANSFER
REQUIREMENTS OF FASB STATEMENT NO. 13 FOR LEASES OF REAL ESTATE. This
tentative conclusion stated that transfers of title should be determined
using the guidance set forth in Article 2 of the Uniform Commercial Code.
In July 2001, the EITF reached a consensus that integral equipment subject to
a lease should be evaluated as real estate. Further, a consensus was reached
that for integral equipment or property improvements for which no statutory
title registration system exists, the lessor must execute and deliver such
documents that transfer ownership by the end of the lease term. The effect
of EITF 00-11 was to allow the use of sales-type lease accounting for
IRUs.
         On March 31, 2000, the FASB issued Interpretation No. 44, ACCOUNTING
FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AN INTERPRETATION OF
ACCOUNTING PRINCIPLES BOARD OPINION NO. 25. This interpretation modifies the
current practice of accounting for certain stock award agreements and is
generally effective beginning July 1, 2000.

         In June 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS. This
statement requires that all business combinations initiated after June 30, 2001,
be accounted for using the purchase method. Also in June 2001, the FASB issued
SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Under SFAS No. 142, goodwill
is no longer subject to amortization over its estimated useful life. Rather,
goodwill will be subject to at least an annual assessment for impairment by
applying a fair-value based test. The


                                       13
<Page>

provisions of these statements are required to be adopted by the Company for
its fiscal year beginning January 1, 2002. We do not currently have goodwill
or acquired intangible assets; therefore, we do not believe the adoption of
the new statements will have a material impact on our financial condition or
results of operations.

         During June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS. This statement establishes the accounting for legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. This statement is
effective for fiscal periods beginning after June 30, 2002. The Company does not
believe the adoption of this statement will have a material impact on the
Company's financial condition or results of operations.

         Effective August 31, 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. This statement superceded SFAS
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF and established a single accounting framework for the
disposal of a segment of a business or other long-lived asset to be disposed of
through a sale. Initial adoption of this statement is not expected to have a
material impact on the Company's financial position or results of operations.


RECENT DEVELOPMENTS

         ISSUANCE OF SERIES B PREFERRED STOCK

         On May 24, 2001, we issued 2,000,000 shares of our Series B Senior
Cumulative Convertible Preferred Stock (the "Series B Preferred Stock") for
gross proceeds of $200 million. The Series B Preferred Stock has an initial
liquidation preference of $100 per share. Dividends on the Series B Preferred
Stock are cumulative from the date of issuance at an annual rate equal to the
liquidation preference multiplied by 10% compounded quarterly, payable in
increases in the liquidation preference of the Series B Preferred Stock. The
holder of the Series B Preferred Stock may convert their shares, in whole or in
part, into common stock by dividing the sum of the liquidation preference plus
accrued dividends by the conversion price of $8.50 per share. The Series B
Preferred Stock will also automatically convert to common stock upon the
consummation of certain transactions. The Series B Preferred Stock provides for
mandatory redemption on August 15, 2010 at a price in cash equal to the
liquidation preference amount plus accumulated and unpaid dividends through the
date of redemption.

         The holder of the Series B Preferred Stock is entitled to vote on all
matters submitted to a vote of the holders of our capital stock as if all shares
of the Series B Preferred Stock were converted to common stock. The Preferred
Stock is senior to our common stock with respect to dividend distributions and
distributions on liquidation.

         In connection with the issuance of the Series B Preferred Stock, we
granted to the holder of the Series B Preferred Stock contingent anti-dilution
warrants to purchase shares of common stock at a price of $0.01 per share. The
anti-dilution warrants vest and become exercisable from time to time in
connection with the vesting of other contingent warrants previously issued by
the Company (the "Prior Contingent Warrants") for a number of shares of common
stock that will cause the percentage of the common stock held by such holder
after giving effect to the exercise of the anti-dilution warrants and the Prior
Contingent Warrants to equal the percentage of the common stock held by such
holder immediately prior to such exercise.

         In connection with the issuance of the Series B Preferred Stock, we
granted to the holder of the Series B Preferred Stock contingent warrants (the
"Performance Warrants") to purchase 5,000,000 shares of the Company's common
stock at an exercise price of $0.01 per share. The Performance Warrants will
vest and become exercisable on (a) the date of any equity issuance at a price
per share that


                                       14
<Page>

is less than the effective price per share paid by the holder of the Series B
Preferred Stock, except for certain exempt issuances, as defined in the warrant
agreement or (b) June 30, 2003, in the event of a failure to reach certain
revenue and EBITDA targets, as defined in the agreement, or to complete a sale
of the Company or public offering at specified valuations.

         The issuance of the Series B Preferred Stock relieved our contingent
obligation to issue additional warrants under the terms of our high yield debt
offering in 2000. Additionally, according to the terms of the Company's note
payable to affiliate, approximately $12.4 million in principal and interest was
repaid as a result of the issuance of the Series B Preferred Stock.

         SUPPLY AGREEMENT WITH CISCO SYSTEMS, INC.

         On April 12, 2001, PF.Net Corp., our wholly owned subsidiary, entered
into an agreement (the "Supply Agreement") with Cisco pursuant to which Cisco
will supply optronics and data internetworking equipment for our network. We
have committed to purchase at least $225 million of equipment and services from
Cisco through May 24, 2003.

         AMENDMENT TO FIRST UNION CREDIT FACILITY

         On May 24, 2001, in connection with the Supply Agreement described
above, our credit facility with First Union National Bank was amended to provide
for an additional $297.4 million in vendor financing to be provided by Cisco
Systems Capital Corporation in the amount of $285 million and by an affiliate in
the amount of $12.4 million. The amendment to the Credit Facility results in
total borrowing capacity of $647.4 million.

         As amended, the First Union Credit Agreement provides for term notes
under Tranche A and a revolving facility. The Tranche A facility provides for
borrowings of up to approximately $497.4 million, and the revolving facility
provides for borrowings of up to $150 million. The Tranche A facility is
comprised of three subfacilities (i) $160 million available for the purchase of
vendor products and services used in the construction of the network, (ii) $40
million available to finance general capital expenditures and operating expenses
associated with development of our network, as defined, and (iii) $297.4 million
available for the purchase of vendor products and services used in the
construction of the network. The revolving facility provides for borrowings for
general capital expenditures and operating expenses associated with the
development of the network and working capital needs.

         Borrowings under the Credit Facility bear interest, at PF.Net Corp.'s
option, at the following rates per annum: (i) LIBOR (4.18% annual rate as of
September 30, 2001) plus an applicable margin ranging between 3.50% to 4.75% per
annum based on PF.Net Corp.'s consolidated leverage ratio or (ii) a base rate,
which is equal to the greater of (a) the current prime rate of First Union, or
(b) the current U.S. federal funds rate plus 0.5% per annum, plus an applicable
margin, ranging from 2.25% to 3.50% per annum based on the status of our
subsidiary's consolidated leverage ratio. Indebtedness under the First Union
Credit Agreement matures on December 31, 2006.

         The First Union Credit Agreement is subject to certain restrictive
covenants including minimum route mile completion in accordance with PF.Net
Corp.'s network development agreement with AT&T, minimum revenue and operating
results before interest, income taxes, depreciation and amortization and certain
debt to equity ratios. The Credit Facility is secured by substantially all of
the assets of PF.Net Corp. and its subsidiaries.

         As of September 30, 2001, we had a total of approximately $339.4
million (net of $3.9 million of outstanding letters of credit) available under
the Credit Facility, assuming we meet certain spending requirements with respect
to our network and the equipment purchased from Cisco for use on our network.



                                       15
<Page>


         AMENDMENTS TO AT&T AGREEMENTS

         On July 27, 2001, we and AT&T amended the original network development
agreement entered into during October 1999 related to the construction of our
network and the dark fiber purchase agreement entered into during December 2000
related to our purchase of fiber from AT&T. We will reduce our overall capital
expenditures by approximately $47 million as a result of the amendment to the
network development agreement and will receive approximately $15 million less
from AT&T for AT&T's share of the constructed routes. This amendment results in
a net reduction in capital expenditures of approximately $32 million through
December 2002.

         The amendments to the network development agreement and the dark fiber
purchase agreement will result in an overall increase in route miles to the
current network of approximately 1,450 miles. The total commitment under the
amended dark fiber purchase agreement remains substantially the same as the
original commitment; however, we now have the right to accept route segments
through 2006, which will allow us to defer approximately $68 million of payments
into 2003 and beyond. These two amendments allow us to reduce our overall
capital expenditures while at the same time increasing our total network route
miles to more than 20,000.

         BUSINESS UPDATE

         We are continuing to increase our construction expenditures as we
continue the build-out of our nationwide network. Construction expenditures
approximated $392 million during the nine months ended September 30, 2001, and
we anticipate construction spending in the near term will increase from these
levels as we continue our network build, pull fiber on our first phase network
routes and begin lighting our network.

         We began pulling fiber through conduit in August 2000 and we lit our
first route (Houston to Jacksonville) for testing purposes in the second quarter
of 2001. Successful testing of our Houston to Jacksonville route was completed
in the third quarter. On November 1, 2001, the Houston to Jacksonville route was
formally placed in service and we have begun carrying customer traffic on this
route. Our Tulsa to St. Louis route is complete and we expect to have dark fiber
IRU revenue on this route beginning in the fourth quarter. We have experienced
some permitting and construction delays on certain routes; however, our network
build plan remains on track to be substantially completed during 2002. As of
September 30, 2001, we had approximately 4,400 route miles of conduit in the
ground and approximately 3,400 route miles of fiber-optic cable installed.

         AT&T is making payments to us for our progressive construction of its
portion of our network. Touch America is also making payments to us for our
progressive construction of network links that will be swapped pursuant to our
swap agreement with them. Through September 30, 2001, we have received an
aggregate of approximately $225.9 million pursuant to our network development
agreement with AT&T and from proceeds related to dark fiber and conduit
dispositions. During the nine months ended September 30, 2001, we entered into
various dark fiber and conduit sale or IRU agreements resulting in year to date
proceeds of approximately $71.3 million. The majority of these proceeds will be
recognized over the term of the related IRU or underlying service agreements
beginning in the fourth quarter of 2001.

         In March 2001, we purchased network capacity and colocation services
from Winstar Wireless, Inc. ("Winstar") for an aggregate purchase price of $50
million, with $25 million paid in the first quarter of 2001 and the remaining
$25 million due in May 2001. On April 18, 2001, Winstar filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. We have had various discussions
with Winstar about continued utilization of the services; however, we cannot
determine what impact, if any, the bankruptcy filing will have on these
services. On July 23, 2001, Winstar filed an action in the U.S. Bankruptcy Court
seeking payment of the additional $25 million. Management does not believe the
Company is obligated to pay additional amounts and intends to vigorously defend
against this claim.



                                       16
<Page>

         In March 2001, we sold Winstar conduits under a 20-year IRU for $25
million paid in the first quarter of 2001 with an additional $25 million to be
paid in May 2001. On July 25, 2001, Winstar filed a motion in the U.S.
Bankruptcy Court to reject this contract. The Company has objected to this
motion and believes it has meritorious defenses against Winstar's motion to
reject the conduit purchase contract without also rejecting the capacity and
colocation agreement. Velocita management does not believe these proceedings
will have a material adverse effect on our financial condition or results of
operations.

         On August 14, 2001, we announced a reduction in our workforce by
approximately 75 employees, representing approximately 24% of our total full
time staff. The reductions primarily affected operations and sales, general and
administrative personnel. These changes are in accordance with our capital
conservation initiative to minimize overall cash operating expenses as we
continue our network completion in uncertain market and economic conditions. We
do not expect charges related to these reductions to materially impact the
Company.

         Effective September 7, 2001, Mr. David Duncan resigned as the Koch
Telecom designee on our Board of Directors. Mr. Duncan was replaced by Mr. Tim
Cesarek as the Koch Telecom designee on September 24, 2001 and John Warta was
elected as a PF Telecom designee on the Board of Directors on the same date.

         As of September 30, 2001, we had 21 primary communications services
customers to whom we resell capacity that we purchase from other
telecommunications providers. We are pursuing additional resale customers and we
plan to selectively migrate these customers to our network upon its completion
on a segment-by-segment basis, as appropriate. We also had multiple dark fiber
and conduit customers as of September 30, 2001, and we anticipate recording
revenue from these customers as they accept the respective fibers and conduit on
certain routes in the fourth quarter of 2001 and during 2002. We will also
provide maintenance and colocation services to some of these customers once the
respective fiber or conduit is delivered and accepted.

RESULTS OF OPERATIONS 2001 VS. 2000

         THIRD QUARTER 2001 VS. THIRD QUARTER 2000

         We are a development stage company without a significant history of
operating revenue. During the three months ended September 30, 2001, revenue
totaled approximately $4.5 million compared to approximately $63,000 during the
same period in the preceding year. This increase was due to the increase in the
number of resale customers from September 30, 2000 to September 30, 2001. During
the three months ended September 30, 2001, we also recognized revenue of $3
million related to a construction service contract to build optical amplifier
facilities for another telecommunications provider. We anticipate this contract
will generate total revenue of approximately $9.0 million through early 2002.

         Cost of revenue for the three months ended September 30, 2001 was
approximately $6.6 million, compared to $232,000 incurred during the third
quarter of 2000. The increase was a result of additional headcount within our
network operations group, incremental communication services customers resulting
in higher access costs and the costs associated with construction services
contracts entered into during 2001. The Company expects the cost of revenue to
continue to increase as we continue adding new communications customers and
enter into additional construction services contracts while continuing the
build-out of our network.

          Selling, general and administrative expenses were $10 million for the
third quarter of 2001, an increase from $9.2 million during the third quarter of
2000. Third quarter 2000 expenses include recruiting fees and bonuses related to
the hiring of executives in 2000, which decreased approximately $3.1 million.
Excluding these expenses, the increase in selling, general and administrative
expenses was approximately $3.9 million. This increase primarily relates to the
growth in headcount within the Company's selling, general and administrative
departments since September 30, 2000 to accelerate the launch of our
communication services business.



                                       17
<Page>

         Depreciation and amortization expenses for the quarter were $850,000,
an increase from $160,000 from the third quarter of 2000. The increase is a
direct result of the operational assets placed in service between September 30,
2000 and September 30, 2001, primarily including, furniture, fixtures, office
equipment, computer hardware and the leasehold improvements related to our new
headquarters facility in the Washington, DC metropolitan area.

         Interest income was $1.1 million for the quarter ended September 30,
2001, a decrease of $1.7 million from the third quarter 2000 amount of $2.8
million. The decrease resulted from lower average cash balances in 2001 as
compared to 2000 and declining interest rates. During 2000, we completed an
offering of high yield debt, resulting in gross cash proceeds of $225 million
and a higher average cash balance during 2000. We expect interest income to
decrease during the year as we continue construction spending for our network,
utilize available cash, and earn interest at a lower rate from lower market
rates.

         Net interest expense increased to $11.6 million for the third quarter
of 2001 from $3.1 million in 2000. The increase was due to the borrowings under
the Credit Facility, which were not drawn until January 2001, and higher
commitment fees as a result of the increased availability under the Credit
Facility subsequent to the vendor financing closed in May 2001. The amortization
of deferred financing costs associated with the vendor financing transaction
also contributed to the higher interest expense.

         NINE MONTHS ENDED SEPTEMBER 30, 2001 VS. NINE MONTHS ENDED SEPTEMBER
30, 2000


         Revenue increased to $7.0 million during the first nine months of 2001,
an increase of approximately $6.9 million over the same period in 2000. The
increase was due to the growth in the communications business and construction
services as a result of conduit installation contracts and the construction of
optical amplifier facilities for another telecommunications provider. We expect
the construction of these facilities to generate approximately $9.0 million in
revenue, with construction expected to be completed in early 2002. During the
fourth quarter of 2001 and early 2002, we anticipate increases in communications
services revenue due to additional resale customers and revenue associated with
customers on our recently lit route from Houston to Jacksonville.

         Cost of revenue for the first nine months of 2001 was $11.3 million,
compared to $311,000 for the same period in 2000. The increase was a result of
the buildup of staff within our network operations department, higher access
costs in connection with the growing communications business and the costs
associated with the construction services contracts entered into in 2001. The
Company expects the cost of revenue to continue to increase as we continue
adding new communications customers and enter into additional construction
contracts while continuing the build-out of our network through 2002.

          Selling, general and administrative expenses were $29.7 million in the
first nine months of 2001, representing an increase of 112% over the $14 million
amount for the same period in 2000. This increase primarily resulted from the
growth in the Company's selling, general and administrative departments during
the past 12 months to increase headcount to accelerate the launch of our
communication services business. We anticipate a reduction in expenses during
the fourth quarter when compared to the third quarter as a result of the
reduction in force and our capital conservation initiative.

          Depreciation and amortization expenses for the first nine months of
2001 were $1.7 million, an increase of $1.4 million over the $317,000 amount for
the same period in 2000. The increase is a direct result of the operational
assets placed in service between September 30, 2000 and September 30, 2001,
including, furniture, fixtures, office equipment, computer hardware and
leasehold improvements related to our new headquarters facility. We anticipate
depreciation and amortization expenses will increase significantly during the
fourth quarter and into 2002 as we implement business support systems and our
Houston to Jacksonville route becomes operational in November.

         Interest income was $3.8 million for the first nine months of 2001
compared to $7.4 million in the first nine months of 2000. The decrease of 49%
was primarily due to the lower average balance of cash and cash equivalents
during the first nine months of 2001 and declines in interest rates. Cash
balances


                                       18
<Page>

during the first nine months of 2000 included proceeds from our high yield units
offering and the Series A Preferred Stock issuance which significantly increased
our average cash on hand in 2000.

         Net interest expense for the nine months ended September 30, 2001 of
$16.8 million represents an increase of $2.5 million from the $14.3 million
amount for the same period in 2000. The increase was primarily due to the draws
on our Credit Facility, the increase in commitment fees as a result of the
increase in the amount available following our vendor financing transaction and
the increase caused by the amortization of deferred financing costs associated
with the vendor financing transaction. Partially offsetting the increases were
the higher capitalization of interest costs in the first nine months of 2001 as
we increased the monthly spending on our network build-out. Capitalized interest
was $26.1 million in the first nine months of 2001 and $19.5 million in the
first nine months of 2000. The Company expects net interest expense to increase
on a quarterly basis for the remainder of 2001 and into 2002 as we borrow
additional amounts under our Credit Facility.

         Our net losses continue to reflect our development stage status and
future recovery of tax losses remain uncertain. If we are able to carry these
losses forward, future tax amounts owed will be lower due to these loss carry
forwards.

FINANCIAL CONDITION AS OF SEPTEMBER 30, 2001 AND CASH FLOWS DURING THE NINE
MONTHS THEN ENDED

         Our working capital surplus of $73.7 million as of September 30, 2001
represented an increase of $77.6 million from the deficit of $3.9 million as of
December 31, 2000. The increase was primarily due to net borrowings under the
Credit Facility of approximately $304 million and the reduction of the contract
liability of $11.2 million to AT&T as a result of continued construction of our
network and billings to AT&T for their portion of the cost. These increases in
our working capital were partially offset by higher accounts payable and accrued
expenses resulting from our purchase of network infrastructure, optronics and
data internetworking equipment.

         During the nine months ended September 30, 2001, our cash levels
increased approximately $110.5 million.

         Cash used for operations during the nine months ended September 30,
2001 was approximately $3.4 million compared to cash provided by operations of
$13.9 million in 2000. The decrease in cash provided by operations was due to
higher operating costs in 2001 caused primarily by salaries and benefits
associated with the increase in headcount.

         Investing activities include the use of proceeds from draws under the
Credit Facility as well as from the issuance of the Series B Preferred Stock
aggregating approximately $437 million to continue construction of our
nationwide network.

         Cash provided by financing activities of $550 million during the nine
months ended September 30, 2001 consisted of net proceeds from our borrowings
under the Credit Facility of $304 million, net proceeds from the issuance of the
Series B Preferred Stock of $199 million and the proceeds received under our
cost sharing agreement with AT&T of approximately $70 million. Partially
offsetting these financing sources were deferred financing fees of $9.6 million
and a repayment of our note payable to affiliate of $12.4 million.



                                       19
<Page>


LIQUIDITY AND CAPITAL RESOURCES

         The development and construction of our nationwide facilities-based
network will require significant capital expenditures, a substantial portion of
which have been and continue to be incurred prior to the realization of any
significant revenue. These expenditures, along with the associated early
operating expenses, will result in substantial negative operating cash flow and
substantial net operating losses for us for the foreseeable future. Although we
believe that our cost estimates and network build-out schedule are reasonable,
the actual construction costs or the timing of the capital expenditures may be
different than current estimates.

         During July 2001, we and AT&T amended the original network development
agreement entered into during October 1999 related to the construction of our
network and the dark fiber purchase agreement entered into during December 2000
related to our purchase of fiber from AT&T. The agreement, as amended, will
reduce our overall capital expenditures by approximately $47 million and we will
receive approximately $15 million less from AT&T for AT&T's share of the
constructed routes. This amendment results in a net reduction in capital
expenditures of approximately $32 million through December 2002.

         The amendments to the network development agreement and the dark fiber
purchase agreement will result in an overall increase in route miles to the
current network of approximately 1,450 miles. The total purchase commitment
under the amended dark fiber purchase agreement remains substantially the
same as the original commitment. We are now purchasing an average of 12
fibers over 9,000 route miles, as compared to an average of 15 fibers over
7,155 miles as per the original agreement. In addition, we now have the right
to accept up to half of the fiber count on route segments through 2006, which
will allow us to defer approximately $68 million of payments into 2003 and
beyond. This amendment and revisions to our network development agreement
have allowed us to reduce our overall capital expenditures while at the same
time increasing our total network route miles to more than 20,000. We
continue to evaluate our planned timing of construction expenditures and we
may selectively defer other planned expenditures, rescale portions of our
network, or defer purchases should capital expenditures differ significantly
from our estimates.

         Total capital expenditures from January 1, 2001 through December 31,
2002 are expected to be approximately $1.05 billion, of which we spent $437
million from January 1, 2001 through September 30, 2001. Our current cash and
cash equivalents on hand and the undrawn commitments on the Credit Facility, as
amended, provided us with approximately $258 million of funds available at the
end of September 2001. An additional $268.3 million will become available under
our Credit Facility as we increase our spending for Cisco data equipment,
optronics equipment and other specified services through 2001 and 2002. We also
expect to receive additional proceeds under our network development agreement
with AT&T and asset sales in excess of $300 million from October 1, 2001 through
December 31, 2002.

         We expect that our primary cash uses from October 1, 2001 through
December 31, 2002 will include network build costs, optronics and data
internetworking equipment and other business support systems totaling
approximately $600 million and debt service payments of approximately $87
million. We also expect to generate substantial operating losses through 2002.

SUMMARY

         We continue to expect that the borrowings and additional availability
under the Credit Facility, proceeds received under joint construction
contracts, anticipated proceeds from dispositions of dark fiber and operating
revenues, our vendor financing agreement with Cisco and cash on hand will be
sufficient to satisfy our anticipated cash requirements through completion of
substantially all of our network build and initial light plan, which we expect
to occur during the latter part of 2002.  However, we are dependent on dark
fiber and conduit proceeds for a significant portion of our cash requirements
throughout 2002.  We are also planning for growth in operating revenues to
drive reductions in our net operating losses.  Given current market conditions
specific to the telecommunications industry, these sources of funding may be
at risk.  If actual operating results are worse than our current estimates,
these sources of funding may not be sufficient to meet our needs through the
completion of the network.  We are also dependent on the continued liquidity

                                       20
<Page>

of our existing construction partners and their ability to complete portions
of our planned network and to meet their obligations to us.  Management has
initiated a capital conservation program to conserve capital and manage our
ongoing cash operating expenditures to mitigate these risks.  We continue to
evaluate our expenditures and plan to reduce or defer selected expenditures.
We may need to raise additional funds to meet our liquidity needs for
subsequent periods and may do so when market conditions permit us to raise
capital on acceptable terms.

         We cannot assure you that our capital needs will not exceed the amounts
we have estimated, that our construction costs will not be larger than we
currently anticipate, that cash received from dark fiber dispositions or our net
operating revenues and resulting losses will be at the levels we currently
expect, that we will be able to finance changes to our construction plan, or
that we will be able to fully access or obtain the necessary funds under the
Credit Facility or from the sources described above or at all. We cannot assure
you that our construction partners will have continued liquidity and meet their
payment or performance obligations to us in a timely manner. If we are unable to
obtain the necessary funds, we will be required to further decrease or defer our
planned capital expenditures and, depending on the cash flow from our
then-existing businesses, reduce the scope of our planned operations and/or
restructure our debts.

         Our amended credit agreement and vendor financing in May 2001 resulted
in higher interest expense and revisions to our debt covenants. Continued
increases in interest rates could have a material impact on our ability to pay
interest on variable rate debt that we may obtain under our credit facilities.
In addition, our ability to expand our business and enter into new customer
relationships will depend on our ability to obtain additional financing for
these projects. Continued weakness in the capital markets for telecommunications
companies, including the increasing bankruptcy filings among competitors and
potential customers, could also materially affect our ability to obtain
additional financing or sell dark fibers or conduits.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

         We have interest rate exposure related to the Credit Facility.
Borrowings under the Credit Facility bear interest at rates that fluctuate with
changes in short-term interest rates. The weighted average interest rate based
on outstanding amounts under the variable rate debt of approximately $304
million was approximately 8% as of September 30, 2001. A hypothetical increase
of 1% in the variable portion of the weighted average rate (i.e. a weighted
average rate of 9.0%) would increase annual interest expense of the Company by
approximately $3 million. The Credit Facility requires us to hedge the risks
related to interest rate movements through the use of interest rate protection
agreements or other derivative instruments and as necessary to ensure that at
least 50% of our consolidated indebtedness either bears interest at a fixed rate
or is protected against interest rate fluctuations by a hedging agreement that
fixes or limits our interest cost. As a result of this requirement and our
additional borrowings under the Credit Facility during the third quarter, we
entered into two interest rate cap agreements to fix the rate of interest on $75
million of the outstanding variable rate debt. The terms of the agreements
provide that the net interest expense related to $75 million of the borrowings
under the Credit Facility will not exceed 12%. The agreements therefore cap the
LIBOR portion of the interest rate at 7.25%. At September 30, 2001, we had $300
million of fixed rate debt bearing interest ranging from 7.375% to 13.75%;
however, the debt currently bearing interest at 7.375% could potentially
increase to the cap amount of 12% in the future. To maintain an effective
balance of fixed and variable obligations, we may elect to enter into specific
interest rate swaps or other derivative instruments, as we deem necessary. The
change in interest rates is based on hypothetical movements and is not
necessarily indicative of the actual results that may occur. Future earnings and
losses will be affected by actual fluctuations in interest rates.



                                       21
<Page>


MARKET RISK

         We have market risk exposure related to put warrants. We issued
warrants to purchase 14,141,414 shares of our common stock at $2.8125 per share.
In the event that we do not complete an initial public offering by October 29,
2004, the holder of the warrants shall have the right to require us to
repurchase the unexercised shares at the difference between the warrant exercise
price and the fair market price of our common stock on the date of repurchase.
If we are unable to pay cash or if debt terms prohibit payment of cash for the
repurchase, we will use commercially reasonable efforts to provide substitute
consideration, including subordinated indebtedness or preferred equity. We
recognize changes to the fair market value of the put warrants in earnings.
Changes in the fair value of our common stock affect the fair value of the put
warrants. Such changes could have a material effect on our financial position
and results of operations. During the nine months ended September 30, 2001, the
fair value of the put warrants increased $23 million to $94.3 million,
determined using the Black-Scholes option-pricing model.



                                       22
<Page>


                           PART II - OTHER INFORMATION

ITEM 6.  EXHIBITS AND CURRENT REPORTS ON FORM 8-K

         (a)      EXHIBITS

                    EXHIBIT NO.             DESCRIPTION OF EXHIBIT
                    -----------             ----------------------

                        3.1         Amended and Restated Certificate of
                                    Incorporation, filed on May 24, 2001, of
                                    Velocita Corp. (incorporated by reference to
                                    Exhibit 3.1 of Velocita Corp.'s Quarterly
                                    Report on Form 10-Q filed on August 14, 2001
                                    (File No. 333-39646)).

                        3.2         Certificate of Designations, filed on May
                                    24, 2001 of Series A Senior Cumulative
                                    Convertible Preferred Stock of Velocita
                                    Corp. (incorporated by reference to Exhibit
                                    3.2 to Velocita Corp.'s Quarterly Report on
                                    Form 10-Q filed on August 14, 2001 (File No.
                                    333-39646)).

                        3.3         Certificate of Designations, filed on May
                                    24, 2001 of Series B Senior Cumulative
                                    Convertible Preferred Stock of Velocita
                                    Corp. (incorporated by reference to Exhibit
                                    3.3 to Velocita Corp.'s Quarterly Report on
                                    Form 10-Q filed on August 14, 2001 (File No.
                                    333-39646)).

                        3.4         By-Laws of Velocita Corp. (incorporated by
                                    reference to Exhibit 3.4 of Velocita Corp.'s
                                    Registration Statement on Form S-4 filed on
                                    June 19, 2000 (File No. 333-39646)).

                       10.1         Employment Agreement, dated October 1, 2001,
                                    between Velocita Corp. and Mr. Robert
                                    Annunziata

                       10.2         Letter Agreement, dated October 1, 2001,
                                    between Odyssey Investment Partners Fund,
                                    LP, Odyssey Coinvestors, LLC, PF Telecom
                                    Holdings, LLC, Koch Telecom Ventures, Inc.,
                                    Cisco Systems, Inc., First Union Capital
                                    Partners, LLC, UBS Capital II, LLC and Mr.
                                    Robert Annunziata


          (b)     REPORTS ON FORM 8-K:

                  None

                                   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.

                                      VELOCITA CORP.
                                      (Registrant)


                                  By: /s/ David L. Taylor
                                      ------------------------------
                                      David L. Taylor
                                      Chief Financial Officer and
                                      Principal Accounting Officer

                                  Dated: November 14, 2001


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