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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
                            ------------------------
 
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
 
                         COMMISSION FILE NO. 000-22697
 
                              AT HOME CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
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                   DELAWARE                                      77-0408542
       (STATE OR OTHER JURISDICTION OF            (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
        INCORPORATION OR ORGANIZATION)
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                              425 BROADWAY STREET
                             REDWOOD CITY, CA 94063
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
 
                                 (650) 569-5000
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      NONE
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                             SERIES A COMMON STOCK
 
     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]
 
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                                                              AS OF JANUARY 31, 1999
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Aggregate market value of the voting stock held by
  non-affiliates of the registrant based on the closing bid
  price of such stock:......................................      $4,698,327,500
Number of shares of Series A Common Stock outstanding:......         106,355,301
Number of shares of Series B Common Stock outstanding:......          15,400,000
Number of shares of Series K Common Stock outstanding:......           2,609,707
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                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Portions of Registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders to be filed by April 30, 1999 are Incorporated by
Reference into Part III (Items 10, 11, 12, and 13) hereof.
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                              AT HOME CORPORATION
 
                        1998 ANNUAL REPORT ON FORM 10-K
 
                               TABLE OF CONTENTS
 
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                           PART I
Item 1. Business............................................     3
Item 2. Properties..........................................    14
Item 3. Legal Proceedings...................................    15
Item 4. Submission of Matters to a Vote of Security
  Holders...................................................    15
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                                    PART II
 
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Item 5. Market for Registrant's Common Equity and Related
  Shareholder Matters.......................................   15
Item 6. Selected Financial Data.............................   16
Item 7. Management's Discussion and Analysis of Financial
  Condition and Results of Operations.......................   17
Item 8. Financial Statements and Supplementary Data.........   40
Item 9. Changes in and Disagreements With Accountants on
  Accounting and Financial Disclosure.......................   40
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                                    PART III
 
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Item 10. Directors and Executive Officers of the
  Registrant................................................   40
Item 11. Executive Compensation.............................   40
Item 12. Security Ownership of Certain Beneficial Owners and
  Management................................................   40
Item 13. Certain Relationships and Related Transactions.....   41
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                                    PART IV
 
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Item 14. Exhibits, Financial Statements, Financial Statement
  Schedule and Reports on Form 8-K..........................   41
SIGNATURES..................................................   45
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                                     PART I
 
ITEM 1.
 
                                    BUSINESS
 
     This annual report contains forward-looking statements relating to future
events or financial results, such as statements indicating that "we believe,"
"we expect" or "we anticipate" that certain events may occur or certain trends
may continue, and similar statements relating to future events or financial
results. These forward-looking statements are subject to material risks and
uncertainties as indicated under the caption "Risk Factors." Actual results
could vary materially as a result of a number of factors including those set
forth in "Risk Factors" and elsewhere in this report.
 
     We are the leading provider of broadband Internet services over the cable
television infrastructure to consumers. By virtue of our relationships with 18
cable companies in North America and Europe, we have access to approximately
58.7 million homes, which includes exclusive access to over 50% of the
households in the United States and Canada. We also provide broadband Internet
services to businesses over both the cable television infrastructure and digital
telecommunications lines.
 
     Our primary offering, the @Home service, allows residential subscribers to
connect their personal computers via cable modems to a high-speed Internet
backbone network developed and managed by us. This service enables subscribers
to receive the "@Home Experience," which includes Internet service over hybrid
fiber co-axial, or HFC, cable at transmission speeds up to 100 times faster than
typical dial-up connections, "always on" connection and rich multimedia
programming through our broadband Internet portal. The technology foundation of
the @Home Experience is our scalable, distributed, intelligent network
architecture (our broadband network), a "parallel Internet" that optimizes
traffic routing, improves security and consistency of service, and facilitates
end-to-end network management, enhancing our ability to address performance
bottlenecks before they affect the user experience.
 
     Our @Media group has established the @Home launch screen as the leading
broadband Internet portal, providing a gateway to compelling multimedia and
electronic commerce offerings on the Internet. To date, the @Home Experience has
generated greater page views per subscriber than are reported by the leading
narrowband Internet portal companies. Our @Media group works with content
providers to facilitate the creation of rich multimedia broadband content
delivered through the @Home portal and to facilitate online transactions and
services for @Home subscribers. Multimedia content offerings include on-demand
video clips from partners such as Bloomberg and CNN Interactive, on-demand music
and CD previews provided by our Tune-In service and low-latency multiplayer
gaming from SegaSoft. Electronic commerce partners include Amazon.com, the
leading online bookseller, BuyDirect.com, an online software distributor, and
Travelocity, a leading online travel site. Our @Media group also sells
advertising on a cost per thousand impressions, or CPM, basis as well as on a
sponsorship basis. We had 57 advertisers in the fourth quarter of 1998,
including Ford, Godiva, Intel, Kodak, Lands' End, Lexus, Mercedes Benz and
Starbucks.
 
     For businesses, our @Work services provide a platform for Internet,
intranet and extranet connectivity solutions and networked business applications
over both cable infrastructure and digital telecommunications lines. In order to
accelerate deployment of the @Work connectivity and hosting solutions into major
U.S. metropolitan areas, we have established strategic relationships with
Teleport Communications Group, the country's largest competitive local exchange
carrier and a subsidiary of AT&T, Northpoint, a provider of digital subscriber
line services to businesses, and Exodus, a provider of Internet hosting and
network management services. By combining our broadband distributed network
architecture with cable, telephone and technology relationships, the @Work
services provide a compelling platform for nationwide delivery of network-based
business applications. We have developed this platform at a low incremental cost
by leveraging our existing broadband network investment. We currently provide
@Work services to nearly 1,700 businesses.
 
     We have entered into distribution arrangements for our @Home service with
16 cable companies in North America whose cable systems pass approximately 57.3
million homes -- Tele-Communications, Inc., Cablevision Systems Corp., Comcast
Corporation, Cox Communications, Inc., Rogers Cablesystems Limited, Shaw
Cablesystems Ltd., Bresnan Communications Company, Century Communications Corp.,
Cogeco
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Cable, Inc., Garden State Cable, Insight Communications, InterMedia Partners IV
L.P., Jones Intercable, Inc., Lenfest Communications Inc., Marcus Cable
Operating Company, L.P. and Midcontinent Cable Co. Some of these distribution
arrangements are subject to the completion of definitive agreements. As of
December 31, 1998, approximately 13.2 million of the homes served by these cable
partners were passed by upgraded two-way HFC cable, and we believe that our
cable partners will complete the upgrade of systems passing a majority of their
homes within four years. In order to shorten time to market for cable operators,
we provide a turnkey solution, which includes not only a technology platform and
a national brand, but also ongoing marketing, customer service, billing and
product development support. As of December, 1998, we had launched the @Home
service through our cable partners in portions of 59 cities and communities in
the United States and Canada and have approximately 331,000 subscribers.
 
     As part of our strategy to expand into international markets, we have
entered into agreements for the distribution of our @Home service by Edon and
Palet Kabelcom in the Netherlands. We have entered into an agreement with Intel
to create a limited partnership whereby Intel will invest $20 million in @Home
Benelux, which operates under the trade name @Home Nederland, to help speed the
deployment of broadband services in the Netherlands. We have also initiated
distribution programs with leading consumer electronics retailers and computer
manufacturers, including CompUSA, Compaq and Dell, to facilitate the sale of the
@Home service and cable modems compliant with the new DOCSIS cable modem
standard. In addition, we are working with CableLabs and National Digital
Television Center, a subsidiary of TCI, to develop advanced digital set-top
boxes to provide broadband Internet access via television sets and to accelerate
transformation of the Internet into a mass medium.
 
RECENT EVENTS
 
     Acquisition of Excite, Inc. On January 19, 1999, we agreed to acquire
Excite, Inc. and to issue shares of our Series A common stock, including shares
issuable upon the exercise of Excite options and warrants, valued at
approximately $6.7 billion at the time of the announcement of the acquisition.
Excite is a global Internet media company that attracts approximately 17 million
visitors monthly to its www.excite.com and www.webcrawler.com portal Web sites.
Excite is based in Redwood City, California. Under the merger agreement, we will
issue approximately 1.0419 shares of our Series A common stock in exchange for
each outstanding share of Excite common stock. As a result, assuming no exercise
of Excite or our outstanding options and warrants, former shareholders of Excite
will own approximately 30% of the outstanding shares of our Series A common
stock. The acquisition will be accounted for as a purchase and is expected to
close in the second quarter of 1999. Although our and Excite's boards of
directors have approved the transaction, the acquisition is subject to several
conditions, including approval by both companies' stockholders and the
expiration of applicable waiting periods under certain antitrust laws.
Therefore, there is a risk that the merger may not be consummated, and, even if
the merger is consummated, we will face challenges integrating Excite's business
with ours.
 
     Backbone Capacity Contract with AT&T. On January 5, 1999, we announced that
we had entered an agreement with AT&T to create a nationwide Internet Protocol
network utilizing AT&T's backbone to cost-effectively support broadband services
throughout North America over the next 20 years. This new backbone facility,
which is scheduled to be deployed in mid-1999, represents a 100-fold increase in
our backbone capacity and initially will enable us to support up to five million
broadband users. AT&T will first provide us with 2 OC-48 channels, each with the
capacity to transport 2.5 gigabits per second of data, over a 15,000 mile
optical network. The agreement provides for significant expansion of capacity
that allows us to take advantage of the rapid evolution of data transport
technology.
 
     Accounting Change for Certain Warrants. Following discussions with the
staff of the Securities and Exchange Commission, we will record as intangible
assets and amortize ratably over their remaining lives amounts which were
previously expensed in connection with our Cablevision distribution agreement.
We had recorded non-cash charges to operations of $172.6 million and $74.5
million in the fourth quarter of 1997 and the first quarter of 1998 related to
the agreement. We have reversed these previously expensed amounts and recorded
the entire $247.1 million as intangible assets, which will be amortized ratably
over their remaining lives. We will carry these intangible assets in our
financial statements at the lower of its amortized cost or fair
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value. These adjustments to our financial statements for the year ended December
31, 1997 and for the first three quarters of 1998 resulted in an increase to
assets and stockholders' equity at the end of each of these periods. The
reversal of the previously recorded charges to operations, less the amortization
of the intangible asset, resulted in a decrease to our previously reported net
losses for the fourth quarter of 1997 and the first quarter of 1998 and an
increase in the previously reported net losses for the second and third quarters
of 1998.
 
     Acquisition of Narrative Communications Corp. On December 30, 1998, we
acquired Narrative for approximately 1.3 million shares of Series A common
stock, including shares issuable upon the exercise of outstanding Narrative
options, valued at approximately $93.8 million. Narrative, a market leader in
rich media advertising and direct marketing solutions for the World Wide Web, is
based in Waltham, Massachusetts and has nearly 50 employees. Narrative had a net
loss of approximately $5.7 million on revenues of approximately $202,000 in 1997
and had a net loss of $5.8 million on revenues of approximately $621,000 through
December 30, 1998, the purchase date. The acquisition was accounted for as a
purchase, and approximately $92.4 million of the purchase price was allocated to
goodwill and other intangible assets and will be amortized over the respective
useful lives of those assets, estimated to be 3.5 years. The remainder of the
purchase price, $2.7 million, was charged to operations in the fourth quarter of
1998 as purchased in-process research and development.
 
     Offering of Convertible Subordinated Debentures. On December 28, 1998, we
issued $437.0 million of Convertible Subordinated Debentures in a private
offering within the United States to qualified institutional investors. The
issue price of each $1,000 debenture was $524.64, or 52.464% of principal amount
at maturity, and the effective annual interest rate on the debentures, excluding
amortization of the issuance cost, is approximately 4%. Each debenture is
convertible at the option of the holder at any time prior to maturity into 6.55
shares of our Series A common stock. The debentures mature on December 28, 2018,
and interest on the debentures at the rate of 0.5246% per annum on the principal
amount due at maturity is payable semiannually commencing June 28, 1999. We
raised approximately $22.4 million of net proceeds from the offering. We intend
to use the net proceeds of the offering for general corporate purposes,
including working capital and capital expenditures, including those associated
with domestic and international expansion and additional backbone capacity. A
portion of the net proceeds also may be used to acquire or invest in
complementary businesses or products or to obtain the right to complementary
technologies.
 
PRODUCTS AND SERVICES
 
  @Home Service
 
     Our primary offering is the @Home service, a comprehensive broadband
Internet solution that leverages the two-way HFC cable television infrastructure
and our technological and programming capabilities to provide the @Home
Experience, which we believe is the most compelling consumer Internet experience
currently available. By connecting via a cable modem to the @Home broadband
network through the local cable infrastructure, subscribers to the @Home service
can achieve peak data transmission speeds of 2 to 5 megabits per second, which
is over 100 times faster than the peak data transmission speed of a 28.8
kilobits per second dial-up modem. This high bandwidth enables compelling
multimedia applications, broadband advertising, online commerce and multiplayer
games. The @Home service offering also includes standard Internet service
provider functionality, including Web page hosting for subscribers, the ability
to create and manage multiple email accounts and remote access. We also offer
the ability to share Internet access across multiple PCs in the home for an
additional monthly fee. A critical differentiation of the @Home service is that
the two-way cable infrastructure is "always on," providing instantaneous access
to the Internet and eliminating the need for a time consuming dial-up procedure
using the telephone network.
 
     Our @Media group has established the @Home launch screen as the leading
broadband Internet portal, providing a gateway to compelling multimedia and
electronic commerce offerings on the Internet. The @Home portal provides the
user with access to an array of multimedia content channels, powerful tools and
Web-based applications designed specifically to take advantage of our broadband
network architecture. We believe that the @Home portal broadens the appeal of
online services beyond technology enthusiasts to the mass market by facilitating
access to broadband content (such as animated graphics, near-CD-quality audio
 
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and video clips) and stimulating persistent usage with timely, dynamic, highly
sought-after data streams, as well as by simplifying navigation, increasing the
subscriber's knowledge of Internet resources. The @Home portal is organized
around a series of channels, which are defined by both topical subjects (such as
news, technology, sports or popular culture) and audiences (such as children,
game players or shoppers), and which present timely and compelling editorial
content. Through the @Home portal, we generate and direct regular audience
traffic to @Media and content providers' offerings. The @Home portal includes a
variety of tools that allow users to obtain information quickly and easily. For
example, the "How Do I" section, which is one click from the @Home portal,
provides users with a variety of step-by-step solutions to such tasks as making
plane reservations and checking movie schedules. The service also includes a
"Member Services" area where the customer can manage accounts and services via a
simple graphical interface, and personalized user services such as
individualized stock portfolios. We have also recently launched the @Home
Assistant, a proprietary @Home software application, which exploits @Home's
"always-on" connection to provide "out of browser" one-click access to
personalized stock prices, news feeds, local weather, sports scores and dining
information. The @Home Experience also permits @Home subscribers to access
online services, purchase software and engage in multiplayer gaming and
interactive shopping.
 
     The @Home service is currently offered to consumers in the United States
for flat monthly fees generally ranging from $35 to $55, and typically includes
a cable modem provided by the cable partner. Installation of the @Home service
is provided by the cable partner at prices generally ranging from $75 to $175.
Upon installation, each new subscriber's personal computer is configured for the
@Home Experience with @Home client software, which provides access to the @Home
portal as well as other online services, Internet service providers and Web
content. In addition to making the Internet considerably easier to access for
consumers, the @Home client software offers advertisers and content providers a
rich and consistent client environment for delivering multimedia advertising,
content and applications. The @Home client software includes a customized
browser from Netscape and other high-performance and multimedia software
optimized for the @Home Experience. We also provide a customized version of
Microsoft's Internet Explorer, thereby giving subscribers a choice of browsers.
We have also initiated a distribution program with leading consumer electronic
retailers and computer retailers, including CompUSA, Compaq and Dell, to
facilitate the sale of the @Home service and DOCSIS-compliant cable modems.
 
     In an effort to increase the deployment of our @Home service into North
American homes and businesses, we are planning to establish a joint venture with
cable operators, technology suppliers and systems integrators to encourage small
and medium-sized cable operators to offer the @Home service. The venture would
extend our current business model for large cable operators by providing a full
range of services, including financing of cable and network equipment, expanded
customer service, billing systems and service installation, and marketing
support.
 
     We are currently developing the capability to deliver the @Home Experience
to televisions via set-top boxes connected to the cable infrastructure, and
thereby meet the needs of a broader market of non-computer users. According to
IDC, there are approximately 282 million television sets compared to
approximately 66 million personal computers in United States households. In
September 1998, we entered into an agreement with TCI's National Digital
Television Center pursuant to which we agreed to develop software and provide
integration services for TCI's advanced set-top devices that will deliver both
digital television and Internet data services. The agreement contemplates that
we will provide Internet connectivity for these devices, supply email accounts
via geographically dispersed mail servers and provide overall system management
for TCI's email services. We also are working with National Digital Television
Center on the overall software integration related to TCI's advanced digital
set-top devices. See "Risk Factors -- We face challenges associated with our
joint development effort with TCI."
 
  @Work Services
 
     For businesses, @Work services provide end-to-end managed connectivity for
Internet, intranet and extranet solutions over the cable infrastructure and
digital telecommunications lines. In addition, @Work is developing a next
generation platform to support networked business applications and other
value-added data networking solutions such as server hosting and electronic
commerce hosting. In order to accelerate
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deployment of @Work's connectivity solutions in metropolitan areas throughout
the United States, we have established a strategic relationship with TCG, the
country's largest CLEC, to provide targeted co-location and local telephone
circuits for infrastructure and subscriber connectivity. We currently offer two
services: @Work Internet and @Work Remote.
 
     @Work Internet. The @Work Internet service delivers dedicated, high-speed,
end-to-end managed Internet connectivity to commercial enterprises over digital
telecommunications lines, HFC cable and digital subscriber lines. The @Work
Internet service offers dedicated access options at peak data transmission
speeds ranging from 56 kilobits per second to 10 megabits per second. These
solutions are priced competitively vis-a-vis existing alternatives. As of
December 31, 1998, the telco-based @Work Internet service was available in 22
metropolitan markets including Boston, Chicago, Denver, Detroit, Los Angeles,
New York, Orange County, Philadelphia, Phoenix, San Diego, San Francisco,
Seattle, Vancouver and Washington, D.C. At December 31, 1998, we were providing
@Work Internet services to nearly 1,700 businesses, a majority of these over
digital telecommunications lines.
 
     In February 1998, we and Cox announced the availability of the @Work
Internet service via Cox's HFC cable infrastructure in Orange County, Phoenix,
and San Diego. Businesses in these markets that are passed by two-way HFC cable
can connect directly to the @Work Internet service. The @Work Internet HFC
service is a shared bandwidth solution that offers peak data transmission speeds
of 2 to 5 megabits per second downstream using the @Home broadband network.
 
     @Work Remote. The @Work Remote Service is our first virtual private
networking solution. This solution provides a secure, high-speed method for
corporations to extend their local area networks to telecommuters and branch
offices via the cable infrastructure. In November 1997, we announced a non-
exclusive agreement with TCI, Cox and Comcast to develop, deploy and market
@Work Remote in areas served by these cable partners. The @Work Remote service
also includes the network equipment and software needed to connect corporate
local area networks securely to the @Home broadband network via high-bandwidth
local telephone circuits. We offer virtual private network capability between
branch offices and corporate headquarters.
 
     Our future @Work service offerings will leverage our existing connectivity
solutions and broadband network architecture to deliver more value-added
services to commercial customers. @Work has introduced and will continue to
introduce enhanced access services that include increased service level options
as well as solutions for companies seeking multiple commercial Internet
connections to provide redundancy and load balancing. We also develop and deploy
hosting services that allow corporate information technology professionals to
outsource certain networking tasks. For example, we introduced a variety of
commercial shared Web site hosting and co-location services in the third quarter
of 1998. To further this goal, we entered into an agreement in March 1998 with
Exodus, a provider of Internet hosting and network management solutions, to
develop and deploy @Work-branded shared server hosting solutions. These hosting
solutions will also serve as a platform for outsourced network-based, commercial
applications and related management services. In addition, by designing each of
our regional data centers to include high-availability, high-performance servers
and mass storage, we believe that we will have the ability to deliver and
facilitate next-generation client-server and distributed-object networked
business applications. See "Risk Factors -- We must respond to rapid
technological change."
 
  @Media Services and Technologies
 
     Our @Media group has established the @Home portal as the leading broadband
Internet portal, providing a gateway to compelling multimedia and electronic
commerce offerings on the Internet. To date, the @Home Experience has generated
greater page views per subscriber than are reported by the leading narrowband
Internet portal companies. The @Media group works with content providers to
facilitate the creation of rich multimedia broadband content delivered through
the @Home portal and to facilitate online transactions and services for our
subscribers.
 
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     We believe that growth in our subscriber base will be critical to
attracting advertisers. In addition to traditional sales and marketing efforts,
we have developed a variety of compelling programming services delivered through
the @Home portal in order to drive incremental subscriber revenue and
penetration. In addition to receiving advertising fees, the @Media programming
services provide a variety of other revenue sources, including fees related to
content partnering arrangements. Examples of @Media programming services
include:
 
          Real-Time News and Entertainment Services. Continuously-updated
     headlines delivered in the News, Sports and Finance @Home channels, and
     video clips presenting top stories, sports highlights and movie previews.
     Current @Media partners include Bloomberg and CNN Interactive.
 
          Interactive Shopping. Evaluate and purchase goods via an interactive
     multimedia shopping experience. Current @Media partners include Amazon.com,
     AutoConnect, N2K, PC Connection, QVC, Realtor.com, Reel.Com and
     Travelocity. In addition, we have partnered with BuyDirect.com to enable
     @Home users to purchase and download software titles at speeds
     substantially faster and with greater reliability than a typical dial-up
     modem.
 
          High-Speed Multiplayer Gaming. Download and play popular Internet
     games against other online players, delivered via the @Home Games channel.
     By combining high speed with very low latency, the @Home broadband network
     provides an excellent environment for high-quality game play. We have
     already co-located game servers on our network backbone and are offering
     multiplayer online games to @Home subscribers from SegaSoft.
 
          Digital Audio Services. Near-CD-quality audio on various music, talk
     and event channels (including jazz, rock and 24-hour sports talk) via our
     Tune-In service. Users can simultaneously listen to the Tune-In service and
     browse the Internet. Current @Media partners include Bloomberg Radio, CNET
     Radio, Net Radio, SportsLine and Spinner.com.
 
          Digital Photography. @Media has established a relationship with Intel
     to utilize our high bandwidth to create an online photography resource
     center. The resulting service, Making Pictures, enables users to share
     their photographs and learn more about the industry migration to digital
     photography.
 
          Enhanced Search and Directory Services. Leading search and directory
     services integrated into the @Home portal. Current @Media partners include
     Inktomi Corporation, a leading provider of search solutions, and Looksmart
     International Limited, a leading provider of directory services.
 
     The @Media group offers a series of technologies to assist advertisers and
content providers in delivering compelling multimedia advertising and premium
services, including replication and co-location. Replication enables our content
partners to place copies of their content and applications locally on the @Home
broadband network, thereby reducing the possibility of Internet bottlenecks at
the interconnect points. Co-location allows content providers to co-locate their
content servers directly on the @Home broadband network. Content providers can
then serve their content to @Home subscribers without traversing the congested
Internet. For example, CNN and Bloomberg videos are replicated into each of our
regional data centers. Also, multiplayer game servers are co-located to enable
low-latency online gaming.
 
     The @Media group sells advertising through several formats including
banners, half-banners, and the "B*box," a broadband audio/video advertising
space. With the B*box, advertisers are not constrained by the Web banner
paradigm and can broaden their creative presentation using video clips, audio
and animation. Advertisers have the ability to enhance their message by using
multimedia tools and technologies such as Enliven, Flash, Quicktime Video, Real
Audio and Shockwave. We derive advertising revenue on a CPM basis as well as on
a sponsorship basis. We had 57 advertisers in the fourth quarter of 1998,
including Ford, Godiva, Intel, Kodak, Lands' End, Lexus, Mercedes Benz and
Starbucks. Advertisers have reported response rates (click-throughs)
substantially greater than they currently experience with traditional Web banner
advertisements. Advertisers' ability to present more compelling messages to
online users has resulted in advertising rates greater than those charged for
banner advertising on the Web.
 
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     In addition to revenue derived from advertisements, we have established
relationships with certain of our interactive shopping and gaming partners
whereby we participate in the revenues or profits for certain transactions on
the @Home portal. We also allow certain of our content partners to sponsor
certain content channels for a fee.
 
THE @HOME BROADBAND NETWORK
 
     We designed the @Home broadband network on the premise that sustainable,
high-performance Internet access requires a new, scalable architecture to
alleviate Internet bottlenecks and to enable true end-to-end network management
capabilities. Residential subscribers access the network primarily through
high-speed cable modems, which attach to their personal computers via a standard
Ethernet connection, while businesses can also connect through
telecommunications networks. The four key principles of our network strategy are
moving data closer to the user, end-to-end network management, "always-on"
service and scalability.
 
     Moving Data Closer to the User. The @Home broadband network utilizes
caching and replication technologies to move the information that a subscriber
requests close to the subscriber. Local caching reduces backbone network
traffic, enabling the @Home broadband network to overcome a fundamental weakness
of the Internet's duplicative data transfers. For example, when a subscriber
downloads a video clip from a Web site, the user must "pull" data across the
Internet from that Web site to the user's Internet service provider and finally
to the user's computer. If the user's neighbor requests the same video clip from
that Web site, the neighbor must pull the same data across a similar path. In
contrast, our approach would move the video clip over our high-speed backbone
only once in a given geographic area and retain it in a local cache near the
user's home where it could be accessed by every subscriber within that area
without retransmission over the backbone. This more cost-effective approach
simultaneously improves the end user's performance and reduces traffic volume
across the backbone.
 
     End-to-End Network Management. We achieve end-to-end network management
through our proactive network quality, service and performance management
systems. The @Home broadband network provides visibility from our servers (or
content partners' servers) across the backbone and all the way to the
subscriber's home. Because the @Home broadband network is centrally managed, we
can dynamically identify and enhance network quality, service and performance,
or address issues before they affect the user experience.
 
     "Always On" Service. The @Home broadband network is "always on," unlike
switched technologies such as dial-up and ISDN. The user is always connected to
the Internet as long as his or her computer and cable modem are on. This
eliminates the need for a time-consuming connection process, as with a dial-up
service, and changes the way the customer uses the Internet.
 
     Scalability. The @Home service is architected to be scalable to handle
increasing numbers of subscribers without degradation. Although users in the
same service area share high-bandwidth access (much like corporate LANs), which
may limit the effective bandwidth that is available to a given subscriber at a
given time, this shared connection is particularly efficient and well suited to
the sporadic nature of Internet traffic, where browsing tends to consume
bandwidth in discrete bursts intermixed with periods of inactivity. As
subscriber penetration increases, the cable operator has multiple cost-effective
alternatives to increase capacity, including allocating additional 6 MHz
channels for the @Home service or reducing the number of subscribers sharing a
given bandwidth by adding nodes, with each node serving a smaller number of
subscribers over the same fiber-optic infrastructure.
 
     The primary components of the @Home broadband network are our high-speed
private national backbone, regional data centers, regional networks, headends
(including caching servers), network connections and cable modems and the
Network Operations Center.
 
          Private National Backbone. We operate our own private national
     backbone, which consists of a network of high-speed asynchronous transfer
     mode communications services that we lease to connect our regional data
     centers and regional networks with content providers and the Internet.
     These services currently operate at a speed of 45 megabits per second and
     can be upgraded to 155 megabits per second or higher. This backbone can be
     viewed as a high-speed "parallel Internet" that connects via our routers
 
                                        9
<PAGE>   10
 
     to the Internet at multiple network access points with "Tier-One" peering
     status, which permits us to exchange Internet traffic with other nationwide
     Internet service providers. In January 1999, we announced that we had
     entered an agreement with AT&T to create a nationwide Internet Protocol
     network utilizing AT&T's backbone to cost-effectively support ubiquitous
     broadband services throughout North America over the next 20 years. This
     new backbone facility, which is scheduled to be deployed in mid-1999,
     represents a 100-fold increase in our backbone capacity and initially will
     enable us to support up to five million broadband users.
 
          Regional Data Centers. The regional data centers act as service hubs
     for defined geographic areas, such as major metropolitan areas, providing
     key services, including email, news groups and chat facilities, to
     subscribers, managing network performance proactively, replicating content
     and applications, and providing a cost-efficient infrastructure to cache
     and multicast data throughout a region and to house local content and
     subscribers' Web pages. We use "high availability" servers from Sun
     Microsystems, Inc. in our regional data centers for these mission-critical
     activities. We have deployed regional data centers in 19 geographic areas
     as of December 31, 1998.
 
          Regional Networks. The regional networks consist of network routers
     and switches that interconnect our regional data centers and national
     backbone to multiple cable headend facilities at speeds of 45 megabits per
     second to 155 megabits per second. These networks generally take advantage
     of cable operators' fiber optic infrastructures that are normally used to
     transport cable television signals from a consolidated master headend
     facility to other headends within a region. This approach often allows us
     to avoid the high cost of leasing conventional high-speed communication
     services from local telephone companies when deploying high-speed
     connectivity in a region.
 
          Headends. The cable system headends are connected to each regional
     data center through the regional network. In order to move data as close to
     the subscriber as possible and to avoid repetitive transmission of the same
     data, the headends employ high-performance caching servers that store
     frequently accessed content locally, thereby greatly reducing the amount of
     data transmission (and corresponding transport costs) in higher layers of
     the network. In addition, local caching servers can compile far more
     comprehensive usage data than is normally attainable on the Internet, which
     can be used for network troubleshooting, tuning performance and tailoring
     the @Home service.
 
          Network Connections. The last leg of the network connection is from
     the headend to the consumer over a cable operator's HFC cable system.
     Multiple fiber optic lines carry the signal from the headend out to cable
     nodes in each neighborhood, which in turn connect through traditional
     coaxial cable to the home. These fiber optic nodes typically service from
     300 to 2,000 homes in a relatively modern cable system. In such a system,
     each television channel requires 6 MHz of the 450-750 MHz of total system
     capacity. Downstream transmission of the @Home service utilizes a similar
     channel. Upstream transmission, however, utilizes a frequency range not
     used for traditional broadcast by cable systems. This range is more prone
     to interference than downstream channels, which effectively limits the peak
     upstream transmission speed.
 
          Cable Modems. In the home, a cable modem connects to the cable
     television coaxial wiring and attaches to the user's personal computer via
     standard Ethernet connections. While peak data transmission speed of a
     cable modem depends on the specific model and can approach 10-27 megabits
     per second downstream and 0.7-10 megabits per second upstream, the
     performance that subscribers actually experience is often constrained by
     the capacity of their personal computers, the capacity of the server being
     accessed and the type of network architecture utilized. In addition, in
     some markets, we have limited users' upstream bandwidth in order to prevent
     user abuse, and we expect to continue to limit upstream bandwidth in
     additional portions of our network. The North American cable industry has
     adopted DOCSIS to support the delivery of data services utilizing
     interoperable cable modems. We believe that this new standard and the
     distribution of DOCSIS-compliant modems through computer retailers will
     facilitate the growth of the cable modem industry and the availability of
     lower cost interoperable cable modems through retail channels. See "Risk
     Factors -- The scalability, speed and
 
                                       10
<PAGE>   11
 
     security of our network is unproven" and "-- We depend on two-way cable
     modems based upon a new industry standard."
 
          Network Operations Center. We provide end-to-end network management
     through our Network Operations Center. The Network Operations Center uses
     advanced network management tools and systems to monitor the network
     infrastructure on a 24 x 7 basis, enhancing its ability to address
     performance bottlenecks before they affect the user experience. From the
     Network Operations Center, we can manage the @Home broadband network from
     end-to-end, including the backbone, regional data centers, regional
     networks, headend facilities, servers and other components of the network
     infrastructure to the user's home. See "Risk Factors -- Our dependence on
     our network exposes us to a significant risk of system failure."
 
     We also utilize certain key technologies from third parties to build and
manage the @Home broadband network. In particular, we have established strategic
relationships with AT&T for network backbone capacity, Sun Microsystems for high
availability servers, Silicon Graphics for caching servers, Cisco Systems, Inc.
for network routing and switching hardware, Sprint for national switched ATM
backbone services, Objective Systems Integrators, Inc. for network management
software, Tivoli Systems Inc. for systems management software to operate
regional data centers remotely, Oracle Corporation for advanced database
management software, Microsoft and Netscape and for server and browser software,
Inktomi for proxy and caching software and Software.com for efficient mail
delivery. See "Risk Factors -- We must respond to rapid technological change"
and "-- The scalability, speed and security of our network is unproven."
 
PRODUCT DEVELOPMENT AND ENGINEERING
 
     Our product development and engineering efforts focus on: (1) design and
development of new technologies and products to increase the speed and
efficiency of our broadband network architecture and to facilitate the
development and distribution of high bandwidth content and commercial
value-added applications; (2) adaptation of our network services for use over
non-HFC access technologies, such as digital subscriber line; (3) development of
software tools and enabling platforms for the creation and distribution of
enhanced content optimized for our broadband network; and (4) porting the
appropriate components of the @Home Experience to TV-based Internet devices and
developing software, email support and related services for these devices. See
"Risk Factors -- We face challenges associated with our joint development effort
with TCI."
 
     Our product development and engineering expenses for the years ended
December 31, 1996, 1997 and 1998 were $6.3 million, $12.0 million and $17.0
million.
 
STRATEGIC DISTRIBUTION RELATIONSHIPS
 
     Strategic Relationships with North American Cable Partners. We have
strategic relationships with 16 cable companies whose systems pass approximately
57.3 million homes in North America. Subject to certain exceptions, TCI,
Comcast, Cablevision and Cox have granted us the exclusive right to offer high-
bandwidth residential consumer Internet services over their cable systems until
June 4, 2002. Rogers and Shaw have agreed to market and promote the @Home
service in Canada on an exclusive basis. Our other cable partners in North
America have entered into agreements to distribute the @Home service on an
exclusive basis through certain of their cable systems. See "Risk Factors -- Our
cable partners are not generally obligated to carry our services, and the
exclusivity obligations that prevent them from carrying competing services are
limited and may be terminated."
 
     Of the 57.3 million homes, approximately 13.2 million were passed by
upgraded two-way HFC cable as of December 31, 1998, and we believe that our
cable partners will complete the upgrade of systems passing a majority of their
homes within four years. Our cable partners have announced and begun to
implement major infrastructure investments in order to deploy two-way HFC cable.
However, certain of our cable partners have limited experience with these
upgrades, and these investments have placed a significant strain on the
financial, managerial, operating and other resources of our cable partners, most
of which are already highly leveraged. Therefore, these infrastructure
investments have been, and we expect will continue to be, subject to change,
                                       11
<PAGE>   12
 
delay or cancellation. Although our commercial success depends on the successful
and timely completion of these infrastructure upgrades, most of our cable
partners are under no obligation to upgrade systems or to introduce, market or
promote our services. See "Risk Factors -- We depend on our cable partners to
upgrade to the two-way cable infrastructure necessary to support our @Home
service; the timing and availability of these upgrades are uncertain" and
"-- Our principal cable partners may dispose of their cable systems, which would
reduce our potential subscriber base."
 
     As of December 31, 1998, we had approximately 331,000 subscribers in the
United States and Canada, including recently acquired Internet subscribers
served by Jones and Cogeco that are being converted to the @Home service. As of
December 31, 1998, our cable partners had launched the @Home service in portions
of the cities and communities set forth in the following table.
 
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
CABLE PARTNERS                       CITIES & COMMUNITIES
-----------------------------------------------------------------------------
<S>              <C>                              <C>
  BRESNAN        Bay City, MI
-----------------------------------------------------------------------------
  CABLEVISION    Long Island, NY
                 Norwalk, CT
-----------------------------------------------------------------------------
  COGECO         Toronto, ON                      Windsor, ON
-----------------------------------------------------------------------------
  COMCAST        Atlanta, GA                      Orange County, CA
                 Baltimore, MD                    Philadelphia, PA
                 Charleston, SC                   Sarasota, FL
                 Chesterfield, VA                 Trenton, NJ
                 Detroit, MI
-----------------------------------------------------------------------------
  COX            Hampton Roads, VA                Orange County, CA
                 Hartford, CT                     Phoenix, AZ
                 New Orleans, LA                  Providence, RI
                 Oklahoma City, OK                San Diego, CA
                 Omaha, NE
-----------------------------------------------------------------------------
  GARDEN STATE   Cherry Hill, NJ
-----------------------------------------------------------------------------
  INSIGHT        Jeffersonville, IN
-----------------------------------------------------------------------------
  INTERMEDIA     Greenville/Spartanburg, SC       Nashville, TN
                 Louisville, KY
-----------------------------------------------------------------------------
  JONES          Washington DC Region, VA
-----------------------------------------------------------------------------
  MARCUS         Fort Worth, TX
-----------------------------------------------------------------------------
  ROGERS         Ottawa, ON                       Toronto, ON
                 Southwest Ontario                Vancouver, BC
-----------------------------------------------------------------------------
  SHAW           Calgary, AB                      Richmond Hill, ON
                 Edmonton, AB                     Saskatoon, SK
                 Ft. McMurray, AB                 Victoria, BC
                 Kelowna, BC                      Winnipeg, MB
-----------------------------------------------------------------------------
  TCI            Arlington Heights, IL            Moline, IL
                 Baton Rouge, LA                  Pittsburgh, PA
                 Cedar Rapids, IA                 Portland, OR
                 Dallas, TX                       Rochester, NY
                 Denver, CO                       Royal Oak, MI
                 Des Moines, IA                   San Francisco Bay Area, CA
                 East Lansing, MI                 Seattle, WA
                 Hartford, CT                     Spokane, WA
                                                  Woodhaven, MI
-----------------------------------------------------------------------------
</TABLE>
 
     In order to shorten time to market for cable operators, we provide a
turnkey solution, which includes not only a technology platform, but also a
national brand, marketing, customer service and billing. This solution enables
our cable partners to leverage their respective infrastructures to deliver
high-bandwidth interactive data services that represent significant new revenue
opportunities. Our cable partners have the additional opportunity to develop and
receive all the revenues derived from local content distributed locally through
 
                                       12
<PAGE>   13
 
portions of the @Home broadband network to local subscribers. Our cable partners
bear the cost of upgrading and maintaining their cable systems to provide
high-speed two-way data transmission, installing the @Home service in
subscribers' homes, procuring the cable modems needed to interface with the
@Home broadband network and local marketing efforts. See "Risk
Factors -- Several factors may inhibit the growth of the @Home Service."
 
     Under current arrangements with our U.S. cable partners, we receive 35% of
both the basic monthly fees and the fees for premium services, and they retain
the entire installation payment. In Canada, we receive a smaller percentage of
the monthly subscription fees billed by Rogers, Shaw and Cogeco because Rogers,
Shaw and Cogeco are responsible for various costs that are not borne by our
cable partners in the United States such as the costs of providing additional
customer support, data transport within Canada, and national marketing and
content programming.
 
     In international markets, we anticipate that the subscriber pricing and
revenue or royalty splits with cable system operators will be different from
those that prevail in the United States based on differences in services and
content provided by the international cable system operators, data transport
costs and regulatory environments. To the extent that we offer terms of
distribution and other services to international cable system operators that are
more favorable than those offered to the four principal U.S. cable partners,
these principal U.S. cable partners have the right to obtain such more favorable
terms under a "most favored nation" provision in their distribution agreement
with us.
 
     Strategic Relationships with Cable Partners Outside of North America. On
July 15, 1998, we entered into a Joint Venture Agreement with Edon and MEGA
Limburg Telediensten N.V. and N.V. PNEM Teleservices, together acting under the
trade name Palet Kabelcom (Edon and Palet Kabelcom are each multi-system cable
operators in The Netherlands which together cover approximately twenty percent
(20%) of homes served by cable in The Netherlands), to create a Netherlands
limited liability company known as @Home Benelux B.V. @Home Benelux will deliver
a customized version of our Internet services to residential cable subscribers
in The Netherlands and, later, throughout the Dutch-speaking Benelux
territories. In addition, we have entered into an agreement with Intel to create
a limited partnership whereby Intel will invest $20 million in @Home Benelux,
which operates under the trade name @Home Nederland, to help speed the
deployment of broadband services in the Netherlands. In connection with the
formation of @Home Benelux, we have agreed to license to @Home Benelux our core
technologies on an exclusive basis in the Dutch-speaking Benelux territories for
a period of seven years commencing on the earlier of June 30, 1999 or the date
we are first entitled to receive revenue from our 1,000th @Home Benelux
subscriber. We will also perform certain management services in connection with
the start-up and ongoing operations of @Home Benelux. Edon and Palet Kabelcom
have each agreed to the exclusive distribution via their cable networks of our
Internet services for a similar time period as the @Home Benelux license. @Home
Benelux will also seek to expand its penetration of homes served by cable in the
Benelux territories by entering into additional exclusive distribution
agreements with other multi-system cable operators. We believe that @Home
Benelux will begin delivery of our services to customers in The Netherlands in
the first quarter of 1999.
 
     Agreement with TCG. We have a Master Communications Services Agreement with
TCG, the largest CLEC in the United States, which provides high-speed fiber
optic telecommunications services to commercial customer sites in metropolitan
centers in the United States. Under its agreement with us, TCG provides
telecommunications facilities management and network services for the local
telecommunications transport requirements of our @Work services. In markets
served by TCG networks, TCG provides us with (1) the ability to co-locate our
equipment within TCG's network distribution facilities and (2) transport access
facilities to and from the co-located equipment, including all services provided
completely on TCG's network and services provided through a combination of TCG's
network and the network of a third-party local exchange carrier. The agreement
provides us with such telecommunications services at rates generally at or below
those of competing carriers, and the ability to co-locate our regional data
centers within TCG's network distribution facilities at favorable rates. Our
access to TCG's fiber optic network and switching infrastructure gives us a
nationwide opportunity in the commercial marketplace, which we believe will
accelerate the deployment of our @Work services into major United States
markets.
 
                                       13
<PAGE>   14
 
     Agreement with Northpoint. In June 1998, we entered into an agreement with
Northpoint, a wholesale data CLEC that provides digital subscriber line access
to small and medium sized businesses, whereby Northpoint provides "local loops"
that represent an additional last-mile transport option for @Work's Internet
access and networking offerings. Northpoint currently offers service in Boston,
Chicago, metropolitan Los Angeles, New York City, San Diego, the San Francisco
Bay Area and Washington D.C. and plans to expand nationally over the next
several years. As part of the agreement, we will receive engineering and
operational support from Northpoint. In addition, we will have input into
Northpoint's launch plans, and the two companies will jointly fund marketing
programs. We believe that favorable access to Northpoint's digital subscriber
line transport services will facilitate @Work's deployment of cost-effective
dedicated commercial Internet access services aimed at small businesses that
historically have relied on dial-up or ISDN access options.
 
     Agreement with Exodus. In March 1998, we entered into an agreement with
Exodus, a provider of Internet hosting and network management services, under
which Exodus will work with us to develop and implement customized,
@Work-branded versions of Exodus' server hosting and network management services
solutions that leverage Exodus facilities and infrastructure. We will market and
sell these solutions in conjunction with @Work's connectivity and value-added
network applications. Additionally, Exodus has committed to market and resell
certain @Work commercial connectivity and value-added application solutions. We
will also work with Exodus to interconnect our respective networks, allowing us
to take advantage of Exodus' series of private and public peering relationships.
We believe that favorable access to these hosting capabilities will accelerate
the development and implementation of @Work's network-based applications and
other services.
 
EMPLOYEES
 
     As of December 31, 1998, we had 570 employees, excluding temporary
personnel and consultants. Of the total: 96 were employed in networking
engineering; 101 were employed in operations; 166 were employed in customer
support, sales, marketing and related activities; 69 supported the @Work
services; 70 supported the @Media services; 13 supported our international
operations; and 55 were employed in general and administration. None of our
employees is represented by a labor union, and we consider our relations with
our employees to be good. Our ability to achieve our financial and operational
objectives depends in large part upon the continued service of our senior
management and key technical personnel and our continuing ability to attract and
retain highly qualified technical and managerial personnel. Competition for such
qualified personnel in our industry and geographical location in the San
Francisco Bay Area is intense, particularly in software development, network
engineering, cable engineering and product management personnel. See "Risk
Factors -- We face challenges managing our expanded operations and we depend on
key personnel."
 
ITEM 2. PROPERTIES
 
     We are headquartered in facilities consisting of approximately 135,000
square feet in Redwood City, California, which we occupy under a 12-year lease.
In September 1997 and March 1998, we exercised build-to-suit options requiring
the landlord to build additional facilities of approximately 360,000 square feet
on adjacent property. All facilities constructed under our build-to-suit options
will be subject to leases of up to 15 years in length, have base rent determined
in relation to construction costs and will include tenant improvements paid for
by us. The build-to-suit options that have been exercised to date provide for
monthly rental payments beginning upon the phased completion of the buildings.
Occupancy of the first phase is scheduled to occur during the second half of
1999, and occupancy of the second phase is scheduled to occur early in the year
2000. In addition to our build-to-suit options, in December 1998 we exercised
our right to purchase one land parcel from the landlord. The purchase price of
the exercised option is payable in two installments, one of $278,000, which was
paid in December 1998, and a second installment of $5,288,000, which is due in
the first half of 1999. We also have smaller offices in Waltham, Massachusetts
and Bala Cynwyd, Pennsylvania. The Waltham facility, which we assumed in
connection with our acquisition of Narrative and which consists of approximately
10,000 square feet, houses our new Enliven service. The Bala Cynwyd facility is
a small sales office that supports our cable partners in the eastern United
States and eastern
 
                                       14
<PAGE>   15
 
Canada. We believe that our existing facilities and the facilities we have the
right to have built will be adequate to accommodate our growth for the
foreseeable future.
 
ITEM 3. LEGAL PROCEEDINGS
 
     We are not aware of any material legal proceedings at December 31, 1998.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     There were no matters submitted to a vote of security holders in the fourth
quarter of 1998.
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
 
     Market for Registrant's Common Equity. Our Series A Common Stock is traded
on the National Market System of the Nasdaq Stock Market, Inc. under the symbol
ATHM. The following table sets forth the range of the high and low sale prices
by quarter as reported on the Nasdaq National Market since July 11, 1997, the
date our Common Stock commenced trading.
 
<TABLE>
<CAPTION>
                          QUARTER                              HIGH       LOW
                          -------                             -------    ------
<S>                                                           <C>        <C>
1997 Third Quarter (commencing July 11, 1997)...............  25 5/16    17
1997 Fourth Quarter.........................................  29 3/8     18 7/16
1998 First Quarter..........................................  38 1/8     20 1/2
1998 Second Quarter.........................................  57 1/4     29 3/4
1998 Third Quarter..........................................  54 15/16   23 1/2
1998 Fourth Quarter.........................................  84 3/4     34 1/2
</TABLE>
 
     As of February 5, 1998, the number of stockholders of record was 911. We
currently intend to retain any earnings for use in our business and do not
anticipate paying any cash dividends in the foreseeable future.
 
     Recent Sales of Unregistered Securities. On November 9, 1998, in connection
with our acquisition of Full Force Systems, Inc., we issued 38,190 shares of our
Series A common stock to the shareholders of Full Force in a private transaction
that was exempt from registration under the Securities Act by virtue of Section
4(2) of the Securities Act.
 
     On December 28, 1998, we issued $437 million principal amount of
Convertible Subordinated Debentures due 2018 in a transaction that was exempt
under the Securities Act by virtue of Section 4(2) of the act. Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated and
Goldman Sachs & Co. acted as initial purchasers and offered the debentures to
qualified institutional investors in the United States in reliance on Rule 144A
under the Securities Act and to institutional accredited investors, as defined
in Rule 501(a)(1), (2), (3) and (7) under the Securities Act. Each $1,000
debenture is convertible into 6.55 shares of our Series A common stock.
 
     On December 30, 1998, in connection with our acquisition of Narrative, we
issued 1,205,333 shares of our Series A common stock to the Narrative
stockholders in a private transaction that was exempt from registration under
the Securities Act by virtue of Section 4(2) of the Securities Act, and we will
issue options to purchase 141,273 shares of our Series A common stock.
 
     Use of Proceeds from Sales of Registered Securities. We commenced our
initial public offering on July 11, 1997 pursuant to a Registration Statement on
Form S-1 (File No. 333-27323). In the offering, we sold an aggregate of
10,350,000 shares of Series A common stock (including 1,350,000 shares sold
pursuant to the exercise of the Underwriters' over-allotment option) at an
initial price of $10.50 per share. The offering was closed on July 16, 1997.
 
     Aggregate proceeds from the offering were $108,675,000, which included
$14,175,000 in aggregate proceeds due to the exercise of the underwriters'
option to purchase shares to cover over-allotments. The
 
                                       15
<PAGE>   16
 
Company paid underwriters' discounts and commissions of $7,607,250 and other
expenses of approximately $1,300,000 in connection with the IPO. Our total
expenses in the offering were $8,907,250, and our net proceeds were $99,767,750.
Of the net proceeds, $12,345,000 has been used for purchases of property,
equipment and improvements, $9,292,000 has been used for payments on capital
lease obligations, $19,941,000 has been used to fund operating losses and the
remainder has been allocated to general working capital requirements.
 
ITEM 6. SELECTED FINANCIAL DATA
 
     The following selected consolidated financial data is qualified by
reference, and should be read in conjunction with, our Consolidated Financial
Statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere herein. The
selected consolidated statement of operations data presented below for the years
ended December 31 1998, 1997 and 1996, and the selected consolidated balance
sheet data as of December 31, 1998, 1997 and 1996, are derived from our
consolidated financial statements that have been included elsewhere in this Form
10-K.
 
<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                            ---------------------------------------
                                                               1998           1997          1996
                                                            -----------    ----------    ----------
                                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                         <C>            <C>           <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues(1)...............................................   $  48,045      $  7,437      $    676
Costs and expenses:
  Operating costs.........................................      46,965        22,459         6,969
  Product development and engineering.....................      17,009        11,984         6,312
  Sales and marketing.....................................      18,091        11,863         6,368
  General and administrative..............................      12,429        10,635         6,054
                                                             ---------      --------      --------
Total costs and expenses before cost and amortization of
  distribution agreements and acquisition costs(2)........      94,494        56,941        25,703
                                                             ---------      --------      --------
Loss from operations before cost and amortization of
  distribution agreements and acquisition costs...........     (46,449)      (49,504)      (25,027)
Interest income, net......................................       6,413         3,033           514
                                                             ---------      --------      --------
Loss before cost and amortization of distribution
  agreements and acquisition costs........................     (40,036)      (46,471)      (24,513)
Purchased in-process research and development.............       2,758            --            --
Cost and amortization of distribution agreements..........     101,385         9,246            --
                                                             ---------      --------      --------
Net loss..................................................   $(144,179)     $(55,717)     $(24,513)
                                                             =========      ========      ========
Pro forma basic and diluted net loss per share............   $   (1.26)     $  (0.54)     $  (0.26)
                                                             =========      ========      ========
Pro forma shares used in per share calculation............     114,240       103,543        96,120
                                                             =========      ========      ========
</TABLE>
 
---------------
 
<TABLE>
<S>                                                         <C>          <C>         <C>
(1) Revenues from related parties.........................  $  10,458    $  2,948    $    634
                                                            =========    ========    ========
(2) Depreciation and amortization included in costs and
  expenses................................................  $  15,029    $  8,913    $  1,903
                                                            =========    ========    ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                                    AS OF DECEMBER 31,
                                                              -------------------------------
                                                                1998        1997       1996
                                                              --------    --------    -------
<S>                                                           <C>         <C>         <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents, and short-term cash investments.....  $419,289    $120,379    $16,770
Working capital.............................................   390,324     101,390     10,573
Distribution agreements, net of accumulated amortization....   186,247     163,345         --
Total assets................................................   780,631     323,928     33,388
Convertible debentures......................................   229,344          --         --
Capital lease obligations, less current portion and other
  long-term liabilities.....................................    14,356      15,735      5,654
Stockholders' equity........................................   493,866     282,407     18,317
</TABLE>
 
                                       16
<PAGE>   17
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
GENERAL
 
     We are the leading provider of broadband Internet services over the cable
television infrastructure to consumers. By virtue of our relationships with 18
cable companies in North America and Europe, we have access to approximately
58.7 million homes, which includes exclusive access to over 50% of the
households in the United States and Canada. We also provide broadband Internet
services to businesses over both the cable television infrastructure and digital
telecommunications lines.
 
     Our primary offering, the @Home service, allows residential subscribers to
connect their personal computers via cable modems to a high-speed Internet
backbone network developed and managed by us. This service enables subscribers
to receive the "@Home Experience," which includes Internet service over hybrid
fiber co-axial, or HFC, cable at transmission speeds up to 100 times faster than
typical dial-up connections, "always on" connection and rich multimedia
programming through our broadband Internet portal. The technology foundation of
the @Home Experience is our scalable, distributed, intelligent network
architecture (our broadband network), a "parallel Internet" that optimizes
traffic routing, improves security and consistency of service, and facilitates
end-to-end network management, enhancing our ability to address performance
bottlenecks before they affect the user experience.
 
     Our @Media group has established the @Home launch screen as the leading
broadband Internet portal, providing a gateway to compelling multimedia and
electronic commerce offerings on the Internet. To date, the @Home Experience has
generated greater page views per subscriber than are reported by the leading
narrowband Internet portal companies. Our @Media group works with content
providers to facilitate the creation of rich multimedia broadband content
delivered through the @Home portal and to facilitate online transactions and
services for @Home subscribers. Multimedia content offerings include on-demand
video clips from partners such as Bloomberg and CNN Interactive, on-demand music
and CD previews provided by our Tune-In service and low-latency multiplayer
gaming from SegaSoft. Electronic commerce partners include Amazon.com, the
leading online bookseller, BuyDirect.com, an online software distributor, and
Travelocity, a leading online travel site. Our @Media group also sells
advertising on a cost per thousand impressions, or CPM, basis as well as on a
sponsorship basis. We had 57 advertisers in the fourth quarter of 1998,
including Ford, Godiva, Intel, Kodak, Lands' End, Lexus, Mercedes Benz and
Starbucks.
 
     For businesses, our @Work services provide a platform for Internet,
intranet and extranet connectivity solutions and networked business applications
over both cable infrastructure and digital telecommunications lines. In order to
accelerate deployment of the @Work connectivity and hosting solutions into major
U.S. metropolitan areas, we have established strategic relationships with
Teleport Communications Group, the country's largest competitive local exchange
carrier and a subsidiary of AT&T, Northpoint, a provider of digital subscriber
line services to businesses, and Exodus, a provider of Internet hosting and
network management services. By combining our broadband distributed network
architecture with cable, telephone and technology relationships, the @Work
services provide a compelling platform for nationwide delivery of network-based
business applications. We have developed this platform at a low incremental cost
by leveraging our existing broadband network investment. We currently provide
@Work services to nearly 1,700 businesses.
 
     We have entered into distribution arrangements for our @Home service with
16 cable companies in North America whose cable systems pass approximately 57.3
million homes -- Tele-Communications, Inc., Cablevision Systems Corp., Comcast
Corporation, Cox Communications, Inc., Rogers Cablesystems Limited, Shaw
Cablesystems Ltd., Bresnan Communications Company, Century Communications Corp.,
Cogeco Cable, Inc., Garden State Cable, Insight Communications, InterMedia
Partners IV L.P., Jones Intercable, Inc., Lenfest Communications Inc., Marcus
Cable Operating Company, L.P. and Midcontinent Cable Co. Some of these
distribution arrangements are subject to the completion of definitive
agreements. As of December 31, 1998, approximately 13.2 million of the homes
served by these cable partners were passed by upgraded two-way HFC cable, and we
believe that our cable partners will complete the upgrade of systems passing a
majority of their homes within four years. In order to shorten time to market
for cable operators, we provide a turnkey solution, which includes not only a
technology platform and a national brand, but also ongoing marketing, customer
service, billing and product development support. As of December 31, 1998, we
 
                                       17
<PAGE>   18
 
had launched the @Home service through our cable partners in portions of 59
cities and communities in the United States and Canada and have approximately
331,000 subscribers.
 
     As part of our strategy to expand into international markets, we have
entered into agreements for the distribution of our @Home service by Edon and
Palet Kabelcom in the Netherlands. We have entered into an agreement with Intel
to create a limited partnership whereby Intel will invest $20 million in @Home
Benelux, which operates under the trade name @Home Nederland, to help speed the
deployment of broadband services in the Netherlands. We have also initiated
distribution programs with leading consumer electronics retailers and computer
manufacturers, including CompUSA, Compaq and Dell, to facilitate the sale of the
@Home service and cable modems compliant with the new DOCSIS cable modem
standard. In addition, we are working with CableLabs and National Digital
Television Center, a subsidiary of TCI, to develop advanced digital set-top
boxes to provide broadband Internet access via television sets and to accelerate
transformation of the Internet into a mass medium.
 
     This annual report contains forward-looking statements relating to future
events or financial results, such as statements indicating that "we believe,"
"we expect" or "we anticipate" that certain events may occur or certain trends
may continue, and similar statements relating to future events or financial
results. These forward-looking statements are subject to material risks and
uncertainties as indicated under the caption "Risk Factors." Actual results
could vary materially as a result of a number of factors including those set
forth in "Risk Factors" and elsewhere in this report.
 
RESULTS OF OPERATIONS
 
     YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
 
  Revenues
 
<TABLE>
<CAPTION>
                                                               1998      CHANGE     1997
                                                              -------    ------    ------
                                                                (DOLLARS IN THOUSANDS)
<S>                                                           <C>        <C>       <C>
Revenues....................................................  $48,045     546%     $7,437
                                                              =======              ======
</TABLE>
 
     Our revenues increased by 546% to $48.0 million for 1998 from $7.4 million
for 1997. The growth in revenues came from an increase in the number of
subscribers to our services. Our revenues consist of monthly subscription fees
for the @Home residential service, installation and monthly access fees for
@Work services, and fees for advertising, content placement and content
development from @Media services. In 1998, approximately 50% of our revenues
came from @Home services, approximately 40% of our revenues came from @Work
services, and approximately 10% of our revenues came from @Media services. Our
@Home subscribers increased 569% to approximately 331,000 at the end of 1998
from approximately 50,000 at the end of 1997. The number of subscribers to our
@Work services increased by 409% to approximately 1,700 at the end of 1998 from
331 at the end of 1997. Revenues generated from our @Media services were evenly
split between advertising revenue and content revenue. Our number of advertisers
at December 31, 1998, 57, was 185% higher than our number of advertisers at
December 31, 1997. Content revenues increased as demand for broadband portal
placement intensified. For 1998, revenues for the @Home service generated from
United States subscribers and Canadian subscribers represented 78% and 22% of
total revenues. We expect subscriber growth rates for the @Home service in the
United States to exceed those in Canada in 1999. Therefore, we expect revenues
generated from United States @Home subscribers will represent a greater portion
of total revenues for the @Home service in 1999. However, subscriber growth is
subject to a number of risks. See "Risk Factors -- Several factors may inhibit
the growth of the @Home service." Revenues from related parties, as a percentage
of total revenues, represented approximately 22% for 1998 and 40% for 1997.
Related-party revenues included development fees for @Work services and set-top
devices and fees for billing and support functions.
 
                                       18
<PAGE>   19
 
  Total Costs and Expenses
 
<TABLE>
<CAPTION>
                                                                1998      CHANGE     1997
                                                              --------    ------    -------
                                                                 (DOLLARS IN THOUSANDS)
<S>                                                           <C>         <C>       <C>
Operating costs.............................................  $ 46,965     109%     $22,459
Product development and engineering.........................    17,009      42%      11,984
Sales and marketing.........................................    18,091      52%      11,863
General and administrative..................................    12,429      17%      10,635
                                                              --------              -------
  Total costs and expenses before cost and amortization of
     distribution agreements and acquisition costs..........    94,494      66%      56,941
Purchased in-process research and development...............     2,758     N/A           --
Cost and amortization of distribution agreements............   101,385     997%       9,246
                                                              --------              -------
          Total costs and expenses..........................  $198,637     200%     $66,187
                                                              ========              =======
</TABLE>
 
     Total costs and expenses before charges for purchased in-process research
and development and cost and amortization of distribution agreements increased
66% to $94.5 million for 1998 from $56.9 million for 1997. Total expenses after
cost and amortization of the distribution agreements and purchased in-process
research and development associated with the acquisitions of Narrative and Full
Force increased 200% for 1998 to $198.6 million from $66.2 million for 1997. We
believe continued expansion of our operations is critical to the achievement of
our goals, and we anticipate that costs and expenses will continue to increase
in 1999 although at a slower rate than the expected increase in our revenues.
However, our operating results may fluctuate significantly, and revenues could
grow at a slower rate than costs and expenses. See "Risk Factors -- Our
quarterly operating results may fluctuate significantly."
 
     Operating Costs. Operating costs are primarily related to providing
services to customers, maintaining the @Home broadband network, generating
content programming for the @Home portal and deploying the @Home service in
Europe. Operating costs increased 109% to $47.0 million for fiscal 1998 from
$22.5 million for 1997. This increase was primarily a result of:
 
     - additional telecommunications costs to connect the @Home broadband
       network to additional areas;
 
     - costs associated with the initial start-up and deployment of the @Home
       service in Europe;
 
     - maintenance and depreciation of capital equipment required for our
       network; and
 
     - expanded customer service operations to support a larger subscriber base.
 
Operating costs are expected to increase substantially during 1999 as we
continue to make substantial investments in network infrastructure and customer
service operations.
 
     Product Development and Engineering. Product development and engineering
expenses consist primarily of salaries and related expenses for personnel, fees
to outside contractors and consultants and the allocated cost of facilities.
Product development and engineering increased 42% to $17.0 million for fiscal
1998 from $12.0 million for 1997. This increase is primarily due to:
 
     - expenditures focused on the continued development of the @Home backbone
       network to incorporate new telecommunications and server technologies;
 
     - efforts to incorporate Internet technologies into advanced digital
       set-top boxes; and
 
     - development of software tools and enabling platforms for the creation and
       distribution of enhanced content optimized for our broadband network.
 
We anticipate that product development and engineering costs will continue to
increase during 1999 due in part to increased technology development efforts
related to our broadband network, including initial design and deployment costs
associated with our AT&T backbone capacity agreement, and advanced digital
set-top boxes.
 
                                       19
<PAGE>   20
 
     Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and promotional expenses. Sales and marketing expenses
increased 52% to $18.1 million for 1998 from $11.9 million for 1997. This
increase was principally the result of increases in sales and marketing
activities to support the expansion of @Work services, the growth in advertising
and content partnering arrangements and regional deployments of the @Home
service. We expect that sales and marketing costs will continue to increase in
1999 primarily due to personnel and other costs related to:
 
     - @Home and @Work subscriber acquisition, including expanded retail
       initiatives;
 
     - our efforts to increase advertising and content partnering arrangements;
       and
 
     - expanded product offerings, including delivery of the @Home service
       through set-top devices.
 
     General and Administrative. General and administrative expenses consist
primarily of administrative and executive personnel costs, fees for professional
services and the costs of computer systems to support our operations. General
and administrative expenses increased by 17% to $12.4 million for 1998 from
$10.6 million for 1997. This increase was caused by hiring additional finance,
human resource and facilities personnel. To support our expected growth, we
anticipate that costs in this area will continue to grow significantly during
1999.
 
     Purchased in-process research and development. In the fourth quarter of
1998, we acquired Narrative for a total purchase consideration of $93.8 million,
and we acquired Full Force for a total purchase consideration of $1.7 million.
In connection with these acquisitions, in the fourth quarter of 1998, we
recorded purchased in-process research and development charges to operations of
approximately $2.7 million for Narrative and $58,000 for Full Force. These
amounts represent an allocation of purchase price to development projects for
the creation of new technologies that will:
 
     - allow our subscribers to use their existing television sets
       simultaneously for viewing regular television programming, viewing the
       Internet and making telephone calls;
 
     - make Internet advertising more interesting for the viewer; and
 
     - assist advertisers in tracking various advertising metrics.
 
     As of the date that we valued the Narrative technology, we estimated that
13% of the research and development effort had been completed at the date of the
Narrative acquisition and expect the remaining 87% of the research and
development efforts to require approximately 5 months to complete. As of the
date that we valued the Full Force technology, we estimated that 33% of the
research and development effort had been completed at the date of the Full Force
acquisition and expect the remaining 67% of the research and development efforts
to require approximately two months to complete. Although we expect that we will
successfully develop technologies related to the purchased in-process research
and development, substantial additional development of these technologies is
required, and these technologies may not achieve commercial viability. The
efforts required to develop technologies related to the purchased in-process
research and development principally relate to the completion of planning,
designing, prototyping, verification and testing activities required to
establish that products associated with the technologies can be successfully
introduced.
 
     The value of the purchased in-process research and development was
determined by estimating the projected net cash flows related to products
associated with the new technologies, including costs to complete the
development of the technologies and the future revenues that may be earned upon
commercialization of the products. We then discounted these cash flows back to
their net present value.
 
     If we do not successfully deploy commercially-accepted products based on
the acquired in-process technology, our operating results could be adversely
affected in future periods.
 
     Cost and Amortization of Distribution Agreements. Cost and amortization of
distribution agreements consist primarily of charges and amortization related to
warrants to purchase our common stock issued in connection with distribution
agreements with certain of our cable partners and their future performance in
connection with distributing our services. Cost and amortization of distribution
agreements increased from $9.2 million in 1997 to $101.4 million in 1998,
primarily as a result of the amortization of the cost of the
                                       20
<PAGE>   21
 
Cablevision distribution agreement and charges associated with the successful
achievement of certain performance milestones by other cable partners. We will
incur approximately $13.6 million per quarter for amortization of the
Cablevision distribution agreement through the first half of 2002, and this
amount would increase if TCI transfers certain cable systems to Cablevision. In
addition, total cost and amortization of distribution agreements could increase
significantly if our cable partners achieve certain performance milestones.
 
     Interest Income, Net. Interest income, net represents interest and realized
gains earned on our cash and short-term cash investments and available-for-sale
investments less interest expense on debt obligations, including our convertible
subordinated debentures. Interest income, net was $6.4 million for 1998 and $3.0
million for 1997. Interest income for 1998 was $8.4 million compared to $4.2
million for 1997. This increase was principally due to the increased cash
balances available to invest following our Series A common stock offering in
August 1998. Interest expense for 1998 was $2.0 million compared to $1.2 million
for 1997. This increase was due primarily to increases in capital lease
obligations associated with our leasing of capital equipment. We anticipate
interest expense will increase sharply in 1999 due to the interest obligations
of our convertible subordinated debentures.
 
     Income Taxes. Due to operating losses incurred since inception, we did not
record a provision for income taxes in 1998 or 1997. At December 31, 1998, we
had net deferred tax assets of $92.5 million relating principally to tax net
operating loss carryforwards and the temporary difference relating to the cost
and amortization of distribution agreements recorded in 1998 and 1997.
Realization of deferred tax assets is dependent on future earnings, if any, the
timing and amount of which are uncertain. A valuation allowance has been
recorded for the net deferred tax assets as of December 31, 1998 and 1997, since
we lack an earnings history. Accordingly, we have not recorded any income tax
benefit for net losses incurred for any period from inception through December
31, 1998. See Note 9 of Notes to Consolidated Financial Statements.
 
     Net Loss. Our net loss before the costs and amortization for distribution
agreements and purchased in-process research and development was $40.0 million
for 1998 and $46.5 million for 1997. Our net loss for 1998 of $144.2 million
includes costs and amortization of $101.4 million related to certain
distribution agreements and $2.8 million related to purchased in-process
research and development from our acquisitions of Narrative and Full Force. The
decrease in net loss before the costs and amortization for distribution
agreements and purchased in-process research and development was primarily a
result of additional revenues, partially offset by the additional expenses
attributable to the expansion of our @Home and @Work services. We anticipate
that our net loss, excluding non-cash charges relating to amortization of the
distribution agreement, performance warrants earned by cable operators and
amortization of amounts related to mergers and acquisitions, will continue to
decline during 1999 as revenues grow at a faster rate than expenses. However,
revenues could grow at a slower rate than costs and expenses. See "Risk
Factors -- Our operating results may fluctuate significantly."
 
     If our merger with Excite closes, we expect to record charges for the
amortization of goodwill and other intangible assets in our statement of
operations estimated at approximately $1,700 million annually for four years
from the date of the acquisition. This estimate is based on a preliminary
valuation and is subject to change pending a final analysis of the total
purchase cost and the fair value of the assets acquired and liabilities assumed.
The impact of such changes could be material.
 
     YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
 
  Revenues
 
<TABLE>
<CAPTION>
                                                               1997     CHANGE    1996
                                                              ------    ------    ----
                                                               (DOLLARS IN THOUSANDS)
<S>                                                           <C>       <C>       <C>
Revenues....................................................  $7,437    1,000%    $676
                                                              ======              ====
</TABLE>
 
     Revenues for 1997 equaled $7.4 million, an increase of $6.7 million over
revenues of $676,000 for 1996. Revenues from related parties as a percentage of
total revenues were approximately 40% for 1997 and 94% for
 
                                       21
<PAGE>   22
 
1996. For 1997, revenues from @Work services in the United States and from the
@Home service in Canada contributed significantly to our total revenues,
especially during the second half of the year.
 
  Total Costs and Expenses
 
<TABLE>
<CAPTION>
                                                               1997      CHANGE     1996
                                                              -------    ------    -------
                                                                 (DOLLARS IN THOUSANDS)
<S>                                                           <C>        <C>       <C>
Operating Costs.............................................  $22,459     222%     $ 6,969
Product development and engineering.........................   11,984      90%       6,312
Sales and marketing.........................................   11,863      86%       6,368
General and administrative..................................   10,635      76%       6,054
                                                              -------     ---      -------
  Total costs and expenses before cost and amortization of
     distribution agreement.................................   56,941     122%      25,703
Cost and amortization of distribution agreements............    9,246     N/A           --
                                                              -------     ---      -------
          Total costs and expenses..........................  $66,187     N/A      $25,703
                                                              =======              =======
</TABLE>
 
     Total Costs and Expenses. Total costs and expenses before the cost and
amortization of distribution agreements was $56.9 million for 1997 and $25.7
million for 1996. This increase was primarily a result of:
 
     - operating costs associated with expansion and deployment of the @Home
       broadband network to support the @Home service subscriber growth;
     - additional corporate infrastructure investments; and
     - the start-up of @Work services.
 
     Operating Costs. Operating costs were $22.5 million for 1997 and $7.0
million for 1996. This increase was primarily a result of:
 
     - maintenance and depreciation from capital equipment used in support of
       the @Home broadband network and headend architecture;
     - additional telecommunications costs to support the deployment of the
       @Home broadband network to additional sites;
     - customer service operations;
     - development of additional content programming resources; and
     - the launch of our @Work services.
 
     Product Development and Engineering. Product development and engineering
expenses were $12.0 million for 1997 and $6.3 million for 1996. The higher level
of expenses for product development and engineering were attributable
principally to increases in personnel and related expenses incurred primarily in
four areas:
 
     - the design, testing and deployment of the @Home broadband network;
     - the development of software tools and enabling platforms for the creation
       and distribution of enhanced content;
     - applications development specifically designed to take advantage of the
       @Home broadband network; and
     - the development of @Work services.
 
     Sales and Marketing. Sales and marketing expenses were $11.9 million for
1997 and $6.4 million for 1996. This increase was principally the result of:
 
     - continued increases in sales and marketing activities to support the
       expansion of regional deployments of the @Home and @Work services;
     - the expansion of our sales force and related travel and entertainment
       expenses;
     - expenditures for trade shows; and
     - increased marketing activities, including market development funds, to
       attract additional cable partners, subscribers and corporate accounts.
 
                                       22
<PAGE>   23
 
     General and Administrative. General and administrative expenses were $10.6
million for 1997 and $6.1 million for 1996. This increase was the result of:
 
     - additions of personnel to support our operations;
     - stock compensation charges resulting from stock options and stock
       purchase agreements;
     - additional facilities expenditures; and
     - additional expenses related to activities and requirements of becoming a
       publicly traded company.
 
     Interest Income, Net. Interest income, net represents interest earned by
our cash and short-term cash investments, less interest expense on our debt
obligations. Interest income, net was $3.0 million for 1997 and $514,000 for
1996. Interest income for 1997 was $4.2 million as compared to $693,000 for
1996. This increase was principally due to the increased balances available to
invest resulting from our preferred stock financing in April 1997 and our
initial public offering in July 1997. Interest expense for 1997 was $1.2 million
as compared to $179,000 for 1996. This increase was due primarily to significant
increases in capital lease obligations associated with our leasing of capital
equipment.
 
     Income Taxes. Due to operating losses incurred since inception, we have not
recorded a provision for income taxes in 1997 or 1996.
 
     Net Loss. The net loss before the charge for the cost and amortization of
distribution agreements was $46.5 million for 1997 and $24.5 million for 1996.
The net loss for 1997 of $55.7 million includes amortization of $9.2 million
related to the distribution agreement with Cablevision. The increase in net loss
before the amortization from the agreement with Cablevision was primarily a
result of additional business activities, partially offset by the additional
revenues attributable to the expansion of our @Home and @Work services.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Since inception, we have financed our operations primarily through a
combination of private and public sales of equity and convertible debt
securities and capital equipment leases. At December 31, 1998, our principal
source of liquidity was $419.3 million of cash, cash equivalents and short-term
cash investments, as compared to $120.4 million at December 31, 1997.
 
     In September 1997, we entered into a term loan agreement with Silicon
Valley Bank. The term loan, as amended in October 1998, provides for borrowings
of up to $15.0 million to finance the acquisition of property, equipment and
improvements, and to collateralize letters of credit. At our option, borrowings
under this term loan bear interest either at the Bank's prime rate or at LIBOR
plus 2.5%. As of December 31, 1998, there were no borrowings under this term
loan although there were outstanding letters of credit in the amount of $3.5
million related to real property transactions. Under the term loan, we are
required to meet certain financial covenants. The term loan expires on October
19, 2002.
 
     Net cash used in operating activities for 1998 was $30.2 million. This is
primarily the result of a net loss of $144.2 million, which was reduced by
non-cash items for:
 
     - charges for performance warrants charges earned under distribution
       agreements, $49.8 million;
     - amortization of the distribution agreements, $51.6 million; and
     - depreciation and amortization from operations of $15.0 million.
 
An $8.1 million increase in accounts receivable occurring in connection with our
growth in revenues also impacted our cash used in operating activities.
 
     Net cash used in investing activities in 1998 was $54.8 million. This use
of funds was the result of purchases of net short-term investments of $43.1
million and $16.8 million in cash purchases of property, equipment and
improvements as part of our continued expansion in core businesses. Gross
capital expenditures for equipment, software, furniture, leasehold improvements
and fixtures for 1998 was $29.7 million and for 1997 was $26.5 million, of which
$12.9 million in 1998 and $16.5 million in 1997 were financed through capital
leases. We expect to spend approximately $100 million each year over the next
two years for capital expenditures, of which we will spend approximately $50
million for additional backbone capacity and related equipment.
                                       23
<PAGE>   24
 
     Net cash provided by financing activities for 1998 was $341.5 million. Of
this increase, $130.8 million resulted primarily from the sale of common stock
in 1998 and $222.4 million resulted from the net proceeds from our sale of
convertible debentures in December 1998.
 
     We believe that we have the financial resources needed to meet our
presently anticipated business requirements, including capital expenditure and
strategic operating programs, for at least the next 12 months. Thereafter, if
cash generated by operations is insufficient to satisfy our liquidity
requirements, we may need to sell additional equity or debt securities or obtain
additional credit facilities. The sale of additional equity or convertible debt
securities may result in additional dilution to our stockholders. We may not be
able to raise any such capital on terms acceptable to us or at all.
 
     We are headquartered in facilities consisting of approximately 135,000
square feet in Redwood City, California, which we occupy under a 12-year lease.
In September 1997 and March 1998, we exercised build-to-suit options requiring
the landlord to build additional facilities of approximately 360,000 square feet
on adjacent property. All facilities constructed under our build-to-suit options
will be subject to leases of up to 15 years in length, have base rent determined
in relation to construction costs and will include tenant improvements paid for
by us. The build-to-suit options that have been exercised to date provide for
monthly rental payments beginning upon the phased completion of the buildings.
Occupancy of the first phase is scheduled to occur during the second half of
1999, and occupancy of the second phase is scheduled to occur early in 2000. In
addition to our build-to-suit options, in December 1998 we exercised our right
to purchase one land parcel from the landlord. The purchase price of the
exercised option is payable in two installments, one of $278,000, which was paid
in December 1998, and a second installment of $5,288,000, which is due in the
first half of 1999. We also have smaller offices in Waltham, Massachusetts and
Bala Cynwyd, Pennsylvania. We believe that our existing facilities and the
facilities we have the right to have built will be adequate to accommodate our
growth for the foreseeable future.
 
DISCLOSURES ABOUT MARKET RISK
 
     The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates.
 
  Interest Rate Sensitivity.
 
     Short-Term Investments. We had short-term investments of $118.6 million at
December 31, 1998. These short-term investments consist of highly liquid
investments with original maturities at the date of purchase of between three
and twelve months. These investments are subject to interest rate risk and will
fall in value if market interest rates increase. A hypothetical increase in
market interest rates by 10 percent from levels at December 31, 1998 would cause
the fair value of these short-term investments to decline by an immaterial
amount. Because we are not required to sell these investments before maturity,
we have the ability to avoid realizing losses on these investments due to a
sudden change in market interest rates. However, we could choose to sell these
investments before maturity at a loss. Declines in interest rates over time
will, however, reduce our interest income.
 
     Outstanding Convertible Debt. At December 31, 1998, we had outstanding
long-term convertible debentures of approximately $229.3 million at a fixed
interest rate of 4%. In certain circumstances, we may be required to redeem
these debentures for our Series A common stock or cash. Because the interest
rate on these debentures are fixed, a hypothetical 10 percent decrease in
interest rates would not have a material impact on us. Increases in interest
rates could, however, increase the interest expense associated with future
borrowings by us, if any. We do not hedge against interest rate increases.
 
  Equity Price Risk.
 
     We own 86,000 shares of common stock of Exodus Communications. We purchased
these shares at the time of Exodus' initial public offering in March 1998 at a
price of $15.00 per share. At December 31, 1998, the
 
                                       24
<PAGE>   25
 
closing price of Exodus' common stock was $64.25 per share. We value this
investment using the closing fair market value stated in the Wall Street Journal
for the last day of each month. As a result, we reflect this investment in our
balance sheet at December 31, 1998 at its market value of $5.5 million, with the
unrealized gains and losses excluded from earnings and reported in the
"Accumulated Other Comprehensive Income" component of stockholders' equity. We
do not hedge against equity price changes.
 
  Foreign Currency Exchange Rate Risk.
 
     Substantially all of our revenues are realized in U.S. dollars and most of
our revenues are from customers in the United States. Therefore, we do not
believe we face significant direct foreign currency exchange rate risk. We do
not hedge against foreign currency exchange rate changes.
 
IMPACT OF ADOPTION OF NEW ACCOUNTING STANDARDS
 
     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and displaying comprehensive income and its
components. Additionally, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes reporting standards
regarding operating segments, products and services, geographic areas and major
customers. We adopted these Statements in 1998. Adoption of these Statements did
not have a material impact on our consolidated financial position, results of
operations or cash flows.
 
     In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." We expect to adopt this Statement effective
January 1, 2000, which will require that we recognize all derivatives on our
balance sheets at fair value. We do not anticipate that the adoption of this
Statement will have a significant effect on our results of operations or
financial position.
 
     In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which establishes
guidelines for the accounting for the costs of all computer software developed
or obtained for internal use. We adopted SOP 98-1 effective for the year ended
December 31, 1998. The adoption of SOP 98-1 did not have a material impact on
our consolidated financial statements.
 
     In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities," which is effective for fiscal years beginning after
December 15, 1998. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. We are required to adopt SOP 98-5
for the year ended December 31, 1999. The adoption of SOP 98-5 is not expected
to have a material impact on our consolidated financial statements.
 
IMPACT OF THE YEAR 2000 ISSUE
 
     Year 2000 computer issues create certain risks for us, although we believe
that such risks are less significant than those faced by many companies due to
the fact that we commenced operations in 1995. If our internal and network
information systems do not correctly recognize and process date information
beyond the year 1999, there could be an adverse impact on our operations. To
address these Year 2000 issues with our internal and network systems, we have
initiated a program to evaluate our internal and network systems. We and our
majority shareholder, TCI, have initiated a comprehensive program to address
Year 2000 readiness in our systems and with our customers' and suppliers'
systems. The program has been designed to gather information regarding the Year
2000 compliance of products and services that we require to deploy our
residential and commercial Internet services. Under the program, assessment and
remediation are proceeding in tandem and are intended to have our critical
systems in Year 2000 compliance by June 30, 1999. These activities are intended
to encompass all major categories of systems that we use, including network
management, customer service and business operations. The costs incurred to date
related to the program have not been material. We currently expect that the
total cost of our Year 2000 readiness program will not exceed $750,000 over the
next fiscal year. The total cost estimate does not include potential costs
related to any
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<PAGE>   26
 
customer or other claims or the costs of internal software or hardware replaced
in the normal course of business. The total cost estimate is based on the
current assessment of our Year 2000 readiness needs and is subject to change as
the program proceeds.
 
     As part of the normal course of our operations, we are currently in the
process of transitioning to or implementing new computer software for our
accounting, billing, network management, human resources and other management
information systems. We are assessing and testing these systems for Year 2000
dependencies and will implement changes to such systems if necessary. The
successful implementation of these new systems is crucial to the efficient
operation of our business. We may not be successful implementing new systems in
an efficient and timely manner, and the new systems may not be adequate to
support our operations. Problems with installation or initial operation of the
new systems could cause substantial difficulties in operations planning,
business management and financial reporting, which could have a material adverse
effect on our business. The cost of bringing our new systems into Year 2000
compliance, if necessary, is not expected to have a material effect on our
financial condition or results of operations.
 
     We have also initiated formal communications with many of our significant
suppliers to determine the extent to which we are vulnerable to these suppliers'
failure to remedy their own Year 2000 issues. We have already received
assurances of Year 2000 compliance from a number of those suppliers. Most of the
suppliers have no contractual obligations under existing contracts to provide us
with this information. We are taking steps with respect to new supplier
agreements to seek assurance that the suppliers' products and internal systems
are Year 2000 compliant. Despite these assurances, we may still experience
supplier-related Year 2000 problems.
 
     Although we currently expect that the Year 2000 issue will not pose
significant operational problems, delays in the implementation of new
information systems or a failure to fully identify all Year 2000 dependencies in
our existing system and in the systems of our suppliers could have material
adverse consequences. Therefore, we are developing, but do not yet have,
contingency plans for continuing operations in the event these problems arise.
 
RISK FACTORS
 
     An investment in our common stock involves a high degree of risk. You
should carefully consider the following risk factors and the other information
in this Form 10-K before investing in our common stock. Our business and results
of operations could be seriously harmed by any of the following risks. The
trading price of our common stock could decline due to any of these risks, and
you may lose all or part of your investment.
 
     RISKS RELATED TO OUR BUSINESS
 
OUR BUSINESS IS UNPROVEN, AND WE MAY NOT ACHIEVE PROFITABILITY
 
     We were incorporated in March 1995, and we commenced operations in August
1995; we have incurred operating losses in each fiscal period since our
inception. As of December 31, 1998, we had an accumulated deficit of $227.2
million. In addition, we currently intend to increase capital expenditures and
operating expenses in order to expand our network and to market and provide our
services to a growing number of potential subscribers. As a result, we expect to
incur additional net operating losses before cost and amortization of
distribution agreements and amortization of goodwill and other intangible assets
for at least the next three quarters.
 
     The profit potential of our business model is unproven. Our @Home service
was available only in portions of 59 geographic markets as of December 31, 1998
and may not achieve broad consumer or commercial acceptance. Although
approximately 2,053 organizations have agreed to utilize @Work services as of
December 31, 1998, our @Work services may not achieve broad commercial
acceptance and the current rate of deployment for @Work services may not be
sustained. We have difficulty predicting whether the pricing models for our
Internet services will prove to be viable, whether demand for our Internet
services will materialize at the prices our cable partners charge for the @Home
service or the prices we or our cable partners charge for @Work services, or
whether current or future pricing levels will be sustainable. If such
 
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<PAGE>   27
 
pricing levels are not achieved or sustained or if our services do not achieve
or sustain broad market acceptance, our business will be significantly harmed.
We may never achieve favorable operating results or profitability.
 
SEVERAL FACTORS MAY INHIBIT THE GROWTH OF THE @HOME SERVICE
 
     As of December 31, 1998, we had approximately 331,000 cable modem
subscribers, including recently acquired Internet subscribers that are being
converted to the @Home service. Our ability to increase the number of
subscribers to the @Home service to achieve our business plans and generate
future revenues will be dependent on a number of factors, many of which are
beyond our control. For instance, certain cable partners from time to time have
not achieved subscriber levels which we had originally anticipated. These
factors include, among others:
 
     - the rate at which our current and future cable partners upgrade their
       cable infrastructures
 
     - our ability and the ability of our cable partners to coordinate timely
       and effective marketing campaigns with the availability of cable
       infrastructure upgrades
 
     - the success of our cable partners in marketing and installing the @Home
       service in their local cable areas
 
     - the prices that our cable partners set for the @Home service and for its
       installation
 
     - the speed at which our cable partners can complete the installations
       required to initiate service for new subscribers
 
     - the commercial availability of DOCSIS-compliant, self-installable modems
       and the success of our roll-out of these products with the @Home service
 
     - the quality of customer and technical support provided by us and our
       cable partners
 
     - the quality of content on the @Home service
 
     We believe subscriber growth has been constrained, and will continue to be
constrained, by the cost and the amount of time required to install the @Home
service for each residential consumer. In addition, our growth has been
constrained by the rate at which our cable partners have upgraded their cable
systems, and most of our cable partners are not obligated to upgrade their cable
infrastructures or market the @Home service. Moreover, the @Home service is
currently priced at a premium to many other online services, and large numbers
of subscribers may not be willing to pay a premium for the @Home service.
Because of the preceding factors, among others, our actual revenues or the rate
at which we will add new subscribers may differ from our forecasts. We may not
be able to increase our subscriber base in accordance with our internal
forecasts or the forecasts of industry analysts or to a level that meets the
expectations of investors. The rate at which subscribers have increased during
1998 does not necessarily indicate the rate at which subscribers may be expected
to increase in the future. In particular, while we have recently forecast that
our number of subscribers could grow to over 1.1 million by December 31, 1999
from approximately 331,000 subscribers at December 31, 1998, we may not achieve
this level of subscriber growth, particularly given the risks set forth here.
 
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY
 
     Our operating results may fluctuate significantly due to a variety of
factors, many of which are outside our control. Factors that may affect our
operating results attributable to our @Home service include:
 
     - the timing of our cable partners' upgrades of their cable infrastructures
       and roll-outs of the @Home service
 
     - the rate at which customers subscribe to our Internet services and the
       prices subscribers pay for these services
 
     - changes in the revenue splits between us and our cable partners
                                       27
<PAGE>   28
 
     - the demand for electronic commerce
 
     - the effectiveness of our cable partners' marketing, installation and
       other operations
 
     Operating results attributable to our @Work services are dependent on:
 
     - the demand for, and level of acceptance of, our corporate Internet,
       intranet and extranet connectivity and telecommuting solutions
 
     - the introduction of, demand for, and level of acceptance of, our
       value-added business applications
 
     - in part, the timing of our cable partners' upgrades of their cable
       infrastructures
 
     - the effectiveness of our cable partners' marketing and other operations
 
     - competitive pressures, including pricing pressure and the availability of
       competing technologies, in the market for business Internet services
 
     - the creditworthiness of our @Work customers
 
     Following discussions with the staff of the Securities and Exchange
Commission, we recently restated our financial statements for the year ended
December 31, 1997 and the first three quarters of 1998 to record as intangible
assets and amortize ratably over their useful lives amounts that were previously
expensed in connection with our Cablevision distribution agreement. Our
operating results have been and will continue to be adversely affected by
significant charges associated with warrants issued to current and potential
cable partners in connection with distribution agreements.
 
     Our quarterly revenues and operating results are difficult to forecast even
in the short term. A significant portion of our expenses are fixed in advance
based in large part on future revenue forecasts. If revenue is below
expectations in any given quarter, the adverse impact of the shortfall on our
operating results may be magnified by our inability to adjust spending to
compensate for the shortfall. Moreover, our cable partners have complete
discretion regarding the pricing of the @Home service in their territories,
which could further impact our ability to generate revenue. A shortfall in
actual compared to estimated revenue could significantly harm our business.
 
THE SCALABILITY, SPEED AND SECURITY OF OUR NETWORK IS UNPROVEN
 
     Due to the limited deployment of our services, the ability of our network
to connect and manage a substantial number of online subscribers at high
transmission speeds is as yet unknown, and we face risks related to our
network's ability to be scaled up to its expected subscriber levels while
maintaining superior performance. The network may be unable to achieve or
maintain a high speed of data transmission, especially as our subscribers
increase. In recent periods, the performance of the network has experienced some
deterioration in certain markets as a result of subscriber abuse of the @Home
service. While we seek to eliminate such abuse by limiting users' upstream
bandwidth, our failure to achieve or maintain high-speed data transmission would
significantly reduce consumer demand for our services. In addition, while we
have taken steps to prevent users from sharing files via the @Home service and
to protect against "email spamming," public concerns about security, privacy and
reliability of the cable network, or actual problems with the security, privacy
or reliability of our network, may inhibit the acceptance of our Internet
services.
 
WE FACE CHALLENGES MANAGING OUR EXPANDED OPERATIONS AND WE DEPEND ON KEY
PERSONNEL
 
     We may not be able to successfully manage any future periods of rapid
growth or expansion, which we expect to place a significant strain on our
managerial, operating, financial and other resources. From time to time, we and
our cable partners have had difficulty managing network operations and expansion
of backbone capacity and providing adequate customer service or efficient
provisioning of new subscribers. A prolonged failure to perform these functions
successfully would significantly inhibit subscriber growth and retention. We
 
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<PAGE>   29
 
are highly dependent upon the efforts of our senior management team, and our
future performance will depend, in part, upon the ability of senior management
to manage growth effectively. This will require us:
 
     - to implement additional management information systems capabilities
 
     - to further develop our operating, administrative, financial and
       accounting systems and controls
 
     - to maintain close coordination among engineering, accounting, finance,
       marketing, sales and operations
 
     - to hire and train additional technical and marketing personnel
 
There is intense competition for senior management, technical and marketing
personnel in the areas of our activities. The loss of the services of any of our
senior management team or the failure to attract and retain additional key
employees could significantly harm our business. We maintain no key-person life
insurance.
 
WE DEPEND ON TWO-WAY CABLE MODEMS BASED UPON A NEW INDUSTRY STANDARD
 
     Each of our subscribers currently must obtain a cable modem from a cable
partner to access the @Home service. The North American cable industry has
recently adopted a set of interface standards known as DOCSIS for hardware and
software to support the delivery of data services over the cable infrastructure
utilizing interoperable cable modems. We believe that these specifications,
together with our distribution relationships with CompUSA, Compaq and Dell, will
facilitate the growth of the cable modem industry and the availability of lower
cost, interoperable cable modems through retail channels. However, certain of
our cable partners have chosen to delay some deployments of the @Home service
until the widespread commercial availability of DOCSIS-compliant cable modems.
Our subscriber growth could be constrained and our business could be
significantly harmed if our cable partners choose to slow the deployment of the
@Home service further, as a result of the timing of widespread commercial
availability of DOCSIS-compliant cable modems or otherwise. Cable modems that
are DOCSIS-compliant are not expected to be available in significant quantities
until at least the second quarter of 1999. Although multiple vendors are
expected to supply DOCSIS-compliant cable modems and their constituent
components, any cable partner's reliance on a single provider of these modems or
components could cause that cable partner to be unable to generate expected
subscriber growth for the @Home service if the supplier does not provide the
cable partner with a sufficient quantity of DOCSIS-compliant modems.
 
OUR MARKETS ARE HIGHLY COMPETITIVE
 
     The markets for consumer and business Internet services and online content
are extremely competitive, and we expect that competition will intensify in the
future. Our most direct competitors are other providers of cable-based Internet
services, unaffiliated cable companies, national long-distance and local
exchange carriers, Internet and online service providers, and Internet content
aggregators.
 
     We compete with other cable-based services. Our competitors in the
cable-based services market are those companies that have developed their own
cable-based services and market those services to unaffiliated cable system
operators that are planning to deploy data services. In particular, Time Warner
Inc. and MediaOne Group have deployed high-speed Internet access services over
their existing local HFC cable networks through their cable-based Internet
service, Road Runner, which features a variety of proprietary content from Time
Warner Publications. Time Warner's substantial libraries of multimedia content
could provide Road Runner with a significant competitive advantage. In June
1998, Microsoft and Compaq each invested $212.5 million in Road Runner and
announced that Microsoft will provide software for the Road Runner service and
that Compaq will produce cable-ready personal computers to be used with the
service. Time Warner and MediaOne plan to market the Road Runner service through
their own cable systems as well as to other cable system operators nationwide.
Although we do not presently compete directly with the Road Runner service for
subscribers because Road Runner is offered over different cable systems than
those that carry the @Home service, we do compete with the Road Runner service
in seeking to establish distribution arrangements with cable system operators.
Furthermore, if and when our existing cable partners cease to be subject to
their exclusivity obligations, we may compete with Road Runner and potentially
other Internet service providers for distribution over the cable systems of our
cable partners. In addition, other cable system
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<PAGE>   30
 
operators, including Adelphia Communications Corporation, have launched their
own cable-based Internet services that could compete with our services.
 
     We also compete with other high-speed telecommunications technologies. Long
distance inter-exchange carriers, such as AT&T, MCI Worldcom and Sprint have
deployed large-scale Internet access networks and sell connectivity to business
and residential customers. The regional Bell operating companies and other local
exchange carriers have also entered this field and are providing price
competitive services. Many such carriers are offering diversified packages of
telecommunications services, including Internet access, to residential customers
and could bundle these services together, which could put us at a competitive
disadvantage. Many of these competitors are offering or may soon offer
technologies that will compete with some or all of our high-speed data service
offerings. These technologies include integrated services digital network (ISDN)
and asymmetric digital subscriber line (ADSL). In January 1998, technology
companies including Compaq, Intel and Microsoft together with numerous
telecommunications providers announced an initiative to develop a simplified
version of ADSL, referred to as "ADSL Lite," which is intended to reduce the
complexity and expense of installing Internet services based on ADSL. Also, in
October 1998, the International Telecommunications Union adopted an ADSL
standard called G Lite. Widespread commercial acceptance of ADSL technologies
could significantly reduce the potential subscriber base for our Internet
services, which could significantly harm our business.
 
     We compete with other online services. We also compete with Internet
service providers that provide basic Internet access to residential consumers
and businesses, generally using existing telephone network infrastructures.
While not offering the advantages of broadband access, these services are widely
available and inexpensive. In addition, we compete with online service providers
such as America Online, Inc. that provide, over the Internet and on proprietary
online services, content and applications ranging from news and sports to
consumer videoconferencing. These services currently are designed for broad
consumer access over telecommunications-based transmission media, which enables
the provision of data services to the large group of consumers who have personal
computers with modems. America Online and Bell Atlantic have recently entered
into an agreement whereby America Online will offer its Internet services using
Bell Atlantic's advanced digital subscriber line infrastructure. Online service
providers also provide basic Internet connectivity, ease of use and consistency
of environment. In addition to developing their own content or supporting
proprietary third-party content developers, online services often establish
relationships with traditional broadcast and print media outlets to bundle their
content into the service.
 
     We compete with content aggregators and Internet portals. Finally, we
compete with content aggregators and Internet portals that seek to capture
audience flow by providing ease-of-use and offering content that appeals to a
broad audience. Leading companies in this area include America Online, Yahoo!
Inc. and Lycos, Inc. In this market, competition affects existing and potential
relationships with both content providers and subscribers. The principal bases
of competition in attracting content providers include quality of demographics,
audience size, cost-effectiveness of the medium and ability to create
differentiated experiences using aggregator tools. The principal bases of
competition in attracting subscribers include richness and variety of content
and ease of access of the desired content. Many online service providers, such
as America Online, have the advantage of large customer bases, industry
experience, many content partnerships and significant resources.
 
     Many of our competitors have more resources than we do. Many of our
competitors and potential competitors have substantially greater financial,
technical and marketing resources, larger subscriber bases, longer operating
histories, greater name recognition and more established relationships with
advertisers and content and application providers than we do. These competitors
may be able to undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and devote substantially more resources to
developing Internet services or online content than we could. We may not be able
to compete successfully against current or future competitors, and competitive
pressures could significantly harm us. Further, as a strategic response to
changes in the competitive environment, we and our cable partners may make
certain pricing, service or marketing decisions or enter into acquisitions or
new ventures that could significantly harm us.
 
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<PAGE>   31
 
WE FACE CHALLENGES ASSOCIATED WITH OUR JOINT DEVELOPMENT EFFORT WITH TCI
 
     We were selected by TCI to develop software and provide integration
services for TCI's next generation advanced digital set-top devices. Although we
believe this relationship could enable us to expand our product line and market
the @Home service to a broader audience of consumers who do not regularly use a
personal computer, the agreement does not require that TCI deploy the @Home
service on these set-top devices, and we cannot predict when these set-top
devices will become commercially available. Notwithstanding our agreement with
TCI, we cannot deploy set-top device Internet services over the cable
infrastructure of TCI or our cable partners without their consent.
 
     In addition to the technological, financial and infrastructure challenges
TCI faces in deploying the new set-top devices, the success of this development
effort is subject to:
 
     - the technological and operational challenges of providing and supporting
       email and other Internet services to set-top device users
 
     - competition from alternative Internet service providers and deployment
       technologies
 
     - the degree to which consumers desire Internet services, including email,
       on their televisions
 
In addition, our cable partners can work with third parties to develop and
deploy set-top devices, and even if they do choose to work with us, our revenue
split on any fees generated from services deployed on these devices may differ
from our revenue split with respect to our current high-speed cable Internet
services.
 
OUR DEPENDENCE ON OUR NETWORK EXPOSES US TO A SIGNIFICANT RISK OF SYSTEM FAILURE
 
     Our operations are dependent upon our ability to support our highly complex
network infrastructure and avoid damage from fires, earthquakes, floods, power
losses, telecommunications failures and similar events. The occurrence of a
natural disaster or other unanticipated problem at our network operations center
or at a number of our regional data centers could cause interruptions in our
services. Additionally, failure of our cable partners or companies from which we
obtain data transport services to provide the data communications capacity we
require, as a result of natural disaster, operational disruption or any other
reason, could cause interruptions in the services we provide. Any damage or
failure that causes interruptions in our operations could significantly harm our
business.
 
WE MUST RESPOND TO RAPID TECHNOLOGICAL CHANGE
 
     The markets for consumer and business Internet access services and online
content are characterized by rapid technological developments, frequent new
product introductions and evolving industry standards. The emerging nature of
these products and services and their rapid evolution will require that we
continually improve the performance, features and reliability of our network,
Internet content and consumer and business services, particularly in response to
competitive offerings. We may not be successful in responding quickly, cost
effectively and sufficiently to these developments. There may be a time-limited
market opportunity for our cable-based consumer and business Internet services,
and we may not be successful in achieving widespread acceptance of our services
before competitors offer products and services with speed and performance
similar to or better than our current offerings. In addition, the widespread
adoption of new Internet or telecommuting technologies or standards, cable-based
or otherwise, could require that we make substantial expenditures to modify or
adapt our network, products and services. This could fundamentally affect the
character, viability and frequency of Internet-based advertising and content
services. Finally, new Internet or telecommuting services or enhancements that
we offer may contain design flaws or other defects.
 
YEAR 2000 ISSUES COULD AFFECT OUR BUSINESS
 
     If our internal and network information systems do not correctly recognize
and process date information beyond the year 1999, we may not be able to conduct
operations. To address these Year 2000 issues, we and our majority shareholder,
TCI, have initiated a comprehensive program to address Year 2000 readiness in
our systems and with our customers' and suppliers' systems. The program has been
designed to gather information
 
                                       31
<PAGE>   32
 
regarding the Year 2000 compliance of products and services that we require to
deploy our residential and commercial Internet services. Under the program,
assessment and remediation are proceeding in tandem, and we intend to have our
critical systems in Year 2000 compliance by June 30, 1999. These activities
encompass all major categories of systems that we use, including network
management, customer service and business operations. The costs incurred to date
related to the program have not been material. We currently expect that the
total cost of our Year 2000 readiness program will not exceed $750,000 in 1999.
The total cost estimate does not include potential costs related to any customer
or other claims or the costs of internal software or hardware replaced in the
normal course of business. The total cost estimate is based on the current
assessment of our Year 2000 readiness needs and is subject to change as the
program proceeds.
 
     As part of our normal course of operations, we are currently in the process
of transitioning to or implementing new computer software for our accounting,
billing, network management, human resources and other management information
systems. We are assessing and testing these systems for Year 2000 compliance and
will implement changes to these systems, if necessary. The successful
implementation of these new systems is crucial to the efficient operation of our
business. However, we may not implement our new systems in an efficient and
timely manner, and the new systems may not be adequate to support our
operations. Problems with installation or initial operation of the new systems
could cause substantial difficulties in operations planning, business management
and financial reporting, which could significantly harm our business, financial
condition and results of operations. The cost of bringing our new systems into
Year 2000 compliance, if necessary, is not expected to have a material effect on
our financial condition or results of operations.
 
     We have also initiated formal communications with many of our significant
suppliers to determine the extent to which we are vulnerable to these suppliers'
failure to remedy their own Year 2000 issues. We have already received
assurances of Year 2000 compliance from a number of those suppliers. Most of the
suppliers have no contractual obligations under existing contracts to provide us
with this information. We are taking steps with respect to new supplier
agreements to seek assurance that the suppliers' products and internal systems
are Year 2000 compliant. Despite these assurances, we may still experience
supplier-related Year 2000 problems.
 
     Although we currently expect that the Year 2000 issue will not pose
significant operational problems, delays in the implementation of new
information systems or a failure to fully identify all Year 2000 dependencies in
our existing system and in the systems of our suppliers could have material
adverse consequences. Therefore, we are developing, but do not yet have,
contingency plans for continuing operations in the event these problems arise.
 
WE FACE CHALLENGES EXPANDING INTERNATIONALLY
 
     A key component of our strategy is expansion into international markets. To
date, we have developed distribution relationships only with United States,
Canadian and Dutch cable system operators. We have extremely limited experience
in developing localized versions of our products and services and in developing
relationships with international cable system operators. We may not be
successful in expanding our product and service offerings into foreign markets.
In addition to the uncertainty regarding our ability to generate revenues from
foreign operations and expand our international presence, there are certain
risks inherent in doing business internationally, such as:
 
     - regulatory requirements (including the regulation of Internet access)
 
     - legal uncertainty regarding liability for information retrieved and
       replicated in foreign jurisdictions
 
     - export and import restrictions
 
     - tariffs and other trade barriers
 
     - difficulties in staffing and managing foreign operations
 
     - longer payment cycles
 
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<PAGE>   33
 
     - problems in collecting accounts receivable
 
     - fluctuations in currency exchange rates
 
     - seasonal reductions in business activity during the summer months in
       Europe and certain other parts of the world
 
     - potential inability to use European customer information due to new
       European governmental regulations
 
     - potential adverse tax consequences
 
     One or more of these factors could significantly harm our international
operations and therefore our business.
 
OUR BUSINESS MAY BE IMPACTED BY CABLE UNBUNDLING PROPOSALS AND OTHER GOVERNMENT
REGULATION AND LEGAL UNCERTAINTIES
 
     Federal regulation could harm our business. Currently, our services are not
directly subject to regulations of the Federal Communication Commission or any
other federal or state communications regulatory agency. However, changes in the
regulatory environment relating to the Internet market, including regulatory
changes that affect telecommunications costs, limit usage of subscriber-related
information or increase the likelihood or scope of competition from the regional
Bell operating companies or other telecommunications companies, could affect our
pricing or ability to market our services successfully. For example, regulation
of cable television rates may affect the speed at which our cable partners
upgrade their cable systems to carry our services. Similarly, legislation
considered in the last Congress, which would have restricted the use of
subscriber information by interactive computer services for marketing and other
purposes, could adversely affect the marketing of our services as well as our
revenue from advertising.
 
     Local franchise authorities could seek to regulate our services. Many of
our United States cable partners' local cable affiliates have elected to
classify the provision of the @Home service as additional cable services under
their respective local franchise agreements, and to pay franchise fees in
accordance with those agreements. Local franchise authorities may attempt to
subject cable systems to higher or other franchise fees or taxes or otherwise
require cable operators to obtain additional franchises in connection with their
distribution of the @Home service. There are thousands of franchise authorities,
and thus it will be difficult or impossible for us or our cable partners to
operate under a unified set of franchise requirements.
 
     The FCC could require our cable partners to grant our competitors access to
the cable infrastructure. America Online, MindSpring Enterprises, Inc.,
Consumers Union and other parties have requested the FCC to require cable
operators to provide Internet and online service providers with unbundled access
to the cable infrastructure. In the event that the FCC were to require
third-party access to the cable infrastructure, Internet and online service
providers could potentially provide services over the cable infrastructure of
our cable partners that compete with our services. If the FCC or another
governmental agency were to classify our cable partners as common carriers of
Internet services, or if they were to seek such classification as a means of
protecting themselves against liabilities, our rights as the exclusive
residential high-speed Internet service provider over the systems of our United
States cable partners could be lost. In addition, if we or our United States
cable partners were classified as common carriers, these cable partners could be
subject to government-regulated tariff schedules for the amounts they could
charge for our services.
 
     Local agencies may require third party access. The third party access issue
has also been raised in proceedings before local governments. Local governments
must approve the transfer of TCI's cable systems to AT&T in connection with the
AT&T's acquisition of TCI. America Online, U S West and some Internet service
providers have asked local governments to impose a third-party access
requirement on TCI as a condition to approving the transfer, and Portland and
Multnomah County, Oregon have imposed such a condition. AT&T and TCI have
challenged this action in Federal District Court. Seattle and King County,
Washington, are considering a similar condition. Other local governments are
considering imposing third-party
 
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<PAGE>   34
 
access requirements on cable operators in franchise renewal proceedings and in
connection with transfers of cable systems between cable operators.
 
     Canadian regulation could affect our business. Rogers and Shaw have
informed us that, due to certain Canadian regulations, they are required to
provide access to their respective networks to third-party Internet service
providers. Although no third party currently uses Rogers' or Shaw's networks for
the purpose of offering Internet services, these Canadian regulations preclude
us from having an exclusive contractual right to access these networks.
 
     Deregulation of telephone companies could enhance their ability to compete
against our service. The FCC also is considering whether to provide the Bell
operating companies and other incumbent local exchange carriers with significant
relief from existing access, resale, unbundling, pricing, and cost recovery
rules and policies, without regard to local access and transport boundaries, in
order to encourage the deployment and operations by these carriers of
high-capacity, packet-switched networks and other advanced telecommunications
facilities and related services, including Internet access services.
Deregulation of telephone company advanced services could enhance the ability of
these companies to compete against the delivery of @Home's services by our cable
partners.
 
WE COULD FACE LIABILITY FOR DEFAMATORY OR INDECENT CONTENT
 
     It is possible that claims could be made against Internet and online
service providers under both United States and foreign law for defamation,
negligence, copyright or trademark infringement, or other theories based on the
nature and content of the materials disseminated through their networks. Several
private lawsuits seeking to impose such liability are currently pending. In
addition, legislation has been proposed that imposes liability for or prohibits
the transmission over the Internet of certain types of information. The
imposition upon Internet and online service providers of potential liability for
information carried on or disseminated through their systems could require us to
implement measures to reduce our exposure to this liability. This may require
that we expend substantial resources or discontinue certain service or product
offerings. The increased attention focused upon liability issues as a result of
these lawsuits and legislative proposals could impact the growth of Internet
use. Furthermore, certain foreign governments, such as Germany, have enacted
laws and regulations governing content distributed over the Internet that are
more strict than those currently in place in the United States. One or more of
these factors could significantly harm our business.
 
OUR PRO FORMA ACCOUNTING FOR THE EXCITE MERGER MAY CHANGE
 
     The total estimated purchase price for the Excite merger has been allocated
on a preliminary basis to assets and liabilities based on our best estimates of
their fair values, with the excess costs over the net assets acquired allocated
to goodwill and other intangible assets. This allocation is subject to change
pending a final analysis of the fair values of the assets acquired and
liabilities assumed. The impact of these changes could be material to our future
results of operations.
 
CERTAIN TRANSACTIONS MAY RESULT IN ADDITIONAL DILUTION TO OUR STOCKHOLDERS
 
     We have entered into agreements with Cablevision, Rogers, Shaw, certain
other cable partners and other business partners pursuant to which we have
issued warrants to purchase a total of 23,619,036 shares of our Series A common
stock. Under these agreements, warrants to purchase 12,386,125 shares of our
Series A common stock at an average price of $2.26 per share were exercisable as
of December 31, 1998. To the extent that Cablevision, Rogers, Shaw, certain
other cable partners or other business partners become eligible to and exercise
their warrants, our stockholders would experience substantial dilution. We also
may issue additional stock, or warrants to purchase stock, at prices less than
fair market value in connection with efforts to expand distribution of the @Home
service.
 
OUR STOCK PRICE IS SUBJECT TO SIGNIFICANT VOLATILITY
 
     The stock market has from time to time experienced significant price and
volume fluctuations. In addition, the market price of the shares of our Series A
common stock, like the market prices of shares of
                                       34
<PAGE>   35
 
other Internet companies, has been and is likely to be highly volatile. Factors
such as fluctuations in our operating results, announcements of technological
innovations or new products by us or our competitors, regulatory actions, market
rumors, acquisitions in the Internet, telecommunications or cable industries and
general market conditions may have a significant effect on the market price of
our Series A common stock and other securities, such as our outstanding
debentures, that are convertible into or exercisable for our Series A common
stock.
 
     RISKS RELATED TO OUR RELATIONSHIPS WITH OUR CABLE PARTNERS
 
WE DEPEND ON OUR CABLE PARTNERS TO UPGRADE TO THE TWO-WAY CABLE INFRASTRUCTURE
NECESSARY TO SUPPORT OUR @HOME SERVICE; THE AVAILABILITY AND TIMING OF THESE
UPGRADES ARE UNCERTAIN
 
     Transmission of the @Home service and certain @Work services over cable
depends on the availability of high-speed two-way HFC cable infrastructure.
However, only a portion of existing cable plant in the United States and in
certain international markets has been upgraded to HFC cable, and even less is
capable of high-speed two-way transmission. Our cable partners have announced
and begun to implement major infrastructure investments in order to deploy
two-way HFC cable. However, certain of our cable partners have limited
experience with these upgrades, and these investments have placed a significant
strain on the financial, managerial, operating and other resources of our cable
partners, most of which are already highly leveraged. Therefore, these
infrastructure investments have been, and we expect will continue to be, subject
to change, delay or cancellation. Although our commercial success depends on the
successful and timely completion of these infrastructure upgrades, most of our
cable partners are under no obligation to upgrade systems or to introduce,
market or promote our services. The failure of our cable partners to complete
these upgrades in a timely and satisfactory manner, or at all, would prevent us
from delivering high-performance Internet services and would significantly harm
our business.
 
OUR CABLE PARTNERS ARE NOT GENERALLY OBLIGATED TO CARRY OUR SERVICES, AND THE
EXCLUSIVITY OBLIGATIONS THAT PREVENT THEM FROM CARRYING COMPETING SERVICES MAY
BE TERMINATED
 
     Our cable partners are subject to certain exclusivity obligations that
prohibit them from obtaining high-speed (greater than 128 kilobits per second)
residential consumer Internet services from any source other than us. However,
most of our cable partners are under no affirmative obligation to carry any of
our services, and the exclusivity obligations of our principal cable partners,
TCI, Comcast, Cox and Cablevision, expire on June 4, 2002, and may be terminated
sooner under certain circumstances. For example, our principal cable partners
may terminate all their exclusivity obligations upon a change in law that
materially impairs certain of their rights. Also, Comcast or Cox may terminate
all exclusivity obligations of our principal cable partners at any time if there
is a change of control of TCI that results, within one year, in the incumbent
directors of TCI no longer constituting a majority of the TCI board of
directors. AT&T has agreed with TCI not to take intentional actions that would
allow termination of these exclusivity obligations. Either Comcast or Cox, based
on relative subscriber criteria as of June 4, 1999 and as of each anniversary of
that date, has the right to terminate the exclusivity obligations of our
principal cable partners if TCI and its affiliates do not meet certain
subscriber penetration levels for the @Home service. Based upon current
subscriber penetration information available to us, it is uncertain whether TCI
will meet these penetration levels at June 4, 1999 or in the future. If Comcast
or Cox terminates the exclusivity obligations, this could significantly harm our
business and cause an immediate drop in our stock price. Finally, Comcast may
terminate its own exclusivity obligations upon its election after June 4, 1999
if it permits a portion of its equity in us to be repurchased by us at Comcast's
original cost. Comcast has informed us that it has entered into an agreement
with Microsoft Corporation under which Microsoft can require Comcast to
terminate its exclusivity obligations after June 4, 1999. Although Microsoft has
stated in the agreement that it has no present intention to do so, Microsoft may
be more likely than Comcast to terminate Comcast's exclusivity obligations.
 
                                       35
<PAGE>   36
 
THE EXCLUSIVITY OBLIGATIONS OF OUR CABLE PARTNERS ARE LIMITED
 
     The exclusivity obligations also are subject to exceptions that would
permit our principal cable partners and their affiliates to engage in certain
activities which could compete, directly or indirectly, with our activities. For
example, each of these cable partners and its affiliates is permitted to:
 
     - engage in any business other than the provision of high-speed residential
       consumer Internet services, including competing with our @Work operations
 
     - maintain voting equity interests of 10% or less in public companies that
       directly compete with our @Home service and related Internet backbone
       connectivity services
 
     - acquire an interest in any business that competes with our high-speed
       residential consumer Internet services (so long as the competitive
       business is not its primary business)
 
     - acquire equity securities of public companies that compete with us,
       provided that it does not control (or is not under common control with)
       such companies
 
     - operate a competing business in any cable system territory where the
       exclusivity obligations have been terminated
 
OUR CABLE PARTNERS MAY OFFER CERTAIN SERVICES DESPITE THEIR EXCLUSIVITY
OBLIGATIONS
 
     Most of our cable partners' exclusivity obligations are limited to
high-speed residential Internet services and do not extend to various excluded
services that they may offer without us. These excluded services include:
 
     - telephony services
 
     - services that are primarily work-related (such as @Work services)
 
     - residential Internet services that do not use the cable partners' cable
       television infrastructures, regardless of data transmission speed
 
     - local Internet services that do not require use of an Internet backbone
       outside a single metropolitan area
 
     - services that are utilized primarily to connect students to schools,
       colleges or universities
 
     - Internet telephony, Internet video telephony or Internet video
       conferencing
 
     - limited Internet services primarily intended for display on a television
       such as some types of Internet-based digital set-top services
 
     - certain Internet services that are primarily downstream services where
       the user cannot send upstream commands in real-time
 
     - streaming video services that include video segments longer than 10
       minutes in duration
 
     In addition, our cable partners can engage in limited testing, trials and
similar activities with respect to businesses subject to their exclusivity
obligations. By engaging in the excluded services, most cable partners can
compete, directly or indirectly, with our activities, including our @Work
services.
 
WE ARE PROHIBITED FROM OFFERING THE EXCLUDED SERVICES
 
     Until the later of June 4, 2002 or such time as a principal cable partner
is no longer in compliance with its exclusivity obligations, we may not offer
the excluded services described above using a principal cable partner's cable
plant, or to residences in the geographic areas served by its cable systems,
without its consent. These restrictions apply even if we have integrated an
excluded service with the @Home service in another geographic area. In the case
of streaming video transmissions that include video segments longer than 10
minutes in duration, we face increased obligations to our principal cable
partners that remain in compliance with their exclusivity obligations.
Specifically, we have agreed not to allow these video transmissions using
 
                                       36
<PAGE>   37
 
their cable infrastructure or in the geographic areas served by their cable
systems, without their consent. Therefore, we may never have access to the cable
infrastructures of our principal cable partners for excluded services, and we
must negotiate a separate agreement, including a new revenue split, if
applicable, with each of the principal cable partners for each excluded service
that we seek to provide over their cable infrastructures.
 
WE ARE CONTROLLED BY TCI
 
     TCI controls approximately 71% of our voting power and has the power to
elect a majority of our board members and to control all matters requiring the
approval of our stockholders. TCI's Series B common stock carries ten votes per
share and gives TCI the right to elect five Series B directors, one of which is
designated by Comcast and one of which is designated by Cox. Currently, four of
our 11 directors are directors, officers or employees of TCI or its affiliates.
As long as TCI owns at least 7,700,000 shares of our Series B common stock and
holds a majority of our voting power, our Board may take action only if approved
by the Board and by a majority of the Series B directors, three of five of which
are designees of TCI. This allows TCI to block actions of our Board, even
through the TCI directors may not then constitute a majority of the Board. In
addition, TCI can expand the Board at any time and fill the vacancies with TCI
designees to control a majority of the Board. Further, we may not take certain
corporate actions without the approval of TCI's Series B directors and in
certain cases the directors designated by Comcast and Cox. Notwithstanding these
provisions, all of our directors owe fiduciary duties to our stockholders. If
and when the merger of AT&T and TCI is complete, AT&T will control TCI and thus
control us. Even if and when we complete the Excite merger, TCI or AT&T will
continue to own more than 50% of our voting power.
 
WE MAY NOT REALIZE THE EXPECTED BENEFITS FROM, AND COULD BE HARMED BY, AT&T'S
ACQUISITION OF TCI AND TCG
 
     On June 24, 1998, TCI and AT&T announced that AT&T has agreed to acquire
TCI. AT&T and TCI anticipate that their merger, which is subject to regulatory
approval, will be completed in the first quarter of 1999. In addition, in July
1998, AT&T acquired Teleport Communications Group, Inc. While we believe that
AT&T's acquisition of TCI and TCG may benefit us by increasing the rate at which
TCI's cable facilities will be upgraded to the two-way HFC cable necessary to
carry our services, by allowing us to utilize the strength of AT&T's brand in
marketing the @Home service to consumers and by increasing the potential for
cooperation between us and TCG, these benefits may not be realized and AT&T's
TCI acquisition may not be completed. Moreover upon a change of control of TCI
that results within one year in the incumbent directors of TCI no longer
constituting a majority of the TCI board of directors, either Cox or Comcast can
terminate the exclusivity obligations that apply to our principal cable
partners. While AT&T has agreed with TCI not to take intentional actions that
would allow termination of these exclusivity obligations, if AT&T did take these
actions, either Cox or Comcast would have the right to terminate the exclusivity
obligations of all our principal cable partners. This would significantly harm
our business and cause an immediate drop in our stock price.
 
     As discussed above, local franchise authorities could impose an obligation,
in connection with AT&T's acquisition of TCI, that AT&T and TCI allow third
parties to access TCI's cable infrastructure. The imposition of such an
obligation could lessen the anticipated benefits of their merger, and therefore
the benefits we may receive as a result of their merger.
 
WE MAY FACE ADDITIONAL COMPETITION FROM AT&T
 
     AT&T operates certain businesses that could compete with our services,
notwithstanding any exclusivity obligations that may apply to it if and when its
acquisition of TCI is completed. First, AT&T operates a consumer Internet
service known as AT&T WorldNet. Although AT&T WorldNet is currently a dial-up
service that does not utilize broadband technologies, AT&T may be able to use
non-cable-based data transport mechanisms to offer high-speed residential
Internet services that compete with our @Home service. Second, AT&T owns TCG,
which operates an Internet service for business customers that competes with our
@Work service. Our @Work business depends to a significant extent on our
agreement with TCG for local access telecommunications services. If TCG ceases
to cooperate with us, our @Work business would be
 
                                       37
<PAGE>   38
 
harmed. Because our @Work business is not subject to the cable partners'
exclusivity obligations, AT&T or TCG are not limited in their ability to compete
with our @Work business. In addition, AT&T and Time Warner recently announced
the formation of a significant strategic relationship that will include a joint
venture to offer AT&T-branded cable telephony service to residential and small
business customers over Time Warner's existing cable television systems in 33
states. The relationship between AT&T and Time Warner could ultimately extend to
other broadband services, including cable Internet services, that compete with
our @Home service. Therefore, even once it controls us, AT&T may take actions
that benefit TCG, WorldNet or other services of AT&T or other parties to our
detriment.
 
WE DEPEND ON OUR CABLE PARTNERS FOR DISTRIBUTION; THIS CREATES CONFLICTS OF
INTEREST
 
     Through their cable systems, our cable partners provide the principal
distribution network for our services, and they share the revenue from the @Home
services that are derived from our subscribers. Given our contractual and
business relationships with our cable partners, the interests of our cable
partners may not always coincide with our interests, and conflicts of interest
concerning the split of revenues and other matters exist. Because TCI,
Cablevision, Comcast and Cox all operate cable systems that will be the primary
distributors of the @Home service, situations may arise where their interests
may diverge or appear to diverge from the interests of our other stockholders.
TCI and the other principal cable partners, acting through their Board
designees, have the ability to cause us to take certain actions or prohibit us
from taking certain actions that may be favored by other stockholders or by the
other directors who are not affiliated with our principal cable partners. Our
Board, which is controlled by TCI, has the power, subject to directors'
fiduciary duties, to approve transactions in which our principal cable partners
have an interest, including amending or terminating their distribution agreement
with us or changing the revenue splits in their favor. Under the agreements
under which our U. S. cable partners distribute our services, we receive 35% of
monthly fees and fees for premium services. However, most of these agreements,
including the agreement with our principal cable partners, contain contractual
"most favored nation" provisions, which provide that our principal cable
partners are entitled to distribution arrangements and related services on terms
at least as favorable as those obtained by any other cable system operator.
Therefore, our principal cable partners have the power, subject to their
fiduciary duties, to cause us to approve more favorable distribution
arrangements, including more favorable revenue splits, for one or more
unaffiliated cable operators in order to receive more favorable distribution
arrangements themselves and reduce our share of subscriber fees.
 
WE DEPEND ON OUR CABLE PARTNERS TO MARKET, DELIVER AND SUPPORT THE @HOME SERVICE
 
     Because subscribers to the @Home service will subscribe through a cable
partner, the cable partner will substantially control the customer relationship
with the subscriber. Each cable partner has complete discretion regarding the
pricing of the @Home service to subscribers in its territories (except for
certain premium services for which we may contract directly with the
subscriber), and a cable partner could use the @Home service as a loss leader in
order to increase demand for other products or services with more attractive
terms. The cable partners do not have any affirmative obligations (other than
the payment of revenue splits to us) with respect to marketing, installing and
maintaining infrastructure for, providing customer service for and billing for
the @Home service. In limited circumstances, such as a cable partner's failure
to upgrade a cable system or roll out the @Home service after it has committed
to do so, we may be entitled to certain cost reimbursements and to be released
from certain of our exclusivity obligations, neither of which may be an
effective remedy for the failure. Our business requires a substantial rollout of
the @Home service, and if a widespread rollout does not occur, our business will
not be viable. Moreover, our cable partners have in the past experienced, and
may in the future experience, delays in installing the @Home service in areas in
which it has been introduced. Our cable partners are expected to provide general
customer service to our subscribers and, under their distribution agreements,
have the option to provide technical support, rather than utilizing our service
and support capabilities. If a cable partner elects to provide technical
support, we must reimburse them for our avoided costs, and we would have little
or no control over the quality of customer service actually provided to
subscribers of the @Home service. If the customer service and support provided
by our cable partners are unsatisfactory to subscribers, consumer demand for the
@Home service will likely diminish.
 
                                       38
<PAGE>   39
 
OUR CABLE PARTNERS CONTROL THE TERMS OF DISTRIBUTION OF THE @HOME SERVICE
 
     We and our cable partners have entered into agreements providing for the
distribution of the @Home service by our cable partners and their affiliates.
The economic and other terms of these agreements may be less favorable to us
than those that could have been negotiated had we been independent of our
principal cable partners. In addition, the agreements with our principal cable
partners contain provisions that permit a cable partner to change certain
aspects of the distribution of the @Home service without our approval. For
example, a principal cable partner has the option to provide certain customer
service functions that we currently provide and upon which our 35% revenue split
was based. If a principal cable partner elects to provide these services, it is
also entitled to reimbursement of our avoided costs. Similarly, the principal
cable partners have certain rights to remove cable systems from the approved
rollout schedule or to substitute cable systems in place of removed systems.
These rights are contractual in nature and may be exercised by the principal
cable partners in their sole discretion. The exercise by the principal cable
partners of these contractual rights may significantly harm our business. Our
cable partners also control the rollout schedule of the @Home service, and our
principal cable partners hold certain priority rights with respect to this
rollout schedule. This priority could harm us because we may be required to roll
out our services to our principal cable partners before rolling out the services
to other cable system operators, even though the other cable system operators
may be ready to roll out the @Home service sooner or on terms more favorable for
us.
 
OUR PRINCIPAL CABLE PARTNERS CAN BLOCK ACCESS TO CERTAIN CONTENT AND SERVICES
 
     Each principal cable partner has the right to exclude the promotion of
specified national content providers from the @Home service offered through its
cable systems, subject to an adjustment in the revenue split if the number of
such exclusions exceeds a specified number. In addition, a principal cable
partner has the right to block access to certain content, including streaming
video segments of more than ten minutes in duration, and we are obligated to use
reasonable best efforts to block such access. We are also obligated to use
reasonable best efforts to consult with and involve each of the principal cable
partners in the development of requirements for, design of and introduction of
enhancements, new features and new applications of the @Home service. If
principal cable partners representing a majority of the residential subscribers
who subscribe to the @Home service object to any enhancement, feature or
application, we have agreed not to implement that enhancement, feature or
application in the territories of the objecting cable partners. If any of the
cable partners exercise these rights to block access to certain content or
services in certain territories, we may be required to devote substantial
expenses and resources to provide different content and services in different
territories and to assist them in blocking such access. This could significantly
harm our business.
 
OUR CABLE PARTNERS MAY COMPETE WITH US FOR ADVERTISING AND PROGRAMMING REVENUE
 
     While we retain 100% of the revenue from our programming of the designated
national area of the @Home service, our principal U.S. cable partners retain
100% of revenue generated from their programming of a designated local area of
the start page of the @Home service. These revenues could include advertising
fees, service fees, content provider charges, transaction fees and promotional
revenue. Accordingly, in exercising their right to program the local area, our
cable partners could place a significant amount of advertising or program
content on the @Home service for which we receive no share of the revenues. For
example, given the national or regional coverage of their operations, any of our
principal cable partners and its affiliates could strike agreements with
advertisers that could effectively result in broad-based advertising campaigns
reaching significant regions of the United States in competition with our
advertising campaigns, generating revenue only for such cable partner and its
affiliates and not for us. In Canada, we share national advertising revenue with
our Canadian cable partners.
 
WE DEPEND ON TCG FOR LOCAL TELECOMMUNICATIONS SERVICES FOR OUR @WORK SERVICES
 
     We depend on TCG, which is owned by AT&T, to provide local
telecommunications services and co-location within TCG's facilities on favorable
economic terms. This relationship enables us to provide @Work services to an
entire metropolitan area in which TCG has facilities. If we were required to
obtain comparable telecommunications services from local exchange carriers, we
would effectively be limited to providing @Work services to commercial customers
within a ten-mile radius of one of our points of presence. As a result, we would
be required to build multiple points of presence to service an entire
metropolitan area, which would substantially increase our capital costs to enter
new markets and which could make such market
 
                                       39
<PAGE>   40
 
entry uneconomical. If we were required to pay standard local exchange carrier
rates, the ongoing operating costs for our @Work services would be substantially
higher. The loss of our strategic relationship with TCG would significantly harm
our ability to deploy our @Work services. In addition, TCG has acquired a
provider of Internet-related services to businesses and corporate customers and
will compete directly with the @Work Internet service. To the extent TCG
acquires or enters into strategic relationships with other Internet service
providers, TCG may reduce its support of the @Work services. Although there are
alternative suppliers for TCG's services, it could take a significant period of
time for us to establish similar relationships, and equivalent terms might not
be available.
 
OUR PRINCIPAL CABLE PARTNERS MAY DISPOSE OF THEIR CABLE SYSTEMS, WHICH WOULD
REDUCE OUR POTENTIAL SUBSCRIBER BASE
 
     Our agreements with our principal cable partners do not require that they
maintain a specified number of cable systems, subscribers or homes passed in
order to maintain their control over equity ownership of us. These principal
cable partners may dispose of a significant amount of their cable systems
without requiring that these cable systems remain subject to any exclusivity
provisions. However, to the extent that any of our principal cable partners
disposes of systems accounting for more than 20% of the number of homes passed
in its service areas as of June 4, 1996 (subject to certain exceptions) without
causing such transferred homes to remain exclusive to us, then that principal
cable partner may be required to sell a proportionate amount of its equity
interest in us to our other principal cable partners at fair market value. For
example, TCI has completed the transfer or sale of certain cable systems and has
announced the proposed sale or transfer of additional cable systems and is
considering various plans and proposals that may result in the disposition of
other of its cable systems. Although TCI has informed us that it is attempting
to cause certain of these transferred systems to remain subject to TCI's
exclusivity obligations, these efforts may not be successful. These dispositions
could significantly harm us if the transferred homes do not remain exclusive.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The index to our Consolidated Financial Statements and the Report of the
Independent Auditors appears in Part IV of this Form 10-K.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     Not Applicable.
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
 
     The information concerning our directors required by Item 10 is
incorporated by reference herein to section entitled "Proposal No. 1 -- Election
of Directors" of the proxy statement for our 1999 Annual Meeting of Stockholders
that we will file by April 30, 1999. The information concerning our executive
officers required by Item 10 is incorporated by reference to the section of our
proxy statement entitled "Executive Officers."
 
ITEM 11. EXECUTIVE COMPENSATION
 
     The information required by Item 11 is incorporated herein by reference to
the sections entitled "Executive Compensation" and "Proposal No. 1 -- Election
of Directors" of our proxy statement.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information required by Item 12 is incorporated herein by reference to
the section entitled "Security Ownership of Certain Beneficial Owners and
Management" of our proxy statement.
 
                                       40
<PAGE>   41
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information required by Item 13 is incorporated herein by reference to
the section entitled "Certain Transactions" of our proxy statement.
 
     With the exception of the information specifically stated as being
incorporated by reference from our proxy statement in Part III of this Annual
Report on Form 10-K, our proxy statement is not to be deemed as filed as part of
this report. The proxy statement will be filed with the Securities and Exchange
Commission by April 30 1999.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
(a)(1) Financial Statements. We have filed the following financial statements
with this Form 10-K:
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Ernst & Young LLP, Independent Auditors...........   47
Consolidated Balance Sheets at December 31, 1998 and
  1997......................................................   48
Consolidated Statements of Operations for the Years Ended
  December 31, 1998, 1997 and 1996..........................   49
Consolidated Statements of Stockholders' Equity for the
  Years Ended December 31, 1998, 1997 and 1996..............   50
Consolidated Statements of Cash Flows for the Years Ended
  December 31, 1998, 1997 and 1996..........................   51
Notes to Consolidated Financial Statements..................   52
</TABLE>
 
(a)(2) Financial Statement Schedules. -- Not applicable.
 
(a)(3) Exhibits.
 
<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                  TITLE
    -------                                 -----
    <S>          <C>
    3.01         Third Amended and Restated Certificate of Incorporation of
                 Registrant filed August 14, 1996(1)
    3.02         Certificate of Amendment of Third Amended and Restated
                 Certificate of Incorporation of Registrant filed April 11,
                 1997(1)
    3.03         Certificate of Designation of Series C Convertible
                 Participating Preferred Stock of Registrant filed April 11,
                 1997(1)
    3.04         Form of Certificate of Amendment of the Third Amended and
                 Restated Certificate of Incorporation of Registrant
                 effective July 15, 1997(1)
    3.05         Form of Second Amended and Restated Bylaws of Registrant
                 effective July 16, 1997(1)
    3.06         Form of Fourth Amended and Restated Certificate of
                 Incorporation of Registrant filed July 16, 1997(1)
    4.01         Third Amended and Restated Registration Rights Agreement,
                 dated April 11, 1997, among Registrant and the parties
                 indicated therein(1)
    4.02         Letter Agreement relating to Tag-Along/Drag-Along Rights,
                 dated April 11, 1997, among Registrant and the parties
                 indicated therein(1)
    4.03         Canadian Purchase Letter Agreement, dated April 11, 1997,
                 among Registrant and the parties indicated therein(1)
    4.04         Form of Amended and Restated Stockholders' Agreement, dated
                 August 1, 1996, among Registrant and the parties indicated
                 therein, as amended on May 15, 1997(1)
    4.05         Form of certificate of Registrant's Series A common stock(1)
</TABLE>
 
                                       41
<PAGE>   42
 
<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                  TITLE
    -------                                 -----
    <S>          <C>
    4.06         Narrative Communications Corp. 1998 Equity Incentive Plan,
                 assumed by Registrant as of December 30, 1998(*)
    4.07         Registrant's 1997 Equity Incentive Plan, as amended(*)(2)
    4.08         Registrant's 1997 Employee Stock Purchase Plan, as
                 amended(*)(2)
    9.01         Voting Agreement, dated April 11, 1997 among Registrant, TCI
                 Internet Holdings, Inc., Comcast PC Investments, Inc., Cox
                 Teleport Providence, Inc., Rogers Cablesystems Limited and
                 Shaw Cablesystems Ltd.(1)
    10.01 A      Stock Purchase Agreement, dated August 29, 1995, among
                 Registrant, TCI Internet Services, Inc., Kleiner Perkins
                 Caufield & Byers VII, KPCB VII Founders Fund and KPCB
                 Information Sciences Zaibatsu Fund II(1)
    10.01 B      Letter Agreement and Term Sheet, dated as of October 2,
                 1997, among Registrant, Cablevision Systems Corporation, CSC
                 Parent Corporation, Comcast Corporation, Cox Enterprises,
                 Inc., Kleiner Perkins Caufield & Byers and
                 Tele-Communications, Inc.(3)
    10.02 A      Letter Agreement, dated May 9, 1996, among Registrant, TCI
                 Internet Holdings, Inc., Kleiner Perkins Caufield & Byers
                 VII, KPCB VII Founders Fund and KPCB Information Sciences
                 Zaibatsu Fund II(1)
    10.02 B      Warrant Purchase Agreement, dated October 10, 1997, between
                 Registrant and Cablevision Systems Corporation(3)
    10.03 A      Stock Purchase and Exchange Agreement, dated August 1, 1996,
                 among Registrant, TCI Internet Holdings, Inc., Kleiner
                 Perkins Caufield & Byers VII, KPCB Information Sciences
                 Zaibatsu Fund II, James Clark, Comcast PC Investments, Inc.,
                 and Cox Teleport Providence, Inc.(1)
    10.03 B      Warrant to Purchase Shares of Series A common stock of the
                 Registrant issued to CSC Parent Corporation as of October
                 10, 1997(3)
    10.04 A      Term Sheet, dated June 4, 1996, among Registrant, TCI
                 Internet Holdings, Inc., Kleiner Perkins Caufield & Byers
                 VII, KPCB Information Sciences Zaibatsu Fund II, KPCB VII
                 Founders Fund, Comcast PC Investments, Inc., and Cox
                 Teleport Providence, Inc.(1)
    10.04 B      Contingent Warrant to Purchase Shares of Series A Common
                 Stock of Registrant issued to CSC Parent Corporation as of
                 October 10, 1997(3)
    10.05        Stock Purchase Agreement, dated April 11, 1997, among
                 Registrant, Rogers Cablesystems Limited, Shaw Cablesystems
                 Ltd., Sun Microsystems, Inc., Netscape Communications
                 Corporation, James Barksdale, Motorola, Inc. and Bay
                 Networks, Inc.(1)
    10.06        Term Sheet dated March 18, 1997, among Registrant and Shaw
                 Cablesystems Ltd. and Rogers Cablesystems Limited(1)
    10.07        Master Communications Services Agreement, dated April 2,
                 1997, between Registrant and Teleport Communications Group
                 Inc.(1)
    10.08        Lease, dated October 17, 1996, between Registrant and
                 Martin/Campus Associated, L.P.(1)
    10.09        Form of Indemnification Agreement between Registrant and
                 each of its directors and executive officers(*)(1)
    10.10        Registrant's 1996 Incentive Stock Option Plan(*)(1)
    10.11        Registrant's 1996 Incentive Stock Option Plan No. 2(*)(1)
    10.12        Narrative Communications Corp. 1995 Stock Option Plan,
                 assumed by Registrant as of December 30, 1998(*)
</TABLE>
 
                                       42
<PAGE>   43
 
<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                  TITLE
    -------                                 -----
    <S>          <C>
    10.13        Description of Registrant's 1998 Executive Incentive Plan(*)
    10.14        Restricted Stock Purchase Agreement, dated July 31, 1996,
                 between Registrant and Thomas A. Jermoluk for purchase of
                 Series A common stock(*)(1)
    10.15        Restricted Stock Purchase Agreement, dated July 31, 1996,
                 between Registrant and Thomas A. Jermoluk for purchase of
                 Series K preferred stock(*)(1)
    10.16        Restricted Stock Purchase Agreement, dated July 31, 1996,
                 between Registrant and William R. Hearst III for purchase of
                 Series A common stock(*)(1)
    10.17        Restricted Stock Purchase Agreement, dated July 29, 1996,
                 between Registrant and Ken Goldman for purchase of Series A
                 common stock(*)(1)
    10.18        Form of Restricted Stock Purchase Agreement and Promissory
                 Note between Registrant and other officers for purchase of
                 Series A common stock(*)(1)
    10.19        Employment Letter Agreement, dated July 19, 1996, between
                 Registrant and Thomas A. Jermoluk(*)(1)
    10.20        Letter of Agreement, dated May 15, 1997, among Registrant
                 and the parties indicated therein, including as exhibits the
                 Master Distribution Agreement Term Sheet and the Term Sheet
                 for Form of LCO Agreement(1)
    10.21        Build To Suit Lease, dated September 29, 1997 between
                 Registrant and Martin/Campus Associates, L.P. (425 Broadway,
                 Redwood City, California)(4)
    10.22        Build To Suit Lease, dated September 29, 1997, between
                 Registrant and Martin/ Campus Associates, L.P., (440
                 Broadway, Redwood City, California)(4)
    10.23        Loan and Security Agreement, dated September 30, 1997,
                 between Registrant and Silicon Valley Bank(4)
    10.24        Binding Warrant Term Sheet, dated February 24, 1998, among
                 Registrant, Rogers Communications, Inc. and Shaw
                 Communications, Inc.(5)
    10.25        Warrant Purchase Agreement, dated May 5, 1998, between
                 Registrant and Century Communications Corp.
    10.26        Warrant to Purchase Series A Common Stock of Registrant
                 issued to Century Communications Corp. as of May 5, 1998
    10.27        Form of Warrant to Purchase Series A Common Stock of
                 Registrant to be issued to Century Communications Corp.
    10.28        Warrant Purchase Agreement, dated June 27, 1998, between
                 Registrant and Garden State Cablevision L.P.
    10.29        Warrant to Purchase Series A Common Stock of Registrant
                 issued to Garden State Cablevision L.P. as of June 27, 1998
    10.30        Warrant Purchase Agreement, dated June 26, 1998, between
                 Registrant and Jones Intercable Inc.
    10.31        Warrant to Purchase Series A common stock of Registrant
                 issued to Jones Intercable Inc. as of June 26, 1998
    10.32        Agreement and Plan of Merger, dated December 30, 1998,
                 between Registrant and Narrative Communications Corp.
                 (incorporated by reference to Exhibit 2.1 of our Report on
                 Form 8-K filed on January 14, 1999 (File No. 000-22697))
    10.33        IRU Capacity Agreement, dated December 19, 1998, between
                 Registrant and AT&T Corp.(**)
    10.34        Form of Loan Modification Agreement between Registrant and
                 Silicon Valley Bank
</TABLE>
 
                                       43
<PAGE>   44
 
<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                  TITLE
    -------                                 -----
    <S>          <C>
    10.35        Build to Suit Option Agreement, dated October 25, 1996,
                 between Registrant and Martin/Campus Associates, L.P., and
                 First Amendment to Build to Suit Option Agreement.
    10.36        Build to Suit Lease, dated July 14, 1998, between Registrant
                 and Martin/Campus Associates, L.P. (420 Broadway, Redwood
                 City, California)
    10.37        Form of Build to Suit Lease between Registrant and
                 Martin/Campus Associates, L.P. (430 Broadway, Redwood City,
                 California)
    21.01        Subsidiaries of Registrant(1)
    23.01        Consent of Ernst & Young LLP, Independent Auditors
    24.01        Power of Attorney executed by each officer and director (See
                 pages 44 and 45 of this Form 10-K)
    27.01        Financial data schedule for year ended December 31, 1998
</TABLE>
 
---------------
 *  Management contracts or compensatory plans required to be filed as an
    exhibit to Form 10-K.
 
**  Confidential treatment has been requested with respect to certain
    information contained in this document. Confidential portions have been
    omitted from this public filing and have been filed separately with the
    Securities and Exchange Commission.
 
(1) Incorporated by reference to exhibits to our Registration Statement on Form
    S-1 (File No. 333-27323), which became effective on July 11, 1997.
 
(2) Incorporated by reference to exhibits to our Registration Statement on Form
    S-8 filed on July 28, 1998 (File No. 333-60037).
 
(3) Incorporated by reference to exhibits to our Registration Statement on Form
    8-K filed on October 22, 1997 (File No. 000-22697).
 
(4) Incorporated by reference to exhibits to our Report on Form 10-Q filed on
    November 14, 1997 (File No. 000-22697).
 
(5) Incorporated by reference to exhibits to our Report on Form 10-Q filed on
    May 15, 1998 (File No. 000-22697), as amended on February 8, 1999.
 
(b) Reports on Form 8-K.
 
     No such reports were filed in the fourth quarter of 1998.
 
(c) Exhibits. -- See (a)(3) above.
 
(d) Financial Statement Schedules. -- Not applicable.
 
                                       44
<PAGE>   45
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
 
Date: February 19, 1999                   AT HOME CORPORATION
 
                                          By: /s/ THOMAS A. JERMOLUK
                                            ------------------------------------
                                            Thomas A. Jermoluk
                                            Chairman, President and
                                            Chief Executive Officer
 
                               POWER OF ATTORNEY
 
     Each individual whose signature appears below constitutes and appoints
Thomas A. Jermoluk, Kenneth A. Goldman and David G. Pine, and each of them, his
true and lawful attorneys-in-fact and agents, each with the power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
 
<TABLE>
<CAPTION>
                      SIGNATURE                                    TITLE                    DATE
                      ---------                                    -----                    ----
<C>                                                    <S>                            <C>
            PRINCIPAL EXECUTIVE OFFICER:
 
               /s/ THOMAS A. JERMOLUK                  President, Chief Executive     February 19, 1999
-----------------------------------------------------  Officer and Chairman of the
                 Thomas A. Jermoluk                    Board
 
            PRINCIPAL FINANCIAL OFFICER:
 
               /s/ KENNETH A. GOLDMAN                  Senior Vice President and      February 19, 1999
-----------------------------------------------------  Chief Financial Officer
                 Kenneth A. Goldman
 
            PRINCIPAL ACCOUNTING OFFICER:
 
                /s/ ROBERT A. LERNER                   Corporate Controller           February 19, 1999
-----------------------------------------------------
                  Robert A. Lerner
</TABLE>
 
                                       45
<PAGE>   46
 
<TABLE>
<CAPTION>
                      SIGNATURE                                    TITLE                    DATE
                      ---------                                    -----                    ----
<C>                                                    <S>                            <C>
                ADDITIONAL DIRECTORS:
 
              /s/ WILLIAM R. HEARST III                Vice Chairman                  February 19, 1999
-----------------------------------------------------
                William R. Hearst III
 
               /s/ JAMES L. BARKSDALE                  Director                       February 19, 1999
-----------------------------------------------------
                 James L. Barksdale
 
                  /s/ L. JOHN DOERR                    Director                       February 19, 1999
-----------------------------------------------------
                    L. John Doerr
 
               /s/ LEO J. HINDERY, JR.                 Director                       February 19, 1999
-----------------------------------------------------
                 Leo J. Hindery, Jr.
 
                 /s/ JOHN C. MALONE                    Director                       February 19, 1999
-----------------------------------------------------
                   John C. Malone
 
                /s/ BRUCE W. RAVENEL                   Director                       February 9, 1999
-----------------------------------------------------
                   John C. Malone
 
                /s/ BRIAN L. ROBERTS                   Director                       February 19, 1999
-----------------------------------------------------
                  Brian L. Roberts
 
                /s/ LARRY E. ROMRELL                   Director                       February 19, 1999
-----------------------------------------------------
                  Larry E. Romrell
 
               /s/ JAMES R. SHAW, JR.                  Director                       February 11, 1999
-----------------------------------------------------
                 James R. Shaw, Jr.
 
                /s/ DAVID M. WOODROW                   Director                       February 6, 1999
-----------------------------------------------------
                  David M. Woodrow
</TABLE>
 
                                       46
<PAGE>   47
 
               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders
At Home Corporation
 
     We have audited the accompanying consolidated balance sheets of At Home
Corporation as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
At Home Corporation at December 31, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
 
                                                               ERNST & YOUNG LLP
 
San Jose, California
January 19, 1999
 
                                       47
<PAGE>   48
 
                              AT HOME CORPORATION
 
                          CONSOLIDATED BALANCE SHEETS
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                1998         1997
                                                              ---------    --------
<S>                                                           <C>          <C>
Current assets:
  Cash and cash equivalents.................................  $ 300,702    $ 44,213
  Short-term investments....................................    118,587      76,166
                                                              ---------    --------
          Total cash, cash equivalents and short-term
            investments.....................................    419,289     120,379
  Accounts receivable, (net of allowance for doubtful
     accounts of $252 in 1998 and none in 1997).............      6,358       1,470
  Accounts receivable -- related parties....................      4,300         672
  Other current assets......................................      3,381       2,919
                                                              ---------    --------
          Total current assets..............................    433,328     125,440
Property, equipment and improvements, net...................     49,240      33,061
Distribution agreements, net................................    186,247     163,345
Intangible assets, net......................................     93,989          --
Other assets................................................     17,827       2,082
                                                              ---------    --------
          Total assets......................................  $ 780,631    $323,928
                                                              =========    ========
 
                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $   7,100    $  2,409
  Accounts payable -- related parties.......................      3,684       2,108
  Accrued compensation and related expenses.................      1,262         798
  Accrued transport costs...................................      2,444       1,179
  Deferred revenues.........................................      5,164       1,941
  Other accrued liabilities.................................     11,305       5,644
  Current portion of capital lease obligations..............     12,045       9,971
                                                              ---------    --------
          Total current liabilities.........................     43,004      24,050
Convertible debentures......................................    229,344          --
Capital lease obligations, less current portion.............     14,356      15,735
Other liabilities...........................................         61       1,736
Commitments and contingencies
Stockholders' equity:
  Common stock, $0.01 par value:
     Authorized shares -- 230,277,660 in 1998 and 1997
     Issued and outstanding shares -- 123,272,867 in 1998
      and 118,603,220
       in 1997..............................................    719,680     370,111
  Notes receivable from stockholders........................         (4)       (319)
  Deferred compensation.....................................     (2,880)     (4,399)
  Accumulated other comprehensive income....................      4,235          --
  Accumulated deficit.......................................   (227,165)    (82,986)
                                                              ---------    --------
          Total stockholders' equity........................    493,866     282,407
                                                              ---------    --------
          Total liabilities and stockholders' equity........  $ 780,631    $323,928
                                                              =========    ========
</TABLE>
 
See accompanying notes.
                                       48
<PAGE>   49
 
                              AT HOME CORPORATION
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                            ---------------------------------
                                                              1998         1997        1996
                                                            ---------    --------    --------
<S>                                                         <C>          <C>         <C>
Revenues(1)...............................................  $  48,045    $  7,437    $    676
Costs and expenses(2):
  Operating costs.........................................     46,965      22,459       6,969
  Product development and engineering.....................     17,009      11,984       6,312
  Sales and marketing.....................................     18,091      11,863       6,368
  General and administrative..............................     12,429      10,635       6,054
  Purchased in-process research and development...........      2,758          --          --
  Cost and amortization of distribution agreements........    101,385       9,246          --
                                                            ---------    --------    --------
Total costs and expenses..................................    198,637      66,187      25,703
                                                            ---------    --------    --------
Loss from operations......................................   (150,592)    (58,750)    (25,027)
Interest income, net......................................      6,413       3,033         514
                                                            ---------    --------    --------
Net loss..................................................  $(144,179)   $(55,717)   $(24,513)
                                                            =========    ========    ========
Pro forma basic and diluted net loss per share............  $   (1.26)   $  (0.54)   $  (0.26)
                                                            =========    ========    ========
Shares used in pro forma basic and diluted per share
  calculations............................................    114,240     103,543      96,120
                                                            =========    ========    ========
---------------
(1) Revenues from related parties.........................  $  10,458    $  2,948    $    634
                                                            =========    ========    ========
(2) Depreciation and amortization included in costs and
    expenses..............................................  $  66,620    $ 18,159    $  1,903
                                                            =========    ========    ========
</TABLE>
 
See accompanying notes.
                                       49
<PAGE>   50
 
                              AT HOME CORPORATION
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                         CONVERTIBLE                              NOTES                       ACCUMULATED
                                       PREFERRED STOCK       COMMON STOCK       RECEIVABLE                       OTHER
                                      -----------------   ------------------       FROM         DEFERRED     COMPREHENSIVE
                                      SHARES    AMOUNT    SHARES     AMOUNT    STOCKHOLDERS   COMPENSATION      INCOME
                                      ------   --------   -------   --------   ------------   ------------   -------------
<S>                                   <C>      <C>        <C>       <C>        <C>            <C>            <C>
Issuance of preferred stock, less
  issuance costs....................   1,000   $  9,968        --   $     --      $  --         $    --         $   --
Net loss............................      --         --        --         --         --              --             --
                                      ------   --------   -------   --------      -----         -------         ------
Balances at December 31, 1995.......   1,000      9,968        --         --         --              --             --
Issuance of preferred stock, less
  issuance costs....................   3,522     35,025        --         --         --              --             --
Series A common stock issued under
  stock option plans and restricted
  stock agreements..................      --         --    12,402        718       (170)             --             --
Repurchases of Series A common
  stock.............................      --         --      (547)       (29)        --              --             --
Deferred compensation related to
  grant of stock options............      --         --        --        346         --            (346)            --
Amortization of deferred
  compensation......................      --         --        --         --         --              74             --
Net loss............................      --         --        --         --         --              --             --
                                      ------   --------   -------   --------      -----         -------         ------
Comprehensive loss..................      --         --        --         --         --              --             --
                                      ------   --------   -------   --------      -----         -------         ------
Balances at December 31, 1996.......   4,522     44,993    11,855      1,035       (170)           (272)            --
Issuance of Series C preferred
  stock, less issuance costs........     240     46,339        --         --         --              --             --
Conversion of preferred stock to
  common stock......................  (4,762)   (91,332)   95,252     91,332         --              --             --
Series A common stock issued in the
  initial public offering, less
  issuance costs....................      --         --    10,350     99,768         --              --             --
Series A common stock issued under
  stock option plans and restricted
  stock agreements..................      --         --     2,191        527       (234)             --             --
Repurchases of Series A common
  stock.............................      --         --    (1,045)       (91)        15              --             --
Repayment of notes receivable.......      --         --        --         --         70              --             --
Warrants issued to purchase Series A
  common stock in connection with
  distribution agreements...........      --         --        --    172,283         --              --             --
Deferred compensation related to
  grant of stock options............      --         --        --      5,257         --          (5,257)            --
Amortization of deferred
  compensation......................      --         --        --         --         --           1,130             --
Net loss............................      --         --        --         --         --              --             --
                                      ------   --------   -------   --------      -----         -------         ------
Comprehensive loss..................      --         --        --         --         --              --             --
                                      ------   --------   -------   --------      -----         -------         ------
Balances at December 31, 1997.......      --         --   118,603    370,111       (319)         (4,399)            --
Series A common stock issued in the
  secondary offering, less issuance
  costs.............................      --         --     2,875    125,725         --              --             --
Series A common stock and options
  for Series A common stock issued
  in acquisitions...................      --         --     1,244     94,953         --              --             --
Series A common stock issued upon
  exercise of warrants..............      --         --        96                    --              --             --
Series A common stock issued under
  stock option plans and employee
  stock purchase plan...............      --         --       650      5,139         --              --             --
Repurchases of Series A common
  stock.............................      --         --      (195)       (36)        12              --             --
Repayment of notes receivable.......      --         --        --         --        303              --             --
Warrants issued to purchase Series A
  common stock in connection with
  distribution agreements...........      --         --        --    124,287         --              --             --
Amortization of deferred
  compensation, net of cancelled
  stock options.....................      --         --        --       (499)        --           1,519             --
Net loss............................      --         --        --         --         --              --             --
Unrealized gain on investments......      --         --        --         --         --              --          4,235
                                      ------   --------   -------   --------      -----         -------         ------
Comprehensive loss..................      --         --        --         --         --              --             --
                                      ------   --------   -------   --------      -----         -------         ------
Balances at December 31, 1998.......      --   $     --   123,273   $719,680      $  (4)        $(2,880)        $4,235
                                      ======   ========   =======   ========      =====         =======         ======
 
<CAPTION>
 
                                      ACCUMULATED   STOCKHOLDERS'
                                        DEFICIT        EQUITY
                                      -----------   -------------
<S>                                   <C>           <C>
Issuance of preferred stock, less
  issuance costs....................   $      --      $   9,968
Net loss............................      (2,756)        (2,756)
                                       ---------      ---------
Balances at December 31, 1995.......      (2,756)         7,212
Issuance of preferred stock, less
  issuance costs....................          --         35,025
Series A common stock issued under
  stock option plans and restricted
  stock agreements..................          --            548
Repurchases of Series A common
  stock.............................          --            (29)
Deferred compensation related to
  grant of stock options............          --             --
Amortization of deferred
  compensation......................          --             74
Net loss............................     (24,513)       (24,513)
                                       ---------      ---------
Comprehensive loss..................          --        (24,513)
                                       ---------      ---------
Balances at December 31, 1996.......     (27,269)        18,317
Issuance of Series C preferred
  stock, less issuance costs........          --         46,339
Conversion of preferred stock to
  common stock......................          --             --
Series A common stock issued in the
  initial public offering, less
  issuance costs....................          --         99,768
Series A common stock issued under
  stock option plans and restricted
  stock agreements..................          --            293
Repurchases of Series A common
  stock.............................          --            (76)
Repayment of notes receivable.......          --             70
Warrants issued to purchase Series A
  common stock in connection with
  distribution agreements...........          --        172,283
Deferred compensation related to
  grant of stock options............          --             --
Amortization of deferred
  compensation......................          --          1,130
Net loss............................     (55,717)       (55,717)
                                       ---------      ---------
Comprehensive loss..................          --        (55,717)
                                       ---------      ---------
Balances at December 31, 1997.......     (82,986)       282,407
Series A common stock issued in the
  secondary offering, less issuance
  costs.............................          --        125,725
Series A common stock and options
  for Series A common stock issued
  in acquisitions...................          --         94,953
Series A common stock issued upon
  exercise of warrants..............          --             --
Series A common stock issued under
  stock option plans and employee
  stock purchase plan...............          --          5,139
Repurchases of Series A common
  stock.............................          --            (24)
Repayment of notes receivable.......          --            303
Warrants issued to purchase Series A
  common stock in connection with
  distribution agreements...........          --        124,287
Amortization of deferred
  compensation, net of cancelled
  stock options.....................          --          1,020
Net loss............................    (144,179)      (144,179)
Unrealized gain on investments......          --          4,235
                                       ---------      ---------
Comprehensive loss..................          --       (139,944)
                                       ---------      ---------
Balances at December 31, 1998.......   $(227,165)     $ 493,866
                                       =========      =========
</TABLE>
 
See accompanying notes.
                                       50
<PAGE>   51
 
                              AT HOME CORPORATION
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31,
                                                              ----------------------------------
                                                                1998         1997         1996
                                                              ---------    ---------    --------
<S>                                                           <C>          <C>          <C>
CASH (USED IN) OPERATING ACTIVITIES
Net loss....................................................  $(144,179)   $ (55,717)   $(24,513)
Adjustments to reconcile net loss to cash used in operating
  activities:
  Depreciation and amortization.............................     14,009        7,783       1,829
  Amortization of distribution agreements...................     51,591        9,246          --
  Cost of distribution agreements...........................     49,794           --          --
  Amortization of deferred compensation.....................      1,020        1,130          74
  Charge for purchased in-process research and
    development.............................................      2,758           --          --
  Changes in assets and liabilities:
    Accounts receivable.....................................     (8,099)      (1,338)       (804)
    Other assets............................................     (9,143)      (2,251)     (1,190)
    Accounts payable........................................      5,822        1,089       2,605
    Accrued compensation and related expenses...............        322          550         159
    Deferred revenues.......................................      3,126        1,853          87
    Other accrued liabilities...............................      4,503        6,026         798
    Other long-term liabilities.............................     (1,736)          61       1,675
                                                              ---------    ---------    --------
Cash (used in) operating activities.........................    (30,212)     (31,568)    (19,280)
CASH (USED IN) INVESTING ACTIVITIES
Purchase of short-term investments..........................   (135,342)    (103,030)     (8,998)
Sales and maturities of short-term investments..............     92,922       33,925       2,000
Purchase of property, equipment and improvements............    (16,793)      (9,989)     (7,320)
Increase in other assets....................................      4,291           --          --
Business combinations, net of cash acquired.................        144           --          --
                                                              ---------    ---------    --------
Cash (used in) investing activities.........................    (54,778)     (79,094)    (14,318)
CASH PROVIDED BY FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures............    229,344           --          --
Issuance costs of convertible debentures....................     (6,878)          --          --
Proceeds from issuance of convertible preferred stock.......         --       46,339      35,025
Proceeds from issuance of common stock, net of
  repurchases...............................................    130,828       99,985         519
Proceeds from capital lease financing.......................         --        5,630       1,500
Payments on capital lease obligations.......................    (12,118)      (6,858)       (581)
Repayment of notes receivable from stockholders.............        303           70          --
                                                              ---------    ---------    --------
Cash provided by financing activities.......................    341,479      145,166      36,463
                                                              ---------    ---------    --------
Net increase in cash and cash equivalents...................    256,489       34,504       2,865
Cash and cash equivalents, beginning of period..............     44,213        9,709       6,844
                                                              ---------    ---------    --------
Cash and cash equivalents, end of period....................  $ 300,702    $  44,213    $  9,709
                                                              =========    =========    ========
SUPPLEMENTAL DISCLOSURES
  Interest paid.............................................  $   2,148    $   1,039    $    143
                                                              =========    =========    ========
  Acquisition of equipment under capital leases.............  $  12,872    $  16,527    $  7,916
                                                              =========    =========    ========
  Financing of other assets.................................  $      --    $   1,572    $     --
                                                              =========    =========    ========
  Notes receivable from stockholders issued in connection
    with exercise of stock options and restricted stock
    purchases...............................................  $      --    $     234    $    170
                                                              =========    =========    ========
  Issuance of warrants issued in connection with the
    distribution agreement with Cablevision.................  $  74,493    $ 172,283    $     --
                                                              =========    =========    ========
  Acquisitions of Narrative Communications Corporation and
    Full Force Systems, Inc.:
    Common stock issued and options and warrants exercisable
      for common stock assumed..............................  $  94,953    $      --    $     --
                                                              =========    =========    ========
    Liabilities assumed.....................................  $   2,589    $      --    $     --
                                                              =========    =========    ========
</TABLE>
 
See accompanying notes.
                                       51
<PAGE>   52
 
                              AT HOME CORPORATION
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
THE COMPANY
 
     At Home Corporation (the "Company") was incorporated in the state of
Delaware on March 28, 1995. The Company provides Internet services to consumers
and businesses over the cable television infrastructure. As of December 31,
1998, the Company's services were available through cable systems in a limited
number of cities in North America.
 
DEPENDENCE ON CABLE COMPANIES
 
     The Company has strategic relationships with eighteen cable companies that
provide through their cable systems the principal distribution network for the
Company's services to its subscribers. The Company's cable partners have granted
the Company the exclusive right to offer high-speed residential consumer
Internet services over their cable systems, subject to certain exceptions.
However, these cable partners are under no obligation to carry the Company's
services. In addition, the cable partners' exclusivity obligations in favor of
the Company expire in June 2002, and may be terminated prior to that date under
certain circumstances.
 
     Transmission of data over cable is dependent on the availability of
high-speed two-way hybrid fiber coaxial cable infrastructure. Currently,
significant portions of the cable infrastructure in the United States have not
been upgraded from coaxial cable to hybrid fiber-coaxial cable and, in addition,
are not capable of two-way transmission. Cable system operators have announced
and begun to implement major infrastructure investments in order to deploy
data-over-cable services. However, there can be no assurance that such
infrastructure improvements will be completed.
 
DEPENDENCE ON KEY TECHNOLOGY SUPPLIERS
 
     The Company currently depends on a limited number of suppliers for certain
key technologies used to build and manage the Company's services. Although the
Company believes that there are alternative suppliers for each of these
technologies, the Company has established favorable relationships with each of
its current suppliers, and it could take a significant period of time to
establish relationships with alternative suppliers and substitute their
technologies. The loss of any of the Company's relationships with its current
suppliers could have a material adverse effect on the Company's financial
condition and results of operations.
 
BASIS OF PRESENTATION
 
     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
 
     Certain reclassifications have been made to prior year's financial
statements to conform to current year's presentation.
 
USE OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
Actual results could differ from those estimates.
 
                                       52
<PAGE>   53
                              AT HOME CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
CASH AND CASH EQUIVALENTS
 
     Cash equivalents are highly liquid investments with insignificant interest
rate risk and maturities of 90 days or less and are stated at amounts that
approximate fair value, based on quoted market prices. Cash equivalents consist
principally of investments in interest-bearing demand deposit accounts with
financial institutions and highly liquid debt securities of corporations and the
U.S. Government. The Company includes in cash and cash equivalents all
short-term, highly liquid investments that mature within 90 days of their
acquisition date.
 
PROPERTY, EQUIPMENT AND IMPROVEMENTS
 
     Property, equipment and improvements are stated at cost. Depreciation and
amortization are computed using the straight-line method over the shorter of the
estimated useful life of the asset or the lease term.
 
INTANGIBLE ASSETS
 
     Intangible assets consist of purchased technology, acquired workforce and
goodwill related to the acquisitions of Narrative Communications Corp.
("Narrative") and Full Force Systems, Inc. ("Full Force") which were accounted
for as purchases (Note 3). Amortization of intangible assets is provided on the
straight-line basis over the estimated useful lives of the assets, which range
from 3 to 3.5 years. Acquired in-process research and development without
alternative future use is charged to operations when acquired.
 
     The Company records impairment losses on intangible assets when events and
circumstances indicate that such assets might be impaired and the estimated fair
value of the asset is less than its recorded amount. To date, no such impairment
has occurred.
 
REVENUE RECOGNITION
 
     Monthly customer subscription revenue is recognized in the period in which
subscription services are provided. The Company also earns revenue from cable
system operators for providing certain support services, such as customer
support, local area content development and pre-commercial deployment fees.
Revenue from cable system operators is recognized as the services are performed.
Through December 31, 1998, the majority of such revenue was derived from cable
system operators that are also stockholders of the Company. Revenues also
include the sale of online advertising based on fixed-fee charter programs,
delivery of impressions on a cost per thousand basis and content partnering
arrangements. Such revenues are recognized over the term of the programs.
 
ADVERTISING COSTS
 
     All advertising costs are expensed as incurred. Advertising costs, which
are included in sales and marketing expenses, were $1,771,000, $626,000 and
$684,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
 
RESEARCH AND DEVELOPMENT SOFTWARE COSTS
 
     Research and development costs are charged to operations as incurred.
Software development and prototype costs incurred prior to the establishment of
technological feasibility are included in research and development and are
expensed as incurred. Software development costs incurred subsequent to the
establishment of technological feasibility through the period of general market
availability of the product are capitalized and amortized over their estimated
useful life.
 
                                       53
<PAGE>   54
                              AT HOME CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
INCOME TAXES
 
     The Company accounts for income taxes under the liability method. Deferred
tax assets and liabilities are determined based on differences between the
financial reporting and tax bases of assets and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to
reverse.
 
STOCK-BASED COMPENSATION
 
     The Company accounts for stock-based awards to employees in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25") and has adopted the disclosure-only
alternative of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123").
 
PRO FORMA NET LOSS PER SHARE
 
     The Company adopted Statement of Financial Accounting Standards Statement
No. 128, "Earnings Per Share" ("FAS 128"), which is effective for fiscal years
ending after December 15, 1997. FAS 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Dilutive
earnings per share is very similar to the previously reported fully diluted
earnings per share.
 
     Pro forma basic and diluted net loss per share is computed using the
weighted average number of common shares outstanding, net of shares subject to
repurchase, and also gives effect to the conversion of all outstanding shares of
convertible preferred stock into shares of common stock for the years ended
December 31, 1997 and 1996. Such information is presented in Note 2.
 
EFFECT OF NEW ACCOUNTING STANDARDS
 
     In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes new
standards for reporting and displaying comprehensive income and its components.
FAS 130 establishes standards for reporting and displaying comprehensive income
and its components (revenues, expenses, gains and losses). Comprehensive income
as defined includes all changes in equity (net assets) during a period from
non-owner sources. Such items may include foreign currency translation
adjustments, unrealized gains/losses from investing and hedging activities, and
other transactions. The Company adopted FAS 130 in 1998.
 
     In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS
131") which was adopted by the Company for the period ending December 31, 1998.
FAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. The Company
operates in one business segment, Internet services to consumers and business
over the cable television infrastructure.
 
     In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", which establishes
guidelines for the accounting for the costs of all computer software developed
or obtained for internal use. The Company adopted SOP 98-1 effective for the
year ended December 31, 1998. The adoption of SOP 98-1 did not have a material
impact on the Company's consolidated financial statements.
 
     In April, 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." The statement is effective for fiscal years beginning
after December 15, 1998. The statement requires costs of
 
                                       54
<PAGE>   55
                              AT HOME CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
start-up activities and organization costs to be expensed as incurred. The
Company is required to adopt SOP 98-5 for the year ended December 31, 1999. The
adoption of SOP 98-5 is not expected to have a material impact on the Company's
consolidated financial statements.
 
     In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). The Company expects to adopt
FAS 133 effective January 1, 2000. FAS 133 will require the Company to recognize
all derivatives on the balance sheet at fair value. The Company does not
anticipate that the adoption of FAS 133 will have a significant effect on its
results of operations or financial position.
 
 2. PRO FORMA NET LOSS PER SHARE
 
     Pro forma basic and diluted net loss per share are computed using the
weighted average number of common shares outstanding. The computation for the
periods ended December 31, 1997 and 1996, also gives pro forma effect to the
conversion, in connection with the Company's initial public offering in July
1997, of all outstanding shares of convertible preferred stock into shares of
common stock. The effect of outstanding stock options, warrants and common stock
subject to repurchase is excluded from the computation as their inclusion would
be anti-dilutive.
 
     The computation of basic and diluted net loss per share is as follows (in
thousands, except per share data):
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                    ---------------------------------
                                                      1998         1997        1996
                                                    ---------    --------    --------
<S>                                                 <C>          <C>         <C>
Net loss..........................................  $(144,179)   $(55,717)   $(24,513)
                                                    =========    ========    ========
Weighted average shares of common stock
  outstanding.....................................    120,054      17,515       4,808
Less: weighted average shares of common stock
  subject to repurchase...........................     (5,814)     (9,224)     (3,940)
Pro forma common equivalent shares from
  convertible preferred stock.....................         --      95,252      95,252
                                                    ---------    --------    --------
Shares used in per share calculations.............    114,240     103,543      96,120
                                                    =========    ========    ========
Basic and diluted net loss per share..............  $   (1.26)   $  (0.54)   $  (0.26)
                                                    =========    ========    ========
</TABLE>
 
 3. BUSINESS COMBINATIONS
 
     The Company completed acquisitions of Full Force and Narrative in November
and December 1998, respectively. These acquisitions were each accounted for as a
purchase.
 
     Narrative is a provider of advertising solutions for the Internet. The
purchase consideration was approximately $93,800,000, comprising the issuance of
1,205,333 shares of the Company's Series A common stock with an aggregate fair
value of approximately $84,212,000, the assumption of options to purchase
141,273 shares of the Company's Series A common stock with an aggregate fair
value of approximately $9,169,000, and $419,000 of acquisition costs.
 
     Full Force is a developer of set-top applications for interactive
television. The purchase consideration was approximately $1,672,000, comprising
of the issuance of 38,190 shares of the Company's Series A common stock with an
aggregate fair value of approximately $1,572,000 and $100,000 of acquisition
costs.
 
                                       55
<PAGE>   56
                              AT HOME CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                  NARRATIVE   FULL FORCE
                                                                  ---------   ----------
<S>                                                               <C>         <C>
Cash........................................................       $    77     $     69
Accounts receivables and other assets.......................           584           60
Property and equipment......................................           520            5
Purchased technology........................................        22,900          215
Other identified intangible assets..........................         1,050          101
Goodwill....................................................        68,404        1,318
Purchased in-process research and development...............         2,700           58
Liabilities assumed.........................................        (2,435)        (154)
                                                                   -------     --------
          Total purchase consideration......................       $93,800     $  1,672
                                                                   =======     ========
</TABLE>
 
     The value assigned to purchased in-process technology in these acquisitions
was determined by identifying the research projects for which technological
feasibility had not been achieved and assessing the date of completion of the
research and development effort. The state of completion was determined by
estimating the costs and time incurred to date relative to those costs and time
to be incurred to develop the in-process technology into commercially viable
products. The estimated discounted net cash flows included only net cash flows
resulting from the percentage of research and development efforts complete at
the date of acquisition. The discount rate included a factor that took into
account the uncertainty surrounding the successful development of the in-process
technology projects.
 
     To determine the value of purchased technology, the expected future cash
flows of the existing developed technologies were discounted taking into account
the characteristics and applications of the product, the size of existing
markets, growth rates of existing and future markets as well as an evaluation of
past and anticipated product-life cycles.
 
     The following unaudited pro forma summary represents the consolidated
results of operations as if the acquisitions of Narrative and Full Force had
occurred at the beginning of the each year presented and excludes 2,758,000 of
purchased in process research and development charges related to these
acquisitions (in thousands, except per share data).
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                                 1998         1997
                                                              ----------    ---------
<S>                                                           <C>           <C>
Pro forma revenues..........................................  $  49,261     $  8,279
                                                              =========     ========
Pro forma net loss..........................................  $ 173,810     $(88,285)
                                                              =========     ========
Pro forma net loss basic and diluted per share..............  $   (1.51)    $  (0.76)
                                                              =========     ========
Number of shares used in pro forma basic and diluted per
  share calculation.........................................    115,483      115,483
                                                              =========     ========
</TABLE>
 
     The pro forma results of operations are not necessarily indicative of the
results that would have occurred if the acquisitions had occurred at the
beginning of each year presented and are not intended to be indicative of future
results of operations.
 
                                       56
<PAGE>   57
                              AT HOME CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 4. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
 
SHORT-TERM INVESTMENTS
 
     The Company has classified all short-term investments as
available-for-sale. Available-for-sale securities are carried at amounts that
approximate fair market value based on quoted market prices. Realized gains and
losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in interest income. Interest on
securities classified as available-for-sale is also included in interest income.
 
     The following is a summary of available-for-sale securities (in thousands):
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1998        1997
                                                              --------    --------
<S>                                                           <C>         <C>
Corporate bonds and notes...................................  $280,429    $ 74,867
Market auction preferred stock..............................    98,609      21,000
U.S. government obligations.................................     8,760       5,772
Money market instruments....................................       620       2,789
Certificates of deposit.....................................     9,388      15,004
                                                              --------    --------
                                                               397,806     119,432
Less: Included in cash and cash equivalents.................   279,219      43,266
                                                              --------    --------
Included in short-term investments..........................  $118,587    $ 76,166
                                                              ========    ========
</TABLE>
 
     Unrealized gains and losses at December 31, 1998 and 1997 and realized
gains and losses for the years then ended were not material. Accordingly, the
Company has not made a provision for such amounts in its consolidated balance
sheets. The cost of securities sold is based on the specific identification
method. All available-for-sale securities at December 31, 1998 have maturity
dates in 1999.
 
 5. PROPERTY, EQUIPMENT AND IMPROVEMENTS
 
     The components of property, equipment and improvements are as follows (in
thousands):
 
<TABLE>
<CAPTION>
                                                        DECEMBER 31,
                                                     ------------------    ESTIMATED
                                                      1998       1997     USEFUL LIVES
                                                     -------    -------   ------------
<S>                                                  <C>        <C>       <C>
Computer equipment and software....................  $56,004    $32,318     3-4 years
Furniture and fixtures.............................    7,271      5,278       5 years
Leasehold improvements.............................    9,628      5,119    Lease term
                                                     -------    -------
                                                      72,903     42,715
Less: accumulated depreciation and amortization....   23,663      9,654
                                                     -------    -------
                                                     $49,240    $33,061
                                                     =======    =======
</TABLE>
 
     Equipment and improvements include amounts for assets acquired under
capital leases, principally computer equipment and software and furniture and
fixtures of approximately $40,023,000 and $24,443,000 at December 31, 1998 and
1997, respectively. Accumulated amortization of these assets was approximately
$15,843,000 and $7,339,000 at December 31, 1998 and 1997, respectively.
 
 6. COMMITMENTS
 
     The Company leases certain office facilities under non-cancelable operating
leases that expire at various dates through 2008, and which require the Company
to pay operating costs, including property taxes, insurance and maintenance.
These facility leases generally contain renewal options and provisions adjusting
the lease payments based upon changes in the consumer price index and increases
in real estate taxes and
 
                                       57
<PAGE>   58
                              AT HOME CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
operating expenses or in fixed increments. Rent expense is reflected on a
straight-line basis over the terms of the leases. The Company also has
obligations under a number of capital equipment leases.
 
     Future minimum lease payments under non-cancelable operating and capital
leases having terms in excess of one year as of December 31, 1998 are as follows
(in thousands):
 
<TABLE>
<CAPTION>
                                                              OPERATING    CAPITAL
                                                               LEASES      LEASES
                                                              ---------    -------
<S>                                                           <C>          <C>
Year ending December 31,
  1999......................................................  $  5,506     $14,911
  2000......................................................     7,622       9,650
  2001......................................................     7,686       3,563
  2002......................................................     7,136         275
  2003......................................................     7,317          --
  Thereafter................................................    74,284          --
                                                              --------     -------
          Total minimum lease payments......................  $109,551      28,399
                                                              ========
Less amounts representing interest..........................                 1,998
                                                                           -------
Present value of minimum capital lease obligations..........                26,401
Less current portion........................................                12,045
                                                                           -------
Noncurrent portion..........................................               $14,356
                                                                           =======
</TABLE>
 
     In September 1997 and March 1998, the Company exercised build-to-suit
options requiring the landlord to build additional facilities of approximately
360,000 square feet on adjacent property. All facilities constructed under the
Company's build-to-suit options will be subject to leases of up to 15 years in
length, have base rent determined in relation to construction costs and will
include tenant improvements paid for by the Company. The build-to-suit options
that have been exercised to date provide for monthly rental payments beginning
upon the phased completion of the buildings. Occupancy of the first phase is
scheduled to occur during the second half of 1999 and occupancy of the second
phase is scheduled to occur early in the year 2000.
 
     In addition to our build-to-suit options, in December 1998 we exercised our
right to purchase one land parcel from the landlord. The purchase price of the
exercised option is payable in two installments, one of $278,000, which was paid
in December 1998, and a second installment of $5,288,000, which is due in the
first half of 1999.
 
     The Company is also committed to make expenditures for tenant improvements
estimated to be approximately $9,723,000 in 1999.
 
     Facility rent expense amounted to approximately $3,593,000, $1,245,000, and
$600,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
 
 7. CONVERTIBLE DEBENTURES AND TERM LOAN AGREEMENT
 
CONVERTIBLE DEBENTURES
 
     On December 28, 1998, the Company issued $437,000,000 of Convertible
Subordinated Debentures in a private offering within the United States to
qualified institutional investors. The issue price of each $1,000 debenture was
$524.64 (52.464% of principal amount at maturity), or approximately
$229,300,000. Issuance costs were approximately $6,900,000, resulting in net
proceeds to the Company of approximately $222,400,000. The issuance costs were
recorded as other assets and are being amortized by charges to interest expense
ratably over the term of the debentures. Each debenture is convertible at the
option of the holder at any time prior to maturity, unless redeemed or otherwise
purchased, into 6.55 shares of the Company's Series A common stock. The
debentures mature on December 28, 2018, and interest on the debentures at the
 
                                       58
<PAGE>   59
                              AT HOME CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
rate of 0.5246% per annum on the principal amount due at maturity, $437,000,000,
is payable semiannually commencing June 28, 1999. The effective annual interest
rate on the debentures, excluding accretion of original issuance discount and
amortization of the issuance costs, is approximately 4%.
 
TERM LOAN AGREEMENT
 
     The Company has available a $15,000,000 term loan agreement with a bank to
finance the acquisition of property, equipment and improvements, and to
collateralize letters of credit. Borrowings under this term loan bear interest
at the Company's option of the lendor's prime rate or Libor plus 2.5%. Under the
terms of the term loan, the Company is required to meet certain financial
covenants. The term loan expires in October 19, 2002.
 
     As of December 31, 1998, there were no borrowings under this term loan
although there were outstanding letters of credit in the amount of $3,500,000
million issued as security deposits on real property leases.
 
 8. STOCKHOLDERS' EQUITY
 
COMMON STOCK
 
     On July 11, 1997, the Company completed its Initial Public Stock Offering
("Initial Public Offering") and issued 10,350,000 shares (including 1,350,000
shares issued in connection with the exercise of the underwriters'
over-allotment option) of its common stock to the public at a price of $10.50
per share. The Company received net proceeds of approximately $99,800,000 in
cash. Concurrent with the Initial Public Offering, each share of preferred stock
converted to common stock on a 20-for-1 basis. Shares of Series AT, AX, AM, and
C preferred stock converted into 64,974,600 shares of Series A common stock.
Shares of Series T preferred stock converted into 15,400,000 shares of Series B
common stock. Shares of Series K preferred stock converted into 14,877,660
shares of Series K common stock.
 
     Common stock consists of the following at:
 
<TABLE>
<CAPTION>
                                                                            SHARES ISSUED
                                            SHARES AUTHORIZED              AND OUTSTANDING
                                             AT DECEMBER 31,               AT DECEMBER 31,
                                        --------------------------    --------------------------
                SERIES                     1998           1997           1998           1997
                ------                  -----------    -----------    -----------    -----------
<S>                                     <C>            <C>            <C>            <C>
A.....................................  200,000,000    200,000,000    105,263,160     88,325,560
B.....................................   15,400,000     15,400,000     15,400,000     15,400,000
K.....................................   14,877,660     14,877,660      2,609,707     14,877,660
                                        -----------    -----------    -----------    -----------
                                        230,277,660    230,277,660    123,272,867    118,603,220
                                        ===========    ===========    ===========    ===========
</TABLE>
 
     The holders of Series A, B and K common stock have one, ten and one vote(s)
per share, respectively. Each share of Series B and K common stock is
convertible into one share of Series A common stock at the option of the
holders.
 
     As of December 31, 1998, one principal cable stockholder controlled
approximately 71% of the voting power of the Company as a result of its
ownership in Series A and Series B common stock.
 
PREFERRED STOCK
 
     The Board of Directors is authorized, subject to any limitation prescribed
by Delaware law, to issue, from time to time, in one or more series, up to
9,650,000 shares of preferred stock, with such designation, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, as shall be stated and expressed in a Board
resolution or resolutions providing for the issue of such series without any
further vote or action by the stockholders. The Board may authorize the issuance
of such preferred stock with voting or conversion rights that could adversely
affect the voting power or other
 
                                       59
<PAGE>   60
                              AT HOME CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
rights of the holders of common stock. Thus, the issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in control of the
Company. No shares of preferred stock were issued or outstanding at December 31,
1998 or 1997.
 
STOCK PURCHASE AGREEMENTS
 
     During 1996, the Company entered into stock purchase agreements with
certain employees, officers, directors and consultants under which the Company
issued 7,527,000 shares of Series A common stock at prices ranging from $0.01 to
$0.10 per share, and 50,000 shares of Series K preferred stock at $10.00 per
share. Proceeds from the issuance of the restricted stock were received in the
form of cash or five-year secured promissory notes bearing interest at a rate of
approximately 5.9% per annum. Certain of the agreements provide that the
unvested shares are subject to repurchase by the Company upon termination of
employment at the original price paid for the shares. The shares generally vest
at the rate of 25% after one year and ratably on a monthly basis for three years
thereafter. During the year ended December 31, 1997, the Company repurchased
519,350 shares of common stock pursuant to such agreements. As of December 31,
1998, 1,947,483 shares were subject to repurchase.
 
     Under the terms of an employment agreement with an executive officer, so
long as the officer is employed by the Company, and for 90 days thereafter if
his employment is terminated without cause, to the extent the officer sells any
of his vested common shares during a five-year guarantee period beginning in
July 2000 at an average price less than $5.00 per share, if the Company's stock
is publicly traded, the Company is obligated to pay the officer the difference
between $5.00 per share and the average price for each share sold. At December
31, 1998, the officer owned 2,098,225 shares of Series A common stock. At
December 31, 1998, the officer owned 1,000,000 shares of Series K common stock.
 
WARRANTS
 
     In October 1996, the Company issued a warrant to its facilities lessor that
gives the lessor the right to purchase 200,000 shares of Series A common stock
for $15.00 per share. The warrant is exercisable for a five-year period
beginning in October 1997. The Company deemed the warrant to have insignificant
fair value at the time of issuance. During the year ended December 31, 1998, the
lessor acquired 158,625 shares under the terms of the warrant.
 
     In April 1997, the Company also issued warrants to purchase 2,000,000
shares of Series C preferred stock at a price of $10.00 per share to certain of
the Series C preferred stock investors that are also cable system operators. The
warrants are exercisable from June 2004 or earlier, subject to certain
performance standards being met by the cable systems operators, as specified in
the agreement. The Company deemed the warrants to have insignificant fair value
at the time of issuance. At December 31, 1998, 1,060,351 warrants were
exercisable.
 
     In July 1997, the Company issued a warrant to Intel Corporation in
connection with a development agreement that gives Intel Corporation the right
to purchase 100,000 shares of Series A common stock for $10.00 per share ("Intel
Warrant 1"). The shares exercisable under Intel Warrant 1 vest 25% on the six
month anniversary of the agreement and the remainder vests monthly for two years
thereafter. The warrant is exercisable through September 2002. In September
1997, the Company, in an amendment to the development agreement, issued a second
warrant ("Intel Warrant 2") that gives Intel Corporation the right to purchase
100,000 shares of Series A common stock for $21.00 per share. The shares
exercisable under Intel Warrant 2 vest on an accelerated basis from September
2004 or earlier, subject to certain performance standards being met by Intel
Corporation, as specified in the amended development agreement. In September
2004, all unvested shares will automatically vest. The Company deemed the
warrants to have insignificant fair value at the time of issuance. At December
31, 1998, 133,333 warrants were exercisable.
 
                                       60
<PAGE>   61
                              AT HOME CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     In October 1997, the Company entered into a contract with Cablevision
Systems Corporation ("Cablevision"), and its parent, CSC Parent Corporation
("CSC Parent"), Comcast Corporation ("Comcast"), Cox Enterprises, Inc. ("Cox"),
Kleiner, Perkins, Caufield & Byers and Tele-Communications, Inc. ("TCI") (the
"Agreement"). The Agreement provides that Cablevision will enter into a Master
Distribution Agreement for the distribution of the Company's @Home service on
substantially the same terms and conditions as TCI, Comcast and Cox. Although
Cablevision is subject to certain exclusivity obligations that prohibit it from
obtaining high-speed (greater than 128 kilobits per second ) residential
consumer Internet services from any source other than the Company, Cablevision
is under no obligation to upgrade its cable systems to two-way cable
infrastructure and is under no affirmative obligation to roll out, market,
promote or carry any of the Company's services. The exclusivity obligations in
favor of the Company expire in June 2002, and may be terminated sooner under
certain circumstances. These exclusivity obligations also are subject to
exceptions that would permit Cablevision to engage in certain activities which
could compete, directly or indirectly, with the activities of the Company.
 
     The Agreement provides for the issuance to Cablevision and CSC Parent of a
warrant to purchase up to 7,875,784 shares of the Company's Series A Common
Stock at an exercise price of $0.50 per share (the "Warrant"). The Warrant was
immediately exercisable, subject to the receipt of all necessary governmental
consents or approvals. The Agreement provides for the issuance of an additional
warrant to Cablevision and CSC Parent to purchase up to 3,071,152 shares of the
Company's Series A common stock at an exercise price of $0.50 per share under
certain conditions (the "Contingent Warrant"). The Contingent Warrant is not
immediately exercisable and will become exercisable as and to the extent certain
cable television systems are transferred from TCI and its controlled affiliates
to CSC, CSC Parent or their controlled affiliates. During the year ended
December 31, 1997, the Company recorded the fair value of the Warrant,
$172,600,000, as an intangible asset, which is being amortized ratably over 56
months, the remaining term of the exclusivity obligations. During the year ended
December 31, 1998, the Contingent Warrant became exercisable for 2,355,514
shares of common stock. The Company capitalized the fair value of the Contingent
Warrant, $74,500,000, as an intangible asset, which is being amortized ratably
over 51 months, the remaining term of the exclusivity obligations. As of
December 31, 1998 and 1997, accumulated amortization of the cost of the
distribution agreement totaled approximately $60,837,000 and $9,246,000,
respectively.
 
     In February 1998, the Company issued performance-based warrants to Rogers
Cablesystems Limited ("Rogers") and Shaw Cablesystems Ltd. ("Shaw") to purchase
up to 2,900,000 and 2,100,000 shares of Series A common stock, respectively, at
an exercise price of $10.50 per share. Warrants to purchase 919,768 shares of
common stock became exercisable when Rogers and Shaw met certain subscriber
performance milestones during the year ended December 31, 1998. The Company
recorded non-cash charges to operations for the fair value of these warrants of
$49,794,000.
 
     In February 1998, the Company issued performance based warrants to certain
other cable operators to purchase an aggregate of up to 5,272,100 shares of
Series A common stock, respectively, at an exercise price of $10.50 per share.
As of December 31, 1998 none of these had vested as the performance milestones
had not been met. In the event the performance milestones are met, the Company
will incur non-cash charges to operations in future periods based on the
difference between the then fair market value of the Company's Series A common
stock and the exercise price of $10.50 per share.
 
STOCK OPTIONS
 
     In January 1996, the Company adopted the 1996 Incentive Stock Option Plan,
and in July 1996, the Company adopted the 1996 Incentive Stock Option Plan No. 2
(collectively, the "1996 Plans"). The 1996 Plans provide for incentive stock
options, as defined by the Internal Revenue Code, to be granted to employees, at
an exercise price not less than 100% of the fair value at the grant date as
determined by the
 
                                       61
<PAGE>   62
                              AT HOME CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Board of Directors. The 1996 Plans also provide for nonqualified stock options
to be issued to nonemployee officers, directors and consultants at an exercise
price of not less than 85% of the fair value at the grant date.
 
     The options granted under the 1996 Plans were exercisable immediately upon
issuance and generally have a term of ten years. Upon termination of employment,
unvested shares may be repurchased by the Company at the original purchase
price. Fully vested shares could have been repurchased by the Company at the
higher of the original purchase price or the fair market value of the shares as
determined by the Board of Directors. The repurchase right for vested shares
expired upon the completion of the Initial Public Offering. Stock options
generally vest at the rate of 25% after one year and ratably on a monthly basis
for three years thereafter.
 
     The Company's 1997 Equity Incentive Plan ("1997 Plan") was adopted by the
Board of Directors in May 1997 and approved by the stockholders in July 1997 as
the successor to the 1996 Plans. The 1997 Plan provides for the grant of
incentive stock options, nonqualified stock options, restricted stock awards and
stock bonuses to employees, directors and consultants of the Company. Options
under the 1997 Plan generally vest at the rate of 25% after one year and ratably
on a monthly basis for three years thereafter. The total number of shares of
Series A common stock reserved for issuance under the 1997 Plan is 25,775,000
less the total number of shares issued or issuable to employees, officers,
directors and consultants under restricted stock purchase agreements, the 1996
Plans and shares issued under the 1997 Employee Stock Purchase Plan, discussed
below.
 
     The Company's 1998 Equity Incentive Plan ("1998 Plan"), was adopted by the
Board of Directors in December 1998. The 1998 Plan provides for the grant of
450,000 shares of the Company's common stock and 447,300 options were granted to
existing Narrative employees on December 30, 1998. Options vest under the 1998
Plan vest at the rate of 25% after one year and ratably on a monthly basis for
three years thereafter.
 
     As a result of the Narrative acquisition (Note 3), the Company assumed
options outstanding under the Narrative 1995 Stock Option Plan exercisable for
141,273 shares of the Company's Series A common stock (based on the merger
exchange ratio). These options are included in the following table under options
granted in the year ended December 31, 1998. Options generally vest at the rate
of 25% after one year and ratably on a quarterly basis for three years
thereafter.
 
     A summary of activity under the Company's stock option plans is as follows:
 
<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                         --------------------------------------------------------------------------
                                  1998                      1997                      1996
                         ----------------------    ----------------------    ----------------------
                                       WEIGHTED                  WEIGHTED                  WEIGHTED
                           NUMBER      AVERAGE       NUMBER      AVERAGE       NUMBER      AVERAGE
                             OF        EXERCISE        OF        EXERCISE        OF        EXERCISE
                           SHARES       PRICE        SHARES       PRICE        SHARES       PRICE
                         ----------    --------    ----------    --------    ----------    --------
<S>                      <C>           <C>         <C>           <C>         <C>           <C>
Balance at beginning
  of year............     3,058,135     $10.26        223,000     $ 0.06             --        --
Options granted......     7,647,652     $40.73      5,158,001     $ 6.30      5,296,500     $0.06
Options exercised....      (424,553)    $ 7.01     (2,170,586)    $ 0.25     (4,875,500)    $0.06
Options cancelled....      (267,939)    $18.83       (152,280)    $ 3.78       (198,000)    $0.05
                         ----------                ----------                ----------
Balance at end of
  year...............    10,013,295     $33.44      3,058,135     $10.26        223,000     $0.06
                         ==========                ==========                ==========
Options exercisable
  at year-end........     1,616,393                 1,641,885                   223,000
                         ==========                ==========                ==========
</TABLE>
 
                                       62
<PAGE>   63
                              AT HOME CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The following table summarizes information about stock options outstanding
at December 31, 1998:
 
<TABLE>
<CAPTION>
                             OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
                  -----------------------------------------   ----------------------
                                WEIGHTED-AVERAGE   WEIGHTED                 WEIGHTED
     RANGE                         REMAINING       AVERAGE                  AVERAGE
  OF EXERCISE       NUMBER        CONTRACTUAL      EXERCISE     NUMBER      EXERCISE
     PRICES       OUTSTANDING     LIFE (YEARS)      PRICE     EXERCISABLE    PRICE
----------------  -----------   ----------------   --------   -----------   --------
<S>               <C>           <C>                <C>        <C>           <C>
$ 0.05 - $ 4.00    1,164,716          8.31          $ 2.41     1,140,404     $ 2.38
$ 4.40 - $ 8.00      194,186          8.77          $ 5.79       119,335     $ 5.74
$18.44 - $33.00    2,310,880          9.10          $23.14       334,654     $19.53
$33.13 - $34.44    2,119,612          9.36          $33.91         9,750     $33.89
$37.00 - $46.34    2,663,375          9.74          $38.57        10,250     $41.84
$47.06 - $71.50    1,560,526          9.97          $65.89         2,000     $56.85
                  ----------                                   ---------
$ 0.05 - $71.50   10,013,295          9.36          $33.44     1,616,393     $ 6.69
                  ==========                                   =========
</TABLE>
 
     At December 31, 1998, outstanding options to purchase 763,224 shares were
vested and 2,258,953 shares of nonvested common stock issued pursuant to
exercises of options were subject to repurchase at the Company's option in the
event of employee terminations.
 
     The Company recorded deferred compensation of $5,257,000 and $346,000
during the years ended December 31, 1997 and 1996, respectively, for the
difference between the exercise or purchase price and the deemed fair value of
certain of the Company's stock options granted and stock issued under stock
purchase agreements. These amounts are being amortized by charges to operations
over the vesting periods of the individual stock options and stock purchase
agreements, which are generally four years. A portion of the shares issued under
certain stock purchase agreements during the year ended December 31, 1996 vested
immediately. As a result the related compensation charge for the vested shares
was recorded in the period in which the shares were issued.
 
EMPLOYEE STOCK PURCHASE PLAN
 
     The 1997 Employee Stock Purchase Plan ("ESPP") was established in July of
that year to provide employees with an opportunity to purchase common stock of
the Company through payroll deductions. The Company initially reserved 400,000
shares of common stock for issuance to participants and an additional 600,000
shares were reserved during the year ended December 31, 1998. Under the ESPP,
the Company's employees, subject to certain restrictions, may purchase shares of
common stock at the lesser of 85 percent of the fair market value at either the
beginning of each two-year offering period or the end of each six-month purchase
period within the two-year offering period. In February and July 1998, employees
purchased 117,027 and 114,918 shares, respectively.
 
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION PLANS
 
     Pro forma information regarding results of operations and loss per share is
required by Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS
123") for stock-based awards to employees as if the Company had accounted for
such awards using a valuation method permitted under FAS 123.
 
     The value of the Company's stock-based awards to employees in the years
ended December 31, 1996 and 1997, prior to the Initial Public Offering, was
estimated using the minimum value method. Options granted subsequent to the
Initial Public Offering have been valued using the Black-Scholes option pricing
model. Among other things, the Black-Scholes model considers the expected
volatility of the Company's stock price, determined in accordance with FAS 123,
in arriving at an option valuation. The minimum value method does not consider
stock price volatility. Further, certain other assumptions necessary to apply
the Black-Scholes
 
                                       63
<PAGE>   64
                              AT HOME CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
model may differ significantly from assumptions used in calculating the value of
options granted in 1996 and 1997, prior to the Initial Public Offering, under
the minimum value method.
 
     The fair value of the Company's stock-based awards to employees was
estimated assuming no expected dividends and the following weighted-average
assumptions:
 
<TABLE>
<CAPTION>
                                                 OPTIONS                             ESPP
                                      -----------------------------        ------------------------
                                         YEAR ENDED DECEMBER 31,           YEAR ENDED DECEMBER 31,
                                      -----------------------------        ------------------------
                                       1998       1997       1996             1998          1997
                                      -------    -------    -------        ----------    ----------
<S>                                   <C>        <C>        <C>            <C>           <C>
Expected life of options..........    4 years    4 years    4 years        6 months      7 months
Expected volatility...............     1.00       0.71        N/A            1.00          0.72
Risk free interest rate...........     4.69%      6.00%      6.50%           4.50%         5.09%
</TABLE>
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                    ---------------------------------
                                                      1998         1997        1996
                                                    ---------    --------    --------
<S>                                                 <C>          <C>         <C>
Net loss as reported..............................  $(144,179)   $(55,717)   $(24,513)
Pro forma net loss................................  $(166,401)   $(56,746)   $(24,520)
Pro forma basic and diluted net loss per
  share -- as reported............................  $   (1.26)   $  (0.54)   $  (0.26)
Pro forma basic and diluted net loss per
  share -- as adjusted............................  $   (1.46)   $  (0.55)   $  (0.26)
</TABLE>
 
     The weighted-average fair value of options granted during the years ended
December 31, 1998, 1997 and 1996 was $28.01, $3.29 and $0.01, respectively. The
weighted-average fair value of ESPP rights granted during the years ended
December 31, 1998 and 1997 was $5.33 and $3.97, respectively.
 
 9. INCOME TAXES
 
     The Company's income tax benefit differs from the income tax benefit
determined by applying the U.S. federal statutory rate to the net loss as
follows (in thousands):
 
<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31, 1998
                                                      -------------------------------
                                                        1998        1997       1996
                                                      --------    --------    -------
<S>                                                   <C>         <C>         <C>
Income tax benefit at U.S. statutory rate...........  $(50,463)   $(19,501)   $(8,334)
Valuation allowance for deferred tax assets.........    50,463      19,501      8,334
                                                      --------    --------    -------
Income tax benefit..................................  $     --    $     --    $    --
                                                      ========    ========    =======
</TABLE>
 
                                       64
<PAGE>   65
                              AT HOME CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities for federal and state income
taxes at are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                               AS OF DECEMBER 31,
                                                              --------------------
                                                                1998        1997
                                                              --------    --------
<S>                                                           <C>         <C>
Deferred tax assets:
  Net operating loss carryforwards..........................  $ 38,394    $ 25,484
  Cost and amortization of distribution agreements..........    45,078       3,767
  Accrued costs and expenses................................     6,054          --
  Capitalized start-up costs................................     2,462       3,357
  Other.....................................................       480       1,106
                                                              --------    --------
Total gross deferred tax assets.............................    92,468      33,714
Less valuation allowance....................................   (92,468)    (33,181)
                                                              --------    --------
          Deferred tax assets...............................        --         533
                                                              --------    --------
Deferred tax liabilities:
  Property and equipment....................................        --         533
                                                              --------    --------
Total gross deferred tax liabilities........................        --         533
                                                              --------    --------
          Net deferred tax assets...........................  $     --    $     --
                                                              ========    ========
</TABLE>
 
     Realization of deferred tax assets is dependent on future earnings, if any,
the timing and amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax assets as of December 31,
1998 and 1997 has been established to reflect these uncertainties. The valuation
allowance increased by $59,287,000, $22,324,000 and $9,714,000 in 1998, 1997 and
1996, respectively.
 
     At December 31, 1998, the Company had net operating loss carryforwards for
federal and state tax purposes of approximately $94,227,000. These carryforwards
will expire beginning in 2010 and 2003 for federal and state purposes,
respectively, if not utilized.
 
10. RELATED PARTY TRANSACTIONS
 
     For the years ended December 31, 1998, 1997 and 1996, the Company purchased
services of approximately none, $215,000 and $2,726,000, respectively, from
certain stockholders.
 
     The Company entered into an OEM software license agreement under which the
Company paid the vendor none, $2,275,000 and $1,388,000 during the years ended
December 31, 1998, 1997 and 1996, respectively, as nonrefundable license fees,
prepaid support and services. A member of the Company's Board of Directors is
also an executive officer of the vendor.
 
     Related party transactions with principal cable stockholders are described
in Note 1.
 
11. RETIREMENT PLAN
 
     The Company has a retirement plan under Section 401(k) of the Internal
Revenue Code. Under the retirement plan, participating employees may defer a
portion of their pretax earnings up to the Internal Revenue Service annual
contribution limit. The Company may make contributions to the plan at the
discretion of the Board of Directors. To date, no such contributions have been
made by the Company.
 
                                       65
<PAGE>   66
                              AT HOME CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
12. FINANCIAL INSTRUMENTS
 
     Financial instruments which subject the Company to concentrations of credit
risk consist primarily of cash and trade accounts receivable. The Company
maintains its cash with three domestic financial institutions with high credit
standings. The Company performs periodic evaluations of the relative credit
standing of this institution. The Company conducts business with companies in
various industries throughout the United States. The Company performs ongoing
credit evaluations of its corporate customers and generally does not require
collateral. Reserves are maintained for potential credit losses and such losses
to date have been within management's expectations.
 
     The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
 
     Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
 
     Accounts receivable and accounts payable: The carrying amounts reported in
the balance sheet for accounts receivable and accounts payable approximate their
fair value.
 
     Investment securities: The fair values for available-for-sale securities
are based on quoted market prices.
 
     Convertible debentures: The fair values of the Company's convertible
debentures are estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements.
 
     The carrying amounts and fair values of the Company's financial instruments
are as follows: (in thousands)
 
<TABLE>
<CAPTION>
                                                  DECEMBER 31, 1998         DECEMBER 31, 1997
                                                ----------------------    ---------------------
                                                CARRYING        FAIR      CARRYING       FAIR
                                                 AMOUNT        VALUE       AMOUNT        VALUE
                                                --------      --------    --------      -------
<S>                                             <C>           <C>         <C>           <C>
Cash and cash equivalents.....................  $300,702      $300,702    $44,213       $44,213
Short-term cash investments...................   118,587       118,587     76,166        76,166
Accounts receivable...........................    10,658        10,658      2,142         2,142
Accounts payable..............................    10,784        10,784      4,517         4,517
Convertible debentures........................   229,344       229,344         --            --
</TABLE>
 
13. SUBSEQUENT EVENTS (UNAUDITED)
 
MERGER AGREEMENT WITH EXCITE, INC.
 
     On January 19, 1999 the Company entered into a merger agreement with
Excite, Inc. ("Excite"), a global Internet media company that offers consumers
and advertisers comprehensive Internet navigation services with extensive
personalization capabilities. Under the terms of the merger agreement, the
Company will issue approximately 54.9 million shares of its Series A common
stock for all of the outstanding common stock of Excite based on an exchange
ratio of approximately 1.041902 shares of the Company's Series A common stock
for each share of Excite's common stock. The Company may issue up to
approximately 15.3 million additional shares of Series A common stock in
connection with the assumption of obligations under Excite's stock option and
employer stock purchase plans and outstanding warrants. The transaction will be
accounted for as a purchase. The Company's preliminary unaudited estimate of the
total purchase consideration is approximately $6,964 million, based on the fair
value at the time of announcement of the merger, of Series A common stock to be
issued and stock option, stock purchase plan and warrant obligations assumed,
plus estimated transaction costs.
 
                                       66
<PAGE>   67
                              AT HOME CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The merger has been approved by the boards of directors of At Home and
Excite, but the acquisition is subject to several conditions, including approval
by both companies' stockholders and the expiration of applicable waiting periods
under certain antitrust laws.
 
     The following unaudited pro forma condensed financial information presents
the combined results of operations of the Company and Excite, including the
amortization of goodwill and other intangible assets, as if the merger had
occurred at the beginning of each year presented (in thousands).
 
<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                            --------------------------
                                                               1998           1997
                                                            -----------    -----------
<S>                                                         <C>            <C>
Pro forma revenues........................................  $   202,150    $    61,551
                                                            ===========    ===========
Pro forma net loss........................................  $(1,881,073)   $(1,827,974)
                                                            ===========    ===========
Pro forma basic and diluted net loss per share............  $    (11.12)   $    (11.54)
                                                            ===========    ===========
Number of shares used in basic and diluted pro forma per
  share calculation.......................................      169,124        158,427
                                                            ===========    ===========
</TABLE>
 
     The pro forma results of operations are not necessarily indicative of the
results that would have occurred had the merger occurred at the beginning of
each year presented, and are not intended to be indicative of future results of
operations.
 
CHANGES IN COMMON SHARES AUTHORIZED
 
     On January 19, 1999, the Company's Board of Directors authorized an
increase in the number of authorized shares of Series A common stock from
200,000,000 to 233,000,000 and a decrease in the number of authorized shares of
Series K common stock from 14,877,660 to 2,609,707, subject to stockholder
approval.
 
BACKBONE AGREEMENT
 
     The Company entered into a twenty-year agreement with a major
tele-communications company to create a nationwide Internet Protocol network.
This new backbone facility, which is scheduled to be deployed in mid-1999,
initially will enable the Company to support up to five million broadband users.
In connection with this agreement, the Company will incur expenditures of
approximately $50,000,000 over each of the next two years for additional
backbone capacity and related equipment. The Company will capitalize these
payments and amortize the amounts by charges to operations over the term of the
agreement.
 
                                       67
<PAGE>   68
 
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED
                                    -------------------------------------------------------------
                                        (IN THOUSANDS, EXCEPT PER SHARE AND STOCK PRICE DATA)
                                     MARCH 31,        JUNE 30,      SEPTEMBER 30,    DECEMBER 31,
                                        1998            1998            1998             1998
                                    ------------    ------------    -------------    ------------
<S>                                 <C>             <C>             <C>              <C>
Total revenue.....................  $      5,773    $      9,220    $     13,815     $     19,237
Costs and expenses:
  Operating costs.................         8,615          10,098          12,256           15,996
  Product development and
     engineering..................         3,573           3,891           4,588            4,957
  Sales and marketing.............         3,500           4,356           4,978            5,257
  General and administrative......         2,874           2,925           3,112            3,518
  Purchased in-process research
     and development..............            --              --              --            2,758
  Cost and amortization of
     distribution agreements......        19,534          13,628          13,628           54,595
                                    ------------    ------------    ------------     ------------
          Total costs and
            expenses..............        38,096          34,898          38,562           87,081
                                    ------------    ------------    ------------     ------------
Loss from operations..............       (32,323)        (25,678)        (24,747)         (67,844)
Interest income, net..............         1,107             906           1,460            2,940
                                    ------------    ------------    ------------     ------------
Net loss..........................  $    (31,216)   $    (24,772)   $    (23,287)    $    (64,904)
                                    ============    ============    ============     ============
Pro forma basic and diluted net
  loss per share..................  $      (0.28)   $      (0.22)   $      (0.20)    $      (0.56)
                                    ============    ============    ============     ============
Price range per share.............  $20.50-38.13    $29.75-57.25    $23.50-54.94     $34.50-84.75
</TABLE>
 
                                       68
<PAGE>   69
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
                                                                             SEQUENTIALLY
    EXHIBIT                                                                    NUMBERED
    NUMBER                       DESCRIPTION OF DOCUMENT                         PAGE
    -------    ------------------------------------------------------------  ------------
    <S>        <C>                                                           <C>
    4.06       Narrative Communications Corp. 1998 Equity Incentive Plan,
               assumed by Registrant as of December 30, 1998(*)
    10.12      Narrative Communications Corp. 1995 Stock Option Plan,
               assumed by Registrant as of December 30, 1998(*)
    10.13      Description of Registrant's 1998 Executive Incentive Plan(*)
    10.25      Warrant Purchase Agreement, dated May 5, 1998, between
               Registrant and Century Communications Corp.
    10.26      Warrant to Purchase Series A Common Stock of Registrant
               issued to Century Communications Corp. as of May 5, 1998
    10.27      Form of Warrant to Purchase Series A Common Stock of
               Registrant to be issued to Century Communications Corp.
    10.28      Warrant Purchase Agreement, dated June 27, 1998, between
               Registrant and Garden State Cablevision L.P.
    10.29      Warrant to Purchase Series A Common Stock of Registrant
               issued to Garden State Cablevision L.P. as of June 27, 1998
    10.30      Warrant Purchase Agreement, dated June 26, 1998, between
               Registrant and Jones Intercable Inc.
    10.31      Warrant to Purchase Series A common stock of Registrant
               issued to Jones Intercable Inc. as of June 26, 1998
    10.33      IRU Capacity Agreement, dated December 19, 1998, between
               Registrant and AT&T Corp.(**)
    10.34      Form of Loan Modification Agreement between Registrant and
               Silicon Valley Bank
    10.35      Build to Suit Option Agreement, dated October 25, 1996,
               between Registrant and Martin/Campus Associates, L.P., and
               First Amendment to Build to Suit Option Agreement.
    10.36      Build to Suit Lease, dated July 14, 1998, between Registrant
               and Martin/Campus Associates, L.P. (420 Broadway, Redwood
               City, California)
    10.37      Form of Build to Suit Lease between Registrant and
               Martin/Campus Associates, L.P. (430 Broadway, Redwood City,
               California)
    23.01      Consent of Ernst & Young LLP, Independent Auditors
    24.01      Power of Attorney executed by each officer and director (See
               pages 44 and 45 of this Form 10-K)
    27.01      Financial data schedule for year ended December 31, 1998
</TABLE>
 
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 *  Management contracts or compensatory plans required to be filed as an
    exhibit to Form 10-K.
 
**  Confidential treatment has been requested with respect to certain
    information contained in this document. Confidential portions have been
    omitted from this public filing and have been filed separately with the
    Securities and Exchange Commission.