Document:

<PAGE>

                                                                   Exhibit 10.33

                            JOINT VENTURE AGREEMENT

                                    between

             RHYTHMS NETCONNECTIONS INC. and RHYTHMS LINKS, INC.,
                            Delaware corporations,

                                      and

                       OPTEL COMMUNICATIONS CORPORATION,
                            an Ontario corporation,

                                    to form

                             RHYTHMS CANADA INC.,
          a corporation incorporated under the laws of New Brunswick.

                             Dated January 1, 2000
<PAGE>

                               TABLE OF CONTENTS
                               -----------------
                                                                            Page
                                                                            ----
ARTICLE I DEFINITIONS........................................................ 1
              1.1   "Affiliate".............................................. 1
              1.2   "Annual Budgets"......................................... 2
              1.3   "Ancillary Agreements"................................... 2
              1.4   "Articles of Incorporation".............................. 2
              1.5   "Board".................................................. 2
              1.6   "Bona Fide Offer"........................................ 2
              1.7   "Business Day"........................................... 2
              1.8   "Business Deadlock"...................................... 2
              1.9   "Business Plan".......................................... 2
              1.10  "Bylaws"................................................. 2
              1.11  "Canadian Carrier Telecommunications Assets"............. 2
              1.12  "Canadian Communications Market"......................... 2
              1.13  "Capital Budget"......................................... 2
              1.14  "Capital Call"........................................... 2
              1.15  "Chairperson"............................................ 3
              1.16  "Change Order Proposal".................................. 3
              1.17  "Confidential Information"............................... 3
              1.18  "CRTC"................................................... 3
              1.19  "Customer Requirement Modification Notice"............... 3
              1.20  "Customer Requirement Notice"............................ 3
              1.21  "Customer Premises Equipment"............................ 3
              1.22  "Data Network Equipment"................................. 3
              1.23  "Data Products".......................................... 4
              1.24  "Data Products and Services Support Center".............. 4
              1.25  "Data Services".......................................... 4
              1.26  "Direct Cost"............................................ 4
              1.27  "Director"............................................... 4
              1.28  "Disclosing Party"....................................... 4
              1.29  "Dollars" and "$"........................................ 4
              1.30  "DSL".................................................... 4
              1.31  "Effective Date"......................................... 4
              1.32  "Event of Withdrawal".................................... 4
              1.33  "Fair Market Value"...................................... 5
              1.34  "Human Resources Plan"................................... 5
              1.35  "Independent Appraiser".................................. 5
              1.36  "Independent Businesses"................................. 5
              1.37  "ILEC"................................................... 5
              1.38  "ISP".................................................... 5
              1.39  "JVCO"................................................... 5
              1.40  "JVCO Auditor"........................................... 5
              1.41  "JVCO Business".......................................... 5
              1.42  "JVCO Communications Markets"............................ 5

                                       i
<PAGE>

                           TABLE OF CONTENTS (Continued)
                           -----------------

                  1.43   "JVCO Customers"............................... 6
                  1.44   "JVCO Dedicated Assets"........................ 6
                  1.45   "Majority Decision"............................ 6
                  1.46   "Network Operations Support Center"............ 6
                  1.47   "OCI".......................................... 6
                  1.48   "Operating Budget"............................. 6
                  1.49   "Operating Plan"............................... 6
                  1.50   "OPTEL"........................................ 6
                  1.51   "Optel Pre-Existing Customers"................. 6
                  1.52   "Optel Combined Service Customers"............. 6
                  1.53   "Optel Customer Base".......................... 6
                  1.54   "Optel Outsourced Services".................... 6
                  1.55   "Outsourced Services".......................... 6
                  1.56   "Outsourcing Proposal"......................... 6
                  1.57   "Party" and "Parties".......................... 6
                  1.58   "Percentage Shares"............................ 7
                  1.59   "Person"....................................... 7
                  1.60   "Prime Rate"................................... 7
                  1.61   "Quarterly Outlook"............................ 7
                  1.62   "Receiving Party".............................. 7
                  1.63   "Regulatory Requirements"...................... 7
                  1.64   "RHYTHMS"...................................... 7
                  1.65   "Rhythms Outsourced Services".................. 7
                  1.66   "Seconded Employees"........................... 7
                  1.67   "Share"........................................ 7
                  1.68   "Shared Assets"................................ 7
                  1.69   "Small and Medium Business Customers".......... 7
                  1.70   "Subscription Agreement"....................... 7
                  1.71   "Telecommunications Provider".................. 7
                  1.72   "Telecommunications Services".................. 8
                  1.73   "Third Party".................................. 8
                  1.74   "Unanimous Decision"........................... 8
                  1.75   "Underlying Network Facilities"................ 8
                  1.76   "Voice Services"............................... 8

ARTICLE II CORPORATE ORGANIZATION....................................... 8
                  2.1    Formation...................................... 8
                  2.2    Name........................................... 8
                  2.3    Place of Business.............................. 8
                  2.4    Conduct of JVCO Business....................... 8
                  2.5    Independent Organization....................... 9
                  2.6    Duration of Corporation........................ 9
                  2.7    Title to JVCO Property......................... 9
                  2.8    Partition..................................... 10
                                      ii
<PAGE>

                           TABLE OF CONTENTS (Continued)
                           -----------------
                                                                            Page
                                                                            ----
               2.9   Fiscal Year............................................. 10

ARTICLE III CAPITAL STRUCTURE AND FINANCING.................................. 10
               3.1   Capital Structure....................................... 10
               3.2   Capital Contributions................................... 10
               3.3   Dividend Policy......................................... 12
               3.4   Redemption of Series A Preferred Shares................. 12

ARTICLE IV MANAGEMENT........................................................ 12
               4.1   Board of Directors...................................... 12
               4.2   Officers................................................ 14
               4.3   Authority of the Board and Officers..................... 14
               4.4   Provisions for Dealing with Board Deadlock.............. 18
               4.5   JVCO Plans and Budgets.................................. 18
               4.6   Accounting and Internal Controls........................ 19
               4.7   Access to Books and Records............................. 20

ARTICLE V CONTRIBUTED RESOURCES.............................................. 20
               5.1   Seconded Employees...................................... 20
               5.2   Outsourced Services..................................... 21
               5.3   Optel Leased Assets..................................... 23
               5.4   Trademark Licenses...................................... 24
               5.5   Technology Licenses..................................... 24
               5.6   Non-Competition; Other Businesses....................... 24
               5.7   Non-Solicitation of Employees........................... 27
               5.8   Transition of Business.................................. 27

ARTICLE VI CONFIDENTIAL INFORMATION.......................................... 28
               6.1   Treatment of Confidential Information................... 28
               6.2   Copying Confidential Information........................ 29
               6.3   Time Period............................................. 29
               6.4   Remedies................................................ 29
               6.5   Confidential Information of JVCO........................ 29

ARTICLE VII SHARE TRANSFER RESTRICTIONS...................................... 29
               7.1   Transfer Restrictions................................... 29
               7.2   Buy-Sell Option......................................... 32
               7.3   Additional Parties...................................... 32
               7.4   Event of Withdrawal..................................... 33

ARTICLE VIII REPRESENTATIONS AND WARRANTIES.................................. 33
               8.1   Mutual Representations and Warranties................... 33
               8.2   Additional Representations, Warranties and Covenants.... 34

                                      iii
<PAGE>

                           TABLE OF CONTENTS (Continued)
                           -----------------
                                                                            Page
                                                                            ----

ARTICLE IX TERMINATION....................................................... 35
                  9.1   General.............................................. 35
                  9.2   Termination by a Party for Cause..................... 35
                  9.3   Liquidation; Survival................................ 36

ARTICLE X MISCELLANEOUS PROVISIONS........................................... 36
                  10.1  Publicity............................................ 36
                  10.2  Assignment........................................... 36
                  10.3  Governing Law........................................ 36
                  10.4  Force Majeure........................................ 36
                  10.5  Waiver............................................... 37
                  10.6  Notice, Consents, Etc................................ 37
                  10.7  Entire Agreement..................................... 38
                  10.8  Headings............................................. 38
                  10.9  Severability......................................... 38
                  10.10 Dispute Resolution................................... 38
                  10.11 Counterparts......................................... 39
                  10.12 Expenses............................................. 39
                  10.13 Applicable Laws and Regulations...................... 39
                  10.14 Indemnities.......................................... 39
                  10.15 Ancillary Agreements................................. 39

                                      iv
<PAGE>

                         TABLE OF CONTENTS (Continued)
                         -----------------
                                                                            Page
                                                                            ----
SCHEDULE 1.25  DATA SERVICES................................................. 42

SCHEDULE 1.3  ANCILLARY AGREEMENTS........................................... 44

SCHEDULE 1.42  COMMUNICATIONS MARKETS........................................ 45

SCHEDULE 1.43  PRELIMINARY CUSTOMERS......................................... 46

SCHEDULE 4.1(a)  INITIAL BOARD OF DIRECTORS.................................. 47

SCHEDULE 4.5(a)  INITIAL BUSINESS PLAN AND SUPPORTING FINANCIAL INFORMATION.. 48

SCHEDULE 5.1(a)  PRELIMINARY HUMAN RESOURCES PLAN............................ 49

SCHEDULE 5.3(a)  OPTEL LEASED ASSETS......................................... 50

EXHIBIT A  FORM OF ARTICLES OF INCORPORATION.................................  1

EXHIBIT B  FORM OF BYLAWS....................................................  1

EXHIBIT C  FORMS OF EMPLOYEE PROPRIETARY INFORMATION AND
              INVENTIONS AGREEMENTS..........................................  1

EXHIBIT D  FORM OF TRADEMARK LICENSING AGREEMENT.............................  1

EXHIBIT E  FORM OF TECHNOLOGY LICENSE AGREEMENTS.............................  1

                                       v
<PAGE>

                            JOINT VENTURE AGREEMENT
                            -----------------------

     This Joint Venture Agreement ("Agreement") is entered into as of January 1,
2000 (the "Effective Date"), between Rhythms NetConnections Inc. and Rhythms
Links, Inc., corporations formed under and governed by the laws of the State of
Delaware and having their principal place of business at 6933 South Revere
Parkway, Englewood, Colorado 80112-3931 (collectively, with their Affiliates (as
defined below), "RHYTHMS"), and Optel Communications Corporation, a corporation
incorporated under the laws of the Province of Ontario and having its principal
place of business at 111 Peter Street, Toronto, Ontario M5V 2H1 (collectively,
with its Affiliates, "OPTEL").

                                    RECITALS
                                    --------

     WHEREAS, OPTEL, a wholly-owned subsidiary of OCI Communications Inc.
("OCI"), is engaged in the business of providing telecommunications services in
selected markets of Canada as a Competitive Local Exchange Carrier ("CLEC"); and

     WHEREAS, RHYTHMS is engaged in the business of providing data
communications products and services within the United States of America
("U.S.") and, in the course of such efforts, has developed significant technical
and marketing expertise related to the same; and

     WHEREAS, RHYTHMS and OPTEL desire to establish a joint venture through the
formation of a corporation in Canada ("JVCO") in order to create a national
presence in Canada for the purpose of marketing and providing data
communications products and services to select customers within selected local
markets in Canada; and

     WHEREAS, RHYTHMS and OPTEL will make substantially equal contributions to
the initial capital investment in JVCO as reflected by OPTEL's initial
US$10,000,000 funding of JVCO in exchange for RHYTHMS investment of US$5,300,000
in equity securities of OCI.

     NOW, THEREFORE, in consideration of the mutual covenants and promises
contained in this Agreement and other good and valuable consideration, receipt
and sufficiency of which are acknowledged, the parties agree as follows:

                                   ARTICLE I

                                  DEFINITIONS
                                  -----------

     As used in this Agreement, the following capitalized terms, whether used in
the singular or the plural, will have the following meanings:

     1.1  "Affiliate" means with respect to a specified entity, an entity that
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with the entity specified, except for
JVCO. For purposes of this Section 1.1, "control" means the possession, direct
or indirect, of the power to direct or cause the direction of the management and
policies of an entity, whether through the ownership of voting securities, by
contract, or otherwise.

<PAGE>

     1.2  "Annual Budgets" means the budgets described in Section 4.5(b)(i) of
this Agreement.

     1.3  "Ancillary Agreements" means the agreements described in Schedule 1.3
to this Agreement.

     1.4  "Articles of Incorporation" means the articles of incorporation for
JVCO to be filed in accordance with the laws of the Province of New Brunswick in
substantially the form attached hereto as Exhibit A.

     1.5  "Board" means the Board of Directors of JVCO described in Section 4.1
of this Agreement.

     1.6  "Bona Fide Offer" means a written offer from a Third Party, with the
required financial means, to purchase all or any portion of a Party's interest
in JVCO from such Party wishing to sell on the same terms and conditions
contained in such offer.

     1.7  "Business Day" means any day except a Saturday, Sunday, statutory
holiday in Toronto, Ontario, or any day on which banks in the United States are
not open for regular business.

     1.8  "Business Deadlock" means (a) the inability of the Board to obtain the
unanimous consent of all Board members for any Unanimous Decision or (b) the
inability to obtain the majority consent of the Board for any other decision,
for a period of at least sixty (60) days from the time the decision at issue was
initially presented to the Board for action.

     1.9  "Business Plan" means the business plan of JVCO, as amended and in
effect from time to time, described in Section 4.5(a) of this Agreement. The
Parties have agreed on the initial Business Plan, which is set forth as Schedule
4.5(a) to this Agreement.

     1.10 "Bylaws" means the bylaws of JVCO as amended from time to time in
substantially the form attached hereto as Exhibit B.

     1.11 "Canadian Carrier Telecommunications Assets" means those assets and
facilities that can only be owned and operated by a telecommunications common
carrier in accordance with the Canadian Telecommunications Act and the Canadian
Telecommunications Common Carrier Ownership and Control Regulations.

     1.12 "Canadian Communications Market" means the market for communications
goods and services within the geographic area of the country of Canada.

     1.13 "Capital Budget" means the annual capital expenditures budget
described in Section 4.5 of this Agreement.

     1.14 "Capital Call" means the installment payment by a Party of additional
capital contributions described in Section 3.2(d) of this Agreement.

                                       2
<PAGE>

     1.15  "Chairperson" means chairperson of the Board described in Section
4.1(e) of this Agreement.

     1.16  "Change Order Proposal" means the proposal described in Section
5.2(d) of this Agreement.

     1.17  "Confidential Information" means any and all technical and business
information of JVCO, a Party or an Affiliate of a Party (the "Disclosing
Party"), that is (a) material, competitively sensitive, and not generally known
in the industry or the public, including but not limited to trade secrets and
proprietary information, in whatever form or medium (including, but not limited
to product/service specifications, prototypes, computer programs, methods of
equipment interconnection, drawings, models, marketing plans, financial data),
and (b) obtained by any other Person including JVCO, a Party or an Affiliate of
a Party (the "Receiving Party"): (i) through the working arrangement between the
Disclosing Party and Receiving Party, regardless whether a formal "disclosure"
event occurs; (ii) disclosed in writing and marked or otherwise indicated orally
or in writing as Confidential Information; (iii) disclosed orally and identified
as Confidential Information at the time of disclosure; or (iv) which the
Receiving Party knows or has reason to know is Confidential Information. For the
purposes of this definition, any technical or business information of a Third
Party furnished or disclosed by one Party to another will be deemed Confidential
Information of the Disclosing Party unless otherwise specifically indicated in
writing to the contrary.

      Information will not be considered Confidential Information if it is: (i)
in the public domain without breach of this Agreement; (ii) developed
independently, with no effort or thought of circumventing or contravening the
rights of the Party or Person owning the information; (iii) lawfully disclosed,
without breach of a nondisclosure agreement, from a Third Party under no
restriction on disclosure; or (iv) documented as being known to the Receiving
Party, or in the Receiving Party's lawful possession, without burden of
confidentiality, prior to its disclosure hereunder.

     1.18  "CRTC" means the Canadian Radio-television and Telecommunications
Commission.

     1.19  "Customer Requirement Modification Notice" means the notice to JVCO
of modified customer requirements as described in Section 5.6(b)(ii)of this
Agreement.

     1.20  "Customer Requirement Notice" means the notice to JVCO of modified
customer requirements as described in Section 5.6(b)(i)of this Agreement.

     1.21  "Customer Premises Equipment" means equipment employed on the
premises of a Person (other than a carrier) to originate, route, or terminate
telecommunications.

     1.22  "Data Network Equipment" means data networking equipment, including
(without limitation), OSI layer 2 switches and layer 3 routers and Digital
Subscriber Line Access Multiplexers (DSLAM) that are utilized in connection with
Underlying Network Facilities for the purposes of providing Data Services.

                                       3
<PAGE>

     1.23  "Data Products" means the Customer Premises Equipment which is
necessary for JVCO Customers to access Data Services.

     1.24  "Data Products and Services Support Center" means the centralized
support center that will manage JVCO's Data Network Equipment and Underlying
Network Facilities by providing services such as monitoring, reconfiguring, and
troubleshooting, as well as providing customer support services to JVCO
Customers.

     1.25  "Data Services" means those services that are expressly defined on
Schedule 1.25 of this Agreement or that may be added to the Schedule 1.25 from
time to time upon the Unanimous Decision of the Board; except that Data Services
shall not include Voice Services.

     1.26  "Direct Cost" means:

           (a)  with regard to any services to be performed, the actual salaries
of the individuals for the time expended in performing such services plus all
attendant benefit expenses for each such individual;

           (b)  with regard to third-party provided products and services, the
actual invoiced amount plus any applicable taxes; and

           (c)  with regard to any regulated functions to be performed by the
Parties or their Affiliates, the fully distributed cost. Direct Cost will also
include an allocation of shared and other costs, including overhead costs, which
increase directly in proportion to the activity.

     1.27  "Director" means a member of the Board as described in Section 4.1(a)
of this Agreement.

     1.28  "Disclosing Party" means the Person disclosing Confidential
Information as described in Section 1.17 of this Agreement.

     1.29  "Dollars" and "$" mean dollars in currency of the United States of
America unless otherwise specifically indicated.

     1.30  "DSL" means digital subscriber line and related technology as
described in Schedule 1.25 to this Agreement.

     1.31  "Effective Date" means the date set forth in the preamble to this
Agreement.

     1.32  "Event of Withdrawal" means the occurrence of any of the following:

           (a)  the dissolution or the revocation of a Party's charter or
certificate of incorporation; provided, however, that the merger of a Party with
an Affiliate will not be considered an Event of Withdrawal for the purposes of
this Agreement;

           (b)  the dissolution and commencement of winding up a Party;

                                       4
<PAGE>

           (c)  the entry of a final order by a court of competent jurisdiction
adjudicating any Party to be incapable of performing such Party's obligations
under this Agreement (in which case the effective date of withdrawal will be the
date such decree is entered);

           (d)  the filing by a Party of any petition in bankruptcy or for
reorganization, management, composition, re-adjustment, liquidation or similar
relief under any statute, law or regulation governing the rights and relief of
debtors; or the adjudication of a Party as bankrupt or insolvent; or the
application by a Party for or such Party's consent to or acquiescence in the
appointment of a trustee, receiver or liquidator for all or any substantial part
of such Party's assets; or the making by a Party of an assignment for the
benefit of creditors; or any substantially similar action on the part of a
Party.

     1.33  "Fair Market Value" means the fair market value assigned to the
object or interests being valued as will be conclusively determined by the
Independent Appraiser. For the sole purpose of determining the Fair Market
Value, the Independent Appraiser shall be given access and may review all books
and records of, and information available for, JVCO.

     1.34  "Human Resources Plan" means the human resources plan of JVCO, as
amended and in effect from time to time, described in Section 5.1(a) of this
Agreement. The Parties have agreed on the initial Human Resources Plan, which is
set forth as Schedule 5.1(a) to this Agreement.

     1.35  "Independent Appraiser" means the appraisal firm which is selected by
a Unanimous Decision of the Board.

     1.36  "Independent Businesses" means the separate businesses of the Parties
as described in Section 5.6(h)(ii) of this Agreement.

     1.37  "ILEC" means an Incumbent Local Exchange Carrier in Canada.

     1.38  "ISP" means Internet Service Provider, an entity that provides direct
access to the Internet.

     1.39  "JVCO" means the corporation referenced in the recitals of this
Agreement (and any successor entity to JVCO in the form of a corporation during
the term of this Agreement).

     1.40  "JVCO Auditor" means the outside accountants of JVCO described in
Section 4.3(e)(ix) of this Agreement.

     1.41  "JVCO Business" means the development, marketing and sale of the Data
Products and Data Services, either directly or through subsidiaries or
Affiliates or Third Parties to JVCO Customers in accordance with the Business
Plan.

     1.42  "JVCO Communications Markets" means the markets in which JVCO
provides communications goods and services as described in Schedule 1.42 to this
Agreement.

                                       5
<PAGE>

     1.43  "JVCO Customers" means the wholesale customers, large business
customers (excluding Small and Medium Business Customers) and residential
customers (if and when approved by the Board) in the JVCO Communications Markets
as set forth on Schedule 1.43.

     1.44  "JVCO Dedicated Assets" means those assets loaned or leased to JVCO
by a Party that are utilized as a necessary part of the JVCO Business, but
excluding Shared Assets.

     1.45  "Majority Decision" means a decision of the Board as described in
Section 4.3(e) of this Agreement.

     1.46  "Network Operations Support Center" means the centralized support
center which will manage the Underlying Network Facilities which are used by
JVCO in connection with its Data Services by providing services such as
monitoring, reconfiguring, and troubleshooting.

     1.47  "OCI" means the corporation described in the recitals to this
Agreement.

     1.48  "Operating Budget" means the annual operating budget described in
Section 4.5 of this Agreement.

     1.49  "Operating Plan" means the plan for implementing the Business Plan as
described in Section 4.5 of this Agreement.

     1.50  "OPTEL" means the corporation described in the preamble to this
Agreement.

     1.51  "Optel Pre-Existing Customers" means the customers of OPTEL prior to
the Effective Date as set forth on Schedule 1.43.

     1.52  "Optel Combined Service Customers" means the prospective customers of
OPTEL for the provision of combined voice and data services as set forth on
Schedule 1.43.

     1.53  "Optel Customer Base" means the group or groups of customers
comprised of Small and Medium Business Customers, Optel Pre-Existing Customers
and Optel Combined Service Customers.

     1.54  "Optel Outsourced Services" means services provided to JVCO by OPTEL
as described in Section 5.2(b) of this Agreement.

     1.55  "Outsourced Services" means services provided to JVCO by the Parties
as described in Section 5.2 of this Agreement.

     1.56  "Outsourcing Proposal" means the proposal described in Section 5.2(d)
of this Agreement.

     1.57  "Party" and "Parties" mean RHYTHMS and OPTEL and each permitted
successor and assign of such Party which executes a written agreement to be
bound by the terms of this Agreement.

                                       6
<PAGE>

     1.58  "Percentage Shares" means, as to each Party, the percentage ownership
of issued and outstanding Class A Voting Shares of JVCO.

     1.59  "Person" means any natural person, estate, trust, corporation,
company, limited liability company, limited company, or other entity, legal or
otherwise, recognized at law.

     1.60  "Prime Rate" means the prime rate of interest as published in the
Wall Street Journal under the heading "Money Rates" (if there is more than one,
then the highest) three editions prior to the date on which the event that gave
rise under this Agreement to the need to refer to such Prime Rate.

     1.61  "Quarterly Outlook" means the quarterly forecast described in Section
4.5(b)(ii) of this Agreement.

     1.62  "Receiving Party" means the Person receiving Confidential Information
as described in Section 1.17 of this Agreement.

     1.63  "Regulatory Requirements" means all applicable laws, orders, rules,
and regulations of any regulatory agency, including, without limitation,
individual state and provincial regulatory commissions and the CRTC, which
relate to JVCO Customers.

     1.64  "RHYTHMS" means, collectively, the corporations described in the
preamble to this Agreement.

     1.65  "Rhythms Outsourced Services" means services provided to JVCO by
RHYTHMS as described in Section 5.2(b) of this Agreement.

     1.66  "Seconded Employees" means employees of the Parties described in
Section 5.1 of this Agreement.

     1.67  "Share" means any share or unit representing an equity interest of
JVCO under the Articles of Incorporation, regardless of label or designation.

     1.68  "Shared Assets" means those assets loaned or leased to JVCO by a
Party that are also utilized as a necessary part of such Party's business to
provide data and telecommunications products and services to non-JVCO Customers.

     1.69  "Small and Medium Business Customers" means small and medium-sized
business entities in the JVCO Communications Markets as set forth on Schedule
1.43.

     1.70  "Subscription Agreement" means that certain Subscription and Purchase
Agreement between RHYTHMS and OCI Communications Inc. dated October 26, 1999.

     1.71  "Telecommunications Provider" means an entity which leases, owns
and/or operates Underlying Network Facilities within a Canadian Communications
Market other than OPTEL.

                                       7
<PAGE>

     1.72  "Telecommunications Services" means the transmission of
communications between and among various geographic locations.

     1.73  "Third Party" means any entity which is not a Party or an Affiliate
of a Party to this Agreement.

     1.74  "Unanimous Decision" means a decision of the Board as described in
Section 4.3(d) of this Agreement.

     1.75  "Underlying Network Facilities" means transmission equipment and
associated electronics that are used to facilitate Telecommunications Services
that are provided by broadband network, including, without limitation, unbundled
local loop, wire, cable, fiber optics, private lines, DSOs, DS1s, and DS3s.

     1.76  "Voice Services" means those services that provide the transmission
of voice data over DSL.

                                  ARTICLE II

                            CORPORATE ORGANIZATION
                            ----------------------

     2.1  Formation. On or before the Effective Date, the Parties shall cause
JVCO to be incorporated as a corporation pursuant to the laws of the Province of
New Brunswick. The initial Articles of Incorporation and Bylaws of JVCO shall be
in substantially the form attached hereto as Exhibit A and Exhibit B,
respectively.

     2.2  Name. The name of JVCO shall be "Rhythms Canada Inc." or such other
name as the Board may from time to time determine. The Board will cause to be
filed on behalf of JVCO such business name registrations as may from time to
time be required by law.

     2.3  Place of Business. The principal place of business of JVCO will be 111
Peter Street, Toronto, Ontario M5V 2H1. The Board may, at any time and from time
to time, change the location of JVCO's principal place of business and establish
such additional place or places of business of JVCO.

     2.4  Conduct of JVCO Business.

          (a)  The Parties shall organize JVCO for the purpose of developing and
providing, alone or in combination with others, directly or indirectly, Data
Products and Data Services that utilize DSL to JVCO Customers located in the
JVCO Communications Markets.

          (b)  Each Party shall vote its Shares and shall take all other actions
reasonably necessary to ensure that the Articles of Incorporation and Bylaws do
not at any time conflict with the provisions of this Agreement. In the event of
a conflict between this Agreement and the Articles of Incorporation and Bylaws,
the terms of this Agreement shall prevail.

          (c)  In order to accomplish and give effect to this Agreement, each
Party covenants and agrees to vote, or cause to be voted, the Shares owned by it
in accordance with the

                                       8
<PAGE>

provisions and intent of this Agreement. Each Party also covenants and agrees
that it will at all times vote and act and take all such steps as may be
reasonably within its power and use reasonable commercial efforts to cause JVCO
to act in accordance with the provisions and intent of this Agreement.

           (d)  The operations of JVCO shall be in compliance with all laws
applicable thereto and be conducted to avoid the application of any penalty,
sanction or loss to JVCO. The Parties will respectively use reasonable efforts
to channel to JVCO appropriate business opportunities in the JVCO Communications
Markets of which the Parties become aware, and jointly consider ways in which
they can promote, support and market the Data Products and Data Services of
JVCO, provided that nothing in the foregoing shall be construed to limit either
Party in any way from conducting their own Independent Businesses in their sole
discretion.

2.5  Independent Organization.

           (a)  The Parties agree that JVCO shall be operated by the Board as an
independent legal and economic entity in accordance with this Agreement and
applicable law. JVCO shall be solely and independently responsible for the Data
Products and Data Services, including without limitation (a) the adoption of
policies regarding pricing, marketing, sales and promotions, and operations and
(b) the planning and strategic direction of the Data Products and Data Services.
The Board, Parties and management of JVCO, in their respective capacities as
directors, officers or employees of JVCO, shall at all times act in the best
interests of JVCO. Except as set forth herein, neither Party shall be obligated
to act in a manner that would be detrimental to their Independent Businesses.

           (b)  The Parties agree to provide sufficient personnel and outsourced
services to JVCO in accordance with Sections 5.1 and 5.2 of this Agreement and
the Business Plan in effect from time to time.

           (c)  Each Party hereby assures the other, and further agrees to be
responsible for ensuring, that any management or other personnel nominated,
appointed or otherwise supplied by it, in their respective capacities as
directors, officers or employees of JVCO, shall abide by the terms of this
Agreement and act impartially and in the best interests of JVCO. Nothing herein
shall be interpreted as precluding or lessening the obligations and duties that
directors, officers and employees may have to the Parties or that a Party shall
have to its shareholders.

     2.6  Duration of Corporation. The term of this Agreement will commence on
the Effective Date and, unless otherwise extended by the mutual agreement of the
Parties, will continue until dissolution and termination of JVCO as provided in
Article IX below.

     2.7  Title to JVCO Property. All property owned by JVCO, whether real or
personal, tangible or intangible, will be deemed to be owned by JVCO as an
entity, and no Party, individually, will have direct ownership of such property.
JVCO may hold any of its assets in its own name or in the name of its nominee,
which nominee may be one or more individuals, corporations, trusts or other
entities.

                                       9
<PAGE>

     2.8  Partition. No Party, nor any successor-in-interest to any Party, will
have the right while this Agreement remains in effect to have the property of
JVCO partitioned, or to file a complaint or institute any proceeding at law or
in equity to have the property of JVCO partitioned, and each Party, on behalf of
itself, its successors and assigns, waives any such right. It is the intention
of the Parties that during the term of this Agreement, the rights of the Parties
and their successors-in-interest, as among themselves, will be governed by the
terms of this Agreement, and that the right of any Party or its successors-in-
interest to assign, transfer, sell or otherwise dispose of its interest in
JVCO's properties will be subject to the limitations and restrictions of this
Agreement.

     2.9  Fiscal Year. The fiscal year of JVCO will end on the last day of
December of each calendar year.

                                  ARTICLE III

                        CAPITAL STRUCTURE AND FINANCING
                        -------------------------------

     3.1  Capital Structure. The capital structure of JVCO shall be composed of:

          (a)  common shares (the "Common Shares") which shall be divided into
two classes: (i) an unlimited number of Class A Voting Shares, of which one
hundred thousand (100,000) shares shall be issued to RHYTHMS and one hundred
thousand (100,000) shares shall be issued to OPTEL pursuant to Section 3.2(a) of
this Agreement; and (ii) an unlimited number of Class B Non-Voting Shares which
shall be reserved for issuance in the form of options or shares, as determined
by the Board, to employees and consultants of JVCO pursuant to incentive
agreements and on such terms as approved in accordance with this Agreement; and

          (b)  an unlimited number of preferred shares issuable in series, of
which ten million (10,000,000) shares of Series A Preferred Shares with a
redemption amount of US$1.00 per share shall be issued to OPTEL pursuant to
Section 3.2(b) of this Agreement. The Series A Preferred Shares shall have no
voting or conversion rights, but shall earn dividends at a rate of six percent
(6%) per annum payable only upon redemption in accordance with Section 3.4. The
rights and obligations of the Common Shares and Preferred Shares shall be
substantially as set forth in the Articles of Incorporation attached hereto as
Exhibit A.

     3.2  Capital Contributions.

          (a)  Initial Capital Contributions in Exchange for Class A Voting
Shares. On or before the Effective Date, each Party shall subscribe for and
purchase one hundred thousand (100,000) Class A Voting Shares at an issue price
of US$0.001 per share.

          (b)  Initial Capital Contributions in Exchange for Series A Preferred
Shares. On or before the Effective Date, OPTEL shall subscribe for and purchase
one million (1,000,000) shares of Series A Preferred Shares at an issue price of
US$1.00 per share. No later than fifteen (15) Business Days following approval
of the initial Business Plan by the Board, OPTEL shall subscribe for and
purchase the remaining nine million (9,000,000) shares of Series A Preferred
Shares at an issue price of US$1.00 per share.

                                       10
<PAGE>

     (c)  Third-Party Financing. Notwithstanding the power of the Board to
obtain additional capital contributions from the Parties pursuant to Section
3.2(d), the Parties intend that JVCO shall be self-financed with (i) debt
financing from Third Parties, without such financing involving any recourse to
the Parties as shareholders of JVCO, and/or (ii) equity financing through
private placements to Third Parties and/or an initial public offering by JVCO.

     (d)  Installments of Capital Contributions. To the extent that JVCO is
unable to receive sufficient amounts of financing through Third Parties, the
Parties shall be obligated to provide additional capital contributions through
installments as set forth in the Annual Budgets and as approved by the Board
("Capital Calls").

          (i)   At the beginning of each fiscal quarter, each Party shall
contribute to JVCO such cash amounts as required by the Capital Call identified
in the Quarterly Outlook preceding such fiscal quarter.

          (ii)  Each Party's obligation to make its share of each installment of
additional capital contributions shall be subject to satisfaction, on or before
the beginning of the fiscal quarter for which such installment would otherwise
be due, of the following conditions:

                (A)  JVCO shall be validly existing and in good standing under
the laws of New Brunswick, as indicated by a Certificate of Status from the
Province of New Brunswick;

                (B)  all regulatory and legal requirements applicable to payment
of such installment shall have been met; and

                (C)  the other Party shall have contributed each installment of
its capital contribution required to have been contributed by it pursuant to
this Section 3.2(d).

          (iii) In exchange for additional capital contributions under this
Section 3.2(d), the Parties shall receive additional Class A Voting Shares in
the amount of X/Y, where X is the amount in Canadian dollars of each individual
capital contribution, and where Y is the fair market value per Class A Voting
Share in Canadian dollars at the time of the contribution as determined in good
faith by the Board of Directors.

          (iv)  Either Party may notify the other Party within ten (10) Business
Days of receiving notice of a required capital contribution approved by the
Board (an "Installment Notice") of such Party's intention not to pay the
required installment by the date such installment would otherwise be due (a
"Non-Payment Notice"). The Party providing the Non-Payment Notice shall have a
ninety (90) day cure period from the date of the Installment Notice in which to
pay the required installment. If a Party either (i) fails to provide a Non-
Payment Notice and fails to pay the required installment or (ii) provides a Non-
Payment Notice and fails to pay the required installment within ninety (90) days
of the Installment Notice, then such Party shall be deemed in default of its
capital contribution installment requirement (the "Defaulting Party"). If the
other Party has paid its required installment (the "Paying Party"), such Paying
Party shall have the option of also paying the Defaulting Party's installment
whereupon the total number of additional shares of Class A Voting Shares
provided pursuant to Section 3.2(d)(iii) shall be issued to the Paying Party.

                                       11
<PAGE>

          (e)  No Further Funding Obligations. Except as provided in this
Section 3.2, neither Party will be obligated to make contributions to the
capital of JVCO, lend any funds, or otherwise advance or contribute any
additional funds to JVCO.

          (f)  Limitation on Repayment of Capital Contributions. Except for
dividends on Series A Preferred Shares, no interest or dividends will accrue on
any contributions to the capital of JVCO, and no Party will have the right to
withdraw or to be repaid any capital contributed by it or to receive any other
payment in respect of its interest in JVCO, including without limitation as a
result of its withdrawal from JVCO, except as specifically provided in this
Agreement.

     3.3  Dividend Policy. The Parties acknowledge and agree that the Business
Plan contemplates the use of retained earnings to fund the growth of the JVCO
Business. JVCO shall have the right, but not the obligation, to pay dividends to
the Parties hereunder subject to approval by the Board.

     3.4  Redemption of Series A Preferred Shares. OPTEL shall have the right to
redeem all or any portion of its Series A Preferred Shares, payable by JVCO in
cash based on the initial purchase price per share plus any accumulated
dividends for any shares redeemed, upon the occurrence of any of the following
events:

          (a)  the sale by RHYTHMS of any equity holdings of OCI (in which event
the Series A Preferred Shares may be redeemed on a pro rata basis with the
percentage sale of OCI equity holdings sold);

          (b)  the receipt by JVCO of at least twenty-five million U.S. dollars
(US$25,000,000) through an arm's length financing transaction with a Third
Party;

          (c)  the confirmation by the JVCO Auditor of JVCO achieving positive
EBITDA; or

          (d)  the third anniversary date of the Effective Date and/or any
subsequent anniversary date thereafter.

                                  ARTICLE IV

                                  MANAGEMENT
                                  ----------

     4.1  Board of Directors.

          (a)  Except as otherwise expressly provided in this Agreement, the
Parties hereby delegate to the Board of Directors of JVCO all power and
authority to manage the business and affairs of JVCO.

          (b)  JVCO shall be governed by a board of directors (the "Board")
comprised of four directors (the "Directors") with each Party entitled to
nominate two (2) Directors. The initial nominees are set forth on Schedule
4.1(a) to this Agreement. The Parties agree to elect the

                                       12
<PAGE>

foregoing nominees at any shareholder meeting (or any proposed action by written
consent) for the purpose of electing Directors to the Board.

          (c)  If the Percentage Shares of the Parties are no longer equal, the
composition and size of the Board will change as follows:

               (i)   In the event that a Party's Percentage Share equals or
exceeds sixty percent (60%), such Party shall be entitled to nominate one (1)
additional Director for a total of three (3) Directors on the Board representing
such Party. The Parties agree to (i) approve any action necessary to increase to
five (5) the authorized number of Directors on the Board, and (ii) elect the
foregoing additional nominee at any shareholder meeting (or any proposed action
by written consent) for the purpose of electing Directors to the Board.

               (ii)  In the event that a Party's Percentage Share equals eighty
percent (80%), such Party shall be entitled to nominate two (2) additional
Directors for a total of four (4) Directors on the Board representing such
Party. Accordingly, the other Party with a Percentage Share equal to or below
twenty percent (20%) will only be entitled to nominate a total of one (1)
Director on the Board representing the other Party.

               (iii) In the event that a Party's Percentage Share exceeds eighty
percent (80%), such Party shall be entitled to nominate all Directors and the
other Party with a Percentage Share below twenty percent (20%) will no longer be
entitled to nominate any Director on the Board representing the other Party.

               (iv)  If a Party's Percentage Share is greater than or equal to
sixty percent (60%) but less than or equal to eighty percent (80%), such Party
shall be entitled to representation on the Board in proportion to such Party's
Percentage Share. In order to effectuate such proportionate representation, the
Parties agree to (A) approve any action necessary to increase the authorized
number of Directors on the Board (B) elect the requisite number of nominees in
the manner described herein in order to adjust the Board composition to reflect
the Parties' Percentage Shares.

          (d)  Subject to the nomination provisions of Sections 4.1(b) and
4.1(c), if a Director dies, resigns, or becomes incapacitated, the Party that
nominated such Director will designate a replacement to serve until the election
of a new Director can be held.

          (e)  The Chairperson of the Board will serve for a term of one (1)
calendar year and will be designated by RHYTHMS for terms in even numbered years
and by OPTEL for terms in odd years. If a Party's Percentage Share falls below
forty percent (40%), such Party shall lose the right to designate the
Chairperson and the other Party holding a Percentage Share above sixty percent
(60%) will be entitled to designate the Chairperson. The initial Chairperson,
whose term will end December 31, 2000, will be Scott Chandler.

          (f)  The Board will meet once each quarter (unless different intervals
are designated in writing by the Board). Meetings may also be called for any
purpose by the Chairperson forthwith upon receipt of a written request from a
Director or the President. Board meetings may be held by telephone. Written
notice of the time, place and purpose of any meeting of the Board will be given
by the Chairperson to each Director at least ten (10) Business

                                       13
<PAGE>

Days prior to such meeting unless a shorter period of written notice is agreed
in writing to by all Directors. Each Director will be informed in writing not
less than five (5) Business Days in advance of any meeting of the agenda or
matters to be presented to the meeting; provided, however, that in the case of
emergency matters regarding JVCO or its business, the Chairperson and the
President may call a meeting of the Board by sending a written notice containing
the reason for such meeting to each Director at least forty eight (48) hours
prior to such meeting. Any matter, whether or not on the agenda may be raised at
any meeting at which all four (4) Directors are present, provided that if any
Director objects to discussion of a matter not on the agenda, that matter will
not be discussed until the next meeting with respect to which such matter
appears on the agenda. Minutes of the Board meetings will be recorded. These
minutes will be circulated to each Director for approval as soon as practicable
following the relevant Board meeting. Upon adoption, the minutes will be signed
in counterparts by each member and filed at JVCO's principal office.

     4.2  Officers.

          (a)  Directions from the Board will be executed through the President.
The President will be responsible for the management of the day-to-day
operations of JVCO in accordance with the Business Plan and Operating Plan and
will have such other powers and duties as may be assigned by the Board from time
to time. The President's salary, benefits, and expenses will be funded by JVCO.
The President will report directly to the Board and will be an ex officio member
of the Board without voting privileges. Without limiting the foregoing, the
President will have the duty and power to:

               (i)   retain, hire, and terminate all permanent and temporary
employees of JVCO;

               (ii)  supervise and review the performance of all employees of
JVCO and to direct their efforts in accordance with this Agreement, the Business
Plan and Operating Plan, and any other direction from the Board;

               (iii) oversee and implement the preparation of the Business Plan
and Operating Plan, and participate in the preparation of the Annual Budgets,
Quarterly Outlooks and related financial reports; and

               (iv)  approve any payment or other disbursement of funds on
behalf of JVCO in amounts up to US$10,000 as well as such larger amounts up to
US$250,000 for specific expenditures contained in the current Annual Budgets as
approved by the Board.

          (b)  The President may be terminated or removed from performing any
and all duties for JVCO, including, without limitation, managing the day-to-day
operations of the same, upon the affirmative vote of any two Directors of the
Board.

     4.3  Authority of the Board and Officers.

          (a)  JVCO's business and affairs will be managed by or under the
direction of the Board in accordance with the Business Plan, Operating Plan and
Annual Budgets.

                                       14
<PAGE>

          (b)  Except as otherwise provided in this Agreement, any action to be
taken by the Board will require a majority vote of the total number of
Directors. Each Director shall be entitled to one (1) vote on each issue before
the Board. A majority of the total number of Directors will constitute a quorum
of the Board, provided, however, that at least one Director representing each of
the Parties must be present for a quorum to exist. No action may be taken by the
Board unless a quorum is present, provided, however, in no event will any
Unanimous Decision be adopted by the Board if less than all of the Directors are
in attendance or consent in writing to such Unanimous Decision. No individual
Party will have the authority to act for, or to assume any obligation or
responsibility on behalf of the other Party or JVCO unless, and then only to the
extent, authorized to do so by the Board in writing or by further written
agreement between the Parties.

          (c)  So long as each Party has a Percentage Share of at least forty
percent (40%), all Unanimous Decisions and Majority Decisions by or on behalf of
JVCO will be made by the Board acting by the unanimous consent of all Directors.
In the event that a Party's Percentage Share exceeds sixty percent (60%), all
Majority Decisions will be made by the Board acting by the simple majority
consent of Directors. In the event that a Party's Percentage Share exceeds
eighty percent (80%), all Unanimous Decisions and Majority Decisions will be
made by the Board acting by the simple majority consent of Directors.

          (d)  As used in this Agreement, and subject to Section 4.3(c), the
term "Unanimous Decisions" will include:

               (i)    approval of the addition of a new Person as a Party to
this Agreement and determination of the terms and conditions pursuant to which
such Person will be added whether as a result of (A) a transfer and sale of a
Party's interest in accordance with Section 7.1(d); or (B) a request to admit an
additional Party pursuant to Section 7.3;

               (ii)   a decision as to whether to effect a dissolution of JVCO;

               (iii)  amendments to the Articles of Incorporation or Bylaws of
JVCO;

               (iv)   approval of a change in the capital structure of JVCO;

               (v)    approval of the payment of dividends or distributions on
the equity securities of JVCO in accordance with the Articles of Incorporation
and as specified in the Articles of Amendment for the Series A Preferred Shares;

               (vi)   approval of a high-yield debt offering or initial public
offering of JVCO equity securities, including the timing, nature, and investment
bank selection;

               (vii)  execution or amendment of any material agreement (other
than the execution of this Agreement and the Ancillary Agreements referred to in
Schedule 1.3) between JVCO and any Party (or any of its Affiliates);

               (viii) approval of a change of the location of JVCO's principal
place of business;

                                       15
<PAGE>

               (ix)    approval of all additional capital contributions whether
or not reflected in the Business Plan and/or Operating Plan;

               (x)     establishment of reasonable funded reserves to provide
for payment of any JVCO operating expenses, debt payments, and capital
expenditures;

               (xi)    approval of all material activities of JVCO not in the
ordinary course of business, including, without limitation, (A) the disposition
of all or substantially all of JVCO's assets or other business interests; (B)
any acquisition or divestiture by JVCO of any interest in a business entity and
the merger of JVCO with any other entity; (C) the borrowing of funds or
incurring of other liabilities not in the ordinary course of business by JVCO;
(D) the creation of any mortgage, security interest, lien or other encumbrance
on JVCO property; and (E) the making by JVCO of any loans, granting any credit,
entering into any guaranties or giving any indemnities;

               (xii)   appointment of the President and any other senior
officers of JVCO;

               (xiii)  appointment of the Independent Appraiser;

               (xiv)   determination of the (A) date by which the Fair Market
Value will be determined; and (B) assumptions, if any, to be provided to and
used by the Independent Appraiser;

               (xv)    determination of the number of additional Class A Voting
Shares received by the Parties in exchange for capital contributions in
accordance with Section 3.2(d)(iii);

               (xvi)   review and approval of each business case for a proposed
new Data Product and/or Data Service to be offered by JVCO; the business case
will include, without limitation, an assessment by OPTEL of the feasibility of
offering the proposed new Data Products and/or Data Services utilizing the
existing Underlying Network Facilities architecture within each of the JVCO
Communications Markets. Such business cases may be presented to the Board
individually or as part of a proposed Business Plan;

               (xvii)  approval of the addition and/or removal of a JVCO
Communications Market from Schedule 1.42;

               (xviii) approval of the addition of residential customers as JVCO
Customers;

               (xix)   approval of any individual expenditure in excess of
US$250,000 regardless of its inclusion in any Annual Budget; and

               (xx)    adjustment of the amount of individual expenditures
subject to approval by Majority Decision in accordance with Section 4.3(e)(i).

                                       16
<PAGE>

          (e)  As used in this Agreement, and subject to Section 4.3(c), the
term "Majority Decisions" will include:

               (i)    approval of any individual expenditure of more than
US$10,000 which is not included in the Annual Budget, provided that the Board
will use its best efforts to incorporate into the Annual Budgets, each
individual expenditure over US$10,000. The Board has the authority by Unanimous
Decision to raise or lower the amounts subject to its approval. In the event the
Board receives information from the President that a revenue assumption or any
other financial assumption contained in a Business Plan, Operating Plan or
Annual Budget will not occur, the Board will have the right to withdraw its
approval of any individual expenditure which was approved in reliance on such
assumption. Notwithstanding the foregoing, the Board must approve by Unanimous
Decision each individual expenditure in excess of US$250,000 regardless of its
inclusion in any Annual Budget;

               (ii)   approval of all Business Plans, Operating Plans, Annual
Budgets, Quarterly Outlooks, and Human Resources Plans, including any additional
capital contributions reflected therein, as well as any revisions to approved
Business Plans, Operating Plans, Annual Budgets, Quarterly Outlooks, and Human
Resources Plans; provided, however, that with regard to a Party's Outsourcing
Proposal, a price overrun of twenty percent (20%) or less than the price
reflected in such Party's Outsourcing Proposal will not be considered a revision
to the Annual Budget;

               (iii)  approval of all material contracts of JVCO including those
involving (A) nonstandard terms and conditions and sales revenue to JVCO or
obligations of JVCO in excess of US$100,000; and (B) standard terms and
conditions and sales revenue to JVCO or obligations of JVCO in excess of
US$500,000;

               (iv)   approval of the adoption or change of any significant tax
and accounting policies or elections;

               (v)    approval of any action to be taken in response to a
communication received by the JVCO Auditor not in the ordinary course of
business;

               (vi)   approval of the purchase, lease or other acquisition of
any real property interests;

               (vii)  approval of material decisions with respect to any
judicial, administrative, or other proceeding by or against JVCO or referencing
the JVCO name;

               (viii) approval of the selection, use, licensing and sale of any
and all JVCO trade marks, trade names and service marks;

               (ix)   approval of the appointments and changes of JVCO's outside
accountants (the "JVCO Auditor"), attorneys and other professional advisors;

               (x)    selection of all vendors to provide material outsourced
services to JVCO and determination of whether to engage in a competitive bid
process for the selection of such vendors in accordance with Section 5.2(e);

                                       17
<PAGE>

               (xi)   determination of whether a JVCO function, other than those
being provided by each of the Parties, will be performed through outsourced
services; and

               (xii)  selection of the vendor to provide any outsourced services
to JVCO, including, without limitation, choosing between substantially
competitive bids submitted by two or more Parties and/or Affiliates.

     4.4  Provisions for Dealing with Board Deadlock. In the event that the
Board shall fail to reach agreement on any material matter before it after
deliberating upon such matter at any properly constituted Board meeting (such
failure to be hereinafter referred to as a "Deadlock"), any Director may, upon
simultaneous notice to the Parties and the other Directors, refer such matter to
the Parties for resolution by them. Such Director's notice shall be accompanied
by a memorandum or other form of statement setting out such Director's position
on the matter in dispute and such Director's recommendation. The other Directors
may also prepare and distribute memoranda or other forms of statement. If a
dispute is so referred to them, the Parties shall, within ten (10) Business Days
from the date of such notice, confer in good faith with a view toward resolving
such matter and, if it is appropriate, shall cause the Directors to take such
action as is necessary to resolve such matter in the manner agreed by the
Parties. The failure to resolve an issue under this Section by referral to
senior management of the Parties shall specifically not create any right to
utilize the arbitration procedures in Section 10.10.

     4.5  JVCO Plans and Budgets.

          (a)  Business Plans and Operating Plans. The Board will cause to be
prepared annually a five year business plan ("Business Plan") which will include
an analysis of all strategic development and marketing plans for JVCO,
including, without limitation, JVCO's network deployment plan, as well as an
operating plan for a two-year period describing the manner in which JVCO will
implement such Business Plan (the "Operating Plan"). OPTEL agrees to submit for
inclusion in the Business Plan a description of its five-year plan, including,
without limitation, projected milestones, for constructing or deploying
Underlying Network Facilities within each of the JVCO Communications Markets.
The initial Business Plan, together with the supporting financial information,
is attached hereto as Schedule 4.5(a), and the Parties recognize that such
financial information is subject to further review and approval by the Board.

          (b)  Budgets and Forecasts.

               (i)    Operating Budget and Capital Budget. The Board will cause
to be prepared an annual operating budget ("Operating Budget") and an annual
capital expenditures budget ("Capital Budget") (collectively, the "Annual
Budgets") for each fiscal year of JVCO, commencing with the fiscal year ending
December 31, 2000, on or before ninety (90) days prior to the commencement of
such fiscal year. The Board will review the Annual Budgets which will not be
effective until unanimously approved by the Board. Should the Board be unable to
agree on the Annual Budgets for any fiscal year, the Annual Budgets for the
preceding fiscal year will remain in effect for a maximum of ninety (90) days at
a level not less than one hundred percent (100%) of each of the Annual Budgets
for the prior fiscal year, during which time the Board will use all reasonable
efforts to agree upon the Annual Budgets for the period in question. The initial
Annual Budgets for the Fiscal Year ending December 31, 2000 will be

                                       18
<PAGE>

prepared no later than forty-five (45) days after the Effective Date and
submitted to the Board for its consideration. The Operating Budget will set
forth in reasonable detail (a) the authorized expenses on a quarterly basis of
each functional area of JVCO, (b) estimated revenue by product and distribution
channel on a quarterly basis, (c) a projected profit and loss statement for the
fiscal year on a quarterly basis, (d) a projected balance sheet as of each
quarter of each fiscal year, (e) a schedule of projected cash flow, including
estimated Party and capital contributions for each quarter of each fiscal year
and (f) any other information any member of the Board may reasonably request.
The Capital Budget will set forth and itemize in reasonable detail amounts to be
committed or expended on a quarterly basis for equipment, leasehold improvements
and other capitalized items and any other items as any member of the Board may
reasonably request.

               (ii)   Quarterly Outlook. The Board will cause to be prepared a
quarterly forecast in such detail and for such periods as the Board may
reasonably request (a "Quarterly Outlook") to be prepared at least thirty (30)
days prior to commencement of the applicable fiscal quarter. The Board will
review the Quarterly Outlooks which will not be effective until unanimously
approved by the Board. All cash required to be contributed by the Parties to
JVCO in the next succeeding calendar quarter will be reflected in the Quarterly
Outlook.

     4.6  Accounting and Internal Controls.

          (a)  JVCO will conduct its business at all times in accordance with
high standards of business ethics and maintain JVCO's accounts in accordance
with generally accepted accounting principles consistently applied and
specifically, will:

               (i)    maintain full and accurate books, records, and accounts
which will, in reasonable detail, accurately and fairly reflect all transactions
of JVCO; and

               (ii)   devise and maintain a system of internal accounting
controls sufficient to provide reasonable assurances that (A) transactions are
executed in accordance with general or specific authorizations, and (B)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and all
tax information returns, and to maintain accountability for assets.

          (b)  JVCO books will be kept on the accrual method of accounting, and
will be closed and balanced at the end of each fiscal year. JVCO's books,
records and accounts shall be audited annually by such independent certified
public accountant as may be selected by the Board from time to time. The Board
will make such tax elections as may be necessary or desirable and will direct
JVCO's tax advisor to file them accordingly. The Board will cause the timely
preparation and filing of all required federal and provincial income tax
returns. Unless otherwise agreed in writing by the Parties, the Board will use
reasonable efforts to submit any tax filing to each Party for review and
approval at least thirty (30) days prior to its due date plus all extensions.
The Board will also provide to each Party all JVCO information necessary to
prepare the Party's tax return. This information will be furnished to the
Parties by the original due date of JVCO's tax return (including all extensions)
unless otherwise agreed to in writing by the Parties.

                                       19
<PAGE>

     4.7  Access to Books and Records. JVCO will permit each Party or its
authorized representative to visit and inspect the properties of JVCO, including
its corporate and financial records, during normal business hours following
reasonable notice and as often as may be reasonably requested.

                                   ARTICLE V

                             CONTRIBUTED RESOURCES
                             ---------------------

5.1  Seconded Employees.
     ------------------

          (a)  The Parties intend that JVCO initially operate with a minimal
number of employees hired by JVCO. In lieu of hiring employees by JVCO , the
Parties shall make certain of their own employees available to JVCO on a
temporary or secondment basis (the "Seconded Employees") in accordance with the
Human Resources Plan attached hereto as Schedule 5.1(a).

          (b)  Each calendar quarter (as soon as practicable but in no event
later than thirty (30) days after the end of such quarter), JVCO will reimburse
each Party that provided Seconded Employees for the actual salary of each of its
Seconded Employees plus all costs related to attendant benefit and overhead
allocations and all other expenses directly incurred by the Party for each
Seconded Employee. Seconded Employees will not be eligible for incentive or
performance bonuses specific to the Party or Affiliate from which they were
seconded after the date of secondment, but will be eligible for a JVCO incentive
or performance bonus of up to forty percent (40%) of his or her base salary.
Notwithstanding the foregoing, the Parties acknowledge that it is their
intention that as JVCO implements the Business Plan, JVCO will hire permanent
employees as is reasonable under the circumstances.

          (c)  All tangible and intangible work product including, without
limitation, inventions (whether or not patentable), works of authorship,
computer programs, trade secrets, proprietary information, algorithms, patents,
copyrights, and other technology, information, and intellectual property of
Seconded Employees in the course of their services to JVCO will be owned solely
by JVCO and will be deemed to be Confidential Information of JVCO. Each Party
providing Seconded Employees (i) will make any assignments necessary to
accomplish the foregoing and (ii) represents that it has appropriate agreements
with its Seconded Employees to ensure that it is entitled to make such
assignments.

          (d)  JVCO, or its successor, shall have the right to offer permanent
employment to all Seconded Employees with the prior written consent of the Party
which employs such Seconded Employee.

          (e)  At such time as an employment opportunity arises within JVCO,
each of the Parties will be provided with a written description of the vacant
position. The job description will at a minimum identify the responsibilities of
the position as well as any required skills and qualifications. A Party will
have two (2) weeks from receipt of each job description to provide the President
with a list of all interested employees interested in the subject position.
Nothing in this Section 5.1(e) will preclude JVCO from conducting a search for
candidates external to the Parties subsequent to giving the Parties notice of
the vacant position.

                                       20
<PAGE>

          (f)  A Party will provide JVCO with written notice of its intent to
remove a Seconded Employee from JVCO ninety (90) days prior to the date of such
removal and will not remove such Seconded Employee until the expiration of such
notice without the consent of the other Parties.

     5.2  Outsourced Services. Certain functions of the JVCO Business will be
outsourced by JVCO for performance by the Parties or their Affiliates as
follows:

          (a)  RHYTHMS will provide to JVCO at its Direct Cost, any and all of
the following functions as outsourced services (collectively, the "Rhythms
Outsourced Services"):

               (i)    marketing functions related to JVCO's offering of Data
Products and Data Services, including, without limitation, product development,
product management, vendor relations, direct sales of U.S. ISPs/carriers by
RHYTHMS' U.S. Affiliates, indirect sales of U.S. ISPs/carriers, channel support,
market communications, and brand advertising;

               (ii)   operational functions related to JVCO's provision and
maintenance of Data Products and Data Services, including, without limitation,
ordering, planning/design of capacity management, providing customer support
services, vendor relations relating to network equipment, and technical support;

               (iii)  logistical functions related to JVCO's procurement of
Customer Premises Equipment and Data Network Equipment to be used in its
provision of Data Products and Data Services including supply, installation and
maintenance; and

               (iv)   Data Products and Services Support Center.

          (b)  OPTEL will provide to JVCO, at its Direct Cost, any and all of
the following functions as outsourced services (collectively, the "Optel
Outsourced Services"):

               (i)    Network Operations Support Center for Underlying Network
Facilities (specifically, the unbundled local loops);

               (ii)   Underlying Network Facilities planning, engineering,
installation and maintenance (specifically, the ordering of unbundled local
loops, collocation space, and DS-3 connectivity);

               (iii)  power, space and communications for OPTEL-owned Data
Network Equipment to be leased to JVCO and located in ILEC central offices for
each of the JVCO Communications Markets; and

               (iv)   where available, office space and attendant support for
all individuals who will be located in each of the particular JVCO
Communications Markets for the purposes of staffing JVCO's business activities
which will be charged at direct cost.

          (c)  Within sixty (60) days from the Effective Date, the Board will
determine which Parties will perform the necessary administrative functions
related to JVCO's marketing, offering and maintenance of Data Products and Data
Services, including, without limitation,

                                       21
<PAGE>

invoicing, collections, cash management, payroll, accounting and taxes. Each of
the Parties will submit to the Board:

               (i)    within ten (10) Business Days of the Effective Date,
written notice informing the Board whether or not the Party is interested in
performing such functions; and

               (ii)   subject to a Party having informed the Board of its
interests by complying with Section 5.2(d) below within thirty (30) days of the
Effective Date, an Outsourcing Proposal for such administrative functions as
well as such other information as the Board may reasonably request to assist in
making this decision.

In its review of the foregoing information, the Board will take into
consideration those factors described in Section 5.2(e) below. Each Party agrees
to reasonably cooperate with the Board to achieve the purposes of this Section
5.2(c).

          (d)  Each Party will submit annually, for inclusion in the Annual
Budgets, a proposal detailing the functions that it will perform on behalf of
JVCO during the ensuing year as well as the projected costs to be charged to
JVCO for such functions (each proposal, an "Outsourcing Proposal"). Further, in
the event JVCO requests a change in the scope of work pursuant to the
Outsourcing Proposal, the affected Party will submit a proposal of the projected
costs, if any, associated with such change ("Change Order Proposal") for
appropriate review and approval by JVCO. To the extent that the actual costs
charged by a Party to JVCO exceed twenty percent (20%) of the estimated cost
originally contained in such Party's Outsourcing Proposal and/or Change Order
Proposal, the Board will decide by Unanimous Decision whether such cost overrun
will be paid by JVCO.

          (e)  The Board may determine by a Unanimous Decision that certain
functions of the JVCO Business other than those described in either Section
5.2(a) or Section 5.2(b) may be outsourced to Third Parties. In making a
determination regarding the appropriate Third Party vendor to provide a function
to be outsourced, the Board may entertain an offer by one or more of the Parties
(or their Affiliates) to provide such functions; provided, however, the Board
may solicit a Third Party vendor to provide any such services pursuant to a
competitive bid process following the following guidelines:

               (i)    Any Party (or any of its Affiliates) will be afforded
ample opportunity to submit a bid;

               (ii)   If a Party (or any of its Affiliates) submits a bid that
is substantially competitive with the best bid the Board receives from a Third
Party, then, in making its selection, the Board will prefer the bid of such
Party or Affiliates to that of any Third Party vendor. Whether a bid of a Party
or Affiliate is substantially competitive will be decided by a Unanimous
Decision of the Board. In making this decision, the Board will take into
consideration the following factors (which are not listed in order of
importance):

                      (A)  the nature and experience of the bidder in providing
the service in question or in providing like services to the service in
question;

                                       22
<PAGE>

                      (B)  the specifications of the service offered by the
bidder (including but not limited to any special terms, the specified technical
support, the time of performance and the level of resources to be dedicated to
the service);

                      (C)  the response time and contingency facilities and
arrangements offered by the bidder to address routine and extraordinary
problems;

                      (D)  any cost savings to JVCO as a result of the
particular specifications offered by the bidder in question; and

                      (E)  the price for the service, provided, however, that a
bid which is no more than 5% higher in price will be deemed substantially
competitive if all other relevant factors are deemed equal;

               (iii)  In the event two or more Parties and/or Affiliates submit
bids that are substantially competitive, the Board will use the same factors in
Section 5.2(e)(ii) above to determine by Unanimous Decision which of these bids
is more substantially competitive than the other(s) and, further, will award the
bid to such Party or Affiliate having the most substantially competitive bid;
and

               (iv)   In the event that a Party's (or any of its Affiliates')
bid is not substantially competitive with the best bid the Board receives from a
Third Party, such Party or Affiliate will be entitled to modify its bid to make
it substantially competitive with the best bid submitted by a Third Party
vendor.

     5.3  Optel Leased Assets.

          (a)  The Parties acknowledge that, due to the initial fifty percent
(50%) ownership of JVCO by a non-Canadian entity, the Telecommunications Act of
Canada will not permit JVCO to qualify as a Canadian Carrier or to own, lease or
operate certain telecommunications assets ("Canadian Carrier Telecommunications
Assets"). OPTEL shall provide JVCO with long-term lease arrangements, providing
access to and use of any and all Canadian Carrier Telecommunications Assets
necessary for the conduct of JVCO Business. OPTEL shall propose, for approval by
the Board, lease arrangements, on commercially reasonable terms, for Canadian
Carrier Telecommunications Assets that will be owned and operated by OPTEL and
purchased expressly for the use of JVCO as set forth on Schedule 5.3(a) (the
"Optel Leased Assets"). Such lease arrangements shall provide terms describing
the assets provided by OPTEL, the services provided by OPTEL to operate the
assets, the lease payment terms from JVCO to OPTEL, and any financing guarantee
obligations of JVCO or the Parties as a condition of any Third Party financing
required for OPTEL to purchase or lease the Optel Leased Assets. RHYTHMS hereby
acknowledges and agrees that RHYTHMS will guarantee one half of any obligation
that JVCO has to OPTEL with respect to the financing of any Optel Leased Assets.

          (b)  For any telecommunications equipment or property provided by
RHYTHMS to OPTEL or JVCO, RHYTHMS agrees to provide such telecommunication
equipment or property at Direct Cost.

                                       23
<PAGE>

          (c)  In the event that the Telecommunications Act of Canada is amended
or the percentage ownership of JVCO changes to permit JVCO to own Canadian
Carrier Telecommunications Assets, JVCO shall have the option to purchase the
Optel Leased Assets that OPTEL had previously provided to JVCO pursuant to
Section 5.3(a) above. JVCO shall have the right to (i) purchase the Optel Leased
Assets at book value, and/or (ii) in the case of assets subject to lease
agreements entered into by OPTEL on behalf of JVCO, assume the lease obligations
for the Optel Leased Assets at Direct Cost.

          (d)  Within one hundred twenty (120) days of becoming eligible to own
Canadian Carrier Telecommunications Assets, JVCO will notify OPTEL of its
intention to purchase the Optel Leased Assets. Once JVCO notifies OPTEL of such
intention, JVCO and OPTEL shall have one hundred twenty (120) days to complete
the purchase of Optel Leased Assets by JVCO.

     5.4  Trademark Licenses.

          (a)  The Data Products and Data Services will be offered by JVCO using
the "Rhythms" service mark.

          (b)  RHYTHMS shall grant to JVCO a non-exclusive license for the use
of RHYTHMS trade/service marks and trade names in the JVCO Business under the
terms of a license agreement in substantially the form attached hereto as
Schedule D.

     5.5  Technology Licenses. The Parties shall negotiate in good faith and
enter into technology licensing agreements between (a) RHYTHMS and JVCO, and (b)
OPTEL and JVCO in substantially the form attached hereto as Schedule E.

     5.6  Non-Competition; Other Businesses.

          (a)  JVCO Customers. Except as otherwise provided in this Agreement,
the Parties intend that JVCO will have the exclusive right to market and provide
the Data Products and Data Services to JVCO Customers within the JVCO
Communications Markets. Except as otherwise provided in this Agreement, the
Parties and their Affiliates will not engage in or benefit from, directly or
indirectly, the marketing and providing of any Data Products or Data Services,
as identified in Schedule 1.25, to JVCO Customers in any JVCO Communications
Markets throughout the term of this Agreement. Unless the Parties mutually agree
in writing to the contrary or except as provided in this Agreement: (i) all Data
Products and Data Services will be provided to JVCO Customers in JVCO
Communications Markets as products and services of JVCO; (ii) no Party will
engage in any solicitation of JVCO Customers for Data Products or Data Services;
and (iii) JVCO will not market directly to non-JVCO Customers.

          (b)  Non-JVCO Customers. The Parties intend that JVCO will be the
supplier of choice for RHYTHMS and OPTEL for marketing and providing the Data
Products and Data Services (except in the case of OPTEL, Voice Services) to all
other customers within the JVCO Communications Markets that are not JVCO
Customers. JVCO shall have the right of first refusal to supply Data Products
and Data Services to RHYTHMS or OPTEL for such non-JVCO Customers.

                                       24
<PAGE>

               (i)    Proposed Non-JVCO Customers. The Party planning to provide
Data Products or Data Services to non-JVCO customers within the JVCO
Communications Markets shall send written notification to the President of JVCO
specifying the customer and the customer's requirements for Data Products and/or
Data Services (the "Customer Requirement Notice"). Within three (3) Business
Days of receipt of a Customer Requirement Notice, the President shall notify the
Party submitting such Customer Requirement Notice of the decision of JVCO to
elect to either accept or decline the opportunity of providing Data Products
and/or Data Services under the terms of the Customer Requirement Notice. If JVCO
elects to decline such opportunity, the Party may submit the Customer
Requirement Notice (under the same terms submitted to JVCO) to an alternate
supplier or suppliers of data products and services, with a copy provided to the
President of JVCO.

               (ii)   Existing Non-JVCO Customers. If for performance or market
coverage reasons, a Party determines that JVCO is not adequately addressing the
needs of such Party's non-JVCO Customer, such Party shall send written
notification to the President of JVCO specifying the customer and the
modifications in products or services necessary to satisfy such non-JVCO
customer's requirements for Data Products and/or Data Services (the "Customer
Requirement Modification Notice"). Within three (3) Business Days of receipt of
a Customer Requirement Modification Notice, the President shall notify the Party
submitting such Customer Requirement Modification Notice of the decision of JVCO
to elect to either accept or decline the opportunity to continue providing Data
Products and/or Data Services under the terms of the Customer Requirement
Modification Notice. If JVCO elects to decline such opportunity, the Party may
submit a revised Customer Requirement Notification (under the same terms of the
Customer Requirement Modification Notice submitted to JVCO) to an alternate
supplier or suppliers of data products and services, with a copy provided to the
President of JVCO.

               (iii)  A Party shall be permitted to provide the data products
and services of an alternate supplier to non-JVCO Customers pursuant to
subsections 5.6(b)(i) and 5.6(b)(ii), above, notwithstanding the intention of
the Parties that JVCO be the supplier of choice as provided in Section 5.6(b).

          (c)  Optel Customers. OPTEL intends to use JVCO Data Products and Data
Services (excluding Voice Services) when marketing to (i) Small and Medium
Business Customers, (ii) Pre-Existing Optel Customers, and (iii) Optel Combined
Service Customers (collectively, the "Optel Customer Base"). If for performance
or market coverage reasons, the Parties determine that OPTEL is not adequately
addressing the needs of customers in the Optel Customer Base, JVCO may amend its
Business Plan to provide JVCO Data Products and Data Services directly to
customers in the Optel Customer Base.

          (d)  Joint Marketing to Rhythms Customers. The Parties intend that
JVCO may engage in certain joint marketing efforts with RHYTHMS to target
existing customers of RHYTHMS as set forth on Schedule 1.43 which have
facilities located in each of the JVCO Communications Markets.

          (e)  Voice Services. In the event that JVCO determines to provide
Voice Services to JVCO Customers, the Parties intend that JVCO will contract
with OPTEL to supply the necessary switched services required to provide Voice
Services and that OPTEL will supply

                                       25
<PAGE>

such switched services on a basis that is substantially competitive with other
Third Party providers.

           (f)  Transfer Pricing.  For the two (2) year period following the
                ----------------
effective Date, JVCO shall supply RHYTHMS and OPTEL with Data Products and Data
Services for provision to the respective customers of RHYTHMS and OPTEL in the
JVCO Communications Markets at prices and terms no less favorable than those
prices and terms for similar Data Products and Data Services provided or offered
by JVCO to any other JVCO Customer (based on similar scope, volume and customer
requirements) ("Transfer Pricing"). Upon the second anniversary of the Effective
Date and each year thereafter, the Parties agree to review the current Transfer
Pricing, with the intention of implementing a pricing system to RHYTHMS and
OPTEL based on incremental cost. Incremental cost includes variable or direct
costs (included in the Business Plan as variable cost of sales), plus the
average semi-variable cost per line item (including the fixed cost of sales and
operating costs) calculated over the subsequent twelve (12)-month period across
all Canadian communications markets, in accordance with the approved Annual
Budget. If the calculated amount of incremental cost exceeds the current
Transfer Pricing, incremental cost-based pricing to RHYTHMS and/or OPTEL will
not be implemented for that twelve (12)-month period.

           (g)  Non-Competition Following Withdrawal from JVCO. Except as
                ----------------------------------------------
provided in Sections 5.6(b) and 5.6(c), no Party will represent, establish or
maintain an independent or separate visibility or presence in the JVCO
Communications Markets with regard to any of the Data Products or Data Services.
The Parties further agree that upon a Party's withdrawal from or transfer of its
entire interest in JVCO, for any reason (except for an Event of Withdrawal),
such Party and its Affiliates will not engage in or benefit from, directly or
indirectly, the marketing and providing of any Data Products or Data Services to
JVCO Customers in any JVCO Communications Market for a period of one (1) year
from the effective date of such withdrawal or transfer; provided, however, that
                                                        --------  -------
this non-compete obligation will be limited to those (A) Data Products and Data
Services being provided by JVCO to JVCO Customers, (B) within the JVCO
Communications Markets, and (C) in the case of withdrawal by RHYTHMS, to
customers that are in the Optel Customer Base, as of effective date of such
withdrawal or transfer. Nothing in this Section 5.6(g) will be deemed to
prohibit either Party from engaging in or benefiting from, directly or
indirectly, the marketing and providing of: (i) other products or services that
are not Data Products and Data Services; (ii) Data Products and Data Services to
customers that are not JVCO Customers; or (iii) Data Products and Data Services
outside of the geographic areas defined as the JVCO Communications Markets in
this Agreement. In the event that OPTEL withdraws from JVCO for any reason
whatsoever, JVCO shall not directly engage in or benefit from the marketing and
providing of any Data Products or Data Services to the Optel Customer Base for a
period of one (1) year from the effective date of OPTEL's withdrawal

           (h)  New Business Proposals. Each Party shall bring to the Board for
                ----------------------
its review business cases for proposed new Data Products and/or Data Services
(except in the case of OPTEL, Voice Services) ("New Business Opportunity") to be
provided by JVCO either through internal development or acquisition. In the
event the Board reviews a New Business Opportunity to be offered by JVCO and
fails to approve such New Business Opportunity by Unanimous Decision, the
Parties agree that the Party presenting the New Business Opportunity to the
Board shall be permitted to pursue such New Business Opportunity (except that if
such

                                       26
<PAGE>

New Business Opportunity involves the acquisition of a DSL business, then
neither Party shall be permitted to pursue such New Business Opportunity) while
the other Party will be prohibited from pursuing such New Business Opportunity
in any JVCO Communications Markets for a period of six (6) months from the date
the Board makes such determination. Any and all information provided by a Party
in connection with a New Business Opportunity will be deemed to be Confidential
Information of such Disclosing Party and will be subject to the confidentiality
provisions set forth in Article VI of this Agreement. Notwithstanding the
foregoing, any offering of a New Business Opportunity will be subject to the
following conditions:

        (i) OPTEL and its Affiliates will not in any manner use any of the
trade/service marks or trade names owned by RHYTHMS including, without
limitation, the "Rhythms" brand name, in connection with such offering; and

       (ii) notwithstanding anything to the contrary in this Section 5.6(h),
it is understood that the Parties and their Affiliates are and will be engaged
in other separate activities and businesses in and outside of the JVCO
Communications Markets that may not be directly related to the JVCO Business
(the "Independent Businesses"), and except to the extent otherwise agreed to,
the Parties and their Affiliates will be required to devote only so much time as
each in its sole discretion may deem necessary as shareholders of JVCO.

       (i)  Independent Businesses. Except as otherwise specifically provided in
            ----------------------
this Agreement and the Ancillary Agreements, and without affecting either
Party's or its Affiliates' duties to perform its obligations under this
Agreement and the Ancillary Agreements in the best interest of JVCO, nothing
contained in this Agreement and the Ancillary Agreements will be construed as
limiting the right of any Party or its Affiliates to engage in any Independent
Businesses, including (but not limited to) the businesses in which such Party or
its Affiliates are currently engaged or in which any Party or its Affiliates may
hereinafter engage. The Parties hereby acknowledge and agree that the provision
by OPTEL of (i) voice services, including, without limitation, Voice Services,
to any customer and (ii) Data Products and Data Services to non-JVCO customers
shall constitute an Independent Business of OPTEL. For greater certainty and
notwithstanding the foregoing, the Parties acknowledge and agree that the
marketing and provision by OPTEL of voice services, including, without
limitation, Voice Services, to any customer shall not be limited in any way by
any provision of this Agreement. Any benefits or obligations arising from such
Independent Businesses will inure solely to such Party or their Affiliates and
not JVCO or the other Party or their Affiliates; and neither JVCO nor the other
Party will have any rights by virtue of this Agreement to such Independent
Businesses or the income or profits derived therefrom.

  5.7  Non-Solicitation of Employees. JVCO will not solicit employees of RHYTHMS
       -----------------------------
or OPTEL (and their respective Affiliates), and RHYTHMS and OPTEL (and their
respective Affiliates) will not solicit employees of JVCO or one another without
the prior written consent of the employing party, except for general
solicitation (e.g., newspaper advertisements) not specifically targeted to
employees of the employing party.

  5.8  Transition of Business.
       ----------------------
       Upon a Party's withdrawal from or transfer of its entire interest in JVCO
pursuant to either Section 5.6(g), Section 7.2 or Article IX, the Parties agree
to cooperate to ensure an orderly transition of business between JVCO and the
Parties.

                                       27
<PAGE>

          (a)  During such transition, the withdrawing Party shall be permitted
wholesale access to the services and assets of JVCO on commercially reasonable
terms, including the use of (i) equipment and real property assets for a period
of twelve (12) months, (ii) intellectual property rights (including
trade/service marks and trade names) and assets for a period of six (6) months,
and (iii) Outsourced Services for a period of twelve (12) months.

          (b)  The Party withdrawing from or transferring its entire interest in
JVCO shall be required to transfer or sell to JVCO, at Fair Market Value as
determined by the Independent Appraiser, any JVCO Dedicated Assets that had been
provided to JVCO (excluding trade/service marks and trade names) for conducting
the JVCO Business, and provided that any Optel Leased Assets shall be
transferred in accordance with Section 5.3(c).

          (c)  For a period of one (1) year following the withdrawal, the
withdrawing Party will not solicit employees of JVCO without the written consent
of JVCO.

                                  ARTICLE VI

                            CONFIDENTIAL INFORMATION
                            ------------------------

        6.1  Treatment of Confidential Information.
             -------------------------------------

             (a)  Each of JVCO, the Parties, and the Parties' Affiliates will
hold and maintain in strictest confidence all Confidential Information and
during the period in which the obligations imposed by the Article VI are in
effect, and, except as otherwise provided in Section 6.5, the Receiving Party
will not disclose or otherwise communicate such Confidential Information to
others, or use it for any purpose, except for the sole purposes of this
Agreement.

             (b)  Each member of the Board and all employees of JVCO, seconded
or otherwise, will sign a proprietary information and inventions agreement
substantially in the form of that reflected in Exhibit C to this Agreement.
                                               ---------

             (c)  Except as otherwise provided in Section 6.5, each Receiving
Party will not copy Confidential Information unless specifically authorized in
writing by the Disclosing Party and will not make disclosure of any such
Confidential Information to anyone except its employees and Affiliates to whom
disclosure is necessary for the purposes of this Agreement or the business of
JVCO.

             (d)  Each Party will appropriately notify each of its directors,
officers, employees and Affiliates to whom such disclosure is made that such
disclosure is made in confidence and will be kept in confidence by such Persons.

             (e)  Notwithstanding the foregoing, each Receiving Party will
protect Confidential Information with the same degree of care that it protects
its own sensitive information of a similar nature, but in any event will
exercise reasonable efforts, consistent with the nature of each particular piece
of Confidential Information, to protect it from unauthorized disclosure.

                                       28
<PAGE>

     6.2  Copying Confidential Information. In the event that any copies of
          --------------------------------
Confidential Information that bears a confidential, proprietary, or similar
notice or legend (a "Confidentiality Legend") are made, each such copy will
contain and state the same Confidentiality Legend, if any, which appear on the
original.

     6.3  Time Period. Confidential Information will he deemed a valuable trade
          -----------
secret of a Disclosing Party, and each Receiving Party will hold such
Confidential Information in confidence for the greater of (i) the term of this
Agreement or (ii) a period of three (3) years from the date of receipt of same,
unless otherwise agreed to in writing by the Disclosing Party. Upon expiration
of the applicable time period, all Confidential Information together with any
copies of same, will be returned or certified destroyed by the Receiving Party
to the Disclosing Party. The requirements of use and confidentially set forth
herein will survive after termination and after return of such Confidential
information.

     6.4  Remedies. The Parties acknowledge that the unauthorized disclosure or
          --------
use of any Confidential Information could cause irreparable harm and significant
injury, the extent and consequence of which may be difficult to assess.
Therefore, the Parties agree that if a Party believes its Confidential
Information may have been disclosed contrary to this Article VI, that in
addition to any other remedies in law or equity available to the aggrieved
Party, such Party will be entitled to immediate injunctive relief.

     6.5  Confidential Information of JVCO. Each Party will have the right to
          --------------------------------
use Confidential Information owned by JVCO in connection with its or an
Affiliate's business purposes subject to the condition that each Party will
protect such Confidential Information with the same degree of care that it
protects its own sensitive information of a similar nature, but in any event
will exercise reasonable efforts, consistent with the nature of each particular
piece of Confidential Information received from JVCO, to protect it from
unauthorized disclosure. In no event will the Confidential Information owned by
either a Party or an Affiliate of a Party which is provided either to (i) JVCO
for use in connection with its business; or (ii) the Board in connection with a
review or a business case for a proposed new Data Product and/or Data Service,
be deemed to be Confidential Information of JVCO unless and until otherwise
agreed to in writing by the Disclosing Party.

                                  ARTICLE VII

                          SHARE TRANSFER RESTRICTIONS
                          ---------------------------

     7.1  Transfer Restrictions.
          ---------------------

          (a)  Except as set forth in this Section 7.1, and subject to
compliance with the other terms of this Agreement, no Party shall sell, assign,
or otherwise transfer any Shares owned by it (each action, a "Share Transfer")
without the prior written consent of the other Party. No Party shall create or
permit to exist any security interest, lien, claim, pledge, option, right of
first refusal, agreement, limitation on the voting rights, charge or other
encumbrance of any nature whatsoever (each action, an "Encumbrance") in respect
of the Shares of JVCO without the prior written consent of the other Party.
Except as otherwise provided herein, no Party shall attempt a Share Transfer or
Encumbrance prior to the fifth anniversary of the Effective Date. Any

                                       29
<PAGE>

attempted Share Transfer or Encumbrance in violation of this Section 7.1 will be
deemed null and void. Notwithstanding the foregoing, OPTEL shall have the right
to create a security interest in and to pledge any of its Shares to Nortel
Networks Corporation or its affiliates (collectively, "Nortel") in connection
with a proposed credit facility to be provided by Nortel to OPTEL. In the event
of a default by OPTEL under such a credit facility, beneficial ownership of
OPTEL's Shares shall not transfer to Nortel, unless Nortel agrees in writing to
be bound by the terms and conditions of this Agreement.

          (b)  To the extent allowable under law, a Party may transfer all, but
not less than all, of its Shares in JVCO to an Affiliate provided that such
transferring Party will remain fully responsible for the satisfaction of its
obligations under this Agreement.

          (c)  The certificates evidencing the Shares shall bear a legend
substantially as set forth below :

          THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO, AND MAY BE
          SOLD, ASSIGNED OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH, THE
          PROVISIONS OF A JOINT VENTURE AGREEMENT DATED AS OF JANUARY 1, 2000
          BETWEEN RHYTHMS NETCONNECTIONS INC. AND OPTEL COMMUNICATIONS
          CORPORATION, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE
          OFFICE OF RHYTHMS CANADA IN TORONTO, ONTARIO.  ANY TRANSFER THEREOF IN
          CONTRAVENTION OF SUCH PROVISIONS SHALL BE VOID AND OF NO EFFECT.

          (d)  Right of First Offer.
               --------------------
               (i)  General.  If, after the fifth anniversary of the Effective
                    -------
Date, a Party ("Selling Party") proposes a Share Transfer by such Party to a
Third Party (a "Proposed Sale"), the Selling Party must first offer such Shares
to JVCO (the "Right of First Offer") at the same price and on the same other
terms and conditions as the Proposed Sale (except that JVCO exercising its Right
of First Offer shall be entitled to pay cash for the purchase price) in
accordance with this Section 7.1(d):

                    (A)  the consideration for the Proposed Sale shall consist
solely of cash, cash equivalents or marketable securities;

                    (B)  the Selling Party shall deliver an Offering Notice to
JVCO and each of the Parties not less than thirty (30) days prior to each
Proposed Sale, setting forth: (1) the name of the Selling Party and the number
of Shares proposed to be sold; (2) the name and address of the proposed
purchaser; and (3) the proposed per share purchase price (which must be payable
in cash, cash equivalents or marketable securities) and the terms and conditions
of payment offered by such proposed purchaser;

                    (C)  JVCO shall give a Purchase Notice or a Refusal Notice
to the Selling Party and each of the Parties within ten (10) Business Days of
receipt of the Offering Notice; and

                                       30
<PAGE>

        (D)  if JVCO declines to purchase all of the Shares in the Proposed
Sale, the Parties shall have a Right of First Offer on such Shares. The Parties
shall give a Purchase Notice or a Refusal Notice to all other Parties within ten
(10) Business Days after receipt of JVCO's Refusal Notice. A Party electing to
purchase any Shares in the Proposed Sale shall be entitled to purchase the
amount of Shares so elected unless the amount elected by all Parties would
exceed the amount of Shares to be sold, in which case it shall be entitled to
purchase the lower of the amount of Shares so elected and a pro rata portion of
the Shares to be sold based on the amount of Shares beneficially owned by it and
its Affiliates and the amount of Shares beneficially owned by each other elected
Party and their Affiliates. Any failure by a party hereto to give a Purchase
Notice or a Refusal Notice in a timely manner is contemplated herein shall have
the same effect as the giving of a Refusal Notice by such party.

   (ii) The closing of the purchase of the Shares pursuant to the Right of First
Offer shall take place at the principal executive offices of JVCO on the
thirtieth day after delivery of the Purchase Notice (or upon such other date as
may be mutually agreed) (the "Final Transaction"). At such closing, the Selling
Party will deliver certificates representing the Shares so purchased duly
endorsed against payment therefor.

  (iii) In the event that all of the Shares are not sold pursuant to the Right
of First Offer set forth in Section 7.1(d)(i), the Selling Party may sell, at
any time within ninety (90) days from the date of the last Refusal Notice, the
Shares in the Proposed Sale in cash, cash equivalents or marketable securities
at a price per share equal to or greater than and on other terms and conditions
no more favorable to the purchaser than those of the Proposed Sale. As a
condition of the sale of such Shares, the Selling party must first obtain a
written agreement by such purchaser to adhere to this Agreement and/or any other
terms and conditions that are mutually agreed upon by the existing members of
the Board.

  (iv)  The obligations set forth in this Section 7.1(d) shall not apply to
Share Transfers (A) pursuant or subsequent to an initial public offering, or (B)
that constitute permitted Share Transfers to Affiliates pursuant to Section
7.1(b).

  (v)   The Selling Party will continue to provide services of the type and
pursuant to the same terms and conditions which it is obligated to provide
pursuant to Section 5.2 of this Agreement until the date of the Final
Transaction which results in the Selling Party's sale of all of its Shares.
Further, notwithstanding consummation of the Final Transaction, at the option of
JVCO, as evidenced by written notice provided within sixty (60) days from the
date of the Offering Notice which contemplates the Final Transaction, the
Selling Party will continue to provide the above described services to JVCO for
a term of not less than two (2) years from the date of the Final Transaction
(the "Transition Term"); provided, however, that in the event JVCO has
commitments to JVCO Customers greater than two (2) years, with respect
specifically to each of said JVCO Customers, the Transition Term will be
commensurate with the term of a particular JVCO Customer's contract with JVCO.
Further, the Parties agree to negotiate the extending of the Transaction Term
for specific situations other than those described herein on a case-by-case
basis.

  (vi)  Notwithstanding the five (5) year period from the Effective Date during
which a Selling Party is restricted from entertaining a Proposed Sale (the
"Restricted

                                       31
<PAGE>

Transfer Period"), a Selling Party may entertain a Proposed Sale to sell a
portion of the Selling Party's Shares for the purpose of financing JVCO's
business activities and the Right of First Offer described in this Section
7.1(d) shall apply. In addition to the information described above, the Offering
Notice shall also contain a certification from an officer of the Selling Party
that the purpose for such Proposed Sale is to seek additional parties for
financing assistance. No Selling Party may seek to sell more than twenty percent
(20%) of its Percentage Shares, in the aggregate, during the Restricted Transfer
Period.

        (vii)  The Right of First Offer set forth in this Section 7.1(d) may not
be assigned or transferred, except that such rights are assignable by each Party
to (A) any Affiliate of such Party, or (B) a party or parties reasonably
acceptable to each of the other Parties.

   7.2  Buy-Sell Option.
        ---------------
        (a)  Either Party shall have the right to exercise an option to sell all
of its Shares to the other Party or to buy all of the Shares of the other Party
(the "Buy-Sell Option") upon the earlier of:

             (i)  the fifth anniversary of the Effective Date; or

             (ii) the date when the Telecommunications Act of Canada is amended
to permit RHYTHMS to qualify as a Canadian Carrier or to own, lease or operate
Canadian Carrier Telecommunications Assets, but not earlier than the second
anniversary of the Effective Date.

        (b)  The Party exercising the Buy-Sell Option (the "Exercising Party")
shall provide the other Party (the "Non-Exercising Party") with a notice (the
"Buy-Sell Notice") (i) informing the other Party of the intent to exercise the
Buy-Sell Option, and (ii) designating the price per share of Class A Voting
Shares at which the Exercising Party is offering to either (A) sell all of the
Exercising Party's shares of Class A Voting Shares to the Non-Exercising Party
or (B) purchase all of the Non-Exercising Party's shares of Class A Voting
Shares.

        (c)  The Non-Exercising Party shall have thirty (30) days from receipt
of the Buy-Sell Notice to elect whether to (i) sell all of such Non-Exercising
Party's shares of Class A Voting Shares to the Exercising Party or (ii) purchase
all of the Exercising Party's shares of Class A Voting Shares. Within thirty
(30) days of the Non-Exercising Party's election, the Parties shall conclude the
transaction to transfer all of the shares of Class A Voting Shares to the Party
designated through the election of the Buy-Sell Option.

        (d)  In the event that ownership by RHYTHMS of one hundred percent
(100%) of JVCO Class A Voting Shares precludes JVCO from qualifying under the
Telecommunications Act of Canada as a Canadian Carrier or to own or operate
Canadian Carrier Telecommunications Assets and a Party exercises its rights
under Section 7.2(a)(i), RHYTHMS shall be permitted to transfer any shares
purchased from OPTEL to a Third Party or Affiliate of RHYTHMS as permitted under
Canadian law.

   7.3  Additional Parties. Additional parties may be added to this Agreement
        ------------------
but only upon the Unanimous Decision of the Board. Prior to being admitted,
additional partners will

                                       32
<PAGE>

agree in writing to adhere to this Agreement and/or any other terms and
conditions that are mutually agreed upon by the existing members of the Board.

         7.4  Event of Withdrawal.
              -------------------

              (a)  When an Event of Withdrawal occurs, the affected Party or
legal representative thereof or successor in interest thereto (the "Successor")
will promptly give notice to JVCO. If such notice is not given within ten (10)
Business Days after the Event of Withdrawal occurs, any Party having a knowledge
of the occurrence may give notice thereof. Unless otherwise provided in the
definition of Event of Withdrawal above, the effective date of withdrawal shall
be the date such notice is given.

              (b)  When an Event of Withdrawal occurs, the affected Party
("Former Party") shall cease to be a shareholder of JVCO as of the effective
date of withdrawal. Except as otherwise provided by this Agreement, a Successor
shall have no right to become a substitute shareholder of JVCO. Unless and until
a Former Party's interest in JVCO is purchased pursuant to this Article, the
Former Party or Successor shall be entitled to receive the share of JVCO profits
and distributions to which the Former Party or Successor would be entitled to
receive hereunder had no Event of Withdrawal occurred. Except as otherwise
provided herein, neither a Former Party nor a Successor shall have any liability
with respect to obligations incurred by JVCO after the effective date of
withdrawal, or any right to participate in the management of JVCO or the
decisions of the Parties; provided, however, that the Parties may not, without
the express written consent of the Former Party or Successor, take any action
which would change the Former Party's interest in JVCO profits, losses or
distributions, or the time at which distributions are payable if such action
could have required the Former Party's consent if taken prior to the effective
date of withdrawal.

              (c)  When an Event of Withdrawal occurs, if all Parties elect to
continue the business of JVCO, and JVCO gives notice of such election to the
Former Party or Successor within ninety (90) days after the effective date of
withdrawal, then the business of JVCO shall be continued by the Parties. If the
Parties elect to continue the business of JVCO, JVCO or the Parties shall have
the option to purchase the Former Party's entire JVCO interest as of the
effective date of withdrawal, in the manner and on the terms provided in Section
7.1.

                                 ARTICLE VIII

                         REPRESENTATIONS AND WARRANTIES
                         ------------------------------

         8.1  Mutual Representations and Warranties. Each Party hereby
              -------------------------------------
represents and warrants to the other Party as of the Effective Date as follows:

              (a)  Corporate Existence and Power. Such Party (i) is a
                   -----------------------------
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction in which it is incorporated, and (ii) has full corporate
power and authority and the legal right to own and operate its property and
assets and to carry on its business as it is now being conducted and as is
contemplated in this Agreement.

                                       33
<PAGE>

          (b)  Authorization.  Such Party (i) has the corporate power and
               -------------
authority and the legal right to enter into the Agreement and perform its
obligations hereunder, and (ii) has taken all necessary corporate action on its
part required to authorize the execution and delivery of the Agreement and the
performance of its obligations hereunder. The Agreement has been duly executed
and delivered on behalf of such Party, and constitutes a legal, valid, binding
obligation of such Party and is enforceable against it in accordance with its
terms subject to the effects of bankruptcy, insolvency or other laws of general
application affecting the enforcement of creditor rights and judicial principles
affecting the availability of specific performance and general principles of
equity whether enforceability is considered a proceeding at law or equity.

          (c)  Absence of Litigation. Such Party is not aware of any pending or
               ---------------------
threatened litigation (and has not received any communication) which alleges
that such Party's activities related to this Agreement have violated, or that by
conducting the activities as contemplated herein such Party would violate, any
of the intellectual property rights of any other person.

          (d)  Consents.  All necessary consents, approvals and authorizations
               --------
of all governmental authorities and other persons or entities required to be
obtained by such Party in connection with the Agreement have been obtained,
except for the final consent required from the senior note holders of OPTEL.

          (e)  No Conflict.  The execution and delivery of the Agreement and the
               -----------
performance of such Party's obligations hereunder (i) do not conflict with or
violate any requirement of applicable law or regulation or any provision of the
articles of incorporation or bylaws of such Party in any material way, and (ii)
do not conflict with, violate or breach or constitute a default or require any
consent under, any contractual obligation or court or administrative order by
which such Party is bound.

          (f)  Intellectual Property.  Such Party represents and warrants to the
               ---------------------
other that, to the best of its knowledge, it has sufficient legal and/or
beneficial title and ownership under its intellectual property rights necessary
for it to fulfill its obligations under this Agreement and that it is not aware
of any communication alleging that it has violated or by conducting its business
as contemplated by this Agreement would violate any of the intellectual property
rights of any other person. As used herein, "intellectual property rights" means
all patent rights, copyrights, trademarks, trade secret rights, and know-how
rights necessary or useful to make, have made, use, offer for sale, sell, have
sold, import and export the Data Products and Data Services.

     8.2  Additional Representations, Warranties and Covenants. OPTEL hereby
          ----------------------------------------------------
represents, warrants and covenants to RHYTHMS as follows:

          (a)  Authorization as Canadian Carrier. OPTEL is a duly authorized
Canadian carrier and is eligible to operate as a telecommunications common
carrier in Canada, as those terms are defined under and in accordance with the
Telecommunications Act and the Canadian Telecommunications Common Carrier
Ownership and Control Regulations. OPTEL has met all of the requirements imposed
by the Canadian Radio-television and Telecommunications Commission (the "CRTC")
and any other regulatory authority to operate as a competitive local

                                       34
<PAGE>

exchange carrier ("CLEC") and has been recognized by the CRTC as a CLEC eligible
to operate in Canada in certain defined markets.

        (b)  Permits.  OPTEL (i) owns, possesses, holds or has obtained all
             -------
material Canadian federal or provincial governmental and third party licenses,
permits, certificates, certifications, consents, orders, approvals and other
authorizations, including, without limitation, all waivers, licenses and
authorizations under the Telecommunications Act and decisions, orders and rules
established thereunder by the CRTC necessary to operate the business of OPTEL
and necessary to own and operate the Underlying Network Facilities and all
property associated therewith (the "Licenses"), other than those the absence of
which could not reasonably be expected to, individually or in the aggregate,
have a material adverse effect on OPTEL, and (ii) have not received any notice
of proceedings relating to the revocation or the modification of any of the
Licenses that, if determined adversely to OPTEL, could reasonably be expected
to, individually or in the aggregate, have a material adverse effect on OPTEL
taken as a whole.

       (c)  Telecommunications Assets.  OPTEL owns, possesses, or leases and
            -------------------------
maintains sufficient and appropriate telecommunications facilities and assets in
order to perform its obligations under the Agreement, and that those assets and
facilities are free of encumbrances other than any encumbrances disclosed to
RHYTHMS prior to the execution of the Agreement.

                                  ARTICLE IX

                                  TERMINATION
                                  -----------

  9.1  General. This Agreement shall terminate on the earlier to occur of:
       -------

      (a)  written agreement of the Parties setting forth the terms of such
termination;

      (b)  the transfer of all of the Shares of JVCO held by the Parties to one
Party; or

      (c)  the twentieth anniversary of the Effective Date.

  9.2  Termination by a Party for Cause. If any material breach of this
       --------------------------------
Agreement shall occur and to the extent that such material breach is capable of
being cured, but is (A) not cured within one hundred twenty (120) days or (B)
reasonable steps to cure are not taken within twenty (20) Business Days after
the date that the Party committing such material breach (the "Defaulting Party")
receives written notice thereof, the non-Defaulting Party may deliver a written
notice of termination (the "Termination Notice") to the Defaulting Party at any
time, which Termination Notice shall be effective upon such delivery thereof.
Upon the effective date of such Termination Notice, the Parties agree as
follows:

       (a) the Defaulting Party shall be deemed to have submitted the
resignation of each of the Directors nominated by it (and the Defaulting Party
shall cause each of such Directors to immediately so resign);

                                       35
<PAGE>

      (b)  the Defaulting Party shall, upon request by the non-Defaulting Party,
assign all of its right, title and interest in the Shares of JVCO then held by
it to the non-Defaulting Party in exchange for payment of the Fair Market Value
of such transferred Shares;

      (c)  JVCO shall have the right, but not the obligation, upon written
notice to the Defaulting Party, to terminate the Defaulting Party's rights to
use or otherwise practice any intellectual property or technology developed
after the date of the other Party's receipt of the Termination Notice;

      (d)  the non-Defaulting Party and JVCO shall be entitled to avail
themselves cumulatively of any and all remedies available at law or in equity.

 9.3  Liquidation; Survival.
      ---------------------

      (a)  Liquidation.  Upon any termination and liquidation, to the extent
           -----------
permitted by applicable law, the assets of JVCO shall be sold and distributed in
accordance with the Articles of Incorporation and applicable law.

      (b)  Survival.  The Parties' rights and obligations which, by their
           --------
nature, would continue beyond the termination, cancellation, or expiration of
this Agreement, including but not necessarily limited to Article VI and Sections
5.6(g), 5.8, 7.2, 10.1, 10.10 and 10.14 shall survive any termination of this
Agreement.

                                   ARTICLE X

                            MISCELLANEOUS PROVISIONS
                            ------------------------

 10.1 Publicity. No Party (nor any Affiliate of any Party) will originate any
      ---------
publicity, news release, or other public announcement, relating to JVCO, this
Agreement or any other agreement between JVCO and either RHYTHMS or OPTEL or
their respective Affiliates, or the existence of an arrangement between the
Parties, without the prior written approval of the other Party, which approval
will not, be unreasonably withheld or delayed, except as otherwise required by
law.

 10.2 Assignment. Neither this Agreement nor any of the rights or obligations
      ----------
under this Agreement may be assigned by any Party without the prior written
consent of the other Party, except to a permitted transferee under Article VII
of this Agreement.

 10.3 Governing Law. This Agreement will be governed by and interpreted in
      -------------
accordance with the internal laws of the Province of Ontario and the federal
laws of Canada applicable therein, without regard to conflicts-of-law
provisions.

 10.4 Force Majeure. In the event that any Party is prevented from performing or
      -------------
is unable to perform any of its obligations under this Agreement due to any act
of God; fire; casualty; flood; war; strike; lockout; failure of public
utilities; injunction or any act, exercise, assertion or requirement of
governmental authority; epidemic; destruction or production facilities; riots,
insurrection; inability to procure or use materials, labor, equipment,
transportation or energy; or any other cause beyond the reasonable control of
the Party invoking

                                      36
<PAGE>

this Section 10.4 if such Party will have used its reasonable efforts to avoid
such occurrence and minimize its duration, such Party will give notice to the
other Party in writing promptly, and the affected Party's performance will be
excused and the time for performance will be extended for the period of delay or
inability to perform due to such occurrence.

     10.5  Waiver. The waiver by either Party of a breach or a default of any
           ------
provision of this Agreement by the other Party will not be construed as a waiver
of any succeeding breach of the same or any other provision, nor will any delay
or omission on the part of either Party to exercise or avail itself of any
right, power or privilege that it has or may have operate as a waiver of any
right, power or privilege by such Party.

     10.6  Notice, Consents, Etc. Except as otherwise provided in this
           ---------------------
Agreement, all notices, consents, agreements, confirmations, designations,
indications, requests, authorizations, and the like to be given under this
Agreement will be sufficient if in writing and sent via first class mail, or
delivered in person or by express courier or by facsimile with confirmed receipt
(with a copy sent via first class mail), addressed as follows:

     If to RHYTHMS:  Rhythms NetConnections Inc.
                     6933 South Revere Parkway
                     Englewood, Colorado  80112
                     Attn:  Jeffrey Blumenfeld
                     Fax No.:  (303) 476-5700

    With a copy to:  Rhythms NetConnections Inc.
                     6933 South Revere Parkway
                     Englewood, Colorado  80112
                     Attn:  Chief Financial Officer
                     Fax No.:  (303) 476-5700

     If to OPTEL:    Optel Communications Corporation
                     111 Peter Street
                     Toronto, Ontario M5V 2H1
                     Attn:  President
                     Fax No.:  (416) 907-2727

  With a copy to:    Optel Communications Corporation
                     111 Peter Street
                     Toronto, Ontario M5V 2H1
                     Attn:  Chief Financial Officer
                     Fax No.:  (416) 907-2733

      If to JVCO:    Rhythm Canada Inc.
                     111 Peter Street
                     Toronto, Ontario  M5V 2H1
                     Attn:  President
                     Fax No.: _____

                                       37
<PAGE>

    10.7  Entire Agreement. This Agreement and the Ancillary Agreements contain
          ----------------
the full understanding of the Parties with respect to the subject matter of this
Agreement and supersede all prior understandings and writings relating to such
subject matter; provided, however, that, this Agreement will not supersede or
                --------  -------
modify in any respect any of the Ancillary Agreements identified in Schedule 1.3
                                                                    ------------
to this Agreement. No waiver, alteration or modification of any of the
provisions of this Agreement will be binding unless in writing and signed by all
the Parties.

    10.8  Headings. The headings contained in this Agreement are for convenience
          --------
of reference only and will not be considered in construing this Agreement.

    10.9  Severability. In the event that any provision of this Agreement is
          ------------
held by a court of competent jurisdiction to be unenforceable because it is
invalid or in conflict with any law of any relevant jurisdiction, the validity
of the remaining provisions will not be affected, and the rights and obligations
of the Parties will he construed and enforced as if the Agreement did not
contain the particular provision held to be unenforceable.

   10.10  Dispute Resolution.
          ------------------

          (a)  The Parties recognize that bona fide disputes as to business
matters may arise in the conduct of the JVCO Business, which disputes may impair
their ability of JVCO to effectively carry on its business.

          (b)  Each Party will act reasonably and in good faith to avoid
Business Deadlock. In the event of the occurrence of a Business Deadlock, either
Party may, by written notice to the other Party, have the Business Deadlock
referred to a panel consisting of one senior executive from RHYTHMS and one
senior executive from OPTEL for resolution by negotiation within thirty (30)
days after such written notice is received. All such negotiations will be
conducted reasonably and in a good faith manner in an effort to reach a mutually
satisfactory, unanimous resolution. Such resolution, if any, of the Business
Deadlock will be binding on the Parties, and the Parties will instruct the
members of the Board designated by them to approve such resolution.

          (c)  If, after the informal resolution procedure set forth in this
Section 10.10 has failed or the Parties are otherwise unable to resolve such
dispute within thirty (30) days (or such other period as the Parties may agree),
the Parties will submit the matter for binding resolution in accordance with the
rules of arbitration of the Arbitration Act (Ontario).

          (d)  Such arbitrator is authorized to render awards of monetary
damages, direction to take or refrain from taking action, or both. The
prevailing party, as determined by the arbitrator will be entitled to an award
of reasonable attorneys, fees and costs. Judgment upon the award rendered in any
such proceeding may be entered in any court of competent jurisdiction, or
application may be made to such court for judicial acceptance and enforcement of
the award and direction. Any such award or direction will be binding on the
Parties to the proceeding and final, except that for appeals on the grounds that
the award or direction were obtained through fraud. Such proceeding will be
confidential and no stenographic or other record need made of any such
proceeding other than a memorandum of understanding setting forth the elements
of any settlement or award reached. It is expressly agreed that either Party

                                       38
<PAGE>

may seek injunctive relief or specific performance of the obligations under this
Agreement in an appropriate court of law or equity pending an award in
arbitration.

     10.11  Counterparts. This Agreement may be executed in any number of
            ------------
counterparts, each of which will be deemed an original but all of which together
will constitute one and the same instrument.

     10.12  Expenses. Whether or not the transactions contemplated by this
            --------
Agreement or the Ancillary Agreements will be consummated, RHYTHMS and OPTEL
will each bear its own expenses, including without limitation all expenses
relating to counsel incurred in connection with the preparation of this
Agreement or the Ancillary Agreements, the consummation of the transactions
contemplated hereby and thereby, and any waiver or amendment of, or consent
under this Agreement or the Ancillary Agreements.

     10.13  Applicable Laws and Regulations. The Parties agree that all
            -------------------------------
activities to be undertaken by or on behalf of JVCO will be conducted in
compliance with all applicable laws and regulations of the relevant
jurisdiction(s).

     10.14  Indemnities.

            (a) Each Party will indemnify and hold harmless the other Party or
Parties from and against any suit, claim, demand, liability, damage, loss, cost,
or expense, including legal fees and court costs ("Claim"), resulting from,
arising out of, or in any manner attributable to (i) any inaccuracy in any
representation or any breach of any warranty or other agreement or promise
contained in this Agreement or due to the inaccuracy of any document furnished
to it or caused to be furnished to it by the indemnifying Party pursuant to the
terms of this Agreement, (ii) any matter involving a Party's gross negligence or
intentional misconduct, or (iii) any act by a Party in violation of Article VI
and Sections 4.3 of this Agreement; provided, however, that this Section will
                                    --------  -------
not be deemed to include any Claims resulting from, arising out of, in any
manner attributable to taxes based on income.

            (b) A Party entitled to indemnification under this Section 10.14
will deliver written notice of any Claim to the indemnifying Party within ten
(10) Business Days following the date such Party first receives written notice
of such Claim; provided that failure to give this notice within the required
time period will not relieve the indemnifying Party of its obligations under
this Section 10.14 so long as no prejudice results from such failure. The
partner seeking indemnification will keep the indemnifying Party fully informed
of the progress of the claim and will afford the indemnifying Party and its
counsel full opportunity to participate in any action of the Claim. A Party
seeking indemnification will not settle the Claim for which indemnification is
sought without first obtaining written approval from the indemnifying Party.
Approval of a settlement by a Party against whom indemnification is being sought
will not be deemed an admission of liability under this Section 10.14.

     10.15 Ancillary Agreements. Notwithstanding anything to the contrary in
           --------------------
this Agreement, both Parties agree to use commercially reasonable efforts and to
diligently negotiate in good faith each of the Ancillary Agreements contemplated
by this Agreement within one

                                       39
<PAGE>

hundred twenty (120) days after both Parties have executed this Agreement or
such extended period to which the Parties mutually agree.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       40
<PAGE>

     IN WITNESS WHEREOF, the Parties to have caused this Agreement to be
executed in their names by their properly and duly authorized officers or
representatives as of January 1, 2000.

                              RHYTHMS NETCONNECTIONS INC., and
                              RHYTHMS LINKS, INC.

                              By: _______________________________________
                                    Scott C. Chandler
                                    Chief Financial Officer
                                     and Executive Vice President

                              OPTEL COMMUNICATIONS CORPORATION

                              By: _______________________________________
                                    Robert Latham
                                    Chief Executive Officer and President

                  [SIGNATURE PAGE TO JOINT VENTURE AGREEMENT]
<PAGE>

                                 SCHEDULE 1.25
                                 -------------

                                 DATA SERVICES
                                 -------------

I.  "DSL Service" means digital subscriber line, a transmission technology
     -----------
enabling high-speed access in the local copper loop, often referred to as the
last mile between the network service provider i.e., an incumbent carrier,
competitive carrier or an internet service provider and end user. Included are
the various implementations of DSL including ADSL, SDSL, IDSL, RADSL and HDSL.

II. Technical Description.
    ---------------------

    1. The Company will be in the business of providing services to customers.
The Company will provide services to customers from demanding industries like
banking and brokerage services, high-tech manufacturing, healthcare, media, and
other organizations with mission-critical networking requirements. The Company
will offer the following services:

       . Internet Access - An affordable and reliable solution for any size
         business to connect to the net through partnering ISP's. The Company
         has chosen to team with a limited number of ISP partners.

       . Teleworking - A solution for businesses whose employees need to work
         from home and connect to a corporate network at higher speeds at any
         hour.

       . Branch Office Interconnect - A solution for businesses with multiple
         branch offices or affiliates. The service provides communication with
         their corporate network.

       . New products and services as they are developed and become available
         such as voice over DSL.

       . Business to business connectivity.

    2. From a technical perspective the Company offers:

       . Dedicated and secure, always on broadband access, such as high-speed
         DSL technology.

       . Pan-Canadian coverage.

       . Carrier-class reliable and managed network.

       . Flexibility in Layer2 and Layer3 connectivity, including multi-protocol
         support.

       . Service selection possibilities for end-users.

                                 Schedule 1.25
<PAGE>

      . Scalable services (upgrade paths for speeds, features and endpoints).

      . Complete installation all the way to the desktop.

      . Customer service and support at any hour 24 hours a day, 7 days a week.

      . Network based on technology positioned to carry integrated voice, data,
        video, and multimedia all over a single line.

      . Value Added Services like automatic data backup, PBX extension, caching,
        multicast, etc.

     The Company's service solutions include best-in-class customer service and
proactive network management.  This means complete attention to every detail,
including ordering, provisioning, installation, billing and performance
reporting.

     The Company also offers the possibility of turnkey project management for
each and every (end-user) installation.  The installation includes the
installation all the way to your desktop, including inside wiring and equipment.

     3.  Technology platform.  The infrastructure that the Company will deploy
         -------------------
will have an architecture of hubs and spokes. In a selected number of cities
Metropolitan Service Centers (MSC's) will be built to which several Rhythms
Canada Connection Points (CP's) are connected. The CP's connect to the
individual endpoints (at the end-user premises) to provide high-speed access.
The Company's service delivery platform architecture in the Rhythms Canada CP's
and MSC's will mirror the service delivery platform used by Rhythms. The
Company's MSC's will be interconnected with the Rhythms MSC's. The costs of
these connections will be shared by the Company and Rhythms on a basis that is
consistent with the benefit that accrues to each Party.

                                 Schedule 1.25
<PAGE>

                                  SCHEDULE 1.3
                                  ------------

                              ANCILLARY AGREEMENTS
                              --------------------

     Trademark Licensing Agreement

     Technology License Agreement between RHYTHMS and JVCO

     Technology License Agreement between OPTEL and JVCO

                                 Schedule 1.3
<PAGE>

                                 SCHEDULE 1.42
                                 -------------

                             COMMUNICATIONS MARKETS
                             ----------------------

The JVCO Communications Markets include the following metropolitan areas and
cities in Canada including their surrounding townships and villages:

     1.   Toronto (including Brampton, Mississauga, Oakville, Vaughan)
     2.   Montreal (Cote-St. Luc, Dorval)
     3.   Vancouver (including Burnaby, Coquitlam, Langley, New Westminster,
          Richmond, Surrey)
     4.   Ottawa-Hull (including Gatineau, Hull, Kanata, Nepean, Orleans)
     5.   Edmonton (including Fort Saskatchewan, Leduc, Spruce Grove)
     6.   Calgary (including Airdrie)
     7.   Quebec City
     8.   Winnipeg
     9.   Hamilton (including Burlington, Stoney Creek)
     10.  London (including St. Thomas)
     11.  Kitchener-Waterloo (including Cambridge)
     12.  St. Catherines-Niagara
     13.  Halifax (including Dartmouth)
     14.  Victoria
     15.  Windsor
     16.  Oshawa
     17.  Saskatoon
     18.  Regina
     19.  St. John's
     20.  Sudbury

                                 Schedule 1.42
<PAGE>

                                 SCHEDULE 1.43
                                 -------------

                             PRELIMINARY CUSTOMERS
                             ---------------------

JVCO Customers are those large business customers listed on the Financial Post
--------------
500 (attached hereto as Annex 1.43-A) with the exception of those Optel Pre-
                        ------------
Existing Customers listed below.

Small and Medium Business Customers are those businesses in Canada that are:
-----------------------------------

     (a) not listed on the Financial Post 500 (attached hereto as Annex 1.43-A),
                                                                  ------------
and

     (b) not on the preliminary list of U.S. business customers of RHYTHMS
(attached hereto as Annex 1.43-B) with facilities in Canada.
                    ------------

Optel Pre-Existing Customers are the following businesses:
----------------------------

  Sony Corporation                                 MDS Inc.
  George Weston Limited                            Cara Operations Limited
  Loblaw Companies Limited                         Chrysler Credit Canada Ltd.
  Magna International Inc.                         Cinram International Inc.
  Hudson's Bay Company                             Chapters Inc.
  Sears Canada Inc.                                Oxford Properties Group Inc.
  Canadian Tire Corporation, Limited               Scott's Restaurants Inc.
  Dofasco Inc.                                     Imax Corporation
  Lafarge Corporation                              Mark's Work Wearhouse Ltd.
  Westburne Inc.                                   First Marathon Inc.
  Future Shop Ltd.                                 Vincor International Inc.
  Union Gas Limited                                Chateau Stores of Canada Ltd.
  Loews Cineplex Entertainment Corporation         Arbor Memorial Services Inc.
  Dylex Limited                                    Pallet Pallet Inc.
                                                   Dover Industries Limited

Optel Combined Service Customers are the following businesses:
--------------------------------

  York University
  The Montreal Hospital Association

                                 Schedule 1.43
<PAGE>

                                SCHEDULE 4.1(a)
                                ---------------

                           INITIAL BOARD OF DIRECTORS
                           --------------------------

RHYTHMS:

1.  Scott Chandler
2.  Steve Stringer

OPTEL:

1.  Bill Young
2.  Robert Latham

                                Schedule 4.1(a)
<PAGE>

                                SCHEDULE 4.5(a)
                                ---------------

           INITIAL BUSINESS PLAN AND SUPPORTING FINANCIAL INFORMATION
           ----------------------------------------------------------

The initial Business Plan with supporting financial information is attached
hereto as
Annex 4.5-A.
-----------

                                Schedule 4.5(a)
<PAGE>

                                SCHEDULE 5.1(a)
                                ---------------

                        PRELIMINARY HUMAN RESOURCES PLAN
                        --------------------------------

The preliminary Human Resources Plan of JVCO shall be based on the Staffing Plan
described on pages 11-14 of the Business Plan (attached hereto as Annex 4.5-A).

                                Schedule 5.1(a)
<PAGE>

                                SCHEDULE 5.3(a)
                                ---------------

                              OPTEL LEASED ASSETS
                              -------------------

Equipment Description                                    Quantity
---------------------                                    --------

BPXS ATM Switch                                              2

7200 Router                                                  1

Cisco 6100 DSLAM Chassis                                    14

Cisco 6130 DSLAM Chassis                                     7

                                Schedule 5.3(a)
<PAGE>

                                   EXHIBIT A
                                   ---------

                       FORM OF ARTICLES OF INCORPORATION
                       ---------------------------------

                                  Exhibit A-1
<PAGE>

                                   EXHIBIT B
                                   ---------

                                 FORM OF BYLAWS
                                 --------------

                                  Exhibit B-1
<PAGE>

                                   EXHIBIT C
                                   ---------

                   FORMS OF EMPLOYEE PROPRIETARY INFORMATION
                   -----------------------------------------
                           AND INVENTIONS AGREEMENTS
                           -------------------------

                                  Exhibit C-1
<PAGE>

                                   EXHIBIT D
                                   ---------

                     FORM OF TRADEMARK LICENSING AGREEMENT
                     -------------------------------------

                                  Exhibit D-1
<PAGE>

                                   EXHIBIT E
                                   ---------

                     FORM OF TECHNOLOGY LICENSE AGREEMENTS
                     -------------------------------------

                                  Exhibit E-1<PAGE>

                                                                   Exhibit 10.34

                PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT

                                 BY AND AMONG

                          RHYTHMS NETCONNECTIONS INC.

                                      AND

                  THE PURCHASERS LISTED ON SCHEDULE I HERETO

                              ___________________

                                  Dated as of

                               February 6, 2000

                              ___________________

<PAGE>

    This STOCK PURCHASE AGREEMENT is dated as of February 6, 2000 (this
"Agreement"), by and among Rhythms NetConnections Inc., a Delaware corporation
(the "Company"), and each of the purchasers listed on Schedule I hereto
(individually, a "Purchaser" and collectively, the "Purchasers").

    WHEREAS, the Company proposes, subject to the terms and conditions set
forth herein, to issue and sell to the Purchasers 250,000 Shares of its 8.25%
Series E Convertible Preferred Stock, liquidation preference $1,000 per share,
par value $0.001 per share (the "Series E Preferred Stock");

    WHEREAS, the Company proposes, subject to the terms and conditions set
forth herein, to issue and sell to the Purchasers warrants (each a "Warrant" and
together, the "Warrants") to purchase 5,625,000 shares of the Company's Common
Stock (the "Warrant Shares"), par value $0.001 per share, such Warrants to be
allocated and priced as follows: Warrants to purchase 1,875,000 Warrant Shares
at $45.00 per share with a term of three (3) years from the Closing Date
(defined below), Warrants to purchase 1,875,000 Warrant Shares at $50.00 per
share with a term of five (5) years from the Closing Date and Warrants to
purchase 1,875,000 Warrant Shares at $55.00 per share with a term of seven (7)
years from the Closing Date (each price an "Exercise Price" and together, the
"Exercise Prices"), in substantially the form as attached Exhibit A;

    WHEREAS, the Company proposes to form a subsidiary for the purpose of
entering into business relationships in Latin America and desires to grant the
HMTF Purchasers (as defined below) an equity ownership interest equal to twenty-
five percent (25%) of the Capital Stock of such Subsidiary (the "Latin America
Subsidiary"),

    WHEREAS, subject to the terms and conditions set forth herein, the
Purchasers desire to purchase such Series E Preferred Stock and Warrants from
the Company;

    NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows.

                                   ARTICLE I

                                  DEFINITIONS

    (a)  As used in this Agreement, the following terms shall have the following
meanings:

         "Affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person. For the purposes of this definition and the
definition of "HMTF Purchaser", "control" when used with respect to any Person
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.

         "Applicable Law" means (a) any United States federal, state, local or
foreign law, statute, rule, regulation, order, writ, injunction, judgment,
decree or permit of any Governmental

<PAGE>

Authority and (b) any rule or listing requirement of any applicable national
stock exchange or listing requirement of any national stock exchange or
Commission recognized trading market on which securities issued by the Company
or any of the Subsidiaries are listed or quoted.

         "Business Day" means any day other than a Saturday, a Sunday, the day
after Thanksgiving or a day when banks in The City of New York are authorized by
Applicable Law to be closed.

         "Capital Stock" means (i) with respect to any Person that is a
corporation, any and all shares, interests, participations, rights or other
equivalents (however designated) of corporate stock and (ii) with respect to any
other Person, any and all partnership or other equity interests of such Person.

         "Certificate of Designation" means the Certificate of Designation of
the Powers, Preferences and Relative, Participating, Optional and Other Special
Rights and Qualifications, Limitations and Restrictions thereof relating to the
Series E Preferred Stock, in the form attached hereto as Exhibit B.

         "Commission" means the United States Securities and Exchange
Commission.

         "Commission Filings" means all reports, registration statements and
other filings filed by the Company with the Commission (and all notes, exhibits
and schedules thereto and documents incorporated by reference therein).

         "Common Stock" means the  common stock, par value $0.001 per share, of
the Company.

         "Contract" means any contract, lease, loan agreement, mortgage,
security agreement, trust indenture, note, bond, or other agreement (whether
written or oral) or instrument.

         "Conversion Shares" means the shares of Common Stock issuable upon the
conversion of the Series E Preferred Stock in accordance with the terms of the
Certificate of Designation.

         "Equity Documents" means this Agreement, the Registration Rights
Agreement, the Certificate of Designation, the Warrants, the Rights Agreement
Amendment and the Management Rights Agreement.

         "Exchange Act" means the Securities Exchange Act of 1934, and the rules
and regulations of the Commission promulgated thereunder.

         "GAAP" means United States generally accepted accounting principles,
consistently applied.

         "Governmental Authority" means (i) any foreign, Federal, state or local
court or governmental or regulatory agency or authority, (ii) any arbitration
board, tribunal or mediator

                                      -2-
<PAGE>

and (iii) any national stock exchange or Commission recognized trading market on
which securities issued by the Company or any of the Subsidiaries are listed or
quoted.

         "HMTF" means Hicks, Muse, Tate & Furst Incorporated, a Texas
corporation.

         "HMTF Funds" means the funds affiliated with the HMTF Purchaser
identified by the HMTF Purchaser on or prior to the Closing Date.

         "HMTF Group" means HMTF and its Affiliates and their respective
officers, directors, partners, members, stockholders and employees (and members
of their respective families and trusts for the primary benefit of such family
members), and HMTF Purchaser and its Affiliates.

         "HMTF Purchaser" means any one or more of the following: HMTF Bridge
RHY, LLC and one or more members of the HMTF Group designated by HMTF Bridge
RHY, LLC on or prior to the Closing Date.

         "HMTF Shares" means the HMTF Issued Series E Preferred Shares held by
members of the HMTF Group plus the shares of Common Stock issued to and held by
members of the HMTF Group upon conversion of the HMTF Issued Series E Preferred
Shares.

         "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and applicable rules and regulations.

         "Lien" means any mortgage, pledge, lien, security interest, claim,
restriction, charge or encumbrance of any kind.

         "Material Adverse Effect" means a material adverse effect on the
condition (financial or otherwise), business, assets or results of operations of
the Company and the Subsidiaries, taken as a whole.

         "Permitted Transferee" means, with respect to any Purchaser, or any
Permitted Transferee of any Purchaser, (i) any Purchaser Affiliate of such
Purchaser that is not a holder of common stock of the Company on the date hereof
or an affiliate of such holder; and (ii) any person that is a member of the HMTF
Group and any person investing, directly or indirectly, in or in parallel with
any member of the HMTF Group; provided, however, that each Permitted Transferee
must agree in writing pursuant to a Permitted Transferee Agreement, in
accordance with the provisions of Section 6.5, to be bound by the terms, and
subject to the conditions, of this Agreement to the same extent, and in the same
manner, as the transferring Purchaser prior to the transfer of any Securities to
such Permitted Transferee; and provided, further, that the transfer of
Securities from such Purchaser to such Permitted Transferee is in compliance
with all applicable securities laws.

         "Person" means any individual, partnership, corporation, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization, government or agency or political subdivision
thereof, or other entity.

                                      -3-
<PAGE>

         "Purchaser Affiliate" means (a) any direct or indirect holder of any
equity interests or securities in any Purchaser (whether limited or general
partners, members, stockholders or otherwise), (b) any Affiliate of any
Purchaser or (c) any director, officer, employee, representative or agent of (i)
such Purchaser, (ii) any Affiliate of such Purchaser or (iii) any holder of
equity interests or securities referred to in clause (a) above.

         "Registration Rights Agreement" means the Registration Rights
Agreement, to be dated as of the Closing Date, to be entered into by and among
the Company and the Purchasers, in the form attached hereto as Exhibit C.

         "Rights Agreement Amendment" means an amendment dated as of February 6,
2000 to the Company's Rights Agreement dated as of April 2, 1999 between the
Company and American Securities Transfer and Trust, Inc., in substantially the
form attached as Exhibit D.

         "Securities" means the Shares and the Warrants.

         "Securities Act" means the Securities Act of 1933, and the rules and
regulations of the Commission promulgated thereunder.

         "Series E Preferred Stock" has the meaning set forth in the first
recital to this Agreement. The Series E Preferred Stock has the designation,
powers, preferences and rights, and qualifications, limitations and restrictions
thereof set forth in the Certificate of Designation.

         "Shares" means the shares of Series E Preferred Stock to be issued and
sold by the Company to the Purchasers pursuant to Section 2.1 hereof.

         "Subsidiary" means, with respect to any Person (i) a corporation a
majority of whose capital stock with voting power, under ordinary circumstances,
to elect directors is at the time, directly or indirectly, owned by such Person,
by a subsidiary of such Person, or by such Person and one or more subsidiaries
of such Person, (ii) a partnership in which such Person or a subsidiary of such
Person is, at the date of determination, a general partner of such partnership
and has the power to direct the policies and management of such partnership or
(iii) any other Person (other than a corporation) in which such Person, a
subsidiary of such Person or such Person and one or more subsidiaries of such
Person, directly or indirectly, at the date of determination thereof, has (A) at
least a majority ownership interest or (B) the power to elect or direct the
election of the directors or other governing body of such Person.

         "Subsidiary" means a subsidiary of the Company.

         "Term" shall mean the 15-year period ending on the fifteenth
anniversary of the Issuance, after which the Shares, if not earlier redeemed or
converted, shall be mandatorily redeemed by the Company.

         "Transactions" means the transactions contemplated by this Agreement
and the other Equity Documents.

                                      -4-
<PAGE>

    (b)  As used in this Agreement, the following terms shall have the meanings
given thereto in the Sections set forth opposite such terms:

      Term                                              Section
      ----                                              -------
      Agreement                                         Preamble
      Closing                                           2.2
      Closing Date                                      2.2
      Company                                           Preamble
      DGCL                                              3.2(b)
      HMTF Director                                     5.2
      HMTF Issued Series E Preferred Shares             5.2
      Indemnified Party                                 8.1(c)
      Indemnified Person                                8.1(b)
      Indemnifying Party                                8.1(c)
      Information                                       3.7
      Issuance                                          2.1
      Losses                                            8.1(b)
      Management Rights Agreement                       2.2(c)
      Notices                                           8.2
      Permitted Transferee Agreement                    6.5
      Projections                                       3.7
      Purchaser; Purchasers                             Preamble
      Purchase Price                                    2.1
      Securities Transfer                               6.5
      Supplying Purchasers                              8.18

                                 ARTICLE II

                               SALE AND PURCHASE

    SECTION 2.1. Agreement to Sell and to Purchase; Purchase Price. On the
Closing Date, and upon the terms and subject to the conditions set forth in this
Agreement, the Company shall issue and sell to each Purchaser, and each
Purchaser, severally and not jointly, shall purchase and accept from the Company
such number of Shares and Warrants as is set forth opposite such Purchaser's
name on Schedule 1 hereto (the "Issuance"), for a purchase price of one thousand
dollars ($1,000) per Share (the "Purchase Price").

    SECTION 2.2. Closing. The closing of the Issuance to each Purchaser (the
"Closing") shall take place on a date to be specified by the Company and such
Purchaser, which shall be no later than the later of (A) the 2nd Business Day
after the date as of which all of the conditions set forth in Article VII hereof
shall have been satisfied as to the purchase by the HMTF Purchaser (or, to the
extent permitted, waived by the party or parties entitled to the benefit
thereof) and (B) 15 Business Days after the date hereof or at such other time
and date as the parties hereto shall agree in writing (such date and time, the
"Closing Date"), at the offices of Brobeck, Phleger & Harrison LLP, located at
550 West C Street, San Diego, California 92101 or at such other place

                                      -5-
<PAGE>

as the parties hereto shall agree in writing. At such time as a Purchaser and
the Company shall have satisfied all the conditions set forth in Article VII, if
the Company elects, such Purchaser and the Company shall close separately on
such date.

    At the Closing with respect to each Purchaser:

         (a)  Such Purchaser shall deliver:

              (i)   against delivery of a certificate or certificates
                    representing the Shares and the Warrants being purchased by
                    such Purchaser pursuant to Section 2.1, an amount equal to
                    the aggregate Purchase Price of such Securities via wire
                    transfer of immediately available funds to such bank account
                    as the Company shall designate not later than two Business
                    Days prior to the Closing Date;

              (ii)  a copy of the Registration Rights Agreement executed by such
                    Purchaser. At the Closing, with respect to each Purchaser:

    At the Closing, with respect to each Purchaser:

         (b)  The Company shall deliver to such Purchaser:

              (i)   against payment of the Purchase Price therefor, a
                    certificate or certificates representing the Shares and
                    Warrants being purchased by such Purchaser pursuant to
                    Section 2.1, which shall be in definitive form and
                    registered in the name of such Purchaser or its nominee or
                    designee and in a single certificate or in such other
                    denominations as such Purchaser shall request not later than
                    two Business Days prior to the Closing Date;

              (ii)  an opinion of counsel to the Company, dated the Closing
                    Date, covering such matters as are customarily covered by
                    such opinions, in form and substance reasonably acceptable
                    to the Purchasers;

              (iii) an officer's certificate of the Company as contemplated by
                    Section 7.2(f);

              (iv)  a certificate of the secretary of the Company covering such
                    matters as are customarily covered by such certificates and
                    as to the book value per share of the Common Stock, in form
                    and substance reasonably acceptable to the Purchasers;

              (v)   a long-form good standing certificate of the Company issued
                    by the Secretary of State of the State of Delaware; and

              (vi)  a copy of the Registration Rights Agreement executed by the
                    Company.

                                      -6-
<PAGE>

              (vii) A copy of the Rights Agreement Amendment.

         (c)  The Company shall deliver to the HMTF Funds a letter in the form
of Exhibit E executed by the Company (the "Management Rights Agreement").

         (d)  The Company shall deliver to Purchasers (or their designees) a
transaction fee equal to 3.25% of the Purchase Price of the Shares purchased by
Purchasers, in immediately available funds by wire transfer to an account
designated by Purchasers at least two Business Days prior to the Closing Date.

                                  ARTICLE III

                 REPRESENTATIONS AND WARRANTIES OF THE COMPANY

    The Company hereby represents and warrants to each Purchaser on the date
hereof and on and as of the Closing Date as follows:

    SECTION 3.1. Organization and Standing. Each of the Company and the material
domestic Subsidiaries is duly incorporated, validly existing and in good
standing under the laws of its state of incorporation and has all requisite
corporate power and authority to own its properties and assets and to carry on
its business as it is now being conducted and as proposed to be conducted. Each
of the Company and the material domestic Subsidiaries is duly qualified to
transact business as a foreign corporation and is in good standing in each
jurisdiction in which the character of the properties owned or leased by it or
the nature of its business makes such qualification necessary, except for any
such failures to so qualify or be in good standing that would not, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect.

    All of the outstanding shares of Capital Stock of each such material
Subsidiary have been validly issued and are fully paid and non-assessable and,
except as provided on Schedule 3.1 hereof, are owned directly or indirectly by
the Company, free and clear of all pledges, claims, Liens, charges,
encumbrances, and security interest of any kind or nature whatsoever.  The
Company does not own any equity interest in any corporation, partnership,
limited liability company, joint venture, or other entity except as provided on
Schedule 3.1(b) hereof.

    The Company has delivered to Purchaser true and complete copies of the
Company's Certificate of Incorporation, as amended to date, and By-laws, as in
effect on the date hereof.

    SECTION 3.2. Capital Stock. (a) As of the date of this Agreement, the
authorized Capital Stock of the Company consists solely of (i) 250,000,000
shares of Common Stock, par value $0.001 per share, of which 78,296,488 shares
are issued and outstanding as of December 31, 1999 (and no shares of Common
Stock have been issued since December 31, 1999 except those issued in respect to
the exercise of stock options), and (ii) 5,000,000 shares of preferred stock,
par value $0.001 per share, of which no shares are issued or outstanding. Each
share of Capital Stock of the Company that will be issued and outstanding
immediately following the Closing, including without limitation the Shares, will
be duly authorized and

                                      -7-
<PAGE>

validly issued and fully paid and nonassessable, and the issuance thereof will
not have been subject to any preemptive rights or made in violation of any
Applicable Law.

         (b)  Except as set forth on Schedule 3.2, as of the date of this
Agreement, there are (i) no outstanding options, warrants, agreements,
conversion rights, exchange rights, preemptive rights or other rights (whether
contingent or not) to subscribe for, purchase or acquire any issued or unissued
shares of Capital Stock of the Company or any Subsidiary, (ii) no authorized or
outstanding stock appreciation, phantom stock, profit participation, or similar
rights with respect to the Company or any Subsidiary, (iii) no rights,
contracts, commitments or arrangements (contingent or otherwise) obligating the
Company or any Subsidiary to either (A) redeem, purchase or otherwise acquire,
or offer to purchase, redeem, or otherwise acquire, any outstanding shares of,
or any outstanding warrants or rights of any kind to acquire any shares of, or
any outstanding securities that are convertible into or exchangeable for any
shares of, Capital Stock of the Company, or (B) pay any dividend or make any
distribution in respect of any shares of, or any outstanding securities that are
convertible or exchangeable for any shares of, Capital Stock of the Company,
(iv) no agreements or arrangements under which the Company or any Subsidiary is
obligated to register the sale of any of its securities under the Securities Act
(except as provided hereunder) and except as set forth in Schedule 3.2(a) and
(v) no restrictions upon, or Contracts or understandings of the Company or any
Subsidiary, or, to the knowledge of the Company, Contracts or understandings of
any other Person, with respect to, the voting or transfer of any shares of
Capital Stock of the Company or any Subsidiary. Except as set forth on Schedule
3.2(a), there are no securities or instruments containing antidilution or
similar provisions that will be triggered by the consummation of the
transactions contemplated hereby in accordance with the terms of this Agreement,
the Certificate of Designation or the Warrants. Except as set forth on Schedule
3.2(a), no party has any right of first refusal, right of first offer, right of
co-sale or other similar right regarding the Company's securities. Except as set
forth on Schedule 3.2(a), there are no provisions of the Certificate of
Incorporation, as amended, or the By-laws of the Company, no agreements to which
the Company is a party and no agreements by which the Company or any Subsidiary
are bound, that would (a) require the vote of the holders of more than a
majority of the shares of the Company's issued and outstanding Common Stock,
voting together as a single class, to take or prevent any corporate action,
other than those matters requiring a class vote under General Corporation Law of
the State of Delaware (the "DGCL"), or (b) entitle any party to nominate or
elect any director of the Company or require any of the Company's stockholders
to vote for any such nominee or other person as a director of the Company.

         (c)  The Conversion Shares and Warrant Shares have been duly authorized
and adequately reserved in contemplation of the conversion of the Series E
Preferred Stock and the exercise of the Warrants, respectively, and, when issued
and delivered in accordance with the terms of the Certificate of Designation or
the Warrants, as the case may be, will have been validly issued and will be
fully paid and nonassessable, and the issuance thereof will not have been
subject to any preemptive rights or made in violation of any Applicable Law.

         (d)  The holders of the Series E Preferred Stock will, upon issuance
thereof, have the rights set forth in the Certificate of Designation (subject to
the limitations and qualifications set forth therein and under the DGCL.

                                      -8-
<PAGE>

    SECTION 3.3. Authorization; Enforceability. The Company has the power and
authority to execute, deliver and perform its obligations under each of the
Equity Documents, and has taken all action necessary to authorize the execution,
delivery and performance by it of each of such Equity Documents and to
consummate the Transaction. No other corporate or stockholder proceeding on the
part of the Company is necessary for such authorization, execution, delivery and
consummation. The Company has duly executed and delivered this Agreement and, at
the Closing, the Company will have duly executed and delivered each of the other
Equity Documents to be executed and delivered at or prior to Closing. This
Agreement constitutes, and each of the other Equity Documents, when executed and
delivered by the Company, will constitute, a legal, valid and binding obligation
of the Company.

    SECTION 3.4. No Violation; Consents. (a) The execution, delivery and
performance by the Company of each of the Equity Documents and the consummation
by the Company of the Transactions do not and will not contravene any Applicable
Law, except for any such contravention that would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect. The
execution, delivery and performance by the Company of each of the Equity
Documents and the consummation of the Issuance (i) will not (A) violate, result
in a breach of or constitute (with or without due notice or lapse of time or
both) a default (or give rise to any right of termination, cancellation or
acceleration) under any Contract to which the Company is a party or by which the
Company is bound or to which any of its assets is subject, or (B) result in the
creation or imposition of any Lien upon any of the assets of the Company, except
for any such violations, breaches, defaults or Liens that would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect and (ii) will not conflict with or violate any provision of the
certificate of incorporation or bylaws or other governing documents of the
Company.

         (b)  Except as set forth on Schedule 3.4(b) and except for (i) the
filings by the Company, if any, required by the HSR Act, (ii) applicable
filings, if any, required by applicable federal and state securities laws and
(iii) filing of the Certificate of Designation with the Secretary of State of
the State of Delaware, in each case, which shall be made (or are not required to
be made) on or prior to the Closing Date, no consent, authorization or order of,
or filing or registration with, any Governmental Authority or other Person is
required to be obtained or made by the Company for the execution and delivery of
the Equity Documents or the consummation by the Company of the Transactions
except where the failure to obtain such consents, authorizations or orders, or
make such filings or registrations, would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect or a material adverse
effect on the ability of the Company to consummate the transactions contemplated
hereby.

    SECTION 3.5. Commission Filings; Financial Statements. (a) The Company has
filed all reports, registration statements and other filings, together with any
amendments or supplements required to be made with respect thereto, that it has
been required to file with the Commission under the Securities Act and the
Exchange Act. As of the respective dates of their filing with the Commission,
the Commission Filings complied in all material respects with the applicable
provisions of the Securities Act and the Exchange Act and did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or

                                      -9-
<PAGE>

necessary to make the statements made therein, in the light of the circumstances
under which they were made, not misleading.

         (b)  Each of the historical consolidated financial statements of the
Company (including any related notes or schedules) included in the Commission
Filings was prepared in accordance with GAAP (except as may be disclosed
therein), and complied in all material respects with the rules and regulations
of the Commission. Such financial statements fairly present the consolidated
financial position of the Company and the Subsidiaries as of the dates thereof
and the consolidated results of operations, cash flows and changes in
stockholders' equity for the periods then ended (subject, in the case of the
unaudited interim financial statements, to normal, recurring year-end audit
adjustments). Except as set forth on Schedule 3.5(b) or as reflected in the
Commission Filings filed prior to the date hereof, the Company does not have any
liabilities or obligations of any nature (whether accrued, absolute, contingent,
unasserted or otherwise) that individually or in the aggregate would be expected
to have a Material Adverse Effect.

    SECTION 3.6. Private Offering. Based, in part, on the Purchasers'
representations in Section 4.2, the offer and sale of the Securities is exempt
from the registration and prospectus delivery requirements of the Securities
Act. Neither the Company, nor anyone acting on behalf of it, has offered or sold
or will offer or sell any securities, or has taken or will take any other action
(including, without limitation, any offering of any securities of the Company
under circumstances that would require, under the Securities Act, the
integration of such offering with the offering and sale of the Securities, which
would subject the Issuance to the registration provisions of the Securities
Act).

    SECTION 3.7. Provided Information. To the knowledge of the Company, all
written information (excluding information of a general economic nature and
financial projections) concerning the Company and the Transactions (the
"Information") that has been prepared by or on behalf of the Company or any of
the Company's authorized representatives and that has been provided to the
Purchasers or any of their authorized representatives in connection with the
Issuance, when taken as a whole, was, at the time made available, correct in all
material respects and did not, at the time made available, contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements contained therein not misleading in light of the
circumstances under which such statements are made. All financial projections
concerning the Company and the Transactions (the "Projections") that have been
prepared by or on behalf of the Company or any of the Company's authorized
representatives and that have been delivered to the Purchasers or any of their
authorized representatives in connection with the Transactions have been
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the Company's management as to the future financial performance
of the Company and the individual business segments thereof.

    SECTION 3.8. Material Adverse Change. Except as disclosed in the Commission
Filings filed as of the date hereof or as set forth on Schedule 3.8, since
September 30, 1999, there has not been any event, occurrence or development of a
state of circumstances or facts that has had, or could have reasonably been
expected to have, (i) a Material Adverse Effect or (ii) a material adverse
effect on the ability of the Company to perform its obligations under this
Agreement.

                                     -10-
<PAGE>

    SECTION 3.9. Litigation. Except as disclosed in Commission Filings filed as
of the date hereof or as set forth on Schedule 3.9, there are not any (a)
outstanding judgments against or affecting the Company or any of the
Subsidiaries, (b) proceedings pending or, to the knowledge of the Company,
threatened against or affecting the Company or any of the Subsidiaries or (c)
investigations by any Governmental Authority that are, to the knowledge of the
Company, pending or threatened against or affecting the Company or any of the
Subsidiaries that (i) in any manner challenge or seek to prevent, enjoin, alter
or materially delay the Transactions or (ii) if resolved adversely to the
Company or any Subsidiary, would have, individually or in the aggregate, a
Material Adverse Effect.

    SECTION 3.10. Permits and Licenses. The Company and the Subsidiaries have
obtained all governmental permits, licenses, franchises and authorizations
required for the Company and the Subsidiaries to conduct their respective
businesses as currently conducted, except for those of which the failure to
obtain would not have a Material Adverse Effect.

    SECTION 3.11. Intellectual Property, etc. Schedule 3.11 sets forth a true
and complete list of all patents, patent applications, trademarks, trade names,
service marks and registered copyrights and make work rights and applications
therefor, if any, owned by or licensed to the Company that are material to the
Company. All patents, patent applications, trademarks, mask works, service marks
and copyrights of the Company have been duly applied for or registered and filed
with or issued by each appropriate governmental entity in the jurisdictions
indicated on Schedule 3.11, all necessary affidavits of continuing use have been
filed and all necessary maintenance fees have been paid to continue all such
rights in effect. The Company owns or is licensed or otherwise has the right to
use, without payment to any other person except for fees set forth in Schedule
3.11, all intellectual property used in or necessary for the Company's business,
as presently conducted and as proposed to be conducted, except with respect to
"shrink-wrap" software. The Company's ownership and/or use of intellectual
property in its business, as presently conducted and as proposed to be conducted
does not conflict with, or result in any violation of, or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or result in any
loss of a material benefit under or the creation of any Lien in or upon any of
the properties or assets of the Company under, any contract between the Company
and any person or any other intellectual property rights of any other person,
except for any such conflict, violation, default, right of termination,
cancellation, acceleration, loss of material benefit or creation of any Lien
which would not have a Material Adverse Effect.

                                  ARTICLE IV

               REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS

    Each Purchaser severally as to itself only, and not jointly, hereby
represents and warrants to the Company as of the date hereof and as of the
Closing Date as follows:

    SECTION 4.1. Organization; Authorization; Enforceability. Such Purchaser is
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization and has all requisite power and authority to
own its properties and assets and to carry on its business as it is now being
conducted and as currently proposed to be conducted.

                                      -11-
<PAGE>

Such Purchaser has the power to execute, deliver and perform its obligations
under each of the Equity Documents to which it is a party and has taken all
action necessary to authorize the execution, delivery and performance by it of
such Equity Documents and to consummate the transactions contemplated hereby and
thereby. No other proceedings on the part of such Purchaser are necessary for
such authorization, execution, delivery and consummation. Such Purchaser has
duly executed and delivered this Agreement and, at the Closing, such Purchaser
will have duly executed and delivered each of the other Equity Documents to be
executed and delivered at or prior to Closing. This Agreement constitutes, and
each of the other Equity Documents to which such Purchaser is a party, when
executed and delivered by such Purchaser, will constitute, a legal, valid and
binding obligation of such Purchaser.

    SECTION 4.2. Private Placement. (a) Such Purchaser understands that (i) the
offering and sale of the Securities, the Conversion Shares and the Warrant
Shares in the Issuance by the Company is intended to be exempt from registration
under the Securities Act pursuant to Section 4(2) thereof and (ii) there is no
existing public or other market for the Securities.

         (b)  Such Purchaser (either alone or together with its advisors) has
sufficient knowledge and experience in financial and business matters so as to
be capable of evaluating the merits and risks of its investment in the
Securities, the Conversion Shares and the Warrant Shares, and is capable of
bearing the economic risks of such investment.

         (c)  Such Purchaser is acquiring the Securities, the Conversion Shares
and the Warrant Shares to be acquired hereunder for its own account (or for
accounts over which it exercises investment authority or as otherwise provided
herein), for investment and not with a view to the public resale or distribution
thereof, in violation of any securities law.

         (d)  Such Purchaser understands that the Securities, the Conversion
Shares and the Warrant Shares will be issued in a transaction exempt from the
registration or qualification requirements of the Securities Act and applicable
state securities laws, and that such securities must be held indefinitely unless
a subsequent disposition thereof is registered or qualified under the Securities
Act and such laws or is exempt from such registration or qualification.

         (e)  Such Purchaser (A) has been furnished with or has had full access
to all of the information that it considers necessary or appropriate to make an
informed investment decision with respect to the Securities, the Conversion
Shares and the Warrant Shares and that it has requested from the Company, (B)
has had an opportunity to discuss with management of the Company the intended
business and financial affairs of the Company and to obtain information (to the
extent the Company possessed such information or could acquire it without
unreasonable effort or expense) necessary to verify any information furnished to
it or to which it had access and (C) can bear the economic risk of (x) an
investment in the Securities, the Conversion Shares and the Warrant Shares
indefinitely and (y) a total loss in respect of such investment, has such
knowledge and experience in business and financial matters so as to enable it to
understand and evaluate the risks of and form an investment decision with
respect to its investment in the Securities, the Conversion Shares and the
Warrant Shares and to protect its own interest in connection.

                                      -12-
<PAGE>

         (f)  The foregoing representations with respect to the Conversion
Shares and the Warrant Shares are made only if and to the extent the offering of
the Shares and the Warrants constitutes an offering of the Conversion Shares and
the Warrant Shares.

    SECTION 4.3. No Violation; Consents. (a) The execution, delivery and
performance by such Purchaser of each of the Equity Documents to which it is a
party and the consummation of the Transactions do not and will not contravene
any Applicable Law, except for such contraventions as would not, individually or
in the aggregate, reasonably be expected to have a material adverse effect on
the ability of such Purchaser to timely perform its obligations under this
Agreement. The execution, delivery and performance by such Purchaser of each of
the Equity Documents to which it is a party and the consummation of the
Transactions contemplated therein (i) will not (A) violate, result in a breach
of or constitute (with or without due notice or lapse of time or both) a default
(or give rise to any right of termination, cancellation or acceleration) under
any Contract to which such Purchaser is party or by which such Purchaser is
bound or to which any of its assets is subject, or (B) result in the creation or
imposition of any Lien upon any of the assets of such Purchaser, except for any
such violations, breaches, defaults or Liens that would not, individually or in
the aggregate, reasonably be expected to have a material adverse effect on the
ability of such Purchaser to timely perform its obligations under this
Agreement, and (ii) will not conflict with or violate any provision of the
certificate of incorporation or bylaws or other governing documents of such
Purchaser.

         (b)  Except for (i) the filings by the Purchaser, if any, required by
the HSR Act, and (ii) applicable filings, if any, with the Commission pursuant
to the Exchange Act, in each case, which shall be made (or are not required to
be made) on or prior to the Closing Date, no consent, authorization or order of,
or filing or registration with, any Governmental Authority or other Person is
required to be obtained or made by such Purchaser for the execution, delivery
and performance of any of the Equity Documents to which it is a party or the
consummation of any of the transactions contemplated therein, except where the
failure to obtain such consents, authorizations or orders, or make such filings
or registrations, would not, individually or in the aggregate, reasonably be
expected to have a material adverse effect on the ability of such Purchaser to
timely perform its obligations under this Agreement.

    SECTION 4.4. No Litigation. There are not any (a) outstanding judgments
against or affecting the Purchaser or any of its subsidiaries, (b) proceedings
pending or, to the knowledge of the Purchaser, threatened against or affecting
the Purchaser or any of its subsidiaries or (c) investigations by any
Governmental Authority that are, to the knowledge of the Purchaser, pending or
threatened against or affecting the Purchaser or any of its subsidiaries that,
in any case, individually or in the aggregate, would reasonably be expected to
have a material adverse effect on the ability of such Purchaser to timely
perform its obligations under this Agreement.

                                   ARTICLE V

                           COVENANTS OF THE COMPANY

    SECTION 5.1. Operation of Business. From the date hereof until the Closing
Date, the Company shall, and shall cause each of the Subsidiaries to:

                                      -13-
<PAGE>

              (i)   operate its business in all material respects in the
                    ordinary course and in compliance with Applicable Laws;

              (ii)  not adopt any amendment to its charter or bylaws or
                    comparable organizational documents;

              (iii) not split, combine or reclassify any shares of the Company's
                    Capital Stock;

              (iv)  not declare or pay any dividend or distribution (whether in
                    cash, stock or property) in respect of its Capital Stock or
                    increase the number of shares subject to the Company's stock
                    incentive and option plan;

              (v)   not take any action, or knowingly omit to take any action,
                    that would, or that would reasonably be expected to, result
                    in (A) any of the representations and warranties of the
                    Company set forth in Article III becoming untrue or (B) any
                    of the conditions to the obligations of Purchaser set forth
                    in Section 7.2 not being satisfied or (C) the triggering of
                    any of the anti-dilution adjustments contained in the
                    Certificate of Designation for the Series E Preferred Stock
                    (had such Certificate been in effect); or

              (vi)  enter into any agreement or commitment to do any of the
                    foregoing.

    SECTION 5.2. HMTF Director. For so long as members of the HMTF Group own any
combination of the shares of Series E Preferred Shares issued to members of the
HMTF Group on the Closing Date (the "HMTF Issued Series E Preferred Shares") and
Common Stock issued upon conversion of HMTF Issued Series E Preferred Shares
that, taken together, would represent, if all HMTF Issued Series E Preferred
Shares were converted, an amount of Common Stock issuable upon conversion of 40%
or more of the HMTF Issued Series E Preferred Shares, the holders of a majority
of the then outstanding HMTF Shares shall have a right to designate one member
of the Company's Board of Directors (the "HMTF Director"); provided, however,
that the right to designate the HMTF Director under this Section 5.2 shall be
suspended at any time that members of the HMTF Group own at least 100 shares of
Series E Preferred Stock and have the right to elect a person to the Board of
Directors under the terms of the Series E Preferred Stock set forth in the
Certificate of Designation. In the event the holders of a majority of the then
outstanding HMTF Shares are entitled under this Section 5.2 to designate the
HMTF Director for election to the Company's Board of Directors and elect to have
the Board of Directors appoint the HMTF Director, they shall so notify the
Company in writing and the Company shall (a) increase the size of the Board of
Directors by one and fill the vacancy created thereby by electing the HMTF
Director and (b) in connection with the meeting of stockholders of the Company
next following such election, nominate such HMTF Director for election as
director by the stockholders and use its commercially reasonable efforts to
cause the HMTF Director to be so elected. If the holders of a majority of the
then outstanding HMTF Shares are entitled under this Section 5.2 to designate
the HMTF Director for election to the Company's

                                      -14-
<PAGE>

Board of Directors and a vacancy shall exist in the office of a HMTF Director,
the holders of a majority of the then outstanding HMTF Shares shall be entitled
to designate a successor and the Board of Directors shall elect such successor
and, in connection with the meeting of stockholders of the Company next
following such election, nominate such successor for election as director by the
stockholders and use its commercially reasonable efforts to cause the successor
to be elected.

    SECTION 5.3. Access to Books and Records. (a) The Company shall afford to
each of the Purchasers and the Purchasers' accountants, counsel and
representatives full access during normal business hours throughout the period
prior to the Closing Date (or the earlier termination of this Agreement pursuant
to Section 8.4) to all its properties, books, Contracts, commitments and records
(including, but not limited to, tax returns) and, during such period, shall,
upon request, furnish promptly to each of the Purchasers (i) a copy of each
report, schedule and other document filed or received by any of them pursuant to
the requirements of Federal or state securities laws and (ii) all other
information concerning its business, properties and personnel as the Purchasers
may reasonably request, provided that no investigation or receipt of information
pursuant to this Section 5.3 shall affect any representation or warranty of the
Company or the conditions to the obligations of the Purchasers.

         (b)  The Company shall supplement the Information and the Projections
from time to time until the Closing Date if there is a material change in the
Information and the Projections previously provided, but no such supplement
shall be given effect for purposes of determining whether the Company has
breached any representations or warranties for purposes of Section 7.2 and
Section 8.1.

    SECTION 5.4. Agreement to Take Necessary and Desirable Actions. The Company
shall (a) subject to the satisfaction of the conditions set forth in Section
7.1, execute and deliver the Equity Documents and such other documents,
certificates, agreements and other writings, and (b) take such other actions, in
each case, as may be necessary or reasonably requested by any of the Purchasers
in order to consummate or implement the Issuance in accordance with the terms of
this Agreement.

    SECTION 5.5. Compliance with Conditions; Commercially Reasonable Efforts.
The Company shall use all commercially reasonable efforts to cause all
conditions precedent to the obligations of the Company and the Purchasers to be
satisfied. Upon the terms and subject to the conditions of this Agreement, the
Company will use all commercially reasonable efforts to take, or cause to be
taken, all action, and to do, or cause to be done, all things necessary, proper
or advisable consistent with Applicable Law to consummate and make effective in
the most expeditious manner practicable the Issuance in accordance with the
terms of this Agreement.

    SECTION 5.6. HSR Act Notification. To the extent required by the HSR Act,
the Company shall, to the extent it has not already done so, (a) use all
commercially reasonable efforts to file or cause to be filed, as promptly as
practicable after the execution and delivery of this Agreement, with the United
States Federal Trade Commission and the Antitrust Division of the United States
Department of Justice, all reports and other documents required to be filed by
it under the HSR Act concerning the transactions contemplated hereby and (b) use
all commercially reasonable efforts to promptly comply with or cause to be
complied with any requests by the United States Federal Trade Commission or the
Antitrust Division of the United

                                      -15-
<PAGE>

States Department of Justice for additional information concerning such
transactions, in each case so that the waiting period applicable to this
Agreement and the transactions contemplated hereby under the HSR Act shall
expire as soon as practicable after the execution and delivery of this
Agreement. The Company agrees to request, and to cooperate with the Purchasers
in requesting, early termination of any applicable waiting period under the HSR
Act.

    SECTION 5.7. Consents and Approvals. The Company (a) shall use all
commercially reasonable efforts to obtain all necessary consents, waivers,
authorizations and approvals of all Governmental Authorities and of all other
Persons required in connection with the execution, delivery and performance of
the Equity Documents or the consummation of the Issuance and (b) shall
diligently assist and cooperate with the Purchasers in preparing and filing all
documents required to be submitted by the Purchasers to any Governmental
Authority in connection with the Issuance (which assistance and cooperation
shall include, without limitation, timely furnishing, upon written requests, to
the Purchasers all information concerning the Company and the Subsidiaries that
counsel to the Purchasers reasonably determines is required to be included in
such documents or would be helpful in obtaining any such required consent,
waiver, authorization or approval).

    SECTION 5.8.   Reservation of Shares.  The Company shall:

              (i)   cause to be authorized and reserve and keep available at all
                    times during which any of the Shares and Warrants remain
                    outstanding, free from preemptive rights, out of its
                    treasury stock or authorized but unissued shares of Capital
                    Stock, or both, solely for the purpose of effecting the
                    conversion or exercise of the Shares or Warrants pursuant to
                    the terms of the Certificate of Designation, sufficient
                    shares of Common Stock to provide for the issuance of the
                    maximum number of shares issuable upon conversion or
                    exercise of outstanding Shares and Warrants;

              (ii)  issue and cause the transfer agent to deliver such shares of
                    Common Stock as required upon conversion or exercise of the
                    Shares and Warrants; and

              (iii) if any shares of Common Stock reserved for the purpose of
                    issuance upon conversion of the Shares and Warrants require
                    registration with or approval of any Governmental Authority
                    under any Applicable Law before such shares may be validly
                    issued or delivered, secure such registration or approval,
                    as the case may be, and maintain such registration or
                    approval in effect so long as so required.

    SECTION 5.9. Use of Proceeds. The Company shall use the proceeds from the
Issuance for payment of expenses incurred in connection with the Transactions
and for general corporate purposes.

                                      -16-
<PAGE>

    SECTION 5.10. Filing of Certificate of Designation. Prior to the Issuance,
the Company shall file the Certificate of Designation with the Secretary of
State of the State of Delaware pursuant to Section 151(g) of the DGCL.

    SECTION 5.11. Listing of Shares. The Company shall use all commercially
reasonable efforts to cause the shares of Common Stock issuable upon conversion
of the Shares to be listed or otherwise eligible for trading on the NASDAQ
National Market System or other national securities exchange.

    SECTION 5.12. Periodic Information. For so long as the Securities are
outstanding the Company shall file all reports required to be filed by the
Company under Section 13 or 15(d) of the Exchange Act and shall provide the
holders of the Securities and prospective purchasers of such shares with the
information specified in Rule 144A(d) under the Securities Act.

    SECTION 5.13. Legends. So long as applicable, each certificate representing
any portion of the Securities, shall contain, be stamped or otherwise imprinted
with a legend in the following form (in addition to any legend required under
applicable state securities laws):

    "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
    THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR THE
    SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. SUCH SHARES MAY NOT BE
    OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF
    IN THE ABSENCE OF SUCH REGISTRATION OTHER THAN PURSUANT TO AN EXEMPTION FROM
    SUCH REGISTRATION REQUIREMENTS.

After the above requirement for a legend is no longer applicable because the
Securities are freely transferable under the Securities Act, the Company shall
remove such legend upon request from a holder of such Securities, if outside
counsel for such holder reasonably determines that the transfer of such
Securities is no longer restricted by the Securities Act and outside counsel for
the Company reasonably concurs in such determination.

    SECTION 5.14. Payment; Paying Agent; Certain Information. The Company shall

              (i)   make any required payments on the Securities;

              (ii)  maintain (a) an office or agency where the Securities may be
                    presented for payment (the "Paying Agent"), (b) an office or
                    agency where the Securities may be presented for conversion
                    (the "Conversion Agent"), and (c) a Registrar, which shall
                    be an office or an agency where the Securities may be
                    presented for transfer; and

              (iii) provide certain information to the Purchasers, including
                    such information and notices as may be necessary for the
                    Purchasers to exercise their rights under this Agreement and
                    in connection with conversion or exercise of the Securities.

                                      -17-
<PAGE>

    SECTION 5.15. Latin American Subsidiary. The Company agrees to form the
Latin American Subsidiary and to issue to the HMTF Purchasers an aggregate
equity interest in (and proportional representation on the board of) the Latin
American Subsidiary equal to twenty-five percent (25%) of the issued and
outstanding Capital Stock of the Latin American Subsidiary as soon as
practicable after its formation. The HMTF Purchasers' interest will not be
reduced or diluted by the first twenty-five million dollars ($25,000,000)
invested by the Company. The organizational and constitutive documents for the
Latin American Subsidiary and the joint venture will be subject to the HMTF
Purchasers' prior approval, such consent not to be unreasonably withheld or
delayed, and shall contain with respect to the HMTF Purchasers such terms as are
customary for private equity investments in private companies (including,
without limitation, appropriate liquidity and minority protection provisions).

    SECTION 5.16. Latin American Venture. Attached hereto as Exhibit F is a term
sheet describing the indicative terms of a proposed joint venture arrangement to
exploit DSL opportunities in Latin America. The Company will use commercially
reasonable efforts to cause the Latin American Subsidiary to effect the joint
venture, but nothing in this Section 5.16 shall compel the Company to go forward
with the joint venture if in its commercial judgment it would be imprudent or
inadvisable to do so. The Company will not create any other entity, or enter
into any other venture or partnership to exploit DSL opportunities in Latin
America without granting the HMTF Purchasers an interest identical to that held
in the Latin American Subsidiary. The HMTF Purchasers shall be entitled to
representation on any board subcommittee or other board-level task force
assigned to supervise the Company's Latin American venture, if formed, in
proportion to their equity interest in the Latin American Subsidiary.

                                  ARTICLE VI

                          COVENANTS OF THE PURCHASERS

    SECTION 6.1. Agreement to Take Necessary and Desirable Actions. Each
Purchaser shall (a) subject to the satisfaction of the conditions set forth in
Section 7.2, execute and deliver each of the Equity Documents to which it is a
party and such other documents, certificates, agreements and other writings and
(b) take such other actions as may be reasonably necessary, desirable or
requested by the Company in order to consummate or implement the Transactions in
accordance with the terms of this Agreement.

    SECTION 6.2. Compliance with Conditions; Commercially Reasonable Efforts.
Each Purchaser will use all commercially reasonable efforts to cause all of the
obligations imposed upon it in this Agreement to be duly complied with, and to
cause all conditions precedent to the obligations of the Company and the
Purchasers to be satisfied. Upon the terms and subject to the conditions of this
Agreement, each Purchaser will use all commercially reasonable efforts to take,
or cause to be taken, all action, and to do, or cause to be done, all things
necessary, proper or advisable consistent with applicable law to consummate and
make effective in the most expeditious manner practicable the Transactions in
accordance with the terms of this Agreement.

    SECTION 6.3. HSR Act Notification. To the extent required by the HSR Act,
each Purchaser shall, if it has not already done so, (a) use all commercially
reasonable efforts to file or cause to be filed, as promptly as practicable
after the execution and delivery of this Agreement,

                                      -18-
<PAGE>

with the United States Federal Trade Commission and the Antitrust Division of
the United States Department of Justice, all reports and other documents
required to be filed by it under the HSR Act concerning the transactions
contemplated hereby and (b) use all commercially reasonable efforts to promptly
comply with or cause to be complied with any requests by the United States
Federal Trade Commission or the Antitrust Division of the United States
Department of Justice for additional information concerning such transactions in
each case so that the waiting period applicable to this Agreement and the
transactions contemplated hereby under the HSR Act shall expire as soon as
practicable after the execution and delivery of this Agreement. Purchaser agrees
to request, and to cooperate with the Company in requesting, early termination
of any applicable waiting period under the HSR Act.

    SECTION 6.4. Consents and Approvals. Each Purchaser (a) shall use all
commercially reasonable efforts to obtain all necessary consents, waivers,
authorizations and approvals of all Governmental Authorities other than as
expressly set forth in Section 6.3 regarding the HSR Act, and of all other
Persons required in connection with the execution, delivery and performance of
this Agreement or the consummation of the Transactions and (b) shall diligently
assist and cooperate with the Company in preparing and filing all documents
required to be submitted by the Company to any Governmental Authority in
connection with such Transactions (which assistance and cooperation shall
include, without limitation, timely furnishing to the Company all information
concerning such Purchaser that counsel to the Company reasonably determines is
required to be included in such documents or would be helpful in obtaining any
such required consent, waiver, authorization or approval).

    SECTION 6.5. Restrictions on Transfer. No Purchaser shall sell, assign,
transfer, pledge, hypothecate, deposit in a voting trust or otherwise dispose of
any portion of the Securities (any such disposition, a "Securities Transfer"),
other than (a) to a Permitted Transferee of such Purchaser that has agreed in
writing (each, a "Permitted Transferee Agreement") to be bound by the terms and
provisions of this Section 6.5 to the same extent that the transferring
Purchaser would be bound if it beneficially owned the Securities transferred to
such Permitted Transferee or (b)(i) in any transaction in compliance with Rule
144 under the Securities Act or any successor rule or regulation, (ii) in a
transaction exempt from the registration requirements of the Securities Act or
(iii) pursuant to a registration statement. Each Purchaser shall promptly notify
the Company of any Securities Transfer to a Permitted Transferee of such
Purchaser, which notification shall include a Permitted Transferee Agreement
executed by each Permitted Transferee of such Purchaser to whom any Securities
have been transferred .

                                  ARTICLE VII

                        CONDITIONS PRECEDENT TO CLOSING

    SECTION 7.1. Conditions to the Company's Obligations. The obligations of the
Company with respect to a Purchaser hereunder required to be performed on the
Closing Date shall be subject to the satisfaction or waiver, at or prior to the
Closing, of the following conditions:

         (a)  The representations and warranties of such Purchaser contained in
this Agreement shall have been true and correct when made and, in addition,
shall be repeated and

                                      -19-
<PAGE>

true and correct in all material respects on and as of the Closing Date with the
same force and effect as though made on and as of the Closing Date.

         (b)  Such Purchaser shall have performed in all material respects all
obligations and agreements, and complied in all material respects with all
covenants contained in this Agreement to be performed and complied with by such
Purchaser at or prior to the Closing Date.

         (c)  Any applicable waiting period under the HSR Act with respect to
the purchase by such Purchaser shall have expired or been terminated.

         (d)  The Company shall have obtained all necessary consents, waivers,
authorizations and approvals of all Governmental Authorities and of all other
Persons required in connection with the execution, delivery and performance of
the Equity Documents or the consummation of the Issuance.

         (e)  Such Purchaser shall have entered into the Registration Rights
Agreement.

    SECTION 7.2. Conditions to Each Purchaser's Obligations. The obligations of
a Purchaser hereunder required to be performed on the Closing Date shall be
subject to the satisfaction or waiver, at or prior to the Closing, of the
following conditions:

         (a)  The representations and warranties of the Company contained in
this Agreement (i) shall have been true and correct when made and (ii) shall be
(A) in the case of representations and warranties that are qualified as to
materiality or Material Adverse Effect, true and correct and (B) in all other
cases, true and correct in all material respects, in the case of clauses (A) and
(B), as of the Closing Date with the same force and effect as though made on and
as of the Closing Date.

         (b)  The Company shall have performed in all material respects all of
its obligations, agreements and covenants contained in this Agreement to be
performed and complied with at or prior to the Closing Date.

         (c)  The Company shall have entered into the Registration Rights
Agreement.

         (d)  The Company shall have filed the Certificate of Designation with
the Secretary of State of the State of Delaware.

         (e)  Any applicable waiting period under the HSR Act with respect to
the purchase by such Purchaser shall have expired or been terminated.

         (f)  The Company shall have delivered to such Purchaser a certificate
executed by it or on its behalf by a duly authorized representative, dated the
Closing Date, to the effect that each of the conditions specified in paragraph
(a) through (e) of this Section 7.2 has been satisfied.

                                      -20-
<PAGE>

         (g)  No provision of any Applicable Law, injunction, order or decree of
any Governmental Entity shall be in effect which has the effect of making the
Transactions illegal or shall otherwise restrain or prohibit the consummation of
the Transactions.

         (h)  Such Purchaser shall have received an opinion of counsel to the
Company, dated the Closing Date, and addressed to such Purchaser, in form and
substance reasonably acceptable to the Purchaser.

         (i)  Such Purchaser shall have received certificates representing the
Securities purchased by such Purchaser concurrently with the Company's receipt
of the Purchase Price for such Securities.

         (j)  The Purchaser shall have executed and caused its rights agent to
execute the Rights Agreement Amendment.

         (k)  The Company shall have delivered to the HMTF Purchasers a
Management Rights Agreement executed by the Company and addressed to the HMTF
Funds.

         (l)  There shall not have occurred (i) any event, circumstance,
condition, fact, effect or other matter which has had or could reasonably be
expected to have a material adverse effect (x) on the business, assets,
financial condition, prospects, or results of operations of the Company and the
Subsidiaries taken as a whole or (y) on the ability of the Company and the
Subsidiaries to perform on a timely basis any material obligation under this
Agreement or to consummate the Issuance contemplated hereby; or (ii) any
material disruption of or material adverse change in financial, banking or
capital market conditions that would reasonably be expected to materially impair
the Company's ability to obtain financing on reasonable terms.

                                 ARTICLE VIII

                                 MISCELLANEOUS

    SECTION 8.1. Indemnification. (a) All representations, warranties, covenants
and agreements contained in this Agreement shall survive the Closing for 18
months (except (i) covenants and agreements that are required to be performed
after the Closing Date and (ii) the last sentence of Section 3.2(a), which shall
survive indefinitely). Notwithstanding the foregoing, with respect to claims
asserted pursuant to this Section 8.1 before the expiration of the applicable
representation, warranty, covenant or agreement, such claims shall survive until
the date they are finally adjudicated or otherwise resolved.

         (b)  The Company agrees to indemnify and hold harmless each Purchaser
and each Purchaser Affiliate (each an "Indemnified Person"), from and against
(and to reimburse each indemnified person as the same are incurred) any and all
losses (including, but not limited to, impairment of the value of the Shares and
Warrants as of the date such loss first becomes known, but excluding
consequential damages), claims, damages, liabilities, costs and expenses
(collectively, "Losses") to which any indemnified person may become subject or
which any indemnified person may incur based upon, arising out of, or in
connection with (i) a breach of any representation, warranty or covenant of this
Agreement by the Company or (ii) any claim,

                                      -21-
<PAGE>

litigation, investigation or proceeding brought by or on behalf of any Person
other than the Company relating to the Issuance, and to reimburse each
indemnified person upon demand for any reasonable legal or other reasonable out
of pocket expenses incurred in connection with investigating or defending any of
the foregoing, provided the maximum amount indemnifiable to each Purchaser (and
its successors or assigns) under clause (i) shall not exceed the purchase price
of the Shares and Warrants purchased by such Purchaser.

         (c)  If a Person entitled to indemnity hereunder (an "Indemnified
Party") asserts that the Company (the "Indemnifying Party") has become obligated
to the Indemnified Party pursuant to Section 8.1(b), or if any suit, action,
investigation, claim or proceeding is begun, made or instituted as a result of
which the Indemnifying Party may become obligated to the Indemnified Party
hereunder, the Indemnified Party shall notify the Indemnifying Party promptly
and shall cooperate with the Indemnifying Party, at the Indemnifying Party's
expense, to the extent reasonably necessary for the resolution of such claim or
in the defense of such suit, action or proceedings, including making available
any information, documents and things in the possession of the Indemnified
Party. Notwithstanding the foregoing notice requirement, the right to
indemnification hereunder shall not be affected by any failure to give, or delay
in giving, notice unless, and only to the extent that, the rights and remedies
of the Indemnifying Party shall have been materially prejudiced as a result of
such failure or delay.

         (d)  In fulfilling its obligations under this Section 8.1, after the
Indemnifying Party has provided each Indemnified Party with a written notice of
its acceptance of liability under this Section 8.1, as between such Indemnified
Party and the Indemnifying Party, the Indemnifying Party shall have the right to
investigate, defend, settle or otherwise handle, with the aforesaid cooperation,
any claim, suit, action or proceeding brought by a third party in such manner as
the Indemnifying Party may in its sole discretion reasonably deem appropriate;
provided, that (i) counsel retained by the Indemnifying Party is reasonably
satisfactory to the Indemnified Party and (ii) the Indemnifying Party will not
consent to any settlement or entry of judgment imposing any obligations on any
other party hereto other than financial obligations for which such party will be
indemnified hereunder, unless such party has consented in writing to such
settlement or judgment (which consent may be given or withheld in its sole
discretion) and (iii) the Indemnifying Party will not consent to any settlement
or entry of judgment unless, in connection therewith, the Indemnifying Party
obtains a full and unconditional release of the Indemnified Party from all
liability with respect to such suit, action, investigation claim or proceeding.
Notwithstanding the Indemnifying Party's election to assume the defense or
investigation of such claim, action or proceeding, the Indemnified Party shall
have the right to employ separate counsel and to participate in the defense or
investigation of such claim, action or proceeding, which participation shall be
at the expense of the Indemnifying Party, if (i) on the advice of counsel to the
Indemnified Party use of counsel of the Indemnifying Party's choice could
reasonably be expected to give rise to a material conflict of interest, (ii) the
Indemnifying Party shall not have employed counsel reasonably satisfactory to
the Indemnified Party to represent the Indemnified Party within a reasonable
time after notice of the assertion of any such claim or institution of any such
action or proceeding, (iii) if the Indemnifying Party shall authorize the
Indemnified Party to employ separate counsel at the Indemnifying Party's expense
or (iv) such action shall seek relief other than monetary damages against the
Indemnified Party.

                                      -22-
<PAGE>

         (e)  The Company and the Purchasers agree that any payment of Losses
made hereunder will be treated by the parties on their tax returns as an
adjustment to the Purchase Price. If, notwithstanding such treatment by the
parties, a final determination (which shall include the form 870-AD or successor
form) with respect to the Indemnified Party or any of its affiliates causes any
such payment not to be treated as an adjustment to Purchase Price, then the
Indemnifying Party shall indemnify the Indemnified Party for any taxes payable
by the Indemnified Party or any subsidiary by reason of the receipt of such
payment (including any payments under this Section 8.1(e)), determined at an
assumed marginal tax rate equal to the highest marginal tax rate then in effect
for corporate taxpayers in the relevant jurisdiction.

    SECTION 8.2. Notices. All notices, demands, requests, consents, approvals or
other communications (collectively, "Notices") required or permitted to be given
hereunder or which are given with respect to this Agreement shall be in writing
and shall be personally served, delivered by reputable air courier service with
charges prepaid, or transmitted by hand delivery, telegram, telex or facsimile,
addressed as set forth below, or to such other address as such party shall have
specified most recently by written notice. Notice shall be deemed given on the
date of service or transmission if personally served or transmitted by telegram,
telex or facsimile. Notice otherwise sent as provided herein shall be deemed
given on the next business day following delivery of such notice to a reputable
air courier service.

    To the Company:

         Rhythms NetConnections Inc.
         6933 South Revere Parkway
         Englewood, CO  80112-3931
         Attn:  Catherine Hapka
         Telephone:  (303) 476-4200
         Fax:  (303) 476-5700

    with a copy to:

         Brobeck, Phleger & Harrison LLP
         550 West C Street, Suite 1300
         San Diego, CA  9210
         Attn: Martin C. Nichols
         Telephone:  (619) 699-0254
         Fax:  (619) 234-3848

                                      -23-
<PAGE>

    To the Purchasers:

    To the appropriate member of the HMTF Group

         c/o Hicks, Muse, Tate & Furst Incorporated
         1325 Avenue of the Americas
         25th Floor
         New York, NY 10019
         Attn:  Michael J. Levitt
         Telephone:  (212) 424-1400
         Fax:  (212) 424-1450

    with a copy to:

         Hicks, Muse, Tate & Furst Incorporated
         200 Crescent Court, Suite 1600
         Dallas, Texas  75201
         Attn:  Lawrence D. Stuart
         Telephone:  (214) 740-7300
         Fax:  (214) 720-7888

    with a copy to:

         Vinson & Elkins L.L.P.
         1325 Avenue of the Americas (17th Floor)
         New York, NY 10019
         Attention:  Eric S. Shube
         Telephone:  (917) 206-8005
         Fax:  (917) 206-8100

    SECTION 8.3. Governing Law. This Agreement shall be governed by, interpreted
under, and construed in accordance with the laws of the State of New York,
regardless of the laws that might otherwise govern under applicable principles
of conflicts of law thereof.

    SECTION 8.4. Termination. (a) This Agreement may be terminated as between
the Company and any Purchaser (i) at any time prior to the Closing Date by
mutual written agreement of the Company and such Purchaser, (ii) if the Closing
shall not have occurred on or prior to March 31, 2000 either the Company or such
Purchaser, at any time after March 31, 2000, provided that the right to
terminate this Agreement under this Section 8.4(a)(ii) shall not be available to
any party whose failure to fulfill any obligation under this Agreement was the
cause of or resulted in the failure of the Closing to occur on or before such
date, (iii) if any Governmental Authority shall have issued a nonappealable
final order, decree or ruling or taken any other action having the effect of
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement, by either the Company or such Purchaser, (iv) if
either the Company or such Purchaser shall have breached any of its material
obligations under this Agreement, by the non-breaching party, or (v) if an event
described in Section 7.2(l) shall have occurred, by such Purchaser. Any party
desiring to terminate this Agreement pursuant to

                                      -24-
<PAGE>

clauses 8.4(a)(ii), (iii), (iv) or (v) shall promptly give notice of such
termination to the other party.

         (b)  If this Agreement is terminated as between the Company and a
Purchaser, as permitted by Section 8.4(a), such termination shall be without
liability of any party (or any stockholder, director, officer, partner,
employee, agent, consultant or representative of such party) to any other party
to this Agreement; provided that if such termination shall result from the
willful (a) failure of any party to fulfill a condition to the performance of
the obligations of the other party, (b) failure to perform a covenant of this
Agreement or (c) breach by any party hereto of any representation or warranty
contained herein, such failing or breaching party shall be fully liable for any
and all losses (excluding consequential damages) incurred or suffered by the
other party as a result of such failure or breach. The provisions of Sections
8.2, 8.3, this Section 8.4, Sections 8.5, 8.8, 8.10, 8.11, 8.12, 8.13, 8.14,
8.16, 8.17, 8.18 and 8.20 shall survive any termination hereof pursuant to
Section 8.4(a).

    SECTION 8.5. Entire Agreement. As between the Company and each Purchaser
this Agreement and the other Equity Documents (including all agreements entered
into pursuant hereto and thereto and all certificates and instruments delivered
pursuant hereto and thereto) constitute the entire agreement of the parties with
respect to the subject matter hereof and supersede all prior and contemporaneous
agreements, representations, understandings, negotiations and discussions
between the parties, whether oral or written, with respect to the subject matter
hereof.

    SECTION 8.6. Modifications and Amendments. No amendment, modification or
termination of this Agreement as between the Company and a Purchaser shall be
binding unless executed in writing by the Company and such Purchaser intending
to be bound thereby.

    SECTION 8.7. Waivers and Extensions. Any party to this Agreement may waive
any condition, right, breach or default that such party has the right to waive,
provided that such waiver will not be effective against the waiving party unless
it is in writing, is signed by such party, and specifically refers to this
Agreement. Waivers may be made in advance or after the right waived has arisen
or the breach or default waived has occurred. Any waiver may be conditional. No
waiver of any breach of any agreement or provision herein contained shall be
deemed a waiver of any preceding or succeeding breach thereof nor of any other
agreement or provision herein contained. No waiver or extension of time for
performance of any obligations or acts shall be deemed a waiver or extension of
the time for performance of any other obligations or acts.

    SECTION 8.8. Titles and Headings. Titles and headings of sections of this
Agreement are for convenience only and shall not affect the construction of any
provision of this Agreement.

    SECTION 8.9. Exhibits and Schedules. Each of the exhibits and schedules
referred to herein and attached hereto is an integral part of this Agreement and
is incorporated herein by reference.

    SECTION 8.10. Expenses. All costs and expenses incurred in connection with
this Agreement shall be paid by the party incurring such cost or expense;
provided, however, that (a)

                                      -25-
<PAGE>

the Company shall pay the filing fee payable in respect to any HSR Act filing,
and (b) if this Agreement is terminated with respect to any Purchaser for any
reason other than a breach by such Purchaser and other than the failure of the
condition set forth in Section 7.2(l)(ii) to be satisfied, then (without
limiting any party's right to recover damages pursuant to Section 8.4(b)) the
Company shall reimburse such Purchaser for such Purchaser's reasonable out-of-
pocket costs and expenses incurred in connection with this Agreement.

    SECTION 8.11. Press Releases and Public Announcements. All public
announcements or disclosures relating to the Issuance or this Agreement shall be
made only if mutually agreed upon by the Company and the Purchasers, except to
the extent such disclosure is, in the opinion of counsel, required by law or by
regulation of any applicable national stock exchange or Commission recognized
trading market; provided that (a) any such required disclosure shall only be
made, to the extent consistent with law and regulation of any applicable
national stock exchange or Commission recognized trading market, after
consultation with each Purchaser and (b) no such announcement or disclosure
(except as required by law or by regulation of any applicable national stock
exchange or Commission recognized trading market) shall identify any Purchaser
without such Purchaser's prior consent.

    SECTION 8.12. Assignment; No Third Party Beneficiaries. This Agreement and
the rights, duties and obligations hereunder may not be assigned or delegated by
the Company without the prior written consent of the Purchasers, and may not
assigned or delegated by any Purchaser without the Company's prior written
consent except that each Purchaser may assign any or all of its rights and
obligations under this Agreement to any one or more of its Affiliates. Any
assignment or delegation of rights, duties or obligations hereunder made by the
Company without the prior written consent of the Purchasers, shall be void and
of no effect. This Agreement and the provisions hereof shall be binding upon and
shall inure to the benefit of each of the parties and their respective
successors and permitted assigns. This Agreement is not intended to confer any
rights or benefits on any Persons other than the parties hereto, except as
expressly set forth in Section 5.2, Section 8.1, this Section 8.12 or Section
8.20.

    SECTION 8.13. Severability. This Agreement shall be deemed severable, and
the invalidity or unenforceability of any term or provision hereof shall not
affect the validity or enforceability of this Agreement or of any other term or
provision hereof. Furthermore, in lieu of any such invalid or unenforceable term
or provision, the parties hereto intend that there shall be added as a part of
this Agreement a provision as similar in terms to such invalid or unenforceable
provision as may be possible and be valid and enforceable.

    SECTION 8.14. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.

    SECTION 8.15. Further Assurances. As between the Company and a Purchaser,
each party hereto, upon the request of any other party hereto, shall do all such
further acts and execute, acknowledge and deliver all such further instruments
and documents as may be necessary or desirable to carry out the transactions
contemplated by this Agreement, including, in the case of the Company, such
acts, instruments and documents as may be necessary or

                                      -26-
<PAGE>

desirable to convey and transfer to each Purchaser the Shares and Warrants to be
purchased by it hereunder.

    SECTION 8.16. Remedies Cumulative. The remedies provided herein shall be
cumulative and shall not preclude the assertion by any party hereto of any other
rights or the seeking of any remedies against the other party hereto.

    SECTION 8.17. Several Liability of the Purchasers. Nothing in this Agreement
(including, without limitation, Article VI) shall be construed to impose on any
Purchaser any liability for any action or failure to act of any other Purchaser,
including any breach of this Agreement by any such other Purchaser.

    SECTION 8.18. No Duty to Other Purchasers. Each Purchaser confirms with each
other Purchaser that such Purchaser has conducted its own due diligence in
connection with its investment in the Securities and the other Purchasers may
therefore have information different from, or additional to, the information
possessed by such Purchaser. In addition, although certain of such other
Purchasers (the "Supplying Purchasers") may have shared information received by
them (including information contained in third party reports prepared for such
other Purchasers) with such Purchaser, no representation or warranty is being
made with respect to such information by any Supplying Purchaser or any such
third party. Nothing in this Section 8.18 is meant to limit any duty, obligation
or liability the Company may have to any Purchaser under this Agreement or
otherwise.

    SECTION 8.19. Specific Performance. The parties hereto agree that the remedy
at law for any breach of this Agreement may be inadequate, and that as between
the Company and a Purchaser any party by whom this Agreement is enforceable
shall be entitled to specific performance in addition to any other appropriate
relief or remedy. Such party may, in its sole discretion, apply to a court of
competent jurisdiction for specific performance or injunctive or such other
relief as such court may deem just and proper in order to enforce this Agreement
as between the Company and a Purchaser, or prevent any violation hereof, and, to
the extent permitted by applicable as between the Company and a Purchaser law,
each party waives any objection to the imposition of such relief.

    SECTION 8.20. No Purchaser Affiliate Liability. No Purchaser Affiliate shall
have any liability or obligation of any nature whatsoever in connection with or
under this Agreement or the transactions contemplated hereby, and the Company
hereby waives and releases all claims of any such liability and obligation, it
being understood that no such Person or entity (other than Purchaser) shall be
liable for or in respect of this Agreement with the transactions contemplated
hereby.

                                      -27-
<PAGE>

    IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.

                                              RHYTHMS NETCONNECTIONS INC.

                                              By:
                                                 -------------------------------
                                                 Name:  Catherine Hapka
                                                 Title: Chief Executive Officer

                                              HMTF BRIDGE RHY, LLC

                                              By:
                                                 -------------------------------
                                                 Name:
                                                 Title:

                                      -28-
<PAGE>

                                   SCHEDULE I

Purchaser        Number of Shares       Number of Warrants      Purchase Price
---------        ----------------       ------------------      --------------

<PAGE>

                                   EXHIBIT A
                                   ---------

                                FORM OF WARRANT
<PAGE>

                                   EXHIBIT B
                                   ---------

                          CERTIFICATE OF DESIGNATION
<PAGE>

                                   EXHIBIT C
                                   ---------

                         REGISTRATION RIGHTS AGREEMENT
<PAGE>

                                   EXHIBIT D
                                   ---------

                          RIGHTS AGREEMENT AMENDMENT
<PAGE>

                                   EXHIBIT E
                                   ---------

                          MANAGEMENT RIGHTS AGREEMENT
<PAGE>

                                   EXHIBIT F
                                   ---------

                           LATIN AMERICA TERM SHEET

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00005-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00005-of-00352.parquet"}]]