<PAGE>

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

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-Q
(Mark One)

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

     FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                         COMMISSION FILE NUMBER 0-24953
                                                -------

                              VERADO HOLDINGS, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

           DELAWARE                                     33-0521976
           --------                                     ----------
(STATE OR OTHER JURISDICTION OF          (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
 INCORPORATION OR ORGANIZATION)
                                ----------------

                            8390 E. CRESCENT PARKWAY
                                    SUITE 300
                           GREENWOOD VILLAGE, CO 80111
--------------------------------------------------------------------------------
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
                                   (ZIP CODE)

                                 (303) 874-8010
--------------------------------------------------------------------------------
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)


--------------------------------------------------------------------------------
                 (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL
                       YEAR, IF CHANGED SINCE LAST REPORT)
                                ----------------




    INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS:

                                 [X] YES [ ] NO



    AS OF AUGUST 1, 2001, THE REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED OF
5,090,165 SHARES OF SERIES A COMMON STOCK AND 48,904,172 SHARES OF SERIES B
COMMON STOCK.

================================================================================
<PAGE>

VERADO HOLDINGS, INC.
INDEX


<TABLE>
<CAPTION>


                                                                                       PAGE
                                                                                       ----
<S>                                                                                    <C>
FORWARD-LOOKING STATEMENTS                                                               3

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements
   Consolidated Balance Sheets at June 30, 2001 (unaudited) and
     December 31, 2000 ...........................................................       5
   Consolidated Statements of Operations (unaudited) for the three and
     six months ended June 30, 2001 and 2000......................................       6
   Consolidated Statement of Stockholders' Deficit (unaudited)
     for the six months ended June 30, 2001.......................................       7
   Consolidated Statements of Cash Flows (unaudited) for the
     six months ended June 30, 2001 and 2000......................................       8
   Notes to Consolidated Financial Statements (unaudited).........................       9

Item 2.  Management's Discussion and Analysis of Financial Condition
   and Results of Operations......................................................      16

Item 3.  Quantitative and Qualitative Disclosures about Market Risk...............      22

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings........................................................      22
Item 4.  Submission of Matters to a Vote of Security Holders......................      24
Item 5.  Other Information........................................................      24
Item 6.  Exhibits and Reports on Form 8-K.........................................      25

SIGNATURES........................................................................      26
</TABLE>

                                       2
<PAGE>

FORWARD-LOOKING STATEMENTS

      Statements included in this Form 10-Q which are not historical in nature
are intended to be, and are hereby identified as, "forward-looking statements"
within the meaning of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. For example, without limitation, Verado's
projections regarding its financial expectations; business opportunities and
competitive market position; its financial and cash position; industry growth
and its ability to take advantage of industry growth and sell its products;
network enhancement, development, expansion and performance; the successful
launch, implementation, performance and sales of its services and products,
including its managed and professional services products; its ability to meet
the applicable listing requirements for continued listing on the Nasdaq National
Market; the outcome of certain material litigation; the ability of the Company
to successfully execute its business model; the ability to sell or otherwise
dispose of certain business segments; the successful transition to the name
"Verado"; and its ability to obtain needed financing are forward-looking. Actual
events or results may differ materially from the forward-looking statements set
forth in this Form 10-Q and are subject to risks and uncertainties such as: our
ability to properly forecast operating results and cash usage; changes in our
marketplace and in the technology being adopted for our data center and managed
and professional services products; the performance of our network services and
products; our ability to sell, grow and maintain demand for the use of our
services and products; our ability to control operating expenses; our ability to
retain existing customers, obtain new customers and increase their level of use
of our services and products; the success of and market share realized by our
competitors; our ability to obtain financing on terms favorable or acceptable to
us, if at all; the continued viability of our customers in light of volatile
economic conditions; our ability to successfully develop and introduce new
services and products in a timely manner; our ability to successfully develop
and execute a plan to meet the applicable listing requirements for continued
listing on the Nasdaq National Market and thereby avoid delisting; our ability
to successfully defend against any challenges to the use of our name "Verado",
service marks, trademarks, copyrights or intellectual property and our ability
to successfully defend the securities class action litigation Civil Action No.
00-K-1376 in the United States District Court for the District of Colorado.
There can be no assurance that we will be able to successfully realize our
expectations, and, accordingly, the occurrence of one or more of these risks, or
the failure to achieve one or more of these forward-looking objectives, may
cause the prevailing value of our publicly traded debt and equity securities to
decrease. Verado has no obligation to update forward-looking statements. Readers
are encouraged to refer to Verado's reports from time to time filed with the
Securities and Exchange Commission, including the "risk factors" sections of our
registration statement on Form S-1 filed March 7, 2000 and the "risk factors"
and "management's discussion and analysis of financial condition and results of
operations" sections of our Annual Report on Form 10-K filed March 30, 2001 for
further discussions of Verado's business and risk factors that may affect
operating and financial results and forward-looking statements.

                                       3
<PAGE>

                      [THIS PAGE INTENTIONALLY LEFT BLANK]


                                       4
<PAGE>

                         PART I. FINANCIAL INFORMATION

ITEM I.   FINANCIAL STATEMENTS

VERADO HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>

                                                                                                JUNE 30,          DECEMBER 31,
                                                                                                  2001               2000
                                                                                              ------------        -----------
                                                                                              (UNAUDITED)
                                         ASSETS
<S>                                                                                           <C>                 <C>
Current assets:
 Cash and cash equivalents.........................................................           $    62,907         $    15,301
 Marketable securities.............................................................                24,694             126,274
 Accounts receivable, net..........................................................                 1,728               1,950
 Prepaid expenses and other........................................................                 5,372               4,777
                                                                                              -----------         -----------
        Total current assets.......................................................                94,701             148,302
                                                                                              -----------         -----------

Property and equipment.............................................................               123,135             118,760
Accumulated depreciation, property and equipment...................................               (23,191)            (12,441)
                                                                                              -----------         -----------
        Net property and equipment.................................................                99,944             106,319
Goodwill and intangibles, net......................................................                 1,081               6,442
Deferred financing costs, net......................................................                 5,225               6,450
Other assets.......................................................................                 1,254                 866
Long-haul network rights, not in service...........................................                    --               4,408
Net assets of discontinued operations..............................................                    --               3,029
                                                                                              -----------         -----------
        Total assets...............................................................           $   202,205         $   275,816
                                                                                              ===========         ===========


                  LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
 Accounts payable..................................................................           $     3,947         $    13,921
 Deferred revenue..................................................................                 2,250               1,758
 Accrued payroll and related liabilities...........................................                 3,485               4,072
 Other accrued expenses............................................................                 4,888               3,789
 Net liabilities of discontinued operations........................................                 9,395                  --
                                                                                              -----------         -----------
        Total current liabilities..................................................                23,965              23,540

Long-term debt, net of discount....................................................               312,469             335,372
                                                                                              -----------         -----------
        Total liabilities..........................................................               336,434             358,912
                                                                                              -----------         -----------

Stockholders' deficit:
 Preferred stock, $.0001 par value per share: 10,000,000 shares
     authorized; no shares outstanding.............................................                    --                  --
 Common stock, voting, $.0001 par value per share: 500,000,000 shares authorized;
     Series A, 10,135,164 shares designated; 5,090,165 and 5,101,831
       shares issued and outstanding at June 30, 2001 and December 31, 2000,
       respectively................................................................                     1                   1
     Series B, 489,864,836 shares designated; 48,747,727 and 47,313,002 shares
       issued and outstanding at June 30, 2001 and December 31, 2000,
       respectively................................................................                     5                   4
 Additional paid-in capital........................................................               398,201             399,136
 Deferred stock compensation.......................................................                (1,546)             (3,863)
 Accumulated deficit...............................................................              (530,890)           (478,374)
                                                                                              -----------         -----------
        Total stockholders' deficit................................................              (134,229)            (83,096)
                                                                                              -----------         -----------
        Total liabilities and stockholders' deficit................................           $   202,205         $   275,816
                                                                                              ===========         ===========
</TABLE>

                 See notes to consolidated financial statements.

                                       5
<PAGE>

VERADO HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>

                                                               THREE MONTHS ENDED                  SIX MONTHS ENDED
                                                                    JUNE 30,                           JUNE 30,
                                                         -----------------------------      ------------------------------
                                                             2001              2000             2001              2000
                                                         -----------       -----------      -----------        -----------
<S>                                                      <C>               <C>              <C>                <C>
Revenue..............................................    $     4,417       $     3,075      $     9,603        $     5,395

Costs and expenses:
    Cost of revenue..................................          5,927             2,792           11,955              4,134
    Selling, general and administrative expenses.....         14,345            13,419           30,192             32,691
    Impairment of long-lived assets..................         (1,560)               --            1,788                 --
    Depreciation and amortization....................          5,962             3,425           12,421              6,033
                                                         -----------       -----------      -----------        -----------
       Total costs and expenses......................         24,674            19,636           56,356             42,858
                                                         -----------       -----------      -----------        -----------

Operating loss.......................................        (20,257)          (16,561)         (46,753)           (37,463)

Other income (expense):
    Gain on the sale of assets.......................             --             5,501               --              5,501
    Interest income..................................          1,100             4,263            3,178              5,439
    Interest expense.................................        (10,644)           (9,815)         (22,030)           (19,577)
                                                         -----------       -----------      -----------        -----------
       Total other expense...........................         (9,544)              (51)         (18,852)            (8,637)
                                                         -----------       -----------      -----------        -----------

Loss from continuing operations......................        (29,801)          (16,612)         (65,605)           (46,100)

Loss from discontinued operations....................             --           (22,747)              --            (42,943)
Loss on disposition of discontinued operations.......        (19,407)               --          (19,407)                --
                                                         -----------       -----------      -----------        -----------

Loss before extraordinary item.......................        (49,208)          (39,359)         (85,012)           (89,043)

Extraordinary gain--extinguishment of debt...........             --                --           32,496                 --
                                                         -----------       -----------      -----------        -----------

Net loss.............................................    $   (49,208)      $   (39,359)     $   (52,516)       $   (89,043)
                                                         ===========       ===========      ===========        ===========

Basic and diluted loss per common share:
    Loss from continuing operations..................    $     (0.56)      $     (0.32)     $     (1.24)       $     (1.06)
    Loss from discontinued operations................          (0.36)            (0.45)           (0.36)             (0.99)
                                                         -----------       -----------      -----------        -----------
    Loss before extraordinary item...................          (0.92)            (0.77)           (1.60)             (2.05)
    Extraordinary gain - extinguishment of debt......             --                --             0.61                 --
                                                         -----------       -----------      -----------        -----------
    Net loss.........................................    $     (0.92)      $     (0.77)     $     (0.99)       $     (2.05)
                                                         ===========       ===========      ===========        ===========
Weighted average shares outstanding, basic
    and diluted......................................     53,453,365        51,252,275       52,986,544         43,575,244
                                                         ===========       ===========      ===========        ===========
</TABLE>


                 See notes to consolidated financial statements.

                                       6
<PAGE>

VERADO HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT  (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>

                                           Series A                Series B                        Deferred                Total
                                         Common Stock            Common Stock         Additional    Stock      Accum-      Stock-
                                     --------------------     --------------------     Paid-in      Compen-    ulated      holders'
                                      Shares      Amount        Shares     Amount      Capital      sation     Deficit     Deficit
                                     ---------   --------     ----------  --------   -----------  ----------  ----------  ---------
<S>                                  <C>         <C>          <C>         <C>        <C>          <C>         <C>         <C>
Balance at January 1, 2001.........  5,101,831   $      1     47,313,002   $     4   $ 399,136    $  (3,863)  $(478,374)  $ (83,096)
Conversion of Series A common
  stock to Series B common stock...    (11,666)        --         11,666        --          --           --          --          --
Issuance of common stock upon
  exercise of options, warrants or
  employee stock plan purchases....         --         --        210,548        --         219           --          --         219
Issuance of common stock
  representing a 401(k) matching
  contribution.....................         --         --      1,212,511         1         512           --          --         513
Amortization of deferred stock
  compensation.....................         --         --             --        --          --          651          --         651
Write-down of deferred
  compensation related to
  terminated employees.............         --         --             --        --      (1,666)       1,666          --          --
Net loss...........................         --         --             --        --          --           --     (52,516)    (52,516)
                                     ---------   --------   ------------   -------   ---------    ---------   ---------   ---------
Balance at June 30, 2001...........  5,090,165   $      1     48,747,727   $     5   $ 398,201    $  (1,546)  $(530,890)  $(134,229)
                                     =========   ========   ============   =======   =========    =========   =========   =========
</TABLE>

                 See notes to consolidated financial statements.

                                       7
<PAGE>

VERADO HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                          SIX MONTHS ENDED
                                                                                               JUNE 30,
                                                                                     ---------------------------
                                                                                       2001              2000
                                                                                     ---------        ----------
<S>                                                                                  <C>              <C>
Cash flows from operating activities:
  Net loss...............................................................            $(52,516)        $ (89,043)
  Adjustments to reconcile net loss to net cash used by operating
    activities:
    Depreciation and amortization expense................................              12,421             6,033
    Accretion of senior notes............................................              21,646            19,985
    Impairment of long-lived assets......................................               1,788                --
    Amortization of deferred stock compensation..........................                 424             3,170
    Amortization of deferred financing costs.............................                 406               445
    Compensation charges resulting from initial public offering..........                  --             8,537
    Gain on sale of assets...............................................                  --            (5,501)
    Extraordinary gain - extinguishment of debt..........................             (32,496)               --
    Loss from discontinued operations....................................              19,407            42,943
    Other non-cash charges...............................................                  --               492
  Changes in assets and liabilities:
    Accounts receivable..................................................                 222            (1,904)
    Other assets.........................................................               5,577            (5,455)
    Accounts payable.....................................................              (1,292)              764
    Accrued payroll and related liabilities..............................                 (74)              209
    Deferred revenue.....................................................                 492               331
    Other liabilities....................................................               1,099               726
                                                                                     --------         ---------
    Net cash used by operating activities................................             (22,896)          (18,268)
                                                                                     --------         ---------
Cash flows from investing activities:
  Maturities of held-to-maturity marketable securities...................             141,056            40,276
  Purchases of held-to-maturity marketable securities....................             (39,476)         (191,432)
  Purchase of property and equipment.....................................             (13,307)          (45,636)
  Acquisition of assets and intangibles..................................                  --            (2,400)
  Proceeds from the sale of assets.......................................                  --             7,230
                                                                                     --------         ---------
    Net cash provided (used) by investing activities.....................              88,273          (191,962)
                                                                                     --------         ---------
Cash flows from financing activities:
  Payment related to the retirement of Senior Notes......................             (11,234)               --
  Principal payments on debt and capital leases..........................                  --              (143)
  Proceeds from initial public offering, net of offering costs...........                  --           180,957
  Proceeds from private placements.......................................                  --            91,500
  Proceeds from 1999 Equity Investment, net of offering costs............                  --            20,000
  Proceeds from exercise of stock options, warrants and employee stock
  purchase plan..........................................................                 219             5,686
                                                                                     --------         ---------
    Net cash provided (used) by financing activities.....................             (11,015)          298,000

  Net cash used by discontinued operations...............................              (6,756)          (58,197)
                                                                                     --------         ---------

Net increase in cash and cash equivalents................................              47,606            29,573
Cash and cash equivalents, beginning of period...........................              15,301            28,608
                                                                                     --------         ---------
Cash and cash equivalents, end of period.................................            $ 62,907         $  58,181
                                                                                     ========         =========
</TABLE>

                 See notes to consolidated financial statements.

                                       8
<PAGE>

VERADO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.  BASIS OF PRESENTATION

    The consolidated financial statements include the accounts of Verado
Holdings, Inc. and its wholly owned subsidiaries (collectively, the "Company",
"Verado", "its", "we," "us" and "our"). All significant intercompany
transactions and balances have been eliminated in consolidation.

     In the opinion of management, the accompanying unaudited interim
consolidated financial statements include all adjustments (consisting of normal
recurring items) necessary for a fair presentation of results for the interim
periods presented by the Company. The results of operations for any interim
period are not necessarily indicative of results for the full year. The
consolidated financial statements and footnote disclosures should be read in
conjunction with the audited consolidated financial statements and related notes
thereto filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 2000. Certain 2000 amounts have been reclassified to conform to the
2001 basis of presentation.

    The Company's operations have required and will continue to require capital
investment for the design, enhancement and additional build-out of its data
centers and, network; development of new data center product offerings,
including managed and professional services; installation of electronics and
other related equipment and the continued development of operational support
system platforms. The Company expects to incur operating losses for at least the
next several years as it fills its data centers and develops new products. In
addition, the Company expects to continue to experience net cash usage related
to its discontinued operations until such time that it sells or otherwise
disposes of these businesses. The Company has satisfied its cash requirements
through the issuance of equity and debt securities and lease financing; however,
there is no assurance that the Company will be able to obtain such funding in
the future if required.

2.  ACCOUNTING POLICIES

Impairment of long-lived assets

     The impairment of long-lived assets relates to the goodwill associated with
the Intelenet acquisition offset by the reversal of an impairment recognized
during the year ended December 31, 2000. The impairment of long-lived assets
associated with the goodwill related to the Intelenet acquisition was based on
an analysis of expected future undiscounted net cash flows from specific
customers. The estimated value of the goodwill was approximately $1.4 million at
March 31, 2001, which resulted in an impairment of $3.3 million. During the year
ended December 31, 2000, the Company recognized an impairment of $1.9 million
associated with the write-down of credits related to equipment returned to a
certain vendor, for which the Company had no use and did not expect to receive
payment. During the three months ended June 30, 2001, the Company negotiated a
settlement with the vendor and received $1.6 million in cash as net
consideration for the credits.

Loss per share of common stock

     Basic loss per share was computed using the weighted average number of
common shares outstanding during the period. Diluted loss per share would be
determined in the same manner as basic earnings per share except that the number
of shares is increased assuming exercise of dilutive stock options and warrants
using the treasury stock method. The computation of earnings per share did not
assume conversion, exercise or contingent issuance of securities that would have
an anti-dilutive effect on earnings per share. Since the Company has incurred
only net losses, the inclusion of any stock options, warrants or other rights in
the calculation of loss per share would be anti-dilutive. However, if the
securities were not anti-dilutive they would increase the number of shares
outstanding by approximately 8.5 million and 8.4 million options for the three
and six months ended June 30, 2001, respectively, and approximately 23.2 million
warrants for both the three and six months ended June 30, 2001, compared to
approximately 3.1 million and 4.2 million options for the three and six months
ended June 30, 2000, respectively, and approximately 17.9 million and 19.8
million warrants for the three and six months ended June 30, 2000, respectively.

                                       9
<PAGE>

Allowance for doubtful accounts

     The allowance for doubtful accounts was $1.3 million at June 30, 2001 and
December 31, 2000.

Recent Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). This pronouncement
addresses financial accounting and reporting for intangible assets acquired
individually or with a group of other assets (but not those acquired in a
business combination) at acquisition. This Statement also addresses financial
accounting and reporting for goodwill and other intangible assets subsequent to
their acquisition. The Company is required to adopt SFAS 142 at the beginning of
the fiscal year ended December 31, 2002. The Company does not expect that the
adoption of SFAS 142 will have a material impact on the Company's results of
operations, financial position or cash flows.


3.   SENIOR NOTES

     During the quarter ended March 31, 2001, the Company spent approximately
$11.2 million to retire a portion of its senior notes. As a result, we
recognized an extraordinary gain of approximately $32.5 million, net of the
accelerated recognition of related deferred financing costs of approximately
$819,000.

4.   LEASE

     The Company has finalized a master lease agreement with one of its vendors
that allows it to finance up to $20.4 million in equipment and/or other
associated costs. For all leased equipment or other costs under this agreement,
the term is 24 months with an option to purchase the equipment at fair market
value at the end of the lease term. The leased equipment is accounted for as an
operating lease. Through June 30, 2001, there has been approximately $11.8
million of equipment leased and other costs incurred. The agreement was
effective beginning June 2001 and as a result the Company began recognizing the
related monthly expenses of approximately $420,000 per month. Substantially all
of the payment was reflected in cost of revenue. The Company also purchased $2.6
million of maintenance services to cover the leased equipment; of which
approximately $108,000 was recognized during the quarter ended June 30, 2001.
Subsequent to June 30, 2001, the Company leased an additional $474,000 of
equipment. The monthly payment related to this equipment is $17,000 per month
and will be reflected in cost of revenue as well. The Company has until
September 30, 2001 to utilize any of the remaining $8.1 million available under
this lease.

     Pursuant to the provisions of the agreement, the Company must establish a
letter of credit as partial security for its obligations. As a result, the
Company will reflect the $2.2 million of cash collateralizing the letter of
credit as restricted cash once the line of credit is executed.


5.   EMPLOYEE BENEFIT PLANS

     The Compensation Committee of the Board of Directors, in accordance with
our 401(k) Retirement Plan, approved a matching contribution to participants in
the plan in shares of the Company's Series B common stock. On April 26, 2001,
the Company contributed approximately 1.2 million shares of Series B common
stock to employee accounts at a price of $0.42 per share, which represented the
closing price per share on April 25, 2001 as quoted on the Nasdaq National
Market.

6.   BUSINESS SEGMENTS

     The Company operates in the United States of America and conducts
operations through its Data Center and Other segments.

     Data Center. The Company's Data Center segment represents services such as
managed services, dedicated servers, colocation and professional services. We
currently operate eight data centers totaling approximately 240,000 gross square
feet. We have transferred the operations of the Glendale data center to the
Irvine data center

                                      10
<PAGE>

and anticipate completing the closing of the 5,000 square foot Glendale facility
by September 30, 2001 and do not anticipate incurring any material costs
associated with this closing. Typically, selling, general and administrative
expenses shown in this segment represent specifically identifiable direct costs.
These costs include, among other items, office rent and costs associated with
certain sales and support staff physically located at the various locations.
Also included are indirect costs, including but not limited to, certain employee
benefit and business insurance allocations.

     Other. The Company's Other segment represents operations from providing
shared Web hosting services and certain other services, primarily dedicated
access to a certain customer in Southern California. During the three months
ended June 30, 2001 we decided to retain these businesses. The revenue and
related costs associated with these services were reclassified from discontinued
operations to continuing operations. These reclassifications caused revenue and
gross margin for the three months ended March 31, 2001 to increase by $1.3
million and $638,000, respectively. All information presented has been adjusted
to reflect such reclassifications. See further discussion in "Note 8 -
Discontinued Operations."

     Corporate. The Corporate segment represents direct and indirect costs
incurred by the corporate headquarters. The Company currently allocates these
costs to the Data Center segment only on a limited basis. Selling, general and
administrative expenses presented for Corporate include, among other items,
costs related to selling, customer care, provisioning, billing and collections,
information technology, general management and overhead and other administrative
expenses. All inter-segment transactions have been eliminated.

<TABLE>
<CAPTION>

                                             Three Months Ended                                  Six Months Ended
                                                June 30, 2001                                      June 30, 2001
                               ------------------------------------------------   ----------------------------------------------
                                 Data                                               Data
                                Centers    Corporate       Other       Total       Centers    Corporate     Other        Total
                                -------    ---------       -----       -----       -------    ---------     -----        -----
                                                                         (in thousands)
<S>                            <C>        <C>           <C>          <C>          <C>         <C>         <C>         <C>
Revenue .....................  $  3,271   $        --   $     1,146  $    4,417   $   7,140   $      --   $   2,463   $    9,603
Gross margin ................    (2,110)           --           600      (1,510)     (3,590)         --       1,238       (2,352)
Selling, general &
  administrative expenses....     9,699         4,285           361      14,345      19,034      10,428         730       30,192
Other income / (expense).....        --         1,560            --       1,560      (3,348)      1,560          --        1,788
Depreciation and
  amortization ..............     5,035           927            --       5,962      10,618       1,803          --       12,421
Interest income..............        --         1,100            --       1,100          --       3,178          --        3,178
Interest expense.............        --       (10,644)           --     (10,644)         --     (22,030)         --      (22,030)
                               --------   -----------   -----------  ----------   ---------   ---------   ---------    ---------
Net income (loss) from
continuing operations........  $(16,844)  $   (13,196)  $       239  $  (29,801)  $ (36,590)  $ (29,523)  $     508    $ (65,605)
                               ========   ===========   ===========  ==========   =========   =========   =========    =========
Total assets at June 30, 2001                                                     $  94,192   $ 106,981   $   1,032    $ 202,205
                                                                                  =========   =========   =========    =========
</TABLE>

<TABLE>
<CAPTION>

                                             Three Months Ended                            Six Months Ended
                                                June 30, 2000                                June 30, 2000
                               -------------------------------------------   ---------------------------------------
                                 Data                                          Data
                               Centers    Corporate     Other      Total      Centers    Corporate   Other     Total
                               --------   ---------     -----      -----     ---------   ---------   -----     -----
                                                                     (in thousands)
<S>                            <C>        <C>         <C>        <C>         <C>         <C>        <C>      <C>
Revenue .....................  $  1,693   $      --   $   1,382  $   3,075   $   2,634  $      --    $2,761  $  5,395
Gross margin ................      (383)         --         666        283        (161)        --     1,422     1,261
Selling, general &
  administrative expenses....     5,883       7,074         462     13,419       9,185     22,569       937    32,691
Other income / (expense)             --       5,501          --      5,501          --      5,501        --     5,501
Depreciation and
  amortization ..............     2,661         764          --      3,425       4,706      1,327        --     6,033
Interest income..............        --       4,263                  4,263          --      5,439               5,439
Interest expense.............        --      (9,815)         --     (9,815)         --    (19,577)       --   (19,577)
                               --------   ---------   ---------  ---------   ---------  ---------    ------  ---------
Net income (loss) from
continuing operations........  $ (8,927)  $  (7,889)  $     204  $ (16,612)  $ (14,052) $ (30,533)   $  485  $(46,100)
                               ========   =========   =========  =========   =========  =========    ======  ========
Total assets at June 30, 2000                                                $  79,660  $ 296,141    $  258  $376,059
                                                                             =========  =========    ======  ========
</TABLE>

7.  LEGAL PROCEEDINGS

City of Anaheim

      See the Company's Annual Report filed on Form 10-K for the year ended
December 31, 2000 for our prior discussion of litigation with the City of
Anaheim. On March 30, 2001, the Company, FirstWorld Anaheim and the


                                      11
<PAGE>

City of Anaheim (the "City") entered into a Termination, Settlement and Release
Agreement whereby the parties agreed, among other things, to terminate the
Universal Telecommunications System Participation Agreement ("UTS Agreement")
and the Agreement for Use of Operating Property ("Operating Agreement"). Under
the Termination, Settlement and Release Agreement, the parties have agreed to
fully and finally release each other from any claims that they may have,
including any claims for payments or otherwise under the UTS Agreement and the
Operating Agreement with no liability having accrued under either agreement. As
consideration for termination of the UTS and Operating Agreements, FirstWorld
Anaheim has agreed to convey title to certain fiber and equipment assets and to
discontinue service to its customers in the City of Anaheim, and to withdraw its
certification as a Competitive Local Exchange Carrier. Title to the DMS-500
switch and related equipment located in FirstWorld Anaheim's Central Office in
Anaheim will not be conveyed to the City. In a separate Fiber Lease agreement,
the City has granted FirstWorld Orange Coast the right to use certain City of
Anaheim fiber in order to connect customers located in Irvine and surrounding
areas to the DMS-500 switch located within the City of Anaheim.

      On May 9, 2001, FirstWorld Anaheim submitted an Application with the
California Public Utilities Commission to withdraw its offering and provision of
local exchange services. Also, on May 9, 2001, FirstWorld SoCal submitted an
Application with the California Public Utilities Commission to withdraw its
offering and provision of local exchange services in certain rate centers. On
June 28, 2001, a California Public Utilities Commission Administrative Law Judge
("ALJ") issued a ruling requesting additional documentation regarding the
Application filed by FirstWorld Anaheim, and also requesting an explanation as
to why the procedure followed by FirstWorld Anaheim to discontinue service was
not improper and certain financial penalties should not be imposed. On July 16,
2001, FirstWorld Anaheim filed a Response to the ALJ's Order providing the
information that was requested and providing the explanations requested in the
ALJ's Order.

      The Company believes that the outcome of this proceeding will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity; however, there can be no assurance as to the ultimate
outcome or effect of this proceeding.

Securities Class Action Lawsuit

      On July 7, 2000, a purported shareholder class action complaint was filed
in federal district court in Colorado alleging that the Company and various of
its officers and directors and underwriters violated certain federal securities
laws by misstating, and by failing to disclose, certain financial and other
business information (Michael Rasner v. Donald L. Sturm, et al., Civil Action
                      -----------------------------------------
No. 00-K-1376) (the "Rasner Case"). Ten additional complaints with similar
allegations and class periods were later filed (collectively, the "Securities
Litigation"). The Securities Litigation is brought on behalf of a purported
class of purchasers of the Company's stock allegedly traceable to its March 8,
2000 initial public offering ("IPO"). The plaintiffs in the case are seeking
among other relief, class certification, money damages, pre-judgement interest,
rescission, costs and attorney's fees. The court has consolidated the individual
complaints into the Rasner Case. The underwriters are seeking indemnification
from the Company for any damages assessed against them in this action.

      On November 22, 2000, the lead plaintiff group filed its Consolidated
Complaint. The emphasis of the Complaint is that at the time of the IPO, the
Company knew that it would exit various lines of business and had certain
operational and financial issues related to certain lines of business and
allegedly failed to disclose these alleged facts in the prospectus relating to
the IPO.

     The defendants, and the underwriters by separate motion, each filed a
Motion to Dismiss the complaint on January 22, 2001. The plaintiff group filed
responses in opposition to those motions. The defendants, other than the
underwriters, submitted their reply to the plaintiffs' response on March 19,
2001 and requested the court hear oral arguments on the Motion to Dismiss. The
Court granted that request and scheduled oral arguments for June 20, 2001. At
the close of oral arguments the Court denied the Motion to Dismiss. The Court
also referred the case to a federal magistrate judge in order to facilitate
settlement discussions. We filed an Answer to the Consolidated Complaint on July
25, 2001. The underwriter defendants filed their Answer to the Consolidated
Complaint on or about July 20, 2001.

     The plaintiff group has served us with discovery requests, and the Company
will respond to those requests as appropriate.

                                      12
<PAGE>

     This case has been referred to a federal magistrate judge for settlement
purposes. The magistrate has scheduled a settlement conference for September 27,
2001.

     We believe that the allegations in the complaint are without merit, and we
intend to vigorously defend against the claims. We do not believe that the
outcome of this action will have a material adverse effect on our financial
position, results of operations or liquidity; however, litigation is inherently
uncertain and there can be no assurance as to the ultimate outcome or effect of
this action.

Transport Logic

     In February and March of 2000, the former shareholders of Oregon
Professional Services, Inc. d/b/a Transport Logic, Anthony Schwartz, Shanna K.
Dooley-Schwartz, Charles "Tod" Allen, Michael Fetzer and trusts controlled by
them, filed lawsuits in the Circuit Court of Oregon for the County of Multnomah,
asserting they were misled in connection with our acquisition of Transport Logic
and requested that the Company be enjoined to issue them additional shares of
the Company's common stock. After the court granted our Motion to Compel
Arbitration, the parties submitted the matter to arbitration in Denver, Colorado
at the Judicial Arbiter Group.

     The Claimants amended their claims and all Claimants now assert claims
based on fraud by misrepresentation, for violations of Colorado and Oregon
securities laws, violation of the escrow provisions of the purchase agreement
and estoppel under the Stock Purchase Agreement. Finally, the Claimants allege
that we breached the escrow provisions of the Stock Purchase Agreement by not
releasing funds related to the purchase and held in escrow. The Claimants seek
to rescind the stock portion of the purchase of Transport Logic, and to recover
pre- and post-judgment interest and attorneys' fees. In the alternative, the
Claimants allege that they are entitled to money damages or an injunction
compelling us to transfer additional shares of the Company's stock to claimants.

     We filed general denials to all claims and asserted counterclaims under the
purchase and escrow agreements for breach of warranty and indemnification for
attorneys' fees and costs incurred in the defense of the arbitration. We believe
that the Claimants' allegations are without merit and have vigorously defended
against the claims. The arbitration hearing took place during the week of April
9, 2001. The parties submitted written closing argument briefs. On August 6,
2001, the Company received the Arbitrator's Preliminary Statement of Decision
denying the Claimant's claims. The abitrator addressed the parties' claims for
disbursement of funds related to the escrow account. We do not believe that the
outcome of this action will have a material adverse effect upon our financial
position, results of operations or liquidity.

     On July 6, 2001, the same Claimants filed a lawsuit against certain
individual defendants including current and former directors and employees of
the Company alleging substantially the same claims, as well as an additional
claim for failing to register the Company's stock used to purchase the stock of
Transport Logic. The Company may have indemnity obligations to the individual
defendants.

Other

     The Company is engaged in other less significant legal matters arising in
the ordinary course of its business and believes that the outcome of these
actions will not have a material adverse effect on its results of operations,
liquidity or financial position.

8.  DISCONTINUED OPERATIONS

      Internet Services. Historically, the Internet Services segment represented
high-speed Internet access such as dedicated access and digital subscriber lines
("DSL"); dial-up Internet access; shared Web hosting and related equipment
sales. During the three months ended June 30, 2001, we decided to retain the
shared Web hosting business; the revenue and related costs associated with the
Shared web hosting business were reclassified from discontinued operations to
continuing operations. All information presented has been adjusted to reflect
such reclassification. See further discussion in "Note 4 - Business Segments."
It is anticipated that any potential sale or other disposition of the remaining
assets of the Internet Services segment will not be completed until
approximately September 2001.




                                      13
<PAGE>

      On January 31, 2001, the Company entered into an agreement with Earthlink,
Inc. ("Earthlink") for the sale of our dial-up subscriber base. We received an
initial payment of $989,000 in proceeds on February 1, 2001 and an additional
payment of $1.1 million on May 23, 2001. The dial-up subscriber base is expected
to be fully transitioned during the third quarter of 2001, at which time, upon
satisfaction of certain additional contingencies, we will receive the remaining
proceeds, if any.

      In July 2001, the Company entered into an additional agreement with
Earthlink for the sale of a portion of our DSL customer base. On July 17, 2001,
we received an initial payment of $489,000 in proceeds. This customer base is
expected to be fully transitioned by the end of the third quarter of 2001, at
which time, upon satisfaction of certain additional contingencies, we will
receive the remaining proceeds, if any.

      Also in July 2001, the Company entered into an agreement with Covad
Communications Company ("Covad") to sell the portion of our DSL customer base
not sold to Earthlink. This customer base is expected to be fully transitioned
by the end of the third quarter of 2001, at which time, upon satisfaction of
certain additional contingencies, we will receive the proceeds from such sale,
if any. This sales agreement also contains provisions which release the Company
from all obligations pursuant to a previously executed agreement between the
Company and Covad. The timing of this release is concurrent with the final
transition of the customer base to Covad.

      Any customers not sold or transferred to continuing operations, primarily
dedicated access customers, were notified of discontinuation of their service.
The Company anticipates that service to all such customers will be discontinued
by the end of the third quarter 2001.

     Web Integration. The Web Integration segment represents Optec's operations
and included activities related to network consulting, design, integration,
equipment sales and, on a limited basis, Internet service. On May 17, 2001, the
Company completed the sale of the Web Integration segment to an affiliate of JMW
Capital Partners, Inc. for total consideration of $2.7 million.

      Communications. The Communications segment represents certain of the
Company's Southern California operating subsidiaries, excluding certain
operations associated with its Intelenet acquisition and certain data centers
located in Southern California, which will remain part of continuing operations.
The majority of this segment's operations are telephony related, although it
also includes certain Internet services and Web integration services. It is
anticipated that any potential sale or other disposition of the remaining assets
of the Communications segment will not be completed until approximately
September 2001.

      In March 2001, the Company entered into an agreement to terminate its
obligations to the City of Anaheim. See "Note 5 - Legal Proceedings - City of
Anaheim" for a discussion of the transfer of assets to the City pursuant to the
agreement and for a discussion of filings at the California Public Utilities
Commission. On April 3, 2001, notice was provided to certain of the
Communications customers regarding discontinuation of certain services effective
May 15, 2001.

      During the three months ended June 30, 2001, we decided to retain certain
other services, primarily dedicated access services for a certain customer in
Southern California; the revenue and related costs were reclassified from
discontinued operations to continuing operations. All information presented has
been adjusted to reflect such transfer. See further discussion in "Note 6 -
Business Segments."

      The transfer of assets to the City, the disconnection of certain customers
and the transfer of a certain customer to continuing operations resulted in the
disposition of the majority of the operations of the Communications segment. The
Company is continuing to review various alternatives relating to the disposal of
the remaining assets of the Communications segment, including, but not limited
to, further discounting the assets, selling portions of the assets in unrelated
transactions, liquidation and transfer of certain other operations to continuing
operations. However, the Company does not anticipate generating any material
cash proceeds from any of these alternatives.

                                       14
<PAGE>

      The following is summarized financial information related to the
discontinued operations:

<TABLE>
<CAPTION>
                                                           Internet        Web
                                                           Services    Integration     Communications       Total
                                                           --------    -----------     --------------       -----
                                                                                 (in thousands)
<S>                                                       <C>         <C>            <C>                 <C>
For the Three Months Ended June 30, 2001:
  Revenue............................................      $   2,475   $     1,869    $           1,703   $    6,047
                                                           =========   ===========    =================   ==========
  Loss on disposition of discontinued operations.....      $ (12,410)  $    (1,418)   $          (5,579)  $  (19,407)
                                                           =========   ===========    =================   ==========
For the Three Months Ended June 30, 2000:
  Revenue............................................      $   5,792   $     6,557    $           2,413   $   14,762
                                                           =========   ===========    =================   ==========
  Loss from discontinued operations..................      $ (11,786)  $    (2,367)   $          (8,594)  $  (22,747)
                                                           =========   ===========    =================   ==========
For the Six Months Ended June 30, 2001:
  Revenue............................................      $   7,005   $     5,059    $           4,438   $   16,502
                                                           =========   ===========    =================   ==========
  Loss on disposition of discontinued operations.....      $ (12,410)  $    (1,418)   $          (5,579)  $  (19,407)
                                                           =========   ===========    =================   ==========
For the Six Months Ended June 30, 2000:
  Revenue............................................      $  11,593   $    15,062    $           4,942   $   31,597
                                                           =========   ===========    =================   ==========
  Loss from discontinued operations..................      $ (22,255)  $    (3,021)   $         (17,667)  $  (42,943)
                                                           =========   ===========    =================   ==========
</TABLE>

      Loss on disposition of discontinued operations for the three and six
months ended June 30, 2001 includes a write-down of the net assets of the
Internet Services and Communications segments to their net realizable value
based upon updated estimates of anticipated proceeds and revised estimated
losses for the segment from September 1, 2000 through the anticipated
disposition date. The loss from discontinued operations for the three and six
months ended June 30, 2001 related to the Web Integration segment includes the
actual operational losses incurred during the periods and the write-down of the
net assets based upon consideration received in the sale.

      All impairments were first recorded against any available goodwill. If
there was no goodwill or insufficient goodwill, the impairments were then
recorded against property and equipment. As a result of these impairments, the
remaining goodwill associated with the Internet Services segment was written-off
and a portion of its property and equipment was written-off. As there was no
goodwill associated with the Communications segment, all impairments for this
segment were written-off against its property and equipment

      See the Company's Annual Report filed on Form 10-K for the year ended
December 31, 2000 for our prior discussion of loss from disposition of
discontinued operations.

                                       15
<PAGE>

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

Overview

     Verado Holdings, Inc. is a provider of outsourced managed services, data
center, and Web and application hosting solutions for businesses. We provide
customers space, power and Internet access within our eight geographically
dispersed data centers. We also provide dedicated servers that are Internet
connected servers, packaged as a complete Web, database, or application hosting
solution. Our managed services allow customers to obtain functions that would be
typically performed by an in-house Information Technology department.

     To date, the Company has generated cumulative net losses of approximately
$530.9 million and, if it executes on its current business model, expects to
incur operating and net losses for the next several years and anticipates that
it is currently funded through the middle of 2002. In order to achieve positive
operating margins over time, the Company intends to increase the number of
managed and professional services and colocation customers and focus its
resources on its Data Center segment.

     In addition, the Company is in the process of exploring recapitalization
and restructuring options to help reduce its debt and improve its cash position.
The Company has engaged Credit Suisse First Boston Corporation to provide
financial advice in connection with its consideration of a potential
recapitalization or restructuring of the Company.

Revenue

     Revenue is generated primarily through the Company's eight data centers.
Data center revenue is generated primarily by providing managed services
(including administrative services, security services, monitoring and reporting
services, database and application platforms), colocation (including space,
power and Internet access), dedicated servers (including hardware, software and
certain administrative services), and professional services. The monthly fee
paid by a customer is driven primarily by the amount of space required to house
its equipment and the related Internet connectivity and any managed or
professional services provided. We generally charge a one-time set-up fee, which
is recognized over the life of the related underlying contract.

     In addition, the Company generates revenue from providing Shared web
hosting services and certain other services, primarily dedicated access, to a
certain customer in Southern California. Revenue for these services is
recognized when the service is provided.

Costs and Expenses

     Cost of Revenue

     Cost of revenue includes a variety of service and network operations costs.
Network costs primarily consist of backbone transport charges and payments to
other communications carriers for monthly recurring and non-recurring
communications line charges incurred to provide connectivity between our
customers, our data centers and the Internet. Other operational costs include
rent, utilities and labor associated with our data centers and other network
operations centers. We currently enter into operating leases for a significant
portion of our infrastructure and data center space.

     Selling, General and Administrative Expenses ("SG&A")

     Selling expenses include sales and marketing expenses consisting of
marketing salaries and benefits, commissions paid in connection with our sales
programs, travel expenses, trade show expenses, promotional costs as well as
costs associated with acquiring additional customers such as brochures, targeted
advertising and promotional campaigns. General and administrative expenses
include, among other things, office rent, salaries and related expenses of
management and support services personnel, billing and collections, occupancy
fees, consulting fees and general corporate administrative expenses. We also
include non-capitalizable costs associated with the development, support and
expected growth of our operational support system platforms and a one-time bonus
accrual made in 2000, which was owed to the Company's former Chief Executive
Officer ("CEO") in connection with our initial public offering ("IPO"). Finally,
amortization of deferred stock compensation, which represents a non-cash expense
attributable to the conversion of Stock Appreciation Rights ("SARs") to stock
options and options granted during the first quarter of 2000 at less than fair
market value, is also included in SG&A.

                                       16
<PAGE>

     Impairment of Long-Lived Assets

     The impairment of long-lived assets relates to the goodwill related to the
Intelenet acquisition offset by the reversal of an impairment recognized during
the year ended December 31, 2000. The impairment of long-lived assets associated
with the goodwill associated with the Intelenet acquisition was based on an
analysis of expected future undiscounted net cash flows from specific customers.
The estimated value of the goodwill was approximately $1.4 million at March 31,
2001, which resulted in an impairment of $3.3 million. During the year ended
December 31, 2000, the Company recognized an impairment of $1.9 million
associated with the write-down of credits related to equipment returned to a
certain vendor, for which the Company had no use and did not expect to receive
payment. During the three months ended June 30, 2001, the Company negotiated a
settlement with the vendor and received $1.6 million in cash as net
consideration for the credits.

     Depreciation and Amortization

     Depreciation and amortization expenses include charges related to
depreciation of property and equipment, which consists principally of data
equipment; buildings and leasehold improvements; furniture and equipment; and
amortization of intangibles, primarily goodwill. We depreciate our assets and
network infrastructure on a straight-line basis over the estimated useful life
of each asset. Estimated useful lives for our assets currently range from three
to ten years. In addition, we have recorded goodwill in connection with our
Intelenet acquisition, which we amortize over a three-year period.

Interest

     Interest expense is associated with our April 13, 1998, issuance of our
senior notes. We are not currently scheduled to make any cash interest payments
on these senior notes until October 2003.

     Interest income primarily represents interest earned on our investments in
high-grade, short-term marketable securities and cash equivalents. Marketable
securities consist of commercial paper with original maturities greater than
three months but less than six months. Cash equivalents consist of money market
instruments and commercial paper issues with maturities less than three months.
We have classified our marketable securities as held-to-maturity, as we have the
intent and ability to hold these securities to maturity.

Loss from Discontinued Operations

      Loss from discontinued operations represents losses incurred in the
Internet Services, Web Integration and Communications segments prior to
September 1, 2000. The Statement of Operations for the three and six months
ended June 30, 2000 have been restated to reflect the discontinued operations.

Loss on Disposition of Discontinued Operations

      Loss on disposition of discontinued operations consists of two components:
anticipated or actual loss related to the sale of the segment to be disposed of
and the estimated losses for the segment from September 1, 2000 through the
anticipated or actual disposition dates, which were May 17, 2001 for the Web
Integration business segment and are expected to be September 2001 for the
remaining unsold assets of both the Communications and the Internet Services
business segments. See discussion of the status of each of these dispositions in
"Note 8 - Discontinued Operations."

Extraordinary Gain - Extinguishment of Debt

     Extraordinary gain - extinguishment of debt represents the gain recognized
as a result of the early retirement of a portion of our senior notes, net of the
accelerated recognition of related deferred financing costs.

                                       17
<PAGE>

Results of Operations

Three and Six Months Ended June 30, 2001 Compared With Three and Six Months
Ended June 30, 2000

Revenue

     Revenue increased from $3.1 million for the quarter ended June 30, 2000 to
$4.4 million for the quarter ended June 30, 2001, an increase of $1.3 million.
Revenue increased from $5.4 million for the six months ended June 30, 2000 to
$9.6 million for the six months ended June 30, 2001, an increase of $4.2
million.

     Revenue related to the Data Center segment increased $1.6 million and $4.5
million for the three and six months ended June 30, 2001, respectively, compared
to the same prior year periods due, in part, to the addition of customers to our
eight data centers, which we continued to open throughout 2000. Also
contributing to the increase in revenue for the six months ended June 30, 2001,
was approximately $450,000 related to certain non-recurring revenue. As of June
30, 2001, we had 143 data center customers, primarily all of which were
colocation customers (including 24 customers for which we were not recognizing
revenue due to their failure to pay as agreed). Approximately 9% of our sellable
square footage was occupied.

     Revenue related to the Other segment decreased from $1.4 million for the
quarter ended June 30, 2000 to $1.1 million for the quarter ended June 30, 2001,
a decrease of $236,000. Revenue decreased from $2.8 million for the six months
ended June 30, 2000 to $2.5 million for the six months ended June 30, 2001, a
decrease of $298,000. During the three months ended June 30, 2001, the revenue
and related costs associated with the Shared web hosting business and the
revenue and related costs associated with a certain customer in Southern
California were reclassified from discontinued operations to continuing
operations. These reclassifications resulted in revenue and gross margin for the
three months ended March 31, 2001 to increase by $1.3 million and $638,000,
respectively. See "Note 6 -Business Segments." All information presented has
been adjusted to reflect such transfer. The decreases were primarily due to a
decline in the customer base.

Costs and Expenses

     Cost of revenue. Cost of revenue increased from $2.8 million for the
quarter ended June 30, 2000 to $5.9 million for the quarter ended June 30, 2001,
an increase of $3.1 million. Cost of revenue increased from $4.1 million for the
six months ended June 30, 2000 to $12.0 million for the six months ended June
30, 2001, an increase of $7.8 million. The increase in cost of revenue was due
to our eight data centers, which we continued to open throughout 2000, the
increase in our customer base and the addition of the leased equipment. See
further discussion in "Note 4 - Lease." We anticipate that we will continue to
have negative margins associated with the data center business as we strive to
fill our data centers and develop new products. Although we are operating our
other business segment with a positive margin, because of existing uncertainty
in the economy there can be no assurance that we will be able to maintain this
positive margin in the future.

     Selling, general and administrative expense ("SG&A"). SG&A expenses
increased from $13.4 million for the quarter ended June 30, 2000 to $14.3
million for the quarter ended June 30, 2001, an increase of $926,000. SG&A
expenses decreased from $32.7 million for the six months ended June 30, 2000 to
$30.2 million for the six months ended June 30, 2001, a decrease of $2.5
million.

     Salaries and other related payroll expenses and advertising expenses
increased approximately $2.2 million and $728,000, respectively for the quarter
ended June 30, 2001 primarily due to the addition of personnel as a result of
internal growth and expansion of our data center business. Offsetting these
increases was a decrease in the amortization of deferred stock compensation of
$759,000 resulting from the cancellation of SARs and options associated with
employees that have been terminated since March 2000. The expense for the three
months has been adjusted to reflect the unvested portions of the SARs and
options related to employees that terminated during the period. Also, the
Company recognized a $1.9 million bad debt charge in June 2000 related to a
collectibility issue regarding a specific customer. There was no bad debt
expense recognized during the quarter ended June 30, 2001. The remaining
increase was due to higher overall expenses resulting from the expansion of our
operations in accordance with our business plan.

                                       18
<PAGE>

     Salaries and other payroll related expenses decreased approximately $2.7
million for the six months ended June 30, 2001 primarily due to the March 2000
recognition of a $9.6 million bonus expense related to our IPO that was
subsequently paid to our former CEO, offset in part by a $6.9 million increase
in salaries and other related expenses due to the addition of personnel as a
result of internal growth and expansion of our data center business. In
addition, amortization of deferred stock compensation decreased $1.7 million for
the six months ended June 30, 2001 due to the cancellation of SARs and options
associated with employees that have been terminated since March 2000. The
expense for the six months has been adjusted to reflect the unvested portions of
the SARs and options related to employees that terminated during the period.
Partially offsetting these decreases was a $1.7 million increase in advertising
costs due to our targeted advertising and promotional campaigns related to our
data center business and our February 12, 2001 name change and a $798,000
increase in computer maintenance associated primarily with our operational
support system platforms. Also, the Company recognized a $1.9 million bad debt
charge in June 2000 related to a collectibility issue regarding a specific
customer. There was no bad debt expense recognized during the quarter ended June
30, 2001. The remaining increase was due to higher overall expenses resulting
from the expansion of our operations in accordance with our business plan.

     Impairment of long-lived assets. The impairment of long-lived assets
relates to the goodwill associated with the Intelenet acquisition offset by the
reversal of an impairment recognized during the year ended December 31, 2000.
The impairment of long-lived assets associated with the goodwill related to the
Intelenet acquisition was based on an analysis of expected future undiscounted
net cash flows from specific customers. The estimated value of the goodwill was
approximately $1.4 million at March 31, 2001, which resulted in an impairment of
$3.3 million. During the year ended December 31, 2000, the Company recognized an
impairment of $1.9 million associated with the write-down of credits related to
equipment returned to a certain vendor, for which the Company had no use and did
not expect to receive payment. During the three months ended June 30, 2001, the
Company negotiated a settlement with the vendor and received $1.6 million in
cash as net consideration for the credits.


     Depreciation and amortization. Depreciation and amortization expenses
increased from $3.4 million for the quarter ended June 30, 2000 to $6.0 million
for the quarter ended June 30, 2001, an increase of $2.5 million. Depreciation
and amortization expenses increased from $6.0 million for the six months ended
June 30, 2000 to $12.4 million for the six months ended June 30, 2001, an
increase of $6.4 million. The increase was primarily due to depreciation
associated with our data centers.


Other


     Gain on the sale of assets. The gain on sale of assets was related to the
June 1, 2000 sale of certain fiber optic rights for approximately $7.2 million
resulting in a $5.5 million gain. There was no such gain for the six months
ended June 30, 2001.


     Interest income. Interest income decreased from $4.3 million for the
quarter ended June 30, 2000 to $1.1 million for the quarter ended June 30, 2001,
a decrease of $3.2 million. Interest income decreased from $5.4 million for the
six months ended June 30, 2000 to $3.2 million for the six months ended June 30,
2001, a decrease of $2.3 million. The average cash, cash equivalents and
marketable securities balances during the quarter ended June 30, 2001 and 2000
were approximately $92.8 million and $254.1 million, respectively. In addition,
the weighted average interest rates were 4.7% for the quarter ended June 30,
2001 compared to 6.7% for the quarter ended June 30, 2000. The average cash,
cash equivalents and marketable securities balances during the six months ended
June 30, 2001 and 2000 were approximately $115.7 million and $167.6 million,
respectively. In addition, the weighted average interest rates were 5.5% for the
six months ended June 30, 2001 compared to 6.5% for the six months ended
June 30, 2000.

     Interest expense. Interest expense increased from $9.8 million for the
quarter ended June 30, 2000 to $10.6 million for the quarter ended June 30,
2001, an increase of $829,000. Interest expense increased from $19.6 million for
the six months ended June 30, 2000 to $22.0 million for the six months ended
June 30, 2001, an increase of $2.5 million. This increase relates primarily to
interest expense associated with the senior notes. The Company is not currently
scheduled to make any cash interest payments on the senior notes until October
2003. As a result of the retirement of a portion of our senior notes, interest
expense will increase at a slower rate than in previous periods. Capitalized
interest related to continuing operations decreased from $557,000 for the
quarter ended June 30, 2000 to
                                       19
<PAGE>

$51,000 for the quarter ended June 30, 2001, a decrease of $506,000. Capitalized
interest related to continuing operations decreased from $715,000 for the six
months ended June 30, 2000 to $84,000 for the six months ended June 30, 2001, a
decrease of $631,000. There was no capitalized interest related to the
discontinued operations for the three and six months ended June 30, 2001.
Capitalized interest related to discontinued operations for the quarter and six
months ended June 30, 2000 was $141,000 and $171,000, respectively.

     Loss from discontinued operations. Loss from discontinued operations was
$22.7 million and $42.9 million for the quarter and six months ended June 30,
2000. Loss from discontinued operations represents losses incurred in the
Internet Services, Web Integration and Communications segments prior to
September 1, 2000. The Statement of Operations for the three and six months
ended June 30, 2000 have been restated to reflect the discontinued operations.

    Loss on disposition of discontinued operations. Loss on disposition of
discontinued operations was $19.4 million for both the quarter and six months
ended June 30, 2001. Loss on disposition of discontinued operations consists of
two components: anticipated or actual loss related to the sale of the segment to
be disposed of and the estimated losses for the segment from September 1, 2000
through the anticipated or actual disposition dates, which were May 17, 2001 for
the Web Integration business segment and are expected to be September 2001 for
the remaining unsold assets of both the Communications and the Internet Services
business segments.

      Extraordinary gain - extinguishment of debt. Extraordinary gain -
extinguishment of debt was $32.5 million for the quarter ended March 31, 2001
and represents the gain recognized as a result of the early retirement of a
portion of our senior notes, net of the accelerated recognition of related
deferred financing costs. There was no extraordinary gain - extinguishment of
debt for the quarter ended March 31, 2000.

Liquidity and Capital Resources

     The Company's operations have required and will continue to require capital
investment for the design, enhancement and additional build-out of our data
centers and network; development of new data center product offerings, including
managed and professional services; installation of electronics and other related
equipment and the continued development of operational support system platforms.
In addition, we expect to incur operating losses for at least the next few years
as we anticipate filling our data centers and develop new products. Furthermore,
we expect to continue to experience net cash usage related to our discontinued
operations until such time that we sell or otherwise dispose of these
businesses. Historically, we have satisfied our cash requirements through the
issuance of equity and debt securities and lease financing.

     We had $87.6 million and $141.6 million of cash, cash equivalents and
marketable securities as of June 30, 2001 and December 31, 2000, respectively.
In addition, we had an accumulated deficit of $530.9 million and $478.4 million
as of June 30, 2001 and December 31, 2000, respectively. The Company's most
significant sources and uses of funds for the six months ended June 30, 2001
were as follows (in thousands):

<TABLE>
<CAPTION>

       Source of funds:
<S>                                                                                        <C>
         Proceeds from the exercise of stock options, warrants or employee
             stock purchase plan                                                            $         219
                                                                                            -------------
                  Total source of funds                                                     $         219
                                                                                            =============

       Uses of funds:
         Net cash used by operating activities                                              $      22,896
         Purchases of property and equipment                                                       13,307
         Payments related to the retirement of senior notes                                        11,234
         Net cash used by discontinued operations                                                   6,756
                                                                                            -------------
                  Total uses of funds                                                       $      54,193
                                                                                            =============
</TABLE>

     As of June 30, 2001, the Company had completed the disposal of its Web
Integration segment. Additionally, the Company anticipates that it will have
completed the disposition of its Internet Services and Communications segments
by September 30, 2001. Cash usage through final disposition is expected to be
approximately $6.6 million. See further discussion in "Note 8 - Discontinued
Operations."

                                       20
<PAGE>

     If the Company executes its current business model, it believes its
existing cash, cash equivalents and marketable securities will be sufficient to
meet its anticipated cash needs for working capital and capital expenditures
into the middle of 2002. The Company is currently investigating various cash
conservation strategies, including, but not limited to, data center
consolidation, staffing reduction and other cash-reduction plans. However, there
can be no assurance that the Company: (i) will be able to execute its business
model, including attracting and maintaining customers or successfully
implementing cash conservation strategies; (ii) will be able to sell or
otherwise dispose of some or all of certain assets classified as discontinued
operations in the anticipated time frame or at all; or (iii) will receive cash
proceeds in the amounts contemplated from any potential sale or other
disposition. Depending upon the outcome of these planned divestitures, the
execution of our business model and other risks, we may require additional funds
earlier than expected to support our working capital and capital expenditure
requirements and may need to explore means to raise additional funds through
equity, debt financing and vendor financing. Any additional financing we may
need may not be available on terms favorable to us or at all.

     The Company is also considering a potential recapitalization or
restructuring of the Company to help reduce its debt and improve its cash
position. There can be no assurances, however, that a recapitalization or
restructuring would sufficiently strengthen the Company's cash position.

     The Company has finalized a master lease agreement with one of its vendors
that allows it to finance up to $20.4 million in equipment and/or other
associated costs. For all leased equipment or other costs under this agreement,
the term is 24 months with an option to purchase the equipment at fair market
value at the end of the lease term. The leased equipment is accounted for as an
operating lease. Through June 30, 2001, there has been approximately $11.8
million of equipment leased and other costs incurred. The agreement was
effective beginning June 2001 and as a result the Company began recognizing the
related monthly lease expenses of approximately $420,000 per month.
Substantially all of the payment was reflected in cost of revenue. The Company
also purchased $2.6 million of maintenance services to cover the leased
equipment of which approximately $108,000 was recognized during the quarter
ended June 30, 2001. Subsequent to June 30, 2001, the Company leased an
additional $474,000 of equipment. The monthly payment related to this equipment
is $17,000 per month and will be reflected in cost of revenue as well. The
Company has until September 30, 2001 to utilize any of the remaining $8.1
million available under this lease.

     Pursuant to the provisions of the agreement, the Company must establish a
letter of credit as partial security for its obligations. As a result, the
Company will reflect the $2.2 million of cash collateralizing the letter of
credit as restricted cash once the line of credit is executed.

     We have a number of commitments, including certain contractual obligations
with the Irvine Company, a long distance carrier, network operators and real
estate companies. See further discussion in the financial statements included in
the Company's Form 10-K for the year ended December 31, 2000.

     On April 3, 2001, the Company received written notice from the Nasdaq
National Market ("Nasdaq") that the Company's Series B common stock has failed
to maintain a minimum bid price of $5.00 over 30 consecutive trading days as
required by Marketplace Rule 4450(b)(4). On May 18, 2001 Nasdaq notified the
Company that the Securities and Exchange Commission has authorized Nasdaq to
change the minimum $5.00 bid price to $3.00 and that, to comply with this
requirement, the Company's common stock must close at or above $3.00 per share
for a minimum of 10 consecutive trading days prior to July 2, 2001, in
accordance with Marketplace Rule 4310(c)(8)(B). Additionally, under Nasdaq's
Listing Qualifications Maintenance Standard 2, Nasdaq notified the Company that
it also does not meet the Market Capitalization requirement of $50 million or
the Market Value of Public Float requirement of $15 million. Nasdaq also
notified the Company that under Nasdaq's listing qualifications Maintenance
Standard 1, it does not meet the $4.0 million net tangible asset listing
requirement applicable to a Nasdaq issuer with a minimum bid price of at least
$1.00.

     On July 10, 2001 Nasdaq notified the Company that it had failed to achieve
compliance with the revised minimum $3.00 bid price requirement by July 2, 2001.
The Company requested a hearing regarding the Staff's determination to delist
its securities before the Nasdaq Listing Qualifications Panel (the "Panel"). The
Panel has accepted the Company's request for a hearing and scheduled a hearing
for August 30, 2001. There can be no assurance that Nasdaq will grant the
Company an exception to its listing requirements or that the Company can come
into compliance with the listing requirements. If the Panel denies our appeal,
we will seek to have our Series B common stock listed on the Nasdaq Small Cap
Market. Because our Series B common stock continues to trade below $1.00 per
share, there is no assurance that Nasdaq would permit us to list our Series B
common stock on the Nasdaq Small Cap Market. If we were unsuccessful in moving
our Series B common stock to the Nasdaq Small Cap Market, we would intend to
then move to the Over-the-Counter Bulletin Board or another quotation system or
exchange on which we could qualify.

                                       21
<PAGE>

     To date, we have satisfied our cash requirements through the private
placements of debt and equity securities, through an IPO of our Series B common
stock and lease financing. From our inception through June 30, 2001, we raised
approximately $362.0 million in net proceeds from the sale of equity securities
and $241.8 million in net proceeds from the sale of debt securities.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     As of June 30, 2001, the Company's interest bearing cash equivalents and
short-term investments consisted exclusively of commercial paper having original
maturities of six months or less. The Company classifies those instruments
having original maturities of three months or less as cash equivalents whereas
instruments having original maturities of greater than three months, but less
than six months, are classified as marketable securities. The Company places its
commercial paper investments with high credit-quality counterparties and limits
the amount of credit exposure to any one entity. The Company has the ability and
intent to hold such investments, which are not held for trading or speculative
purposes, through their maturity dates.

         The Company's long-term debt at June 30, 2001 consisted of senior notes
which bear interest at a fixed rate. The senior notes accrete in value at a
stated rate of 13% per annum through April 2003 and thereafter bear interest at
a stated rate of 13% per annum payable semi-annually in arrears. The senior
notes mature as to principal in the aggregate amount of $408.9 million in April
2008. The Company has no cash flow exposure due to rate changes for its senior
notes. The carrying value of the senior notes at June 30, 2001 was $312.5
million. The fair value of the Company's senior notes, determined based on the
quoted high-yield market bid price, approximated $20.4 million at June 29, 2001.

                           PART II. OTHER INFORMATION

ITEM 1.  Legal Proceedings

City of Anaheim

      See the Company's Annual Report filed on Form 10-K for the year ended
December 31, 2000 for our prior discussion of litigation with the City of
Anaheim. On March 30, 2001, the Company, FirstWorld Anaheim and the City of
Anaheim (the "City") entered into a Termination, Settlement and Release
Agreement whereby the parties agreed, among other things, to terminate the
Universal Telecommunications System Participation Agreement ("UTS Agreement")
and the Agreement for Use of Operating Property ("Operating Agreement"). Under
the Termination, Settlement and Release Agreement, the parties have agreed to
fully and finally release each other from any claims that they may have,
including any claims for payments or otherwise under the UTS Agreement and the
Operating Agreement with no liability having accrued under either agreement. As
consideration for termination of the UTS and Operating Agreements, FirstWorld
Anaheim has agreed to convey title to certain fiber and equipment assets and to
discontinue service to its customers in the City of Anaheim, and to withdraw its
certification as a Competitive Local Exchange Carrier. Title to the DMS-500
switch and related equipment located in FirstWorld Anaheim's Central Office in
Anaheim will not be conveyed to the City. In a separate Fiber Lease agreement,
the City has granted FirstWorld Orange Coast the right to use certain City of
Anaheim fiber in order to connect customers located in Irvine and surrounding
areas to the DMS-500 switch located within the City of Anaheim.

      On May 9, 2001, FirstWorld Anaheim submitted an Application with the
California Public Utilities Commission to withdraw its offering and provision of
local exchange services. Also, on May 9, 2001, FirstWorld SoCal submitted an
Application with the California Public Utilities Commission to withdraw its
offering and provision of local exchange services in certain rate centers. On
June 28, 2001, a California Public Utilities Commission Administrative Law Judge
("ALJ") issued a ruling requesting additional documentation regarding the
Application filed by FirstWorld Anaheim, and also requesting an explanation as
to why the procedure followed by FirstWorld Anaheim to discontinue service was
not improper and certain financial penalties should not be imposed. On July 16,
2001, FirstWorld Anaheim filed a Response to the ALJ's Order providing the
information that was requested and providing the explanations requested in the
ALJ's Order.

                                       22
<PAGE>

      The Company believes that the outcome of this proceeding will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity; however, there can be no assurance as to the ultimate
outcome or effect of this proceeding.

Securities Class Action Lawsuit

      On July 7, 2000, a purported shareholder class action complaint was filed
in federal district court in Colorado alleging that the Company and various of
its officers and directors and underwriters violated certain federal securities
laws by misstating, and by failing to disclose, certain financial and other
business information (Michael Rasner v. Donald L. Sturm, et al., Civil Action
                      -----------------------------------------
No. 00-K-1376) (the "Rasner Case"). Ten additional complaints with similar
allegations and class periods were later filed (collectively, the "Securities
Litigation"). The Securities Litigation is brought on behalf of a purported
class of purchasers of the Company's stock allegedly traceable to its March 8,
2000 initial public offering ("IPO"). The plaintiffs in the case are seeking
among other relief, class certification, money damages, pre-judgement interest,
rescission, costs and attorney's fees. The court has consolidated the individual
complaints into the Rasner Case. The underwriters are seeking indemnification
from the Company for any damages assessed against them in this action.

      On November 22, 2000, the lead plaintiff group filed its Consolidated
Complaint. The emphasis of the Complaint is that at the time of the IPO, the
Company knew that it would exit various lines of business and had certain
operational and financial issues related to certain lines of business and
allegedly failed to disclose these alleged facts in the prospectus relating to
the IPO.

     The defendants, and the underwriter by separate motion, each filed a Motion
to Dismiss the complaint on January 22, 2001. The plaintiff group filed
responses in opposition to those motions. The defendants, other than the
underwriters, submitted their reply to the plaintiffs' response on March 19,
2001 and requested the court hear oral arguments on the Motion to Dismiss. The
Court granted that request and scheduled oral arguments for June 20, 2001. At
the close of oral arguments the Court denied the Motion to Dismiss. The Court
also referred the case to a federal magistrate judge in order to facilitate
settlement discussions. We filed an Answer to the Consolidated Complaint on July
25, 2001. The underwriter defendants filed their Answer to the Consolidated
Complaint on or about July 20, 2001.

     The plaintiff group has served us with discovery requests, and the Company
will respond to those requests as appropriate.

     This case has been referred to a federal magistrate judge for settlement
purposes. The magistrate has scheduled a settlement conference for September 27,
2001.

     We believe that the allegations in the complaint are without merit, and we
intend to vigorously defend against the claims. We do not believe that the
outcome of this action will have a material adverse effect on our financial
position, results of operations or liquidity; however, litigation is inherently
uncertain and there can be no assurance as to the ultimate outcome or effect of
this action.

Transport Logic

     In February and March of 2000, the former shareholders of Oregon
Professional Services, Inc. d/b/a Transport Logic, Anthony Schwartz, Shanna K.
Dooley-Schwartz, Charles "Tod" Allen, Michael Fetzer and trusts controlled by
them, filed lawsuits in the Circuit Court of Oregon for the County of Multnomah,
asserting they were misled in connection with our acquisition of Transport Logic
and requested that the Company be enjoined to issue them additional shares of
the Company's common stock. After the court granted our Motion to Compel
Arbitration, the parties submitted the matter to arbitration in Denver, Colorado
at the Judicial Arbiter Group.

     The Claimants amended their claims and all Claimants now assert claims
based on fraud by misrepresentation, for violations of Colorado and Oregon
securities laws, violation of the escrow provisions of the purchase agreement
and estoppel under the Stock Purchase Agreement. Finally, the Claimants allege
that we breached the escrow provisions of the Stock Purchase Agreement by not
releasing funds related to the purchase and held in escrow. The Claimants seek
to rescind the stock portion of the purchase of Transport Logic, and to recover
pre- and post-judgment interest
                                       23
<PAGE>

and attorneys' fees. In the alternative, the Claimants allege that they are
entitled to money damages or an injunction compelling us to transfer additional
shares of the Company's stock to claimants.

     We filed general denials to all claims and asserted counterclaims under the
purchase and escrow agreements for breach of warranty and indemnification for
attorneys' fees and costs incurred in the defense of the arbitration. We believe
that the Claimants' allegations are without merit and have vigorously defended
against the claims. The arbitration hearing took place during the week of April
9, 2001. The parties submitted written closing argument briefs. On August 6,
2001, the Company received the Arbitrator's Preliminary Statement of Decision
denying the Claimant's claims. The arbitrator addressed the parties' claims for
disbursement of funds related to the escrow account. We do not believe that the
outcome of this action will have a material adverse effect upon our financial
position, results of operations or liquidity.

     On July 6, 2001, the same Claimants filed a lawsuit against certain
individual defendants including current and former directors and employees of
the Company alleging substantially the same claims, as well as an additional
claim for failing to register the Company's stock used to purchase the stock of
Transport Logic. The Company may have indemnity obligations to the individual
defendants.


Other

     The Company is engaged in other less significant legal matters arising in
the ordinary course of its business and believes that the outcome of these
actions will not have a material adverse effect on its results of operations,
liquidity or financial position.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    The Annual Meeting of Stockholders' of Verado ("the Meeting") was held on
June 1, 2001, in which a total of 88,326,149 eligible votes of Series A and B
common stock were represented out of the 98,385,309 eligible votes of Series A
and B common stock entitled to vote. Holders of Series A common stock were
entitled to 10 votes for every one share of Series A common stock. Holders of
Series B common stock were entitled to one vote for every one share of Series B
common stock. At the Meeting the Election of Directors and the Adoption of
PricewaterhouseCoopers LLP as Verado's independent accountants were considered
and acted upon.

    The results of the Election of Directors were as follows:

<TABLE>
<CAPTION>
                                                      Series A and B                Series A and B
                                                       Common Stock                  Common Stock
                         Name                           Votes For                   Votes Withheld
               -------------------------           -------------------           --------------------
              <S>                                  <C>                           <C>
               Donald L. Sturm                          86,898,070                     1,428,079
               J. Thomas McGrath                        86,912,280                     1,413,869
               Melanie L. Sturm                         86,846,324                     1,479,825
               John G. Donoghue                         86,921,277                     1,404,872
               Kevin C. McTavish                        86,920,626                     1,405,523
               James O. Spitzenberger                   86,914,907                     1,411,242
               William S. Price                         86,919,177                     1,406,972

                                                        Series B                       Series B
                                                       Common Stock                  Common Stock
                         Name                           Votes For                   Votes Withheld
               -------------------------           -------------------           --------------------
               John C. Stiska                           36,603,372                     1,406,117
</TABLE>

    All members were elected to serve until the next annual meeting of
stockholders of the Company or until their respective successors are duly
elected and qualified.

    The results of the election of PricewaterhouseCoopers LLP as Verado's
independent accountants were 88,182,793 votes for, 122,317 votes against and
21,039 abstained. There were no broker non-votes.

                                       24
<PAGE>

ITEM 5.  OTHER INFORMATION

    Effective July 27, 2001, John M. Harper resigned his position as Chief
Technology Officer.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>

(a)      Exhibits:
<S>     <C>
10.60    Master Agreement to Lease Equipment between the Company and Cisco Systems Capital
10.61    Separation and Settlement Agreement between the Company and Marion K. Jenkins
10.62    Separation and Settlement Agreement between the Company and David J. Gandini

(b)      Three reports on Form 8-K has been filed since April 27, 2001:

<CAPTION>
                                                          Were any financial
               Item Reported                               statements filed?              Date of filing
               -------------                               -----------------              --------------
<S>                                                       <C>                            <C>
Item 5 - Other Event - Sale of Optec, Inc.                       No                       June 22, 2001
Item 5 - Other Event - Receipt of Nasdaq Notice                  No                       July 19, 2001
Item 5 - Other Event - Sale of DSL Subscriber Base               No                       August 1, 2001
</TABLE>

                                       25
<PAGE>

                                  SIGNATURES

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

<TABLE>

Date:    August 8, 2001   VERADO HOLDINGS, INC.
<S>                                             <C>
                                                       /s/ J. Thomas McGrath
                                                  ----------------------------------
                                                  Name:   J. Thomas McGrath
                                                  Title:  President and Chief Executive Officer

<CAPTION>
                 SIGNATURE                                TITLE                                DATE
                 ---------                                -----                                ----
<S>                                      <C>                                             <C>
     /s/ J. Thomas McGrath                 President, Chief Executive Officer             August 8, 2001
---------------------------------------    and Director (Principal Executive Officer)

     /s/ Steven D. Butler                  Chief Financial Officer                        August 8, 2001
---------------------------------------    (Principal Financial and Chief
                                           Accounting Officer)
</TABLE>

                                       26