##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




---

FORM 10-Q

(MARK ONE)







FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

OR







For the transition period from

to

Commission File number 25737



---

USinternetworking, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Delaware(State or other jurisdiction of
	incorporation or organization) |  | 52-2078325(I.R.S. Employer
	Identification No.)

One USi Plaza, Annapolis, MD 21401-7478

(Address of principal executive offices)


(Zip Code)


(410) 897-4400





---

Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes 
  No

Shares outstanding of the Registrants common stock

|                              |  |                           
|----------------------------- |  | --------------------------
|Class                         |  | Outstanding at May 7, 2001
|                              |  |                           
|Common Stock, $.001 par value |  | 144,977,264               



---






---

TABLE OF CONTENTS



|                              |                                                                                               |  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Consolidated Financial Statements                                                    
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 2. Changes in Securities and Use of Proceeds                                            
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   



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##### Table of Contents



INDEX

USinternetworking, Inc.

|                              |          |                                                                                                       |                                                                                        |      |   |    | 
|----------------------------- | -------- | ----------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ---- | - | -- | 
|                              |          |                                                                                                       |                                                                                        | Page
|                              |          |                                                                                                       |                                                                                        |     
|                             
|                             
|                             
|                             
|PART I  FINANCIAL INFORMATION |          |                                                                                                       | 3                                                                                      |     
|                              | Item  1. |                                                                                                       | Consolidated Financial Statements of USinternetworking, Inc.                           |      |   |    | 
|                             
|                             
|                             
|                             
|                              |          | Consolidated Balance Sheets as of March 31, 2001
	(unaudited) and December 31, 2000.                  |                                                                                        |      | 3 |   
|                             
|                             
|                             
|                             
|                              |          | Consolidated Statements of Operations for the three months ended
	March 31, 2001 and 2000 (unaudited) |                                                                                        |      | 4 |   
|                             
|                             
|                             
|                             
|                              |          | Consolidated Statement of Stockholders Equity for the
	three months ended March 31, 2001 (unaudited) |                                                                                        |      | 5 |   
|                             
|                             
|                             
|                             
|                              |          | Consolidated Statements of Cash Flows for the three months ended
	March 31, 2001 and 2000 (unaudited) |                                                                                        |      | 6 |   
|                             
|                             
|                             
|                             
|                              |          | Notes to Consolidated Financial Statements                                                            |                                                                                        |      | 7 |   
|                             
|                             
|                             
|                             
|                              | Item  2. |                                                                                                       | Managements Discussion and Analysis of Financial Condition
	and Results of Operations |      |   | 12 | 
|                             
|                             
|                             
|                             
|                              | Item  3. |                                                                                                       | Quantitative and Qualitative Disclosure of Market Risk                                 |      |   | 17 | 
|                             
|                             
|                             
|                             
|PART II  OTHER INFORMATION    |          |                                                                                                       | 17                                                                                     |     
|                             
|                             
|                             
|                             
|                              | Item  1. |                                                                                                       | Legal Proceedings                                                                      |      |   | 17 | 
|                             
|                             
|                             
|                             
|                              | Item  2. |                                                                                                       | Changes in Securities and Use of Proceeds                                              |      |   | 17 | 
|                             
|                             
|                             
|                             
|                              | Item  4. |                                                                                                       | Submission of Matters to a Vote of Security Holders                                    |      |   | 18 | 
|                             
|                             
|                             
|                             
|                              | Item  6. |                                                                                                       | Exhibits and Reports on Form 8-K                                                       |      |   | 18 | 
|                             
|                             
|                             
|                             
|SIGNATURES                    |          |                                                                                                       | 19                                                                                     |     

2



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##### Table of Contents






PART I.  FINANCIAL INFORMATION




Item 1.  Consolidated Financial
Statements

USinternetworking, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

|                                                                                                                 |                                                                                                                                              |                                            |         |              |         |  |         |          |         | 
|---------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------------ | ------- |  | ------- | -------- | ------- | 
|                                                                                                                 |                                                                                                                                              | March 31,                                  |         | December 31,
|                                                                                                                 |                                                                                                                                              | 2001                                       |         | 2000        
|                                                                                                                 |                                                                                                                                              |                                            |         |             
|                                                                                                                 |                                                                                                                                              | (unaudited)                                |         |             
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|ASSETS                                                                                                          
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Current assets:                                                                                                  |                                                                                                                                              |                                            |         |              |         |  |         |         
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                 | Cash and cash equivalents                                                                                                                    |                                            | $       | 111,669      |         |  | $       | 56,962   |        
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                 | Restricted cash                                                                                                                              |                                            |         | 6,102        |         |  |         | 3,102    |        
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                 | Accounts receivable, less allowance of $3,042 in 2001 and $1,785
	in 2000.                                                                   |                                            |         | 38,493       |         |  |         | 35,312   |        
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                 | Due from officer                                                                                                                             |                                            |         | 2,158        |         |  |         | 2,158    |        
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                 | Prepaid software maintenance costs                                                                                                           |                                            |         | 9,060        |         |  |         | 9,115    |        
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                 | Prepaid expenses and other current assets                                                                                                    |                                            |         | 4,382        |         |  |         | 4,232    |        
|                                                                                                                 |                                                                                                                                              |                                            |         |              |         |  |         |         
|                                                                                                                 |                                                                                                                                              | Total current assets                       |         |              | 171,864 |  |         |          | 110,881 | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Deferred iMAP costs, net of accumulated amortization of $25,095
	in 2001 and $18,820 in 2000                     |                                                                                                                                              |                                            | 30,241  |              |         |  | 29,943  |         
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Software licenses, net of accumulated amortization of $11,620 in
	2001 and $9,727 in 2000                        |                                                                                                                                              |                                            | 18,834  |              |         |  | 20,548  |         
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Property and equipment, net of accumulated depreciation of
	$66,593 in 2001 and $52,336
	in 2000                 |                                                                                                                                              |                                            | 219,936 |              |         |  | 218,563 |         
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Goodwill, net of accumulated amortization of $18,096 in 2001 and
	$15,723 in 2000                                |                                                                                                                                              |                                            | 27,372  |              |         |  | 27,560  |         
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Deferred financing costs and other assets, net of accumulated
	amortization of $1,530 in 2001 and $1,232 in 2000 |                                                                                                                                              |                                            | 12,372  |              |         |  | 11,288  |         
|                                                                                                                 |                                                                                                                                              |                                            |         |              |         |  |         |         
|                                                                                                                 |                                                                                                                                              | Total assets                               |         | $            | 480,619 |  |         | $        | 418,783 | 
|                                                                                                                 |                                                                                                                                              |                                            |         |              |         |  |         |         
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                            
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Current liabilities:                                                                                             |                                                                                                                                              |                                            |         |              |         |  |         |         
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                 | Accounts payable                                                                                                                             |                                            | $       | 13,945       |         |  | $       | 23,259   |        
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                 | Accrued compensation and benefits                                                                                                            |                                            |         | 13,110       |         |  |         | 14,718   |        
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                 | Other accrued expenses                                                                                                                       |                                            |         | 8,057        |         |  |         | 6,098    |        
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                 | Deferred revenue                                                                                                                             |                                            |         | 20,796       |         |  |         | 20,478   |        
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                 | Current portion of capital lease obligations                                                                                                 |                                            |         | 30,329       |         |  |         | 21,802   |        
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                 | Current portion of long-term debt                                                                                                            |                                            |         | 16,132       |         |  |         | 22,020   |        
|                                                                                                                 |                                                                                                                                              |                                            |         |              |         |  |         |         
|                                                                                                                 |                                                                                                                                              | Total current liabilities                  |         |              | 102,369 |  |         |          | 108,375 | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Capital lease obligations, less current portion                                                                  |                                                                                                                                              |                                            | 47,839  |              |         |  | 39,238  |         
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Long-term debt, less current portion                                                                             |                                                                                                                                              |                                            | 35,713  |              |         |  | 29,187  |         
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Convertible subordinated notes                                                                                   |                                                                                                                                              |                                            | 125,000 |              |         |  | 125,000 |         
|                                                                                                                 |                                                                                                                                              |                                            |         |              |         |  |         |         
|                                                                                                                 |                                                                                                                                              | Total liabilities                          |         |              | 310,921 |  |         |          | 301,800 | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Commitments and contingent liabilities                                                                           |                                                                                                                                              |                                            |        |              |         |  |        |         
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Stockholders equity:                                                                                            |                                                                                                                                              |                                            |         |              |         |  |         |         
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                 | Preferred stock, $.001 par value, 1,000,000 shares authorized,
	none issued and outstanding                                                  |                                            |         |             |         |  |         |         |        
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                 | Common stock, $.001 par value, 450,000,000 shares authorized;
	issued and outstanding shares of 144,674,172 in 2001 and
	115,063,871 in 2000 |                                            |         | 145          |         |  |         | 115      |        
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                 | Additional paid-in capital                                                                                                                   |                                            |         | 541,802      |         |  |         | 444,878  |        
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                 | Note receivable from officer for purchase of common stock                                                                                    |                                            |         | (2,250       | )       |  |         | (2,250   | )      
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                 | Unearned compensation                                                                                                                        |                                            |         | (13,825      | )       |  |         | (15,029  | )      
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                 | Accumulated deficit                                                                                                                          |                                            |         | (356,174     | )       |  |         | (310,731 | )      
|                                                                                                                 |                                                                                                                                              |                                            |         |              |         |  |         |         
|                                                                                                                 |                                                                                                                                              | Total stockholders equity                 |         |              | 169,698 |  |         |          | 116,983 | 
|                                                                                                                 |                                                                                                                                              |                                            |         |              |         |  |         |         
|                                                                                                                 |                                                                                                                                              | Total liabilities and stockholders equity |         | $            | 480,619 |  |         | $        | 418,783 | 
|                                                                                                                 |                                                                                                                                              |                                            |         |              |         |  |         |         

See accompanying notes.

3



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##### Table of Contents



USinternetworking, Inc.

Consolidated Statements of Operations

(In thousands, except per share amounts)

|                                                                             |                                      |                                  |         |        |         |   |         |        |         |  
|---------------------------------------------------------------------------- | ------------------------------------ | -------------------------------- | ------- | ------ | ------- | - | ------- | ------ | ------- | -
|                                                                             |                                      |                                 
|                                                                             |                                      | Three months ended              
|                                                                             |                                      | March 31,                       
|                                                                             |                                      |                                 
|                                                                             |                                      | 2001                             |         | 2000  
|                                                                             |                                      |                                  |         |       
|                                                                             |                                      |                                 
|                                                                             |                                      | (unaudited)                     
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Revenue                                                                      |                                      | $                                | 36,664  |        |         | $ | 17,790  |       
|                                                                             |                                      |                                  |         |        |         |   |         |       
|Costs and expenses:                                                          |                                      |                                  |         |        |         |   |         |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Direct cost of services              |                                  |         | 19,409 |         |   |         | 11,249 |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Network and infrastructure costs     |                                  |         | 7,966  |         |   |         | 6,090  |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | General and administrative           |                                  |         | 6,759  |         |   |         | 6,225  |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Sales and marketing                  |                                  |         | 15,222 |         |   |         | 17,256 |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Product research and development     |                                  |         | 709    |         |   |         | 512    |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Restructuring charge                 |                                  |         | 1,020  |         |   |         |       |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Non-cash stock compensation expense: |                                  |         |        |         |   |         |        |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                      | Direct cost of services          |         |        | 1,345   |   |         |        | 594     |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                      | Network and infrastructure costs |         |        | 1,253   |   |         |        | 1,137   |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                      | General and administrative       |         |        | 2,585   |   |         |        | 1,064   |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                      | Sales and marketing              |         |        | 1,795   |   |         |        | 1,319   |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                      | Product research and development |         |        | 3       |   |         |        | 10      |  
|                                                                             |                                      |                                  |         |        |         |   |         |       
|                                                                             |                                      |                                  | 6,981   |        |         |   | 4,124   |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Depreciation and amortization        |                                  |         | 18,547 |         |   |         | 9,330  |        
|                                                                             |                                      |                                  |         |        |         |   |         |       
|                                                                             |                                      | Total costs and expenses         |         |        | 76,613  |   |         |        | 54,786  |  
|                                                                             |                                      |                                  |         |        |         |   |         |       
|Operating loss                                                               |                                      |                                  | (39,949 | )      |         |   | (36,996 | )     
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Other income (expense):                                                      |                                      |                                  |         |        |         |   |         |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Interest income                      |                                  |         | 2,044  |         |   |         | 1,903  |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Interest expense                     |                                  |         | (7,538 | )       |   |         | (4,553 | )      
|                                                                             |                                      |                                  |         |        |         |   |         |       
|                                                                             |                                      |                                  | (5,494  | )      |         |   | (2,650  | )     
|                                                                             |                                      |                                  |         |        |         |   |         |       
|                                                                             |                                      | Net loss                         |         | $      | (45,443 | ) |         | $      | (39,646 | )
|                                                                             |                                      |                                  |         |        |         |   |         |       
|Basic and diluted loss per common share attributable to common
	stockholders |                                      | $                                | (0.33   | )      |         | $ | (0.42   | )     
|                                                                             |                                      |                                  |         |        |         |   |         |       

See accompanying notes.

4



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##### Table of Contents



USinternetworking, Inc.

Consolidated Statement of Stockholders Equity

Three months ended March 31, 2001

(In thousands, except share amounts)

|                                      |                                                                                             |                                                                 |            |            |     |            |   |              |         |              |   |               |        |        |   |   |         |       |   |   |          |   |         |   |         |        |         |  
|------------------------------------- | ------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | ---------- | ---------- | --- | ---------- | - | ------------ | ------- | ------------ | - | ------------- | ------ | ------ | - | - | ------- | ----- | - | - | -------- | - | ------- | - | ------- | ------ | ------- | -
|                                      |                                                                                             |                                                                 |            |            |     |            |   |              |         |              |   |              
|                                      |                                                                                             | Common Stock                                                    |            | Additional |     | Note       |   |              |         |              |   | Total        
|                                      |                                                                                             |                                                                 |            | Paid-in    |     | Receivable |   | Unearned     |         | Accumulated  |   | Stockholders
|                                      |                                                                                             | Shares                                                          |            | Par value  |     | Capital    |   | From Officer |         | Compensation |   | Deficit       |        | Equity
|                                      |                                                                                             |                                                                 |            |            |     |            |   |              |         |              |   |               |        |       
|Balance at January 1, 2001            |                                                                                             | 115,063,871                                                     |            | $          | 115 |            |   | $            | 444,878 |              |   | $             | (2,250 | )      |   | $ | (15,029 | )     |   | $ | (310,731 | ) |         | $ | 116,983 |       
|                                     
|                                     
|                                     
|                                     
|                                      | Issuance of common stock for cash, net of offering costs of
	$6,664                         |                                                                 | 28,634,815 |            |     | 29         |   |              |         | 90,182       |   |               |        |       |   |   |         |      |   |   |          |  |         |   |         | 90,211 |        
|                                     
|                                     
|                                     
|                                     
|                                      | Issuance of restricted stock in connection with employee bonus
	plan                        |                                                                 | 240,193    |            |     |           |   |              |         | 636          |   |               |        |       |   |   |         | (428  | ) |   |          |  |         |   |         | 208    |        
|                                     
|                                     
|                                     
|                                     
|                                      | Common stock issued upon exercise of stock options                                          |                                                                 | 151,341    |            |     |           |   |              |         | 336          |   |               |        |       |   |   |         |      |   |   |          |  |         |   |         | 336    |        
|                                     
|                                     
|                                     
|                                     
|                                      | Common stock issued for employee stock purchase plan                                        |                                                                 | 454,904    |            |     | 1          |   |              |         | 821          |   |               |        |       |   |   |         |      |   |   |          |  |         |   |         | 822    |        
|                                     
|                                     
|                                     
|                                     
|                                      | Contribution of common stock to employee benefit plan                                       |                                                                 | 129,048    |            |     |           |   |              |         | 468          |   |               |        |       |   |   |         |      |   |   |          |  |         |   |         | 468    |        
|                                     
|                                     
|                                     
|                                     
|                                      | Stock compensation expense for issuance of common stock options
	at below fair market value |                                                                 |           |            |     |           |   |              |         | 4,481        |   |               |        |       |   |   |         |      |   |   |          |  |         |   |         | 4,481  |        
|                                     
|                                     
|                                     
|                                     
|                                      | Amortization of unearned compensation                                                       |                                                                 |           |            |     |           |   |              |         |             |   |               |        |       |   |   |         | 1,632 |   |   |          |  |         |   |         | 1,632  |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                             | Net loss for the period January 1, 2001 through March 31,
	2001 |            |           |     |            |  |              |         |              |  |               |        |        |  |   |         |       |  |   |          |   | (45,443 | ) |         |        | (45,443 | )
|                                      |                                                                                             |                                                                 |            |            |     |            |   |              |         |              |   |               |        |        |   |   |         |       |   |   |          |   |         |   |         |       
|Balance at March 31, 2001 (unaudited) |                                                                                             | 144,674,172                                                     |            | $          | 145 |            |   | $            | 541,802 |              |   | $             | (2,250 | )      |   | $ | (13,825 | )     |   | $ | (356,174 | ) |         | $ | 169,698 |       
|                                      |                                                                                             |                                                                 |            |            |     |            |   |              |         |              |   |               |        |        |   |   |         |       |   |   |          |   |         |   |         |       

See accompanying notes.

5



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##### Table of Contents



USinternetworking, Inc.

Consolidated Statements of Cash Flows

(In thousands)

|                                                                             |                                                          |                                              |                                           |       |        |        |         |       |       |        |  
|---------------------------------------------------------------------------- | -------------------------------------------------------- | -------------------------------------------- | ----------------------------------------- | ----- | ------ | ------ | ------- | ----- | ----- | ------ | -
|                                                                             |                                                          |                                             
|                                                                             |                                                          | Three months ended                          
|                                                                             |                                                          | March 31,                                   
|                                                                             |                                                          |                                             
|                                                                             |                                                          | 2001                                         |                                           | 2000 
|                                                                             |                                                          |                                              |                                           |      
|                                                                             |                                                          |                                             
|                                                                             |                                                          | (unaudited)                                 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Operating Activities                                                         |                                                          |                                              |                                           |       |        |        |         |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Net loss                                                                     |                                                          | $                                            | (45,443                                   | )     |        | $      | (39,646 | )    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Adjustments to reconcile net loss to net cash used in operating
	activities: |                                                          |                                              |                                           |       |        |        |         |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                          | Depreciation                                 |                                           |       | 16,174 |        |         |       | 7,458 |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                          | Amortization                                 |                                           |       | 2,373  |        |         |       | 1,872 |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                          | Non-cash stock compensation expense          |                                           |       | 6,981  |        |         |       | 4,124 |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                          | Non-cash interest expense                    |                                           |       |       |        |         |       | 65    |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                          | Changes in operating assets and liabilities: |                                           |       |        |        |         |       |       |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                          |                                              | Accounts receivable                       |       |        | (3,181 | )       |       |       | (3,285 | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                          |                                              | Prepaid expenses and other current assets |       |        | (95    | )       |       |       | (5,492 | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                          |                                              | Deferred iMAP costs                       |       |        | (298   | )       |       |       | (5,590 | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                          |                                              | Accounts payable                          |       |        | (9,314 | )       |       |       | 711    |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                          |                                              | Accrued compensation                      |       |        | (1,608 | )       |       |       | 663    |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                          |                                              | Other accrued expenses                    |       |        | 1,959  |         |       |       | 1,198  |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                          |                                              | Deferred revenue                          |       |        | 318    |         |       |       | 2,784  |  
|                                                                             |                                                          |                                              |                                           |       |        |        |         |      
|Net cash used in operating activities                                        |                                                          |                                              | (32,134                                   | )     |        |        | (35,138 | )    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Investing Activities                                                         |                                                          |                                              |                                           |       |        |        |         |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Purchases of property and equipment                                          |                                                          |                                              | (9,700                                    | )     |        |        | (30,925 | )    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Proceeds from sale-leaseback transaction                                     |                                                          |                                              | 17,900                                    |       |        |        |        |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Investment in restricted cash                                                |                                                          |                                              | (3,000                                    | )     |        |        |        |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Purchases of available-for-sale securities                                   |                                                          |                                              |                                          |       |        |        | (12,130 | )    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Proceeds from sale of available-for-sale securities                          |                                                          |                                              |                                          |       |        |        | 20,863  |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Payments to shareholders of acquired businesses                              |                                                          |                                              | (2,185                                    | )     |        |        |        |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Changes in other assets                                                      |                                                          |                                              | (1,084                                    | )     |        |        |        |      
|                                                                             |                                                          |                                              |                                           |       |        |        |         |      
|Net cash provided by (used in) investing activities                          |                                                          |                                              | 1,931                                     |       |        |        | (22,192 | )    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Financing Activities                                                         |                                                          |                                              |                                           |       |        |        |         |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Proceeds from exercise of employee stock options                             |                                                          |                                              | 336                                       |       |        |        | 795     |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Proceeds from issuance of common stock to Employee Stock
	Purchase Plan      |                                                          |                                              | 822                                       |       |        |        |        |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Proceeds from issuance of common stock, net of offering costs                |                                                          |                                              | 90,211                                    |       |        |        | 119,968 |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Proceeds from issuance of long-term debt                                     |                                                          |                                              | 15,940                                    |       |        |        | 15,799  |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Payments on long-term debt                                                   |                                                          |                                              | (14,361                                   | )     |        |        | (2,179  | )    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Payments on capital lease obligations                                        |                                                          |                                              | (8,039                                    | )     |        |        | (2,201  | )    
|                                                                             |                                                          |                                              |                                           |       |        |        |         |      
|Net cash provided by financing activities                                    |                                                          |                                              | 84,910                                    |       |        |        | 132,182 |      
|                                                                             |                                                          |                                              |                                           |       |        |        |         |      
|Net increase in cash and cash equivalents                                    |                                                          |                                              | 54,707                                    |       |        |        | 74,852  |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Cash and cash equivalents at beginning of period                             |                                                          |                                              | 56,962                                    |       |        |        | 112,302 |      
|                                                                             |                                                          |                                              |                                           |       |        |        |         |      
|Cash and cash equivalents at end of period                                   |                                                          | $                                            | 111,669                                   |       |        | $      | 187,154 |      
|                                                                             |                                                          |                                              |                                           |       |        |        |         |      
|Supplemental cash flow information:                                          |                                                          |                                              |                                           |       |        |        |         |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Additional capital purchases acquired via capital leases |                                              | $                                         | 6,133 |        |        | $       | 5,618 |      
|                                                                             |                                                          |                                              |                                           |       |        |        |         |      

See accompanying notes.

6



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##### Table of Contents



USinternetworking, Inc.

Notes to Consolidated Financial Statements

March 31, 2001


(unaudited)


1.  Basis of Presentation

The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and disclosures required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included. For further information, refer to the
consolidated financial statements and notes thereto included in
the Companys annual report on Form 10-K for the year
ended December 31, 2000. Operating results for the three
months ended March 31, 2001 are not necessarily indicative
of the results that may be expected for the year ending
December 31, 2001.

2.  Adoption of Recent Accounting Pronouncements

As of January 1, 2001, the Company adopted Financial
Accounting Standards Board Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities.The
Statement requires the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the
fair value of derivatives are either offset against the change
in fair value of assets, liabilities, or firm commitments
through earnings or recognized in comprehensive income until the
hedged item is recognized in earnings The ineffective portion of
a derivatives change in fair value will be immediately
recognized in earnings.

Upon adoption of the Statement on January 1, 2001, the
Company maintained an interest rate swap agreement in the
notional amount of $4,750 related to outstanding notes payable.
The interest rate swaps effectively fix the rate of interest on
a portion of the Companys floating rate term loans, and
are settled as the related term notes mature. The adoption of
the statement was immaterial to the Companys financial
condition and results of operations.

3.  Loss Per Share

The following table sets forth the computation of basic and
diluted loss per common share:

|                                        |                                                                                                                |                    |       |             |   |   |       |            |  
|--------------------------------------- | -------------------------------------------------------------------------------------------------------------- | ------------------ | ----- | ----------- | - | - | ----- | ---------- | -
|                                        |                                                                                                                |                   
|                                        |                                                                                                                | Three months ended
|                                        |                                                                                                                | March 31,         
|                                        |                                                                                                                |                   
|                                        |                                                                                                                | 2001               |       | 2000       
|                                        |                                                                                                                |                    |       |            
|Numerator:                              |                                                                                                                |                    |       |             |   |   |       |           
|                                       
|                                       
|                                       
|                                       
|                                        | Net loss                                                                                                       |                    | $     | (45,443     | ) |   | $     | (39,646    | )
|                                        |                                                                                                                |                    |       |             |   |   |       |           
|Denominator:                            |                                                                                                                |                    |       |             |   |   |       |           
|                                       
|                                       
|                                       
|                                       
|                                        | Weighted-average number of shares of common stock outstanding
	and not subject to repurchase during the period |                    |       | 137,905,633 |   |   |       | 94,676,274 |  
|                                        |                                                                                                                |                    |       |             |   |   |       |           
|Basic and diluted loss per common share |                                                                                                                | $                  | (0.33 | )           |   | $ | (0.42 | )         
|                                        |                                                                                                                |                    |       |             |   |   |       |           

Basic loss per share is based upon the average number of shares
of common stock outstanding during the periods.

7



---



##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

March 31, 2001


(unaudited)


3.  Loss Per Share  (Continued)

Diluted loss per common share is equal to basic loss per common
share because if potentially dilutive securities were included
in the computation, the result would be anti-dilutive. These
potentially dilutive securities consist of unvested restricted
common stock, stock options and warrants.

4.  Capital Lease Obligations

The Company has entered into capital lease agreements to acquire
certain equipment. Property and equipment includes the following
amounts for leases that have been capitalized.

|                         |       |           |         |              |  |   |         |        | 
|------------------------ | ----- | --------- | ------- | ------------ |  | - | ------- | ------ | 
|                         |       | March 31, |         | December 31,
|                         |       | 2001      |         | 2000        
|                         |       |           |         |             
|Computers and software   |       | $         | 102,476 |              |  | $ | 79,356  |       
|                        
|                        
|                        
|                        
|Accumulated amortization |       |           | (26,374 | )            |  |   | (20,688 | )     
|                         |       |           |         |              |  |   |         |       
|                         | Total |           | $       | 76,102       |  |   | $       | 58,668 | 
|                         |       |           |         |              |  |   |         |       

Amortization of leased property is included in depreciation and
amortization expense.

Future minimum payments under capital lease obligations consist
of the following at March 31, 2001:

|                                           |                              |   |         |         | 
|------------------------------------------ | ---------------------------- | - | ------- | ------- | 
|                                          
|                                          
|                                          
|                                          
|2001                                       |                              | $ | 29,522  |        
|                                          
|                                          
|                                          
|                                          
|2002                                       |                              |   | 35,781  |        
|                                          
|                                          
|                                          
|                                          
|2003                                       |                              |   | 75,724  |        
|                                          
|                                          
|                                          
|                                          
|2004                                       |                              |   | 688     |        
|                                           |                              |   |         |        
|                                           | Total minimum lease payments |   |         | 141,715 | 
|                                          
|                                          
|                                          
|                                          
|Amounts representing interest              |                              |   | (63,547 | )      
|                                           |                              |   |         |        
|Present value of capital lease obligations |                              |   | 78,168  |        
|                                          
|                                          
|                                          
|                                          
|Current portion                            |                              |   | (30,329 | )      
|                                           |                              |   |         |        
|Capital lease obligations, non-current     |                              | $ | 47,839  |        
|                                           |                              |   |         |        

5.  Long-Term Debt

Long-term debt consists of the following:

|                                                                                                                                                                                                                                                                                                                                                                                                            |  |           |       |              |  |   |        | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | ----- | ------------ |  | - | ------ | 
|                                                                                                                                                                                                                                                                                                                                                                                                            |  | March 31, |       | December 31,
|                                                                                                                                                                                                                                                                                                                                                                                                            |  | 2001      |       | 2000        
|                                                                                                                                                                                                                                                                                                                                                                                                            |  |           |       |             
|Note payable to bank due in June 2001 and bearing interest
	at 9% per annum. This note is payable in aggregate monthly
	installments of principal and interest of $7 with all unpaid
	principal and interest due at maturity. This note is secured by
	a mortgage on the real property purchased with the proceeds and
	with restricted cash equal to the principal balance pledged as
	additional security |  | $         | 586   |              |  | $ | 795    | 
|                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                           
|Notes payable due September 1, 2002 through May 1,
	2003 and bearing interest at 11.3% to 13.61% per annum. These
	notes are payable in aggregate monthly installments of principal
	and interest of $303 and are collateralized by certain
	furniture, fixtures, equipment, and software                                                                                                                   |  |           | 5,842 |              |  |   | 13,568 | 

8



---



##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

March 31, 2001


(unaudited)


5.  Long-Term Debt  (Continued)

|                                                                                                                                                                                                                                                                                                                                                                            |       |           |        |              |  |   |        |        | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- | --------- | ------ | ------------ |  | - | ------ | ------ | 
|                                                                                                                                                                                                                                                                                                                                                                            |       | March 31, |        | December 31,
|                                                                                                                                                                                                                                                                                                                                                                            |       | 2001      |        | 2000        
|                                                                                                                                                                                                                                                                                                                                                                            |       |           |        |             
|Notes payable due January 2002 through March 2002 and
	bearing interest at 10.0% to 11.9% per annum. These notes are
	payable in quarterly installments of $1,071 with all unpaid
	principal and interest due at maturity. These notes are
	collateralized by certain software licenses                                                                                     |       |           | 4,187  |              |  |   | 9,030  |       
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|Notes payable due in May 2002 and bearing interest at 12.4%
	and 13.1% per annum. The notes are payable in aggregate monthly
	installments of principal and interest of $446 and are
	collateralized by certain equipment                                                                                                                                                   |       |           | 6,113  |              |  |   | 7,235  |       
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|Notes payable due on February 2005 through May 2006
	and bearing interest at 7.5% per annum. The notes are payable in
	aggregate monthly installments of principal and interest of $79
	with all unpaid principal and interest due at maturity. The
	notes are secured by a mortgage on the real property purchased
	with the proceeds                                      |       |           | 8,148  |              |  |   | 8,232  |       
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|Notes payable due on March 1, 2001 and bearing interest at
	6.6% per annum. These notes were payable in aggregate monthly
	installments of principal and interest of $39 and were
	collateralized by the general assets of the Company                                                                                                                                      |       |           |       |              |  |   | 154    |       
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|Notes payable due between March 2003 and September 2004 and
	bearing interest at rates from 8.25% to 10.25% per annum. The
	notes are payable in aggregate monthly installments of principal
	and interest of $2 and are secured by automobiles purchased with
	the proceeds                                                                                                |       |           | 95     |              |  |   | 99     |       
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|Note payable due on December 29, 2003 bearing interest at
	9.8% per annum. The note is payable in monthly principal
	installments of $99 plus interest and is collateralized by
	restricted cash equal to the principal balance and certain
	building improvements                                                                                                          |       |           | 3,365  |              |  |   | 3,563  |       
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|Note payable due June 1, 2010 and bearing interest at 8.80%
	per annum. The note is payable in aggregate monthly installments
	of principal and interest of $55 with all unpaid principal and
	interest due at maturity. This note is secured by a mortgage on
	the real property purchased with the proceeds and restricted
	cash for a portion of the outstanding balance |       |           | 6,698  |              |  |   | 6,719  |       
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|Amount outstanding under revolving credit line. Credit line
	expires on January 2, 2004 and bears interest based on a
	floating rate. Current rate is LIBOR plus 4.75%. Note is
	interest only with principal due upon facility expiration. The
	note is secured by the general assets of the Company                                                                       |       |           | 15,000 |              |  |   |       |       
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|Note payable to former shareholders of Conklin, bearing interest
	at 10% per annum and due with accrued interest on
	October 8, 2001.                                                                                                                                                                                                                                       |       |           | 2,000  |              |  |   | 2,000  |       
|                                                                                                                                                                                                                                                                                                                                                                            |       |           |        |              |  |   |        |       
|                                                                                                                                                                                                                                                                                                                                                                            | Total |           |        | 52,034       |  |   |        | 51,395 | 
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|Less: current portion                                                                                                                                                                                                                                                                                                                                                       |       |           | 16,132 |              |  |   | 22,020 |       
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                           
|Less: discounts                                                                                                                                                                                                                                                                                                                                                             |       |           | 189    |              |  |   | 188    |       
|                                                                                                                                                                                                                                                                                                                                                                            |       |           |        |              |  |   |        |       
|                                                                                                                                                                                                                                                                                                                                                                            |       | $         | 35,713 |              |  | $ | 29,187 |       
|                                                                                                                                                                                                                                                                                                                                                                            |       |           |        |              |  |   |        |       

9



---



##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

March 31, 2001


(unaudited)


5.  Long-Term Debt  (Continued)

Aggregate maturities of long-term debt at March 31, 2001
are as follows:

|                                        |       |   |        |        | 
|--------------------------------------- | ----- | - | ------ | ------ | 
|                                       
|                                       
|                                       
|                                       
|April 1, 2001 through December 31, 2001 |       | $ | 12,800 |       
|                                       
|                                       
|                                       
|                                       
|2002                                    |       |   | 8,232  |       
|                                       
|                                       
|                                       
|                                       
|2003                                    |       |   | 2,372  |       
|                                       
|                                       
|                                       
|                                       
|2004                                    |       |   | 15,567 |       
|                                       
|                                       
|                                       
|                                       
|2005                                    |       |   | 6,545  |       
|                                       
|                                       
|                                       
|                                       
|2006 and thereafter                     |       |   | 6,518  |       
|                                        |       |   |        |       
|                                        | Total |   | $      | 52,034 | 
|                                        |       |   |        |       

At March 31, 2001, the fair value of long-term debt
approximates its carrying value.

6.  Property and Equipment

Property and equipment consists of the following:

|                          |       |           |         |              |  |   |         |         | 
|------------------------- | ----- | --------- | ------- | ------------ |  | - | ------- | ------- | 
|                          |       | March 31, |         | December 31,
|                          |       | 2001      |         | 2000        
|                          |       |           |         |             
|Building and land         |       | $         | 46,854  |              |  | $ | 42,430  |        
|                         
|                         
|                         
|                         
|Furniture and fixtures    |       |           | 5,839   |              |  |   | 5,820   |        
|                         
|                         
|                         
|                         
|Equipment and automobiles |       |           | 11,639  |              |  |   | 11,328  |        
|                         
|                         
|                         
|                         
|Computers and software    |       |           | 210,187 |              |  |   | 199,436 |        
|                         
|                         
|                         
|                         
|Leasehold improvements    |       |           | 12,010  |              |  |   | 11,885  |        
|                          |       |           |         |              |  |   |         |        
|                          | Total |           |         | 286,529      |  |   |         | 270,899 | 
|                         
|                         
|                         
|                         
|Accumulated depreciation  |       |           | (66,593 | )            |  |   | (52,336 | )      
|                          |       |           |         |              |  |   |         |        
|                          | Total |           | $       | 219,936      |  |   | $       | 218,563 | 
|                          |       |           |         |              |  |   |         |        

Substantially all property and equipment is collateralized under
financing arrangements.

7.  Segment Information

The following tables set forth the Companys operating
segments:

|                          |                                    |                    |   |        |  |  |   |        | 
|------------------------- | ---------------------------------- | ------------------ | - | ------ |  |  | - | ------ | 
|                          |                                    |                   
|                          |                                    | Three months ended
|                          |                                    | March 31,         
|                          |                                    |                   
|                          |                                    | 2001               |   | 2000  
|                          |                                    |                    |   |       
|Revenues:                 |                                    |                    |   |        |  |  |   |       
|                         
|                         
|                         
|                         
|                          | Enterprise Wide Solutions          |                    | $ | 17,198 |  |  | $ | 7,761  | 
|                         
|                         
|                         
|                         
|                          | E-Commerce and Web Based Solutions |                    |   | 19,466 |  |  |   | 10,029 | 
|                          |                                    |                    |   |        |  |  |   |       
|                          | Consolidated                       |                    | $ | 36,664 |  |  | $ | 17,790 | 
|                          |                                    |                    |   |        |  |  |   |       
|Segment operating profit: |                                    |                    |   |        |  |  |   |       
|                         
|                         
|                         
|                         
|                          | Enterprise Wide Solutions          |                    | $ | 6,712  |  |  | $ | 3,024  | 
|                         
|                         
|                         
|                         
|                          | E-Commerce and Web Based Solutions |                    |   | 10,543 |  |  |   | 3,517  | 
|                          |                                    |                    |   |        |  |  |   |       
|                          | Consolidated                       |                    | $ | 17,255 |  |  | $ | 6,541  | 
|                          |                                    |                    |   |        |  |  |   |       

10



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

March 31, 2001


(unaudited)


7.  Segment Information  (Continued)

A reconciliation of segment operating profit to net loss during
the periods presented is as follows:

|                                          |  |                    |         |      |  |   |         |  
|----------------------------------------- |  | ------------------ | ------- | ---- |  | - | ------- | -
|                                          |  |                   
|                                          |  | Three months ended
|                                          |  | March 31,         
|                                          |  |                   
|                                          |  | 2001               |         | 2000
|                                          |  |                    |         |     
|Segment operating profit for all segments |  | $                  | 17,255  |      |  | $ | 6,541   |  
|                                         
|                                         
|                                         
|                                         
|Network and infrastructure costs          |  |                    | (7,966  | )    |  |   | (6,090  | )
|                                         
|                                         
|                                         
|                                         
|General and administrative                |  |                    | (6,759  | )    |  |   | (6,225  | )
|                                         
|                                         
|                                         
|                                         
|Sales and marketing                       |  |                    | (15,222 | )    |  |   | (17,256 | )
|                                         
|                                         
|                                         
|                                         
|Product research and development          |  |                    | (709    | )    |  |   | (512    | )
|                                         
|                                         
|                                         
|                                         
|Non-cash stock compensation expense       |  |                    | (6,981  | )    |  |   | (4,124  | )
|                                         
|                                         
|                                         
|                                         
|Restructuring charge                      |  |                    | (1,020  | )    |  |   |        |  
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |                    | (18,547 | )    |  |   | (9,330  | )
|                                         
|                                         
|                                         
|                                         
|Interest income                           |  |                    | 2,044   |      |  |   | 1,903   |  
|                                         
|                                         
|                                         
|                                         
|Interest expense                          |  |                    | (7,538  | )    |  |   | (4,553  | )
|                                          |  |                    |         |      |  |   |         |  
|Net loss                                  |  | $                  | (45,443 | )    |  | $ | (39,646 | )
|                                          |  |                    |         |      |  |   |         |  

8.  Restructuring Charge

In December 2000, the Company accrued a restructuring
charge of $2,110. The restructuring charge consisted of accrued
severance costs of $727 related to the involuntary termination
of 3 employees of the Company and non-cancelable lease
obligations of $1,383 related to the closing of three sales
offices. Additionally, the Company accrued a restructuring
charge of $1,020 in January 2001 related to severance costs
for the involuntary termination of 144 employees of the Company.
Approximately $1,234 of the accrued restructuring charges has
been paid as of March 31, 2001 and $556 was recognized as a
reduction of the estimated accrual for the termination of
various non-cancelable lease costs. The Company was able to
negotiate a more favorable lease termination settlement on
certain properties than initially anticipated. The following
table summarizes the activity related to the accrued
restructuring charges for the three-month period ended
March 31, 2001.

|                             |                                               |               |     |                |   |       |       |      |   |   |       |        |  
|---------------------------- | --------------------------------------------- | ------------- | --- | -------------- | - | ----- | ----- | ---- | - | - | ----- | ------ | -
|                             |                                               | Severance and |     | Non-cancelable |   |      
|                             |                                               | related costs |     | lease costs    |   | Total
|                             |                                               |               |     |                |   |      
|Balance at December 31, 2000 |                                               | $             | 727 |                |   | $     | 1,383 |      |   | $ | 2,110 |       
|                            
|                            
|                            
|                            
|                             | Restructuring charge in 2001                  |               |     | 1,020          |   |       |       |     |   |   |       | 1,020  |  
|                            
|                            
|                            
|                            
|                             | Payments in 2001                              |               |     | (1,184         | ) |       |       | (50  | ) |   |       | (1,234 | )
|                            
|                            
|                            
|                            
|                             | Changes in estimate for restructuring accrual |               |     |               |   |       |       | (556 | ) |   |       | (556   | )
|                             |                                               |               |     |                |   |       |       |      |   |   |       |       
|Balance at March 31, 2001    |                                               | $             | 563 |                |   | $     | 777   |      |   | $ | 1,340 |       
|                             |                                               |               |     |                |   |       |       |      |   |   |       |       

The remaining accrued restructuring charge of $1,340 is included
in other accrued expenses in the accompanying consolidated
balance sheet as of March 31, 2001.

9.  Stock Warrants

In connection with shares of common stock issued for cash on
January 2, 2001, the Company granted warrants to purchase
9,457,721 shares of common stock at an exercise price of
$4.08, which expire in January 2006. All of the warrants
remained outstanding at March 31, 2001. For further
information, refer to notes to the consolidated financial
statements included in the Companys annual report on
Form 10-K for the year ended December 31, 2000.

11



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##### Table of Contents






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

You should read the following discussion of our results of
operations and financial condition in conjunction with our
consolidated financial statements and related notes included
elsewhere in this Form 10-Q. This discussion contains
forward-looking statements based on current expectations that
involve risks and uncertainties. Actual results and the timing
of certain events may differ significantly from those projected
in such forward-looking statements due to a number of factors.
Dollar amounts stated herein are in thousands except per share
amounts.

Overview

We have developed an advanced, integrated service offering that
provides our clients the ability to use leading business
software applications through our state-of-the-art GSP
environment. During 1998, we devoted substantially all of our
efforts to developing our network infrastructure, recruiting and
training personnel, establishing strategic business partnerships
with application software providers, completing two strategic
acquisitions and raising capital. During our first full year of
operations in 1999, we continued the development activities
started in 1998 and began to market and sell our new iMAP
offerings. In 2000, we completed our development activities,
increased our client base, and expanded our iMAP offerings. We
have incurred a cumulative net loss since inception and expect
to incur additional losses for the foreseeable future. As of
March 31, 2001, we had an accumulated deficit of $356,174.

As of March 31, 2001, we had 238 signed contracts with 168
clients accounting for total revenue, assuming payment over the
full contract terms, of over $368,419. While we have experienced
significant growth in revenue under contract in recent periods
and currently expect continued growth in revenue, prior growth
rates should not be considered as necessarily indicative of
future growth rates or operating results for 2001.

In September 2000, we purchased the assets of EnableVision,
LLC, a comprehensive provider of Lawson financial and human
resources system implementation services. The purchase price
consisted of cash of $2,000 and 290,640 shares of restricted
stock valued at $4,000 on the purchase date.

In October 1999, we purchased the assets of Conklin &
Conklin, Inc., a comprehensive provider of Lawson financial and
human resources system implementation services and a certified
reseller of Lawson software licenses. The purchase price
consisted of cash of $7,700, assumed liabilities of $1,500, and
a $2,000 secured note. The secured note is due on
October 8, 2001, and bears interest at 10%, with interest
payable monthly until the maturity date. In addition, the
purchase price consists of contingent payments of up to $4,600
in cash. Portions of the contingent payments can be earned by
Conklin shareholders through December 2001 upon the
attainment of specified financial milestones.

Revenue. We generate revenue from iMAP services and
information technology services. Revenues from professional IT
services are recognized as services are provided. iMAP revenues
consist of fees for the Companys iMAP services. iMAP
service fees are consideration for access to our network of
Enterprise Data Centers or EDCs, hosting application software,
and the implementation and management of that software. iMAP
contracts generally have a three-to-five year term and revenues
are recognized ratably over the contract term. Payments received
in advance of revenue recognition, even if non-refundable, are
recorded as deferred revenue and recognized ratably over the
term of the iMAP service contract. Some contracts permit
termination without cause by the clients. Contracts permitting
termination without cause generally provide for termination
payments to us that will be recognized as revenue when
collectibility is assured.

Costs and expenses. We incur operating costs and expenses
related to the delivery of iMAP and professional IT services.
They include direct cost of services, network and infrastructure
costs, general and administrative, sales and marketing, product
research and development, non-cash stock compensation, and
depreciation and amortization expenses.

We incur up-front costs related to the delivery of iMAP
services. Product research and development costs and the cost to
operate our network and data centers are recognized as period
costs. Costs related to

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Historical Results of Operations

Revenue

|                                   |               |                |        |                |  |   |        |        | 
|---------------------------------- | ------------- | -------------- | ------ | -------------- |  | - | ------ | ------ | 
|                                   |               | Three months   |        | Three months  
|                                   |               | ended          |        | ended         
|                                   |               | March 31, 2001 |        | March 31, 2000
|                                   |               |                |        |               
|iMAP                               |               | $              | 33,323 |                |  | $ | 13,823 |       
|                                  
|                                  
|                                  
|                                  
|Professional IT services           |               |                | 3,341  |                |  |   | 3,967  |       
|                                   |               |                |        |                |  |   |        |       
|                                   | Total revenue |                | $      | 36,664         |  |   | $      | 17,790 | 
|                                   |               |                |        |                |  |   |        |       
|Enterprise Wide Solutions          |               | $              | 17,198 |                |  | $ | 7,761  |       
|                                  
|                                  
|                                  
|                                  
|E-Commerce and Web Based Solutions |               |                | 19,466 |                |  |   | 10,029 |       
|                                   |               |                |        |                |  |   |        |       
|                                   | Total revenue |                | $      | 36,664         |  |   | $      | 17,790 | 
|                                   |               |                |        |                |  |   |        |       

Direct cost of services

|                                   |                                                                     |                |        |                |  |   |       |        | 
|---------------------------------- | ------------------------------------------------------------------- | -------------- | ------ | -------------- |  | - | ----- | ------ | 
|                                   |                                                                     | Three months   |        | Three months  
|                                   |                                                                     | ended          |        | ended         
|                                   |                                                                     | March 31, 2001 |        | March 31, 2000
|                                   |                                                                     |                |        |               
|iMAP                               |                                                                     | $              | 17,200 |                |  | $ | 8,729 |       
|                                  
|                                  
|                                  
|                                  
|Professional IT services           |                                                                     |                | 2,209  |                |  |   | 2,520 |       
|                                  
|                                  
|                                  
|                                  
|Network and infrastructure         |                                                                     |                | 7,966  |                |  |   | 6,090 |       
|                                   |                                                                     |                |        |                |  |   |       |       
|                                   | Total direct cost of services and Network and infrastructure
	costs |                | $      | 27,375         |  |   | $     | 17,339 | 
|                                   |                                                                     |                |        |                |  |   |       |       
|Enterprise Wide Solutions          |                                                                     | $              | 10,486 |                |  | $ | 4,737 |       
|                                  
|                                  
|                                  
|                                  
|E-Commerce and Web Based Solutions |                                                                     |                | 8,923  |                |  |   | 6,512 |       
|                                  
|                                  
|                                  
|                                  
|Network and infrastructure         |                                                                     |                | 7,966  |                |  |   | 6,090 |       
|                                   |                                                                     |                |        |                |  |   |       |       
|                                   | Total direct cost of services and Network and infrastructure
	costs |                | $      | 27,375         |  |   | $     | 17,339 | 
|                                   |                                                                     |                |        |                |  |   |       |       

Comparison of the three-month period ended
March 31, 2001 to the three-month period ended
March 31, 2000

Revenue. For the three months ended March 31, 2001,
we generated $36,664 of revenue as compared to $17,790 for the
same prior year period.

The increase of $19,500 in iMAP revenue is attributable to the
increase in client iMAP contracts. At March 31, 2001, we
had 238 iMAP contracts versus 147 at March 31, 2000.
Included in our 2001 iMAP revenues was a one-time fee of $2,750
related to the early termination of an E-Commerce contract.
Professional IT services revenue decreased $626, primarily due
to shifting resources from traditional IT clients to iMAP.

The increase of $9,437 in Enterprise Wide Solutions revenue is
mainly attributable to additional iMAP contracts for our
financial management, human resource and customer relationship
management products. The increase of $9,437 in E-Commerce and
Web Based Solutions is mainly attributable to additional client
iMAP contracts for our E-commerce and E-business products.

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Gross margins, direct costs of services, network and
infrastructure costs. For the three-months ended
March 31, 2001, we incurred $27,375 for direct costs of
services and network and infrastructure costs as compared to
$17,339 for the same prior year period. The increase of $10,036
is mainly attributable to our increase in the volume of iMAP
services.

For the three-months ended March 31, 2001, we incurred
$17,200 and $2,209 of direct costs related to the delivery of
our iMAP and professional IT services, respectively. For the
same period in 2000, we incurred $8,729 of direct costs related
to iMAP services and $2,520 of direct costs related to
professional IT services. The $8,471 increase in iMAP services
costs is directly attributable to our increase in iMAP
contracts. In addition, we also wrote-off $809 of deferred iMAP
costs related to the early termination of a contract for which
we received a termination fee. The $311 decrease in professional
IT services costs is directly related to the decrease in
professional services revenue.

In addition, we incurred $7,966 of costs related to the
maintenance of our network and infrastructure costs for the
three-months ended March 31, 2001 and $6,090 in related
costs during the same period in 2000. The increase of $1,876 is
attributable to costs required to support our increase in
business growth.

Gross margins, including iMAP network and infrastructure costs,
for the three-months ended March 31, 2001 were 24% and 34%
for iMAP and professional IT services, respectively. These
margins for the comparable 2000 period were (7)% and 36%,
respectively. Our margins for iMAP services are expected to
continue to improve because our business model contemplates a
much smaller increase in network and infrastructure costs as
revenues increase. Professional IT services margins are expected
to remain constant for the foreseeable future.

For the three-months ended March 31, 2001, we incurred
$10,486 and $8,923 of direct costs related to the delivery of
our Enterprise Wide Solutions and E-Commerce and Web Based
Solutions, respectively. For the same period in 2000, we
incurred $4,737 of direct costs related to Enterprise Wide
Solutions and $6,512 of direct costs related to E-Commerce and
Web Based Solutions. Both increases are directly attributable to
incremental client costs associated with our increase in iMAP
client contracts.

Segment operating profit margins, which exclude iMAP networking
and infrastructure costs, for Enterprise Wide Solutions were 39%
and 39% for the three-months ended March 31, 2001 and 2000,
respectively. Segment operating profit margins for E-Commerce
and Web Based Solutions improved to 54% for the three-months
ended March 31, 2001 as compared to 35% for the same period
in 2000. This improvement reflects the utilization of the
investment made in 2000 to support the increase in iMAP
contracts.

General and administrative expenses. For the three-months
ended March 31, 2001, we incurred $6,759 of general and
administrative expenses compared to $6,225 for the same period
in 2000. The increase of $534 principally reflects the costs
associated with increased executive, finance, human resource,
corporate information systems and facilities personnel required
to support the growth in operations.

Sales and marketing expenses. For the three-months ended
March 31, 2001, we incurred $15,222 of sales and marketing
expenses compared to $17,256 for the same period in 2000. The
decrease of $2,034 reflects lower marketing and advertising
costs incurred for the three-months ended March 31, 2001.
In addition, we also decreased the number of product management
personnel due to the consolidation of business units from eight
in 2000 to two in 2001.

Product research and development expenses. For the
three-months ended March 31, 2001, we incurred $709 of
product research and development expenses compared to $512 for
the same period in 2000. We expect our product research and
development costs to remain constant for the foreseeable future.

Non-cash stock compensation expense. For the three-months
ended March 31, 2001, we incurred a total of $6,981 in
non-cash stock compensation expenses compared to $4,124 for the
same period in 2000. Of the $2,857 increase, $410 reflects the
periods expense in connection with employee stock options
we granted for nominal exercise prices in lieu of cash bonuses.
The remaining amount of $2,447 reflects the amortization of
unearned compensation for awards in prior periods. We expect to
incur up to $12,930 of

14



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Depreciation and amortization. For the three-months ended
March 31, 2001, we incurred $18,547 in depreciation and
amortization expenses, compared to $9,330 for the same period in
2000. Of the $9,217 million increase, $8,717 represents
depreciation of our increasing investment in property and
equipment and the amortization of our prepaid software licenses.
The remaining amount of $500 represents the amortization of the
goodwill recorded upon our acquisitions of Conklin, ACR, IIT and
EnableVision.

Interest income and expense. For the three-months ended
March 31, 2001, we incurred $7,538 in interest expense and
generated $2,044 of interest income. For three-months ended
March 31, 2000, we incurred $4,553 of interest expense and
generated $1,903 of interest income. Our interest expense has
increased as we continue to finance through long-term debt and
capital lease obligations investments in our client solutions
and in our network and infrastructure. See Notes 4 and 5 to
our March 31, 2001 consolidated financial statements for a
summary of our capital lease and long-term debt obligations at
March 31, 2001.

We generated interest income in the first three-months of 2001
from the temporary investments of our proceeds from our
November 2000 and January 2001 debt and equity
transactions. During the same prior year period, we generated
interest income from the temporary investment of the proceeds of
our February 2000 common stock offering and November 1999
debt offering.

Future Assessment of Recoverability and Impairment of
Goodwill

In connection with our acquisition of IIT, ACR, Conklin, and
EnableVision LLC, we recorded goodwill that is being amortized
on a straight-line basis over its estimated useful life. At
March 31, 2001 the unamortized portion of these intangibles
was $27,372, which represented 6% of total assets and 16% of
stockholders equity. Goodwill represents the amount that
we paid for these acquired businesses in excess of the fair
value of the acquired tangible and separately measurable
intangible net assets. We have estimated the useful life of our
goodwill to be between three to five years based upon several
factors, the most significant of which is the susceptibility of
acquired businesses to change as a result of technological
advances and the rapidly changing needs of their customers.

We periodically review the carrying value and recoverability of
our unamortized goodwill and other intangible assets for
impairment. If the facts and circumstances suggest that the
goodwill or other intangible assets may be impaired, the
carrying value of this goodwill will be adjusted by an immediate
charge against income during the period of the adjustment. The
length of the remaining amortization period may also be
shortened, which will result in an increase in the amount of
goodwill amortization during the period of adjustment and each
period thereafter until fully amortized. Once adjusted, there
can be no assurance that there will not be further adjustments
for impairment and recoverability in future periods. We have
integrated the acquired businesses into our primary iMAP service
offerings. Therefore, in evaluating impairment a principal
factor we consider is the failure to achieve expected cash flows
from operations.

Liquidity and Capital Resources

At March 31, 2001, we had cash and cash equivalents of
$111,669. On January 2, 2001 we closed a series of debt and
equity transactions resulting in gross proceeds of $106,151.
Cash in excess of operating requirements is invested in high
grade liquid financial instruments with maturities less than
90 days.

For the three-months ended March 31, 2001, we used $32,134
in operating activities, provided $1,931 from investing
activities and raised $84,910 (net of debt repayments) through
financing activities. Cash used in operating activities was used
to fund working capital needs. Specifically, we used
approximately

15



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##### Table of Contents





Cash will be required for the remainder of 2001 to fund capital
expenditures, which are estimated to be approximately $60,000,
as well as to continue to fund operating activities. Included in
the capital expenditures estimate is $6,000 related to committed
facilities costs. In addition to the cash resources on hand, we
have the following financing sources available:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $50,000 revolving line of credit led by GE Capital. Availability
	under this line is based upon accounts receivable balance and
	our 12 month backlog, which is the committed revenue we expect
	to obtain from our iMAP contracts over the next 12 months.
	The line requires that we meet certain financial covenants and
	is secured by substantially all of our assets. As of
	March 31, 2001, we had used approximately $16,000 of the
	line. Of the remaining $34,000, an additional $23,000 is
	currently available.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | $50,000 of lease financing for HP products, of which $13,360 has
	been funded and $16,640 is currently available. This commitment
	expires June 30, 2001. We expect to negotiate additional vendor
	financing which will enable us to continue to lease HP products
	in the future.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | $20,000 in long-term fixed asset financing from Compaq, of which
	$6,981 has been funded and $6,700 remains available. This
	commitment expires June  30, 2001. We expect to negotiate
	additional vendor financing which will enable us to continue to
	lease Compaq products in the future.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | $20,000 in long-term fixed asset financing from Sun
	Microsystems, of which $4,385 has been funded and $8,680 remains
	available. This commitment expires June 30, 2001. We expect
	to negotiate additional vendor financing which will enable us to
	continue to lease Sun Microsystems products in the future.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | We have entered into an equity draw-down agreement with Acqua
	Wellington North American Equities Fund Ltd., which permits us
	to sell shares of our common stock to Acqua Wellington at our
	sole discretion, depending upon our needs. To date, Acqua
	Wellington has purchased $5,000 of our common stock under this
	agreement. The shares are sold at a 4% to 6% discount based on
	the market price of our common stock at the time of the draw.
	The amount of stock sold in a given draw period is based on the
	stock price during such draw period. Below $3 per share, Acqua
	Wellington is not obligated to purchase our common stock. In
	addition, the SEC has recently applied regulatory limitations on
	such at the market equity draw down facilities that
	limit the capacity of our draw downs from Acqua Wellington to
	below the $140,000 of common stock contemplated by the original
	agreement. We are currently negotiating an amendment to our
	agreement with Acqua Wellington to decrease the per share
	trading price at which we can obligate Acqua Wellington to
	purchase our common stock in a lower aggregate amount which
	complies with the regulatory limitations. We cannot assure that
	we will be successful in these negotiations with Acqua
	Wellington.

We believe that our available resources and cash and cash
equivalents will be sufficient to fund our operations, including
planned levels of capital expenditure, for the foreseeable
future, assuming normal vendor financing and the successful
implementation of our current business model. The majority of
the base infrastructure required to provide our iMAP offerings
has been purchased. As a result, we expect that

16



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If we expand more rapidly than currently anticipated, if our
working capital needs exceed our current expectations, or if we
make acquisitions, we will need to raise additional capital from
equity or debt sources. We cannot be sure that we will be able
to obtain the additional financing to satisfy our cash
requirements or to implement our growth strategy on acceptable
terms, or at all. If we cannot obtain such financing on terms
acceptable to us, we may be forced to curtail our planned
business expansion and may be unable to fund our ongoing
operations.

Restructuring

In December 2000, we accrued a restructuring charge of
$2,110 related to severance costs associated with the
involuntary termination of certain employees of USi and
non-cancelable lease costs associated with the closing of three
sales offices. In January 2001, we accrued a restructuring
charge of $1,020 related to severance costs associated with the
involuntary termination of certain employees of USi. We
anticipate that substantially all of this restructuring accrual
will be paid in 2001.




Item 3.  Quantitative and Qualitative
Disclosures About Market Risk

We are exposed to market risk from changes in interest rates.
Market risk is the risk of loss to future earnings, to fair
value or to future cash flows that may result from the changes
in the price of financial instruments. At March 31, 2001,
we had cash and cash equivalents of $111,669, which consisted of
demand deposit and money market accounts. The accounts are
interest rate sensitive; however, these investments have short
maturities mitigating this sensitivity. A hypothetical 100 basis
point change in interest rates would result in an immaterial
change in our net loss for the three months ended March 31,
2001. At March 31, 2001, the fair value of long-term debt
and capital leases approximates its carrying value. A
hypothetical 100 basis point change in interest rates would
result in an immaterial change in the fair value of the
long-term debt and capital leases. Changes in the quoted market
price of our common stock affects the fair value of our
convertible subordinated notes. At March 31, 2001, we had
$125,000 of convertible subordinated notes outstanding, bearing
interest at 7%, that mature November 1, 2004. The estimated
fair value of these notes was $44,375 at March 31, 2001,
which represents a 32% decrease in the estimated fair value from
December 31, 2000. We continue to manage our exposure to
this risk through our regular operating and financing
activities. There have been no other significant changes in our
interest rate risk and other market risks.




PART II.  OTHER INFORMATION




Item 1.  Legal Proceedings

We are not a party to any material legal proceedings.




Item 2.  Changes in Securities and Use of
Proceeds

On January 2, 2001, we issued 27,022,059 shares of common
stock with certain registration rights for an aggregate purchase
price of $91,875,000 to our Chairman Christopher R.
McCleary, Chief Executive Officer Andrew A. Stern, certain
venture investors, Microsoft, Inc., CFE, Inc., (a wholly owned
subsidiary of GE Capital) and Aether Systems. We also issued to
these shareholders warrants to purchase 9,457,721 shares of
common stock for $4.08 per shares.

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The offer and sale of the securities above were made in reliance
on the exemption from registration under the Securities Act,
provided by Section 4(2) thereunder. The purchasers of
these securities represented that they had adequate access to
information about the Company and were experienced in making
such investments.




Item 4.  Submission of Matters to a Vote of
Security Holders

None.




Item 6.  Exhibits and Reports on
Form 8-K

(a)  The following exhibits are included herein:

None.

(b)  Reports on Form 8-K.

We filed a Current Report on Form 8-K dated
January 17, 2001 under which we filed a press release
announcing our fourth quarter financial results.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1934,
as amended, USinternetworking, Inc. has duly caused this
registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Annapolis, Maryland
on May 15, 2001.



| |                        
| | -----------------------
| | USINTERNETWORKING, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ ANDREW A. STERN

| |                        
| | -----------------------
| |                        
| | Andrew A. Stern        
| | Chief Executive Officer



| |     |                      
| | --- | ---------------------
| | By: | /s/ MARK J. MCENEANEY

| |                                                  
| | -------------------------------------------------
| |                                                  
| | Mark J. McEneaney                                
| | Senior Vice President and Chief Financial Officer

19