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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

|ý | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2002

OR

|o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number 30837

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GENUITY INC.(Exact name of registrant as specified in its charter)

Delaware

74-2864824(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)225 Presidential Way,
Woburn, MA

01801(Address of principal executive offices)

(Zip Code)


Registrant's telephone number, including area code 781-865-2000

(Former name, former address and former fiscal year, if changed since last report)

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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 ý    No o

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes ý    No o

The
Company had 11,403,576 shares of $0.01 par value Class A common stock outstanding and 1 share of $0.01 par value Class B common stock outstanding on
November 8, 2002.

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TABLE OF CONTENTS



|               |  |                                                                                                                         |  | Page
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | ----
|PART I.        |  | INFORMATION                                                                                                             |  |     
|Item 1.        |  | Condensed Consolidated Financial Statements (Unaudited)                                                                 |  |     
|               |  | Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 2001 and 2002         |  | 3   
|               |  | Condensed Consolidated Balance Sheets
as of December 31, 2001 and September 30, 2002                                    |  | 4   
|               |  | Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2001 and 2002                   |  | 5   
|               |  | Condensed Consolidated Statement of Changes in Stockholders' Deficit
for the Nine Months Ended September 30, 2002       |  | 6   
|               |  | Condensed Consolidated Statements of Comprehensive Loss
for the Three and Nine Months Ended September 30, 2001 and 2002 |  | 7   
|               |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                          |  | 8   
|Item 2.        |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                   |  | 40  
|Item 3.        |  | Quantitative and Qualitative Disclosures About Market Risk                                                              |  | 51  
|Item 4.        |  | Controls and Procedures                                                                                                 |  | 52  
|PART II.       |  | OTHER INFORMATION                                                                                                       |  |     
|Item 1.        |  | Legal Proceedings                                                                                                       |  | 53  
|Item 2.        |  | Changes in Securities and Use of Proceeds                                                                               |  | 53  
|Item 3.        |  | Defaults upon Senior Securities                                                                                         |  | 53  
|Item 6.        |  | Exhibits and Reports on Form 8-K                                                                                        |  | 54  
|SIGNATURE      |  | 56                                                                                                                     
|CERTIFICATIONS |  | 57                                                                                                                     

2

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GENUITY INC.        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS        (Unaudited)(In Thousands, except Per Share Data)

|                                                             |                                                                         | Three Months Ended
September 30, |          | Nine Months Ended
September 30, |  
|------------------------------------------------------------ | ----------------------------------------------------------------------- | -------------------------------- | -------- | ------------------------------- | -
|
|Revenues                                                     |                                                                         | $                                | 302,262  |                                 | $
|Operating Expenses                                           |                                                                         |                                  |          |                                 |  
|                                                             | Cost of sales                                                           |                                  |          | 318,965                         |  
|                                                             | Selling, general and administrative                                     |                                  |          | 135,845                         |  
|                                                             | Depreciation and amortization                                           |                                  |          | 128,721                         |  
|                                                             | Special items                                                           |                                  |          | 424                             |  
|                                                             |                                                                         |                                  |          |                                 |  
|Total operating expenses                                     |                                                                         |                                  | 583,955  |                                 |  
|                                                             |                                                                         |                                  |          |                                 |  
|Operating Loss                                               |                                                                         |                                  | (281,693 | )                               |  
|Other Income (Expense)                                       |                                                                         |                                  |          |                                 |  
|                                                             | Interest expense, net                                                   |                                  |          | (18,510                         | )
|                                                             | Other, net                                                              |                                  |          | 959                             |  
|                                                             |                                                                         |                                  |          |                                 |  
|Loss From Continuing Operations Before Income Taxes          |                                                                         |                                  | (299,244 | )                               |  
|Income Taxes                                                 |                                                                         |                                  | 1,134    |                                 |  
|                                                             |                                                                         |                                  |          |                                 |  
|Loss From Continuing Operations                              |                                                                         |                                  | (300,378 | )                               |  
|                                                             |                                                                         |                                  |          |                                 |  
|Discontinued Operations                                      |                                                                         |                                  |          |                                 |  
|                                                             | Loss from operations of Integra (including loss on disposal of $71,971) |                                  |          |                                |  
|                                                             | Income taxes                                                            |                                  |          |                                |  
|                                                             |                                                                         |                                  |          |                                 |  
|Loss from Discontinued Operations                            |                                                                         |                                  |         |                                 |  
|                                                             |                                                                         |                                  |          |                                 |  
|Net Loss                                                     |                                                                         | $                                | (300,378 | )                               | $
|                                                             |                                                                         |                                  |          |                                 |  
|Basic and Diluted Loss Per Common Share:                     |                                                                         |                                  |          |                                 |  
|                                                             | Loss from Continuing Operations                                         |                                  | $        | (30.81                          | )
|                                                             | Loss from Discontinued Operations                                       |                                  |          |                                |  
|                                                             |                                                                         |                                  |          |                                 |  
|                                                             | Net Loss                                                                |                                  | $        | (30.81                          | )
|                                                             |                                                                         |                                  |          |                                 |  
|Basic and Diluted Weighted-Average Common Shares Outstanding |                                                                         |                                  | 9,748    |                                 |  
|                                                             |                                                                         |                                  |          |                                 |  

The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.

3

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GENUITY INC.        CONDENSED CONSOLIDATED BALANCE SHEETS        (Unaudited)(Dollars in Thousands, except Share Data)

|                                                     |                                                                                                                                                                                                            | December 31,
2001                           |           | September 30,
2002 |          
|---------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | --------- | ------------------ | ---------
|ASSETS                                               |                                                                                                                                                                                                           
|Current Assets:                                      |                                                                                                                                                                                                            |                                             |           |                    |          
|                                                     | Cash and cash equivalents                                                                                                                                                                                  |                                             | $         | 950,952            |          
|                                                     | Restricted cash                                                                                                                                                                                            |                                             |           | 23,000             |          
|                                                     | Receivables, less allowances of $23,928 and $24,665, respectively                                                                                                                                          |                                             |           | 281,265            |          
|                                                     | Other current assets                                                                                                                                                                                       |                                             |           | 47,725             |          
|                                                     | Current assets from discontinued operations                                                                                                                                                                |                                             |           | 23,630             |          
|                                                     |                                                                                                                                                                                                            |                                             |           |                    |          
|                                                     |                                                                                                                                                                                                            | Total current assets                        |           |                    | 1,326,572
|Property, Plant and Equipment, Net                   |                                                                                                                                                                                                            |                                             | 1,438,643 |                    |          
|Goodwill, Net                                        |                                                                                                                                                                                                            |                                             | 41,413    |                    |          
|Intangibles, Net                                     |                                                                                                                                                                                                            |                                             | 56,043    |                    |          
|Other Assets                                         |                                                                                                                                                                                                            |                                             | 16,430    |                    |          
|Non-Current Assets from Discontinued Operations      |                                                                                                                                                                                                            |                                             | 115,370   |                    |          
|                                                     |                                                                                                                                                                                                            |                                             |           |                    |          
|                                                     |                                                                                                                                                                                                            | Total assets                                |           | $                  | 2,994,471
|                                                     |                                                                                                                                                                                                            |                                             |           |                    |          
|LIABILITIES AND STOCKHOLDERS' DEFICIT                |                                                                                                                                                                                                           
|Current Liabilities:                                 |                                                                                                                                                                                                            |                                             |           |                    |          
|                                                     | Short-term obligations, including $2.8 billion of debt in default as of September 30, 2002                                                                                                                 |                                             | $         | 154,738            |          
|                                                     | Accounts payable                                                                                                                                                                                           |                                             |           | 114,839            |          
|                                                     | Accrued compensation and related liabilities                                                                                                                                                               |                                             |           | 39,894             |          
|                                                     | Accrued circuits                                                                                                                                                                                           |                                             |           | 96,958             |          
|                                                     | Accrued liabilities                                                                                                                                                                                        |                                             |           | 233,943            |          
|                                                     | Deferred revenue and advanced payments                                                                                                                                                                     |                                             |           | 21,805             |          
|                                                     | Current liabilities from discontinued operations                                                                                                                                                           |                                             |           | 27,198             |          
|                                                     |                                                                                                                                                                                                            |                                             |           |                    |          
|                                                     |                                                                                                                                                                                                            | Total current liabilities                   |           |                    | 689,375  
|Long-Term Obligations                                |                                                                                                                                                                                                            |                                             | 2,346,266 |                    |          
|Other Liabilities                                    |                                                                                                                                                                                                            |                                             | 54,601    |                    |          
|Non-Current Liabilities from Discontinued Operations |                                                                                                                                                                                                            |                                             | 9,148     |                    |          
|                                                     |                                                                                                                                                                                                            |                                             |           |                    |          
|                                                     |                                                                                                                                                                                                            | Total liabilities                           |           |                    | 3,099,390
|                                                     |                                                                                                                                                                                                            |                                             |           |                    |          
|Minority Interest                                    |                                                                                                                                                                                                            |                                             | 3,111     |                    |          
|Stockholders' Deficit:                               |                                                                                                                                                                                                            |                                             |           |                    |          
|                                                     | Preferred stock$0.01 par value; 2,500,000 shares authorized; no shares issued and outstanding                                                                                                             |                                             |           |                   |          
|                                                     | Class A common stock$0.01 par value; 80,000,000 shares authorized; 10,262,420 shares issued and outstanding as of December 31, 2001 and 11,403,576 shares issued and outstanding as of September 30,
2002 |                                             |           | 103                |          
|                                                     | Class B common stock$0.01 par value; 1,050,000 shares authorized; 912,800 shares issued and outstanding as of December 31, 2001 and 1 share issued and outstanding as of September 30, 2002               |                                             |           | 9                  |          
|                                                     | Class C common stock$0.01 par value; 40,000,000 shares authorized; no shares issued and outstanding                                                                                                       |                                             |           |                   |          
|                                                     | Additional paid-in capital                                                                                                                                                                                 |                                             |           | 6,109,016          |          
|                                                     | Accumulated other comprehensive loss                                                                                                                                                                       |                                             |           | (2,416             | )        
|                                                     | Accumulated deficit                                                                                                                                                                                        |                                             |           | (6,214,742         | )        
|                                                     |                                                                                                                                                                                                            |                                             |           |                    |          
|                                                     |                                                                                                                                                                                                            | Total stockholders' deficit                 |           |                    | (108,030 
|                                                     |                                                                                                                                                                                                            |                                             |           |                    |          
|                                                     |                                                                                                                                                                                                            | Total liabilities and stockholders' deficit |           | $                  | 2,994,471
|                                                     |                                                                                                                                                                                                            |                                             |           |                    |          

The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.

4

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GENUITY INC.        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS        (Unaudited)(Dollars in Thousands)

|                                               |                                                                   | Nine Months Ended
September 30,                      |                                       
|---------------------------------------------- | ----------------------------------------------------------------- | ---------------------------------------------------- | --------------------------------------
|
|Cash Flows from Operating Activities:          |                                                                   |                                                      |                                       
|                                               | Net Loss                                                          |                                                      | $                                     
|                                               | Less Loss from Discontinued Operations                            |                                                      |                                       
|                                               |                                                                   |                                                      |                                       
|                                               | Loss from Continuing Operations                                   |                                                      |                                       
|                                               | Adjustments to reconcile net loss to net cash used in operations: |                                                      |                                       
|                                               |                                                                   | Special charge, non-cash portion                     |                                       
|                                               |                                                                   | Depreciation and amortization                        |                                       
|                                               |                                                                   | Provision for bad debt                               |                                       
|                                               |                                                                   | Changes in current assets and current liabilities:   |                                       
|                                               |                                                                   |                                                      | Receivables                           
|                                               |                                                                   |                                                      | Other current assets                  
|                                               |                                                                   |                                                      | Deferred revenue and advanced payments
|                                               |                                                                   |                                                      | Other current liabilities             
|                                               |                                                                   | Other, net                                           |                                       
|                                               |                                                                   |                                                      |                                       
|                                               | Net cash used in operating activities                             |                                                      |                                       
|                                               |                                                                   |                                                      |                                       
|Cash Flows from Investing Activities:          |                                                                   |                                                      |                                       
|                                               | Capital expenditures                                              |                                                      |                                       
|                                               | Capitalized software                                              |                                                      |                                       
|                                               | Increase in restricted cash                                       |                                                      |                                       
|                                               |                                                                   |                                                      |                                       
|                                               |                                                                   | Net cash used in investing activities                |                                       
|                                               |                                                                   |                                                      |                                       
|Cash Flows from Financing Activities:          |                                                                   |                                                      |                                       
|                                               | Repayment of debt                                                 |                                                      |                                       
|                                               | Principal payments under capital lease obligations                |                                                      |                                       
|                                               | Proceeds from borrowings                                          |                                                      |                                       
|                                               | Payment of debt issuance costs                                    |                                                      |                                       
|                                               |                                                                   |                                                      |                                       
|                                               |                                                                   | Net cash provided by financing activities            |                                       
|                                               |                                                                   |                                                      |                                       
|                                               |                                                                   | Cash used in discontinued operations                 |                                       
|                                               |                                                                   |                                                      |                                       
|                                               |                                                                   | Net increase (decrease) in cash and cash equivalents |                                       
|Cash and cash equivalents, beginning of period |                                                                   |                                                      | 868,926                               
|                                               |                                                                   |                                                      |                                       
|Cash and cash equivalents, end of period       |                                                                   | $                                                    | 1,257,034                             
|                                               |                                                                   |                                                      |                                       
|Supplemental Cash Flow Disclosures:            |                                                                   |                                                      |                                       
|Cash paid during the period for:               |                                                                   |                                                      |                                       
|                                               | Interest                                                          |                                                      | $                                     
|                                               | Income taxes                                                      |                                                      | $                                     
|Non-cash investing and financing activities:   |                                                                   |                                                      |                                       
|                                               | Assets recorded under capital lease obligations                   |                                                      | $                                     
|                                               | Assets recorded under accruals                                    |                                                      | $                                     

The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.

5

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GENUITY INC.        CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT        (Unaudited)(Dollars and Shares in Thousands)

|                            |                                          | Class A
Common |       | Class B
Common |     |    |     |      |   |   |    |   |          
|--------------------------- | ---------------------------------------- | -------------- | ----- | -------------- | --- | -- | --- | ---- | - | - | -- | - | ---------
|
|
|
|Balance, December 31, 2001  |                                          | 10,262         |       | $              | 103 |    | 913 |      | $ | 9 |    | $ | 6,109,016
|                            | Net loss                                 |                |      |                |     |   |     |     |   |   |   |   |          
|                            | Conversion of Class B common stock       |                | 1,141 |                |     | 11 |     | (913 | ) |   | (9 | ) |          
|                            | Stock Option Exercise                    |                | 1     |                |     |   |     |     |   |   |   |   |          
|                            | Foreign currency translation adjustments |                |      |                |     |   |     |     |   |   |   |   |          
|                            |                                          |                |       |                |     |    |     |      |   |   |    |   |          
|Balance, September 30, 2002 |                                          | 11,404         |       | $              | 114 |    |    |      |   |  |    | $ | 6,109,016
|                            |                                          |                |       |                |     |    |     |      |   |   |    |   |          

The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.

6

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GENUITY INC.        CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS        (Unaudited)(Dollars in Thousands)

|                                               |                                                                           | Three Months Ended
September 30,  |          | Nine Months Ended
September 30, |     
|---------------------------------------------- | ------------------------------------------------------------------------- | --------------------------------- | -------- | ------------------------------- | ----
|
|Net Loss                                       |                                                                           | $                                 | (300,378 | )                               | $   
|Other Comprehensive Income (Loss), net of tax: |                                                                           |                                   |          |                                 |     
|                                               | Foreign currency translation adjustments                                  |                                   |          | (997                            | )   
|                                               | Less: reclassification adjustment for (gains) losses included in net loss |                                   |          |                                |     
|                                               |                                                                           |                                   |          |                                 |     
|                                               |                                                                           | Other comprehensive income (loss) |          |                                 | (997
|                                               |                                                                           |                                   |          |                                 |     
|Comprehensive Loss                             |                                                                           | $                                 | (301,375 | )                               | $   
|                                               |                                                                           |                                   |          |                                 |     

The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.

7

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GENUITY INC.        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    Significant Events

Liquidity and Capital Resources

On July 24, 2002 Verizon converted all but one of its outstanding shares of Class B common stock of Genuity into shares of Class A common
stock and terminated its existing credit facility with the Company. After giving effect to this conversion, Verizon holds approximately a 10% ownership interest in Genuity, but no longer has the right
to convert its shares to approximately an 80% controlling interest in the Company. As a result of the termination by Verizon of the credit facility (the "Verizon Facility"), Genuity cannot borrow the
remaining amounts available under that facility and the $1.15 billion currently outstanding under the Verizon Facility is callable by Verizon at any time. To date, Verizon has not demanded
payment of the outstanding amounts.

Aside
from the Verizon Facility, the commercial arrangements between Verizon and Genuity, including the Purchase, Resale and Marketing Agreement, are currently not affected by Verizon's
termination of the right to convert its Class B shares into a controlling interest in Genuity, although Verizon's decision will affect the long-term commercial relationship between the
companies. The Company also announced on July 29, 2002 that Michael Masin, a former vice chairman of Verizon Communications, resigned from Genuity's board of directors. Verizon, as a
Class B stockholder, retained its right to a seat on the Genuity board of directors and may appoint a new director in the future. This right exists as long as any share of the Class B
common stock is outstanding. As the holder of Class B common stock, Verizon maintains certain consent rights related to, among other things, any dissolution or liquidation of the Company, the
right to consent to any significant acquisitions or dispositions, major business combinations, or incurring indebtedness or issuing additional equity securities in excess of specified limits. In
accordance with our certificate of incorporation, Verizon's investor safeguards will remain in
effect until it converts all of its Class B shares or no longer has the possibility of converting into more than a 10% ownership interest.

Prior
to Verizon's decision to terminate its right to convert its Class B shares into a controlling interest in Genuity, on July 22, 2002, the Company provided notice to
draw the remaining $850 million available under the existing $2.0 billion revolving line of credit facility with a consortium of nine banks (the "Bank Facility") and thereafter received
$723 million of that request. Deutsche Bank is the only member of the consortium of banks that has failed to fulfill its obligation under the credit facility and the Company has undertaken
legal action to require them to satisfy this obligation. Deutsche Bank has filed an answer to this legal action, asserting various defenses and alleging various counterclaims, which, in substance,
assert that Deutsche Bank was not obligated to fund this draw.

Verizon's
termination of the right to convert their Class B shares into a controlling interest in Genuity resulted in a default under the Bank Facility. While the default
permitted the banks to accelerate our payment obligations under the Bank Facility, the banks did not immediately demand payment of the $1.9 billion outstanding under the facility, including a
$1.15 billion letter of credit to back a private placement bond transaction and $723 million in additional advances. On July 29, 2002, the Company entered into a standstill
agreement with the lenders of the Bank Facility that had funded the $723 million whereby they agreed not to accelerate the payment of the amounts outstanding thereunder until August 12,
2002 and to continue negotiations with the Company. In consideration for this two-week standstill agreement, the Company repaid $100 million of the $723 million advance to
the members of the bank group, which had funded the $723 million. The Company has received five additional standstill agreements: a 30-day extension on August 13, 2002 and on
September 12, 2002, a 15-day extension on October 11, 2002, a 17-day extension on October 26, 2002 and a 10-day extension

8

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on November 12, 2002. In connection with these additional extensions, Genuity has paid in aggregate an additional $108.3 million to the members of the bank group, which funded the
$723 million.

On
August 13, 2002, the Company entered into a standstill agreement with Verizon whereby Verizon agreed not to accelerate the payment of the amounts outstanding under the Verizon
Facility. In consideration for this 30-day standstill agreement Verizon agreed to continue negotiations with Genuity. The Company has negotiated four additional standstill agreements with
Verizon: a 30-day extension on September 12, 2002, a 15-day extension on October 11, 2002, a 17-day extension on October 26, 2002 and a
10-day extension on November 12, 2002. In connection with these additional extensions, the parties have agreed to continue negotiations and to extend the term of borrowing and the
interest period under the Verizon Facility until the end of the respective standstill periods.

Genuity
is continuing discussions with the banks and Verizon with respect to existing commercial and other relationships. We have retained Lazard Frères & Co. as
the Company's financial advisors to assist us in developing a restructuring plan to meet these significant challenges. We are undertaking discussions with Verizon and the banks to restructure our
obligations under the Verizon Facility and Bank Facility, but we may not be able to obtain satisfactory waivers or amendments to either of the facilities. In the event either Verizon or the banks
accelerate the payment obligations under their
respective facility, we would not have sufficient liquidity to satisfy the claims and would need to seek the protection afforded debtors under the bankruptcy laws.

We
are in the process of evaluating our strategy in light of the debt defaults, and our business plan, under various possible scenarios. We continue to incur significant losses and
negative cash flow from operations and would expect to continue to do so in the future. While we have recently reduced expenses to conserve cash, our business plan prior to the action of Verizon would
have required funding of these additional losses and of capital expenditures. Absent satisfactory restructuring of the Company's existing credit facilities, currently in default, the Company's ability
to find other financing to cover repayment of the existing credit facilities and funding of operational needs is not likely in view of the Company's situation and the difficulties in the
telecommunications market in general.

The
Company has reflected the $2.8 billion of aggregate borrowings outstanding under the Bank Facility and Verizon Facility as short-term obligations in the
accompanying condensed consolidated balance sheets as of September 30, 2002, as the Company is currently in default of the underlying agreements. Unamortized debt issuance cost of
$9.4 million as of September 30, 2002 would be subject to accelerated amortization or immediate expense depending on the outcome of the Company's restructuring plan.

NASDAQ Listing

On September 12, 2002, the Company announced that a notification from NASDAQ had been received indicating that the Company's Class A common stock
had not satisfied the minimum listing requirement of $3.00 per share for the previous 30 consecutive trading days and not maintained a minimum market value of publicly held shares of
$15 million. The Company has until December 5, 2002 to regain compliance and maintain its listing on the NASDAQ. A delisting from the Nasdaq National Market's quotation system will
reduce the liquidity of an investment in the Company's Class A common shares.

Special ItemsValuation of Assets (See Note 4 for further discussion)

Pursuant to SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" the impairment of tangible and intangible assets is
assessed when changes in circumstances indicate that their carrying value may not be recoverable. An impairment loss is measured based on the difference

9

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between the carrying amount and fair value of the asset. The estimate of future cash flows associated with the Company's underlying business segments is an integral part of the impairment assessment
within this accounting standard. Depending in the outcome of current restructuring efforts, the Company may incur additional impairment charges associated with property, plant and equipment in the
future.

Commitments

Effective October 10, 2002, the Company paid approximately $4.8 million to a large circuit provider in exchange for the elimination of the existing,
aggregate circuit commitment of $90 million.

Effective
October 10, 2002, the Company paid $10 million to a global telecommunications company and circuit provider to modify the existing circuit agreement between the
parties to extend the expiration of the original term from May 21, 2004 to October 31, 2005 and to lower the future circuit commitment for the period from November 1, 2002 through
October 31, 2005, from approximately $293 million to approximately $157 million. The reduced circuit commitment includes quarterly commitments of $17 million for the
quarter ended January 31, 2003, $14.5 million for the quarters ended April 30, 2003 and July 31, 2003, $15 million for the quarter ended October 31, 2003 and
$12 million for each of the remaining quarterly periods through October 31, 2005.

2.    General

Organization

Prior to its initial public offering, Genuity Inc. ("Genuity" or the "Company"), a Delaware corporation, was a wholly-owned subsidiary of GTE Corporation
("GTE"), now part of Verizon Communications Inc. ("Verizon"). On June 22, 2000, Genuity completed a recapitalization. As part of the recapitalization, Genuity converted 26 shares of
common stock issued and outstanding to 912,800 shares of Class B common stock.

Genuity
completed its initial public offering of its Class A common stock on June 30, 2000. Genuity sold 8,695,650 shares of Class A common stock, which trade on the
Nasdaq National Market under the symbol "GENU".

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has
incurred recurring operating losses and negative cash flows from operating activities, and it has working capital and stockholders' deficits as of September 30, 2002. The Company's default on
its credit facilities as outlined
in Note 1 and potential need to file for Chapter 11 under the bankruptcy laws raise ongoing substantial doubt about the Company's ability to continue as a going concern. The condensed
consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of
liabilities that might result from the outcome of this uncertainty.

The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments, special items and discontinued
operations presentation described in Note 3 and Note 4), considered necessary for a fair presentation have been included. Operating results for the nine months ended

10

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September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

The
balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 2001.

The
unaudited condensed consolidated financial statements of Genuity include the accounts of the Company and its three wholly-owned subsidiaries; Genuity Telecom Inc., Genuity
Solutions Inc. and Genuity International Networks Inc. All significant inter-company amounts have been eliminated. The unaudited condensed consolidated financial statements also reflect
the acquisition of a 93% ownership interest in Integra S.A. ("Integra") in 2001, which has been reflected on a discontinued operations basis for all periods presented. (See Note 3 for further
discussion).

Genuity
prepares its condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States, which require that management make
estimates and assumptions that affect reported amounts. Actual results could differ from these estimates.

Summary of Significant Accounting Policies

The Company's significant accounting policies are described in more detail in Note 2 of the Notes to the Consolidated Financial Statements included in its
most recent annual report on Form 10-K filed with the Securities and Exchange Commission. For interim reporting purposes, the Company follows the same significant accounting
policies.

Revenue Recognition

Revenue is generally recognized when services are rendered or products are delivered to customers. We recognize revenues when persuasive evidence of an
arrangement between the customer and us exists, service has been provided to the customer, the price to the customer is fixed and determinable and collectibility of the sales price is reasonably
assured. We recognize revenues from financially distressed customers in the period in which cash is received, after the collection of all previous outstanding accounts receivable balances. We perform
ongoing credit evaluations of our customers' financial condition and maintain an allowance for estimated credit losses. Billings made or payments received in advance of providing services are deferred
along with the associated costs until the period these services are provided and recognized over the shorter of the remaining contract term or estimated customer relationship. Deferred revenue and
advanced payments totaled $21.8 million and $121.3 million as of December 31, 2001 and September 30, 2002, respectively. The increase in deferred revenue and advanced
payments relates primarily to the $100 million prepayment made by Verizon in the second quarter of 2002 and the deferral of AOL dial-up revenues.

Genuity
has contracts with some customers that provide service level commitments. If Genuity does not meet the required service levels, it may be obligated to provide credits, usually in
the form of free service for a short period of time. These amounts are accounted for in cost of sales. To date, credits issued under these arrangements for Genuity's failure to meet service level
commitments have not been material.

The
majority of Genuity's contracts consist of separate agreements to provide Internet access, web hosting, transport or value-added eBusiness services to customers.

11

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Access

Internet access services include dial-up, dedicated and broadband access and voice-over-IP for service providers and
enterprise customers. Internet access customers typically sign one or two-year contracts providing for monthly recurring service fees that are earned and recognized based on either fixed
fees or usage. Access also includes revenue associated with the development, operation and maintenance of a nationwide dial-up network for America Online, Inc. ("America Online" or
"AOL").

Hosting and Value-Added Services

Web hosting services provide reliable hosting and high-speed network infrastructure as well as flexible, fast and secure hosting platforms and an
experienced technical support staff. Web hosting services include managed hosting, collocation, content delivery and high end managed storage. Value-added services include managed security services
and virtual private networks for secure data transmission and professional consulting. Web hosting and value-added services customers typically sign contracts ranging from one or two years, although a
three-year contract is available for certain hosting services. Hosting revenues are based primarily on monthly fees for server management, physical facilities and bandwidth utilization.
Revenues for security and virtual private network service contracts are earned and recorded based on fixed, monthly recurring fees.

Transport

Transport services include services such as asynchronous transfer mode, or ATM, and private line services. ATM transfer service, a form of high-speed
data transfer, is targeted primarily at enterprises, carriers and Internet service providers with high-bandwidth voice, video and data transmission requirements. Private line service
provides dedicated point-to-point transport services through non-switched, non-usage sensitive dedicated facilities. Transport revenues are earned and
recognized based on customer usage of circuit mileage and capacity. Transport customers typically sign one or two-year contracts.

International

International revenues include all international revenues for access, web hosting and value-added services, and transport. These revenues are recognized on a
basis consistent with domestic services. The international contracts typically range from one to two years, although longer term contracts are available for certain services.

Cash and Cash Equivalents

Cash and cash equivalents include investments in short-term, highly liquid securities, which have maturities when purchased of three months or less.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed over the assets' estimated useful life
using the straight-line method. Useful lives used in computing depreciation are as follows: buildings10 to 30 years, communications networkfiber optic
cable20 to 25 years, communications networkdata processing equipment and machinery which include labor and other direct costs3 to 10 years and
furniture and fixtures5 to 7 years. Leasehold improvements are amortized over the shorter of the lease period or their estimated useful life using the straight-line
method. Maintenance and repairs are charged to expense as incurred; improvements are capitalized. In connection with the recent impairment charges, the Company

12

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reviewed the useful lives used in computing depreciation for property, plant and equipment and determined that the lives were still appropriate.

When
property is sold or retired, the cost of the property and the related accumulated depreciation are removed from the accompanying condensed consolidated balance sheets and any gain
or loss on the transaction is included as a component of operating expenses in the accompanying condensed consolidated statements of operations.

Work
in progress represents costs incurred for the build-out and expansion of the network infrastructure, purchase of network hardware and includes engineering costs and
capitalized interest. When these assets are placed in service, the costs are recorded in the appropriate property, plant and equipment accounts and depreciation begins.

Genuity
leases data communications equipment and facilities under capital lease agreements. The assets under capital leases are recorded at the lower of the assets' fair value or the
present value of future minimum lease payments. Assets under capital leases are depreciated over the shorter of the useful life of the asset or the term of the lease. Depreciation for these assets
ranges from 3 to 10 years.

Indefeasible
rights of use ("IRU") agreements are accounted for as service or lease arrangements based on the rights conveyed in the underlying agreements. Agreements qualifying for
lease accounting treatment are accounted for as operating or capital leases in accordance with SFAS No. 13, "Accounting for Leases." IRUs qualifying for capital lease treatment are capitalized
within property, plant and equipment as communications networkfiber optic cable. These assets are amortized over the shorter of the assets' useful life or the underlying lease term.
Depreciation for these assets ranges from 20 to 25 years.

The
Company has entered into several long-term network agreements for the provision of managed modems. Costs associated with contracts that qualify for capital lease
treatment in accordance with SFAS No. 13, "Accounting for Leases," are capitalized and depreciated over the shorter of the
underlying assets' useful life or lease term. Costs are capitalized within work in progress during the construction phase and classified as communications network-data processing equipment
and machinery when the assets have been placed into service. Depreciation for these assets ranges from 3 to 5 years.

Goodwill and Intangibles, Net

Goodwill and intangibles pertain primarily to the acquisitions of BBN Corporation and Genuity Incorporated, both acquired in 1997.

The
Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets" in its entirety on January 1, 2002 and, as a result, ceased the amortization of goodwill.

The
Company determined that the goodwill and intangibles associated with the BBN Corporation acquisition was impaired as of December 31, 2001 and recorded an impairment charge to
write the goodwill and intangible assets down to a fair value of $0. The Company performed another impairment test for goodwill and intangible assets as of July 1, 2002, the reporting date
closest to July 24, 2002, the date that Verizon announced that they were terminating their right to convert their Class B shares into a controlling interest in Genuity. As a result of
this impairment test, the Company recorded an impairment charge to write down the goodwill and intangible assets associated with the Genuity Incorporated acquisition to a fair value of $0.

The
remaining amounts within intangible assets as of September 30, 2002 pertain to internal use software, which is amortized on a straight-line basis over 3 to
5 years. Software maintenance costs are expensed as incurred.

13

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Valuation of Assets

The impairment of tangible and intangible assets is assessed when changes in circumstances indicate that their carrying value may not be recoverable. Prior to
January 1, 2002, impairment determinations were based on the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Under SFAS No. 121, when indicators of impairment are present a determination of impairment, if any, is
made based on estimated future cash flows, salvage value or expected net sales proceeds depending on the circumstances. An impairment loss would be measured based on the amount by which the carrying
amount of the asset exceeds the fair value of the asset. In instances where goodwill had been recorded in connection with impaired assets, the carrying amount of the goodwill was first eliminated
before any reduction to the carrying value of tangible or identifiable intangible assets. Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement retains the requirements of SFAS No. 121 to recognize an impairment loss when indicators of impairment are present only if the
carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and to measure an impairment loss as the difference between the carrying amount and fair value of
the asset. The Company also adopted SFAS No. 142 on January 1, 2002. Pursuant to this statement, the Company is required to record an impairment loss on goodwill whenever the fair value
of the underlying reporting unit does not support the carrying value of goodwill. Genuity's policy is to record asset impairment losses as well as net gains or losses on sales of assets as a component
of operating expenses.

Impairment
losses of approximately $0.4 million and $985.7 for the three months ended September 30, 2001 and 2002, respectively, and $5.8 million and
$1.1 billion for the nine months ended September 30, 2001 and 2002 are included in special items in the accompanying condensed consolidated statements of operations. (See Note 4
for further discussion.)

Debt Issuance Costs (See Note 1 for significant events)

Costs incurred in connection with the issuance of debt are amortized to interest expense using the effective interest rate method over the terms of the
corresponding borrowings. The unamortized debt
issuance costs totaled $11.8 million and $9.4 million as of December 31, 2001 and September 30, 2002, respectively. These costs are included in other assets in the
accompanying condensed consolidated balance sheets.

Concentrations of Credit Risk and Significant Customers

Genuity's accounts receivable are subject to credit risk. Genuity performs regular credit evaluations of its customers' financial condition and maintains
allowances for potential credit losses. Genuity's risk of loss is limited due to its ability to terminate service on delinquent accounts. The credit risk is also mitigated by the large number of
customers comprising the customer base, with the exception of two large customers, America Online and Verizon.

AOL Time Warner

Revenues from AOL Time Warner, Inc. ("AOLTW"), the parent company of America Online, in relation to Genuity's total revenues are significant. Revenues from
AOLTW represented $311.8 million, or 34%, and $275.8 million, or 36%, of Genuity's total revenues for the nine months ended September 30, 2001 and 2002, respectively. The total
accounts receivable balance related to amounts

14

---

owed to Genuity by AOLTW represented $116.9 million, or 28%, and $64.9 million, or 40%, of Genuity's ending gross accounts receivable balance at September 30, 2001 and 2002,
respectively. (See Note 15 for further discussion.)

Verizon

Revenues from Verizon were $153.8 million, or 17%, and $213.9 million, or 28%, of Genuity's total revenues for the nine months ended
September 30, 2001 and 2002, respectively. The total accounts receivable balance related to amounts owed to Genuity by Verizon represented $116.6 million, or 28%, and
$32.8 million, or 20%, of Genuity's ending gross accounts receivable balance at September 30, 2001 and 2002, respectively. (See Note 16 for further discussion.)

Loss per Share

Basic earnings or loss per share ("EPS") is measured as the income or loss attributable to common stockholders divided by the weighted-average outstanding common
shares for the period. Diluted EPS presents the dilutive effect on a per share basis of potential common shares as if they had been
converted at the later of the date of issuance or the beginning of the periods presented. Potential common shares that have an anti-dilutive effect are excluded from diluted EPS.
Contingently issuable shares are included in the calculation of diluted EPS if all of the necessary conditions regarding the share issuance have been met as of the end of the reporting period.

Recent Accounting Pronouncements

In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal activities and rescinds Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This Statement requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost as defined in EITF Issue No. 94-3
was recognized at the date of an entity's commitment to an exit plan. This Statement also establishes that fair value is the objective for initial measurement of the liability. The provisions of SFAS
No. 146 are effective for exit and disposal activities that are initiated after December 31, 2002, with early application encouraged.

In
April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13 and Technical Corrections".
This Statement rescinds FASB Statement No. 4 "Reporting Gains and Losses from Extinguishment of Debt" and an amendment of that Statement, SFAS No. 64 "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements" by restricting the reporting of extinguishments of debt as extraordinary items in the income statement to limited circumstances. This Statement amends
SFAS No. 13 "Accounting for Leases" to require sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback
transactions. The provisions of this Statement related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002 with early application encouraged.
The provisions of this Statement related to SFAS No. 13 shall be effective for transactions occurring after May 15, 2002, with early application encouraged. All other provisions of this
Statement shall be effective for financial statements issued on or after May 15, 2002, with early application encouraged. The adoption of this statement is not expected to have a material
effect on the Company's results of operations or financial position.

15

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In
August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Under SFAS No 143, the fair value of a liability for an asset retirement
obligation is required to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Additionally, the associated asset retirement costs are required to be
capitalized as part of the carrying amount of the long-lived asset. This Statement is effective for all fiscal years beginning after June 15, 2002. The adoption of this statement is
not expected to have a material effect on the Company's results of operations or financial position.

Reclassifications

Certain reclassifications have been made to the 2001 financial statements to conform to the 2002 presentation. Such reclassifications have no effect on previously
reported net loss or stockholders' deficit.

3.    Discontinued Operations

The Company acquired Integra in September 2001.

On
August 10, 2002, the Company's Board of Directors voted to no longer provide funding to Integra, a company in which we held a 93% common stock interest and which was accounted
for on a consolidated basis within our international segment. On September 3, 2002, Integra filed for bankruptcy with the Commercial Court of Nanterre in France. We deconsolidated our
investment in Integra as of August 31, 2002 upon the loss of control resulting from these events. On October 1, 2002, the Court approved the liquidation of Integra. Based on the loss of
control of Integra and the bankruptcy proceeding, the Company viewed its investment in Integra as abandoned and therefore, the financial position and results of operations of Integra have been
reflected on a discontinued operations basis in the accompanying condensed consolidated financial statements for all periods presented in accordance with SFAS No. 144.

Upon
deconsolidation, the net investment in Integra, accounted for under the equity method of accounting, was deemed to be other than temporarily impaired and the Company recognized a
$72 million impairment loss in September 2002, to write down the net investment in Integra to its estimated fair value of $0.

During
the second quarter of 2002, the Company identified certain international businesses of Integra, which would be exited including entities in Italy, Spain and Norway. The Company
recorded a loss of approximately $11.1 million reflecting the estimated loss on disposal of these international entities.

The
following is the summarized results of operations for the three and nine months ended September 30, 2002 for the discontinued operations (in thousands):

Three Months
Ended

Nine Months
EndedSeptember 30,2002

2002Revenues

$
1,496

$
14,892Pretax Losses

$
6,928

$
75,483


16

---

The
assets and liabilities associated with the discontinued operations have been presented separately on a condensed basis in the asset and liability sections of the accompanying
condensed consolidated balance sheets. The following summarizes the major assets and liabilities within the condensed captions (in thousands):

Financial Position

As of December 31, 2001Current Assets:Cash and cash equivalents

$
5,766Receivables, net


10,211Other current assets


7,653Total Current Assets

$
23,630Long Term Assets:Property, plant and equipment, net

$
43,574Goodwill, net


48,709Intangibles, net


21,605Other assets


1,482Total Long Term Assets

$
115,370Current Liabilities:Short-term obligations

$
2,667Accounts payable


8,663Accrued compensation and related liabilities


5,952Accrued liabilities


9,517Deferred revenue and advanced payments


399Total Current Liabilities

$
27,198Long Term liabilitiesLong-term Obligations

$
2,917Other Liabilities


6,231Total Long-Term Liabilities

$
9,148


4.    Special ItemsImpairment

On July 24, 2002 Verizon converted all but one of its outstanding shares of Class B common stock of Genuity into shares of Class A common
stock and terminated its existing credit facility with the Company. Verizon's termination of the right to convert their Class B shares into a controlling interest in Genuity resulted in an
event of default for amounts outstanding under the Verizon Facility and the Bank Facility, thereby rendering amounts outstanding on these facilities due upon demand, and eliminating the Company's
ability to draw any further amounts on these facilities. As a result of this event, the Company began discussions to restructure its debt obligations, assessed its ability to raise additional
financing, re-evaluated its business plan under various possible scenarios, and began discussions with various parties regarding the potential sale of certain assets. Without the
availability of funding under the Verizon Facility and Bank Facility or alternative sources of adequate financing, the Company would not be able to fund its expected future operating losses and
capital requirements. This

17

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indicated that the Company may not be able to recover the carrying value of its long-lived assets. Furthermore, the continued weakness in demand for telecommunication services, the
perceived uncertainty by our current customers about the Company's viability absent the Verizon support, coupled with the filing for bankruptcy by a large number of other large telecommunications
service providers in mid-2002, as well as the results of discussions with potential acquirers of some of the Company's assets indicated that a significant decline in the market value of
the Company's long-lived assets existed. These indicators prompted the Company to perform an assessment of the carrying value of its long-lived assets pursuant to SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."

Since
December 31, 2001, there has been a substantial decline in the value of network and related equipment as evidenced by the numerous bankruptcy filings in 2002 within the industry.
In addition, Verizon's July 24, 2002 decision adversely affected the long-term prospects of the Company. Although the short-term contractual arrangements between the two companies remain
intact, this decision significantly reduced the projected cash flows for many of our product lines.

Consistent
with the methodology used at December 31, 2001, management prepared a cash flow analysis by reporting segment for each line of business. The undiscounted cash flows
were compared to the carrying values associated with each line of business. The lines of business represent various product lines within each of our four operating segments: Access, Hosting and
Value-Added Services, Transport and International including International Access and International Hosting and Value-Added services. The undiscounted cash flows did not support the carrying values for
these lines of business. For this analysis, the Company considered its fiber optic network, including the indefeasible rights to use fiber optic cable, the opto-electronics associated with
the lit fiber, the points of presence and other equipment associated with the network, to be a shared asset utilized by all business lines. Based on the cash flow analysis, there were no excess cash
flows available to support the carrying value of the fiber optic network.

In
accordance with SFAS No. 144, the measurement of an impairment loss should be based on the fair value of the asset. Management determined that the best measure of fair value
for substantially all of the assets that were impaired would be a review of recent transactions within the industry, prices for similar assets and for AOL/Dial present value techniques. The Company
had an independent valuation performed to determine the fair value of these assets.

In
conjunction with the fair value assessment for the property, plant and equipment, the Company also performed an impairment assessment for the remaining goodwill and acquired
intangibles in accordance with SFAS No. 142. Based on the results of the impairment assessment, the carrying value for the goodwill and acquired intangibles were reduced to a fair value of $0.

As
a result of this review and the independent valuation, the Company recorded an impairment charge of $986 million during the third quarter of 2002 based on the amount by which
the carrying

18

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amount exceeded the fair value. The components of the charge, which are included in special items in the accompanying condensed consolidated statements of operations, are as follows (in millions):

Deployed Plant

$
862Assets Held for Sale


44Goodwill and Intangibles


80Total Impairment Charge

$
986By Segment:Access

$
211Hosting


278GNI/Transport


238International


75Other


184$
986


As
previously mentioned, at December 31, 2001, the Company recorded an impairment charge of $2.6 billion related to its long-lived assets in accordance with
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." At that time, the Company's estimates of
undiscounted cash flows did not support the carrying amounts for the direct assets, goodwill and intangible assets of AOL/Dial and International Access lines of business, as well as the Company's
fiber-optic network (Global Network Infrastructure), and the impairment charge consisted principally of charges related to those assets. The impairment charge taken during the quarter ended
September 30, 2002 includes a further impairment of these assets, as well as the assets associated with the Company's Hosting and Value-Added services line of business, and Dial related assets.
The additional impairment charge recorded during the quarter ended September 30, 2002 related to non-Dial Access services is due to lower growth rates arising, in part, from the expected
reduced long-term commercial relationship with Verizon. As regards to the Hosting line of business, the impairment charge is due to the fact that the Company's expectations of cash flows associated
with this line of business have declined from year-end given a decline in the current demand for, and future revenue expected from, hosting services. Furthermore, revised fair value estimates
associated with the Company's AOL Dial business resulted in a further impairment of these assets. Finally, as it relates to the GNI and Transport line of business, a more severe depression in
the fair value of telecommunications network and related equipment as evidenced by the numerous bankruptcy filings in 2002 of telecommunications service providers and the resulting values realized for
these assets upon liquidation or re-emergence from bankruptcy by these companies contributed to the additional charge recorded in 2002.

The
impairment charge recorded in the third quarter of 2002 associated with the net investment in Integra is reflected within discontinued operations in the accompanying condensed
consolidated statements of operations. (See Note 3 for further discussion.)

19

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5.    Special ItemsRestructuring Charge

Special items include costs associated with the impairment of certain assets, net gains (losses) on fixed asset sales, costs associated with the Company's
workforce reduction initiatives and other costs related to facilities that will be exited. The $986.2 million and $1.1 billion charge for the three and nine months ended
September 30, 2002, respectively, include the following (in millions):

For the three months ended

For the nine months endedSeptember 30,
2002Reduction in Force

$
0.6

$
11.4Facilities Exit Costs


4.7


32.3Contract Termination Costs


(4.8
)

(4.8
)Asset Impairment (See Note 4 and Note 6)


985.6


1,091.2Loss on Fixed Asset Sales


0.1


4.3Total Special Items

$
986.2

$
1,134.4


In
the third quarter of 2002, the Company recorded an adjustment to increase the estimated severance costs associated with the second quarter reduction in force by $0.6 million,
an adjustment to increase the estimated facility exit costs by $6.7 million, an adjustment to reduce the estimate facility exit costs by $2.0 million related to the cost of two
facilities which will no longer be vacated and an adjustment to reduce the contract termination costs recorded in the fourth quarter of 2001 by $4.8 million.

Prior
to the third quarter of 2002, the Company initiated the following restructuring plans:

On
May 3, 2001, the Company announced a plan to reduce future expenditures. This plan resulted in a reduction of the Company's full-time equivalent employees by 964,
or 16%, and a reduction of 2001 capital expenditures from $2.2 billion to $1.4 billion. The projected 2001 capital expenditures were further reduced to a range of $1.2 billion to
$1.25 billion on August 22, 2001. The reduction in the Company's employees impacted multiple functional areas throughout the Company. All 964 full-time equivalent employees
assumed in the plan were terminated as of August 31, 2001. This included 776 employees and 188 contractors. Severance and associated termination benefits for the 776 employees included in the
restructuring charge in 2001 were approximately $17.9 million.

In
the fourth quarter of 2001, the Company announced several cost saving initiatives. These included the decision to de-emphasize and later exit the wholesale
dial-up access business, with the exception of our two largest customers, AOL and Verizon, and an expected reduction in the future capital expenditure program. In addition, on
November 1, 2001 the Company announced a company-wide restructuring and cost savings plan. This included a reduction in the U.S.-based full-time equivalent employees by
922, or 21%. The 922 full-time equivalent employees included 803 full-time employees and 119 contractor positions. All of the full-time equivalent employees were
terminated in the fourth quarter of 2001. Severance and associated termination benefits for the 803 employees included in the restructuring charge in 2001 were approximately $15.9 million.

The
Company vacated each of the 46 locations identified by the Company in 2001 as sites to be exited. These sites included a data center, several POP facilities, sales sites and
administrative buildings. The lease termination dates on some of the underlying sites extend through 2030. Facility and

20

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equipment related costs of approximately $59.7 million in the 2001 restructuring charges include lease termination costs and future lease commitments, net of estimated recoveries from
subleasing. The Company also recorded a $3.0 million adjustment in the fourth quarter of 2001 to reduce the estimated lease termination costs recorded in the second quarter of 2001.

The
remaining costs within the 2001 restructuring charges of $54.0 million represent various contract termination costs including the expected termination costs associated with
the Company's decision to exit the wholesale dial-up access business.

During
the first quarter of 2002, the Company completed its reduction in workforce as part of the Company's cost saving initiatives that were previously announced during the fourth
quarter of 2001. This included an additional reduction in the U.S.-based full-time equivalent employees by 231. The 231 full-time equivalent employees included 189
full-time employees and 42 contractor positions. Severance and associated termination benefits for the 189 employees included in the restructuring charge were approximately
$2.2 million.

On
May 2, 2002, the Company announced an additional headcount reduction. Genuity reduced its headcount by an additional 664 full-time equivalent employees during the
second quarter. Severance and associated termination benefits included in the restructuring charge for the quarter ended June 30, 2002 were approximately $8.6 million. The Company
identified 17 additional facilities, which would be exited including POP facilities, sales sites and administrative buildings. We have vacated 9 of the facilities and anticipate that all but
2 of the remaining locations will be vacated by the end of the first quarter of 2003. In the third quarter of 2002, we reduced the restructuring charge for the cost of the 2 facilities
we are no longer committed to vacating. Facility and related costs of approximately $27.6 million in the restructuring charge include lease termination costs and future lease commitments, net
of estimated recoveries from subleasing.

As
a result of these restructuring actions taken in 2001 and the first nine months of 2002, the Company has recorded a cumulative restructuring charge, which is included in special items
in 2001 and 2002, totaling $186.4 million associated with the reduction in force and the reduced capital expenditure program. As of September 30, 2002, approximately $94.2 million
has been paid, including approximately $42.5 million related to employee severance and associated benefits. In addition, the restructuring liability was reduced by approximately
$3 million representing an adjustment to the estimated lease termination costs. The remaining accrual associated with the restructuring charge was approximately $89.2 million as of
September 30, 2002.

As
of September 30, 2002, due to the cumulative restructuring efforts and attrition, Genuity had approximately 2,500 employees, a 53% reduction from a peak of approximately 5,300
employees as of March 31, 2001.

The
activity for the third quarter of 2002 associated with the restructuring charge was as follows (in thousands):

Balance as of June 30, 2002

$
102,040Adjustments in the quarter


536Cash paid during the quarter


(13,348
)Balance as of September 30, 2002

$
89,228


21

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As
of September 30, 2002, the long-term portion of the accrued restructuring liability is included in other liabilities and the short-term portion is
included in accrued liabilities in the accompanying condensed consolidated balance sheets.

6.    Property, Plant and Equipment, Net

Property, plant and equipment, net, was comprised of the following (in thousands):

December 31,
2001

September 30,
2002Land

$
10,020

$
9,535Buildings


108,472


75,046Communications networkfiber-optic cable


239,626


7,286Communications networkdata processing equipment and machinery


792,616


584,930Furniture and fixtures


39,600


10,659Leasehold improvements


237,232


86,429Work in progress


282,773


18,813Subtotal


1,710,339


792,698Accumulated depreciation


(271,696
)

(41,342
)Total

$
1,438,643

$
751,356


Depreciation
expense was $112.6 million and $40.9 million for the three months ended September 30, 2001 and 2002, respectively, and $278.1 million and
$201.2 million for the nine months ended September 30, 2001 and 2002, respectively.

In
the second quarter of 2002, the leasehold improvements associated with the facilities being exited were evaluated for impairment. This evaluation indicated that the fair value of the
leasehold improvements was $0 and as a result, the Company recorded an impairment loss of approximately $47.6 million. The Company recognized a $58.0 million impairment loss associated
with certain indefeasible rights of use for fiber optic cable to write the assets down to a fair value of $0 due to the insolvency of the fiber optic cable providers and the Company's plan to
discontinue use of the fiber. These impairment losses are included in special items in the accompanying condensed consolidated statements of operations.

Verizon's
announcement on July 24, 2002 that they would not convert their Class B shares into a controlling interest in Genuity and the resulting impact on Genuity's debt
and projected future revenues, represented an indicator that the property, plant and equipment may be impaired. We performed an impairment assessment as of July 1, 2002, the closest reporting
period to July 24, 2002. Based on the results of the impairment test we recorded an impairment of $862 million as of July 1, 2002 to reduce the carrying amounts of the property,
plant and equipment to fair value. (See Note 4 for further discussion.)

22

---

7.    Goodwill, Net

The activity related to goodwill for the nine months ended September 30, 2002, was comprised of the following (in thousands):

HostingBalance as of December 31, 2001

$
41,413Deductions


(41,413
)Balance as of September 30, 2002

$



Verizon's
announcement on July 24, 2002 that they would not convert their Class B shares into a controlling interest in Genuity and the resulting impact on Genuity's debt
and projected future revenues, represented an indicator that the goodwill may be impaired. We performed an impairment assessment as of July 1, 2002, the closest reporting period to
July 24, 2002. Based on the results of the impairment test we recorded an impairment of $41.4 million as of July 1, 2002 to reduce the carrying value of goodwill to a fair value
of $0. (See Note 4 for further discussion.)

The
Company adopted SFAS No. 142 on January 1, 2002. The following table compares the first nine months of 2001 and 2002, assuming that SFAS No. 142 was applied in
the first nine months of 2001 and goodwill was not amortized in that period (in thousands, except per share data):

For the nine months ended September 30,2001

2002Reported Net Loss

$
(946,301
)
$
(1,915,042
)Goodwill Amortization


21,198


Adjusted Net Loss

$
(925,103
)
$
(1,915,042
)Basic and Diluted Earnings (Loss) Per Common ShareReported Net Loss Per Share

$
(98.01
)
$
(170.48
)Goodwill Amortization Per Share


2.19


Adjusted Net Loss Per Share

$
(95.82
)
$
(170.48
)


8.    Intangibles, Net

Intangibles, net, was comprised of the following (in thousands):

|                      |       | December 31, 2001 |        | September 30, 2002
|--------------------- | ----- | ----------------- | ------ | ------------------
|
|Intangible Assets     |       |                   |        |                   
|Customer lists        |       | $                 | 4,000  |                   
|Trademarks            |       |                   | 4,000  |                   
|Developed technology  |       |                   | 19,000 |                   
|Internal use software |       |                   | 92,080 |                   
|                      |       |                   |        |                   
|                      | Total |                   | $      | 119,080           
|                      |       |                   |        |                   

23

---

Amortization
expense for intangibles was $9.1 million and $3.7 million for the three months ended September 30, 2001 and 2002, respectively, and $26.1 million
and $22.4 million for the nine months ended September 30, 2001 and 2002, respectively. Based on the assets as of September 30, 2002, future estimated amortization expense for
intangibles is approximately $3.7 million for the last three months of 2002 and $13.8 million, $2.3 million, $1.6 million and $1.1 million in 2003, 2004, 2005 and
2006, respectively.

Verizon's
announcement on July 24, 2002 that they would not convert their Class B shares into a controlling interest in Genuity and the resulting impact on Genuity's debt
and projected revenues, represented an indicator that intangibles may be impaired. We performed an impairment assessment as of July 1, 2002, the closest reporting period to July 24,
2002. Based on the results of the impairment test we recorded an impairment of $38.8 million as of July 1, 2002 to reduce the carrying amount of intangibles to their fair value. (See
Note 4 for further discussion.)

9.    Short-Term and Long-Term Obligations (See Note 1 for discussion of significant events)

Short-term and long-term obligations were as follows (in thousands):

December 31,
2001

September 30,
2002Current portion of capital leases

$
147,104

$
131,5426% convertible subordinated debentures


7,634


7,487Bank borrowings (in default)





547,500Private placement bonds (in default)





1,150,000Verizon borrowings (in default)





1,150,000Total short-term obligations

$
154,738

$
2,986,529Long-term portion of capital leases

$
46,266

$
297,307Private placement bonds


1,150,000


Verizon borrowings


1,150,000


Total long-term obligations

$
2,346,266

$
297,307


On
April 1, 1987, BBN Corporation, a subsidiary of Genuity, issued $84.7 million of 6% convertible subordinated debentures due in 2012. The terms of the debentures provide
for the conversion of the debentures into cash at an exchange ratio of $966.67 for each $1,000 of principal. The debentures are unsecured obligations and are subordinated in right of payment to all
senior indebtedness of Genuity. Given this subordination, no payments have been made on the debentures since July 24, 2002, when the Company went into default on its senior borrowings.

As
of September 30, 2002, Genuity had purchased and retired debentures with a face value of $77.2 million, which has been used to satisfy the annual sinking fund
requirements through 2011. The remaining balance at September 30, 2002 has been included in short-term obligations based on an estimate of the timing for the remaining debt
conversions.

Genuity
has two credit facilities, one with Verizon (the "Verizon Facility") and the other with a consortium of nine banks (the "Bank Facility"). The Verizon and Bank facilities required
that Verizon maintain or have the ability to realize (through the exercise of its option in Genuity) a voting ownership interest in the Company that is greater than 50%. Credit provided to Genuity and
loans extended to the Company under these facilities are callable in the event that this condition does not exist. On July 24, 2002, Verizon converted all but one share of its Class B
common stock in Genuity

24

---

into Class A common stock and relinquished its right to obtain a controlling interest in Genuity. This resulted in an event of default for all the outstanding amounts under the Bank Facility
and Verizon Facility.

On
March 5, 2001, as amended, the Company entered into a $2 billion credit facility with Verizon Investments Inc., a wholly-owned subsidiary of Verizon. Interest is
payable periodically depending on the terms of the individual borrowings, with the principal due on the earlier of September 5, 2005 or the date that is three months prior to the scheduled
expiration of the option of Verizon to convert its Class B common stock into Class C common stock. On July 24, 2002, this credit facility was terminated by Verizon as a result of
the event of default, which occurred when Verizon relinquished their ability to obtain a controlling interest in Genuity. Accordingly, Verizon is not obligated to advance the remaining available
balance under the facility. As of September 30, 2002, the $1.15 billion outstanding was in default and has been classified as short-term debt in the accompanying condensed consolidated
balance sheets.

Interest
expense on the Verizon Facility is based on London Inter-bank Offer Rate ("LIBOR") plus 200 basis points whenever the principal amount borrowed is less than
$1.0 billion. When the principal amount borrowed equals or exceeds $1.0 billion, the interest rate on the total borrowings will be based on LIBOR plus 225 basis points.

Genuity
has a committed and unsecured $2.0 billion revolving line of credit facility with nine participating banks. On September 24, 2001, this Bank Facility was amended
and restated primarily to provide us with the option of using available amounts under the facility through the issuance of letters of credit and to provide us with additional operating flexibility.
The Bank Facility matures on the earlier of September 5, 2005 or the date that is three months prior to the scheduled expiration of the option of Verizon to convert its Class B common
stock into Class C common stock. As a result of Verizon's decision to relinquish its right to obtain a controlling interest in Genuity, the amounts outstanding under this facility as of
September 30, 2002 are in default and have been classified as short-term debt in the accompanying condensed consolidated balance sheets.

As
of September 30, 2002, the fee for the Bank Facility, which is based on our credit rating as determined by Moody's Investors Service ("Moody's") and Standard & Poor's
Rating Service ("S&P"), was 50 basis points and is payable quarterly in arrears. The Bank Facility is guaranteed by the Company's principal domestic operating subsidiaries. The Bank Facility contains
certain restrictions, including our ability to incur liens, and requires that we do not exceed a maximum ratio of debt to debt plus contributed capital of 73%.

On
September 27, 2001, a $1.15 billion letter of credit was issued under the Bank Facility to back a private placement bond transaction. The bond transaction was executed
on the same date and for the same amount. Interest on the bonds is based on three month LIBOR plus 55 basis points and is payable quarterly in arrears. Fees for maintaining the letter of credit are
385 basis points per annum payable quarterly in arrears. To secure payment of interest on the bonds, we are required to maintain a $23.0 million cash reserve while the bonds are outstanding. On
August 20, 2005, the bonds mature and the letter of credit expires.

On
July 22, 2002, Genuity provided notice to draw the remaining $850 million available under the $2.0 billion revolving line of credit with the banks and thereafter
received $723 million of that request. This advance bears interest at a rate of prime and is payable quarterly in arrears. As of September 30, 2002 the remaining balance of this advance
was $547.5 million.

25

---

On
July 24, 2002, Verizon converted all but one of its outstanding shares of Class B common stock of Genuity into shares of Class A common stock and terminated its existing
credit facility with the Company.

On
July 29, 2002, the Company entered into a standstill agreement with the lenders of the Bank Facility that had funded the $723 million whereby they agreed not to
accelerate the payment of the amounts outstanding thereunder until August 12, 2002 and to continue negotiations with the Company. In consideration for this two-week standstill
agreement, the Company repaid $100 million of the $723 million advance to the members of the bank group which had funded the $723 million. The Company received five additional
standstill agreements: a 30-day extension on August 13, 2002 and on September 12, 2002, a 15-day extension on October 11, 2002, a 17-day
extension on October 26, 2002 and a 10-day extension on November 12, 2002. In connection with these additional extensions, Genuity has paid in aggregate an additional
$108.3 million to the members of the bank group which funded the $723 million.

On
August 13, 2002, the Company entered into a standstill agreement with Verizon whereby Verizon agreed not to accelerate the payment of the amounts outstanding under the Verizon
Facility. In consideration for this 30-day standstill agreement Verizon agreed to continue negotiations with Genuity. The Company has negotiated four additional standstill agreements with
Verizon: a 30-day extension on September 12, 2002, a 15-day extension on October 11, 2002 a 17-day extension on October 26, 2002 and a
10-day extension on November 12, 2002. In connection with these additional extensions, the parties have agreed to continue negotiations and to extend the term of borrowing and the interest
period under the Verizon Facility until the end of the respective standstill periods.

On
May 8, 2002, the Company entered into a standby letter of credit agreement based on prevailing market rates. The Company is required to pledge cash as collateral for any
amounts outstanding. As of September 30, 2002, the amount outstanding under this letter of credit was $3.3 million and has been classified as restricted cash in the accompanying
condensed consolidated balance sheets.

10.  Stockholders' Deficit (See Note 1 for discussion of significant events)

Preferred Stock

The board of directors has the authority, without further action by the holders of Class A common stock or Class C common stock, to issue from time
to time, shares of Genuity preferred stock in one or more series. The issuance of shares of preferred stock is, however, subject to the approval of holders of the Class B common stock. Once the
approval of the holders of the Class B common stock has been obtained, the board of directors may fix the number of shares, designations, preferences, powers and other special rights of the
preferred stock.

Common Stock

Our Class A common stock trades on the NASDAQ under the symbol "GENU" and the Nouveau Marché under the symbol "Genuity A-REGS
144." Until October 11, 2002, the shares of Class A common stock which trade on the Nouveau Marché could not have been resold, pledged, or otherwise hedged or transferred
directly or indirectly in the United States or to U.S. Persons, as such term is defined in Regulation S under the Securities Act of 1933. In addition, as of October 11, 2002, through
October 11, 2003, the shares of Class A common stock which trade on the Nouveau Marché may not be sold, pledged, hedged or otherwise disposed of in the United States or to
U.S. Persons, except in accordance with the volume limitations and manner of sale procedures specified in Rule 144 under the Securities Act. (See Note 1 for discussion of significant
events.)

26

---



On May 16, 2002, the board of directors and shareholders approved a 20-to-1 reverse stock split of the Company's common stock. The
shares began trading at the split adjusted stock price on NASDAQ and the Nouveau Marché on May 30, 2002. Accordingly, the presentation of shares outstanding and amounts per share
have been restated for all periods presented to reflect the split.

The
shares of Genuity's Class A common stock, Class B common stock and Class C common stock are identical in all respects except for voting rights, conversion rights
and as otherwise described below. The rights, preferences and privileges of holders of Class A common stock, Class B common stock and Class C common stock are subject to the
rights of the holders of shares of any other class of common stock that Genuity may authorize and issue and any series of preferred stock that Genuity may designate and issue in the future.

Voting Rights.Except as required by law or as described below, the holders of the Class A common stock,
Class B common stock and Class C common stock vote together as a single class on all matters submitted to a vote of Genuity's stockholders. Each share of Class A common stock
entitles the holder to one vote per share.

Each
share of Class B common stock entitles the holder to one vote per share. The holders of Class B common stock, voting separately as a class, are entitled to elect one
director to Genuity's board of directors. Genuity is also required to obtain the consent of the holders of Class B common stock before taking specific actions, including making significant
acquisitions or dispositions, entering into major business combinations, and incurring indebtedness or issuing additional equity securities in excess of specified limits. Under the terms of the
Federal Communications Commission's ("FCC") Memorandum and Order, dated June 16, 2000 (the "FCC Order"), Verizon has agreed that it will not consent to Genuity's acquisition of a traditional
voice long-distance provider unless the FCC has first reviewed and approved the acquisition.

Each
share of Class C common stock entitles the holder to five votes per share.

Conversion.The Class A common stock has no conversion rights. Each share of Class C common stock is
convertible by the holder at any time into one share of Class A common stock. Each share of Class C common stock will automatically convert into one share of Class A common stock
if at any time the aggregate number of outstanding shares of Class C common stock, together with shares of Class C common stock issuable upon conversion of Class B common stock,
constitutes less than 10% of Genuity's outstanding common stock. The shares of Class B common stock are convertible by the holder into shares of Class A or Class C common stock
under the following two methods:



Under
the terms of the FCC order:



27

---



Under
the terms of the FCC Order, if Verizon has not eliminated the applicable Section 271 restrictions as to 100% of the former Bell Atlantic in-region lines on or
before June 30, 2005, which may be
extended under certain circumstances, Verizon's ability to convert each Class B common stock into approximately 43 shares of Class A common stock or Class C common stock will
expire. If Verizon has satisfied the applicable Section 271 restrictions as to 100% of the former Bell Atlantic in-region lines on or before that date, or any extension, its ability
to convert each Class B common stock into approximately 43 shares of Class A common stock or Class C common stock will not expire. The Class B common stock transferred to a
third party will not be subject to this expiration limitation.

As
of October 30, 2002, Verizon has eliminated regulatory restrictions in 11 of 14 jurisdictions covered in the FCC Order representing 87% of the former Bell Atlantic
in-region access lines.

Registration Rights Agreement.Under a Registration Rights Agreement, Verizon and its transferees or assignees will be
entitled to cause us to register shares of Class A common stock that are issued following the conversion of either our Class B common stock or our Class C common stock.

Genuity Right of First Offer.Under the terms of the FCC order, if Verizon seeks to sell some or all of its shares of Genuity
Class B common stock, or the shares of Genuity common stock received by it on conversion of all or some of its shares of Genuity's Class B common stock, after eliminating the applicable
Section 271 restrictions as to at least 50% but less than 95% of the former Bell Atlantic in-region lines, Verizon will first offer to sell those shares to Genuity with the purchase
price payable in the form of an unsubordinated, marketable debt instrument of Genuity with a fair market value equal to its face value. Genuity's issuance to Verizon of such a debt instrument shall
constitute an exception to any limitation on the aggregate amount of Genuity's debt that Verizon may hold pursuant to the FCC Order. This debt instrument will bear interest at a commercially
reasonable rate, comparable to rates under similar instruments held by companies with debt ratings comparable to Genuity's, with a commercially reasonable time for repayment. The purchase price for
all of the shares of Class B common stock will be equal to the lower of (a) the fair market value of those shares as determined by a nationally recognized independent investment banker
selected jointly by Verizon and Genuity or (b) the sum of:



28

---



Liquidation.In the event of any dissolution, liquidation, or winding up of Genuity's affairs, whether voluntary or
involuntary, the holders of the Class A common stock, the Class B common stock, and the Class C common stock will be entitled to share ratably, in proportion to the number of
shares they represent of Genuity's outstanding common stock, in the assets legally available for distribution to stockholders, in each case after payment of all of Genuity's liabilities and subject to
preferences that may apply to any series of preferred stock then outstanding. Genuity may not dissolve, liquidate or wind up its affairs without obtaining the consent of the holders of the outstanding
shares of its Class B common stock.

Mergers and Other Business Combinations.If Genuity enters into a merger, consolidation or other similar transaction in which
shares of its common stock are exchanged for or converted into securities, cash or any other property, the holders of each class of Genuity's common stock will be entitled to receive an equal per
share amount of the securities, cash, or any other property, as the case may be, for which or into which each share of any other class of common stock is exchanged or converted; provided that in any
such merger, consolidation or other similar transaction, the holders of the shares of Class B common stock shall be entitled to receive, at their election, either (1) the merger
consideration such holders would have received had they converted their shares of Class B common stock immediately prior to the consummation of such transaction or (2) a new security
that is convertible into the merger consideration and has substantially identical voting and other rights as the Class B common stock. In any transaction in which shares of capital stock are
distributed, the shares that are exchanged for or converted into the capital stock may differ as to voting rights and conversion rights only to the extent that the voting rights and conversion rights
of Class A common stock, Class B common stock and Class C common stock differ at that time. The holders of the Class B common stock, voting separately as a class, must
consent to any such merger, consolidation or other similar transaction.

Rights of the Class B Common Stock.The holders of Class B common stock, voting separately as a class, are
entitled to elect one director to Genuity's board of directors. This right exists as long as there is at least one share of Class B common stock outstanding. The Class B common stock
also maintains certain consent rights related to, among other things, any dissolution or liquidation of the Company, the right to consent to any significant acquisitions or dispositions, major
business combinations, or incurring indebtedness or issuing additional equity securities in excess of specified limits. In accordance with our certificate of incorporation, Verizon's investor
safeguards will remain in effect until it converts all of its Class B shares or no longer has the possibility of converting into more than a 10% ownership interest.

11.  Loss Per Share

The weighted-average common shares outstanding for both basic and diluted loss per share were approximately 9,748,000 shares and 9,655,000 shares for the three
and nine month periods ending September 30, 2001, respectively, and 11,346,000 shares and 11,233,000 shares for the three and nine month periods ending September 30, 2002, respectively.

Potential
common shares excluded in the computation of weighted-average diluted shares outstanding were approximately 3,725,000 for the three and nine months ended September 30,
2001

29

---

and 3,448,000 for the three and nine months ended September 30, 2002, as their inclusion would have an anti-dilutive effect.

12.  Segment Reporting

Genuity's operations are reported in four segments: Access, Hosting and Value-Added Services, Transport and International.

Access.Internet access pertains to a variety of global Internet access services, including dial-up, DSL
dedicated, and other broadband and voice-over-IP, by providing and managing the underlying scaleable infrastructure. Genuity also provides a range of customer premise equipment
necessary to connect to the Internet, including routers, channel service units/data service units, modems, software and other products. Customers receive 24 hours per day, seven days per week
network monitoring and technical support from Genuity's Network Operations Centers ("NOC").

Hosting and Value-Added Services.Hosting pertains to services that allow customers to successfully implement their eBusiness
strategies through scaleable, reliable and secure Web sites, which serve as the infrastructure to communicate with suppliers, customers and employees, as well as to deliver interactive content and
conduct online commerce. The eBusiness model enables companies to decrease sales costs; accelerate time to market; access new sales channels; increase revenues, productivity and customer satisfaction;
and gain competitive advantage. Genuity currently operates 6 data centers in the United States. Through the operations center, Genuity monitors these systems 24 hours a day, seven days a week.
Value-Added Services includes revenue for professional consulting and value-added Internet services such as security and virtual private networks.

Transport.Genuity provides a broad range of transport services to customers through a single point of contact for planning,
ordering, installing, billing, maintaining and managing customers' transport services. Genuity provides seamless operation of local loops, central office connections and interexchange carrier
transport. Through Genuity's NOC, network faults, intrusion or environmental alarms are observed, diagnostics are performed, and referrals or dispatches are initiated as needed.

International.International revenues include all international revenues for Access, Hosting and Value-Added Services, and
Transport. Genuity operates one data center outside of the United States in Amsterdam, Netherlands.

Network
costs within Global Network Infrastructure ("GNI") which are incurred to support the Access, Hosting and Value-Added Services, Transport and International segments are not
allocated to these
segments for management reporting or segment reporting purposes. Similarly, selling, general and administrative expenses are not allocated to the segments for management or segment reporting purposes.

Revenues
received from AOLTW are part of the Access and International segments. Revenues received from Verizon are part of the Access and Transport segments. Revenues from AOLTW,
including Docomo-AOL, in relation to Genuity's total revenues were $311.8 million, or 34%, and $275.8 million, or 36%, for the nine months ended September 30, 2001 and
2002, respectively. Revenues from Verizon in relation to Genuity's total revenues were $153.8 million, or 17%, and $213.9 million, or 28%, for the nine months ended September 30,
2001 and 2002, respectively.

Management
utilizes several measurements to evaluate its operations and allocate resources. However, the principal measurements are consistent with Genuity's financial statements. The
accounting policies of the segments are the same as those described in Note 2.

30

---

Financial
information for Genuity's segments is as follows (in thousands):

|                                                    |                                     | Three Months Ended
September 30, |          | Nine Months Ended
September 30, |        
|--------------------------------------------------- | ----------------------------------- | -------------------------------- | -------- | ------------------------------- | -------
|
|Revenues                                            |                                     |                                  |          |                                 |        
|                                                    | Access                              |                                  | $        | 232,019                         |        
|                                                    | Hosting and Value-Added Services    |                                  |          | 31,063                          |        
|                                                    | Transport                           |                                  |          | 25,600                          |        
|                                                    | International                       |                                  |          | 13,580                          |        
|                                                    |                                     |                                  |          |                                 |        
|                                                    |                                     | Total revenues                   |          |                                 | 302,262
|Operating Expenses                                  |                                     |                                  |          |                                 |        
|                                                    | Cost of sales                       |                                  |          | 318,965                         |        
|                                                    | Selling, general and administrative |                                  |          | 135,845                         |        
|                                                    | Depreciation and amortization       |                                  |          | 128,721                         |        
|                                                    | Special items                       |                                  |          | 424                             |        
|                                                    |                                     |                                  |          |                                 |        
|                                                    |                                     | Total operating expenses         |          |                                 | 583,955
|                                                    |                                     |                                  |          |                                 |        
|Operating Loss                                      |                                     |                                  | (281,693 | )                               |        
|Other Income (Expense)                              |                                     |                                  |          |                                 |        
|                                                    | Interest expense, net               |                                  |          | (18,510                         | )      
|                                                    | Other, net                          |                                  |          | 959                             |        
|                                                    |                                     |                                  |          |                                 |        
|Loss From Continuing Operations Before Income Taxes |                                     | $                                | (299,244 | )                               | $      
|                                                    |                                     |                                  |          |                                 |        
|Capital Expenditures(1)                             |                                     |                                  |          |                                 |        
|                                                    | Access                              |                                  | $        | 21,400                          |        
|                                                    | Hosting and Value-Added Services    |                                  |          | 32,412                          |        
|                                                    | GNI/Transport                       |                                  |          | 14,716                          |        
|                                                    | International                       |                                  |          | 10,958                          |        
|                                                    | Other                               |                                  |          | 42,835                          |        
|                                                    |                                     |                                  |          |                                 |        
|                                                    |                                     | Total                            |          | $                               | 122,321
|                                                    |                                     |                                  |          |                                 |        
|Depreciation and Amortization                       |                                     |                                  |          |                                 |        
|                                                    | Access                              |                                  | $        | 27,836                          |        
|                                                    | Hosting and Value-Added Services    |                                  |          | 12,187                          |        
|                                                    | GNI/Transport                       |                                  |          | 64,724                          |        
|                                                    | International                       |                                  |          | 5,554                           |        
|                                                    | Other                               |                                  |          | 18,420                          |        
|                                                    |                                     |                                  |          |                                 |        
|                                                    |                                     | Total                            |          | $                               | 128,721
|                                                    |                                     |                                  |          |                                 |        

---

31

---



December 31,
2001

September 30,
2002Property, Plant and Equipment, NetAccess

$
360,650

$
524,422Hosting and Value-Added Services


241,587


5,344GNI/Transport


475,780


134,792International


96,709


3,923Other


263,917


82,875Total

$
1,438,643

$
751,356


13.  Commitments and Contingencies

Leases

Genuity leases office space, data centers, points of presence, network equipment and managed modems under long-term capital and operating leases. Many
of these leases have options for renewal with provisions for increased rent upon renewal. Genuity's rent expense was $21 million and $9.6 million for the three months ended
September 30, 2001 and 2002, respectively, and was $68.0 million and $35.8 million for the nine months ended September 30, 2001 and 2002, respectively. Rent expense
attributable to our fiber optic network, including points of presence and data centers, is included in cost of sales and all other rent expense is included in selling, general and administrative
expenses in the accompanying condensed consolidated statements of operations.

As
of September 30, 2002, the future minimum lease payments under non-cancelable capital and operating leases with initial or remaining periods in excess of one year
were as follows (in thousands):

Capital
Leases

Operating
Leases2002

$
39,400

$
7,2002003


165,400


26,6002004


138,600


24,9002005


100,600


23,0002006


81,400


22,500Thereafter


27,200


76,700Total minimum lease payments


552,600

$
180,900Amount representing interest


(123,800
)Present value of minimum lease payments

$
428,800


The
table above includes commitments related to future minimum lease payments for operating leases. The Company has also accrued future lease costs as part of the restructuring charges
recorded in 2001 and 2002 associated with operating leases on facilities, which either have been or will be vacated. These future lease costs are not included in the operating lease amounts in the
table above as the costs have been accrued on the accompanying condensed consolidated balance sheets. As of September 30, 2002, the remaining balance associated with these accrued future lease
costs totaled $70.6 million. Of this amount, $19.5 million is included in accrued liabilities and $51.1 million is included in other liabilities in the accompanying condensed
consolidated balance sheets.

32

---

Consistent
with the terms of the FCC Order, GTE, now part of Verizon, guarantees some of Genuity's existing real estate leases.

Contract Commitments

Genuity has entered into several agreements for indefeasible rights of use ("IRUs") for its network infrastructure in the United States. The initial terms of the
IRUs are for 20-25 years, with options to extend the terms. Genuity is obligated to pay operating and maintenance costs over the contract terms. As of September 30, 2002,
annual operating and maintenance expense was approximately $5.3 million, which will be adjusted for inflation increases over the contract terms. As of September 30, 2002, the future
minimum commitments under these agreements, excluding future operating and maintenance costs, were as follows (in thousands):

2002

$
1,200Total future minimum commitments

$
1,200


Genuity
has entered into a number of agreements for IRUs to trans-oceanic cable systems that are either deployed or in the process of being deployed. The initial terms of the IRUs are
for 25 years. As of September 30, 2002, the outstanding commitments under the agreements were as follows (in thousands):

2002

$
2,8002003


1,900Total future minimum commitments

$
4,700


Genuity
has entered into non-cancelable long-term purchase commitments for circuits with communications providers. The purchase agreements contain provisions that
require Genuity to purchase a minimum amount of services annually. If Genuity does not purchase the minimum service, it is required to pay the amount of the shortfall between the minimum commitments
and actual purchases. As of September 30, 2002, future minimum payments under these non-cancelable purchase commitments were as follows (in thousands):

2002

$
57,5002003


244,4002004


111,9002005


27,4002006


12,000Thereafter


Total future minimum commitments

$
453,200


Subsequent
to September 30, 2002, we amended the agreements with two major circuit vendors to reduce the future circuit commitments by approximately $226 million, resulting
in a remaining commitment of $227 million. (See Note 1 for further discussion.)

In
addition to the long-term purchase commitments, we also purchase circuits on a monthly basis under agreements with other communications providers. These agreements do not
contain minimum purchase commitments; however, we are obligated to pay a termination fee related to certain

33

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agreements for early termination. In addition, certain agreements contain volume commitments and Genuity is obligated to pay a penalty if these volume levels are not achieved.

Genuity
has entered into long-term network service agreements for the development of managed modems to be utilized in the dial-up modem services business. These
agreements contain minimum purchase commitments based on the achievement of various production milestones. These contracts also contain most-favored customer pricing and business downturn
provisions that could reduce the contractual commitments in the event that market prices for similar services decrease over the contract term or if there is a material downturn in customer demand for
modem services. As of September 30, 2002, the future minimum commitments under these agreements were as follows (in thousands):

Accrued Liabilities Plus Interest

Future Commitments

Total2002

$
32,200

$
2,900

$
35,1002003


189,300


16,300


205,6002004


165,100


17,300


182,4002005


110,100


34,100


144,2002006


73,900


9,100


83,000Total future minimum commitments

$
570,600

$
79,700

$
650,300


The
accrued liabilities plus interest amounts reflected in the table above include future estimated interest payments and amounts that are accrued in the accompanying condensed
consolidated balance sheets as capital lease obligations, accounts payable or other liabilities.

Compensation Arrangements

Effective July 1, 2002, the Company adopted a Critical Employee Retention Program in order to stabilize the employment of certain key employees of the
Company. The program provides for periodic additional compensation through June 30, 2003 to employees deemed critical during the retention period as long as they remain employed during the
retention period. The total cost of the program, which is accrued as earned, is $17 million. No amounts had been paid related to this program as of September 30, 2002.

Contingencies

On July 24, 2002, the Company filed an action against Deutsche Bank AG in the United States District Court for the District of Massachusetts (C.A.
No. 02 cv 11502 GAO) seeking damages for the failure of Deutsche Bank to fund its share (approximately $127 million) of a draw by Genuity for an extension of credit under a credit
agreement extended by a group of financial institutions, including the defendant. As a result of repayments since made to the financial institutions under various standstill agreements, the amount
claimed as owed by Deutsche Bank could be reduced to their pro rata portion of the funding. Deutsche Bank has filed an answer to this legal action, asserting various defenses and alleging various
counterclaims, which, in substance, assert that Deutsche Bank was not obligated to fund our draw.

On
October 2, 2002 Genuity Solutions Inc. filed an action in the United States District Court for the Southern District of New York against Nortel Networks Inc. and
Nortel Networks Corp. Genuity's complaint alleges breach of contract arising from Nortel's failure to make a payment of approximately $6 million that was due on or before September 30,
2002. Genuity's complaint also seeks a declaratory

34

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judgment that Nortel is obligated to pay to Genuity $8 million due in the fourth quarter of 2002. Finally, Genuity's complaint alleges that Nortel has engaged in unfair and deceptive acts and
practices in violation of Massachusetts General Law Chapter 93A.

The
Company is subject to other claims arising in the ordinary course of business. In the opinion of management, these other claims are not expected to have a material effect on
operations.

14.  Related Party Transactions (See Note 1 for discussion of significant events)

As of December 31, 2001, the Company had the following related party transaction:

On
September 5, 2000, the Company entered into a $2.0 billion revolving line of credit facility, as amended and restated, with a consortium of 9 banks (See Note 9
for further discussion). One of these banks was also a major stockholder of the Company. The terms of the Bank Facility were entered into based on prevailing market rates. As of December 31, 2001, a
$1.15 billion letter of credit was outstanding under the Bank Facility to back a private placement bond transaction.

15.  Transactions with America Online

Effective January 8, 2002, we amended our existing agreement with AOL. The term of the amended agreement remains unchanged with certain obligations
continuing through December 31, 2006. Under the amended agreement, AOL is obligated to satisfy minimum purchase commitments for dial-up access ports through 2003 and to purchase
managed digital subscriber line network access services through 2004. However, under the amended agreement, AOL is no longer obligated to purchase and Genuity is no longer obligated to provide other
non-digital subscriber line broadband network access services.

Under
the amended agreement, AOL may purchase dial-up access ports through 2006 for a fixed monthly fee for each activated dial-up access port managed by us. The
fixed monthly fee for each dial-up access port will be reduced by specified amounts throughout the term of the amended agreement. Such specified price reductions were implemented in
April 2002 and will occur in January 2003, and January 2004. The amended agreement contains minimum commitments for such ports through the end of 2003. The Company does not
anticipate that AOL will exceed the minimum commitment during this period. Given the fixed price and volume commitments in the amended agreement for the first two years, revenue will be recognized on
a straight-line basis through December 31, 2003. Assuming the number of dial-up access ports remains constant, revenues in 2002 will be approximately
$77.7 million lower than 2001 revenues. The cash payments received in excess of the revenue recognized during 2002 will be recorded as deferred revenue, which will be amortized and recognized
as revenue in 2003. The estimated revenue that will be deferred at the end of 2002 will be approximately $35.7 million of which $32.4 million was recorded as of September 30,
2002.

Under
the amended agreement, starting in January 2004, AOL has the option of reducing the number of dial-up access ports to a reduced commitment level. Revenue in 2004
through the end of the amended agreement will be recognized monthly based on the per port price and volumes in effect each month. Assuming the number of dial-up access ports remains
constant, revenues in 2004 will be approximately $55.4 million lower than 2003 revenues. Assuming the number of dial-up access ports remains constant, the estimated impact of these
price declines would be a year over year reduction of cash received of approximately $41.9 million, $71.4 million and $19.7 million in 2002, 2003 and 2004, respectively. Actual
declines in both revenues and cash receipts could be greater starting in 2004 if AOL exercises its option to reduce the number of dial-up access ports to the reduced commitment level.

35

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Additionally,
we remain obligated to offer to AOL, subject to certain limitations as set forth in the amended agreement, reduced pricing if we offer a third party better pricing for
comparable dial-up access services than that paid by AOL. Under the amended agreement, AOL may request lower pricing for dial-up access ports effective on or after
January 1, 2005, if the market price for comparable services, as defined in the amended agreement, is lower than the pricing then being offered to AOL. If we do not agree to reduce the fees we
charge to AOL for the applicable dial-up access ports to the market price, AOL may, subject to advance notice and other limitations, terminate future dial-up service
commitments to us and decommission an equal number of its existing dial-up access ports with us. Similarly, AOL may reduce its dial-up service commitments in the event we fail
to meet monthly or geographic delivery targets.

Pursuant
to the amended agreement, AOL may, on or after January 1, 2004 and subject to advance notice and other limitations, decommission dial-up access ports managed
by us in proportion to their decommissioning of dial-up access ports provided by other vendors. We are required to maintain a dedicated network operations center to service the portions of
our network dedicated to AOL.

Pursuant
to the amended agreement and subject to certain limitations as specified in the amended agreement, AOL is also committed to order other services from the Company, excluding
dial-up access services and broadband backhaul services for DSL, in an aggregate amount equal to or greater than $39.0 million through December 31, 2005. This commitment
includes a minimum annual order value of $10.0 million in 2002, 2003 and 2004 and $9.0 million in 2005. The $39.0 million commitment requires AOL to make minimum biannual payments
in accordance with a defined payment schedule, subject to certain conditions and potential reductions as described in the amended agreement, including minimum biannual payments of $10.0 million
for the six-month period ending December 31, 2002, $5.0 million for each of the six-month periods ending June 30, 2003, December 31, 2003,
June 30, 2004 and December 31, 2004 and $4.5 million for the six-month periods ending June 30, 2005 and December 31, 2005. No amounts have been paid by
AOL through September 30, 2002.

We
continue to provide broadband services to AOL in connection with their digital subscriber line service offerings. Under the prior agreement, AOL was committed to purchase from us the
network
services necessary to serve specified percentages of their broadband customers other than digital subscriber line customers (i.e. cable and satellite broadband customers). However, under the amended
agreement, AOL is no longer obligated to purchase additional network services from us in connection with these other broadband service offerings.

In
connection with providing DSL service to an AOL customer, AOL is responsible for providing its customers with the local access circuit and we are responsible for the interconnection
of that circuit to our backbone, transmission of the traffic to AOL and the monitoring, management and control of the network. We receive a specified monthly fee for each AOL DSL customer for whom we
provide network services. These fees are subject to agreed upon reductions, as the number of AOL DSL customers for whom we are providing services increases. At specified times during the course of the
amended agreement, AOL has the right to seek a reduction in the fee paid to us for broadband backhaul services based on the then prevailing market prices for comparable broadband backhaul services. If
we do not agree to reduce our fees to AOL for broadband network services to the market price in the manner described in the amended agreement, AOL may, subject to advance notice and other limitations,
terminate future broadband service purchase commitments to us and terminate existing broadband service. AOL may also terminate future broadband service purchase commitments in the event we fail to
deliver services to a new local access and transport area within a specified period.

36

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Additionally,
the Company entered into a separate marketing agreement with AOL Time Warner, Inc. ("AOLTW"), the parent company of America Online, effective January 4, 2002.
Under this agreement, the Company has committed to pay AOLTW $40.5 million through December 31, 2003 for various marketing media inventory, including advertising in print and online. The
Company is committed to purchase a minimum of $8.0 million in advertising in each consecutive six-month period over the contract term, but within each year the Company must purchase
and use at least $20.3 million in advertising. Advertising is expensed as incurred. As of September 30, 2002, the Company has incurred $17.7 million of advertising costs under
this agreement.

16.  Transactions with Verizon (See Note 1 for discussion of significant events)

Concurrent with the closing of the initial public offering, Genuity executed agreements with Verizon and certain of its affiliates including transition services
agreements, a Purchase, Resale and Marketing agreement, intellectual property agreements, a network monitoring agreement and real estate agreements. The transition services, intellectual property,
network monitoring, Purchase, Resale, and Marketing and real estate agreements involve services provided to and/or received from Verizon. The transition and network monitoring agreements vary from
four to twelve months with rights to terminate earlier. These transition services were completed on or before December 31, 2001. The fees paid or received from these agreements are fixed under
the agreements and were based on historical costs and comparable market prices.

Under
the Purchase, Resale and Marketing agreement, Verizon agreed to purchase at least $500 million of Genuity's services over a five-year period. Effective
April 30, 2002, the Company amended this agreement with Verizon. Verizon made a $100 million prepayment in the second quarter of 2002 pursuant to this agreement. Prepayments are
reflected in deferred revenue and advanced payments in the accompanying condensed consolidated balance sheets. As a result of this prepayment, the total purchase commitment was reduced from
$500 million to $491 million based on an estimate of the time value of money associated with the prepayment and the minimum purchase commitment of $200 million by June 22,
2003 was eliminated. The Company will recognize revenue associated with this prepayment as the underlying services are provided to Verizon. As of September 30, 2002, $40.0 million of the
$100 million prepayment has been recognized as revenue. Since inception, Verizon has purchased approximately $168.7 million of services under this agreement through September 30,
2002, including $40.0 million of the $100 million prepayment.

The
recapitalization agreement executed on June 22, 2000 requires Genuity to obtain the consent of Verizon prior to taking actions such as making acquisitions for consideration
that exceed 20% of Genuity's market capitalization, making any acquisitions with a purchase price in excess of $100 million or entering into any joint venture with an investment in excess of
$100 million that is not closely related to Genuity's business, making any disposition in excess of 20% of Genuity's market capitalization, and certain other restrictions on incurring
indebtedness and other protective rights.

GTE,
now part of Verizon, granted to TELUS Corporation the exclusive right to our trademarks and to all proprietary technology that we had developed prior to the date of our initial
public offering for use solely in Canada for the provision of telecommunications services, including Internet services. We have entered into a licensing arrangement with TELUS (the "TELUS Agreement")
to grant it similar rights with respect to all trademarks and proprietary technology that we develop or acquire after June 30, 2000. The TELUS agreement also limits our ability to directly
provide Internet services in Canada. However, the agreement does not preclude other commercial business with TELUS, which we continue to pursue on an ongoing basis.

37

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On
March 5, 2001, as amended, the Company entered into a $2 billion credit facility with Verizon Investments Inc., a wholly-owned subsidiary of Verizon. Interest is
payable periodically depending on the terms of the individual borrowings, with the principal due on the earlier of September 5, 2005 or the date that is three months prior to the scheduled
expiration of the option of Verizon to convert its Class B common stock into Class C common stock. On July 24, 2002, this credit facility was terminated by Verizon as a result of
the event of default, which occurred when Verizon relinquished their ability to obtain a controlling interest in Genuity. Accordingly, Verizon is not obligated to advance the remaining available
balance under the facility. As of September 30, 2002, the $1.15 billion outstanding was in default and has been classified as short term debt in the accompanying condensed consolidated
balance sheets.

In
June 2001, Genuity entered into a five year agreement with Verizon for DSL access services. This agreement includes tiered pricing based on the level of DSL line volumes
achieved. The agreement contains volume commitments and Genuity is obligated to pay a penalty if these volume levels are not achieved. Amounts charged by Verizon are based on tariffs approved by the
FCC. Effective November 1, 2002, this agreement was assigned to Verizon Internet Service, Inc. and GTE.net LLP, part of Verizon Internet Solutions.

Effective
January 3, 2002, Genuity entered into an agreement (the "MOU") with Verizon Service Corp. on behalf of certain Verizon operating telephone companies ("OTCs") and Verizon
Advanced Data Inc. ("VADI") and Verizon Advanced DataVirginia, Inc. for dedicated access services, frame relay, ATM, and certain other services (collectively "Access
Services"). Under this agreement, Genuity is committed to purchase an aggregate minimum of $283 million of Access Services over a five year period, including minimum commitments to purchase
certain amounts of Access Services in each state, and minimum commitments to purchase certain amounts of Access Services from each of VADI and OTCs. Amounts charged by Verizon are subject to tariff
approvals from individual states. Verizon notified Genuity verbally on or about July 16, 2002 that the Federal Communications Commission (FCC) had refused to approve the Memorandum of
Understanding (MOU) because the FCC disapproved the MOU's waiver of termination liabilities and required a cost justification. Verizon has not provided the FCC with cost justifications for the waiver.
The waiver protected Genuity from termination liability in migrating a large number of previously provisioned Verizon circuits to the MOU regime. On September 20, 2002, Genuity gave notice to
Verizon that Genuity was terminating the agreement due to failure by Verizon to secure necessary regulatory approval and failure by Verizon to propose any alternative agreement that might satisfy the
original intentions of the parties. Section 10(a) of the MOU recognizes that certain regulatory and other governmental approvals are required under the MOU, which include FCC approval. It is
Genuity's position that any prospect of imposing termination liabilities would eliminate most, if not all, of the benefit of the MOU for Genuity. Verizon takes the position that Genuity's termination
is not justified under Section 10 and that Genuity owes various penalties.

In
February 2002, the Company entered into a ISDN/PRI Services Agreement with Verizon, which re-prices existing ISDN/PRI local telecommunications services in certain
states at rates which are lower than the rates we were previously paying Verizon for these services. Under this agreement, we are committed to purchase certain minimum amounts of ISDN/PRI services in
certain Verizon states. The state-by-state purchase commitments continue over a period of three years, or less if all of the ISDN/PRI services are converted to Verizon CyberPOP
services. All new ISDN/PRI services purchased by us under this Agreement have a minimum service term of three years. Amounts charged by Verizon are subject to tariff approvals from individual states.

38

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Effective
April 1, 2002, the Company amended its Master Agreement with Verizon in which Genuity provides Wholesale Dial Access services to Verizon. The amendment provides for,
among other things, a reduction in Verizon's minimum purchase commitment in 2002 and 2003 from $24 million to $20 million.

Effective
April 22, 2002, the Company entered into an agreement with Verizon for CyberPOP service. This agreement will supplement Genuity's existing agreements with other vendors
for managed modems. Amounts owed under the contract for the CyberPOP service are based on tariff-approved rates and estimated to be approximately $127 million over the contract term. The
agreement has a minimum term of 36 months with renewal options.

On
May 1, 2002, the Company amended its Master Agreement with Verizon in which Genuity provides Wholesale DSL ISP services to Verizon. The amendment, which is effective on
August 5, 2002, modifies the rates paid by Verizon for both consumer and non-consumer DSL services. In addition, the amendment extends the term of the original Master Agreement to
March 31, 2003 with an additional extension possible to March 31, 2005, subject to agreement by the parties on rates and other terms and conditions.

Under
this amendment, Genuity will be Verizon's preferred provider of IP backbone services and Verizon will be one of Genuity's preferred provider of associated access services within
Verizon's franchise territories. As part of this amendment, as it relates to the provision of digital subscriber line (DSL) service, Genuity transitioned its current responsibilities for
end-user local loop management to Verizon and Genuity continued to deliver IP backbone services to Verizon. Under this agreement, Verizon is responsible for coordinating all aspects
associated with installing new DSL customers, including the acquisition of the local loop and CPE, a function previously performed by Genuity. As a result of this new contractual relationship,
starting with the quarter ended September 30, 2002, Genuity no longer recognizes the revenue related to the provisioning of digital subscriber line (DSL) local loops and CPE, which accounted
for approximately $108.6 million for the first six months of 2002. The lower revenues are essentially offset by a similar reduction in expenses associated the elimination of the local loop, CPE
and other charges related with provisioning new subscribers.

39

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

This Form 10-Q contains certain forward-looking statements regarding, among other things, our future financial performance, our strategies and
anticipated trends in our business, our future funding requirements and expected restructuring activities. Investors are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof and are based solely on our current expectations and projections about certain events. In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, we caution investors that our future financial and operating results may differ materially from those projected in the forward-looking statements. Such forward-looking
statements involve known and unknown risks and uncertainties and, accordingly, there are many factors that may cause our actual results, level of activity, performance or achievements to be materially
different from any future results, level of activity, performance of achievements expressed or implied by such forward-looking statements. Those factors that may cause our actual results, level of
activity, performance or achievements to be materially different from that expressed or implied by any forward-looking statement include those discussed in this section and elsewhere in this
Form 10-Q. Each of these factors, and others, are also discussed from time to time in our other filings with the Securities and Exchange Commission, including in our
Form 10-K. The forward looking statements contained in this report on Form 10-Q speak only as of the time the statements were given, and we do not undertake to
revise those forward-looking statement to reflect events after the date of this report.

The
following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this report.

SIGNIFICANT EVENTS

As stated elsewhere in this report, on July 24, 2002, Verizon converted all but one of its outstanding shares of Class B common stock of Genuity
into shares of Class A common stock and terminated its existing credit facility with the Company. After giving effect to this conversion, Verizon holds approximately a 10% ownership interest in
Genuity, but no longer has the right to convert its shares to approximately an 80% controlling interest in the Company. As a result of the termination by Verizon of the credit facility, Genuity cannot
borrow the remaining amounts available under that facility and the $1.15 billion currently outstanding under the Verizon Facility is callable by Verizon at any time. To date, Verizon has not
demanded payment of the outstanding amounts.

Aside
from the Verizon Facility, the commercial arrangements between Verizon and Genuity, including the Purchase, Resale and Marketing Agreement, are currently not affected by Verizon's
termination of the right to convert its Class B shares into a controlling interest in Genuity, although Verizon's decision will affect the long-term commercial relationship between the
companies. The Company also announced on July 29, 2002 that Michael Masin, a former vice chairman of Verizon Communications, resigned from Genuity's board of directors. Verizon, as a
Class B stockholder, retained its right to a seat on the Genuity board of directors and may appoint a new director in the future. This right exists as long as any share of the Class B
common stock is outstanding. As the holder of Class B common stock, Verizon maintains certain consent rights related to, among other things, any dissolution or liquidation of the Company, the
right to consent to any significant acquisitions or dispositions, major business combinations, or incurring indebtedness or issuing additional equity securities in excess of specified limits. In
accordance with our certificate of incorporation, Verizon's investor safeguards will remain in effect until it converts all of its Class B shares or no longer has the possibility of converting
into more than a 10% ownership interest.

Prior
to Verizon's decision to terminate its right to convert its Class B shares into a controlling interest in Genuity, on July 22, 2002, the Company provided notice to
draw the remaining $850 million available under the existing $2.0 billion revolving line of credit facility with a consortium of nine banks

40

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and thereafter received $723 million of that request. Deutsche Bank was the only member of the consortium of banks that has failed to fulfill its obligation under the Bank Facility and we have
undertaken legal action to require them to satisfy their obligation. Deutsche Bank has filed an answer to this legal action, asserting various defenses and alleging various counterclaims, which, in
substance, assert that Deutsche Bank was not obligated to fund this draw.

Verizon's
termination of the right to convert their Class B shares into a controlling interest in Genuity resulted in a default under the Bank Facility. While the default
permitted the banks to accelerate our payment obligations under the Bank Facility, the banks did not immediately demand payment of the $1.9 billion outstanding under the facility, including a
$1.15 billion letter of credit to back a private placement bond transaction and $723 million in additional advances. On July 29, 2002, the Company entered into a standstill
agreement with the lenders under the Bank Facility that had funded the $723 million whereby they agreed not to accelerate the payment of the amounts outstanding thereunder until
August 12, 2002 and to continue negotiations with the Company. In consideration for this two-week standstill agreement, the Company repaid $100 million of the
$723 million advance to the members of the bank group, which had funded the $723 million. The Company has received five additional standstill agreements: a 30-day extension
on August 13, 2002 and on September 12, 2002, a 15-day extension on October 11, 2002, a 17-day extension on October 26, 2002 and a
10-day extension on November 12, 2002. In connection with these additional extensions, Genuity has paid in aggregate an additional $108.3 million to the members of the bank
group, which funded the $723 million.

On
August 13, 2002, the Company entered into a standstill agreement with Verizon whereby Verizon agreed not to accelerate the payment of the amounts outstanding under the Verizon
Facility. In consideration for this 30-day standstill agreement Verizon agreed to continue negotiations with Genuity. The Company has negotiated four additional standstill agreements with
Verizon: a 30-day extension on
September 12, 2002, a 15-day extension on October 11, 2002, a 17-day extension on October 26, 2002 and a 10-day extension on
November 12, 2002. In connection with these additional extensions, the parties have agreed to continue negotiations and to extend the term of borrowing and the interest period under the Verizon
Facility until the end of the respective standstill periods.

Genuity
is continuing discussions with the banks and Verizon with respect to existing commercial and other relationships. We have retained Lazard Frères & Co. as
the Company's financial advisors to assist us in developing a restructuring plan to meet these significant challenges. We are undertaking discussions with Verizon and the banks to restructure our
obligations under the Verizon Facility and Bank Facility, but we may not be able to obtain satisfactory waivers or amendments to either of the facilities. In the event either Verizon or the banks
accelerate the payment obligations under their respective facility, we would not have sufficient liquidity to satisfy the claims and would need to seek the protection afforded debtors under the
bankruptcy laws.

We
are in the process of evaluating our strategy in light of the debt defaults, and our business plan, under various possible scenarios. We continue to incur significant losses and
negative cash flow from operations and would expect to continue to do so in the future. While we have recently reduced expenses to conserve cash, our business plan prior to the action of Verizon would
have required funding of these additional losses and of capital expenditures. Absent satisfactory restructuring of the Company's existing credit facilities, currently in default, the Company's ability
to find other financing to cover repayment of the existing credit facilities and funding of operational needs is not likely in view of the Company's situation and the difficulties in the
telecommunications market in general. Further, in the current telecommunications market, establishment of a valuation of assets for a company is very difficult, and in general it is to be expected
that there could be periodic impairment charges incurred in the future with respect to the Company's assets.

41

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NASDAQ Listing

On September 12, 2002, the Company announced that a notification from NASDAQ had been received indicating that the Company's Class A common stock
had not satisfied the minimum listing requirement of $3.00 per share for the previous 30 consecutive trading days and not maintained a minimum market value of publicly held shares of
$15 million. The Company has until December 5, 2002 to regain compliance and maintain its listing on the NASDAQ. A delisting from the Nasdaq National Market's quotation system will
reduce the liquidity of an investment in the Company's Class A common shares.

RESULTS OF OPERATIONS

2002 Compared to 2001

Revenues (in thousands)

Three Months Ended September 30,2001

2002Amount

%

Amount

%Access

$
232,019

77
%
$
168,403

75
%Hosting and Value-Added Services


31,063

10


23,896

11Transport


25,600

8


14,949

7International


13,580

5


15,515

7Total

$
302,262

100
%
$
222,763

100
%


Nine Months Ended September 30,2001

2002Amount

%

Amount

%Access

$
674,819

75
%
$
603,868

78
%Hosting and Value-Added Services


107,193

12


74,684

10Transport


77,861

9


51,269

6International


44,650

4


46,527

6Total

$
904,523

100
%
$
776,348

100
%


Total
revenues for the quarter ended September 30, 2002 decreased $79.5 million, or 26%, and for the first nine months of 2002 decreased $128.2 million, or 14%, over
the same periods in 2001. Total revenues for the quarter ended September 30, 2002 from Verizon decreased $16.7 million, or 28%, and for the first nine months of 2002 increased
$60.1 million, or 39%, over the same periods in 2001 and represented 28% of Genuity's total revenue in 2002. Verizon purchases Genuity's services both in connection with the Purchase, Resale
and Marketing agreement and outside of this agreement. Under the Purchase, Resale and Marketing agreement, Verizon agreed to purchase at least $500 million of Genuity's services over a
five-year period. Effective April 30, 2002, the Company amended this agreement. Verizon made a $100 million prepayment in the second quarter of 2002 pursuant to this
amendment. Prepayments are reflected in deferred revenue and advanced payments in the accompanying condensed consolidated balance sheets. As a result of this prepayment, the total purchase commitment
was reduced from $500 million to $491 million based on an estimate of the time
value of money associated with the prepayment and the minimum purchase commitment of $200 million by June 22, 2003 was eliminated. The Company will recognize revenue associated with this
prepayment as the underlying services are provided to Verizon. As of September 30, 2002, $40.0 million of the $100 million prepayment has been recognized as revenue. Since
inception, Verizon has

42

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purchased approximately $168.7 million of services under this agreement through September 30, 2002, including $40.0 million of the $100 million prepayment.

Access.Access revenues, which include dial-up, dedicated, broadband and voice-over-IP
decreased $63.6 million, or 27%, for the quarter ended September 30, 2002, and for the first nine months of 2002 decreased $71.0 million, or 11%, over the same periods in 2001.

Dial-up
revenues for the quarter ended September 30, 2002, decreased by $30.5 million, or 24%, and for the first nine months of 2002 decreased
$93.3 million, or 25%, over the same periods in 2001 primarily due to the renegotiated AOL (America Online, "AOL") contract, which became effective on January 8, 2002, and the Company's
exit from the wholesale dial-up access business in the fourth quarter of 2001. Approximately $22.6 million, or 74%, of the overall reduction in dial-up revenues for the
quarter ended September 30, 2002 is due to lower revenues from AOL, which decreased 23% over the same period in 2001. Effective January 8, 2002, we amended our existing agreement with
America Online. The America Online agreement includes provisions for minimum purchase requirements at fixed monthly fees, service level requirements and termination provisions. The fixed monthly fees
for dial-up access services decrease at various intervals over the contract term.

Dedicated
access revenues for the quarter ended September 30, 2002 decreased by $14.4 million, or 28%, and for the first nine months of 2002 decreased $35.9 million,
or 23%, over the same periods in 2001 due to continued churn, non-service related customer credits and continued price pressures.

Broadband
revenues for the quarter ended September 30, 2002 decreased $18.9 million, or 38%, over the same period in 2001 and for the first nine months of 2002 increased
$67.6 million, or 53% over the same period in 2001. On May 1, 2002, Genuity and Verizon finalized a "Preferred Provider" agreement where Genuity will be Verizon's preferred provider of
IP backbone services and Verizon will be one of Genuity's preferred provider of associated access services within Verizon's franchise territories. As part of this agreement, as it relates to the
provision of digital subscriber line (DSL) service, Genuity transitioned its current responsibilities for end-user local loop management to Verizon and Genuity continued to deliver IP
backbone services to Verizon. Under this agreement, Verizon is responsible for coordinating all aspects associated with installing new DSL customers, including the acquisition of the local loop and
CPE, a function previously performed by Genuity. As a result of this agreement, starting with the quarter ended September 30, 2002, Genuity no longer recognizes revenue for the provisioning of
digital subscriber line (DSL) local loops and CPE, which accounted for approximately $108.6 million for the first six months of 2002. The lower revenues are essentially offset by a similar
reduction in expenses associated the elimination of the local loop, CPE and other charges related with provisioning new subscribers. Normalizing for the absence of these revenues, broadband revenues
for the quarter ended September 30, 2002 increased $11.4 million, or 58%, and for the first nine months of 2002 increased $27.5 million, or 48%, over the same periods in 2001,
reflecting the increase in total
broadband subscribers from approximately 517,000 subscribers as of September 30, 2001 to approximately 916,000 subscribers as of September 30, 2002 (including AOL).

Voice-over-IP
revenues for the quarter ended September 30, 2002 increased 25% over the same period in 2001 to $2.7 million. Revenues for the first
nine months of 2002 decreased $6.2 million, or 47%, due to the loss of a large wholesale customer in the latter half of last year.

Hosting and Value-Added Services.Hosting and Value-Added Services revenues for the quarter ended September 30, 2002
decreased $7.2 million, or 23%, and for the first nine months of 2002 decreased $32.5 million, or 30%, over the same periods in 2001. These decreases were due primarily to a loss of
customers and a slower pace of new order activity in hosting services. The number of hosting customers declined from 280 as of September 30, 2001 to 156 as of September 30, 2002.

Transport.Transport revenues for the quarter ended September 30, 2002 decreased $10.7 million, or 42%, and for
the first nine months of 2002 decreased $26.6 million, or 34%, over the same periods

43

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in 2001 primarily due to higher revenue churn, lower pricing and the deferral of revenues from delinquent customers.

International.International revenues for the quarter ended September 30, 2002 increased $1.9 million, or 14%,
and for the first nine months of 2002 increased $1.9 million, or 4%, over the same periods in 2001.

Cost of Sales

Cost of sales for the quarter ended September 30, 2002 decreased $113.4 million, or 36%, and for the first nine months of 2002 decreased
$201.5 million, or 20%, over the same periods in 2001. These results reflect the impact of the new contractual relationship with Verizon under which Genuity is no longer recognizing revenue or
expense for the provisioning of digital subscriber line (DSL) local loops and CPE. Normalizing for the effect of this new contractual relationship, cost of sales for the quarter ended
September 30, 2002 decreased $83.1 million, or 29%, and for the first nine months of 2002 decreased $241.5 million, or 26%. Cost of sales, as a percentage of total revenues, was
112% and 104% for the nine months ended September 30, 2001 and 2002, respectively. This decrease reflects the Company's efforts to reduce circuit and other costs. Telecommunications circuit
costs are the largest component of cost of sales and as a percentage of total cost of sales, were approximately 69% and 73% for the three months ended September 30, 2001 and 2002, respectively,
and 69% and 71% for the first nine months of 2001 and 2002, respectively. Telecommunication circuit costs for the three months ended September 30, 2002 decreased $68.6 million, or 31%,
over the same period in 2001. Approximately $18.8 million of the decrease in circuit costs as due to the new contractual relationship with Verizon. Circuit costs were further reduced as a
result of the Company's decision to exit the
wholesale dial-up access business in the fourth quarter of 2001, except for providing dial-up access to our two largest customers, America Online and Verizon. Also contributing
to lower circuit costs were the network grooming efforts and the continued deployment of managed modems.

The
Company continues to improve the efficiency of the network by increasing the utilization of our current network, disconnecting unused circuits on a timely basis and deploying managed
modems. The Company has entered into long-term agreements with several managed modem vendors. These agreements are capitalized and financed through lease obligations. These assets are
depreciated over the terms of the contract as the modems are deployed and the leased circuits are terminated. As of September 30, 2002, approximately 96% of the planned managed modems have been
deployed. The reduction in circuit costs was partially offset by higher termination charges, depreciation, operation and maintenance and interest costs associated with the managed modem agreements as
the Company migrates to this new network model. For the nine months ended September 30, 2002, depreciation and interest expense associated with these modems was $100 million compared to
$17.6 million in the same period in 2001. The Company expects to complete the deployment of these modems during the fourth quarter of 2002, which will result in lower circuit expense as
circuits are terminated, but will also result in future increases in depreciation and interest expense.

Labor
and related costs, including travel and contractor expenses to support our network infrastructure and customer service, were approximately 18% and 16% of cost of sales for the
quarter ended September 30, 2001 and 2002, respectively. These costs decreased by approximately $25.2 million, or 44%, over the same period in 2001. The decrease was due primarily to a
lower level of full-time equivalent employees during the first nine months of 2002. Other costs, such as facilities, maintenance, property taxes and customer premise equipment (CPE) costs
were approximately 13% and 11% of cost of sales for the quarter ended September 30, 2001 and 2002, respectively. These costs decreased $19.6 million, or 46%, over 2001 due primarily to
lower CPE costs associated with the new agreement with Verizon for the provisioning of DSL customers in 2002.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses for the quarter ended September 30, 2002 decreased $52.3 million, or 39%, and for the first nine months
of 2002 decreased $169.4 million, or 38%, over the same periods in 2001. These decreases are primarily due to the benefit of the headcount reduction initiatives completed in the second half of
2001 and the first nine months of 2002. Contractor, labor and related expenses decreased $27.1 million for the quarter ended September 30, 2002 and $120.2 million for the first
nine months of 2002, over the same periods in 2001. Also contributing to the overall decrease are lower advertising, rental equipment and internal communication costs and a lower provision for
uncollectibles accounts receivable. Partially offsetting these savings were higher advisory fees in connection with the Company's debt restructuring efforts.

Depreciation and Amortization

Depreciation and amortization expenses for the quarter ended September 30, 2002 decreased $84.1 million, or 65%, and for the first nine months of
2002 decreased $101.8 million, or 31%, over the same periods in 2001. The lower depreciation expense was primarily due to the impairment charges that were recorded in the fourth quarter of 2001
and the third quarter of 2002, and the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002. Pursuant to the adoption of SFAS No. 142, goodwill and
acquired intangibles with indefinite lives are no longer amortized. Partially offsetting the lower depreciation expense was an increase in managed modem depreciation of approximately
$25.3 million for the quarter ended September 30, 2002 and $68.7 million for the first nine months of 2002 over the same periods in 2001.

Special Items

Special items include costs associated with the impairment of certain assets, net gains (losses) on fixed asset sales, costs associated with the Company's
workforce reduction initiatives and other costs related to facilities that will be exited. The $986.2 million and $1.1 billion charge for the three and nine months ended
September 30, 2002, respectively, include the following (in millions):

For the three months ended

For the nine months endedSeptember 30,
2002Reduction in Force

$
0.6

$
11.4Facilities Exit Costs


4.7


32.3Contract Termination Costs


(4.8
)

(4.8
)Asset Impairment


985.6


1,091.2Loss on Fixed Asset Sales


0.1


4.3Total Special Items

$
986.2

$
1,134.4


During
the first quarter of 2002, the Company completed its reduction in workforce as part of the Company's cost saving initiatives that were previously announced during the fourth
quarter of 2001. This included an additional reduction in the U.S.-based full-time equivalent employees by 231. The 231 full-time equivalent employees included 189
full-time employees and 42 contractor positions. Severance and associated termination benefits for the 189 employees included in the restructuring charge were approximately
$2.2 million.

On
May 2, 2002, Genuity announced an additional headcount reduction. Genuity reduced its headcount by an additional 664 full-time equivalent employees during the
second quarter. Severance and associated termination benefits included in the restructuring charge for the quarter ended June 30, 2002 were approximately $8.6 million. The Company
identified 17 additional facilities, which would be

45

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exited, which included POP facilities, sales sites and administrative buildings. We have vacated 9 of the facilities and anticipate that all but 2 of the remaining locations will be vacated by
the end of the first quarter of 2003. In the third quarter of 2002, we reduced the restructuring charge for the cost of the 2 facilities we are no longer committed to vacating. Facility and
related costs of approximately $27.6 million in the restructuring charge include lease termination costs and future lease commitments, net of estimated recoveries from subleasing. In addition,
the leasehold improvements associated with the facilities being exited were evaluated for impairment. This evaluation indicated that the fair value of the leasehold improvements was $0 and as a
result, the Company recorded an impairment loss of approximately $47.6 million.

The
Company recognized a $58.0 million impairment loss associated with certain indefeasible rights of use for fiber optic cable to write the assets down to a fair value of $0 due
to the insolvency of the fiber optic cable providers and the Company's plan to discontinue use of the fiber.

On
July 24, 2002 Verizon converted all but one of its outstanding shares of Class B common stock of Genuity into shares of Class A common stock and terminated its
existing credit facility with the Company. Verizon's termination of the right to convert their Class B shares into a controlling interest in Genuity resulted in an event of default for amounts
outstanding under the Verizon Facility and the Bank Facility, thereby rendering amounts outstanding on these facilities due upon demand, and eliminating the Company's ability to draw any further
amounts on these facilities. As a result of this event, the Company began discussions to restructure its debt obligations, assessed its ability to raise additional financing, re-evaluated
its business plan under various possible scenarios, and began discussions with various parties regarding the potential sale of certain assets. Without the availability of funding under the Verizon
Facility and Bank Facility or alternative sources of adequate financing, the Company would not be able to fund its expected future operating losses and capital requirements. This indicated that the
Company may not be able to recover the carrying value of its long-lived assets. Furthermore, the continued weakness in demand for telecommunication services, the perceived uncertainty by
our current customers about the Company's viabililty absent the Verizon support, coupled with the filing for bankruptcy by a large number of other large telecommunications service providers in
mid-2002, as well as the results of discussions with potential acquirers of the Company's
assets indicated that a significant decline in the market value of the Company's long-lived assets existed. These indicators prompted the Company to perform an assessment of the carrying
value of its long-lived assets pursuant to SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." As a result of this assessment, the Company
recorded an impairment charge of $985.6 million during the third quarter of 2002 based on the amount by which the carrying amount exceeded the fair value.

In
the third quarter of 2002, the Company recorded an adjustment to increase the estimated severance costs associated with the second quarter reduction in force by $0.6 million,
an adjustment to increase the estimated facility exit costs by $6.7 million, an adjustment to reduce the estimate facility exit costs by $2.0 million related to the cost of two
facilities which will no longer be vacated and an adjustment to reduce the contract termination costs recorded in the fourth quarter of 2001 by $4.8 million.

The
Company recorded a loss on the sale of miscellaneous assets of approximately $4.3 million for the nine months ended September 30, 2002.

Interest Expense, net

Interest expense, net, for the quarter ended September 30, 2002 was $45.2 million compared $18.5 million for the quarter ended
September 30, 2001. The increase in net interest expense is primarily due to the increase in the Company's debt to $2.9 billion as of September 30, 2002 compared to
$2.3 billion borrowed in the second quarter 2001 and an increase in the interest rate associated with the borrowings.

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Income Taxes

Genuity generated pre-tax book losses of $299.2 million and $1.1 billion for the quarters ended September 30, 2001 and 2002,
respectively. The tax provision represents the amounts owed for state and foreign taxes. A valuation allowance has been established to fully reserve the tax benefits associated with the net operating
losses as their future realizability is uncertain.

Discontinued Operations

The loss from discontinued operations totaled $79.0 million and $147.8 million for the quarter ended and nine months ended September 30,
2002, respectively.

On
August 10, 2002, the Company's Board of Directors voted to no longer provide funding to Integra S.A., a company in which we held a 93% common stock interest and which was
accounted for on a consolidated basis within our international segment. On September 3, 2002, Integra filed for bankruptcy with the Commercial Court of Nanterre in France. We deconsolidated our
investment in Integra as of August 31, 2002 upon the loss of control resulting from these events. On October 1, 2002, the court approved the liquidation of Integra. Based on the loss of
control of Integra and the bankruptcy proceeding, the Company viewed its investment in Integra as abandoned and therefore, the financial position and results of operations of Integra have been
reflected on a discontinued operations basis in the accompanying condensed consolidated financial statements for all periods presented.

Net Loss

Net losses increased to $1.2 billion for the quarter ended September 30, 2002 compared to $300.4 million for the quarter ended
September 30, 2001 and increased to $1.9 billion for the first nine months of 2002 compared to $946.3 million for the first nine months of 2001.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States for interim financial information, the instructions to Form 10-Q and Article 10 of
Regulation S-X. The preparation of our financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. We base our accounting estimates on historical experience and other factors that are believed to be reasonable under the circumstances. However,
actual results may vary from these estimates under different assumptions or conditions. The following is a summary of our critical accounting policies and estimates:



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LIQUIDITY AND CAPITAL RESOURCES

Significant Events

On July 24, 2002 Verizon converted all but one of its outstanding shares of Class B common stock of Genuity into shares of Class A common
stock and terminated its existing credit facility with the Company. After giving effect to this conversion, Verizon holds approximately a 10% ownership interest in Genuity, but no longer has the right
to convert its shares to approximately an 80% controlling interest in the Company. As a result of the termination by Verizon of the credit facility, Genuity cannot borrow the remaining amounts
available under that facility and the $1.15 billion currently outstanding under the Verizon Facility is callable by Verizon at any time. To date, Verizon has not demanded payment of the
outstanding amounts.

On
July 22, 2002, the Company provided notice to draw the remaining $850 million available under the existing $2 billion revolving line of credit facility with a
consortium of nine banks and thereafter received $723 million of that request. Deutsche Bank was the only member of the consortium of banks that has failed to fulfill its obligation under the
Bank Facility and we have undertaken legal action to require them to satisfy their obligation. Deutsche Bank has filed an answer to this legal action, asserting various defenses and alleging various
counterclaims, which, in substance, assert that Deutsche Bank was not obligated to fund this draw.

Verizon's
termination of the right to convert their Class B shares into a controlling interest in Genuity resulted in a default under the Bank Facility. While the default
permitted the banks to accelerate our payment obligations under the Bank Facility, the banks did not immediately demand

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payment of the $1.9 billion outstanding under the Bank Facility, including a $1.15 billion letter of credit to back a private placement bond transaction and $723 million in
additional advances. On July 29, 2002, the Company entered into a standstill agreement with the lenders of the Bank Facility that had funded the $723 million whereby they agreed not to
accelerate the payment of the amounts outstanding thereunder until August 12, 2002 and to continue negotiations with the Company. In consideration for this two-week standstill
agreement, the Company repaid $100 million of the $723 million advance to the members of the bank group, which had funded the $723 million. The Company has received five
additional standstill agreements: a 30-day extension on August 13, 2002 and on September 12, 2002, a 15-day extension on October 11, 2002, a
17-day extension on October 26, 2002 and a 10-day extension on November 12, 2002. In connection with these additional extensions, Genuity has paid in aggregate an
additional $108.3 million to the members of the bank group, which funded the $723 million.

On
August 13, 2002, the Company entered into a standstill agreement with Verizon whereby Verizon agreed not to accelerate the payment of the amounts outstanding under the Verizon
Facility. In consideration for this 30-day standstill agreement Verizon agreed to continue negotiations with Genuity. The Company has negotiated four additional standstill agreements with
Verizon: a 30-day extension on September 12, 2002, a 15-day extension on October 11, 2002, a 17-day extension on October 26, 2002 and a
10-day extension on November 12, 2002. In connection with these additional extensions, the parties have agreed to continue negotiations and to extend the term of borrowing and the
interest period under the Verizon Facility until the end of the respective standstill periods.

Genuity
is continuing discussions with the banks and Verizon with respect to existing commercial and other relationships. We have retained Lazard Frères & Co. as
the Company's financial advisors to assist us in developing a restructuring plan to meet these significant challenges. We are undertaking discussions with Verizon and the banks to restructure our
obligations under the Verizon Facility and Bank Facility, but we may not be able to obtain satisfactory waivers or amendments to either of the facilities. In the event either Verizon or the banks
accelerate the payment obligations under their respective facility, we would not have sufficient liquidity to satisfy the claims and would need to seek the protection afforded debtors under the
bankruptcy laws.

We
are in the process of evaluating our strategy in light of the debt defaults, and our business plan, under various possible scenarios. We continue to incur significant losses and
negative cash flow from operations and would expect to continue to do so in the future. While we have recently reduced expenses to conserve cash, our business plan prior to the action of Verizon would
have required funding of these additional losses and of capital expenditures. Absent satisfactory restructuring of the Company's existing credit facilities, currently in default, the Company's ability
to find other financing to cover repayment of the existing credit facilities and funding of operational needs is not likely in view of the Company's situation and the difficulties in the
telecommunications market in general. Further, in the current telecommunications market, establishment of a valuation of assets for a company is very difficult, and in general it is to be expected
that there could be periodic impairment charges incurred in the future with respect to the Company's assets.

On
September 12, 2002, the Company received a notification from NASDAQ that the Company's Class A common stock had not satisfied the minimum listing requirement of $3.00
per share for the previous 30 consecutive trading days and not maintained a minimum market value of publicly held shares of $15 million. The Company has until December 5, 2002 to regain
compliance and maintain its listing on the NASDAQ. A delisting from the Nasdaq National Market's quotation system will reduce the liquidity of an investment in the Company's Class A common
shares.

2002 Compared to 2001

We have used cash in our operating and investing activities during the first nine months of 2001 and 2002. We have funded these cash requirements principally
through the proceeds from borrowings.

49

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Net
cash used in operating activities was $704.9 million and $293.9 million for the first nine months of 2001 and 2002, respectively. Net cash used in operating activities
for these periods was primarily the result of operating losses.

Net
cash used in investing activities was $1.2 billion and $111.9 million for the first nine months of 2001 and 2002, respectively. Net cash used in investing activities in
each of these periods was primarily the result of capital expenditures for the construction of network infrastructure, data centers and facilities.

Net
cash provided by financing activities was $2.3 billion and $441.3 million for the first nine months of 2001 and 2002, respectively. Net cash provided by financing
activities was primarily due to proceeds from borrowings.

Our
unamortized debt issuance costs were $11.8 million and $9.4 million as of December 31, 2001 and September 30, 2002, respectively. These costs are included
in other assets in the accompanying condensed consolidated balance sheets. The costs are amortized to interest expense based on the effective interest method over the terms of the corresponding
borrowings.

As
of September 30, 2002, our indebtedness included $7.5 million of 6% convertible subordinated debentures. These debentures are due in 2012 and may be converted at any
time by the bondholders into cash at an exchange ratio of $966.67 for each $1,000 of principal. The debentures are unsecured obligations and are subordinated in right of payment to Genuity's senior
indebtedness, if any. Given this subordination, no payments have been made on the debentures since July 24, 2002 when the Company went into default on its senior borrowings.

As
of September 30, 2002, our indebtedness also included $428.8 million in capital leases. The capital leases have original terms of 3 to 10 years from the date of
purchase. The principal and interest are payable either monthly or quarterly in advance, with the exception of managed modem agreements for which payments are made based on the achievement of
production milestones.

Summary of Contractual Obligations and Commercial Commitments(in thousands):

|                                                           |  | Payments due by year
|---------------------------------------------------------- |  | --------------------
|
|Contractual Obligations:                                   |  |                     
|Short-term debt, including $2.8 billion of debt in default |  | $                   
|Capital Lease Obligations                                  |  |                     
|Operating Leases                                           |  |                     
|Lease Costs Accrued in Restructuring                       |  |                     
|Other Commercial Commitments                               |  |                     
|                                                           |  |                     
|Total Contractual Cash Obligations                         |  | $                   
|                                                           |  |                     

INFLATION AND CHANGING PRICES

Cost increases from suppliers have not had a material adverse impact on the Company's business or operating results during the periods presented, nor does the
Company believe that supplier cost increases will have a material impact on future business or operating results. Price competition and price decreases in our service offerings have been and will
continue to be significant, given the general excess capacity for fiber network and data center space in our market sector and have negatively affected the Company's profitability.

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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal activities and rescinds Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This Statement requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost as defined in EITF Issue No. 94-3
was recognized at the date of an entity's commitment to an exit plan. This Statement also establishes that fair value is the objective for initial measurement of the liability. The provisions of SFAS
No. 146 are effective for exit and disposal activities that are initiated after December 31, 2002, with early application encouraged.

In
April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13 and Technical Corrections".
This Statement rescinds FASB Statement No. 4 "Reporting Gains and Losses from Extinguishment of Debt" and an amendment of that Statement, SFAS No. 64 "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements" by restricting the reporting of extinguishments of debt as extraordinary items in the income statement to limited circumstances. This Statement amends
SFAS No. 13 "Accounting for Leases" to require
sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The provisions of this Statement related
to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002 with early application encouraged. The provisions of this Statement related to SFAS
No. 13 shall be effective for transactions occurring after May 15, 2002, with early application encouraged. All other provisions of this Statement shall be effective for financial
statements issued on or after May 15, 2002, with early application encouraged. The adoption of this statement is not expected to have a material effect on the Company's results of operations or
financial position.

In
August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Under SFAS No 143, the fair value of a liability for an asset retirement
obligation is required to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Additionally, the associated asset retirement costs are required to be
capitalized as part of the carrying amount of the long-lived asset. This Statement is effective for all fiscal years beginning after June 15, 2002. The adoption of this statement is
not expected to have a material effect on the Company's results of operations or financial position.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Genuity's interest rate risk exposure relates primarily to its short-term investments and debt. Currently, short-term investments are
classified as cash and cash equivalents and consist primarily of commercial paper and money market instruments. Our investment income is subject to interest rate risk resulting from potential future
decreases in interest rates. To mitigate this risk, we ensure that our short-term investments are comprised of high quality, highly liquid instruments.

As
of September 30, 2002, Genuity's debt included $2.8 billion of floating-rate debt, which was exposed to changes in interest rates. This exposure was linked
to both changes in LIBOR and the prime rate. An increase of one percentage point in LIBOR and the prime rate would increase annual pre-tax interest expense by approximately
$23 million and $5 million, respectively.

To
date, the foreign currency risk has not been material to Genuity's results of operations or financial position.

51

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ITEM 4.    CONTROLS AND PROCEDURES

The Company has established and maintains disclosure controls and procedures that are designed to ensure that material information relating to the Company and its
subsidiaries required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Within the 90 days prior to the date of this quarterly report, the Company carried
out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures. Based on that evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were effective as of the date of such evaluation.

The
Chief Executive Officer and Chief Financial Officer have also concluded that there were no significant changes in the Company's internal controls or in other factors that could
significantly affect the internal controls subsequent to the date that the Company completed its evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.

52

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PART II.    OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

On July 24, 2002, the Company filed an action against Deutsche Bank AG in the United States District Court for the District of Massachusetts (C.A.
No. 02 cv 11502 GAO) seeking damages for the failure of Deutsche Bank to fund its share (approximately $127 million) of a draw by Genuity for an extension of credit under a credit
agreement extended by a group of financial institutions, including the defendant. As a result of repayments since made to the financial institutions under various standstill agreements, the amount
claimed as owed by Deutsche Bank could be reduced to their pro rata portion of the funding. Deutsche Bank has filed an answer to this legal action, asserting various defenses and alleging various
counterclaims, which, in substance, assert that Deutsche Bank was not obligated to fund this draw.

On
October 2, 2002 Genuity Solutions Inc. filed an action in the United States District Court for the Southern District of New York against Nortel Networks Inc. and
Nortel Networks Corp. Genuity's complaint alleges breach of contract arising from Nortel's failure to make a payment of approximately $6 million that was due on or before September 30,
2002. Genuity's complaint also seeks a declaratory judgment that Nortel is obligated to pay to Genuity $8 million due in the fourth quarter of 2002. Finally, Genuity's complaint alleges that
Nortel has engaged in unfair and deceptive acts and practices in violation of Massachusetts General Law Chapter 93A.

ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS

Changes in Securities

On July 24, 2002, Verizon converted all but one of its outstanding shares of Class B common stock of Genuity into shares of Class A common
stock. After giving effect to this conversion, Verizon holds approximately a 10 percent ownership interest in Genuity, but no longer has the right to convert its shares to approximately an 80%
controlling interest in the Company. Michael Masin, a former vice chairman of Verizon Communications, resigned from the Genuity Board of Directors. Verizon, as a Class B stockholder, retained
its right to a seat on the Company's board of directors and may appoint a new director in the future.

Use of Proceeds

Not applicable.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

On July 24, 2002 Verizon converted all but one of its outstanding shares of Class B common stock of Genuity into shares of Class A common
stock and terminated its existing credit facility with the Company. After giving effect to this conversion, Verizon holds approximately a 10% ownership interest in Genuity, but no longer has the right
to convert its shares to approximately an 80% controlling interest in the Company. As a result of the termination by Verizon of the credit facility, Genuity cannot borrow the remaining amounts
available under that facility and the $1.15 billion currently outstanding under the Verizon Facility is callable by Verizon at any time. To date, Verizon has not demanded payment of the
outstanding amounts.

Aside
from the Verizon Facility, the commercial arrangements between Verizon and Genuity, including the Purchase, Resale and Marketing Agreement, are currently not affected by Verizon's
termination of the right to convert its Class B shares into a controlling interest in Genuity, although Verizon's decision will affect the long-term commercial relationship between the
companies. The Company also announced on July 29, 2002 that Michael Masin, a former vice chairman of Verizon Communications, resigned from Genuity's board of directors. Verizon, as a
Class B stockholder,

53

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retained its right to a seat on the Genuity board of directors and may appoint a new director in the future. This right exists as long as any share of the Class B common stock is outstanding.
As the holder of Class B common stock, Verizon maintains certain consent rights related to, among other things, any dissolution or liquidation of the Company, the right to consent to any
significant acquisitions or dispositions, major business combinations, or incurring indebtedness or issuing additional equity securities in excess of specified limits. In accordance with our
certificate of incorporation, Verizon's investor safeguards will remain in effect until it converts all of its Class B shares or no longer has the possibility of converting into more than a 10%
ownership interest.

On
July 22, 2002, the Company provided notice to draw the remaining $850 million available under the existing $2.0 billion revolving line of credit facility with a
consortium of nine banks and thereafter received $723 million of that request. Deutsche Bank is the only member of the consortium of banks that has failed to fulfill its obligation under the
credit facility and the Company has undertaken legal action to require them to satisfy this obligation. Deutsche Bank has filed an answer to this legal action, asserting various defenses and alleging
various counterclaims, which, in substance, assert that Deutsche Bank was not obligated to fund this draw.

Verizon's
termination of the right to convert their Class B shares into a controlling interest in Genuity resulted in a default under the Bank Facility. While the default
permitted the banks to accelerate our payment obligations under the facility, the banks did not immediately demand payment of the $1.9 billion outstanding under the Bank Facility, including a
$1.15 billion letter of credit to back a private placement bond transaction and $723 million in additional advances. On July 29, 2002, the Company entered into a standstill
agreement with the lenders of the Bank Facility who had funded the $723 million whereby they agreed not to accelerate the payment of the amounts outstanding thereunder until August 12,
2002 and to continue negotiations with the Company. In consideration for this two-week standstill agreement, the Company repaid $100 million of the $723 million advance to
the members of the bank group, which had funded the $723 million. The Company has received five additional standstill agreements: a 30-day extension on August 13, 2002 and on
September 12, 2002, a 15-day extension on October 11, 2002, a 17-day extension on October 26, 2002 and a 10-day extension on
November 12, 2002. In connection with these additional extensions, Genuity has paid in aggregate an additional $108.3 million to the members of the bank group, which funded the
$723 million.

On
August 13, 2002, the Company entered into a standstill agreement with Verizon whereby Verizon agreed not to accelerate the payment of the amounts outstanding under the Verizon
Facility. In consideration for this 30-day standstill agreement Verizon agreed to continue negotiations with Genuity. The Company has negotiated four additional standstill agreements with
Verizon: a 30-day extension on September 12, 2002, a 15-day extension on October 11, 2002, a 17-day extension on October 26, 2002 and a
10-day extension on November 12, 2002. In connection with these additional extensions, the parties have agreed to continue negotiations and to extend the term of borrowing and the
interest period under the Verizon Facility until the end of the respective standstill periods.

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K



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Genuity
filed a current report on Form 8-K on July 25, 2002, reporting under Item 5, that the Company provided notice to the consortium of banks to draw the
remaining $850 million under the $2 billion line of credit facility. Deutsche Bank was the only member of the consortium that failed to fulfill its obligation and Genuity has sought
legal action against Deutsche Bank. The Company also announced that Verizon Communications Inc. provided notice to Genuity requesting conversion of all but one of its Class B shares of
common stock in Genuity into Class A common stock and the termination of the credit facility.

On
July 30, 2002, the Company filed a current report on Form 8-K, reporting under Item 5, that on July 29, 2002 Genuity had entered into a
two-week standstill agreement with the consortium of banks for the line of credit. As part of the agreement, Genuity made a $100 million payment to the banks that funded the
$723 million draw. The Company also announced that Lazard Frères & Co. have been retained as financial advisors and that Michael Masin, a former vice chairman of Verizon
Communications, resigned from Genuity's Board of Directors.

The
Company filed a current report on Form 8-K on August 7, 2002, reporting under Item 5, that a press release was issued stating that the Chairman and CEO and
the CFO have signed sworn statements and filed them with the U.S. Securities and Exchange Commission attesting to the accuracy of the Company's recent SEC filings.

On
August 14, 2002, the Company filed a current report on Form 8-K, reporting under Item 5, that on August 13, 2002, Genuity issued a press release
announcing an additional standstill with the consortium of banks and Verizon.

Genuity
filed a current report on Form 8-K on September 13, 2002, reporting under Item 5, an additional 30-day standstill, which was announced
September 12, 2002. The Company also announced that it had been notified by NASDAQ, that, for the previous 30 consecutive trading days, the Company's Class A common stock had not
satisfied the minimum listing requirement of $3.00 per share and not maintained a minimum market value of publicly held shares of $15 million. The Company has until December 5, 2002 to
regain compliance and maintain its listing on the NASDAQ.

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SIGNATURE

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

|                         |  | GENUITY INC.
|------------------------ |  | ------------
|                         |  |             
|Dated: November 14, 2002 |  |             

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CERTIFICATION

I, Paul R. Gudonis, certify that:

1.    I
have reviewed this quarterly report on Form 10-Q of Genuity Inc.;

2.    Based
on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.    Based
on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.    The
registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



5.    The
registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent function):



6.    The
registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.

|Dated: November 14, 2002 |  |                                                                                                 
|------------------------ |  | ------------------------------------------------------------------------------------------------
|                         |  | /s/PAUL R. GUDONISPaul R. Gudonis Chairman and Chief Executive Officer
(Duly Authorized Officer)

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CERTIFICATION

I, Daniel P. O'Brien, certify that:

1.    I
have reviewed this quarterly report on Form 10-Q of Genuity Inc.;

2.    Based
on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.    Based
on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.    The
registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



5.    The
registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent function):



6.    The
registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.

|Dated: November 14, 2002 |  |                                                                                                                     
|------------------------ |  | --------------------------------------------------------------------------------------------------------------------
|                         |  | /s/DANIEL P. O'BRIENDaniel P. O'Brien Executive Vice President and Chief Financial Officer
(Duly Authorized Officer)

58

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