<PAGE>

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

                               ----------------

                                   FORM 10-Q

[X]Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
   Act of 1934

                 For the quarterly period ended March 31, 2001

                                      OR

[_]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

                               ----------------

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

              Delaware                              74-2864824
   (State or other jurisdiction of               (I.R.S. Employer
   incorporation or organization)               Identification No.)

        225 Presidential Way,                          01801
             Woburn, MA                             (Zip Code)
   (Address of principal executive
              offices)

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

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

                               ----------------

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

  The Company had 173,913,000 shares of $0.01 par value Class A common stock
outstanding and 18,256,000 shares of $0.01 par value Class B common stock
outstanding at May 11, 2001.

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<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
 <C>     <S>                                                               <C>
                         PART I--FINANCIAL INFORMATION

 Item 1. Consolidated Financial Statements (Unaudited)

         Consolidated Statements of Operations for the Three Month
          Periods Ended March 31, 2000 and 2001.........................     3

         Consolidated Balance Sheets as of December 31, 2000 and March
          31, 2001......................................................     4

         Consolidated Statements of Cash Flows for the Three Month
          Periods Ended March 31, 2000 and 2001.........................     5

         Consolidated Statements of Comprehensive Loss for the Three
          Month Periods Ended March 31, 2000 and 2001...................     6

         Notes to Unaudited Consolidated Financial Statements...........     7

 Item 2. Management's Discussion and Analysis of Financial Condition and
          Results of Operations.........................................    20

 Item 3. Quantitative and Qualitative Disclosures About Market Risk.....    24

                          PART II--OTHER INFORMATION

 Item 1. Legal Proceedings..............................................    24

 Item 2. Changes in Securities and Use of Proceeds......................    24

 Item 3. Defaults upon Senior Securities................................    24

 Item 4. Submission of Matters to a Vote of Security Holders............    24

 Item 5. Other Information..............................................    24

 Item 6. Exhibits and Reports on Form 8-K...............................    25

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

                                       2
<PAGE>

                                  GENUITY INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)
                     (In Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
                                                         Three Months Ended
                                                              March 31,
                                                         --------------------
                                                           2000       2001
                                                         ---------  ---------
<S>                                                      <C>        <C>
Revenues................................................ $ 247,852  $ 299,467
Operating Expenses
  Cost of sales.........................................   283,928    345,253
  Selling, general and administrative...................   108,336    153,046
  Depreciation and amortization.........................    53,786     93,525
                                                         ---------  ---------
    Total operating expenses............................   446,050    591,824
                                                         ---------  ---------
Operating Loss..........................................  (198,198)  (292,357)
Other Income (Expense)
  Interest income (expense), net........................    (2,973)     1,215
  Other, net............................................    (8,067)      (182)
                                                         ---------  ---------
Loss Before Income Taxes................................  (209,238)  (291,324)
Income Taxes............................................       588      1,026
                                                         ---------  ---------
Net Loss................................................ $(209,826) $(292,350)
                                                         =========  =========
Basic and Diluted Loss Per Common Share................. $  (11.49) $   (1.52)
                                                         =========  =========
Basic and Diluted Weighted-Average Common Shares
 Outstanding............................................    18,256    192,169
                                                         =========  =========
</TABLE>


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


                                       3
<PAGE>

                                  GENUITY INC.

                          CONSOLIDATED BALANCE SHEETS
                                  (Unaudited)
                   (Dollars in Thousands, except Share Data)

<TABLE>
<CAPTION>
                                                       December 31, March 31,
                                                           2000        2001
                                                       ------------ ----------
<S>                                                    <C>          <C>
                        ASSETS
Current Assets:
  Cash and cash equivalents...........................  $  868,926  $  160,772
  Receivables, less allowances of $29,099 and $31,232,
   respectively.......................................     369,460     340,219
  Other current assets................................      51,600      59,364
                                                        ----------  ----------
    Total current assets..............................   1,289,986     560,355
Property, Plant and Equipment, Net....................   3,009,706   3,082,339
Goodwill and Other Intangibles, Net...................     526,449     527,275
Other Assets..........................................      73,184      67,711
                                                        ----------  ----------
    Total assets......................................  $4,899,325  $4,237,680
                                                        ==========  ==========
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Short-term obligations, including current
   maturities.........................................  $   35,514  $  235,376
  Accounts payable....................................     442,874      77,415
  Accrued compensation and related liabilities........      40,584      30,465
  Accrued circuits....................................     168,506     153,515
  Accrued liabilities.................................     369,200     197,877
  Deferred revenue....................................       9,907      12,277
                                                        ----------  ----------
    Total current liabilities.........................   1,066,585     706,925
Long-Term Obligations.................................      52,606      46,256
Other Liabilities.....................................      14,249      12,590
                                                        ----------  ----------
    Total liabilities.................................   1,133,440     765,771
                                                        ----------  ----------
Stockholders' Equity:
  Preferred stock-$0.01 par value; 50,000,000 shares
   authorized; no shares issued and outstanding.......         --          --
  Class A common stock--$0.01 par value; 1,600,000,000
   shares authorized; 173,913,000 shares issued and
   outstanding........................................       1,739       1,739
  Class B common stock--$0.01 par value; 21,000,000
   shares authorized; 18,256,000 shares issued and
   outstanding........................................         183         183
  Class C common stock--$0.01 par value; 800,000,000
   shares authorized; no shares issued and
   outstanding........................................         --          --
  Additional paid-in capital..........................   6,017,274   6,017,274
  Accumulated other comprehensive income..............       1,078        (548)
  Accumulated deficit.................................  (2,254,389) (2,546,739)
                                                        ----------  ----------
    Total stockholders' equity........................   3,765,885   3,471,909
                                                        ----------  ----------
    Total liabilities and stockholders' equity........  $4,899,325  $4,237,680
                                                        ==========  ==========
</TABLE>

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

                                       4
<PAGE>

                                  GENUITY INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                             (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                          Three Months Ended
                                                               March 31,
                                                          --------------------
                                                            2000       2001
                                                          ---------  ---------
<S>                                                       <C>        <C>
Cash Flows From Operating Activities:
 Net loss................................................ $(209,826) $(292,350)
 Adjustments to reconcile net loss to net cash used in
  operations:
  Depreciation and amortization..........................    53,786     93,525
  Provision for bad debt.................................     1,553      5,643
  Changes in current assets and current liabilities:
   Receivables...........................................    16,447     23,598
   Other current assets..................................   (17,834)    (7,764)
   Other current liabilities.............................    40,017    (77,702)
  Other, net.............................................    (5,374)     2,306
                                                          ---------  ---------
   Net cash used in operating activities.................  (121,231)  (252,744)
                                                          ---------  ---------
Cash Flows From Investing Activities:
 Capital expenditures....................................  (210,895)  (612,188)
 Capitalized software....................................    (1,408)   (36,734)
                                                          ---------  ---------
   Net cash used in investing activities.................  (212,303)  (648,922)
                                                          ---------  ---------
Cash Flows From Financing Activities:
 Repayment of debt.......................................      (136)      (226)
 Principal payments under capital lease obligations......    (6,719)    (6,262)
 Proceeds from short-term borrowings.....................       --     200,000
 Repayment of note payable--GTE..........................  (136,484)       --
 Contributions from GTE..................................   487,947        --
                                                          ---------  ---------
   Net cash provided by financing activities.............   344,608    193,512
                                                          ---------  ---------
   Net increase (decrease) in cash and cash equivalents..    11,074   (708,154)
Cash and cash equivalents, beginning of period...........     6,044    868,926
                                                          ---------  ---------
Cash and cash equivalents, end of period................. $  17,118  $ 160,772
                                                          =========  =========
Supplemental Cash Flow Disclosures:
Cash paid during the period for:
 Interest................................................ $   2,881  $   2,395
                                                          =========  =========
 State income taxes...................................... $     588  $     275
                                                          =========  =========
Noncash investing and financing activities:
 Property, plant and equipment recorded under accruals... $  56,471  $  48,943
                                                          =========  =========
 Intangibles recorded under accruals..................... $     --   $   1,179
                                                          =========  =========
</TABLE>

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

                                       5
<PAGE>

                                  GENUITY INC.

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                                  (Unaudited)
                             (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                          Three Months Ended
                                                               March 31,
                                                          --------------------
                                                            2000       2001
                                                          ---------  ---------
<S>                                                       <C>        <C>
Net Loss................................................. $(209,826) $(292,350)
Other Comprehensive Income (Loss), net of tax:
  Foreign currency translation adjustments...............       550     (1,626)
  Unrealized loss on securities..........................    (1,525)       --
                                                          ---------  ---------
                                                               (975)    (1,626)
                                                          ---------  ---------
Comprehensive Loss....................................... $(210,801) $(293,976)
                                                          =========  =========
</TABLE>



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


                                       6
<PAGE>

                                 GENUITY INC.

             NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

Organization

  Prior to its initial public offering, Genuity 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 510 shares of common stock issued
and outstanding to 18,256,000 shares of Class B common stock. These shares
have been reflected as if issued on December 31, 1999.

  Genuity completed its initial public offering of its Class A common stock on
June 30, 2000. Genuity sold 173,913,000 shares of Class A common stock, which
trade on the Nasdaq National Market under the symbol "GENU".

Basis of Presentation

  The unaudited consolidated financial statements of Genuity Inc. ("Genuity"
or the "Company"), a Delaware corporation, 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 consolidated financial
statements of Genuity presented herein, should be read in conjunction with the
audited consolidated financial statements of Genuity as of and for the year
ended December 31, 2000. In the opinion of management, the unaudited
consolidated financial statements presented herein reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation. Interim results are not necessarily indicative of results to be
expected for the entire year.

  Genuity prepares its consolidated financial statements in accordance with
generally accepted accounting principles, 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 Consolidated Financial Statements included in its
most recent 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. Billings made or payments received in advance of
providing services are deferred until the period these services are rendered.

  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.

 Access

  Internet access services include dial-up, dedicated, broadband access for
service providers and enterprise customers and Internet Protocol Communication
Services (IPCS), formerly referred to as voice-over-IP. Internet

                                       7
<PAGE>

                                 GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 capacity utilization. Revenues for IPCS services are earned and
recorded based on 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"), based on a fee per modem per
month basis. The contract with America Online extends through 2006.

 Hosting and Value-Added Services

  Web hosting services include managed hosting, collocation, content delivery
and high availability services. Web hosting customers typically sign one or
two-year contracts, although a three-year contract is available for certain
hosting services. Revenues are earned and recognized based on monthly fees for
server management, physical facilities and bandwidth utilization.

  Value-added services includes eBusiness services, such as managed security
services and virtual private networks for secure data transmission and
professional consulting. Revenues for security and virtual private network
services are earned and recorded based on fixed, monthly recurring fees.
Value-added eBusiness service contracts typically range from one to two years.

 Transport

  Transport services include services such as asynchronous transfer mode, or
ATM, private line services, and the sale of excess capacity. ATM transfer
service, a form of high-speed data transfer, is targeted primarily at 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. These revenues are recognized on a basis
consistent with domestic services.

Goodwill and Other Intangibles

  Goodwill and other intangible assets pertain to the acquisitions of BBN
Corporation and Genuity Incorporated, both acquired in 1997, and internal use
software. Goodwill is being amortized on a straight-line basis over the lesser
of 20 years or the period benefited. Other intangible assets include customer
bases, trademarks, developed technology and in-place work forces in connection
with the acquisitions, and internal use software. Customer bases and in-place
work forces are amortized in a manner consistent with historical attrition
patterns over 3 to 10 years. Trademarks, developed technology and internal use
software are amortized on a straight-line basis over 3 to 10 years.

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. Under
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," 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 has

                                       8
<PAGE>

                                 GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

been recorded in connection with impaired assets, the carrying amount of the
goodwill is first eliminated before any reduction to the carrying value of
tangible or identifiable intangible assets. Genuity's policy is to record
asset impairment losses as well as net gains or losses on sales of assets as a
component of other income (expense). Under Accounting Principles Board Opinion
("APB") No. 17, "Intangible Assets," the Company also annually evaluates the
future period over which the benefit of goodwill will be received, based on
future cash flows, and changes the amortization life accordingly. Impairment
losses of approximately $10.1 million, and $0.0 for the three months ended
March 31, 2000 and 2001, respectively, are included in other, net, in the
accompanying consolidated statements of operations.

Concentrations of Credit Risk and Significant Customers

  Genuity's accounts receivable are subject to some 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 advanced billings to some of its customers for services and the
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 one large customer, America Online.

  Revenues from America Online in relation to Genuity's total revenues were
significant. However, the credit risk associated with America Online is
mitigated by a history of timely collections. The average accounts receivable
balance related to amounts owed to Genuity by America Online represented 37%
and 19% of Genuity's ending accounts receivable balance during the three month
periods ended March 31, 2000 and 2001, respectively, while revenues from
America Online represented 46% and 32% of Genuity's total revenues for the
three month periods ended March 31, 2000 and 2001, respectively.

  Genuity has been a supplier of network access services in the United States
to America Online since 1995. Genuity entered into a new agreement with
America Online effective as of December 31, 1999, pursuant to which America
Online has agreed to purchase additional dial-up access services from Genuity
for a seven-year term through December 31, 2006. Under the new agreement,
America Online has also agreed to purchase managed digital subscriber line and
other broadband network access services from Genuity for a five-year term
through December 31, 2004. This agreement includes provisions for minimum
purchase requirements at fixed monthly fees, subject to market pricing
adjustments, service level requirements and termination provisions. In
addition to the contractual reduction in fixed monthly fees for dial-up access
services during 2000, an additional price reduction is scheduled in the third
quarter of 2002.

  Under a separate agreement with AOL Japan, Inc. ("AOL Japan"), Genuity has
agreed to provide dial-up network access services to America Online in Japan.
This agreement also includes minimum purchase requirements on the part of AOL
Japan, market pricing adjustments, service level requirements, and termination
provisions.

Earnings per Share

  Earnings per common share is calculated based on the provisions of SFAS No.
128, "Earnings 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.


                                       9
<PAGE>

                                 GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Recent Accounting Pronouncements

  The Securities and Exchange Commission issued Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements", on December 3,
1999. Genuity adopted this accounting guidance in the first quarter of 2000.
There was no material impact to the Company's consolidated financial
statements for the adoption of SAB No. 101.

  In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133, as amended by SFAS No. 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities--an Amendment of FASB Statement No.
133", establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133, also amended by SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133--an Amendment of FASB Statement No. 133", is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. The adoption of this new standard did not have a material effect on the
Company's consolidated financial statements.

Reclassifications

  Certain reclassifications have been made to the 2000 financial statements to
conform to the 2001 presentation. Such reclassifications have no effect on
previously reported net loss or stockholders' equity.

2. PROPERTY, PLANT AND EQUIPMENT, NET

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

<TABLE>
<CAPTION>
                                                      December 31, March 31,
                                                          2000        2001
                                                      ------------ ----------
   <S>                                                <C>          <C>
   Land..............................................  $    4,855  $    4,855
   Buildings and improvements........................      56,888      65,770
   Communications network--fiber-optic cable.........     588,088     638,464
   Communications network--data processing equipment
    and machinery....................................   1,387,243   1,452,283
   Furniture and fixtures............................      19,546      28,263
   Leasehold improvements............................     196,538     264,618
   Work in progress..................................   1,270,455   1,220,273
                                                       ----------  ----------
     Subtotal........................................   3,523,613   3,674,526
   Accumulated depreciation..........................    (513,907)   (592,187)
                                                       ----------  ----------
     Total...........................................  $3,009,706  $3,082,339
                                                       ==========  ==========
</TABLE>

  Depreciation expense was $38.9 million and $78.3 million for the three
months ended March 31, 2000 and 2001, respectively.


                                      10
<PAGE>

                                 GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

3. GOODWILL AND OTHER INTANGIBLES, NET

  Goodwill and other intangibles, net, was comprised of the following (in
thousands):

<TABLE>
<CAPTION>
                                                        December 31, March 31,
                                                            2000       2001
                                                        ------------ ---------
   <S>                                                  <C>          <C>
   Goodwill............................................  $ 495,348   $ 495,348
   Customer bases......................................     77,000      77,000
   Trademarks..........................................     34,000      34,000
   Developed technology................................     19,000      19,000
   In-place work forces................................      9,190       9,190
   Internal use software...............................     87,535     103,495
                                                         ---------   ---------
     Subtotal..........................................    722,073     738,033
   Accumulated amortization............................   (195,624)   (210,758)
                                                         ---------   ---------
     Total.............................................  $ 526,449   $ 527,275
                                                         =========   =========
</TABLE>

  Amortization expense was $14.9 million and $15.2 million for the three
months ended March 31, 2000 and 2001, respectively.

4. SHORT-TERM AND LONG-TERM OBLIGATIONS

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

<TABLE>
<CAPTION>
                                                          December 31, March 31,
                                                              2000       2001
                                                          ------------ ---------
   <S>                                                    <C>          <C>
   Current portion of capital leases.....................   $26,032    $ 26,120
   6% convertible subordinated debentures................     9,482       9,256
   Note payable--Verizon.................................       --      200,000
                                                            -------    --------
     Total short-term obligations........................   $35,514    $235,376
                                                            =======    ========
   Capital leases........................................    52,606      46,256
                                                            -------    --------
     Total long-term obligations.........................   $52,606    $ 46,256
                                                            =======    ========
</TABLE>

  On April 1, 1987, BBN Corporation, an entity acquired by GTE (now part of
Verizon) in 1997, issued $84.7 million of 6% convertible subordinated
debentures. The 6% convertible subordinated debentures due 2012 may be
converted by the bondholders into cash at an exchange ratio of $966.67 for
each $1,000 in principal amount of debentures. The debentures are unsecured
obligations of Genuity and are subordinated in right of payment to Genuity's
senior indebtedness, if any.

  As of March 31, 2001, Genuity had purchased and retired debentures with a
face value of $75.4 million, which has been used to satisfy the annual sinking
fund requirements through 2011. The remaining balance at March 31, 2001 has
been included in short-term obligations based on an estimate of the timing for
the remaining debt conversions.

  On September 5, 2000, the Company entered into a committed and unsecured
$2.0 billion revolving line of credit facility that 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. The facility is guaranteed by our principal operating
subsidiaries. Credit advances bear interest at a rate equal to either (1) for
base rate advances, the higher of the prime announced by Chase Manhattan Bank
or .50% per

                                      11
<PAGE>

                                 GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

annum above the federal funds rates or (2) for London Inter-bank Offer Rate
("LIBOR") advances, LIBOR plus a percentage determined based on our credit
rating. The interest on credit advances will be payable in quarterly
installments. The credit facility contains restrictions on the Company's
ability to incur liens and requires that we maintain a minimum debt-to-debt
plus contributed capital ratio. As of March 31, 2001, there were no
outstanding credit advances under this facility.

  Effective as of March 5, 2001, the Company entered into a $500 million line
of credit facility with Verizon Investments Inc., a wholly owned subsidiary of
Verizon, with a maturity date of May 31, 2001 (See Note 10 for further
discussion). This line of credit is required to be repaid from the proceeds of
any issuance of debt by Genuity in public or private capital market
transactions prior to maturity. Interest expense on the line of credit
facility is based on LIBOR plus 2.00% and is payable, along with any principal
borrowed, not later than maturity. As of March 31, 2001, borrowings under this
line of credit were $200.0 million.

5. STOCKHOLDERS' EQUITY

Preferred Stock

  The board of directors has the authority, without further action by the
holders of Genuity 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

  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. So long as 50% or more of the shares of Class B common
stock outstanding at the completion of the initial public offering remain
outstanding, no holder or group of holders of Class A common stock may vote
any of their shares in excess of 20% of the aggregate number of the then
outstanding number of shares of Class A common stock.

  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.


                                      12
<PAGE>

                                 GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  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. Verizon,
directly or indirectly, owns all of the outstanding shares of Class B common
stock.

  Under the terms of the FCC order:

  .  if Verizon eliminates the applicable restrictions of Section 271 of the
     Telecommunications Act of 1996 (the "Section 271 restrictions") as to
     100% of the former Bell Atlantic in-region lines, Verizon could convert
     the Class B common stock into 800,000,000 shares of Class A common stock
     or Class C common stock, subject to the terms of the FCC Order;

  .  if Verizon eliminates the applicable Section 271 restrictions as to 95%
     of the former Bell Atlantic in-region lines, Verizon may under certain
     circumstances require Genuity to reconfigure its operations in one or
     more former Bell Atlantic in-region states where Verizon has not
     eliminated those restrictions in order to bring those operations into
     compliance with Section 271 restrictions;

  .  if Verizon eliminates the applicable Section 271 restrictions as to 50%
     of the former Bell Atlantic in- region lines and, under circumstances
     described in the recapitalization agreement, it first offers its shares
     to Genuity, it could transfer its shares of Class B common stock to one
     or more third parties that would then be able to convert the Class B
     common stock into an aggregate of 800,000,000 shares of Class A common
     stock;

  .  if Verizon does not eliminate the applicable Section 271 restrictions as
     to at least 50% of the former Bell Atlantic in-region lines, the Class B
     common stock is convertible into shares of Class A common stock,
     representing approximately 10% of Genuity's total common stock
     outstanding after conversion.

  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 the Class B common stock into
800,000,000 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 the Class B common stock into
800,000,000 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.

  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.

  Verizon's Right to Acquire Additional Shares. If at any time during the one
year following conversion by Verizon or its affiliates of any shares of Class
B common stock, Verizon and its affiliates beneficially own shares of Class A
common stock and Class C common stock that in the aggregate exceed 70% of the
total number of shares of outstanding common stock, Verizon may acquire from
Genuity during this one-year period a number of shares of Class A common stock
so that it will own shares of common stock equal to 80% of the total number of
shares of the outstanding common stock.

  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.


                                      13
<PAGE>

                                 GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  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:

  .  the value of a 10% equity interest in Genuity at the time of such sale,
     based on the average of the closing prices of the Class A common stock
     on the thirty trading days prior to the date Verizon offers the shares
     to Genuity; and

  .  the amount Verizon would have had on the date of the completion of the
     sale if it had taken the amount of its initial investment in Genuity
     above a 10% equity interest, based on the initial public offering price
     for the Class A common stock, and invested such amount at the time of
     the closing of the initial public offering in the S&P 500 Index.

  Verizon has agreed to grant any consent necessary for Genuity to be able to
complete the repurchase of the Class B common stock held by Verizon.

  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.

Additional Paid-In Capital

  Genuity received contributions from GTE of $487.9 million for the 3 months
ended March 31, 2000. In

                                      14
<PAGE>

                                 GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

June 2000, Genuity raised $1.8 billion in proceeds, net of expenses, from the
initial public offering of its Class A common stock.

6. EARNINGS PER SHARE

  The weighted-average common shares outstanding for both basic and diluted
earnings per share were 18,256,000 shares for the three month period ending
March 31, 2000 and 192,169,000 shares for the three month period ending March
31, 2001. Potential common shares were not included in the computation of
weighted-average diluted shares outstanding for the quarter ended March 31,
2001 because their inclusion would be anti-dilutive. Contingently issuable
shares were not included in the computation of weighted-average diluted shares
outstanding for the quarter ended March 31, 2001, as the necessary conditions
surrounding the share issuance had not been met.

7. 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, dedicated, DSL and other broadband and IPCS, 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 their eBusiness
storefronts. 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 10 global data centers, nine in the U.S. and one in
Leeds, England. Through the Web hosting operation center, Genuity monitors
these systems 24 hours a day, seven days a week. Value-Added Services includes
revenue for 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.

  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 for America Online, including AOL Japan, in relation to Genuity's
total revenues were 46% and 32% for the three months ended March 31, 2000 and
2001, respectively.

  Management utilizes several measurements to evaluate its operations and
allocate resources. However, the principal measurements are consistent with
Genuity's financial statements. Prior period balances have been

                                      15
<PAGE>

                                 GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

reclassified to reflect the new operating segment presentation adopted by the
Company in 2001. Such reclassifications have no effect on the previously
reported totals. The accounting policies of the segments are the same as those
described in Note 1.

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

<TABLE>
<CAPTION>
                                                         Three Months Ended
                                                              March 31,
                                                       -----------------------
                                                           2000        2001
                                                       ------------ ----------
   <S>                                                 <C>          <C>
   Revenues
     Access...........................................  $  189,519  $  218,104
     Hosting and Value-Added Services.................      25,222      38,683
     Transport........................................      23,625      25,662
     International....................................       9,486      17,018
                                                        ----------  ----------
       Total revenues.................................     247,852     299,467
   Operating Expenses
     Cost of sales....................................     283,928     345,253
     Selling, general and administrative..............     108,336     153,046
     Depreciation and amortization....................      53,786      93,525
                                                        ----------  ----------
       Total operating expenses.......................     446,050     591,824
                                                        ----------  ----------
   Operating Loss.....................................    (198,198)   (292,357)
   Other Income (Expense)
     Interest income (expense), net...................      (2,973)      1,215
     Other, net.......................................      (8,067)       (182)
                                                        ----------  ----------
   Loss Before Income Taxes...........................  $ (209,238) $ (291,324)
                                                        ==========  ==========
   Capital Expenditures (1)
     Access...........................................  $   27,519  $   39,071
     Hosting and Value-Added Services.................      20,472       7,361
     GNI/Transport....................................     103,785      75,666
     International....................................       2,539         864
     Other............................................       8,778      28,180
                                                        ----------  ----------
       Total..........................................  $  163,093  $  151,142
                                                        ==========  ==========
   Depreciation and Amortization
     Access...........................................  $   11,954  $   16,988
     Hosting and Value-Added Services.................       4,213       9,209
     GNI/Transport....................................      22,436      48,120
     International....................................          71       2,019
     Other............................................      15,112      17,189
                                                        ----------  ----------
       Total..........................................  $   53,786  $   93,525
                                                        ==========  ==========
<CAPTION>
                                                       December 31, March 31,
                                                           2000        2001
                                                       ------------ ----------
   <S>                                                 <C>          <C>
   Property, Plant and Equipment, Net.................
     Access...........................................  $  606,003  $  629,596
     Hosting and Value-Added Services.................     254,488     254,588
     GNI/Transport....................................   1,974,123   2,002,380
     International....................................      35,639      34,033
     Other............................................     139,453     161,742
                                                        ----------  ----------
       Total..........................................  $3,009,706  $3,082,339
                                                        ==========  ==========
</TABLE>
--------
(1) Includes accruals and capital leases. Excludes capitalized software.

                                      16
<PAGE>

                                 GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


8. COMMITMENTS AND CONTINGENCIES

Leases

  Genuity leases office space and network equipment under long-term capital
and operating leases. These leases have options for renewal with provisions
for increased rent upon renewal. Genuity's rent expense was $15.7 million and
$24.3 million for the three months ended March 31, 2000 and 2001,
respectively. Rent expense attributable to our fiber optic network is included
in cost of sales and all other rent expense is included in selling, general
and administrative expenses in the accompanying consolidated statements of
operations.

  As of March 31, 2001, 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):

<TABLE>
<CAPTION>
                                                             Capital   Operating
                                                              Leases    Leases
                                                             --------  ---------
   <S>                                                       <C>       <C>
   2001..................................................... $ 25,300  $ 54,500
   2002.....................................................   29,900    44,800
   2003.....................................................   15,800    36,800
   2004.....................................................    4,600    33,600
   2005.....................................................    4,200    29,800
   Thereafter...............................................   19,500   117,900
                                                             --------  --------
     Total minimum lease payments...........................   99,300  $317,400
                                                                       ========
   Amount representing interest.............................  (26,900)
                                                             --------
     Present value of minimum lease payments................ $ 72,400
                                                             ========
</TABLE>

  GTE, now part of Verizon, guarantees some of Genuity's existing real estate
leases.

Contract Commitments

  Genuity has entered into several agreements for 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 under the contract terms. As of
March 31, 2001, the future minimum commitments under these agreements were as
follows (in thousands):

<TABLE>
   <S>                                                                 <C>
   2001............................................................... $112,000
   2002...............................................................   60,000
                                                                       --------
     Total future minimum commitments................................. $172,000
                                                                       ========
</TABLE>

  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 March 31, 2001, the
outstanding commitments under the agreements were as follows (in thousands):

<TABLE>
   <S>                                                                  <C>
   2001................................................................ $25,000
   2002................................................................   9,000
                                                                        -------
     Total future minimum commitments.................................. $34,000
                                                                        =======
</TABLE>

  Genuity has entered into non-cancelable long-term purchase commitments with
communications providers. The purchase agreements contain provisions that
require Genuity to purchase a minimum amount of services

                                      17
<PAGE>

                                 GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 March 31, 2001, future minimum payments under these non-
cancelable purchase commitments were as follows (in thousands):

<TABLE>
   <S>                                                                  <C>
   2001................................................................ $25,000
   2002................................................................  31,000
   2003................................................................  26,000
                                                                        -------
     Total future minimum commitments.................................. $82,000
                                                                        =======
</TABLE>

  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 March 31, 2001, the future minimum
commitments under these agreements were as follows (in thousands):

<TABLE>
   <S>                                                                 <C>
   2001............................................................... $277,000
   2002...............................................................  299,000
   2003...............................................................  129,000
   2004...............................................................   62,000
   2005...............................................................  143,000
   Thereafter.........................................................   41,000
                                                                       --------
     Total future minimum commitments................................. $951,000
                                                                       ========
</TABLE>

  In connection with another agreement, under which we hold IRUs for a major
part of our domestic fiber optic network, restrictions on the sale of excess
capacity and on the sale or swap of fiber IRUs were lifted.

Contingencies

  Some claims arising in the ordinary course of business are pending against
the Company. In the opinion of management, these claims are not expected to
have a material effect on operations.

9. RELATED PARTY TRANSACTIONS

Verizon

  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 received from Verizon. The transition and network
monitoring agreements vary from four to twelve months with rights to terminate
earlier. 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 has agreed to
purchase at least $500 million of Genuity's services over a five-year period.

  Verizon purchases Genuity's services both in connection with this purchase
commitment and outside of this agreement. The average accounts receivable
balance related to amounts owed to Genuity by Verizon was $57.6

                                      18
<PAGE>

                                 GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

million or 16% of Genuity's ending accounts receivable balance at March 31,
2001, while revenues from Verizon were $20.0 million or 7% of Genuity's total
revenues for the three months ended March 31, 2001.

  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 the exclusive right to our trademarks and
to all proprietary technology that we had developed prior to the date of our
initial public offering to TELUS Corporation for use solely in Canada for the
provision of telecommunications services, including Internet services. We have
entered into a licensing arrangement with TELUS 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.

  Effective as of March 5, 2001, the Company entered into a $500 million line
of credit facility with Verizon Investments Inc., a wholly owned subsidiary of
Verizon, with a maturity date of May 31, 2001 (See Note 10 for further
discussion). This line of credit is required to be repaid from the proceeds of
any issuance of debt by Genuity in public or private capital market
transactions prior to maturity. Interest expense on the line of credit
facility is based on LIBOR plus 2.00% and is payable, along with any principal
borrowed, not later than maturity.

Revolving Line of Credit Facility

  On September 5, 2000, the Company entered into a $2.0 billion revolving line
of credit facility with a consortium of 9 banks (See Note 4 for further
discussion). One of these banks is also a major stockholder of the Company.
The terms of the line of credit were entered into based on prevailing market
rates.

10. SUBSEQUENT EVENTS

  As of May 3, 2001, the Company approved a plan to reduce future
expenditures, which included a reduction of the Company's employees by
approximately 12% and a reduction in 2001 capital expenditures from $2.2
billion to $1.4 billion.

  On May 3, 2001, Verizon agreed to amend the $500 million line of credit
facility with Genuity to increase the line to $900 million and to extend the
maturity date from May 31, 2001 to December 31, 2001. In addition, Verizon
agreed to provide Genuity with credit enhancements to enable Genuity to access
long-term sources of capital with maturities of up to five years.

                                      19
<PAGE>

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 anticipated growth
strategies and anticipated trends in our business as well as projections
relating to our capital expenditure requirements, our network expansion plans,
locations of new data centers, network operations centers and points of
presence, expected deployment dates for capacity on trans-oceanic cable, our
plans for transitioning customer traffic from leased capacity to our network,
research and development initiatives and increases in sales and marketing
personnel. Investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof and are
predictions 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 including our ability to
maintain or increase our market share and therefore maintain our status as a
Tier 1 Internet backbone provider, maintain and strengthen our relationship
with America Online and other significant customers, obtain additional capital
to fund our operations and the expansion of our capacity and network
infrastructure, successfully maintain and continue to strengthen our brand
recognition, compete effectively for service and enterprise customers, reduce
operating expenses and introduce new services.

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

RESULTS OF OPERATIONS

2001 Compared to 2000

Revenues (in thousands)

<TABLE>
<CAPTION>
                                                        Three Months Ended
                                                             March 31,
                                                     --------------------------
                                                         2000          2001
                                                     ------------  ------------
                                                      Amount   %    Amount   %
                                                     -------- ---  -------- ---
<S>                                                  <C>      <C>  <C>      <C>
Access.............................................. $189,519  76% $218,104  73%
Hosting and Value-Added Services....................   25,222  10    38,683  13
Transport...........................................   23,625  10    25,662   8
International.......................................    9,486   4    17,018   6
                                                     -------- ---  -------- ---
  Total............................................. $247,852 100% $299,467 100%
                                                     ======== ===  ======== ===
</TABLE>

  Total revenues for the quarter ended March 31, 2001 increased $51.6 million,
or 21%, over the same period in 2000.

  Access. Access revenues for the quarter ended March 31, 2001 increased $28.6
million, or 15%, over the same period in 2000. This increase was due primarily
to a $26.0 million, or 478%, increase in broadband revenues, and to a lesser
extent, a $15.2 million, or 42%, increase in dedicated access revenues
compared to the first quarter of 2000. The $26.0 million increase in broadband
revenues, excluding America Online, Inc. ("America Online" or "AOL"), was
driven by an increase in users from approximately 37,000 users as of March 31,
2000 to approximately 229,000 users, as of March 31, 2001. These increases
were offset in part by industry-wide price reductions, and pricing structure
changes associated with our dial-up contract with America Online.

                                      20
<PAGE>

The AOL agreement includes provisions for minimum purchase requirements at
fixed monthly fees, subject to market pricing adjustments, service level
requirements and termination provisions. The impact of the AOL contractual
price reductions on the first quarter of 2001 results as compared to the
corresponding period in 2000 totaled approximately $50.0 million. In addition
to the contractual reduction in the fixed monthly fees for dial-up access
services during 2000, an additional price reduction is scheduled in the third
quarter of 2002.

  Hosting and Value-Added Services. Hosting and Value-added services revenues
for the quarter ended March 31, 2001 increased $13.5 million, or 53%, over the
same period in 2000, due to increases in the number of our managed hosting
customers and the average monthly revenue associated with these customers. In
addition, the average new deal size for hosting contracts increased to
$396,000 in the quarter ended March 31, 2001 compared to $182,000 in the
corresponding period in 2000.

  Transport. Transport revenues for the quarter ended March 31, 2001 increased
$2.0 million, or 9%, over the same period in 2000, due primarily to the sale
of excess capacity on the network as new network segments became operational,
as well as increased sales of private line services and ATM services to
telecommunications carriers and Internet service providers.

  International. International revenues for the quarter ended March 31, 2001
increased $7.5 million, or 79%, over the same period in 2000. This growth is
primarily due to increases in revenue from international sales of Internet
access services, including revenue from AOL Japan.

Cost of Sales

  Cost of sales for the quarter ended March 31, 2001 increased $61.3 million,
or 22%, over the same period in 2000. The increase was due to the expansion of
the network infrastructure to provide access to a broader base of customers
and to provide increased scope of services to Internet access customers.

  Cost of sales, as a percentage of total revenues, was 115% for both the
quarters ended March 31, 2000 and 2001. Telecommunications circuit costs, as a
percentage of total revenues, were approximately 80% for both of the quarters
ended March 31, 2000 and 2001.

Selling, General and Administrative Expenses

  Selling, general and administrative expenses for the quarter ended March 31,
2001 increased $44.7 million, or 41%, over the same period in 2000. This
increase was due primarily to increased selling expenses that were directly
attributable to an increase in the number of sales and sales-related
employees, both domestically and internationally, and to the increased
advertising expense due primarily to increased branding efforts. Also
contributing to these increases were the hiring of additional management staff
and related operating expenses, increased facilities costs and increased
information technology expenses. Included in selling, general and
administrative expenses was a $4.1 million increase in bad debt expense for
the three months ended March 31, 2001 over the comparable period in 2000.

Depreciation and Amortization

  Depreciation and amortization expenses for the quarter ended March 31, 2001
increased $39.7 million, or 74%, over the comparable period in 2000. This
increase reflects the continuing investment in our network infrastructure in
order to support our growth in customers and services.

Income Taxes

  Genuity generated pre-tax book losses of $291.3 million and $209.2 million
for the quarter ended March 31, 2001 and 2000, respectively. Federal income
tax returns were filed on a consolidated basis with GTE, now part of Verizon,
through the date of Genuity's initial public offering. The taxable losses
generated by Genuity up until the date of its initial public offering were
benefited by GTE in its consolidated tax return. Genuity received

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reimbursements for these tax benefits of $62.5 million for the three month
period ended March 31, 2000. To reflect Genuity's income tax provision on a
comparable basis to future periods, these reimbursements have been accounted
for as capital contributions. The tax provision was computed on a stand-alone
basis and 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.

Net Loss

  Net losses increased to $292.4 million for the quarter ended March 31, 2001
compared to $209.8 million for the quarter ended March 31, 2000.

LIQUIDITY AND CAPITAL RESOURCES

  Net cash used in operating activities was $121.2 million and $252.7 million
for the first three months of 2000 and 2001, respectively. Net cash used in
operating activities for these periods was primarily the result of operating
losses.

  Net cash used in investing activities was $212.3 million and $648.9 million
for the first three months of 2000 and 2001, respectively. Net cash used in
investing activities in each of these periods was primarily the result of
capital expenditures for construction of our network infrastructure, as well
as leasehold improvements, furniture, fixtures, computers and other equipment.
As of March 31, 2001, Genuity had $439.9 million of capital commitments
outstanding.

  Net cash received from financing activities was $344.6 million and $193.5
million for the first three months of 2000 and 2001, respectively. Capital
contributions from GTE amounted to $487.9 million for the first three months
of 2000. Proceeds from short-term borrowings amounted to $200.0 million for
the first three months of 2001.

  Genuity has a committed and unsecured $2.0 billion revolving line of credit
facility that matures on the earlier of September 5, 2005 or the date that is
three months prior to scheduled expiration of the option of Verizon to convert
its Class B common stock into Class C common stock. The facility is guaranteed
by Genuity's principal domestic operating subsidiaries. Credit advances bear
interest at a rate equal to either (1) for base rate advances, the higher of
the prime rate announced by Chase or .50% per annum above the federal funds
rate or (2) for London Inter-bank Offer Rate ("LIBOR") advances, LIBOR plus a
percentage determined based on our credit rating. The interest on credit
advances will be payable in quarterly installments. The credit facility
contains restrictions on our ability to incur liens and requires that we
maintain a minimum ratio of debt to debt plus contributed capital. The
facility also provides for an event of default if Genuity experiences a change
of ownership. As of March 31, 2001, there were no outstanding credit advances
under this facility.

  Effective as of March 5, 2001, the Company entered into a $500 million line
of credit facility with Verizon Investments Inc., a wholly owned subsidiary of
Verizon, with a maturity date of May 31, 2001. This line of credit is required
to be repaid from the proceeds of any issuance of debt by Genuity in public or
private capital market transactions prior to maturity. Interest expense on the
line of credit facility is based on LIBOR plus 2.00% and is payable, along
with any principal borrowed, not later than maturity. As of March 31, 2001,
borrowings under this line of credit were $200.0 million.

  On May 3, 2001, Verizon agreed to amend the $500 million line of credit
facility with Genuity to increase the line to $900 million and to extend the
maturity date from May 31, 2001 to December 31, 2001. Verizon also agreed to
provide Genuity with credit enhancements to enable Genuity to access long-term
sources of capital with maturities of up to five years. The aggregate amount
of interim funding and credit enhancements provided by Verizon will be $2.0
billion. All transactions between Genuity and Verizon will be consistent with
the FCC's final order approving the merger of Bell Atlantic and GTE in June
2000, which permits Verizon to lend Genuity up to 25% of its authorized
indebtedness, or $2.75 billion.


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<PAGE>

  As of May 3, 2001, the Company approved a plan to reduce future
expenditures, which included a reduction of the Company's employees by
approximately 12% and a reduction in 2001 capital expenditures from $2.2
billion to $1.4 billion.

  Genuity is in the process of reviewing its long-term plan to operate within
the sources of capital currently available to the Company and it is expected
that capital expenditures will be lower than the $7.0 billion to $9.0 billion
for the four year period ending December 31, 2004 as disclosed in the
Company's Form 10-K. Future cash requirements will depend on a number of
factors, including: the pace at which Genuity expands its network
infrastructure and the associated costs; the rate at which customers purchase
Genuity services and the pricing of those services; the level of marketing
required to build the Genuity brand, to acquire and retain customers and to
maintain a competitive position in the marketplace; the rate at which Genuity
invests in support systems and engineering; and investment opportunities in
complementary businesses or technologies. Genuity believes that the committed
sources of financing will provide sufficient financial resources to meet its
cash requirements through 2002, and that total available sources of financing
will be sufficient to meet the maximum funding requirements in the Company's
business plan.

  As of March 31, 2001, Genuity's indebtedness included $9.3 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 in principal amount of debentures. The debentures are
unsecured obligations of Genuity and are subordinated in right of payment to
our senior indebtedness, if any. Genuity is required to contribute to a
sinking fund annual payments equal to 5% of the aggregate principal amount
issued.

  As of March 31, 2001, Genuity's indebtedness also included $72.4 million in
capital leases. The capital leases have original terms of 5 to 10 years from
the date of purchase, with principal and interest payable monthly or quarterly
in advance.

INFLATION

  Inflation has not had a material adverse impact on the Company's business or
operating results during the periods presented, nor does the Company believe
inflation will have a material impact on future business or operating results.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

  The Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements", on December 3,
1999. Genuity adopted this accounting guidance in the first quarter of 2000.
There was no material impact to the Company's consolidated financial
statements for the adoption of SAB No. 101.

  In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by
SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities--an Amendment to FASB Statement No. 133", establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities. SFAS No. 133, also
amended by SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133--an
Amendment to FASB Statement No. 133", is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. The adoption of this statement
did not have a material effect on the Company's consolidated financial
statements.


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

  Genuity's interest rate risk exposure relates primarily to its short-term
investments and debt portfolio. Currently, short-term investments are
classified as cash and cash equivalents and consist primarily of short-term
debt securities such as commercial paper and money market instruments.
Genuity's investment income is subject to interest rate risk resulting from
potential future decreases in interest rates. Genuity makes investments in
highly liquid instruments with short-term maturity dates.

  As of December 31, 2000 and March 31, 2001, Genuity's debt portfolio
consisted of short-term 6% convertible subordinated debentures and short-term
borrowings. Current interest rate risk on the debentures and short-term
borrowings is mitigated by the fact that they are short-term. Genuity is also
able to borrow funds under its long-term credit facility. Borrowings under the
long-term credit facility are influenced by either changes in short-term LIBOR
interest rates, changes in the prime rate or changes in the federal funds rate
depending on the credit advance. As of March 31, 2001, there were no
outstanding credit advances under the long-term credit facility.

  Genuity will be exposed to foreign currency risk in the future as the
Company's international operations grow. As of March 31, 2001, the net assets
of Genuity's foreign operations were not material.

  Currently, Genuity does not use interest rate derivative instruments to
manage its exposure to interest rate changes; however, Genuity may utilize
derivative instruments to hedge certain exposures in the future.

                          PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

  We do not believe there are any pending or threatened legal proceedings
that, if adversely determined, would have a material adverse effect on us.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

 Changes in Securities

  None.

 Use of Proceeds

  For the three months ended March 31, 2001 the remaining net proceeds from
our initial public offering of Class A common stock were utilized for
operating expenses and capital expenditures in connection with the expansion
of our fiber optic network.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

  Not applicable.

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

  None.

ITEM 5. OTHER INFORMATION

  Not applicable.


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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

  (a) Exhibits

    None.

  (b) Reports on Form 8-K

  Genuity filed a current report on Form 8-K, dated January 31, 2001,
reporting under Item 5 the issuance of a press release discussing the results
of operations for the quarter and the year ended December 31, 2000.

  Genuity filed a current report on Form 8-K, dated February 1, 2001,
reporting under Item 9 the issuance of information related to guidance for the
first quarter and full year of 2001.

  Genuity filed a current report on Form 8-K, dated March 9, 2001, reporting
under Item 5 that it had entered into a $500 million credit agreement with
Verizon Investments Inc., a wholly owned subsidiary of Verizon Communications
Inc.

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                                   SIGNATURES

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

                                          Genuity Inc.

                                                   /s/ Daniel P. O'Brien
                                          By: _________________________________
                                                     Daniel P. O'Brien
                                                 Executive Vice President
                                                and Chief Financial Officer
                                                 (Duly Authorized Officer)

Dated: May 14, 2001

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