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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 June 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

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 at
August 9, 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 Six Months Ended June 30, 2001 and 2002         |  | 3   
|          |  | Condensed Consolidated Balance Sheets
as of December 31, 2001 and June 30, 2002                                   |  | 4   
|          |  | Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2001 and 2002                   |  | 5   
|          |  | Condensed Consolidated Statement of Changes in Stockholders' Deficit
for the Six Months Ended June 30, 2002       |  | 6   
|          |  | Condensed Consolidated Statements of Comprehensive Loss
for the Three and Six Months Ended June 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                             |  | 36  
|Item 3.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                        |  | 48  
|PART II.  |  | OTHER INFORMATION                                                                                                 |  |     
|Item 1.   |  | Legal Proceedings                                                                                                 |  | 49  
|Item 2.   |  | Changes in Securities and Use of Proceeds                                                                         |  | 49  
|Item 3.   |  | Defaults upon Senior Securities                                                                                   |  | 49  
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                               |  | 50  
|Item 5.   |  | Other Information                                                                                                 |  | 50  
|Item 6.   |  | Exhibits and Reports on Form 8-K                                                                                  |  | 50  
|SIGNATURE |  | 51                                                                                                               

2

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

|                                                             |                                     | Three Months Ended
June 30, |          | Six Months Ended
June 30, |  
|------------------------------------------------------------ | ----------------------------------- | --------------------------- | -------- | ------------------------- | -
|
|Revenues                                                     |                                     | $                           | 302,794  |                           | $
|Operating Expenses                                           |                                     |                             |          |                           |  
|                                                             | Cost of sales                       |                             |          | 345,498                   |  
|                                                             | Selling, general and administrative |                             |          | 152,794                   |  
|                                                             | Depreciation and amortization       |                             |          | 103,185                   |  
|                                                             | Special items                       |                             |          | 47,909                    |  
|                                                             |                                     |                             |          |                           |  
|Total operating expenses                                     |                                     |                             | 649,386  |                           |  
|                                                             |                                     |                             |          |                           |  
|Operating Loss                                               |                                     |                             | (346,592 | )                         |  
|Other Income (Expense)                                       |                                     |                             |          |                           |  
|                                                             | Interest expense, net               |                             |          | (6,155                    | )
|                                                             | Minority interest                   |                             |          |                          |  
|                                                             | Other, net                          |                             |          | 278                       |  
|                                                             |                                     |                             |          |                           |  
|Loss Before Income Taxes                                     |                                     |                             | (352,469 | )                         |  
|Income Taxes                                                 |                                     |                             | 1,104    |                           |  
|                                                             |                                     |                             |          |                           |  
|Net Loss                                                     |                                     | $                           | (353,573 | )                         | $
|                                                             |                                     |                             |          |                           |  
|Basic and Diluted Loss Per Common Share                      |                                     | $                           | (36.80   | )                         | $
|                                                             |                                     |                             |          |                           |  
|Basic and Diluted Weighted-Average Common Shares Outstanding |                                     |                             | 9,608    |                           |  
|                                                             |                                     |                             |          |                           |  

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 |                                             | June 30,
2002 |  
|------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ----------------- | ------------------------------------------- | ------------- | -
|ASSETS                                |                                                                                                             
|Current Assets:                       |                                                                                                              |                   |                                             |               |  
|                                      | Cash and cash equivalents                                                                                    |                   | $                                           | 956,718       |  
|                                      | Restricted cash                                                                                              |                   |                                             | 23,000        |  
|                                      | Receivables, less allowances of $24,408 and $28,831, respectively                                            |                   |                                             | 291,476       |  
|                                      | Assets held for sale                                                                                         |                   |                                             |              |  
|                                      | Other current assets                                                                                         |                   |                                             | 55,378        |  
|                                      |                                                                                                              |                   |                                             |               |  
|                                      |                                                                                                              |                   | Total current assets                        |               |  
|Property, Plant and Equipment, Net    |                                                                                                              |                   | 1,482,217                                   |               |  
|Goodwill, Net                         |                                                                                                              |                   | 90,122                                      |               |  
|Intangibles, Net                      |                                                                                                              |                   | 77,648                                      |               |  
|Other Assets                          |                                                                                                              |                   | 17,912                                      |               |  
|                                      |                                                                                                              |                   |                                             |               |  
|                                      |                                                                                                              |                   | Total assets                                |               | $
|                                      |                                                                                                              |                   |                                             |               |  
|LIABILITIES AND STOCKHOLDERS' DEFICIT |                                                                                                             
|Current Liabilities:                  |                                                                                                              |                   |                                             |               |  
|                                      | Short-term obligations, including $2.3 billion of debt in default subsequent to June 30, 2002                |                   | $                                           | 157,405       |  
|                                      | Accounts payable                                                                                             |                   |                                             | 123,502       |  
|                                      | Accrued compensation and related liabilities                                                                 |                   |                                             | 45,846        |  
|                                      | Accrued circuits                                                                                             |                   |                                             | 96,958        |  
|                                      | Accrued liabilities                                                                                          |                   |                                             | 243,460       |  
|                                      | Deferred revenue and advanced payments                                                                       |                   |                                             | 22,204        |  
|                                      |                                                                                                              |                   |                                             |               |  
|                                      |                                                                                                              |                   | Total current liabilities                   |               |  
|Long-Term Obligations                 |                                                                                                              |                   | 2,349,183                                   |               |  
|Other Liabilities                     |                                                                                                              |                   | 60,832                                      |               |  
|                                      |                                                                                                              |                   |                                             |               |  
|                                      |                                                                                                              |                   | Total liabilities                           |               |  
|                                      |                                                                                                              |                   |                                             |               |  
|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 |                   |                                             | 103           |  
|                                      | Class B common stock$0.01 par value; 1,050,000 shares authorized; 912,800 shares issued and outstanding     |                   |                                             | 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                 |               |  
|                                      |                                                                                                              |                   |                                             |               |  
|                                      |                                                                                                              |                   | Total liabilities and stockholders' deficit |               | $
|                                      |                                                                                                              |                   |                                             |               |  

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

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

|                                               |                                                                   | Six Months Ended
June 30,                           |                                       
|---------------------------------------------- | ----------------------------------------------------------------- | --------------------------------------------------- | --------------------------------------
|
|Cash Flows from Operating Activities:          |                                                                   |                                                     |                                       
|                                               | Net loss                                                          |                                                     | $                                     
|                                               | 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                                          |                                                     |                                       
|                                               |                                                                   |                                                     |                                       
|                                               |                                                                   | Net cash provided by (used in) financing activities |                                       
|                                               |                                                                   |                                                     |                                       
|                                               |                                                                   | Net decrease in cash and cash equivalents           |                                       
|Cash and cash equivalents, beginning of period |                                                                   |                                                     | 868,926                               
|                                               |                                                                   |                                                     |                                       
|Cash and cash equivalents, end of period       |                                                                   | $                                                   | 70,917                                
|                                               |                                                                   |                                                     |                                       
|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.

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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                                 |                |  |                |     |  |     |  |   |   |  |   |          
|                           | Foreign currency translation
adjustments |                |  |                |     |  |     |  |   |   |  |   |          
|                           |                                          |                |   |                |     |   |     |   |   |   |   |   |          
|Balance, June 30, 2002     |                                          | 10,262         |   | $              | 103 |   | 913 |   | $ | 9 |   | $ | 6,109,016
|                           |                                          |                |   |                |     |   |     |   |   |   |   |   |          

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

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

|                                               |                                          | Three Months Ended
June 30, |          | Six Months Ended
June 30, |  
|---------------------------------------------- | ---------------------------------------- | --------------------------- | -------- | ------------------------- | -
|
|Net Loss                                       |                                          | $                           | (353,573 | )                         | $
|Other Comprehensive Income (Loss), net of tax: |                                          |                             |          |                           |  
|                                               | Foreign currency translation adjustments |                             |          | 283                       |  
|                                               |                                          |                             |          |                           |  
|Comprehensive Loss                             |                                          | $                           | (353,290 | )                         | $
|                                               |                                          |                             |          |                           |  

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

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GENUITY INC.        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    Subsequent Events

Liquidity & 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 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 have not been affected by Verizon's termination of the right to convert its Class B shares
into a controlling interest in Genuity. The Company also announced on July 29, 2002 that Michael Masin, a vice chairman of Verizon Communications, has resigned from Genuity's board of
directors. Verizon, as a Class B stockholder, has 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 $850.0 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.

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 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.

On
August 13, 2002, we were granted an additional 30-day extension to the standstill agreement, which expired on August 12, 2002. In connection with this extension, Genuity
will make a payment of $50 million to the members of the bank group which funded the $723 million. Genuity is continuing discussions with the banks and Verizon with respect to existing
commercial and other relationships.

We
have retained Lazard Freres & 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,

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but we may not be able to obtain satisfactory waivers or amendments to either or both of the facilities. In the event either Verizon or the banks accelerate the payment obligations under the
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 would not seem 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.

The
Company has reflected the $2.3 billion of borrowings outstanding under the Bank Facility and Verizon Facility as short-term obligations in the accompanying
condensed consolidated balance sheets as of June 30, 2002, as the Company is currently in default of the underlying agreements. Unamortized debt issuance cost of $10.2 million as of
June 30, 2002 would be subject to accelerated amortization or immediate expense depending on the outcome of the Company's restructuring plan.

On
July 25, 2002, Moody's Investor Services and Standard & Poor's Rating Services announced a reduction of our credit rating from Ba1 to Ca and from BB to CCC-,
respectively, as a result of Verizon's decision to cancel its option to reintegrate Genuity and the subsequent default under the Company's credit facilities. This reduction will result in an increase
in the facility fee for our Bank Facility from 25 to 50 basis points per annum and an increase in the fee for the letter of credit issued under our Bank Facility from 160 to 385 basis points per annum
payable quarterly in arrears. Based on these fee increases and the current amounts outstanding under the Bank Facility, the Verizon Facility and the private placement bonds, annual interest expense
for these obligations will be approximately $160.9 million.

We
expect that our stock may be delisted from the Nasdaq National Market's quotation system in the near future, which may limit the liquidity of an investment in the Company's shares.

Integra

Genuity has a 93% ownership interest in Integra S.A. The operations of this entity are funded through borrowings made by Genuity. Based on the events, which have
occurred subsequent to June 30, 2002, the Company has been assessing all of its future funding requirements. On August 10, 2002, Genuity's Board of Directors approved management's
recommendation to no longer provide funding to Integra S.A, which could cause Integra to become insolvent and seek the protection afforded debtors under the bankruptcy laws. The estimated loss
associated with the write-off of our investment in Integra is $80.0 million, which will be recorded in the third quarter of 2002.

Valuation of Assets

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

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between the carrying amount and fair value of the asset. Under SFAS No. 142, "Goodwill and Intangibles Assets," 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. The
estimate of future cash flows associated with the Company's underlying business segments is an integral part of the impairment assessment within these two accounting standards. The events that have
occurred subsequent to June 30, 2002 represent indicators of potential impairment associated with goodwill, intangibles and property, plant and equipment. As of June 30, 2002, goodwill,
intangibles and property, plant and equipment totaled $101.1 million, $57.0 million and $1.5 billion, respectively. As a result of these events, the Company may incur material
impairment charges associated with these assets. Such impairment charges would be recorded during the quarter ended September 30, 2002 or at the time that the impairment can be measured.

Stock Options

On July 2, 2002, the Company issued 1,897,000 stock options to employees and directors who participated in the stock option exchange program and agreed to
the terms set forth in the stock option exchange agreement. The voluntary program gave employees and directors the opportunity to exchange options they were issued from Genuity's Initial Public
Offering in June 2000 through May 31, 2001, and certain other options issued after June 3, 2001, for an equal number of replacement options. The exercise price for the new options
is $2.39, which is the average of the high and low prices of Genuity's Class A common stock on the Nasdaq National Market on July 2, 2002. The new employee options began vesting on the
re-grant date and continue to vest monthly in equal increments over the remaining vesting period of the cancelled options.

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 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 June 30, 2002. The Company's default on its credit facilities as
outlined in Note 1 and potential need to seek protection under the bankruptcy laws raise 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

10

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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 and special items described in
Note 3), considered necessary for a fair presentation have been included. Operating results for the six months ended June 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. The unaudited condensed consolidated financial statements also reflect the acquisition of a 93% ownership interest in Integra S.A.
("Integra") in 2001. All significant inter-company amounts have been eliminated.

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. 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 $22.2 million and $155.8 million as of December 31, 2001 and
June 30, 2002, respectively.

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.

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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.

Assets Held for Sale

Assets that are actively being marketed for sale are separately reflected as held for sale in the accompanying condensed consolidated balance sheets. In the
second quarter of 2002, the Company engaged an outside party to market for sale certain equipment identified as excess as a result of management's decision to reduce capital expenditures. Management
expects to sell the excess equipment as soon as practicable.

12

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Property, Plant and Equipment (See Note 1 for significant subsequent events)

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 impairment charges recorded in the fourth quarter of 2001 and in the second
quarter of 2002, the Company 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 condensed consolidated balance sheet 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, Net (See Note 1 for significant subsequent events)

Goodwill pertains to the acquisitions of BBN Corporation and Genuity Incorporated, both acquired in 1997 and the acquisition of Integra acquired in
September 2001. The Company determined that the goodwill associated with the BBN Corporation acquisition was impaired as of December 31, 2001 and was written down to fair value.

13

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The
Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets" in its entirety on January 1, 2002, and as a result, goodwill is no longer being amortized. The
Company completed the first step of the transitional goodwill impairment test, which is required to be performed as of the date of adoption of the statement. Goodwill has been allocated to two
operating segments, International Hosting and Hosting. As part of the impairment analysis, the Company compared the estimated fair values of these two segments with their carrying values as of
January 1, 2002. The estimated fair values exceeded the carrying values for the two segments indicating that there was no impairment. Future tests of impairment will be performed at least
annually and more often if events or circumstances warrant.

Intangibles, Net (See Note 1 for significant subsequent events)

Intangible assets pertain to the acquisitions of BBN Corporation and Genuity Incorporated, both acquired in 1997, the acquisition of Integra acquired in
September 2001 and internal use software. The Company determined that the intangibles associated with the BBN Corporation acquisition were impaired as of December 31, 2001 and were
written down to fair value.

The
Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets" in its entirety on January 1, 2002, and as a result, in-place workforce was reclassified
to goodwill, as the intangible asset does not meet the recognition criteria. Intangible assets include customer lists, trademarks, and developed technology in connection with the acquisitions, and
internal use software. Customer lists, trademarks and developed technology are amortized on a straight-line basis over 2 to 10 years. Internal use software is amortized on a
straight-line basis over 3 to 5 years. Software maintenance costs are expensed as incurred.

Valuation of Assets (See Note 1 for significant subsequent events)

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 $5.4 million and $122.8 million for the three months ended June 30, 2001 and 2002, respectively, and $5.4 million and
$122.9 million for the six months ended June 30, 2001 and 2002 are included in special items in the accompanying consolidated statements of operations. (See Note 3 for further
discussion.)

14

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Debt Issuance Costs (See Note 1 for significant subsequent 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 $10.2 million as of December 31, 2001 and June 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 $200.7 million, or 33%, and $183.5 million, or 32%, of Genuity's total revenues for the six months ended June 30, 2001 and 2002, respectively. The average
accounts receivable balance related to amounts owed to Genuity by AOLTW represented $77.6 million, or 21%, and $67.9 million, or 25%, of Genuity's ending gross accounts receivable
balance at June 30, 2001 and 2002, respectively. (See Note 13 for further discussion.)

Verizon

Revenues from Verizon were $94.0 million, or 16%, and $170.7 million, or 30%, of Genuity's total revenues for the six months ended June 30,
2001 and 2002, respectively. The average accounts receivable balance related to amounts owed to Genuity by Verizon represented $68.8 million, or 18%, and $104.8 million, or 39%, of
Genuity's ending gross accounts receivable balance at June 30, 2001 and 2002, respectively. (See Note 14 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

15

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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.

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.    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 $181.9 million charge for the quarter ended June 30, 2002 includes the following (in
millions):

Reduction in Force

$
20.3Facilities Exit Costs


38.8Loss on Disposition of International Entities


11.1Asset ImpairmentFacility Related

49.5Fiber Optic Cable

58.1Total




107.6Loss on Fixed Asset Sales


4.1Total Special Items

$
181.9


16

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On May 2, 2002, the Company announced an additional headcount reduction. Genuity reduced its headcount by an additional 932 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
$20.3 million. The Company identified 23 additional facilities, which would be exited including POP facilities, sales sites and administrative buildings. The majority of the facilities will be
vacated by the end of the third quarter of 2002. Facility and related costs of approximately $38.8 million in the restructuring charge include lease termination costs and future lease
commitments, net of estimated recoveries from subleasing.

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 zero
and as a result, the Company recorded an impairment loss of approximately $49.5 million. During the second quarter of 2002, the Company identified certain international businesses, 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,
which is included in special items in the accompanying condensed consolidated statements of operations. The Company recognized a $58.1 million impairment loss associated with certain
indefeasible rights of use for fiber optic cable to write the assets down to a fair value of zero due to the insolvency of the fiber optic cable providers and the Company's plan to discontinue use of
the fiber.

Prior
to the second 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
1,098, or 21%. The 1,098 full-time equivalent employees included 979 full-time employees and 119 contractor positions. Of the 1,098 full-time equivalent employees
assumed in the plan, 922 were terminated in the fourth quarter of 2001 and the remaining 176, related to our international operations, received a termination notification in the fourth quarter of 2001
and ceased employment in the first quarter of 2002. Severance and associated termination benefits for the 979 employees included in the restructuring charge in 2001 were approximately
$21.7 million.

The
Company has vacated 57 of the 58 locations identified by the Company in 2001 as sites, which would be exited. These sites included a data center, several POP facilities, sales sites
and administrative buildings. The Company estimates that the remaining location will be vacated by the end of the third quarter of 2002. The lease termination dates on the underlying sites extend
through 2030. Management is negotiating early buyouts on these lease facilities, where possible, or entering into sublease agreements in lieu of paying termination costs. Facility and equipment
related costs of approximately $62.7 million in the 2001 restructuring charges include lease termination costs and future lease

17

---

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, which is included in special
items in the accompanying condensed consolidated statements of operations, were approximately $2.2 million.

The
Company also recorded a $1.3 million adjustment in the first quarter of 2002 to increase the estimated severance costs recorded in 2001.

As
a result of these restructuring actions taken in 2001 and the first six months of 2002, the Company has recorded a cumulative restructuring charge, which is included in special items
in 2001 and 2002, totaling $218.9 million associated with the reduction in force and the reduced capital expenditure
program. As of June 30, 2002, approximately $88.2 million has been paid, including approximately $39.5 million related to employee severance and associated benefits. In addition,
the restructuring liability was reduced by approximately $3.0 million representing an adjustment to the estimated lease termination costs. The remaining accrual associated with the
restructuring charge was approximately $127.7 million as of June 30, 2002.

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

Balance as of March 31, 2002

$
85,099Second quarter 2002 charge


59,050Cash paid during the quarter


(16,475
)Balance as of June 30, 2002

$
127,674


As
of June 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.

18

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4.    Property, Plant and Equipment, Net (See Note 1 for discussion of significant subsequent events)

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

December 31,
2001

June 30,
2002Land

$
10,020

$
10,020Buildings


108,472


108,293Communications network  fiber-optic cable


239,626


256,399Communications network  data processing equipment and machinery


812,509


1,152,022Furniture and fixtures


42,126


49,268Leasehold improvements


261,471


330,603Work in progress


282,956


34,622Subtotal


1,757,180


1,941,227Accumulated depreciation


(274,963
)

(436,656
)Total

$
1,482,217

$
1,504,571


Depreciation
expense was $87.2 million and $90.6 million for the three months ended June 30, 2001 and 2002, respectively, and $165.5 million and
$166.0 million for the six months ended June 30, 2001 and 2002, respectively.

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 zero
and as a result, the Company recorded an impairment loss of approximately $49.5 million. During the second quarter of 2002, the Company identified certain international businesses, 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,
which is included in special items in the
accompanying condensed consolidated statements of operations. The Company recognized a $58.1 million impairment loss associated with certain indefeasible rights of use for fiber optic cable to
write the assets down to a fair value of zero 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.

5.    Goodwill, Net (See Note 1 for discussion of significant subsequent events)

Goodwill, net, was comprised of the following by reportable segment (in thousands):

Hosting

International

TotalBalance as of December 31, 2001

$
41,413

$
48,709

$
90,122Additions





11,747


11,747Deductions





(809
)

(809
)Balance as of June 30, 2002

$
41,413

$
59,647

$
101,060


The
additions to goodwill relate primarily to a reclassification from acquired intangibles to goodwill resulting from the final valuation study completed for the acquisition of Integra.
The goodwill deduction represents an estimated loss on the disposition of certain international operations, which is included in special items in the accompanying condensed consolidated statements of
operations.

19

---

The
Company ceased the amortization of goodwill upon the adoption of SFAS No. 142 on January 1, 2002. Amortization expense will be approximately $28 million lower in
2002 compared to 2001, including a $7 million reduction as a result of adopting this statement on January 1, 2002 and a $21 million reduction resulting from the impairment of
goodwill recognized in the fourth quarter of 2001.

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

For the six months
ended June 30,2001

2002Reported Net Loss

$
(645,923
)
$
(691,983
)Goodwill Amortization


14,132


Adjusted Net Loss

$
(631,791
)
$
(691,983
)Basic and Diluted Earnings (Loss) Per Common ShareReported Net Loss Per Share

$
(67.23
)
$
(61.92
)Goodwill Amortization Per Share


1.47


Adjusted Net Loss Per Share

$
(65.76
)
$
(61.92
)


6.    Intangibles, Net (See Note 1 for discussion of significant subsequent events)

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

|                                        |       | December 31, 2001 |        | June 30, 2002
|--------------------------------------- | ----- | ----------------- | ------ | -------------
|
|Intangible Assets with Useful Lives     |       |                   |        |              
|Customer lists                          |       | $                 | 4,000  |              
|Trademarks                              |       |                   | 4,000  |              
|Developed technology                    |       |                   | 19,000 |              
|Other intangibles                       |       |                   | 21,282 |              
|Internal use software                   |       |                   | 93,832 |              
|                                        |       |                   |        |              
|                                        | Total |                   | $      | 142,114      
|Intangible Assets with Indefinite Lives |       |                   |        |              
|Developed Technology                    |       |                   |       |              
|                                        |       |                   |        |              
|                                        | Total |                   | $      | 142,114      
|                                        |       |                   |        |              

Amortization
expense for intangibles was $8.9 million and $11.9 million for the three months ended June 30, 2001 and 2002, respectively, and $17.1 million and
$24.1 million for the six months ended June 30, 2001 and 2002, respectively. Based on the assets as of June 30, 2002, future estimated amortization expense for intangibles is
approximately $21.9 million for the last six months of 2002 and $18.4 million, $6.7 million, $4.3 million and $3.2 million in 2003, 2004, 2005 and 2006,
respectively.

20

---

Other
intangibles as of December 31, 2001 represented the Company's preliminary estimate of identifiable intangible assets acquired as part of the Integra acquisition. The final
valuation study was completed in June 2002, and the following intangibles were identified:

Intangible Asset

Cost
(in thousands)

Weighted Average
Useful Life (in years)Customer Lists

$
4,544

7Trademarks


3,285

5Developed Technology


4,482

7Total

$
12,311

7


Developed
Technology includes approximately $1.1 million that is not subject to amortization and approximately $0.7 million related to research and development that was
written off in the second quarter of 2002. The $0.7 million was recorded as intangible amortization and is included in depreciation and amortization expense in the accompanying condensed
consolidated statements of operations.

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

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

December 31,
2001

June 30,
2002Current portion of capital leases

$
149,433

$
156,6166% convertible subordinated debentures


7,634


7,537Other short-term debt


338


50Private placement bonds (in default)





1,150,000Verizon borrowings (in default)





1,150,000Total short-term obligations

$
157,405

$
2,464,203Capital leases

$
49,183

$
170,119Private placement bonds


1,150,000


Verizon borrowings


1,150,000


Total long-term obligations

$
2,349,183

$
170,119


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 debentures,
due 2012, 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.

As
of June 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 June 30, 2002 has been included in short-term obligations based on an estimate of the timing for the remaining debt conversions.

On
March 5, 2001, as amended on September 28, 2001, the Company entered into a $2 billion credit facility with Verizon Investments Inc., (the "Verizon
Facility") a wholly-owned subsidiary of

21

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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. Interest expense on the credit facility is based on London
Inter-bank Offer Rate ("LIBOR") plus 200 basis points when 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. As of June 30, 2002, borrowings under the Verizon Facility totaled
$1.15 billion.

Genuity
has a committed and unsecured $2.0 billion revolving line of credit facility with nine participating banks (the "Bank Facility"). On September 24, 2001, this
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. As of June 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 ("S&P"), was 25 basis points and is payable quarterly in arrears. 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. 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%.

Additionally,
the Verizon and Bank facilities require 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 will be callable in the event that this condition does not exist. (See Note 1 for
discussion of significant subsequent events.)

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. 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. The fee on the letter of
credit varies based on Genuity's credit rating.

On
April 15, 2002, Moody's Investor Services announced a reduction of our credit rating from Baa2 to Ba1. These reductions resulted in an increase in the facility fee for our Bank
Facility from 20 to 25 basis points per annum and an increase in the fee for the letter of credit issued under our Bank Facility from 115 to 160 basis points per annum payable quarterly in arrears.
Although these fees are tied to our credit rating, they are subject to maximum and minimum limitations. The fee limitations under the Bank Facility are as follows:

Minimum

MaximumFacility Fee

8 basis points

50 basis pointsLetter of Credit Fee

82 basis points

385 basis points


Credit
rating reductions will not restrict the Company's ability to draw additional funds or trigger repayment under the Verizon Facility or the Bank Facility. The maximum total increase
for fees tied to our credit rating that the Company could be subject to is 250 basis points over the fees charged as of June 30, 2002.

22

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Credit
advances bear interest at a rate equal to either (1) for base rate advances, the higher of the prime rate announced by Chase Manhattan Bank or 50 basis points per annum
above the federal funds rates or (2) for LIBOR advances, LIBOR plus a percentage determined based on our credit rating. The interest on any credit advances will be payable in quarterly
installments.

On
May 8, 2002, the Company entered into a standby letter of credit agreement with a related party based on prevailing market rates. The Company is required to pledge cash as
collateral for any amounts outstanding. As of June 30, 2002, the amount outstanding under this letter of credit was $2.6 million.

8.    Stockholders' Deficit (See Note 1 for discussion of significant subsequent 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 may not be 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, during the one-year period ending on
October 11, 2003, the shares of Class A common stock which trade on the Nouveau Marché may not be resold, pledged, or otherwise hedged or transferred, except in compliance
with either Regulation S or Rule 144 under the Securities Act.

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

23

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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:



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

24

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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 June 24, 2002, Verizon has eliminated regulatory restrictions in 8 of 14 jurisdictions covered in the FCC Order representing 75% 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:



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,

25

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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 are shares 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.

9.    Loss Per Share

The weighted-average common shares outstanding for both basic and diluted loss per share were approximately 9,608,000 shares for the three and six month periods
ending June 30, 2001 and 11,175,000 shares for the three and six month periods ending June 30, 2002.

Potential
common shares excluded in the computation of weighted-average diluted shares outstanding were approximately 3,866,000 for the three and six months ended June 30, 2001
and 1,648,000 for the three and six months ended June 30, 2002, as their inclusion would have an anti-dilutive effect.

10.  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 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

26

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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 Web hosting operation 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 10 data centers outside of the United States: one in AmsterdamNetherlands and as a result of the acquisition of Integra in ReadingEngland,
ParisFrance, FrankfurtGermany, MilanItaly, StockholmSweden, MadridSpain, OsloNorway, CopenhagenDenmark and
MunichGermany. As part of the restructuring activities initiated in the second quarter of 2002, data centers located in MadridSpain and MilanItaly will be closed
in the third quarter of 2002.

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 for AOLTW,
including Docomo-AOL, in relation to Genuity's total revenues were $200.7 million, or 33%, and $183.5 million, or 32%, for the six months ended June 30, 2001 and 2002,
respectively. Revenues from Verizon in relation
to Genuity's total revenues were $94.0 million, or 16%, and $170.7 million, or 30%, for the six months ended June 30, 2001 and June 30, 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.

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

Three Months Ended
June 30,

Six Months Ended
June 30,2001

2002

2001

2002RevenuesAccess

$
224,696

$
218,488

$
442,800

$
435,465Hosting and Value-Added Services


37,447


25,012


76,130


50,788Transport


26,599


20,003


52,261


36,320International


14,052


21,884


31,070


44,408Total revenues


302,794


285,387


602,261


566,981Operating ExpensesCost of sales


345,498


308,870


690,751


620,165Selling, general and administrative


152,794


98,442


305,840


208,545Depreciation and amortization


103,185


102,456


196,710


190,105Special items


47,909


181,937


47,909


185,504Total operating expenses


649,386


691,705


1,241,210


1,204,319Operating Loss


(346,592
)

(406,318
)

(638,949
)

(637,338
)Other Income (Expense)Interest expense, net


(6,155
)

(28,212
)

(4,940
)

(53,871
)Minority interest





1,611





3,111Other, net


278


(375
)

96


(1,332
)Loss Before Income Taxes

$
(352,469
)
$
(433,294
)
$
(643,793
)
$
(689,430
)Capital Expenditures(1)Access

$
31,796

$
23,928

$
284,169

$
71,380Hosting and Value-Added Services


29,622


10,419


63,879


16,204GNI/Transport


254,258


19,031


556,211


29,648International


15,065


5,687


16,494


13,032Other


56,719


1,198


121,891


9,305Total

$
387,460

$
60,263

$
1,042,644

$
139,569Depreciation and AmortizationAccess

$
23,711

$
42,440

$
44,329

$
70,373Hosting and Value-Added Services


12,098


16,553


24,016


33,244GNI/Transport


47,596


22,220


90,926


44,681International


3,462


7,812


6,556


15,382Other


16,318


13,431


30,883


26,425Total

$
103,185

$
102,456

$
196,710

$
190,105


---

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December 31,
2001

June 30,
2002Property, Plant and Equipment, NetAccess

$
360,650

$
582,992Hosting and Value-Added Services


241,587


230,334GNI/Transport


475,780


379,535International


140,283


112,201Other


263,917


199,509Total

$
1,482,217

$
1,504,571


11.  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 $22.7 million and $13.8 million for the three months ended
June 30, 2001 and 2002, respectively, and was $47.0 million and $30.6 million for the six months ended June 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 June 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

$
101,700

$
19,1002003


237,400


31,1002004


16,100


28,2002005


7,700


25,6002006


8,000


24,300Thereafter


39,100


67,600Total minimum lease payments


410,000

$
195,900Amount representing interest


(83,300
)Present value of minimum lease payments

$
326,700


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 the second and fourth quarter of 2001 and the second quarter of 2002 associated with operating leases on facilities, which either have been vacated or will be exited. 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 June 30, 2002, the
remaining balance associated with these accrued future lease costs totaled $70.7 million. Of this amount, $21.2 million is included in accrued liabilities and $49.5 million is
included in other liabilities in the accompanying condensed consolidated balance sheets.

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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 June 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 June 30, 2002, the future minimum
commitments under these agreements, excluding future operating and maintenance costs, were as follows (in thousands):

2002

$
1,000Total future minimum commitments

$
1,000


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 June 30, 2002, the outstanding commitments under the agreements were as follows (in thousands):

2002

$
7,000Total future minimum commitments

$
7,000


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 June 30, 2002, future minimum payments under these non-cancelable purchase commitments were as follows (in thousands):

2002

$
123,0002003


271,0002004


155,0002005


85,0002006


85,000Thereafter


33,000Total future minimum commitments

$
752,000


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 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

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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 June 30, 2002, the future minimum commitments under these agreements were as follows (in
thousands):

Accrued
Liabilities Plus
Interest

Future
Commitments

Total2002

$
110,000

$
7,000

$
117,0002003


262,000


64,000


326,0002004


31,000


132,000


163,0002005





44,000


44,0002006





63,000


63,000Total future minimum commitments

$
403,000

$
310,000

$
713,000


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.

Contingencies

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

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

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 7 for further discussion). One of these banks is also a major stockholder of the Company. The terms of the bank facility were entered into based on prevailing market rates. On
September 27, 2001, a $1.15 billion letter of credit was issued to guarantee a private placement bond issuance.

On
May 8, 2002, the Company entered into a standby letter of credit agreement with a related party based on prevailing market rates. The Company will be required to pledge cash as
collateral for any amount outstanding. As of June 30, 2002, the amount outstanding under this letter of credit was $2.6 million.

13.  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

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agreement. Such specified price reductions are to be implemented in April 2002, 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 $29.0 million was recorded
through June 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.

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 June 30, 2002.

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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.

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 June 30, 2002, the Company has incurred $10.4 million of advertising costs under this
agreement.

14.  Transactions with Verizon (See Note 1 for discussion of significant subsequent 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 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 as of 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

33

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$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
June 30, 2002, $8.0 million of the $100 million prepayment has been recognized as revenue. Since inception, Verizon has purchased approximately $149.1 million of services
under this agreement through June 30, 2002, including $8.0 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 continued to develop with TELUS during 2001.

On
March 5, 2001, as amended on September 28, 2001, the Company entered into a $2 billion credit facility with Verizon Investments Inc., (the "Verizon
Facility") 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. Interest expense on the credit
facility is based on LIBOR plus 200 basis points when 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. As of June 30, 2002, borrowings under the Verizon Facility totaled $1.15 billion.

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
January 3, 2002, Genuity entered into an agreement with Verizon Service Corp. on behalf of certain Verizon operating telephone companies ("OTCs") and Verizon Advanced
Data Inc. ("VADI") 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.

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/

34

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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.

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. 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 or
about 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.

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
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,
effective July 2002, Genuity will transition its current responsibilities for end-user local loop management to Verizon, with Genuity continuing to deliver IP backbone services to
Verizon. Under this agreement, Verizon will be 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, effective July 1, 2002, Genuity will no longer record the revenues related to the provisioning of the local
loop and CPE to the DSL customer, which accounted for approximately $58.1 million of revenues for the quarter ended June 30, 2002 and $108.6 million for the first six months of
2002. The lower revenues are expected to be offset by a similar reduction in expenses associated the elimination of the local loop, CPE and other charges related to provisioning new subscribers.

35

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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 anticipated
growth strategies and anticipated trends in our business as well as projections relating to our capital expenditure requirements, our future funding requirements, our plans for transitioning customer
traffic from leased capacity to our network, research and development initiatives 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 SUBSEQUENT 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 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 have not been affected by Verizon's termination of the right to convert its Class B shares
into a controlling interest in Genuity. The Company also announced on July 29, 2002 that Michael Masin, a vice chairman of Verizon Communications, has resigned from Genuity's board of
directors. Verizon, as a Class B stockholder, has 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

36

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thereafter received $723 million of that request. 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 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 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.

On
August 13, 2002, we were granted an additional 30-day extension to the standstill agreement, which expired on August 12, 2002. In connection with this extension, Genuity
will make a payment of $50 million to the members of the bank group which funded the $723 million. Genuity is continuing discussions with the banks and Verizon with respect to existing
commercial and other relationships.

We
have retained Lazard Freres & 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 or
both of the facilities. In the event either Verizon or the banks accelerate the payment obligations under the respective facilities, 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 would not seem 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.

We
expect that our stock may be delisted from the Nasdaq National Market's quotation system in the near future, which may limit the liquidity of an investment in the Company's shares.

Genuity
has a 93% ownership interest in Integra S.A. The operations of this entity are funded through borrowings made by Genuity. Based on the events, which have occurred subsequent to
June 30, 2002, the Company has been assessing all of its future funding requirements. On August 10, 2002, Genuity's Board of Directors approved management's recommendation to no longer
provide funding to Integra S.A, which could cause Integra to become insolvent and seek the protection afforded debtors under the bankruptcy laws. The estimated loss associated with the
write-off of our investment in Integra is $80.0 million, which will be recorded in the third quarter of 2002.

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 between the carrying amount and fair value of the asset. Under SFAS
No. 142, "Goodwill and Intangibles Assets," 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. The

37

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estimate of future cash flows associated with the Company's underlying business segments is an integral part of the impairment assessment within these two accounting standards. The events that have
occurred subsequent to June 30, 2002 represent indicators of potential impairment associated with goodwill, intangibles and property, plant and equipment. As of June 30, 2002, goodwill,
intangibles and property, plant and equipment totaled $101.1 million, $57.0 million and $1.5 billion, respectively. As a result of these events, the Company may incur material
impairment charges associated with these assets. Such impairment charges would be recorded during the quarter ended September 30, 2002 or at the time that the impairment can be measured.

RESULTS OF OPERATIONS

2002 Compared to 2001

Revenues (in thousands)

Three Months Ended June 30,2001

2002Amount

%

Amount

%Access

$
224,696

74
%
$
218,488

76
%Hosting and Value-Added Services


37,447

12


25,012

9Transport


26,599

9


20,003

7International


14,052

5


21,884

8Total

$
302,794

100
%
$
285,387

100
%


Six Months Ended June 30,2001

2002Amount

%

Amount

%Access

$
442,800

74
%
$
435,465

77
%Hosting and Value-Added Services


76,130

12


50,788

9Transport


52,261

9


36,320

6International


31,070

5


44,408

8Total

$
602,261

100
%
$
566,981

100
%


Total
revenues for the quarter ended June 30, 2002 decreased $17.4 million, or 6%, and for the first six months of 2002 decreased $35.3 million, or 6%, over the same
periods in 2001. Total revenues for the quarter ended June 30, 2002 from Verizon increased $39.9 million, or 74%, and for the first six months of 2002 increased $76.7 million, or
82%, over the same period in 2001 and represented 30% 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 June 30,
2002, $8.0 million of the $100 million prepayment has been recognized as revenue. Since inception, Verizon has purchased approximately $149.1 million of services under this
agreement through June 30, 2002, including $8.0 million of the $100 million prepayment.

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Access.Access revenues for the quarter ended June 30, 2002 decreased $6.2 million, or 3%, and for the first
six months of 2002 decreased $7.3 million, or 2%, over the same period in 2001. Broadband revenues for the quarter ended June 30, 2002 increased $44.4 million, or 103%, over the
corresponding period in 2001 due to the increase in broadband customers. Total broadband subscribers increased from approximately 452,100 subscribers as of June 30, 2001 to approximately
833,600 subscribers as of June 30, 2002 (including America Online, "AOL"). This increase was offset by a $33.6 million, or 27%, decrease in dial-up revenues
due to the renegotiated AOL contract and the Company's exit from the wholesale dial-up access business in the fourth quarter of 2001, however, we continue to provide dial-up
access to our two largest customers, America Online and Verizon. Approximately $17.5 million, or 52%, of the overall reduction in dial-up revenues is due to lower revenues from AOL,
which decreased 18% over the same period in 2001. Also offsetting the increase in broadband revenues was a decrease in dedicated access revenues of $14.8 million, or 29%, year over year
primarily due to continued churn and non-service related customer credits, continued price pressures and a greater number of lower priced connections.

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
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,
effective July 2002, Genuity will transition its current responsibilities for end-user local loop management to Verizon, with Genuity continuing to deliver IP backbone services to
Verizon. Under this agreement, Verizon will be 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, effective July 1, 2002, Genuity will no longer record the revenues related to the provisioning of the local
loop and CPE to the DSL customer, which accounted for approximately $58.1 million of revenues for the quarter ended June 30, 2002 and $108.6 million for the first six months of
2002. The lower revenues are expected to be offset by a similar reduction in expenses associated the elimination of the local loop, CPE and other charges related with provisioning new subscribers.

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.

The
term of the amended agreement remains unchanged with certain obligations continuing through December 31, 2006. Under the amended agreement, America Online 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, America Online 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, America Online 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 are to be
implemented in April 2002, January 2003, and January 2004. The amended agreement contains minimum commitments for such ports through the end of 2003. We do not anticipate that
America Online 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

39

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estimated revenue that will be deferred at the end of 2002 will be approximately $35.7 million of which $29.0 million was recorded through June 30, 2002.

Under
the amended agreement, starting in January 2004, America Online 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 America Online exercises its option to reduce the number of dial-up access ports to
the reduced commitment level.

Additionally,
we remain obligated to offer to America Online, 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 America Online. Under the amended agreement, America Online 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 America Online. If we do
not agree to reduce the fees we charge to America Online for the applicable dial-up access ports to the market price, America Online 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, America Online may reduce its dial-up service commitments in the event we fail to meet
monthly or geographic delivery targets.

Pursuant
to the amended agreement, America Online 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 America Online.

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 June 30, 2002.

We
continue to provide broadband services to America Online in connection with their digital subscriber line service offerings. Under the prior agreement, America Online 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, America Online 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 America Online customer, America Online 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 America Online and the

40

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monitoring, management and control of the network. We receive a specified monthly fee for each America Online DSL customer for whom we provide network services. These fees are subject to agreed upon
reductions, as the number of America Online DSL customers for whom we are providing services increases. At specified times during the course of the amended agreement, America Online 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
America Online for broadband network services to the market price in the manner described in the amended agreement, America Online may, subject to advance notice and other limitations, terminate
future broadband service purchase commitments to us and terminate existing broadband service. America Online 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.

Hosting and Value-Added Services.Hosting and Value-Added Services revenues for the quarter ended June 30, 2002
decreased $12.4 million, or 33%, and for the first six months of 2002 decreased $25.3 million, or 33%, over the same period in 2001. The decrease was 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 317 as of June 30, 2001 to 175 as of June 30, 2002. Partially offsetting the
decline in hosting revenues was an increase of $3.3 million of revenue from a payment associated with a one-year minimum commitment with one of our customers.

Transport.Transport revenues for the quarter ended June 30, 2002 decreased $6.6 million, or 25%, and for the
first six months of 2002 decreased $15.9 million, or 31%, over the same period in 2001 primarily due to a loss of customers and lower pricing.

International.International revenues for the quarter ended June 30, 2002 increased $7.8 million, or 56%, and
for the first six months of 2002 increased $13.3 million, or 43%, over the same period in 2001 as a result of the Integra acquisition in the fourth quarter of 2001. Excluding the impact of the
Integra acquisition, revenues in the quarter ended June 30, 2002 were $1.2 million, or 9%, higher and essentially unchanged for the first six months of 2002 over the same period in 2001.

Cost of Sales

Cost of sales for the quarter ended June 30, 2002 decreased $36.6 million, or 11%, and for the first six months of 2002 decreased
$70.6 million, or 10%, over the same period in 2001. Cost of sales, as a percentage of total revenues, was 114% and 108% for the three months ended June 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 68% for the three months ended June 30, 2001 and 2002, respectively. Telecommunication circuit costs for the three months ended June 30, 2002 decreased
$26.1 million, or 11%, over the same period in 2001. The decline in circuit costs was primarily the 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 the decline were lower costs associated with
the deployment of managed modems and lower minutes of use volumes associated with our VoIP services. Partially offsetting the lower circuit costs were higher costs associated with the growth in
broadband services. Effective July 1, 2002, as a result of the "preferred provider" agreement between Genuity and Verizon, we will no longer be incurring local loop and CPE charges associated
with the provisioning of new subscribers. The lower cost of sales are expected to be offset by a similar reduction in revenues.

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

41

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the terms of the contract as the modems are deployed and the leased circuits are terminated. As of June 30, 2002, approximately 69% 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 three months ended June 30, 2002, depreciation and interest expense associated with these modems was $34.6 million compared to
$4.6 million in the same period in 2001. The Company expects to increase the deployment of these modems significantly during 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 as well as travel and contractor expenses to support our network infrastructure and customer service were approximately 19% and 15% of cost of sales for the
quarter ended June 30, 2001 and 2002, respectively. These costs decreased by approximately $17.3 million, or 27%, over the same period in 2001. The decrease was due primarily to a lower
level of full-time equivalent employees during the second quarter of 2002. Other costs, such as facilities, maintenance, property taxes and customer premise equipment (CPE) costs were
approximately 12% and 17% of cost of sales for the quarter ended June 30, 2001 and 2002, respectively. These costs increased $6.8 million, or 15%, over 2001 due primarily to higher CPE
costs associated with the increased broadband revenues in 2002.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the quarter ended June 30, 2002 decreased $54.4 million, or 36%, and for the first six months of
2002 decreased $97.3 million, or 32%, over the same period in 2001. The decrease is primarily due to the benefit of the headcount reduction initiatives completed in the second half of 2001 and
the first six months of 2002. Contractor, labor and related expenses decreased $41.5 million for the quarter ended June 30, 2002 and $80.3 million for the first six months of
2002, over the same period in 2001. Also contributing to the overall decrease are lower advertising costs.

Depreciation and Amortization

Depreciation and amortization expenses for the quarter ended June 30, 2002 decreased $0.7 million, or 0.7%, and for the first six months of 2002
decreased $6.6 million, or 3%, over the same period in 2001. This decrease was primarily due to the impairment charge that was recorded in the fourth quarter of 2001 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 was an increase in managed modem depreciation of approximately $26.4 million for the quarter ended June 30, 2002 and
$43.0 million for the first six months of 2002.

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

42

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related to facilities that will be exited. The $181.9 million charge for the quarter ended June 30, 2002 includes the following (in millions):

Reduction in Force

$
20.3Facilities Exit Costs


38.8Loss on Disposition of International Entities


11.1Asset ImpairmentFacility Related

49.5Fiber Optic Cable

58.1Total




107.6Loss on Fixed Asset Sales


4.1Total Special Items

$
181.9


On
May 2, 2002, Genuity announced an additional headcount reduction. Genuity reduced its headcount by an additional 932 full-time equivalent employees during the
second quarter. Severance and associated termination benefits for the 932 employees included in the restructuring charge for the quarter ended June 30, 2002 were approximately
$20.3 million. The Company identified 23 additional facilities, which would be exited which included POP facilities, sales sites and administrative buildings. The majority of the facilities
will be vacated by the end of the third quarter of 2002. Facility and related costs of approximately $38.8 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 zero and as a result, the Company recorded an impairment loss of approximately $49.5 million.

During
the second quarter of 2002, the Company identified certain international businesses, 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, which is included in special items in the accompanying condensed consolidated
statements of operations. The Company recognized a $58.1 million impairment loss associated with certain indefeasible rights of use for fiber optic cable to write the assets down to a fair
value of zero due to the insolvency of the fiber optic cable providers, the changes in the market values of the fiber and the Company's plan to discontinue use of the fiber.

The
Company recorded a loss on the sale of miscellaneous assets of approximately $4.1 million for the quarter ended June 30, 2002.

Interest Expense, net

Interest expense, net, for the quarter ended June 30, 2002 was $28.2 million compared $6.2 million for the quarter ended June 30,
2001. The increase in net interest expense is primarily due to the increase in the Company's debt to $2.3 billion as of June 30, 2002 compared to $750.0 million as of
June 30, 2001.

Income Taxes

Genuity generated pre-tax book losses of $352.5 million and $433.3 million for the quarters ended June 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.

43

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Net Loss

Net losses increased to $434.5 million for the quarter ended June 30, 2002 compared to $353.6 million for the quarter ended June 30,
2001 and increased to $692.0 million for the first six months of 2002 compared to $645.9 million for the first six 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:



44

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LIQUIDITY AND CAPITAL RESOURCES

Significant Subsequent 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 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.

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.

On
August 13, 2002, we were granted an additional 30-day extension to the standstill agreement, which expired on August 12, 2002. In connection with this extension, Genuity
will make a payment of $50 million to the members of the bank group which funded the $723 million. Genuity is continuing discussions with the banks and Verizon with respect to existing
commercial and other relationships.

We
have retained Lazard Freres & Co. as the Company's financial advisors to assist the Company in developing a restructuring plan. 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 or both of the facilities. In the
event either Verizon or the banks accelerate the payment obligations under the respective facility, we would not have

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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 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 would not seem likely in view of the company's situation and the difficulties in the telecommunications
market in general. 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
July 25, 2002, Moody's Investor Services and Standard & Poor's Rating Services announced a reduction of our credit rating from Ba1 to Ca and from BB to CCC-,
respectively, as a result of Verizon's decision to cancel its option to reintegrate Genuity and the subsequent default under the Company's credit facilities. This reduction will result in an increase
in the facility fee for our Bank Facility from 25 to 50 basis points per annum and an increase in the fee for the letter of credit issued under our Bank Facility from 160 to 385 basis points per annum
payable quarterly in arrears. Based on these fee increases and the current amounts outstanding under the Bank Facility, the Verizon Facility
and the private placement bonds, annual interest expense for these obligations will be approximately $160.9 million.

We
expect that our stock may be delisted from the Nasdaq National Market's quotation system in the near future, which may limit the liquidity of an investment in the Company's shares.

2002 Compared to 2001

We have used cash in operating and investing activities during the first half of 2001 and 2002. We have funded these cash requirements principally through the
proceeds from the initial public offering of our Class A common stock and proceeds from borrowings.

Net
cash used in operating activities was $505.0 million and $203.2 million for the first six 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 $1.0 billion and $89.9 million for the first six 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 $737.1 million for the first six months of 2001. Net cash used in financing activities was $52.3 million for the first six
months of 2002. Net cash provided by financing activities in the first six months of 2001 was primarily due to proceeds from borrowings. Net cash used in financing activities in the first six months
of 2002 was primarily the result of principal payments for capital leases, including the managed modem agreements.

Our
unamortized debt issuance costs were $11.8 million and $10.2 million as of December 31, 2001 and June 30, 2002, respectively. These costs are included in
other assets in the accompanying condensed consolidated balance sheets. These costs are being amortized to interest expense based on the effective interest method over the terms of the corresponding
borrowings.

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As
of June 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 any senior indebtedness that we may incur.

As
of June 30, 2002, our indebtedness also included $326.7 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 $2.3 billion of debt in default |  | $                   
|Capital Lease Obligations                                  |  |                     
|Operating Leases                                           |  |                     
|Lease Costs Accrued in Restructuring                       |  |                     
|Other Commercial Commitments                               |  |                     
|                                                           |  |                     
|Total Contractual Cash Obligations                         |  | $                   
|                                                           |  |                     

The
above summary excludes amounts reflected on the accompanying condensed consolidated balance sheets within accounts payable and other liabilities.

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 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.

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

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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.

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 December 31, 2001 and June 30, 2002, Genuity's debt portfolio consisted of short-term 6% convertible subordinated debentures and short-term
borrowings. The carrying value of these short-term borrowings approximates fair value as of December 31, 2001 and June 30, 2002.

As
of December 31, 2001 and June 30, 2002, Genuity's debt included $2.3 billion of floating-rate debt, which was exposed to changes in interest rates.
This exposure was linked to changes in LIBOR. An increase of one percentage point in LIBOR would increase annual pre-tax interest expense by $23 million.

Genuity
will be exposed to foreign currency risk in the future as the Company's international operations grow. To date, the foreign currency risk has not been material to Genuity's
results of operations or financial position.

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.

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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.

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 will hold approximately a 10 percent ownership interest in Genuity, but will no longer have the right to convert to approximately an 80%
controlling interest in the Company. Michael Masin, a vice chairman of Verizon Communications, has resigned from the Genuity Board of Directors. Verizon has 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. This conversion resulted in Verizon owning only approximately 10 percent of the voting power of our outstanding capital stock
and immediately resulted in an event of default under our $2.0 billion existing credit facility with Verizon Investments Inc., a wholly-owned subsidiary of Verizon (the "Verizon
Facility"). The conversion also immediately resulted in an event of default under our $2.0 billion revolving line of credit facility (the "Bank Facility"), which required that after the
exercise of its conversion right Verizon own, directly or indirectly, at least 50% of the voting power of our outstanding capital stock.

Because
of this event of default, the agent under the Bank Facility may, with the consent of or at the direction of the lenders under the Bank Facility owning at least a majority in
interest of the sum of (a) aggregate unpaid principal amount outstanding and (b) the aggregate unpaid principal amount of all letter of credit advances outstanding, terminate the Bank
Facility and declare the obligations there under immediately due and payable. The lenders under the Bank Facility did not immediately demand payment of the $1.9 billion outstanding under the
Bank Facility.

On
July 22, 2002, the Company provided notice to draw the remaining $850 million available under the Bank Facility 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. On July 29, 2002, we entered into a standstill agreement with the lenders under 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, we
repaid $100 million of the $723 million advance to the members of the bank group, which had funded the $723 million.

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On
August 13, 2002, we were granted an additional 30-day extension to the standstill agreement, which expired on August 12, 2002. In connection with this extension, Genuity
will make a payment of $50 million to the members of the bank group which funded the $723 million. Genuity is continuing discussions with the banks and Verizon with respect to existing
commercial and other relationships.

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

On May 16, 2002, the Company held its Annual Meeting of Shareholders. The following proposals were adopted by the margins indicated (the votes shown have
not been retroactively adjusted for the reverse 20-to-1 split of common stock completed on May 30, 2002):

Votes For

Votes WithheldElection of Directors:Paul J. Collins

171,436,959

3,386,692John H. Dasburg

162,173,939

12,649,712Gordon Eubanks

171,419,523

3,404,128Benson P. Shapiro

171,493,060

3,330,591


Votes For

Votes Against

AbstentionsReverse Stock Split:Class A stockholders

149,994,627

5,989,756

583,267Class B stockholders

18,256,000

0

0


ITEM 5.    OTHER INFORMATION

Not applicable.

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K





Genuity
filed a current report on Form 8-K on April 5, 2002, reporting under Item 4, the change in the Company's external auditors from Arthur Andersen LLP to
Ernst & Young LLP. The decision to change external auditors was approved by the audit committee and the full Board of Directors of the Company.

Genuity
filed an amended current report on Form 8-K/A on April 15, 2002, amending the Form 8-K filed on April 5, 2002 for the
termination date of the Company's external auditors.

Genuity
filed a current report on Form 8-K on May 2, 2002, reporting under Item 5, the issuance of a press release discussing the financial results for the
quarter ended March 31, 2002.

Genuity
filed a current report on Form 8-K on May 17, 2002, reporting under Item 5,that the proposal for a reverse 20-to-1 split of the
Company's common stock was approved by its shareholders and its Board of Directors. Upon completion of the reverse split, Genuity had 11,175,220 shares of Class A and B common stock issued and
outstanding.

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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.
|---------------------- |  | ------------
|                       |  | By:         
|Dated: August 14, 2002 |  |             

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