<PAGE>

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

                                   FORM 10-Q

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

               For the quarterly period ended September 30, 2001

                                       OR

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

                   For the transition period from     to

                          Commission File Number 30837

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

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

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

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

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

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

   The Company had 205,248,400 shares of $0.01 par value Class A common stock
outstanding and 18,256,000 shares of $0.01 par value Class B common stock
outstanding at November 9, 2001.

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<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
                         PART I--FINANCIAL INFORMATION
 <C>     <S>                                                               <C>
 Item 1. Consolidated Financial Statements (Unaudited)

         Consolidated Statements of Operations for the Three and Nine
          Month Periods Ended September 30, 2000 and 2001................    3

         Consolidated Balance Sheets as of December 31, 2000 and
          September 30, 2001.............................................    4

         Consolidated Statements of Cash Flows for the Nine Months Ended
          September 30, 2000 and 2001....................................    5

         Consolidated Statement of Changes in Stockholders' Equity for
          the Nine Month Periods Ended September 30, 2000 and 2001.......    6

         Consolidated Statements of Comprehensive Loss for the Three and
          Nine Month Periods Ended September 30, 2000 and 2001...........    7

         Notes to Unaudited Consolidated Financial Statements............    8

 Item 2. Management's Discussion and Analysis of Financial Condition and
         Results of Operations...........................................   27

 Item 3. Quantitative and Qualitative Disclosures About Market Risk......   33

                           PART II--OTHER INFORMATION

 Item 1. Legal Proceedings...............................................   34

 Item 2. Changes in Securities and Use of Proceeds.......................   34

 Item 3. Defaults upon Senior Securities.................................   34

 Item 4. Submission of Matters to a Vote of Security Holders.............   34

 Item 5. Other Information...............................................   34

 Item 6. Exhibits and Reports on Form 8-K................................   34

 SIGNATURES...............................................................  36
</TABLE>

                                       2
<PAGE>

                                  GENUITY INC.

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

<TABLE>
<CAPTION>
                                 Three Months Ended      Nine Months Ended
                                    September 30,          September 30,
                                 --------------------  ----------------------
                                   2000       2001        2000        2001
                                 ---------  ---------  ----------  ----------
<S>                              <C>        <C>        <C>         <C>
Revenues........................ $ 308,142  $ 302,262  $  823,918  $  904,523
Operating Expenses
  Cost of sales.................   339,316    318,965     931,466   1,009,716
  Selling, general and
   administrative...............   139,213    135,845     372,194     441,685
  Depreciation and
   amortization.................    81,250    128,721     196,844     325,431
  Special items.................     2,775        424      11,543      48,333
                                 ---------  ---------  ----------  ----------
    Total operating expenses....   562,554    583,955   1,512,047   1,825,165
                                 ---------  ---------  ----------  ----------
Operating Loss..................  (254,412)  (281,693)   (688,129)   (920,642)
Other Income (Expense)
  Interest income (expense),
   net..........................    27,912    (18,510)     26,966     (23,450)
  Other, net....................    (1,667)       959        (229)      1,055
                                 ---------  ---------  ----------  ----------
Loss Before Income Taxes........  (228,167)  (299,244)   (661,392)   (943,037)
Income Taxes....................       715      1,134       2,023       3,264
                                 ---------  ---------  ----------  ----------
Net Loss........................ $(228,882) $(300,378) $ (663,415) $ (946,301)
                                 =========  =========  ==========  ==========
Basic and Diluted Loss Per
 Common Share................... $   (1.19) $   (1.54) $    (8.58) $    (4.90)
                                 =========  =========  ==========  ==========
Basic and Diluted Weighted-
 Average Common Shares
 Outstanding....................   192,169    194,956      77,285     193,108
                                 =========  =========  ==========  ==========
</TABLE>
  The accompanying notes are an integral part of these unaudited consolidated
                             financial statements.


                                       3
<PAGE>

                                  GENUITY INC.

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

<TABLE>
<CAPTION>
                                                     December 31,  September 30,
                                                         2000          2001
                                                     ------------  -------------
<S>                                                  <C>           <C>
                       ASSETS
Current Assets:
  Cash and cash equivalents......................... $   868,926    $ 1,284,965
  Receivables, less allowances of $29,099 and
   $25,634, respectively............................     369,460        400,956
  Other current assets..............................      51,600         57,578
                                                     -----------    -----------
    Total current assets............................   1,289,986      1,743,499
Property, Plant and Equipment, Net..................   3,009,706      3,542,293
Goodwill and Other Intangibles, Net.................     526,449        574,601
Other Assets........................................      73,184         86,606
                                                     -----------    -----------
    Total assets.................................... $ 4,899,325    $ 5,946,999
                                                     ===========    ===========
        LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Short-term obligations, including current
   maturities....................................... $    35,514    $    80,662
  Accounts payable..................................     442,874        138,089
  Accrued compensation and related liabilities......      40,584         44,726
  Accrued circuits..................................     168,506        131,304
  Accrued liabilities...............................     369,200        167,741
  Deferred revenue..................................       9,907         22,798
                                                     -----------    -----------
    Total current liabilities.......................   1,066,585        585,320
Long-Term Obligations...............................      52,606      2,424,467
Other Liabilities...................................      14,249         28,240
                                                     -----------    -----------
    Total liabilities...............................   1,133,440      3,038,027
                                                     -----------    -----------
Minority Interest...................................         --          18,132
                                                     -----------    -----------
Stockholders' Equity:
  Preferred stock--$0.01 par value; 50,000,000
   shares authorized; no shares issued and
   outstanding......................................         --             --
  Class A common stock--$0.01 par value;
   1,600,000,000 shares authorized; 173,913,000
   shares issued and outstanding as of December 31,
   2000 and 199,556,243 shares issued and
   outstanding as of September 30, 2001.............       1,739          1,995
  Class B common stock--$0.01 par value; 21,000,000
   shares authorized; 18,256,000 shares issued and
   outstanding......................................         183            183
  Class C common stock--$0.01 par value; 800,000,000
   shares authorized; no shares issued and
   outstanding......................................         --             --
  Additional paid-in capital........................   6,017,274      6,090,614
  Accumulated other comprehensive income (loss).....       1,078         (1,262)
  Accumulated deficit...............................  (2,254,389)    (3,200,690)
                                                     -----------    -----------
    Total stockholders' equity......................   3,765,885      2,890,840
                                                     -----------    -----------
    Total liabilities and stockholders' equity...... $ 4,899,325    $ 5,946,999
                                                     ===========    ===========
</TABLE>
  The accompanying notes are an integral part of these unaudited consolidated
                             financial statements.


                                       4
<PAGE>

                                  GENUITY INC.

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

<TABLE>
<CAPTION>
                                                         Nine Months Ended
                                                           September 30,
                                                       -----------------------
                                                          2000        2001
                                                       ----------  -----------
<S>                                                    <C>         <C>
Cash Flows From Operating Activities:
  Net loss............................................ $ (663,415) $  (946,301)
  Adjustments to reconcile net loss to net cash used
   in operations:
    Special charge, non-cash portion in the period....        --        32,242
    Depreciation and amortization.....................    196,844      325,431
    Provision for bad debt............................     10,225       30,709
    Changes in current assets and current liabilities:
      Receivables.....................................    (50,396)     (51,051)
      Other current assets............................    (36,911)        (348)
      Other current liabilities.......................    117,198      (92,760)
  Other, net..........................................     16,997      (15,100)
                                                       ----------  -----------
    Net cash used in operating activities.............   (409,458)    (717,178)
                                                       ----------  -----------
Cash Flows From Investing Activities:
  Capital expenditures................................   (837,878)  (1,094,434)
  Acquisition, net of cash acquired...................        --        (1,483)
  Capitalized software................................    (26,035)     (50,902)
                                                       ----------  -----------
    Net cash used in investing activities.............   (863,913)  (1,146,819)
                                                       ----------  -----------
Cash Flows From Financing Activities:
  Repayment of debt...................................    (37,733)        (335)
  Principal payments under capital lease obligations..    (19,789)     (19,629)
  Repayment of note payable--GTE......................   (136,484)         --
  Proceeds from borrowings............................        --     2,300,000
  Proceeds from stock offering, net of expenses.......  1,830,636          --
  Contributions from GTE..............................  1,213,693          --
                                                       ----------  -----------
    Net cash provided by financing activities.........  2,850,323    2,280,036
                                                       ----------  -----------
    Net increase in cash and cash equivalents.........  1,576,952      416,039
Cash and cash equivalents, beginning of period........      6,044      868,926
                                                       ----------  -----------
Cash and cash equivalents, end of period.............. $1,582,996  $ 1,284,965
                                                       ==========  ===========
Supplemental Cash Flow Disclosures:
Cash paid during the period for:
  Interest............................................ $    5,319  $    12,850
                                                       ==========  ===========
  State income taxes.................................. $    1,496  $     1,151
                                                       ==========  ===========
Non-cash investing and financing activities:
  Assets recorded under capital lease obligations..... $      --   $   131,329
                                                       ==========  ===========
  Assets recorded under accruals...................... $  208,496  $    53,803
                                                       ==========  ===========
  Purchase of 75% ownership interest in Integra (See
   Note 2):
    Fair Value of Assets Acquired and Goodwill........ $      --   $   136,871
    Consideration Given...............................        --       (79,246)
                                                       ----------  -----------
    Liabilities and Minority Interest Assumed......... $      --   $    57,625
                                                       ==========  ===========
</TABLE>
  The accompanying notes are an integral part of these unaudited consolidated
                             financial statements.


                                       5
<PAGE>

                                  GENUITY INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                  (Unaudited)
                       (Dollars and Shares in Thousands)

<TABLE>
<CAPTION>
                                          Class B                Accumulated
                         Class A Common    Common    Additional     Other
                         -------------- ------------  Paid-In   Comprehensive Accumulated
                         Shares  Stock  Shares Stock  Capital   Income (Loss)   Deficit      Total
                         ------- ------ ------ ----- ---------- ------------- -----------  ----------
<S>                      <C>     <C>    <C>    <C>   <C>        <C>           <C>          <C>
Balance, December 31,
 1999...................     --  $   -- 18,256 $183  $2,972,142    $ 2,696    $(1,306,915) $1,668,106
 Effect of stock
  offering, net of
  $82,407 of offering
  expenses.............. 173,913  1,739    --   --    1,828,897        --             --    1,830,636
 Tax benefit on exercise
  of stock options--
  GTE...................     --     --     --   --        2,542        --             --        2,542
 Capital contributions--
  GTE...................     --     --     --   --    1,213,693        --             --    1,213,693
 Net loss...............     --     --     --   --          --         --        (663,415)   (663,415)
 Other..................     --     --     --   --          --      (1,837)           --       (1,837)
                         ------- ------ ------ ----  ----------    -------    -----------  ----------
Balance, September 30,
 2000................... 173,913 $1,739 18,256 $183  $6,017,274    $   859    $(1,970,330) $4,049,725
                         ======= ====== ====== ====  ==========    =======    ===========  ==========
Balance, December 31,
 2000................... 173,913 $1,739 18,256 $183  $6,017,274    $ 1,078    $(2,254,389) $3,765,885
 Issuance of shares for
  acquisition...........  25,643    256    --   --       73,340        --             --       73,596
 Net loss...............     --     --     --   --          --         --        (946,301)   (946,301)
 Other..................     --     --     --   --          --      (2,340)           --       (2,340)
                         ------- ------ ------ ----  ----------    -------    -----------  ----------
Balance, September 30,
 2001................... 199,556 $1,995 18,256 $183  $6,090,614    $(1,262)   $(3,200,690) $2,890,840
                         ======= ====== ====== ====  ==========    =======    ===========  ==========
</TABLE>
  The accompanying notes are an integral part of these unaudited consolidated
                             financial statements.


                                       6
<PAGE>

                                  GENUITY INC.

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

<TABLE>
<CAPTION>
                                    Three Months Ended     Nine Months Ended
                                       September 30,         September 30,
                                    --------------------  --------------------
                                      2000       2001       2000       2001
                                    ---------  ---------  ---------  ---------
<S>                                 <C>        <C>        <C>        <C>
Net Loss..........................  $(228,882) $(300,378) $(663,415) $(946,301)
Other Comprehensive Income (Loss),
 net of tax:
  Foreign currency translation
   adjustments....................        564       (997)       746     (2,340)
  Unrealized loss on securities...     (1,058)       --      (2,583)       --
                                    ---------  ---------  ---------  ---------
                                         (494)      (997)    (1,837)    (2,340)
                                    ---------  ---------  ---------  ---------
Comprehensive Loss................  $(229,376) $(301,375) $(665,252) $(948,641)
                                    =========  =========  =========  =========
</TABLE>
  The accompanying notes are an integral part of these unaudited consolidated
                             financial statements.


                                       7
<PAGE>

                                  GENUITY INC.

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

Organization

   Prior to its initial public offering, Genuity was a wholly-owned subsidiary
of GTE Corporation ("GTE"), now part of Verizon Communications Inc.
("Verizon"). On June 22, 2000, Genuity completed a recapitalization. As part of
the recapitalization, Genuity converted 510 shares of common stock issued and
outstanding to 18,256,000 shares of Class B common stock. These shares have
been reflected as if issued on December 31, 1999.

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

Basis of Presentation

   The unaudited consolidated financial statements of Genuity Inc. ("Genuity"
or the "Company"), a Delaware corporation, include the accounts of the Company
and its three wholly-owned subsidiaries; Genuity Telecom Inc., Genuity
Solutions Inc., and Genuity International Networks Inc. The unaudited
consolidated financial statements also reflect the acquisition of Integra S.A.
("Integra"). (See Note 2 for further discussion.) All significant inter-company
amounts have been eliminated. The unaudited consolidated financial statements
of Genuity presented herein, should be read in conjunction with the audited
consolidated financial statements of Genuity as of and for the year ended
December 31, 2000. In the opinion of management, the unaudited consolidated
financial statements presented herein reflect all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation. Interim
results are not necessarily indicative of results to be expected for the entire
year.

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

Summary of Significant Accounting Policies

   The Company's significant accounting policies are described in more detail
in Note 2 of the Notes to Consolidated Financial Statements included in its
most recent 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. Billings made or payments received in advance of
providing services are deferred until the period these services are rendered.

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

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


                                       8
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Access

   Internet access services include dial-up, dedicated, broadband access for
service providers and enterprise customers and Internet Protocol Communication
Services (IPCS), formerly referred to as voice-over-IP. Internet access
customers typically sign one or two-year contracts providing for monthly
recurring service fees that are earned and recognized based on either fixed
fees or capacity utilization. Revenues for IPCS services are earned and
recorded based on usage. Access also includes revenue associated with the
development, operation and maintenance of a nationwide dial-up network for
America Online, Inc. ("America Online" or "AOL"), based on a fee per modem
basis. The contract with America Online extends through 2006.

Hosting and Value-Added Services

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

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

Transport

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

International

   International revenues include all international revenues for access, Web
hosting and Value-Added services. These revenues are recognized on a basis
consistent with domestic services.

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.
Included in cash and cash equivalents is $23.0 million in cash that is
restricted under the terms of the private placement bond agreement.

Goodwill and Other Intangibles

   Goodwill and other intangible assets pertain to the acquisitions of BBN
Corporation and Genuity Incorporated, both acquired in 1997, the acquisition of
Integra acquired in September 2001 (See Note 2 for further discussion) and
internal use software. Goodwill from the acquisitions of BBN Corporation and
Genuity Incorporated is being amortized on a straight-line basis over the
lesser of 20 years or the period benefited. Goodwill created from the
acquisition of Integra is not being amortized, as this transaction was
initiated after June 30, 2001 and is being accounted for under SFAS No. 142,
"Goodwill and Other Intangible

                                       9
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Assets". Other intangible assets include customer bases, trademarks, developed
technology and in-place work forces in connection with the acquisitions, and
internal use software. Customer bases and in-place work forces are amortized in
a manner consistent with historical attrition patterns over 3 to 10 years.
Trademarks, developed technology and internal use software are amortized on a
straight-line basis over 3 to 10 years.

Valuation of Assets

   The impairment of tangible and intangible assets is assessed when changes in
circumstances indicate that their carrying value may not be recoverable. Under
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," a determination of impairment, if any, is made based on estimated future
cash flows, salvage value or expected net sales proceeds depending on the
circumstances. An impairment loss would be measured based on the amount by
which the carrying amount of the asset exceeds the fair value of the asset. In
instances where goodwill has been recorded in connection with impaired assets,
the carrying amount of the goodwill is first eliminated before any reduction to
the carrying value of tangible or identifiable intangible assets. Genuity's
policy is to record asset impairment losses as well as net gains or losses on
sales of assets as a component of operating expenses. Under Accounting
Principles Board Opinion ("APB") No. 17, "Intangible Assets," the Company also
annually evaluates the future period over which the benefit of goodwill will be
received, based on future cash flows, and changes the amortization life
accordingly.

   Impairment losses of approximately $2.8 million and $0.4 million for the
three months ended September 30, 2000 and 2001, respectively, and $14.9 million
and $5.8 million for the nine months ended September 30, 2000 and 2001 are
included in special items in the accompanying consolidated statements of
operations. Genuity will adopt SFAS No. 142, "Goodwill and Other Intangible
Assets," in its entirety on January 1, 2002. (See Note 3 for further
discussion.)

Debt Issuance Costs

   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. As of September 30, 2001, the unamortized debt
issuance costs totaled $12.3 million and are included in other assets in the
accompanying 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.

 America Online

   Revenues from America Online in relation to Genuity's total revenues are
significant. Revenues from America Online represented 43% and 34% of Genuity's
total revenues for the nine month periods ended September 30, 2000 and 2001,
respectively. The average accounts receivable balance owed to Genuity by
America Online for the first nine months of 2000 and 2001 represented 25% and
19% of Genuity's ending accounts receivable balance at September 30, 2000 and
2001, respectively.


                                       10
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

   Pursuant to the market pricing provisions of its agreement with the Company,
AOL has requested a reduction in monthly dial-up pricing and accordingly has
withheld payment for the difference between the price per modem contained in
the contract and the requested pricing per modem. Although the Company has
reviewed AOL's request and does not believe that any pricing changes are
required to be made at this time, if this matter is determined adversely to the
Company, then the Company may be required to adjust its pricing arrangement
with AOL.

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

 Verizon

   Verizon purchases Genuity's services primarily under the purchase, resale
and marketing agreement outlined in Note 11. The average accounts receivable
balance owed to Genuity by Verizon was $78.7 million for the first nine months
of 2001 representing 18% of Genuity's ending accounts receivable balance at
September 30, 2001, while revenues from Verizon were $150.4 million, or 17%, of
Genuity's total revenues for the nine months ended September 30, 2001.

Earnings per Share

   Earnings per common share is calculated based on the provisions of SFAS No.
128, "Earnings per Share." Basic earnings or loss per share ("EPS") is measured
as the income or loss attributable to common stockholders divided by the
weighted-average outstanding common shares for the period. Diluted EPS presents
the dilutive effect on a per share basis of potential common shares as if they
had been converted at the later of the date of issuance or the beginning of the
periods presented. Potential common shares that have an anti-dilutive effect
are excluded from diluted EPS. Contingently issuable shares are included in the
calculation of diluted EPS if all of the necessary conditions regarding the
share issuance have been met as of the end of the reporting period.

Recent Accounting Pronouncements

   In July 2001, the FASB issued SFAS No. 141, "Business Combinations." This
Statement addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, "Business Combinations", and
SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises." SFAS No. 141 requires that all business combinations be accounted
for by the purchase method and that all intangible assets be recognized as
assets apart from goodwill if they meet certain criteria. The provisions of
this Statement apply to all business combinations initiated after June 30,
2001. Genuity has adopted SFAS No. 141 as of July 1, 2001 for all new business
combinations.


                                       11
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses the accounting for the acquisition of
intangible assets and the financial accounting and reporting for goodwill and
other intangible assets subsequent to their acquisition. Under SFAS No. 142,
goodwill and acquired intangible assets with indefinite lives will no longer be
amortized, while acquired intangible assets with determinable lives will
continue to be amortized. These assets will be subject to periodic impairment
tests. The Company is required to record an impairment loss whenever the fair
value of the underlying reporting unit does not support the goodwill value.
This standard is effective for fiscal years beginning after December 15, 2001.
The provisions of this statement pertaining to business combinations were
adopted as required during this quarter to account for the acquisition of
Integra, a transaction consummated after June 30, 2001. As a result, goodwill
arising from the acquisition is not being amortized. The remaining provisions
of this statement will be adopted in January 2002. Management continues to
assess the financial statement impact of the adoption of this statement,
including the effect of the new method for impairment testing. Management
estimates that one effect of implementing this standard will be reduced
goodwill amortization expense of approximately $28.0 million in 2002 as a
result of adopting this statement on January 1, 2002.

   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. Management is currently evaluating the effects of this statement.

   In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting
and reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for
the disposal of a segment of a business. SFAS No. 144 provides further guidance
on the accounting for long-lived assets held for sale. This statement retains
the requirements of SFAS No. 121 to recognize an impairment loss 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. In addition, future operating
losses are no longer recognized as part of the loss on disposal on discontinued
operations. The provisions of this Statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001.
Management is currently evaluating the effects of this statement.

Reclassifications

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

2. ACQUISITION

   On May 31, 2001, Genuity signed a definitive letter of intent to acquire
Integra, a pan-European provider of managed hosting and eBusiness solutions.
The acquisition of Integra expands Genuity's managed web hosting solutions and
project services offerings. The acquisition also accelerates Genuity's plan for
expansion into Europe and eliminates the need for Genuity to build out
additional European data centers. Pursuant to the public tender offer, each
Integra stockholder who was not a U.S. person could exchange Integra shares for

                                       12
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

newly issued shares of Genuity Class A common stock at an exchange ratio of
three shares of Genuity Class A common stock for every four Integra shares
tendered. Integra stock options and stock warrants could be exchanged for newly
issued shares of Genuity Class A common stock at an exchange ratio of 0.068
shares of Genuity Class A common stock for each Integra stock option or stock
warrant exchanged. As of September 21, 2001, the tender offer was settled and
Genuity issued 25,643,243 shares of Class A common stock which are traded on
the Nouveau Marche. The transaction fees associated with the acquisition were
approximately $5.7 million.

   The total purchase price of $79.2 million includes the purchase of
approximately 75% of Integra's outstanding shares and acquisition costs. The
$2.87 per share value of the common stock issued was based on the average
closing price of the Company's stock for the period covering several days
before and after July 6, 2001, the date the terms of the exchange offer were
approved by the Commission des Operations de Bourse (COB), the French
Securities Market Regulator, and publicly announced.

   The following table summarizes the estimated fair values of the assets
acquired and the liabilities assumed (in thousands):

<TABLE>
<CAPTION>
                                                                          As of
                                                                      September 30,
   Allocation of Purchase Price                                           2001
   ----------------------------                                       -------------
   <S>                                                                <C>
   Cash and Cash Equivalents.........................................   $  4,931
   Receivables.......................................................     11,154
   Property, Plant and Equipment.....................................     46,032
   Other Assets......................................................      8,088
   Goodwill..........................................................     66,666
                                                                        --------
       Total Assets..................................................    136,871
   Liabilities.......................................................     39,493
   Minority Interest.................................................     18,132
                                                                        --------
       Net Assets....................................................   $ 79,246
                                                                        ========
   Consideration:
   Common Stock Issued...............................................   $    256
   Additional Paid-in Capital........................................     73,340
   Acquisition Costs.................................................      5,650
                                                                        --------
       Total Consideration...........................................   $ 79,246
                                                                        ========
</TABLE>

   The purchase price allocation for this acquisition is preliminary and
further refinements may be made based on the completion of final valuation
studies, including the assignment of value to potential other identifiable
intangible assets. In accordance with SFAS No. 142, the goodwill associated
with this acquisition will not be amortized, but will be assessed for
impairment on a periodic basis. The goodwill associated with this acquisition
has been allocated to the International segment.

   The acquisition was recorded under the purchase method of accounting as of
September 30, 2001. The operating results of Integra will be included in
Genuity's consolidated statements of operations beginning October 1, 2001, the
first reporting period subsequent to the consummation date of September 21,
2001. No events occurred between September 21, 2001 and September 30, 2001 at
Integra that would have materially affected Genuity's consolidated financial
position or results of operations.

                                       13
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The following consolidated results of operations are presented as if the
acquisition of Integra had been made at the beginning of the periods presented
(in thousands):

<TABLE>
<CAPTION>
                                    Three Months Ended     Nine Months Ended
                                       September 30,         September 30,
                                    --------------------  --------------------
                                      2000       2001       2000       2001
                                    ---------  ---------  ---------  ---------
<S>                                 <C>        <C>        <C>        <C>
Revenue...........................  $ 321,267  $ 312,226  $ 855,340  $ 936,855
                                    ---------  ---------  ---------  ---------
Operating Loss....................  $(274,323) $(304,517) $(731,989) $(982,777)
                                    ---------  ---------  ---------  ---------
Net Loss..........................  $(238,048) $(316,361) $(683,534) $(989,586)
                                    =========  =========  =========  =========
Basic and Diluted Loss Per Common
 Share............................  $   (1.09) $   (1.45) $   (6.64) $   (4.54)
                                    =========  =========  =========  =========
Basic and Diluted Weighted-Average
 Common Shares Outstanding........    217,812    217,812    102,928    217,812
                                    =========  =========  =========  =========
</TABLE>

   The pro forma information is not necessarily indicative of the results of
operations that would have occurred had the purchase been made at the beginning
of the periods presented or indicative of the future results of the combined
operations. (See Note 12 for further discussion.)

3. SPECIAL CHARGE

   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 $1.2 billion to $1.25 billion on August 22, 2001. In
addition, the Company reduced its capital expenditure program for the four-year
period ended December 31, 2004 to between $4.0 billion and $5.0 billion. 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 special charge, which is included in special items in
the accompanying consolidated statements of operations, were approximately
$17.9 million.

   In response to the reduced capital expenditure program and the elimination
of 16% of the workforce, the Company reviewed its current leased facilities for
opportunities for consolidation and future cost savings. As a result of this
review, approximately 30 locations were identified, including a data center,
several POP facilities, sales sites and administrative buildings, as sites
which would be impacted. Of the 30 locations, 22 locations represent sites for
which the Company had or was in the process of negotiating lease commitments,
but had not relocated to by May 3, 2001 and will not occupy. The remaining 8
locations represent sites which the Company will vacate by the end of the
second quarter of 2002. The lease termination dates on the underlying sites
extend through 2011. Management will try to negotiate early buyouts on these
lease facilities.

   Facility and equipment related costs of approximately $25.9 million in the
special charge include lease termination costs, future lease commitments, net
of estimated recoveries from subleasing, and impairment losses for related
leasehold improvements. The remaining costs within the special charge of $4.1
million represent other exit costs.

   As a result of these actions during the second quarter of 2001, the Company
recorded a special charge of approximately $47.9 million associated with the
reduction in force and the reduced capital expenditure program. As of September
30, 2001, $15.7 million has been paid, $5.4 million represents impairment
losses incurred in connection with the special charge and the remaining accrual
associated with the special charge was approximately $26.8 million.

                                       14
<PAGE>

                                 GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The activity for the third quarter of 2001 associated with the special
charge was as follows (in thousands):

<TABLE>
   <S>                                                                 <C>
   Balance as of June 30, 2001........................................ $ 37,853
   Cash Paid During the Quarter.......................................  (11,041)
                                                                       --------
   Balance as of September 30, 2001................................... $ 26,812
                                                                       ========
</TABLE>

4. PROPERTY, PLANT AND EQUIPMENT, NET

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

<TABLE>
<CAPTION>
                                                    December 31, September 30,
                                                        2000         2001
                                                    ------------ -------------
   <S>                                              <C>          <C>
   Land............................................  $    4,855   $    9,969
   Buildings and improvements......................      56,888       78,404
   Communications network--fiber-optic cable.......     588,088      644,903
   Communications network--data processing
    equipment and machinery........................   1,387,243    1,866,842
   Furniture and fixtures..........................      19,546       38,441
   Leasehold improvements..........................     196,538      323,428
   Work in progress................................   1,270,455    1,348,465
                                                     ----------   ----------
     Subtotal......................................   3,523,613    4,310,452
   Accumulated depreciation........................    (513,907)    (768,159)
                                                     ----------   ----------
     Total.........................................  $3,009,706   $3,542,293
                                                     ==========   ==========
</TABLE>

   Depreciation expense was $64.7 million and $112.6 million for the three
months ended September 30, 2000 and 2001, respectively, and $149.6 million and
$278.1 million for the nine months ended September 30, 2000 and 2001,
respectively.

5. GOODWILL AND OTHER INTANGIBLES, NET

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

<TABLE>
<CAPTION>
                                                     December 31, September 30,
                                                         2000         2001
                                                     ------------ -------------
   <S>                                               <C>          <C>
   Goodwill.........................................  $ 495,348     $ 562,014
   Customer bases...................................     77,000        77,000
   Trademarks.......................................     34,000        34,000
   Developed technology.............................     19,000        19,000
   In-place work forces.............................      9,190         9,190
   Internal use software............................     87,535       117,480
                                                      ---------     ---------
     Subtotal.......................................    722,073       818,684
   Accumulated amortization.........................   (195,624)     (244,083)
                                                      ---------     ---------
     Total..........................................  $ 526,449     $ 574,601
                                                      =========     =========
</TABLE>

   Amortization expense was $16.6 million and $16.1 million for the three
months ended September 30, 2000 and 2001, respectively, and $47.2 million and
$47.3 million for the nine months ended September 30, 2000 and 2001,
respectively.

   The increase in Goodwill in 2001 relates to the acquisition of Integra.
(See Note 2 for further discussion.)

                                      15
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


6. SHORT-TERM AND LONG-TERM OBLIGATIONS

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

<TABLE>
<CAPTION>
                                                      December 31, September 30,
                                                          2000         2001
                                                      ------------ -------------
   <S>                                                <C>          <C>
   Current portion of capital leases.................   $26,032     $   71,166
   6% convertible subordinated debentures............     9,482          9,147
   Other short-term debt.............................       --             349
                                                        -------     ----------
     Total short-term obligations....................   $35,514     $   80,662
                                                        =======     ==========
   Capital leases....................................   $52,606     $  124,467
   Borrowings........................................       --       2,300,000
                                                        -------     ----------
     Total long-term obligations.....................   $52,606     $2,424,467
                                                        =======     ==========
</TABLE>

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

   As of September 30, 2001, Genuity had purchased and retired debentures with
a face value of $75.6 million, which has been used to satisfy the annual
sinking fund requirements through 2011. The remaining balance at September 30,
2001 has been included in short-term obligations based on an estimate of the
timing for the remaining debt conversions.

   On September 27, 2001, Genuity received proceeds from the issuance of
private placement bonds totaling $1.15 billion. These bonds are backed by a
letter of credit and mature on August 20, 2005. Interest is based on three
month LIBOR plus 30 basis points and is payable quarterly in arrears. The
principal is due at maturity.

   On September 5, 2000, the Company entered into a committed and unsecured
$2.0 billion revolving line of credit facility. On September 24, 2001, this
facility was amended and restated primarily to provide the Company with the
option of using available amounts under the facility through the issuance of a
letter of credit and to provide additional operating flexibility to the
Company. The fee for the facility, which is based on our credit rating, is
currently 12.5 basis points and is payable quarterly in arrears. The 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 facility is guaranteed by our
principal operating subsidiaries. The credit facility contains certain
restrictions, including restrictions on the Company's ability to incur liens,
and requires that we maintain a maximum debt to debt plus contributed capital
ratio of 73%. An event of default requiring repayment is triggered if Genuity
experiences a change of ownership. Verizon's exercise of its conversion rights
related to its Class B common shares does not constitute a change in ownership,
as defined in the agreement, assuming Verizon maintains a controlling interest
in Genuity.

   On September 27, 2001, a $1.15 billion letter of credit was issued under the
revolving credit facility to back the private bond placement discussed above.
The fee on the letter of credit varies based on Genuity's credit rating. As of
September 30, 2001, the total fee on the letter of credit was 97.5 basis points
and is payable quarterly in arrears. The letter of credit expires on August 20,
2005.

   The remaining amount available under this revolving line of credit facility
can be issued through a letter of credit or a credit advance. 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 London Inter-bank Offer Rate
("LIBOR") advances, LIBOR plus a percentage determined based on our credit
rating. The interest on credit advances will be payable in quarterly
installments.

                                       16
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   On March 5, 2001, the Company entered into a credit facility with Verizon
Investments Inc., a wholly-owned subsidiary of Verizon. Under this facility, as
amended, the Company may borrow up to $2.0 billion. This facility matures on
September 5, 2005. Interest is payable quarterly in arrears with the principal
due at maturity. Interest expense on the credit facility is based on three
month 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 three month
LIBOR plus 225 basis points. Genuity is obligated to repay the borrowings if
Verizon reasonably believes that continuing to lend would place it in violation
of any rules or regulations that Verizon is subject to. As of September 30,
2001, borrowings under this line of credit totaled $1.15 billion.

   Debt issuance costs were $12.3 million at September 30, 2001 and are
included in other assets in the accompanying consolidated balance sheets. These
costs are being amortized to interest expense based on the effective interest
method over the terms of the corresponding borrowings.

7. STOCKHOLDERS' EQUITY

Preferred Stock

   Our Class A common stock trades on the NASDAQ (GENU) and the Nouveau Marche
(Genuity REGS 144). Until October 12, 2002, the shares of Class A common stock
that trade on the Nouveau Marche may be resold, pledged, or otherwise hedged or
transferred only in accordance with Regulation S under the Securities Act of
1933, which prohibits sales, pledges, hedges or other transfers within the
United States or to U.S. persons prior to that date. Thereafter, the shares may
be resold, pledged, or otherwise hedged or transferred in accordance with Rule
144 under the Securities Act of 1933.

   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

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

   Voting Rights. Except as required by law or as described below, the holders
of the Class A common stock, Class B common stock and Class C common stock vote
together as a single class on all matters submitted to a vote of Genuity's
stockholders. Each share of Class A common stock entitles the holder to one
vote per share. So long as 50% or more of the shares of Class B common stock
outstanding at the completion of the initial public offering remain
outstanding, no holder or group of holders of Class A common stock may vote any
of their shares in excess of 20% of the aggregate number of the then
outstanding number of shares of Class A common stock.

   Each share of Class B common stock entitles the holder to one vote per
share. The holders of Class B common stock, voting separately as a class, are
entitled to elect one director to Genuity's board of directors. Genuity is also
required to obtain the consent of the holders of Class B common stock before
taking specific

                                       17
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

   Under the terms of the FCC order:

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

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

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

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

   Under the terms of the FCC order, if Verizon has not eliminated the
applicable Section 271 restrictions as to 100% of the former Bell Atlantic in-
region lines on or before June 30, 2005, which may be extended under certain
circumstances, Verizon's ability to convert the Class B common stock into
800,000,000 shares of Class A common stock or Class C common stock will expire.
If Verizon has satisfied the applicable Section 271 restrictions as to 100% of
the former Bell Atlantic in-region lines on or before that date, or any
extension, its ability to convert the Class B common stock into 800,000,000
shares of Class A common stock or Class C common stock will not expire. The
Class B common stock transferred to a third party will not be subject to this
expiration limitation.

   Each share of Class C common stock is convertible by the holder at any time
into one share of Class A common stock. Each share of Class C common stock will
automatically convert into one share of Class A common stock if at any time the
aggregate number of outstanding shares of Class C common stock, together with
shares of Class C common stock issuable upon conversion of Class B common
stock, constitutes less than 10% of Genuity's outstanding common stock.

   Verizon's Right to Acquire Additional Shares. If at any time during the one
year following conversion by Verizon or its affiliates of any shares of Class B
common stock, Verizon and its affiliates beneficially own shares of Class A
common stock and Class C common stock that in the aggregate exceed 70% of the
total

                                       18
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

number of shares of outstanding common stock, Verizon may acquire from Genuity
during this one-year period a number of shares of Class A common stock so that
it will own shares of common stock equal to 80% of the total number of shares
of the outstanding common stock.

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

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

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

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

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

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

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

                                       19
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

other rights as the Class B common stock. In any transaction in which shares of
capital stock are distributed, the shares that are exchanged for or converted
into the capital stock may differ as to voting rights and conversion rights
only to the extent that the voting rights and conversion rights of Class A
common stock, Class B common stock and Class C common stock differ at that
time. The holders of the Class B common stock, voting separately as a class,
must consent to any such merger, consolidation or other similar transaction.

Additional Paid-In Capital

   Genuity received contributions from GTE of $1.2 billion for the nine months
ended September 30, 2000. In June 2000, Genuity raised $1.8 billion in
proceeds, net of expenses, from the initial public offering of its Class A
common stock. In September 2001, additional paid-in capital increased $73.3
million as a result of the shares issued to acquire a 75% ownership interest in
Integra (See Note 2 for further discussion).

8. EARNINGS PER SHARE

   The weighted-average common shares outstanding for both basic and diluted
earnings per share were 192,169,000 shares and 77,284,865 shares for the three
and nine month periods ending September 30, 2000, respectively, and 194,956,309
shares and 193,108,313 for the three and nine month periods ending September
30, 2001. Potential common shares were not included in the computation of
weighted-average diluted shares outstanding for the three and nine months ended
September 30, 2000 and September 30, 2001 because their inclusion would be
anti-dilutive. Contingently issuable shares were not included in the
computation of weighted-average diluted shares outstanding for the three and
nine months ended September 30, 2000 and September 30, 2001, as the necessary
conditions surrounding the share issuance had not been met.

9. SEGMENT REPORTING

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

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

   Hosting and Value-Added Services--Hosting pertains to services that allow
customers to successfully implement their eBusiness strategies through
scaleable, reliable and secure Web sites, which serve as the infrastructure to
communicate with suppliers, customers and employees, as well as to deliver
interactive content and conduct online commerce. The eBusiness model enables
companies to decrease sales costs; accelerate time to market; access new sales
channels; increase revenues, productivity and customer satisfaction; and gain
competitive advantage. Genuity currently operates 9 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.

                                       20
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   International--International revenues include all international revenues for
Access, Hosting and Value-Added Services. Genuity operates 8 data centers
outside of the United States: one in Leeds, England, one in Amsterdam,
Netherlands and as a result of the acquisition of Integra in London, England,
Paris, France, Frankfurt, Germany, Milan, Italy, Stockholm, Sweden, and Madrid,
Spain.

   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 from America Online, including AOL Japan, in relation to Genuity's
total revenues were 43% and 34% for the nine months ended September 30, 2000
and 2001, respectively. Revenues from Verizon in relation to Genuity's total
revenues were 17% for the nine months ended September 30, 2001.

   Management utilizes several measurements to evaluate its operations and
allocate resources. However, the principal measurements are consistent with
Genuity's financial statements. Prior period balances have been reclassified to
reflect the new operating segment presentation adopted by the Company in 2001.
Such reclassifications have no effect on the previously reported totals. The
accounting policies of the segments are the same as those described in Note 1.

                                       21
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

<TABLE>
<CAPTION>
                                 Three Months Ended       Nine Months Ended
                                   September 30,            September 30,
                             -------------------------- ----------------------
                                 2000         2001         2000        2001
                             ------------ ------------- ----------  ----------
<S>                          <C>          <C>           <C>         <C>
Revenues
  Access....................  $  232,387   $  232,019   $  620,007  $  674,819
  Hosting and Value-Added
   Services.................      32,711       31,063       89,218     107,193
  Transport.................      26,995       25,600       72,482      77,861
  International.............      16,049       13,580       42,211      44,650
                              ----------   ----------   ----------  ----------
    Total revenues..........     308,142      302,262      823,918     904,523
Operating Expenses
  Cost of sales.............     339,316      318,965      931,466   1,009,716
  Selling, general and
   administrative...........     139,213      135,845      372,194     441,685
  Depreciation and
   amortization.............      81,250      128,721      196,844     325,431
  Special items.............       2,775          424       11,543      48,333
                              ----------   ----------   ----------  ----------
    Total operating
     expenses...............     562,554      583,955    1,512,047   1,825,165
                              ----------   ----------   ----------  ----------
Operating Loss..............    (254,412)    (281,693)    (688,129)   (920,642)
Other Income (Expense)
  Interest income (expense),
   net......................      27,912      (18,510)      26,966     (23,450)
  Other, net................      (1,667)         959         (229)      1,055
                              ----------   ----------   ----------  ----------
Loss Before Income Taxes....  $ (228,167)  $ (299,244)  $ (661,392) $ (943,037)
                              ==========   ==========   ==========  ==========
Capital Expenditures (1)
  Access....................  $  195,341   $   80,011   $  304,542  $  204,246
  Hosting and Value-Added
   Services.................      66,049       26,685      120,468      59,333
  GNI/Transport.............     135,810       30,389      434,801     339,772
  International.............      23,611       29,637       33,086      44,457
  Other.....................      20,518       42,154       49,204     121,769
                              ----------   ----------   ----------  ----------
    Total...................  $  441,329   $  208,876   $  942,101  $  769,577
                              ==========   ==========   ==========  ==========
Depreciation and
 Amortization
  Access....................  $   15,706   $   24,188   $   40,414  $   61,260
  Hosting and Value-Added
   Services.................       8,010        9,497       18,050      28,092
  GNI/Transport.............      36,492       69,704       86,933     173,178
  International.............         839        4,477        1,227       8,883
  Other.....................      20,203       20,855       50,220      54,018
                              ----------   ----------   ----------  ----------
    Total...................  $   81,250   $  128,721   $  196,844  $  325,431
                              ==========   ==========   ==========  ==========
<CAPTION>
                             December 31, September 30,
                                 2000         2001
                             ------------ -------------
<S>                          <C>          <C>           <C>         <C>
Property, Plant and
 Equipment, Net
  Access....................  $  606,003   $  753,989
  Hosting and Value-Added
   Services.................     254,488      290,156
  GNI/Transport.............   1,974,123    2,142,248
  International.............      35,639      115,821
  Other.....................     139,453      240,079
                              ----------   ----------
    Total...................  $3,009,706   $3,542,293
                              ==========   ==========
</TABLE>
--------
(1) Includes accruals and capital leases. Excludes capitalized software.

                                       22
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


10. COMMITMENTS AND CONTINGENCIES

Leases

   Genuity leases office space, network equipment and managed modems under
long-term capital and operating leases. These leases have options for renewal
with provisions for increased rent upon renewal. Genuity's rent expense was
$19.9 million and $21.9 million for the three months ended September 30, 2000
and 2001, respectively, and was $52.9 million and $72.0 million for the nine
months ended September 30, 2000 and 2001, respectively. Rent expense
attributable to our fiber optic network, including Points of Presence (POP) 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
consolidated statements of operations.

   As of September 30, 2001, the future minimum lease payments under non-
cancelable capital and operating leases with initial or remaining periods in
excess of one year were as follows (in thousands):

<TABLE>
<CAPTION>
                                                             Capital   Operating
                                                              Leases    Leases
                                                             --------  ---------
      <S>                                                    <C>       <C>
      2001.................................................. $ 10,500  $ 15,600
      2002..................................................   85,600    53,600
      2003..................................................   71,200    47,400
      2004..................................................   20,200    41,800
      2005..................................................   36,000    36,800
      Thereafter............................................   34,800   149,000
                                                             --------  --------
        Total minimum lease payments........................  258,300  $344,200
                                                                       ========
      Amount representing interest..........................  (62,700)
                                                             --------
      Present value of minimum lease payments............... $195,600
                                                             ========
</TABLE>

   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
("IRU"s) for its network infrastructure in the United States. The initial terms
of the IRUs are for 20-25 years, with options to extend the terms. Genuity is
obligated to pay operating and maintenance costs under the contract terms. As
of September 30, 2001, the future minimum commitments under these agreements
were as follows (in thousands):

<TABLE>
      <S>                                                              <C>
      2001............................................................ $ 95,000
      2002............................................................   60,000
                                                                       --------
        Total future minimum commitments.............................. $155,000
                                                                       ========
</TABLE>

   Genuity has entered into a number of agreements for IRUs to trans-oceanic
cable systems that are either deployed or in the process of being deployed. The
initial terms of the IRUs are for 25 years. As of September 30, 2001, the
outstanding commitments under the agreements were as follows (in thousands):

<TABLE>
      <S>                                                               <C>
      2001............................................................. $13,000
      2002.............................................................   8,000
                                                                        -------
        Total future minimum commitments............................... $21,000
                                                                        =======
</TABLE>

                                       23
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Genuity has entered into non-cancelable long-term purchase commitments with
communications providers. The purchase agreements contain provisions that
require Genuity to purchase a minimum amount of services annually. If Genuity
does not purchase the minimum service, it is required to pay the amount of the
shortfall between the minimum commitments and actual purchases. As of September
30, 2001, future minimum payments under these non-cancelable purchase
commitments were as follows (in thousands):

<TABLE>
      <S>                                                              <C>
      2001............................................................ $ 31,000
      2002............................................................  320,000
      2003............................................................  324,000
      2004............................................................  157,000
      Thereafter......................................................   15,000
                                                                       --------
        Total future minimum commitments.............................. $847,000
                                                                       ========
</TABLE>

   Genuity has entered into long-term network service agreements for the
development of managed modems to be utilized in the dial-up modem services
business. These agreements contain minimum purchase commitments based on the
achievement of various production milestones. These contracts also contain
most-favored customer pricing and business downturn provisions that could
reduce the contractual commitments in the event that market prices for similar
services decrease over the contract term or if there is a material downturn in
customer demand for modem services. As of September 30, 2001, the future
minimum commitments under these agreements were as follows (in thousands):

<TABLE>
      <S>                                                              <C>
      2001............................................................ $    --
      2002............................................................  384,000
      2003............................................................   86,000
      2004............................................................   40,000
      2005............................................................   93,000
      Thereafter......................................................   41,000
                                                                       --------
        Total future minimum commitments.............................. $644,000
                                                                       ========
</TABLE>

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

Contingencies

   On August 1, 2001, a managed modem vendor filed a lawsuit against the
Company alleging a breach of contract. Management has reviewed the claim and
believes that the claim is without merit. However, if the claim were to be
ultimately resolved in an adverse manner, it could have a material effect on
the Company's operating results and cash flows in future periods. While it is
not possible to predict with certainty the ultimate outcome of this lawsuit,
the Company believes, after consultation with outside counsel, that resolution
of this matter will be in the Company's favor and therefore would not be
expected to have a material adverse effect on the Company's financial position
or liquidity.

   The Company is also subject to other 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.

                                       24
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


11. RELATED PARTY TRANSACTIONS

 Verizon

   Concurrent with the closing of the initial public offering, Genuity executed
agreements with Verizon and certain of its affiliates including transition
services agreements, a purchase, resale and marketing agreement, intellectual
property agreements, a network monitoring agreement and real estate agreements.
The transition services, intellectual property, network monitoring, purchase,
resale and marketing and real estate agreements involve services provided to
and received from Verizon. The transition and network monitoring agreements
vary from four to twelve months with rights to terminate earlier. The fees paid
or received from these agreements are fixed under the agreements and were based
on historical costs and comparable market prices. Under the purchase, resale
and marketing agreement, Verizon has agreed to purchase at least $500 million
of Genuity's services over a five-year period.

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

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

   On March 5, 2001, the Company entered into a line of credit facility with
Verizon Investments Inc., a wholly-owned subsidiary of Verizon. Under this
facility, as amended, the Company may borrow up to $2 billion. This facility
matures on September 5, 2005. Interest is payable quarterly in arrears with the
principal due at maturity. Interest expense on the credit facility is based on
three month 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 three
month LIBOR plus 225 basis points. As of September 30, 2001, borrowings under
this line of credit totaled $1.15 billion.

 Revolving Line of Credit Facility

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

12. SUBSEQUENT EVENTS

   Subsequent to September 21, 2001, the tender offer for the acquisition of
Integra shares was reopened. On October 11, 2001, the reopened tender offer was
settled and an additional 3,474,596 shares of Genuity Class A common stock were
issued. Genuity stock was issued, to each Integra stockholder who was not a
U.S. person, at an exchange ratio of three shares of Genuity Class A common
stock for every four Integra shares tendered.

                                       25
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Integra stock warrants and stock options were exchanged for newly issued shares
of Genuity Class A common stock at a ratio of 0.068 shares of Genuity Class A
common stock for each Integra stock warrant or stock option exchanged. These
shares trade on the Nouveau Marche, and were issued under Regulation S of the
Securities Act of 1933. Additionally, 2,217,561 shares of newly issued Genuity
Class A common stock were exchanged for shares of Integra in certain private
placements. These shares are not publicly-traded and were issued under
Regulation D of the Securities Act of 1933. To date, Genuity has acquired
approximately 92% of Integra's outstanding shares.

   On November 1, 2001, the Company announced a company-wide restructuring and
cost savings plan. As a result of these actions, Genuity will further reduce
its U.S.-based workforce by approximately 22 percent of full-time employees and
slightly over 50 percent of its contractor positions. The total reduction will
be approximately 24 percent of full-time equivalent employees with the majority
of the reductions occurring in the fourth quarter of 2001.

                                       26
<PAGE>

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

   This Form 10-Q contains certain forward-looking statements regarding, among
other things, our future financial performance, our anticipated growth
strategies and anticipated trends in our business as well as projections
relating to our capital expenditure requirements, our network expansion plans,
locations of new data centers, network operations centers and points of
presence, expected deployment dates for capacity on trans-oceanic cable, our
plans for transitioning customer traffic from leased capacity to our network,
research and development initiatives and increases in sales and marketing
personnel. Investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof and are
predictions based solely on our current expectations and projections about
certain events. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, we caution investors that our future
financial and operating results may differ materially from those projected in
the forward-looking statements. Such forward-looking statements involve known
and unknown risks and uncertainties and, accordingly, there are many factors
that may cause our actual results, level of activity, performance or
achievements to be materially different from any future results, level of
activity, performance of achievements expressed or implied by such forward-
looking statements. Those factors that may cause our actual results, level of
activity, performance or achievements to be materially different from that
expressed or implied by any forward-looking statement include our ability to
maintain or increase our market share and therefore maintain our status as a
Tier 1 Internet backbone provider, maintain and strengthen our relationship
with America Online and other significant customers, obtain additional capital
to fund our operations and the expansion of our capacity and network
infrastructure, successfully maintain and continue to strengthen our brand
recognition, compete effectively for service and enterprise customers, reduce
operating expenses and introduce new services.

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

RESULTS OF OPERATIONS

2001 Compared to 2000

Revenues (in thousands)

<TABLE>
<CAPTION>
                                                        Three Months Ended
                                                           September 30,
                                                     --------------------------
                                                         2000          2001
                                                     ------------  ------------
                                                      Amount   %    Amount   %
                                                     -------- ---  -------- ---
   <S>                                               <C>      <C>  <C>      <C>
   Access........................................... $232,387  75% $232,019  77%
   Hosting and Value-Added Services.................   32,711  11    31,063  10
   Transport........................................   26,995   9    25,600   8
   International....................................   16,049   5    13,580   5
                                                     -------- ---  -------- ---
     Total.......................................... $308,142 100% $302,262 100%
                                                     ======== ===  ======== ===
<CAPTION>
                                                         Nine Months Ended
                                                           September 30,
                                                     --------------------------
                                                         2000          2001
                                                     ------------  ------------
                                                      Amount   %    Amount   %
                                                     -------- ---  -------- ---
   <S>                                               <C>      <C>  <C>      <C>
   Access........................................... $620,007  75% $674,819  75%
   Hosting and Value-Added Services.................   89,218  11   107,193  12
   Transport........................................   72,482   9    77,861   9
   International....................................   42,211   5    44,650   4
                                                     -------- ---  -------- ---
     Total.......................................... $823,918 100% $904,523 100%
                                                     ======== ===  ======== ===
</TABLE>

                                       27
<PAGE>

   Total revenues for the quarter ended September 30, 2001 decreased $5.9
million, or 2%, and revenues for the first nine months 2001 increased $80.6
million, or 10% over the same periods in 2000.

   Access. Access revenues for the quarter ended September 30, 2001 decreased
$0.4 million, or 0.2%, and for the first nine months of 2001 increased $54.8
million, or 9%, over the same periods in 2000. The quarterly decrease is due to
a $34.4 million, or 21%, decrease in dial-up revenues, which include revenues
from America Online, Inc. ("America Online", or "AOL"). Included in the $34.4
million quarterly decrease is a $19.7 million decrease in wholesale-dial
revenues (excluding revenues from AOL) due to the Company's reduced focus on
this service offering. The decrease also reflects the impact of the AOL
contractual price reduction implemented in the fourth quarter of 2000. The
impact of this reduction on the third quarter of 2001 results as compared to
the corresponding period in 2000 totaled approximately $41.8 million. These
decreases were offset by a $28.8 million, or 171%, increase in broadband
revenues, (excluding broadband revenues from AOL) and to a lesser extent a $6.7
million, or 15%, increase in dedicated access revenues compared to the third
quarter of 2000. The $28.8 million increase in broadband revenues was driven by
an increase in users from approximately 111,000 users as of September 30, 2000
to approximately 293,000 users as of September 30, 2001.

   The increase for the first nine months in 2001 compared to the same period
in 2000 is primarily due to an increase in broadband revenues (excluding
broadband revenues from AOL) of $88.9 million, or 313%, and to a lesser extent
a $33.4 million, or 27%, increase in dedicated access revenues. These increases
were partially offset by a decrease in AOL revenues of $49.6 million, or 14%.

   The AOL agreement includes provisions for minimum purchase requirements at
fixed monthly fees, subject to market pricing adjustments, service level
requirements and termination provisions. The AOL agreement includes two
scheduled price reductions in the fixed monthly fees for dial-up access
services. The first price reduction commenced in the fourth quarter of 2000 and
the next scheduled reduction will occur as of June 1, 2002. Assuming that the
number of modems remain constant, the total impact on 2002 revenue will be a
reduction in revenue in the $40 million to $60 million range primarily
impacting the last six months of 2002.

   Hosting and Value-Added Services. Hosting and Value-added services revenues
for the quarter ended September 30, 2001 decreased $1.6 million, or 5%, and for
the first nine months of 2001 increased $18.0 million, or 20%, over the same
periods in 2000. The quarterly decrease was primarily due to customer churn,
customer reconfiguration of their eBusiness solutions and a slower economic
environment. In addition, the average new deal size for hosting contracts
remained constant at $284,000 in the quarter ended September 30, 2001 compared
to the corresponding period in 2000. The number of managed hosting customers
decreased from 320 at September 30, 2000 to 287 at September 30, 2001. Hosting
and Value-added services revenue for the quarter ended September 30, 2001
decreased $6.4 million, or 17%, compared to the previous quarter. This decrease
was due to lower order volume reflecting the current slower economic
environment, as well as customer turnover. The number of managed hosting
customers decreased from 296 at June 30, 2001 to 287 at September 30, 2001. The
future outlook for new hosting orders is dependent on the condition of the
overall economy and customers' IT spending plans. The increase for the first
nine months of 2001 compared to the same period in 2000 is primarily due to the
increase in the average new deal size associated with managed hosting
customers.

   Transport. Transport revenues for the quarter ended September 30, 2001
decreased $1.4 million, or 5%, and for the first nine months of 2001 increased
$5.4 million, or 7%, over the same periods in 2000. The increase for the first
nine months of 2001 compared to the same period in 2000 is due primarily to the
sale of excess capacity on the network as new network segments became
operational, as well as, increased sales of private line services and ATM
services to telecommunications carriers and Internet service providers.

   International. International revenues for the quarter ended September 30,
2001 decreased $2.5 million, or 15%, and for the first nine months of 2001
increased $2.4 million, or 6%, over the same periods in 2000. The quarterly
decrease is primarily due to competitive price declines and the impact of
unfavorable foreign currency translation.

                                       28
<PAGE>

Cost of Sales

   Cost of sales for the quarter ended September 30, 2001 decreased $20.4
million, or 6%, and for the first nine months of 2001 increased $78.3 million,
or 8%, over the same periods in 2000. The quarterly decrease is a result of
decommissioning circuits to improve the network utilization. The increase for
the first nine months of 2001 compared to the same period in 2000 is due to the
expansion of the network infrastructure in order to provide access to a broader
base of customers and to provide increased scope of services to Internet access
customers.

   Telecommunications circuit costs are the largest component of cost of sales.
For the quarter ended September 30, 2001, circuit costs decreased $25.0
million, or 10%, and for the first nine months of 2001 increased $37.0 million,
or 6%, over the same periods in 2000. The Company is focused on improving the
efficiency of the network and reducing circuit costs. These efforts include
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 arrangements with several managed modem vendors. These
arrangements, which are capitalized and financed through lease obligations,
will result in future reductions in circuit costs and future increases in
depreciation and amortization expense and interest expense. These efforts
resulted in a 8% reduction in circuit costs for the quarter ended September 30,
2001 compared to the previous quarter.

   Cost of sales, as a percentage of total revenues, was 110% and 106% for
quarters ended September 30, 2000 and 2001, respectively. Telecommunications
circuit costs, as a percentage of total revenues, were approximately 79% and
72% for the quarters ended September 30, 2000 and 2001, respectively.

Selling, General and Administrative Expenses

   Selling, general and administrative expenses for the quarter ended September
30, 2001 decreased $3.4 million, or 2%, and for the first nine months of 2001
increased $69.5 million, or 19%, over the same periods in 2000. The quarterly
decrease is primarily due to the benefit of the headcount reduction implemented
in the second quarter of 2001. The increase for the first nine months of 2001
compared to the same period in 2000 is primarily due to higher selling expenses
directly attributable to an increase in the number of sales and sales-related
employees, both domestically and internationally, and to higher advertising
expense due to increased branding efforts. Also contributing to this increase
were the hiring of additional management staff and related operating expenses,
increased facilities costs and increased information technology expenses. Bad
debt expense is included in selling, general and administrative expenses, which
increased $6.1 million and $20.5 million for the three and nine months ended
September 30, 2001, respectively, over the comparable periods in 2000.

Depreciation and Amortization

   Depreciation and amortization expenses for the quarter ended September 30,
2001 increased $47.5 million, or 58%, and for the first nine months of 2001
increased $128.6 million, or 65%, over the comparable periods in 2000. This
increase reflects the continuing investment in our network infrastructure in
order to support our growth in customers and services.

Special Items

   Special items include costs associated with the Company's workforce
reduction initiative and other costs related to facilities that will be exited.
In addition, special items include impairment losses and net gains (losses) on
fixed asset sales.

   The Company recorded an impairment loss of approximately $0.4 million and
$2.8 million in the quarters ended September 30, 2001 and 2000, respectively,
and $5.8 million and $14.9 million for the nine months ended September 30, 2001
and 2000, respectively.

   The Company recorded a special charge of approximately $47.9 million in the
quarter ended June 30, 2001 related to the Company's announcement of a
restructuring plan on May 3, 2001. This plan included a reduction of the
Company's full-time equivalent employees by approximately 16% and a reduction
in the capital expenditure program for the four-year period ended December 31,
2004 to between $4.0 billion to 5.0 billion.

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<PAGE>

   The reduction in the Company's employees impacted multiple functional areas
throughout the Company. Severance and associated termination benefits included
in the special charge were approximately $17.9 million. Facility and equipment
related costs included in the special charge were approximately $25.9 million.
The remaining costs within the special charge of $4.1 million represent other
exit costs.

Interest Income (Expense)

   Interest expense for the quarter and nine months ended September 30, 2001
was $18.5 million and $23.5 million, respectively, compared to interest income
of $27.9 million and $27.0 million for the quarter and nine months ended
September 30, 2000, respectively. During 2000, the cash proceeds from our
initial public offering generated an increase in interest income. In 2001,
Genuity increased its borrowings, which resulted in an increase in interest
expense during the quarter and nine month periods.

Income Taxes

   Genuity generated pre-tax book losses of $299.2 million and $228.2 million
for the quarters ended September 30, 2001 and 2000, respectively. Federal
income tax returns were filed on a consolidated basis with GTE, now part of
Verizon, through the date of Genuity's initial public offering. The taxable
losses generated by Genuity up until the date of its initial public offering
were benefited by GTE in its consolidated tax return. Genuity received
reimbursements for these tax benefits of $62.5 million for the nine month
period ended September 30, 2000. To reflect Genuity's income tax provision on a
comparable basis to future periods, these reimbursements have been accounted
for as capital contributions. The tax provision was computed on a stand-alone
basis and represents the amounts owed for state and foreign taxes. A valuation
allowance has been established to fully reserve the tax benefits associated
with the net operating losses, as their future realizability is uncertain.

Net Loss

   Net losses increased to $300.4 million for the quarter ended September 30,
2001 compared to $228.9 million for the quarter ended September 30, 2000 and
increased to $946.3 million for the first nine months of 2001 compared to
$663.4 million for the first nine months of 2000.

LIQUIDITY AND CAPITAL RESOURCES

   Net cash used in operating activities was $409.5 million and $717.2 million
for the first nine months of 2000 and 2001, respectively. Net cash used in
operating activities for these periods was primarily the result of operating
losses.

   Net cash used in investing activities was $863.9 million and $1.1 billion
for the first nine months of 2000 and 2001, respectively. Net cash used in
investing activities in each of these periods was primarily the result of
capital expenditures for construction of our network infrastructure, as well as
leasehold improvements, furniture, fixtures, computers, software and other
equipment. As of September 30, 2001, Genuity had $270.4 million of capital
commitments outstanding, which are expected to be paid in the fourth quarter of
2001. On September 21, 2001, the Company completed the initial settlement of
its tender offer to acquire shares of Integra. Genuity issued 25.6 million
Class A common shares to acquire approximately 75% of Integra's outstanding
shares. Net cash paid in connection with the acquisition was $1.5 million.

   Net cash received from financing activities was $2.9 billion and $2.3
billion for the first nine months of 2000 and 2001, respectively. Capital
contributions from GTE totaled $1.2 billion for the first nine months of 2000.
On June 30, 2000, Genuity completed an initial public offering of its Class A
common stock and received net proceeds of approximately $1.8 billion.

   On September 27, 2001, Genuity received proceeds from the issuance of
private placement bonds totaling $1.15 billion. These bonds are backed by a
letter of credit and mature on August 20, 2005. Interest is based on three
month LIBOR plus 30 basis points and is payable quarterly in arrears.

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<PAGE>

   Genuity has a committed and unsecured $2.0 billion revolving line of credit
facility. On September 24, 2001, this facility was amended and restated
primarily to provide the Company with the option of using available amounts
under the credit facility through the issuance of a letter of credit and to
provide additional operating flexibility to the Company. The fee for the
facility, which is based on our credit rating, is currently 12.5 basis points
and is payable quarterly in arrears. The 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 facility is guaranteed by our principal operating
subsidiaries. The credit facility contains certain restrictions, including the
Company's ability to incur liens, and requires that we maintain a maximum ratio
of debt to debt plus contributed capital of 73%.

   On September 27, 2001, a $1.15 billion letter of credit was issued under the
revolving credit facility to back the private bond placement discussed above.
The fee on the letter of credit varies based on Genuity's credit rating. As of
September 30, 2001, the total fee on the letter of credit was 97.5 basis points
and is payable quarterly in arrears. The letter of credit expires on August 20,
2005.

   The remaining amount available under this revolving line of credit facility
can be issued through a letter of credit or a credit advance. 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 London Inter-bank Offer Rate
("LIBOR") advances, LIBOR plus a percentage determined based on our credit
rating. The interest on credit advances will be payable in quarterly
installments.

   On March 5, 2001, the Company entered into a credit facility with Verizon
Investments Inc., a wholly-owned subsidiary of Verizon. Under this facility, as
amended, the Company may borrow up to $2 billion. This facility matures on
September 5, 2005. Interest is payable quarterly in arrears with the principal
due at maturity. Interest expense on the credit facility is based on three
month 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 three month
LIBOR plus 225 basis points. As of September 30, 2001, borrowings under this
line of credit totaled $1.15 billion.

   Debt issuance costs were $12.3 million at September 30, 2001 and are
included in other assets in the accompanying consolidated balance sheets. These
costs are being amortized to interest expense based on the effective interest
method over the terms of the corresponding borrowings.

   As of 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 approximately 16% and a reduction in 2001 capital
expenditures from $2.2 billion to $1.4 billion. The projected 2001 capital
expenditures were further reduced to $1.2 billion to $1.25 billion on August
22, 2001.

   On November 1, 2001, the Company announced a company-wide restructuring and
cost savings plan. As a result of these actions, Genuity will further reduce
its U.S.-based workforce by approximately 22 percent of full-time employees and
slightly over 50 percent of its contractor positions. The total reduction will
be approximately 24 percent of full-time-equivalent employees with the majority
of the reductions occurring in the fourth quarter of 2001.

   Genuity is in the process of reviewing its long-term plan to operate within
the sources of capital currently available to the Company and it is expected
that the capital expenditures will be lower than the $4.0 billion to $5.0
billion over the four-year period ending December 31, 2004 disclosed
previously. Cash requirements will depend on a number of factors, including:
the pace at which Genuity expands its network infrastructure and the associated
costs; the rate at which customers purchase Genuity services and the pricing of
those services; the level of marketing required to build the Genuity brand, to
acquire and retain customers and to maintain a competitive position in the
marketplace; the rate at which Genuity invests in support systems and
engineering; and investment opportunities in complementary businesses or
technologies. Genuity believes that the current liquidity is sufficient to meet
its current operating and capital needs through 2002.


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<PAGE>

   As of September 30, 2001, Genuity's indebtedness included $9.1 million of 6%
convertible subordinated debentures. These debentures are due in 2012 and may
be converted at any time by the bondholders into cash at an exchange ratio of
$966.67 for each $1,000 in principal amount of debentures. The debentures are
unsecured obligations of Genuity and are subordinated in right of payment to
our senior indebtedness, if any.

   As of September 30, 2001, Genuity's indebtedness also included $195.6
million in capital leases. The capital leases have original terms of 5 to 10
years from the date of purchase, with principal and interest payable monthly or
quarterly in advance.

COMMON STOCK

   As of September 30, 2001, the Company's common stock outstanding totaled
approximately 217,812,243 consisting of 199,556,243 shares of Class A common
stock and 18,256,000 shares of Class B common stock. The Class B shares are
wholly-owned either directly or indirectly, by Verizon. These shares are
convertible, under certain conditions, into 800,000,000 shares of Class A or
Class C common stock resulting in a total of approximately 999,556,243 common
shares outstanding.

   Under generally accepted accounting principles the Class B shares cannot be
reflected on an as-converted basis until the conditions surrounding the share
conversion have been met. External sources, such as the research reports
written by major investment banks, typically reflect these Class B shares on an
as-converted basis, utilizing the 999,556,243 shares as the basis for their
calculations. However, some external sources, utilize only Class A, or Class A
plus Class B, shares for their per share calculations. Investors relying on any
external information sources should understand the share basis that was used
for the calculations.

INFLATION

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

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

   In July 2001, the FASB issued SFAS No. 141, "Business Combinations." This
Statement addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, "Business Combinations", and
SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises." SFAS No. 141 requires that all business combinations be accounted
for by the purchase method and that all intangible assets be recognized as
assets apart from goodwill if they meet certain criteria. The provisions of
this Statement apply to all business combinations initiated after June 30,
2001. Genuity has adopted SFAS No. 141 as of July 1, 2001 for all new business
combinations.

   In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses the accounting for the acquisition of
intangible assets and the financial accounting and reporting for goodwill and
other intangible assets subsequent to their acquisition. Under SFAS No. 142,
goodwill and acquired intangible assets with indefinite lives will no longer be
amortized, while acquired intangible assets with determinable lives will
continue to be amortized. These assets will be subject to periodic impairment
tests. The Company is required to record an impairment loss whenever the fair
value of the underlying reporting unit does not support the goodwill value.
This standard is effective for fiscal years beginning after December 15, 2001.
The provisions of this statement pertaining to business combinations were
adopted as required during this quarter to account for the acquisition of
Integra, a transaction consummated after June 30, 2001. As a result, goodwill
arising from the acquisition is not being amortized. The remaining provisions
of this statement will be adopted in January 2002. Management continues to
assess the financial statement impact of the adoption of this statement,
including the effect of the new method for impairment testing. Management
estimates that one effect of implementing this standard will be reduced
goodwill amortization expense of approximately $28.0 million in 2002 as a
result of adopting this statement on January 1, 2002.

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<PAGE>

   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. Management is currently evaluating the effects of this statement.

   In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting
and reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for
the disposal of a segment of a business. SFAS No. 144 provides further guidance
on the accounting for long-lived assets held for sale. This statement retains
the requirements of SFAS No. 121 to recognize an impairment loss 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. In addition, future operating
losses are no longer recognized as part of the loss on disposal on discontinued
operations. The provisions of this Statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001.
Management is currently evaluating the effects of this statement.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

   As of December 31, 2000 and September 30, 2001, Genuity's debt portfolio
consisted of short-term 6% convertible subordinated debentures and short-term
borrowings. Current interest rate risk on the debentures and short-term
borrowings is mitigated by the fact that they are short-term.

   As of September 30, 2001, Genuity's long-term debt consisted of $1.15
billion of private placement bonds and $1.15 billion of notes payable to
Verizon. The interest rate risk on this debt is mitigated by the fact that the
debts bear a variable interest rate.

   Genuity will be exposed to foreign currency risk in the future as the
Company's international operations grow. As of September 30, 2001, the net
assets of Genuity's foreign operations, including the net assets of Integra,
were not material.

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

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<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

   None.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Changes in Securities

   On September 21, 2001, Genuity closed the initial tender offer for Integra
and issued 25,643,243 shares of Class A common stock, to each Integra
stockholder who was not a U.S. person, at an exchange ratio of three shares of
Genuity Class A common stock for every four Integra shares tendered. Integra
stock warrants and options were exchanged for newly issued shares of Genuity
Class A common stock at a ratio of 0.068 shares of Genuity Class A common stock
for each Integra stock warrant or stock option exchanged. As a result of this
transaction, Genuity has acquired approximately a 75% ownership interest in
Integra. These shares trade on the Nouveau Marche, and are not registered in
the United States. These shares were issued under Regulation S of the
Securities Act of 1933, and are exempt from registration with the Securities
and Exchange Commission.

Use of Proceeds

   Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

   Not applicable.

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

   None.

ITEM 5. OTHER INFORMATION

   Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

   (a) Exhibits

   None.

   (b) Reports on Form 8-K

   Genuity filed a current report on Form 8-K on August 8, 2001, reporting
under Item 5 the issuance of a press release discussing the financial results
for the quarter ended June 30, 2001.

   Genuity filed a current report on Form 8-K on August 22, 2001, reporting
under Item 9, information to be presented in an analyst meeting including:
reviewing the company's managed hosting strategy, and giving an update on
current network infrastructure projects, including a reduction in the Company's
2001 capital expenditures from $1.4 billion to $1.5 billion to $1.2 billion to
$1.25 billion achieved through continued efficiencies in its operations.

   Genuity filed a current report on Form 8-K on September 28, 2001, reporting
under Item 5 indicating that the Company raised $1.15 billion through the
placement of four-year floating rate bonds. These bonds are

                                       34
<PAGE>

backed by a letter of credit which was drawn under the amended $2 billion
credit agreement with a syndicate of banks.

   Genuity filed a current report on Form 8-K on September 28, 2001, reporting
under Item 2, the completion of the initial closing of its public exchange
offer for the outstanding shares of Integra. Genuity acquired approximately 75%
of the outstanding shares of Integra.

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                                   SIGNATURES

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

                                          Genuity Inc.

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

Dated: November 14, 2001

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