<PAGE>

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

                                 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 June 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 173,913,000 shares of $0.01 par value Class A common stock
outstanding and 18,256,000 shares of $0.01 par value Class B common stock
outstanding at August 10, 2001.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                               TABLE OF CONTENTS

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

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

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

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

         Consolidated Statements of Comprehensive Loss for the Three and
          Six Month Periods Ended June 30, 2000 and 2001................     6

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

 Item 2. Management's Discussion and Analysis of Financial Condition and
          Results of Operations.........................................    22

 Item 3. Quantitative and Qualitative Disclosures About Market Risk.....    27

                        PART II--OTHER INFORMATION

 Item 1. Legal Proceedings..............................................    28

 Item 2. Changes in Securities and Use of Proceeds......................    28

 Item 3. Defaults upon Senior Securities................................    28

 Item 4. Submission of Matters to a Vote of Security Holders............    28

 Item 5. Other Information..............................................    28

 Item 6. Exhibits and Reports on Form 8-K...............................    28

 SIGNATURES..............................................................   30
</TABLE>

                                       2
<PAGE>

                                  GENUITY INC.

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

<TABLE>
<CAPTION>
                                    Three Months Ended     Six Months Ended
                                         June 30,              June 30,
                                    --------------------  --------------------
                                      2000       2001       2000       2001
                                    ---------  ---------  ---------  ---------
<S>                                 <C>        <C>        <C>        <C>
Revenues..........................  $ 267,924  $ 302,794  $ 515,776  $ 602,261
Operating Expenses
  Cost of sales...................    308,222    345,498    592,150    690,751
  Selling, general and
   administrative.................    124,645    152,794    232,981    305,840
  Depreciation and amortization...     61,808    103,185    115,594    196,710
  Special charge..................        --      47,909        --      47,909
                                    ---------  ---------  ---------  ---------
    Total operating expenses......    494,675    649,386    940,725  1,241,210
                                    ---------  ---------  ---------  ---------
Operating Loss....................   (226,751)  (346,592)  (424,949)  (638,949)
Other Income (Expense)
  Interest income (expense), net..      2,027     (6,155)      (946)    (4,940)
  Other, net......................        737        278     (7,330)        96
                                    ---------  ---------  ---------  ---------
Loss Before Income Taxes..........   (223,987)  (352,469)  (433,225)  (643,793)
Income Taxes......................        720      1,104      1,308      2,130
                                    ---------  ---------  ---------  ---------
Net Loss..........................  $(224,707) $(353,573) $(434,533) $(645,923)
                                    =========  =========  =========  =========
Basic and Diluted Loss Per Common
 Share............................  $  (11.14) $   (1.84) $  (22.62) $   (3.36)
                                    =========  =========  =========  =========
Basic and Diluted Weighted-Average
 Common Shares Outstanding........     20,167    192,169     19,212    192,169
                                    =========  =========  =========  =========
</TABLE>


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


                                       3
<PAGE>

                                  GENUITY INC.

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

<TABLE>
<CAPTION>
                                                      December 31,   June 30,
                                                          2000         2001
                                                      ------------  -----------
<S>                                                   <C>           <C>
                       ASSETS
Current Assets:
  Cash and cash equivalents.......................... $   868,926   $    70,917
  Receivables, less allowances of $29,099 and
   $21,527, respectively.............................     369,460       354,763
  Other current assets...............................      51,600        48,673
                                                      -----------   -----------
    Total current assets.............................   1,289,986       474,353
Property, Plant and Equipment, Net...................   3,009,706     3,401,074
Goodwill and Other Intangibles, Net..................     526,449       519,950
Other Assets.........................................      73,184        76,085
                                                      -----------   -----------
    Total assets..................................... $ 4,899,325   $ 4,471,462
                                                      ===========   ===========
        LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Short-term obligations, including current
   maturities........................................ $    35,514   $   828,147
  Accounts payable...................................     442,874       118,298
  Accrued compensation and related liabilities.......      40,584        41,385
  Accrued circuits...................................     168,506       118,063
  Accrued liabilities................................     369,200       152,072
  Deferred revenue...................................       9,907        18,457
                                                      -----------   -----------
    Total current liabilities........................   1,066,585     1,276,422
Long-Term Obligations................................      52,606        51,511
Other Liabilities....................................      14,249        24,910
                                                      -----------   -----------
    Total liabilities................................   1,133,440     1,352,843
                                                      -----------   -----------
Stockholders' Equity:
  Preferred stock--$0.01 par value; 50,000,000 shares
   authorized; no shares issued and outstanding......         --            --
  Class A common stock--$0.01 par value;
   1,600,000,000 shares authorized; 173,913,000
   shares issued and outstanding.....................       1,739         1,739
  Class B common stock--$0.01 par value; 21,000,000
   shares authorized; 18,256,000 shares issued and
   outstanding.......................................         183           183
  Class C common stock--$0.01 par value; 800,000,000
   shares authorized; no shares issued and
   outstanding.......................................         --            --
  Additional paid-in capital.........................   6,017,274     6,017,274
  Accumulated other comprehensive income (loss)......       1,078          (265)
  Accumulated deficit................................  (2,254,389)   (2,900,312)
                                                      -----------   -----------
    Total stockholders' equity.......................   3,765,885     3,118,619
                                                      -----------   -----------
    Total liabilities and stockholders' equity....... $ 4,899,325   $ 4,471,462
                                                      ===========   ===========
</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>
                                                          Six Months Ended
                                                              June 30,
                                                       -----------------------
                                                          2000        2001
                                                       ----------  -----------
<S>                                                    <C>         <C>
Cash Flows From Operating Activities:
  Net loss............................................ $ (434,533) $  (645,923)
  Adjustments to reconcile net loss to net cash used
   in operations:
    Special charge, non-cash portion in the period....        --        43,282
    Depreciation and amortization.....................    115,594      196,710
    Provision for bad debt............................      3,550       17,920
    Changes in current assets and current liabilities:
      Receivables.....................................      2,221       (3,223)
      Other current assets............................    (18,653)       2,927
      Other current liabilities.......................     16,034     (110,485)
  Other, net..........................................      5,301       (6,238)
                                                       ----------  -----------
    Net cash used in operating activities.............   (310,486)    (505,030)
                                                       ----------  -----------
Cash Flows From Investing Activities:
  Capital expenditures................................   (545,728)    (983,953)
  Capitalized software................................    (12,670)     (46,133)
                                                       ----------  -----------
    Net cash used in investing activities.............   (558,398)  (1,030,086)
                                                       ----------  -----------
Cash Flows From Financing Activities:
  Repayment of debt...................................    (37,694)        (335)
  Principal payments under capital lease obligations..    (13,764)     (12,558)
  Proceeds from short-term borrowings.................        --       750,000
  Repayment of note payable--GTE......................   (136,484)         --
  Proceeds from stock offering, net of expenses.......  1,831,547          --
  Contributions from GTE..............................  1,150,930          --
                                                       ----------  -----------
    Net cash provided by financing activities.........  2,794,535      737,107
                                                       ----------  -----------
    Net increase (decrease) in cash and cash
     equivalents......................................  1,925,651     (798,009)
Cash and cash equivalents, beginning of period........      6,044      868,926
                                                       ----------  -----------
Cash and cash equivalents, end of period.............. $1,931,695  $    70,917
                                                       ==========  ===========
Supplemental Cash Flow Disclosures:
Cash paid during the period for:
  Interest............................................ $    4,158  $     7,676
                                                       ==========  ===========
  State income taxes.................................. $      523  $       785
                                                       ==========  ===========
Non-cash investing and financing activities:
  Assets recorded under capital lease obligations..... $      --   $    54,431
                                                       ==========  ===========
  Assets recorded under accruals...................... $   59,317  $    33,957
                                                       ==========  ===========
</TABLE>

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

                                       5
<PAGE>

                                  GENUITY INC.

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

<TABLE>
<CAPTION>
                                    Three Months Ended     Six Months Ended
                                         June 30,              June 30,
                                    --------------------  --------------------
                                      2000       2001       2000       2001
                                    ---------  ---------  ---------  ---------
<S>                                 <C>        <C>        <C>        <C>
Net Loss..........................  $(224,707) $(353,573) $(434,533) $(645,923)
Other Comprehensive Income (Loss),
 net of tax:
  Foreign currency translation
   adjustments....................       (368)       283        182     (1,343)
  Unrealized loss on securities...        --         --      (1,525)       --
                                    ---------  ---------  ---------  ---------
                                         (368)       283     (1,343)    (1,343)
                                    ---------  ---------  ---------  ---------
Comprehensive Loss................  $(225,075) $(353,290) $(435,876) $(647,266)
                                    =========  =========  =========  =========
</TABLE>



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

                                       6
<PAGE>

                                  GENUITY INC.

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

Organization

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

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

Basis of Presentation

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

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

Summary of Significant Accounting Policies

   The Company's significant accounting policies are described in more detail
in Note 2 of the Notes to Consolidated Financial Statements included in its
most recent 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.


                                       7
<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 per
month basis. The contract with America Online extends through 2006.

Hosting and Value-Added Services

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

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

Transport

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

International

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

Goodwill and Other Intangibles

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

Valuation of Assets

   The impairment of tangible and intangible assets is assessed when changes in
circumstances indicate that their carrying value may not be recoverable. Under
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed

                                       8
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 other income (expense). Under Accounting
Principles Board Opinion ("APB") No. 17, "Intangible Assets," the Company also
annually evaluates the future period over which the benefit of goodwill will be
received, based on future cash flows, and changes the amortization life
accordingly. Impairment losses of approximately $2.0 million and $12.1 million
for the three and six months ended June 30, 2000, respectively, are included in
other, net in the accompanying consolidated statements of operations. Genuity
will adopt SFAS No. 142, "Goodwill and Other Intangible Assets," on January 1,
2002. Impairment losses of approximately $5.4 million for the three and six
months ended June 30, 2001 are included in special charge in the accompanying
statements of operations. (See Note 2 for further discussion.)

Concentrations of Credit Risk and Significant Customers

   Genuity's accounts receivable are subject to some credit risk. Genuity
performs regular credit evaluations of its customers' financial condition and
maintains allowances for potential credit losses. Genuity's risk of loss is
limited due to 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. The average accounts receivable balance related to amounts owed to
Genuity by America Online represented 42% and 19% of Genuity's ending accounts
receivable balance during the six month periods ended June 30, 2000 and 2001,
respectively, while revenues from America Online represented 46% and 33% of
Genuity's total revenues for the six month periods ended June 30, 2000 and
2001, respectively.

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

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

 Verizon

   Verizon purchases Genuity's services primarily under the purchase, resale
and marketing agreement outlined in Note 10. The average accounts receivable
balance related to amounts owed to Genuity by Verizon was $68.8 million for the
first six months of 2001 representing 18% of Genuity's ending accounts
receivable balance at June 30, 2001, while revenues from Verizon were $62.7
million or 10% of Genuity's total revenues for the six months ended June 30,
2001.

                                       9
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

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

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

   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.

   In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS 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.
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.

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.


                                       10
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

2. SPECIAL CHARGE

   On May 3, 2001, the Company approved a plan to reduce future expenditures.
This plan included a reduction of the Company's full-time equivalent employees
by approximately 16% and a reduction of 2001 capital expenditures from $2.2
billion to $1.4 billion. In addition, the Company subsequently 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. Severance and associated termination benefits included
in the special charge were approximately $17.9 million. In response to the
reduced capital expenditure program, 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 could be exited. 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.

   During the second quarter of 2001, the Company recorded a special charge of
approximately $47.9 million associated with the reduction in force and reduced
capital expenditure program. As of June 30, 2001, the accrual associated with
the special charge was approximately $37.9 million.

3. PROPERTY, PLANT AND EQUIPMENT, NET

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

<TABLE>
<CAPTION>
                                                      December 31,  June 30,
                                                          2000        2001
                                                      ------------ ----------
   <S>                                                <C>          <C>
   Land..............................................  $    4,855  $    4,969
   Buildings and improvements........................      56,888      77,596
   Communications network--fiber-optic cable.........     588,088     641,506
   Communications network--data processing equipment
    and machinery....................................   1,387,243   1,600,094
   Furniture and fixtures............................      19,546      30,296
   Leasehold improvements............................     196,538     288,321
   Work in progress..................................   1,270,455   1,420,010
                                                       ----------  ----------
     Subtotal........................................   3,523,613   4,062,792
   Accumulated depreciation..........................    (513,907)   (661,718)
                                                       ----------  ----------
     Total...........................................  $3,009,706  $3,401,074
                                                       ==========  ==========
</TABLE>

   Depreciation expense was $46.0 million and $87.2 million for the three
months ended June 30, 2000 and 2001, respectively, and $85.0 million and $165.5
million for the six months ended June 30, 2000 and 2001, respectively.

                                       11
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


4. GOODWILL AND OTHER INTANGIBLES, NET

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

<TABLE>
<CAPTION>
                                                        December 31, June 30,
                                                            2000       2001
                                                        ------------ ---------
   <S>                                                  <C>          <C>
   Goodwill............................................  $ 495,348   $ 495,348
   Customer bases......................................     77,000      77,000
   Trademarks..........................................     34,000      34,000
   Developed technology................................     19,000      19,000
   In-place work forces................................      9,190       9,190
   Internal use software...............................     87,535     113,366
                                                         ---------   ---------
     Subtotal..........................................    722,073     747,904
   Accumulated amortization............................   (195,624)   (227,954)
                                                         ---------   ---------
     Total.............................................  $ 526,449   $ 519,950
                                                         =========   =========
</TABLE>

   Amortization expense was $15.8 million and $16.0 million for the three
months ended June 30, 2000 and 2001, respectively, and $30.6 million and $31.2
million for the six months ended June 30, 2000 and 2001, respectively.

5. SHORT-TERM AND LONG-TERM OBLIGATIONS

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

<TABLE>
<CAPTION>
                                                          December 31, June 30,
                                                              2000       2001
                                                          ------------ --------
   <S>                                                    <C>          <C>
   Current portion of capital leases.....................   $26,032    $ 69,000
   6% convertible subordinated debentures................     9,482       9,147
   Note payable--Verizon.................................       --      750,000
                                                            -------    --------
     Total short-term obligations........................   $35,514    $828,147
                                                            =======    ========
   Capital leases........................................   $52,606    $ 51,511
                                                            -------    --------
     Total long-term obligations.........................   $52,606    $ 51,511
                                                            =======    ========
</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 June 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 June 30, 2001 has been
included in short-term obligations based on an estimate of the timing for the
remaining debt conversions.

   On September 5, 2000, the Company entered into a committed and unsecured
$2.0 billion revolving line of credit facility that matures on the earlier of
September 5, 2005 or the date that is three months prior to the scheduled
expiration of the option of Verizon to convert its Class B common stock into
Class C common stock. The facility is guaranteed by our principal operating
subsidiaries. Credit advances bear interest at a rate equal to either (1) for
base rate advances, the higher of the prime rate announced by Chase Manhattan
Bank or .50% per annum above the federal funds rates or (2) for London Inter-
bank Offer Rate ("LIBOR") advances, LIBOR

                                       12
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

plus a percentage determined based on our credit rating. The interest on credit
advances will be payable in quarterly installments. The credit facility
contains restrictions on the Company's ability to incur liens and requires that
we maintain a minimum debt-to-debt plus contributed capital ratio. As of June
30, 2001, there were no outstanding credit advances under this facility.

   Effective as of March 5, 2001, the Company entered into a $500 million line
of credit facility with Verizon Investments Inc., a wholly-owned subsidiary of
Verizon, with a maturity date of May 31, 2001. This facility was amended on May
22, 2001 to increase the line to $900 million and to extend the maturity date
to December 31, 2001. This line of credit is required to be repaid from the
proceeds of any issuance of debt by Genuity in public or private capital market
transactions prior to maturity. Interest expense on the line of credit facility
advances is based on LIBOR plus 2.00% and is payable, along with any principal
borrowed, not later than maturity. (See Note 11 for further discussion). As of
June 30, 2001, borrowings under this line of credit were $750.0 million.

6. STOCKHOLDERS' EQUITY

Preferred Stock

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

Common Stock

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

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

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

                                       13
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

   Conversion. The Class A common stock has no conversion rights. Verizon,
directly or indirectly, owns all of the outstanding shares of Class B common
stock.

   Under the terms of the FCC order:

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

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

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

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

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

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

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

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

                                       14
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

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

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

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

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

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

                                       15
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Additional Paid-In Capital

   Genuity received contributions from GTE of $1.2 billion for the 6 months
ended June 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.

7. EARNINGS PER SHARE

   The weighted-average common shares outstanding for both basic and diluted
earnings per share were 20,167,000 shares and 19,212,000 shares for the three
and six month periods ending June 30, 2000, respectively, and 192,169,000
shares for the three and six month periods ending June 30, 2001. Potential
common shares were not included in the computation of weighted-average diluted
shares outstanding for the three and six months ended June 30, 2000 and June
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 six months ended June 30, 2000 and June 30, 2001,
as the necessary conditions surrounding the share issuance had not been met.

8. SEGMENT REPORTING

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

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

   Hosting and Value-Added Services--Hosting pertains to services that allow
customers to successfully implement their eBusiness strategies through
scaleable, reliable and secure Web sites, which serve as their eBusiness
storefronts. The eBusiness model enables companies to decrease sales costs;
accelerate time to market; access new sales channels; increase revenues,
productivity and customer satisfaction; and gain competitive advantage. Genuity
currently operates 11 global data centers, nine in the U.S., one in Leeds,
England and one in Amsterdam, Netherlands. Through the Web hosting operation
center, Genuity monitors these systems 24 hours a day, seven days a week.
Value-Added Services includes revenue for professional consulting and value-
added Internet services such as security and virtual private networks.

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

   International--International revenues include all international revenues for
Access, Hosting and Value-Added Services.

   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.

                                       16
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Revenues from America Online, including AOL Japan, in relation to Genuity's
total revenues were 46% and 33% for the six months ended June 30, 2000 and
2001, respectively. Revenues from Verizon in relation to Genuity's total
revenues were 10% for the six months ended June 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.

                                       17
<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      Six Months Ended
                                        June 30,               June 30,
                                 -----------------------  --------------------
                                     2000        2001       2000       2001
                                 ------------ ----------  ---------  ---------
<S>                              <C>          <C>         <C>        <C>
Revenues
  Access........................  $  198,101  $  224,696  $ 387,620  $ 442,800
  Hosting and Value-Added
   Services.....................      31,285      37,447     56,507     76,130
  Transport.....................      21,862      26,599     45,487     52,261
  International.................      16,676      14,052     26,162     31,070
                                  ----------  ----------  ---------  ---------
    Total revenues..............     267,924     302,794    515,776    602,261
Operating Expenses
  Cost of sales.................     308,222     345,498    592,150    690,751
  Selling, general and
   administrative...............     124,645     152,794    232,981    305,840
  Depreciation and
   amortization.................      61,808     103,185    115,594    196,710
  Special charge................         --       47,909        --      47,909
                                  ----------  ----------  ---------  ---------
    Total operating expenses....     494,675     649,386    940,725  1,241,210
                                  ----------  ----------  ---------  ---------
Operating Loss..................    (226,751)   (346,592)  (424,949)  (638,949)
Other Income (Expense)
  Interest income (expense),
   net..........................       2,027      (6,155)      (946)    (4,940)
  Other, net....................         737         278     (7,330)        96
                                  ----------  ----------  ---------  ---------
Loss Before Income Taxes........  $ (223,987) $ (352,469) $(433,225) $(643,793)
                                  ==========  ==========  =========  =========
Capital Expenditures (1)
  Access........................  $   81,682  $   85,164  $ 109,201  $ 124,235
  Hosting and Value-Added
   Services.....................      33,947      25,287     54,419     32,648
  GNI/Transport.................     195,206     233,717    298,991    309,383
  International.................       6,936      13,956      9,475     14,820
  Other.........................      19,908      51,435     28,686     79,615
                                  ----------  ----------  ---------  ---------
    Total.......................  $  337,679  $  409,559  $ 500,772  $ 560,701
                                  ==========  ==========  =========  =========
Depreciation and Amortization
  Access........................  $   12,754  $   20,084  $  24,708  $  37,072
  Hosting and Value-Added
   Services.....................       5,827       9,386     10,040     18,595
  GNI/Transport.................      28,005      53,758     50,441    101,878
  International.................         317       2,387        388      4,406
  Other.........................      14,905      17,570     30,017     34,759
                                  ----------  ----------  ---------  ---------
    Total.......................  $   61,808  $  103,185  $ 115,594  $ 196,710
                                  ==========  ==========  =========  =========
<CAPTION>
                                 December 31,  June 30,
                                     2000        2001
                                 ------------ ----------
<S>                              <C>          <C>         <C>        <C>
Property, Plant and Equipment,
 Net............................
  Access........................  $  606,003  $  697,720
  Hosting and Value-Added
   Services.....................     254,488     272,826
  GNI/Transport.................   1,974,123   2,182,794
  International.................      35,639      45,273
  Other.........................     139,453     202,461
                                  ----------  ----------
    Total.......................  $3,009,706  $3,401,074
                                  ==========  ==========
</TABLE>
--------
(1) Includes accruals and capital leases. Excludes capitalized software.

                                       18
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


9. 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
$17.3 million and $25.8 million for the three months ended June 30, 2000 and
2001, respectively, and was $33.0 million and $50.1 million for the six months
ended June 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 June 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................................................... $ 72,000  $ 35,200
     2002...................................................   29,900    50,700
     2003...................................................   15,800    42,100
     2004...................................................    4,600    33,800
     2005...................................................    4,200    30,000
     Thereafter.............................................   20,400   104,800
                                                             --------  --------
       Total minimum lease payments.........................  146,900  $296,600
                                                                       ========
     Amount representing interest...........................  (26,400)
                                                             --------
     Present value of minimum lease payments................ $120,500
                                                             ========
</TABLE>

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

Contract Commitments

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

<TABLE>
     <S>                                                               <C>
     2001............................................................. $ 90,000
     2002.............................................................   60,000
                                                                       --------
       Total future minimum commitments............................... $150,000
                                                                       ========
</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 June 30, 2001, the
outstanding commitments under the agreements were as follows (in thousands):

<TABLE>
     <S>                                                                <C>
     2001.............................................................. $23,000
     2002..............................................................   5,000
                                                                        -------
       Total future minimum commitments................................ $28,000
                                                                        =======
</TABLE>


                                       19
<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 June 30,
2001, future minimum payments under these non-cancelable purchase commitments
were as follows (in thousands):

<TABLE>
     <S>                                                               <C>
     2001............................................................. $ 82,000
     2002.............................................................  220,000
     2003.............................................................  211,000
     Thereafter.......................................................   62,000
                                                                       --------
       Total future minimum commitments............................... $575,000
                                                                       ========
</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 June 30, 2001, the future minimum
commitments under these agreements were as follows (in thousands):

<TABLE>
     <S>                                                               <C>
     2001............................................................. $ 40,000
     2002.............................................................  344,000
     2003.............................................................  136,000
     2004.............................................................   52,000
     2005.............................................................  122,000
     Thereafter.......................................................   41,000
                                                                       --------
       Total future minimum commitments............................... $735,000
                                                                       ========
</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.

10. 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,

                                       20
<PAGE>

                                  GENUITY INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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.

   Effective as of March 5, 2001, the Company entered into a $500 million line
of credit facility with Verizon Investments Inc., a wholly-owned subsidiary of
Verizon, with a maturity date of May 31, 2001. This facility was amended on May
22, 2001 to increase the line to $900 million and to extend the maturity date
to December 31, 2001. (See Note 11 for further discussion). As of June 30,
2001, borrowings under this line of credit were $750.0 million.

 Revolving Line of Credit Facility

   On September 5, 2000, the Company entered into a $2.0 billion revolving line
of credit facility with a consortium of 9 banks (See Note 5 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.

11. SUBSEQUENT EVENTS

   On August 8, 2001, the Company amended its $900 million line of credit
facility with Verizon to increase the line to $1.15 billion. Interest expense
on the line of credit facility advances up to $1.0 billion is based on LIBOR
plus 2.00%. When total advances exceed $1.0 billion, the interest rate will be
based on LIBOR plus 2.25%. The maturity date remains at December 31, 2001.

   On July 10, 2001, Genuity launched its public tender offer to acquire the
shares of Integra, a pan-European provider of managed hosting and eBusiness
solutions. The tender offer period will extend through August 13, 2001.

                                       21
<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 June
                                                                30,
                                                     --------------------------
                                                         2000          2001
                                                     ------------  ------------
                                                      Amount   %    Amount   %
                                                     -------- ---  -------- ---
   <S>                                               <C>      <C>  <C>      <C>
   Access........................................... $198,101  74% $224,696  74%
   Hosting and Value-Added Services.................   31,285  12    37,447  12
   Transport........................................   21,862   8    26,599   9
   International....................................   16,676   6    14,052   5
                                                     -------- ---  -------- ---
     Total.......................................... $267,924 100% $302,794 100%
                                                     ======== ===  ======== ===
</TABLE>

<TABLE>
<CAPTION>
                                                     Six Months Ended June 30,
                                                     --------------------------
                                                         2000          2001
                                                     ------------  ------------
                                                      Amount   %    Amount   %
                                                     -------- ---  -------- ---
   <S>                                               <C>      <C>  <C>      <C>
   Access........................................... $387,620  75% $442,800  74%
   Hosting and Value-Added Services.................   56,507  11    76,130  12
   Transport........................................   45,487   9    52,261   9
   International....................................   26,162   5    31,070   5
                                                     -------- ---  -------- ---
     Total.......................................... $515,776 100% $602,261 100%
                                                     ======== ===  ======== ===
</TABLE>

   Total revenues for the quarter ended June 30, 2001 increased $34.9 million,
or 13%, and revenues for the first six months 2001 increased $86.5, or 17% over
the same periods in 2000.

                                       22
<PAGE>

   Access. Access revenues for the quarter ended June 30, 2001 increased $26.6
million, or 13%, and for the first six months of 2001 increased $55.2 million,
or 14%, over the same periods in 2000. The quarterly increase was due primarily
to a $34.2 million, or 554%, increase in broadband revenues excluding America
Online, Inc. ("America Online", or "AOL"), and to a lesser extent, a $11.4
million, or 28%, increase in dedicated access revenues compared to the second
quarter of 2000. The $34.2 million increase in broadband revenues, excluding
America Online, was driven by an increase in users from approximately 64,000
users as of June 30, 2000 to approximately 289,000 users as of June 30, 2001.
These increases were partly offset by a decrease in revenues from AOL. The AOL
agreement includes provisions for minimum purchase requirements at fixed
monthly fees, subject to market pricing adjustments, service level requirements
and termination provisions. The impact of the AOL contractual price reductions
implemented in the fourth quarter of 2000 on the second quarter of 2001 results
as compared to the corresponding period in 2000 totaled approximately $52.1
million. In addition to the contractual reduction in the fixed monthly fees for
dial-up access services during 2000, an additional price reduction is scheduled
in the third quarter of 2002.

   Hosting and Value-Added Services. Hosting and Value-added services revenues
for the quarter ended June 30, 2001 increased $6.2 million, or 20%, and for the
first six months of 2001 increased $19.6 million, or 35%, over the same periods
in 2000 due to increases in the number of our managed hosting customers and the
average monthly revenue associated with these customers. In addition, the
average new deal size for hosting contracts increased to $735,000 in the
quarter ended June 30, 2001 compared to $234,000 in the corresponding period in
2000. Excluding an exceptionally large customer contract in the second quarter
of 2001, the average new deal size for hosting contracts was $341,000. Hosting
and Value-added services revenue for the quarter ended June 30, 2001 decreased
$1.2 million or 3% compared to the previous quarter. This decrease was due to a
higher level non-service related credits granted to customers and to a lack of
growth in order volume reflecting the current slower economic environment. The
future outlook for new hosting orders is dependent on the condition of the
overall economy and customers' IT spending plans.

   Transport. Transport revenues for the quarter ended June 30, 2001 increased
$4.7 million, or 22%, and for the first six months of 2001 increased $6.8
million, or 15%, over the same periods in 2000, due primarily to the sale of
excess capacity on the network as new network segments became operational, as
well as increased sales of private line services and ATM services to
telecommunications carriers and Internet service providers.

   International. International revenues for the quarter ended June 30, 2001
decreased $2.6 million, or 16%, and for the first six months of 2001 increased
$4.9 million, or 19%, over the same periods in 2000. The quarterly decrease is
primarily due to decreases in revenue from international sales of Internet
access services, including revenue from AOL Japan.

Cost of Sales

   Cost of sales for the quarter ended June 30, 2001 increased $37.3 million,
or 12%, and for the first six months of 2001 increased $98.6 million, or 17%,
over the same periods in 2000. These increases were due to the expansion of the
network infrastructure to provide access to a broader base of customers and to
provide increased scope of services to Internet access customers.

   Telecommunications circuit costs for the quarter ended June 30, 2001
increased $20.9 million, or 10%, and for the first six months of 2001 increased
$62.0 million, or 15%, 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.
These efforts resulted in a 1.5% reduction in circuit costs as a percentage of
revenues in the three months ended June 30, 2001 compared to the previous
quarter.

   Cost of sales, as a percentage of total revenues, was 115% and 114% for
quarters ended June 30, 2000 and 2001, respectively. Telecommunications circuit
costs, as a percentage of total revenues, were approximately 81% and 78% for
the quarters ended June 30, 2000 and 2001, respectively.

                                       23
<PAGE>

Selling, General and Administrative Expenses

   Selling, general and administrative expenses for the quarter ended June 30,
2001 increased $28.1 million, or 23%, and for the first six months of 2001
increased $72.9 million, or 31%, over the same periods in 2000. This increase
was due primarily to increased selling expenses that were directly attributable
to an increase in the number of sales and sales-related employees, both
domestically and internationally, and to the increased advertising expense due
primarily to increased branding efforts. Also contributing to these increases
were the hiring of additional management staff and related operating expenses,
increased facilities costs and increased information technology expenses.
Included in selling, general and administrative expenses was a $9.9 million and
$14.4 million increase in bad debt expense for the three and six months ended
June 30, 2001, respectively, over the comparable periods in 2000.

Depreciation and Amortization

   Depreciation and amortization expenses for the quarter ended June 30, 2001
increased $41.4 million, or 67%, and for the first six months of 2001 increased
$81.1 million, or 70%, 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 Charge

   The Company recorded a special charge of approximately $47.9 million in the
quarter ended June 30, 2001 related to the Company's previously announced plan
to reduce future expenditures. 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.

   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.

Income Taxes

   Genuity generated pre-tax book losses of $352.5 million and $224.0 million
for the quarter ended June 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 six month period
ended June 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 $353.6 million for the quarter ended June 30, 2001
compared to $224.7 million for the quarter ended June 30, 2000 and to $645.9
million for the first six months of 2001 compared to $434.5 million for the
first six months of 2000.

LIQUIDITY AND CAPITAL RESOURCES

   Net cash used in operating activities was $310.5 million and $505.0 million
for the first six 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 $558.4 million and $1.0 billion
for the first six 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,

                                       24
<PAGE>

furniture, fixtures, computers and other equipment. As of June 30, 2001,
Genuity had $305.3 million of capital commitments outstanding.

   Net cash received from financing activities was $2.8 billion and $737.1
million for the first six months of 2000 and 2001, respectively. Capital
contributions from GTE amounted to $1.2 billion for the first six months of
2000. Proceeds from our initial public offering of Class A common stock totaled
$1.8 billion in the first six months of 2000.

   Genuity has a committed and unsecured $2.0 billion revolving line of credit
facility that matures on the earlier of September 5, 2005 or the date that is
three months prior to scheduled expiration of the option of Verizon to convert
its Class B common stock into Class C common stock. The facility is guaranteed
by Genuity's principal domestic operating subsidiaries. Credit advances bear
interest at a rate equal to either (1) for base rate advances, the higher of
the prime rate announced by Chase or .50% per annum above the federal funds
rate or (2) for London Inter-bank Offer Rate ("LIBOR") advances, LIBOR plus a
percentage determined based on our credit rating. The interest on credit
advances will be payable in quarterly installments. The credit facility
contains restrictions on our ability to incur liens and requires that we
maintain a minimum ratio of debt to debt plus contributed capital. The facility
also provides for an event of default if Genuity experiences a change of
ownership. As of June 30, 2001, there were no outstanding credit advances under
this facility.

   Effective as of March 5, 2001, the Company entered into a $500 million line
of credit facility with Verizon Investments Inc., a wholly-owned subsidiary of
Verizon, with a maturity date of May 31, 2001. This line of credit is required
to be repaid from the proceeds of any issuance of debt by Genuity in public or
private capital market transactions prior to maturity. Interest expense on the
line of credit facility advances up to $1.0 billion is based on LIBOR plus
2.00% and is payable, along with any principal borrowed, not later than
maturity. When total advances exceed $1.0 billion, the interest rate will be
based on LIBOR plus 2.25%. This facility was amended on May 22, 2001 to
increase the line to $900 million and to extend the maturity date to December
31, 2001. On August 8, 2001, the Company amended the line of credit facility
with Verizon to increase the line to $1.15 billion. As of June 30, 2001,
borrowings under this line of credit were $750.0 million.

   Verizon also agreed to provide Genuity with credit enhancements to enable
Genuity to access long-term sources of capital with maturities of up to five
years. The aggregate amount of interim funding and credit enhancements provided
by Verizon will be $2.0 billion. All transactions between Genuity and Verizon
will be consistent with the FCC's final order approving the merger of Bell
Atlantic and GTE in June 2000.

   As of May 3, 2001, the Company approved a plan to reduce future
expenditures. This plan included 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.

   Genuity's current capital expenditures program will require $4.0 billion to
$5.0 billion over the four-year period ending December 31, 2004 although actual
amounts may vary. Cash requirements will depend on a number of factors,
including: the pace at which Genuity expands its network infrastructure and the
associated costs; the rate at which customers purchase Genuity services and the
pricing of those services; the level of marketing required to build the Genuity
brand, to acquire and retain customers and to maintain a competitive position
in the marketplace; the rate at which Genuity invests in support systems and
engineering; and investment opportunities in complementary businesses or
technologies. Genuity believes that the committed sources of financing will
provide sufficient financial resources to meet its cash requirements through
2002.

   As of June 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. Genuity is required to contribute to a sinking
fund annual payments equal to 5% of the aggregate principal amount issued.


                                       25
<PAGE>

   As of June 30, 2001, Genuity's indebtedness also included $120.5 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 June 30, 2001, the Company's common stock outstanding totaled
192,169,000 consisting of 173,913,000 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 973,913,000 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 973,913,000 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

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

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

   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.

   In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS 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

                                       26
<PAGE>

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. 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.

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 June 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. Genuity is also
able to borrow funds under its long-term credit facility. Borrowings under the
long-term credit facility are influenced by either changes in short-term LIBOR
interest rates, changes in the prime rate or changes in the federal funds rate
depending on the credit advance. As of June 30, 2001, there were no outstanding
credit advances under the long-term credit facility.

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

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

                                       27
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

   We are not involved in any legal proceedings which we believe would, if
adversely determined, have a material adverse effect upon our business,
financial condition or results of operations.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Changes in Securities

   None.

Use of Proceeds

   Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

   Not applicable.

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

   On May 17, 2001, the Company held its Annual Meeting of Shareholders. The
following proposals were adopted by the margins indicated:

<TABLE>
<CAPTION>
                                                       Votes For  Votes Withheld
                                                      ----------- --------------
   <S>                                                <C>         <C>
   Election of Directors:
     Philippe P. Dauman.............................. 177,774,613   1,954,834
     Duncan M. Davidson.............................. 178,941,756     787,691
     John W. Gerdelman............................... 178,883,981     845,466
     Debra L. Lee.................................... 178,878,193     851,254
</TABLE>

<TABLE>
<CAPTION>
                                            Votes For  Votes Against Abstentions
                                           ----------- ------------- -----------
   <S>                                     <C>         <C>           <C>
   Approval of Auditors:
     Arthur Andersen LLP.................. 178,994,469    485,303      249,675
</TABLE>

ITEM 5. OTHER INFORMATION

   Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits

     10.1 First Amendment to Credit Agreement

     (b)  Reports on Form 8-K

   Genuity filed a current report on Form 8-K, dated May 3, 2001, reporting
under Item 5 the issuance of a press release discussing the results of
operations for the quarter ended March 31, 2001.

   Genuity filed a current report on Form 8-K, dated May 22, 2001, reporting
under Item 9 information to be presented in an analyst meeting including the
Company's operational plan, its plan to reduce the amount of the

                                       28
<PAGE>

investment in network capital during the 2001 to 2004 period from $7-$9 billion
to $4-$5 billion over the same time period and, also, to increase its short
term credit facility with Verizon from a principal aggregate amount of $500
million to a principal aggregate amount of $900 million.

   Genuity filed a current report on Form 8-K, dated June 1, 2001, reporting
under Item 5 that it had reached an agreement with Integra S.A., a corporation
organized under the laws of France ("Integra"), to acquire all of the
outstanding shares of Integra in a public exchange offer.

                                       29
<PAGE>

                                   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: August 14, 2001


                                       30