<PAGE>

                      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: 000-31201

                               IASIAWORKS, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                   DELAWARE                           94-3228782
        (STATE OR OTHER JURISDICTION OF             (IRS EMPLOYER
        INCORPORATION OR ORGANIZATION)           IDENTIFICATION NO.)

                     2000 ALAMEDA DE LAS PULGAS, SUITE 126
                          SAN MATEO, CALIFORNIA 94403
                                (650) 524-1790

(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF THE
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)


Indicate by check mark whether the registrant (1) has filed all reports required
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. [X] Yes  [_] No

The number of outstanding shares of the registrant's Common Stock, $0.001 par
value, was 39,756,745 at August 1, 2001

                                      1.
<PAGE>

                               IASIAWORKS, INC.
                                   FORM 10-Q

                                     INDEX

<TABLE>
<CAPTION>
PART I:  FINANCIAL INFORMATION                                                                                   PAGE
<S>                                                                                                              <C>
Item 1. Financial Statements

           Unaudited Condensed Consolidated Balance Sheets as of December 31, 2000 and June 30, 2001..........     3

           Unaudited Condensed Consolidated Statements of Operations for the Three
           and Six Months Ended June 30, 2000 and 2001........................................................     4

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

           Notes to Unaudited Condensed Consolidated Financial Statements.....................................     6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................    13

Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................    41

PART II: OTHER INFORMATION

Item 1. Legal Proceedings.....................................................................................    41
Item 2. Changes in Securities and Use of Proceeds.............................................................    42
Item 3. Defaults Upon Senior Securities.......................................................................    42
Item 4. Submission of Matters to a Vote of Security Holders...................................................    42
Item 5. Other Information.....................................................................................    42
Item 6. Exhibits and Reports on Form 8-K......................................................................    42

Signatures
</TABLE>

                                       2
<PAGE>

PART I:  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

                               IASIAWORKS, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                          December 31,       June 30,
                                                                              2000             2001
                                                                         --------------    ------------
<S>                                                                      <C>               <C>
ASSETS
Current assets:
     Cash and cash equivalents                                                $  62,045        $  5,970
     Marketable securities                                                        9,339               5

     Accounts receivable, net                                                     4,480           3,404
     Prepaid expenses and other current assets                                    6,578           4,936
                                                                         --------------    ------------
           Total current assets                                                  82,442          14,315
Restricted cash                                                                   7,063           2,554
Property and equipment, net                                                      69,276          64,675
Goodwill, intangibles and other assets, net                                      34,786             691
                                                                         --------------    ------------
           Total assets                                                       $ 193,567        $ 82,235
                                                                         ==============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                             5,087        $ 14,166
     Accruals and other liabilities                                               5,442          19,735
     Deferred revenue                                                             1,121             759
     Current portion of capital lease obligations                                   560           1,844
     Current portion of long-term debt                                              349          11,123
                                                                         --------------    ------------
           Total current liabilities                                             12,559          47,627
Capital lease obligations, net of current portion                                 1,045           1,718
Long-term notes payable                                                          28,986          17,258
                                                                         --------------    ------------
           Total Liabilities                                                     42,590          66,603
                                                                         --------------    ------------
Stockholders' equity:
Common stock, $0.001 par value; 300,000 shares authorized;
     39,634 shares issued and outstanding at December 31, 2000
     and 39,756 shares issued and outstanding at June 30, 2001                       39              39

Additional paid-in capital                                                      251,551         245,524
Deferred stock-based compensation                                               (13,123)         (2,595)
Accumulated deficit                                                             (85,809)       (223,363)
Accumulated other comprehensive loss                                             (1,681)         (3,973)
                                                                         --------------    ------------
           Total stockholders' equity                                           150,977          15,632
                                                                         --------------    ------------

           Total liabilities and stockholders' equity                         $ 193,567       $  82,235
                                                                         ==============    ============
</TABLE>

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

                                       3
<PAGE>

                               IASIAWORKS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                          Three Months Ended June 30,     Six Months Ended June 30,
                                                                               2000           2001           2000        2001
                                                                           -----------    -----------       --------  -----------
<S>                                                                        <C>            <C>               <C>       <C>
Revenue:
     Internet access and related services                                    $  3,813     $    3,861        $  7,346    $   7,608
     Hosting, co-location and other managed services                            2,232          4,038           3,421        9,656
                                                                           -----------    -----------       --------  -----------
         Total revenue                                                          6,045          7,899          10,767       17,264

Cost of revenue:
     Cost of revenue                                                            4,729          8,686           8,419       18,356
     Depreciation                                                                 826          2,089           1,397        3,091
                                                                           -----------    -----------       --------  -----------
         Total cost of revenue                                                  5,555         10,775           9,816       21,447
                                                                           -----------    -----------       --------  -----------
     Gross profit (loss)                                                          490         (2,876)            951       (4,183)
                                                                           -----------    -----------       --------  -----------

Operating expenses:
  Network operations and support (including stock-based
  compensation of $428 and $212 for the three months ended
  June 30, 2000 and 2001, respectively, and $721 and $504
  for the six months ended June 30, 2000 and 2001, respectively)                1,524          4,547          2,671        10,737
  Sales and marketing (including stock-based
   compensation of $588 and $(1,040) for the three
   months ended June 30, 2000, and 2001,
   respectively, and $918 and $(641) for the six
   months ended June 30, 2000 and 2001, respectively)                           2,517          2,830          4,302         8,177
  General and administration (including
   stock-based compensation of $2,739 and $222 for the three
   months ended June 30, 2000 and 2001, respectively, and
   $4,908 and $1,815 for the six months ended June 30, 2000 and
   2001, respectively)                                                          4,518          7,698           8,490       14,862
  Amortization of intangibles                                                   4,252          3,416           7,716        7,423
  Impairment of goodwill                                                           --         20,496              --       24,160
Non-recurring operating expenses                                                   --         60,180              --       67,697
                                                                           -----------    -----------       --------  -----------
         Total operating expenses                                              12,811         99,167          23,179      133,056
                                                                           -----------    -----------       --------  -----------
Loss from operations                                                          (12,321)      (102,043)        (22,228)    (137,239)
     Interest income                                                              473            167             984          901
     Interest expense                                                             (47)          (697)           (145)        (879)
     Other income (expense) net                                                    30           (406)             84         (337)
                                                                           -----------    -----------       --------  ------------
Net loss                                                                     $(11,865)    $ (102,979)       $(21,305)   $(137,554)
                                                                           ===========    ===========       ========  ============
Net loss per share - basic and diluted                                       $  (3.09)    $    (2.59)       $  (6.28)   $   (3.47)
                                                                           ===========    ===========       ========  ============
Shares used in computing basic and diluted net loss
per share                                                                       3,846         39,702           3,392       39,677
                                                                           ===========    ===========       ========  ============
</TABLE>

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

                                       4
<PAGE>

                               IASIAWORKS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                        Six Months Ended June 30,
                                                                                         2000                2001
                                                                                    ----------------     --------------
<S>                                                                                 <C>                  <C>
Cash flows from operating activities:
     Net loss                                                                              $(21,305)         $(137,554)
     Adjustments to reconcile net loss to net cash used in operating activities:
         Depreciation and amortization                                                        9,099             10,896
         Warrants issued in connection with loans recorded as interest expense                   23                 --
         Stock-based compensation expense                                                     6,547              4,277
         Impairment of goodwill                                                                  --             24,159
         Loss on sale of virtual hosting business                                                --              2,359
         Impairment of property and equipment                                                    --             56,005
         Changes in operating assets and liabilities:
            Accounts receivable                                                                (821)                70
            Provision for doubtful accounts                                                     275                900
            Prepayments and other current assets                                            (11,936)             1,606
            Accounts payable and accrued expenses                                             3,793             23,592
            Deferred revenue                                                                    603               (291)
            Other long term assets                                                               --                625
            Deposits                                                                             --                555
            Restricted cash                                                                     (99)             4,510
                                                                                    ----------------     --------------
                 Net cash used in operating activities                                      (13,821)            (8,291)
                                                                                    ----------------     --------------
Cash flows from investing activities:
     Purchase of property and equipment, net                                                 (4,581)           (59,223)
     Business acquisitions                                                                     (600)                --
     Sale of marketable securities                                                               --              9,339

                                                                                    ----------------     --------------
                Net cash used in investing activities                                        (5,181)           (49,884)

                                                                                    ----------------     --------------
Cash flows from financing activities:
     Principal payments on capital lease obligations                                             --               (198)
     Principal payments on loans                                                                 --               (349)
     Proceeds from capital leases                                                                --              2,174
     Proceeds from loans                                                                        676                382
     Exercise of stock options                                                                   --                 44
     Proceeds from issuance of preferred stock and preferred stock warrants, net                943                 --
     Proceeds from the sale of common stock, net                                                480                180
                                                                                    ----------------     --------------
                Net cash provided by financing activities                                     2,099              2,233
                                                                                    ----------------     --------------
Effect of exchange rate changes on cash and cash equivalents                                   (161)              (133)
Net decrease in cash and cash equivalents                                                   (17,064)           (56,075)
Cash and cash equivalents at beginning of the period                                         42,222             62,045
                                                                                    ----------------     --------------
Cash and cash equivalents at end of the period                                          $    25,158        $     5,970
                                                                                    ================     ==============
Supplemental cash flow disclosures:
     Cash paid during the period for: Interest                                          $        99        $     1,429
                                                                                    ================     ==============
Supplemental disclosure of non-cash investing and financing activities:
         Assets acquired under capital leases                                           $       793        $     2,165
                                                                                    ================     ==============
         Issuance of preferred stock in connection with acquisition                     $     4,850        $        --
                                                                                    ================     ==============
</TABLE>

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

                                       5
<PAGE>

                               IASIAWORKS, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)


NOTE 1 - ORGANIZATION AND BACKGROUND

The Company

         Prior to the quarter ended June 30, 2001, iAsiaWorks, Inc. (the
"Company") offered a broad range of Internet solutions that allowed business
customers to build or extend their presence across multiple markets in the Asia-
Pacific region. These Internet solutions included high-speed, leased-line
Internet access, hosting, co-location, managed services and other value-added
services.

         During the second quarter of this year, in light of the deteriorating
business climate and its diminished resources and inability to access financing,
the Company has refocused the scope and geographic reach of its business
activities with the objective of reducing its operating expense structure to be
in line with its expected revenue streams and financing opportunities. As a
result, the Company now emphasizes co-location services, connectivity and remote
hands services in two principal markets - Taiwan and South Korea - and has de-
emphasized its focus on sales of high-speed, leased-line Internet access and
managed services.

Restructuring and Downsizing Activities

         As part of the Company's efforts to realign its operating expense
structure, the Company has made reductions in force and has sold, closed or
liquidated various business units, sales offices and subsidiaries. Earlier in
2001, the Company sold its virtual hosting business in Australia and made
significant headcount reductions of approximately 100 people companywide,
which together resulted in a $7.5 million charge to non-recurring operating
expense in the first quarter of 2001.

         The Company underwent an additional reduction in force in June, which
resulted in the layoff of 127 employees. The Company also closed all of its
remote sales offices in the United States, and entered into a Creditors
Voluntary Liquidation of its Hong Kong subsidiary in July (see NOTE 9).

         The Company will continue to assess its operating expense structure and
will make additional changes as it deems appropriate.

Going Concern

         The Company's unaudited condensed consolidated financial statements for
the three and six months ended June 30, 2001 have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company incurred a net loss
of $137.6 million for the six-month period ended June 30, 2001 and has an
accumulated deficit of $223.4 million as of June 30, 2001. The Company has
suffered recurring losses from operations and, as of June 30, 2001, has a
working capital deficit of $33.3 million. The Company has not been successful in
raising additional funding to support its operating activities during 2001.
These factors raise substantial doubt about the

                                       6
<PAGE>

Company's ability to continue as a going concern.

         Without obtaining third party debt or equity financing the Company
currently anticipates that cash on hand and anticipated cash flow from
operations are inadequate to continue to fund its operations in the ordinary
course. Cash on hand is being carefully monitored and the Company is managing
its operations on a week-to-week basis. Consequently, the Company will require
substantial additional funding to continue to operate its business as a going
concern. Many companies in the Internet infrastructure industry have experienced
difficulty raising additional financing in recent months. The Company has been
attempting to obtain additional financing for several months and has not
succeeded. Additional financing may not be available to the Company on favorable
terms or at all. If additional financing is not available, the Company may need
to further modify its business plan, sell or merge its business, sell assets,
including its Internet data centers in South Korea and Taiwan, or face
bankruptcy.

         Negotiations for the restructuring of the Company's short term and long
term liabilities, including debt agreements are being conducted. However, the
Company's creditors could force the Company into involuntary bankruptcy at any
time. If this were to occur, it is likely that the Company's creditors will
receive less than 100% of the face value of their claims and that the Company's
stockholders will not receive any return from their investment, and most likely
would lose their investment altogether. In addition, any issuance of equity or
equity-related securities would substantially dilute the ownership interest of
existing stockholders and the issuance of debt securities could increase the
risk or perceived risk of the Company.

         The absence of additional funding has and will continue to have a
significant impact on the Company's ability to sell its services to new
customers or retain existing customers.

         The Company's plans in light of this uncertainty include, but are not
limited to, one or more of the following:

         .        exploring various strategic alternatives, which may include a
                  merger, asset sale, or another comparable transaction;

         .        raising additional capital to fund continuing operations by
                  private placements of equity, debt securities and/or securing
                  new loans which may by collateralized by our assets;

         .        negotiating with creditors to either reduce or restructure our
                  current outstanding obligations;

         .        forming a joint venture with a strategic partner or partners
                  to provide additional capital resources to fund operations;
                  and

         .        executing additional cost-cutting measures which could include
                  additional lay-offs and/or the closure or sale of certain
                  business units and facilities.

         If the Company is unable to raise additional funds by consummating one
of the aforementioned alternatives or restructure its obligations it may not be
able to grow its business or continue operating to achieve its business
objectives and, as a result, may need to further modify its business plan or
file for bankruptcy under Chapter 11 of the United States Federal Bankruptcy
Code. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

                                       7
<PAGE>

NOTE 2 - INTERIM BASIS OF PRESENTATION

         The accompanying unaudited condensed consolidated financial statements
of the Company have been prepared in accordance with generally accepted
accounting principles for interim financial information and the rules of the
Securities and Exchange Commission. Accordingly, they do not contain all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of the Company's financial position as of June 30, 2001, and
the results of its operations and cash flows for the three and six months ended
June 30, 2001 and 2000. The consolidated balance sheet data as of December 31,
2000 is derived from the audited financial statements which are included in the
Company's annual report filed on Form 10-K, which should be read in conjunction
with these financial statements. Operating results for the three and six months
ended June 30, 2001 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2001.


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

         The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All inter-company transactions
and balances have been eliminated upon consolidation.

Revenue Recognition

         The Company's revenue has historically been derived from contracts for
Internet access and related services and monthly fees from customer use of
Internet data centers, managed services, and professional services and sales of
equipment. Internet access, hosting and co-location revenues are generally
billed and recognized ratably over the term of the contract, which generally has
a one-year term. Internet access-related services revenue includes installation
fees and related direct costs. Installation fees and related direct costs are
deferred and recognized over the contract term.

         Managed and other value-added services include administration,
monitoring, security, data backup and consulting services, and equipment sales.
The Company recognizes revenue from maintenance fees for ongoing customer
support ratably over the period of the maintenance contract. Payments for
maintenance fees are generally made in advance and are non-refundable.
Consulting revenue is generally billed on a time and materials basis, and is
recognized as the consulting services are rendered. Revenue from equipment sales
is recognized when the equipment has been delivered to the customer or placed
into service at one of the Company's Internet data centers.

                                       8
<PAGE>

Net Loss Per Share

         Net loss per share has been computed by dividing the net loss by the
weighted-average number of shares outstanding during the period.

         The following table sets forth the computation of net loss per share
for the periods indicated. For periods prior to the Company's initial public
offering, the computation does not reflect the conversion of preferred stock
into common stock, which occurred upon the closing of the Company's initial
public offering, nor does it include the exercise of outstanding options and
warrants for any period. The information set forth is stated in thousands,
except for per share data:

<TABLE>
<CAPTION>
                                       Three Months Ended June 30,        Six Months Ended June 30,
                                          2000             2001            2000                2001
                                      --------------  --------------- ----------------   ------------------
<S>                                   <C>             <C>             <C>                <C>
Numerator:
        Net loss attributable to
        common stockholders                $(11,865)       $(102,979)        $(21,305)           $(137,554)
                                      ==============  =============== ================   ==================

Denominator:
        Shares used in computing net
        loss per share attributable
        to common stockholders, basic
        and diluted                           3,846           39,702            3,392               39,677
                                      ==============  =============== ================   ==================

        Net loss per share
        attributable to common
        stockholders, basic and
        diluted                            $  (3.09)        $  (2.59)        $  (6.28)           $   (3.47)
                                      ==============  =============== ================   ==================
</TABLE>

NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS

         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 133"). SFAS 133, as
amended, establishes a new model for accounting for derivatives and hedging
activities and supersedes and amends a number of existing accounting standards.
SFAS 133 requires that all derivatives be recognized in the balance sheet at
their fair market value and that the corresponding derivative gains or losses be
reported either in the statement of operations or as a deferred item depending
on the type of hedge relationship that exists with respect to these derivatives.
The Company adopted SFAS 133 in the quarter ended March 31, 2001. The Company
has determined that the adoption of this pronouncement did not have a material
impact on its financial condition or results of operations.

         In July 2001, the FASB issued SFAS No. 141, "Business Combinations"
(SFAS 141"). SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the pooling-of-
interests method. The Company believes that the adoption of SFAS 141 will not
have a significant impact on its financial statements.

                                       9
<PAGE>

         In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), which is effective for fiscal years beginning
after March 15, 2001. SFAS 142 requires, among other things, the discontinuance
of goodwill amortization. In addition, the standard includes provisions upon
adoption for the reclassification of certain existing recognized intangibles as
goodwill, reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. We are
currently assessing but have not yet determined the impact of SFAS 142 on our
financial position and results of operations.

NOTE 5 - ASSET IMPAIRMENT

The Company substantially completed construction of its two Internet data
centers in Taiwan and South Korea in the quarter ended June 30, 2001, following
completion of the construction of an Internet data center in Hong Kong in the
quarter ended March 31, 2001, funded by the proceeds from the Company's initial
public offering in August 2000.  Although these Internet data centers are
available for hosting and co-location services, additional work must be
completed on the Taiwan and South Korea Internet data centers to make all space
in them fully conform to the Company's specifications.  Due to continued and
severe liquidity constraints, exacerbated in the second quarter of 2001 by
failure of the Company's efforts to secure additional financing, the Company has
determined that it cannot complete the build-out of the Taiwan and South Korea
Internet data centers or continue normal operations unless it obtains additional
financing.  Consequently, in response to further and significant downsizing of
activities in these markets during the quarter ended June 30, 2001, the
existence of excess capacity of Internet data center space in the Asia-Pacific
region, the significant decline in the Company's stock price during this period
as well as the announcement on July 3, 2001 that the Company was entering into a
creditors voluntary liquidation of its Hong Kong subsidiary, the Company
performed an impairment assessment of all of its long-lived assets in Hong Kong,
Taiwan and South Korea, as well as long-lived assets in the United States that
support revenue-generating activities throughout the Asia-Pacific region for the
Company.  This assessment included both tangible and intangible assets.
Tangible assets comprised property and equipment to be held and used -
principally the new Internet data centers in Taiwan and South Korea as well as
certain assets in the United States - and property and equipment to be disposed
of - principally in Hong Kong.  Intangible assets comprised goodwill and
identified intangible assets recorded upon the acquisition of AT&T Easylink
Asia/Pacific Limited in Hong Kong.

As a result of this review, the Company recorded a $75.6 million impairment
charge during the quarter ended June 30, 2001.  This charge included the write-
off of goodwill and identified intangible assets of $20.5 million, property and
equipment write-downs of $8.2 million for property and equipment to be disposed
of and $46.9 million for property and equipment to held and used.

The write-off of goodwill and other intangible assets recorded in the Company's
Hong Kong subsidiary was based on the Company's announcement on July 3, 2001
that it was liquidating its subsidiary in Hong Kong.  The write-down of property
and equipment that will be disposed was based on a third party distressed sale
valuation.  The write-down of property and equipment to be held and used was
based on a determination that future cash flows could not support the carrying
value of such assets and was computed by comparing the carrying value with the
discounted net present value of the expected future net cash flows.  The
assumptions supporting the cash flows were determined using the best available
estimates.

NOTE 6 - NON RECURRING OPERATING EXPENSES

     In the six months ended June 30, 2001, in response to the deteriorating
economic environment and resulting cut-backs in technology spending,
particularly by large telecommunications carriers, global service providers and
undersea cable companies that comprise the target customer base for the Company,
the Company took steps to refocus its business and reduce its cost structure.
Actions undertaken by the Company included, amongst other initiatives, the sale
of its virtual hosting business in Australia, significant headcount reductions
across the Company (and certain acceleration of vesting of outstanding stock
options for selected individuals), impairment charges associated with the
Company's property and equipment, the terminations of the lease of its corporate
headquarters effective July 2001, and the announcement, on July 3, 2001, of the
liquidation of its subsidiary in Hong Kong.

     In connection with these restructuring and strategic initiatives, the
Company recognized non-recurring operating expenses of $60.2 million and $7.5
million in the three months ended June 30, 2001 and March 31, 2001,
respectively.

         The following table summarizes the major components of the
restructuring and other nonrecurring expenses, by geographic region (in
thousands) :

<TABLE>
<CAPTION>
                                                                                              Total restructuring
                                                                                                   and other
                                 Asset          Office lease    Accelerated Stock                non-recurring
                              impairment        termination       option vesting    Others    operating expenses
                            ---------------   ----------------  ------------------  -------   -------------------
<S>                         <C>               <C>               <C>                 <C>      <C>
Three months ended March
 31, 2001
--------------------------

Hong Kong                           $    --             $   --              $  --    $       --          $   --
Taiwan                                   --                 --                 --            --              --
South Korea                              --                 --                 --            --              --
United States and Other                  --                172              2,599         2,387           7,517
                          ---------------------------------------------------------------------------------------


Consolidated expense for
 3 months ended March 31,
 2001                                    --                172              2,599         2,387           7,517

Non-cash portion                         --                 --              2,599            --           4,958

Cash payments for 3
 months ended March 31,
 2001                                    --                 --                 --            --              --
                          ---------------------------------------------------------------------------------------

Accrual Balance, March
 31, 2001                                --                172                 --         2,387            2,559

Three Months ended June
-----------------------
 30, 2001
 --------

Hong Kong                             5,101                 --                 --           517            5,618
Taiwan                               24,124                 --                 --           149           24,273
South Korea                          22,761                 --                 --            16           22,777
United States and Other               3,083              2,936                 --         1,493            7,512
                          ---------------------------------------------------------------------------------------


Consolidated expense for
 3 months ended June 30,
 2001                                55,069              2,936                 --         2,175           60,180

Non-cash portion                     55,069                 --                 --            --           55,069

Cash payments for 3
 months ended June 30,
 2001                                    --                 --                 --         1,950             1,950
                          ---------------------------------------------------------------------------------------


Accrual Balance, June 30,
 2001                               $    --            $ 3,108              $  --    $    2,612          $ 5,720
                          ---------------------------------------------------------------------------------------
</TABLE>

                                      10
<PAGE>


                            [INTENTIONALLY OMITTED]


                                      11
<PAGE>

NOTE 7 - COMPREHENSIVE LOSS

The components of the comprehensive loss are as follows (in thousands):

<TABLE>
<CAPTION>
                                       Three Months Ended June 30,         Six Months Ended June 30,
                                          2000             2001             2000                2001
                                      --------------  --------------- -----------------   -----------------
<S>                                   <C>             <C>             <C>                 <C>
Net loss                                  $(11,865)       $(102,979)         $(21,305)          $(137,554)
Change in unrealized gain on
marketable securities                           10               --                10                  --
Change in foreign currency
translation adjustments                        374             (712)              161              (2,292)
                                      --------------  --------------- -----------------   -----------------
Comprehensive loss                        $(11,481)       $(103,691)         $(21,134)          $(139,846)
                                      ==============  =============== =================   =================
</TABLE>

NOTE 8 - CONTINGENCIES

      Beginning on March 23, 2001, several putative class action lawsuits were
filed against us, several of our officers and directors, and the underwriters of
our initial public offering in the United States District Court for the Southern
District of New York on behalf of all persons who purchased shares of our stock
between August 3, 2000 and November 27, 2000.  The plaintiffs allege claims
under Sections 11, 12 and 15 of the Securities Act of 1933 and seek unspecified
damages arising out of, among other things, allegedly false or misleading
statements in the prospectus and registration statement issued in connection
with our initial public offering.  These actions are at a very early stage and,
accordingly, we are unable to predict their ultimate outcome.

      However, we believe the foregoing actions are without merit and we intend
to defend against them vigorously.  An unfavorable outcome in these actions
could have a material adverse effect on our business, financial condition and
results of operations.  In addition, even if the ultimate outcome is resolved in
our favor, the defense of such litigation could entail considerable cost and the
diversion of efforts of management, either of which could have a material
adverse effect on our results of operation.

     We are party to several actions which relate to our alleged failure or
alleged anticipated failure to pay contractual obligations. These actions have
been commenced by counterparties to agreements or instruments to which we or our
subsidiaries are parties, and seek payment of obligations under the agreements
or instruments allegedly breached or to be breached by us or our subsidiaries.
The parties bringing these actions seek payment and, in some cases,
extraordinary relief such as the attachment of assets. In certain cases,
plaintiffs are seeking punitive damages or asserting alleged tort claims
relating to alleged breaches or alleged anticipatory breaches by us or our
subsidiaries. Currently, total amounts sought by the plaintiffs in these actions
could be in excess of $2 million.

                                       12
<PAGE>

NOTE 9 - SUBSEQUENT EVENTS

Liquidation of Hong Kong Subsidiary

     On July 3, 2001, in a move to reduce debt levels and costs and focus its
operating efforts on its Internet data centers in Taiwan and South Korea, the
Company entered into a Creditors Voluntary Liquidation of its Hong Kong
subsidiary and appointed a provisional liquidator to oversee the closure of the
business.  As a result of this announcement, the Company has written off
goodwill and other intangible assets recorded by its Hong Kong subsidiary and
written down the carrying value of its property and equipment at June 30, 2001
based on the expected recoverable value to be generated by the liquidator (see
NOTES 5 and 6 for further details).  Since the outcome of the liquidation cannot
be estimated at this time, no other adjustments have been recorded in the
consolidated financial statements as of June 30, 2001 and for the three months
then ended.

Office Lease Termination

     As part of the Company's efforts to reduce its operating expenses, the
Company entered into a lease termination agreement, effective July 31, 2001,
with the landlord of its corporate headquarters in Burlingame, California.  As
part of the termination agreement, the Company agreed to forfeit its security
deposit, in the form of a letter of credit, and certain office equipment in
exchange for an early termination of the office lease and a release and full
settlement of all future and outstanding obligations between the parties (see
Note 6 for further detail).

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

         This Form 10-Q contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, and Section
27A of the Securities Act of 1933, as amended. Forward-looking statements are
identified by words such as "believes," "anticipates," "expects," "intends,"
"will," "may" and other similar expressions. In addition, any statements that
refer to expectations, projections or other characterizations of future events
or circumstances are forward looking statements. Readers are urged to review and
consider carefully the various disclosures made by us in this report and in
other reports filed with the Securities and Exchange Commission that advise
interested parties of risks and uncertainties that may affect our business. Our
actual results may differ materially from any forward-looking statements due to
such risks and uncertainties.

Overview

         From inception in August 1995 until July 1999, we focused on providing
high-speed, leased-line Internet access to business customers in selected
markets in the Asia-Pacific region and derived substantially all of our revenue
from these services. In July 1999, we began to implement a significant change in
our business strategy by focusing on the delivery of dedicated hosting,
co-location and managed services. Prior to that time, we derived virtually no
revenue from hosting, co-location and managed services.

         As part of this new initiative, we planned and began construction of
two new Internet data centers in Taiwan and South Korea in last half of fiscal
year 2000, and also entered into a long-term lease of an Internet data center in
Hong Kong.

         On August 3, 2000, we raised $106.1 million, net of underwriting
discounts, commissions and offering costs, in an initial public offering of nine
million shares of our common stock on the Nasdaq National Market. The proceeds
from the offering have been used principally to fund the build-out of Internet
data centers in the Asia-Pacific region and to fund our growth. Initial
construction of our Internet data centers in Hong Kong and Taiwan was completed
in

                                       13
<PAGE>

February 2001. Initial construction of our Internet data center in South Korea
was completed in May 2001. Although these Internet data centers are operational
and capable of serving customers, not all space in the Internet data centers is
available for co-location services. Additional work must be completed on the
Taiwan and South Korea Internet data centers to make all space in them fully
conform to our specifications.

         This work may not be completed unless we obtain additional financing.
We are currently attempting to raise additional financing to fund our
operations. Without obtaining additional financing we currently anticipate that
cash on hand and anticipated cash flow from operations are inadequate to
continue to fund our operations in the ordinary course. We are carefully
monitoring our cash on hand and our operating expenses on a week-to-week basis.
Consequently, we will require substantial additional funding to continue to
operate our business. Many companies in the Internet infrastructure industry
have experienced difficulty raising additional financing in recent months. We
have been attempting to obtain additional financing for several months and have
not succeeded. Additional financing may not be available to us on favorable
terms or at all. If additional financing is not available, we may need to
further modify our business plan, sell or merge our business, sell assets,
including the Internet data centers, or face bankruptcy.

         We are conducting negotiations with our creditors for the restructuring
of our short term and long-term liabilities including debt agreements. However,
our creditors could force us into involuntary bankruptcy at any time. If this
were to happen, it is likely that our creditors will receive less than 100% of
the face value of their claims and that our stockholders will not receive any
return from their investment, and most likely would lose their investment
altogether. In addition, any issuance of equity or equity-related securities
would dilute the ownership interest of existing stockholders and the issuance of
debt securities could increase the risk or perceived risk of the Company.

         Our business has been impacted by Internet-related companies reducing
the size and scope of operations. Existing customers have expanded their use of
our services more slowly than we expected, and the sales cycle for new customers
has grown longer. Many Internet companies who are customers or prospective
customers have gone out of business. Additionally, price has become one of the
key decision criteria for customers, which creates downward pressure on our
prices and consequently our gross margins. Many customers and prospective
customers have scaled down their budgets for capital expenditures and are
allocating less money for expansion into new geographic markets, which
frequently include the markets we serve in Taiwan and South Korea. Several large
customers have cancelled or not renewed their contracts in light of these
factors as well as our overall financial instability.

         As discussed in this Form 10-Q and in our previous filings on Form 10-Q
and Form 10-K, we have stated that our capital requirements under our business
plan and for fiscal year 2001 are greater than available capital resources. We
acknowledge that in the event we were unable to significantly reduce our capital
expenditures, sell assets, or obtain financing, we may be unable to satisfy our
obligations to third-parties, which could result in defaults under our mortgage
agreements and other financing agreements, we are currently not in compliance
with the covenants contained in certain of these agreements. Such events would
have a material adverse impact on us and threaten our ability to continue as a
going concern. In light of these facts, we have taken a number of recent
actions, including the modification and reduction in scope of our current
business plan, in order to streamline and reorganize operations and reduce
capital expenditures.

         In order to maximize the Company's cash resources in an uncertain
funding environment, we began to take steps in early 2001 to modify our business
plan and reduce our cost structure. Currently, our business strategy is focused
on selling primarily to large, technologically sophisticated customers that need
world-class facilities in Taiwan and South Korea. These

                                       14
<PAGE>

customers include multi-national corporations, telecommunications carriers,
global service providers, and undersea cable companies. As part of the Company's
efforts to realign its operating expense structure, the Company has made
reductions in force, and has sold, closed or liquidated various business units,
sales offices or subsidiaries. In April of 2001, the Company sold its virtual
hosting business in Australia and made significant headcount reductions across
the Company, resulting in a $7.5 million charge to non-recurring operating
expense in the first quarter of 2001. The Company underwent an additional
reduction its force in June, which resulted in the layoff of 127 employees. The
Company also closed all of its remote sales offices in the United States, and
entered into a Creditor Voluntary Liquidation of its Hong Kong subsidiary in
July.

         We have closed those business units or locations that have not provided
us with high margin contributions or whose expense structure cannot be supported
by their related revenue streams (e.g., our Hong Kong subsidiary). Our business
plan now focuses on operations which support our most valuable assets - the
Internet data centers in South Korea and Taiwan - that could potentially produce
the highest margin revenue streams. Given the general business climate and our
own financial instability, we cannot be assured of success in growing our
revenue and controlling our expenses. However, if we are successful in the
implementation of our modified business plan, we would expect to have lower
ongoing revenue and expense levels compared to prior periods, but at
significantly higher margins.

         The Company's plans in light of this uncertainty include, but are not
limited to, one or more of the following:

         .   exploring various strategic alternatives, which may include a
             merger, asset sale, or another comparable transaction;

         .   raising additional capital to fund continuing operations by
             private placements of equity, debt securities and/or securing
             new loans which may by collateralized by our assets;

         .   negotiating with creditors to either reduce or restructure our
             current outstanding obligations;

         .   forming a joint venture with a strategic partner or partners to
             provide additional capital resources to fund operations; and

         .   executing additional cost-cutting measures which could include
             additional lay-offs and/or the closure or sale of certain business
             units and facilities.

         If we are unable to raise additional funds by consummating one of the
aforementioned alternatives or restructure our obligations we may not be able
to grow our business or continue operating to achieve our business objectives
and, as a result, may need to further modify our business plan or file for
bankruptcy under Chapter 11 of the United States Federal Bankruptcy Code.
Funding alternatives may not be available to us within the necessary timeframe,
on favorable terms or at all. The factors leading to and the existence of the
explanatory paragraph in the audit report will have a material adverse effect on
our ability to obtain additional financing.

         If we file for Chapter 11 protection, or institute similar proceedings
in a foreign jurisdiction, or if involuntary proceedings are commenced against
us by our creditors, other parties in interest may be permitted to propose their
own plan, and we could be unsuccessful in

                                       15
<PAGE>

having a plan of reorganization confirmed which is acceptable to the requisite
number of creditors and equity holders entitled to vote on such a plan. This
could lead to our inability to emerge from Chapter 11.

         Moreover, once bankruptcy proceedings are commenced, either by our
filing of a voluntary petition or if an involuntary petition is filed against us
by our creditors, our creditors and other parties in interest could seek our
liquidation. If a plan were consummated or if we were liquidated, it would
almost certainly result in our creditors receiving less than 100% of the face
value of their claims, and in the claims of our equity holders being cancelled
in whole.

Results of Operations

         We believe that period-to-period comparisons of our historical
operational results are not necessarily meaningful and should not be relied upon
as being indicative of future performance. Our prospects must be considered in
light of the risks, expenses and difficulties frequently experienced by
companies in the early stages of development, particularly companies in new and
rapidly evolving markets like ours. The following table presents financial data
for the periods indicated as a percentage of total revenue.

                                       16
<PAGE>

<TABLE>
<CAPTION>
                                                  Three Months Ended June 30,   Six Months Ended June 30,
                                                        2000          2001          2000          2001
                                                            (unaudited)                 (unaudited)
<S>                                               <C>            <C>               <C>           <C>
Revenue:
     Internet access and related services                   63 %          49 %           68 %         44%
     Hosting, co-location and other managed services        37            51             32           56

          Total revenue                                    100 %         100 %          100 %        100%

Cost of revenue:
     Cost of revenue                                        78           110             79          106
     Depreciation                                           14            26             13           18
                                                  ------------   -----------       --------    ---------

          Total cost of revenue                             92           136             92          124
                                                  ------------   -----------       --------    ---------
     Gross margin                                            8           (36)             8          (24)

Operating expenses:
     Network operations and support                         25            58             24           62
     Sales and marketing                                    42            36             40           48
     General and administration                             74            97             79           86
     Amortization of intangibles                            70            43             72           43
     Impairment of goodwill                                 --           259             --          140
     Non-recurring operating expenses                       --           762             --          392
                                                  ------------   -----------       --------    ---------
          Total operating expenses                         211         1,255            215          771
                                                  ------------   -----------       --------    ---------
Loss from operations                                      (203)       (1,291)          (207)        (795)
Interest income                                              8             2              9            5
Interest expense                                            (1)           (9)            (1)          (5)
Other income, net                                           --            (5)             1           (2)
                                                  ------------   -----------       --------    ---------
Net loss                                                  (196)%      (1,303)%         (198)%       (797)%
                                                  ============   ===========       ========    =========
</TABLE>


Three and six months ended June 30, 2000 and 2001

Revenue

         Total revenue increased 31 percent to $7.9 million for the three months
ended June 30, 2001 from $6.0 million for the three months ended June 30, 2000.
The increase in revenue is primarily due to an increase in sales of hosting, co-
location and managed services, which represented 51 percent of revenue in the
second quarter of 2001. We began offering hosting and co-location services late
in the second quarter of 1999.

         Total revenue increased 60 percent to $17.3 million for the six months
ended June 30, 2001 from $10.8 million for the six months ended June 30, 2000.
The increase in revenue is primarily due to an increase in sales of hosting, co-
location and managed services, which represented 56 percent of the revenue in
the first six months of 2001.

                                       17

<PAGE>

         Given that we have modified our business plan significantly and we
expect that if we continue to operate as a going concern it will be on a reduced
capacity with operations in Taiwan and/or South Korea only, it is anticipated
that our reduced capacity will result in a significant reduction in revenue on a
going-forward basis. Revenue generated from operations in Taiwan and South Korea
during the first quarter of 2001 was $4.4 million in aggregate. Revenue
generated from operations in Taiwan and South Korea during the second quarter of
2001 was $3.7 million in aggregate.

         In addition, several large customer contracts expired, were not renewed
or were terminated early, in the second quarter of 2001. We closed all of our
sales offices in the United States and commenced liquidation of our Hong Kong
subsidiary in early July 2001. All of these events will have a negative impact
on revenue in future quarters.

Cost of Revenue

         Cost of revenue increased 94 percent to $10.8 million for the three
months ended June 30, 2001, from $5.6 million for the three months ended June
30, 2000. As a percentage of sales, cost of revenue increased by 136 percent for
the three months ended June 30, 2001, from 92 percent for the three months ended
June 30, 2000.

         Cost of revenue increased 118 percent to $21.4 million for the six
months ended June 30, 2001, from $9.8 million for the six months ended June 30,
2000. As a percentage of sales, cost of revenue increased to 124 percent for the
six months ended June 30, 2001, from 92 percent for the six months ended June
30, 2000.

         The relative and absolute increase in cost of revenue was caused by the
build-out of our international network and expenses resulting from the opening
of our new Internet data center facilities in Taiwan and South Korea. Going
forward, we expect to generate negative gross margins until we have achieved the
necessary revenue levels to offset the initial and significant fixed costs and
expenses relating to operating our Internet data center facilities and other
infrastructure activities.

Network Operations and Support

         Network operations and support expenses increased nearly 200 percent to
$4.5 million for the three months ended June 30, 2001, from $1.5 million for the
three months ended June 30, 2000. Network operations and support expenses as a
percentage of total revenue increased to 58 percent for the three months ended
June 30, 2001, from 25 percent for the three months ended June 30, 2000. The
increase in network operations and support expenses in dollar terms in both
periods is primarily due to an increase in our engineering, operations and
professional service staff to support the new Internet data centers.

         Network operations and support expenses increased 296 percent to $10.7
million for the six months ended June 30, 2001, from $2.7 million for the six
months ended June 30, 2000. Network operations and support expenses as a
percentage of total revenue increased to 62 percent for the six months ended
June 30, 2001, from 24 percent for the six months ended June 30, 2000. The
increase in network operations and support expenses in dollar terms in both
periods is primarily due to an increase in our engineering, operations and
professional service staff to support the new Internet data centers.

         Going forward, we do not expect network operations costs to increase
substantially in absolute terms, since we believe our Internet data centers are
operational with an adequate

                                       18
<PAGE>

headcount to meet anticipated demand for space and services.

Sales and Marketing

         Sales and marketing expenses increased 12 percent to $2.8 million for
the three months ended June 30, 2001, from $2.5 million for the three months
ended June 30, 2000. Sales and marketing expense as a percentage of total
revenue increased to 36 percent for the three months ended June 30, 2001, from
42 percent for the three months ended June 30, 2000.

         Sales and marketing expenses decreased 91 percent to $8.2 million for
the six months ended June 30, 2001, from $4.3 million for the six months ended
June 30, 2000. Sales and marketing expense as a percentage of total revenue
increased to 48 percent for the six months ended June 30, 2001, from 40 percent
for the six months ended June 30, 2000.

         We expect sales and marketing expenses will decrease in absolute terms
compared to the last several quarters during which the Company was focused on an
extensive marketing and brand building campaign. We expect ongoing costs will
also be reduced as a result of reduced headcount in the sales and marketing
organization as we focus our sales efforts on large customers and focus on the
markets in Taiwan and South Korea.

General and Administration

         General and administration expenses increased 71 percent to $7.7
million for the three months ended June 30, 2001, from $4.5 million for the
three months ended June 30, 2000. General and administration expense as a
percentage of total revenue increased to 97 percent for the three months ended
June 30, 2001, from 74 percent for the three months ended June 30, 2000. This
increase in general and administration expenses in absolute dollars was due
primarily to an increase in the amount of staffing and related expenses both in
the Asia-Pacific region and in the United States.

         General and administration expenses increased 75 percent to $14.9
million for the six months ended June 30, 2001, from $8.5 million for the six
months ended June 30, 2000. General and administration expense as a percentage
of total revenue increased to 86 percent for the six months ended June 30, 2001,
from 79 percent for the six months ended June 30, 2000. This increase in general
and administration expenses in absolute dollars was due primarily to an increase
in the amount of staffing and related expenses both in the Asia-Pacific region
and in the United States.

         We expect that, going forward, general and administration expenses will
not increase in absolute terms, since we believe we are sufficiently staffed to
support our current and near-term business activities. We expect that general
and administration expenses will be equal to or lower as a percentage of total
operating expenses compared to prior periods.

Amortization of Intangible Assets

         We recorded amortization of intangible assets of $3.4 million for the
three months ended June 30, 2001, which represents a decrease of 21 percent from
$4.3 million for the three months ended June 30, 2000.

                                       19
<PAGE>

         We recorded amortization of intangible assets of $7.4 million for the
six months ended June 30, 2001, which represents a decrease of 4 percent from
$7.7 million for the six months ended June 30, 2000.

         As a result of the liquidation of our Hong Kong subsidiary in July
2001, we wrote off the goodwill related to the acquisition of AT&T
EasyLink/AsiaPacific Limited, which represented a total write-down of $20.5
million.

Impairment of Assets

         In the first quarter of 2001, we determined that, based on a
significant decline in revenues generated from customer of Web Professionals,
the forecasted future cash flows from Web Professionals could not support the
carrying value of identified intangibles and goodwill recorded in connection
with the acquisition of Web Professionals. As a result, we recorded a $3.7
million impairment charge to reduce goodwill representing the difference between
the carrying value and the discounted net present value of the expected future
net cash flows. The assumptions supporting the cash flows were determined using
our best estimates as of such date and were the result of the losses incurred by
that business in the quarter and those losses projected for the remaining life
of the goodwill.

         The Company substantially completed construction of its two Internet
data centers in Taiwan and South Korea in the quarter ended June 30, 2001,
following completion of the construction of an Internet data center in Hong Kong
in the quarter ended March 31, 2001, funded by the proceeds from the Company's
initial public offering in August 2000. Although these Internet data centers are
available for hosting and co-location services, additional work must be
completed on the Taiwan and South Korea Internet data centers to make all space
in them fully conform to the Company's specifications. Due to continued and
severe liquidity constraints, exacerbated in the second quarter of 2001 by
failure of the Company's efforts to secure additional financing, the Company has
determined that it cannot complete the build-out of the Taiwan and South Korea
Internet data centers or continue normal operations unless it obtains additional
financing. Consequently, in response to further and significant downsizing of
activities in these markets during the quarter ended June 30, 2001, the
existence of excess capacity of Internet data center space in the Asia-Pacific
region, the significant decline in the Company's stock price during this period
as well as the announcement on July 3, 2001 that the Company was entering into a
creditors voluntary liquidation of its Hong Kong subsidiary, the Company
performed an impairment assessment of all of its long-lived assets in Hong Kong,
Taiwan and South Korea, as well as long-lived assets in the United States that
support revenue-generating activities throughout the Asia-Pacific region for the
Company. This assessment included both tangible and intangible assets. Tangible
assets comprised property and equipment to be held and used -principally the new
Internet data centers in Taiwan and South Korea as well as certain assets in the
United States - and property and equipment to be disposed of - principally in
Hong Kong. Intangible assets comprised goodwill and identified intangible assets
recorded upon the acquisition of AT&T Easylink Asia/Pacific Limited in Hong
Kong.

         As a result of this review, the Company recorded a $75.6 million
impairment charge during the quarter ended June 30, 2001. This charge included
the write-off of goodwill and identified intangible assets of $20.5 million,
property and equipment write-downs of $8.2 million for property and equipment to
be disposed of and $46.9 million for property and equipment to held and used.

         The write-off of goodwill and other intangible assets recorded in the
Company's Hong Kong subsidiary was based on the Company's announcement on July
3, 2001 that it was liquidating its subsidiary in Hong Kong. The write-down of
property and equipment that will be disposed was based on a third party
distressed sale valuation. The write-down of property and equipment to be held
and used was based on a determination that future cash flows could not support
the carrying value of such assets and was computed by comparing the carrying
value with the discounted net present value of the expected future net cash
flows. The assumptions supporting the cash flows were determined using the best
available estimates.

                                      20
<PAGE>

Non-recurring Operating Expenses

     In the first quarter of 2001, we recorded a non-recurring operating charge
of $7.5 million as part of our efforts to refocus our business and reduce our
cost structure.  Of this amount $2.4 million related to a loss on the sale of
our virtual hosting business in Australia, and a write down of the associated
goodwill arising from the acquisition of that business, $300,000 related to
redundancy costs associated with significant headcount reductions across the
Company and other items, $1.5 million was incurred in connection with our
ongoing financing initiatives in the first quarter of 2001 and $3.3 million
related to severance costs associated with the resignation of our former Chief
Executive Officer.  The severance costs associated with our former Chief
Executive Officer included $700,000 in severance costs and a non-cash charge of
$2.6 million relating to the accelerated vesting of stock options previously
granted to our former Chief Executive Officer.

     Continuing our restructuring and downsizing activities in the second
quarter of 2001 in light of further and more significant deterioration than we
had anticipated in the economic environment and resulting cut-backs in
technology spending, particularly by our target customer base (large
telecommunications carriers, global service providers and undersea cable
companies), we recorded additional non-recurring operating charges of $60.2
million in the second quarter ended June 30, 2001.  These charges include the
write down of our property and equipment based on an impairment analysis
performed during the second quarter of 2001 of $55.1 million and charges
associated with the termination of our corporate headquarters lease effective in
July 2001 of $2.9 million.

Interest Income and Other Income (Expense)

         Net interest and other income (expense) decreased to an expense of
$936,000 for three months ended June 30, 2001, from an income of $456,000 for
the three months ended June 30, 2000. The decrease in net interest and other
income was due to interest expensed in relation to the Loans in Taiwan and South
Korea.

         Net interest and other income (expense) decreased to an expense of
$315,000 for six months ended June 30, 2001, from an income of $923,000 for the
six months ended June 30, 2000. The increase in net interest and other income
was due to interest expensed in relation to the Loans in Taiwan and South Korea.

Provision for Income Taxes

         We have incurred operating losses for all periods from inception
through June 30, 2001. We have recorded a valuation allowance for the full
amount of our deferred tax assets, as the future realization of the tax benefits
is uncertain. Accordingly, we have recorded no provision for income taxes.

Liquidity and Capital Resources

                                      21

<PAGE>

         From our inception until our initial public offering, we financed our
operations primarily from private sales of convertible preferred stock, net of
issuance costs, which aggregated $109.4 million and, to a lesser extent, from
bank borrowings and lease financings. The size of our accumulated deficit, our
losses since inception and our ongoing need for capital to continue our
operations raises substantial doubt as to our ability to continue operations
during the year 2001. We will need to obtain additional financing to finance
continuing operating losses. There can be no assurance that we will be
successful in our efforts to reduce expenses or to obtain additional financing.
Failure to reduce expenses and/or to obtain additional financing will have a
material adverse effect on our ability to meet our business objectives and
continue as a going concern.

         On August 3, 2000, we completed our initial public offering and
received approximately $106.1 million in cash, net of underwriting discounts,
commissions and offering costs. In our prospectus for our initial public
offering, we stated that proceeds from the offering would only fund the business
for nine months, and that we would likely need additional capital beyond that
nine-month period. Absent outside debt or equity financing, and excluding
significant expenditures required for the completion of the build-out of our
Internet data centers in Taiwan and South Korea, we currently anticipate that
cash on hand and anticipated cash flow from operations are inadequate to
continue to fund our operations in the ordinary course. We continue to carefully
monitor our cash on hand and are operating on a week-to-week basis.
Consequently, the Company will require substantial additional funding to
continue to operate its business. Many companies in the Internet infrastructure
industry have experienced difficulty raising additional financing in recent
months. Indeed, we have been attempting to obtain additional financing for
several months and have not succeeded. Additional financing may not be available
to the Company on favorable terms or at all. If additional financing is not
available, the Company may need to further modify its business plan, sell or
merge its business, sell assets, including the Internet data centers, or face
bankruptcy. In addition, any issuance of equity or equity-related securities
would substantially dilute the ownership interest of existing stockholders and
the issuance of debt securities could increase the risk or perceived risk of the
Company

         Net cash used in operating activities for the six months ended June 30,
2001 was approximately $8.3 million, as adjusted for non-recurring operating
expense charges. Net cash used in investing activities for the six months ended
June 30, 2001 was approximately 49.9 million, the principal component being cash
outflows related to the build-out of our Internet data centers in Taiwan and
South Korea. Net cash provided by financing activities for the six months ended
June 30, 2001 was approximately $2.2 million.

         At June 30, 2001, we had cash and cash equivalents aggregating $8.5
million of which $2.6 million was restricted cash. In addition, we had a debt
balance at June 30, 2001, of $28.4 million, related to the purchase of land and
buildings in Taiwan and South Korea for our Internet data centers. The amount of
the debt in U.S. Dollar equivalents was reduced due to declines in the value of
the Taiwan Dollar and Korean Won against the U.S. Dollar. We had capital lease
obligations of $3.6 million at June 30, 2001. Additionally, accounts payable and
accrued liabilities have increased significantly due to increased level of
activity related to the build-out of the Internet data center and timing of
payments for the work performed as a result of our deteriorating liquidity
situation.

         Our capital outlays primarily relate to the build-out of our Internet
data centers in South Korea and Taiwan. Although these Internet data centers are
operational and capable of serving

                                       22
<PAGE>

customers, not all space in the Internet data centers is available for co-
location and managed services. Additional work must be completed on the Taiwan
and South Korean Internet data centers to make all space in them fully conform
to our specifications. This work may not be completed unless we obtain
additional financing.

         Our liquidity and capital requirements depend on numerous factors
discussed under the section entitled "Risk Factors" beginning on page 24.
Factors such as the ability to obtain additional financing to continue
operations, expand our customer base, the level of investment in new Internet
data centers, the level of expenditures for marketing and sales, the level of
investment in distribution, customer service and other capabilities would also
increase our liquidity requirements. The timing and amount of these capital
requirements cannot be accurately predicted.

         The Company's unaudited condensed consolidated financial statements for
the three and six months ended June 30, 2001 have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities in the normal course of business. The Company incurred a net loss
of $137.6 million for the six-month period ended June 30, 2001 and has an
accumulated deficit of $223.4 million as of June 30, 2001. The Company has
incurred net losses from operations since inception and, as of June 30, 2001,
has a working capital deficit of $33.3 million. The Company has not been
successful in raising additional funding to support its operating activities
during 2001. These factors raise substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

         We may enter into additional credit arrangements in order to raise
additional funds. These credit arrangements may not be available to us on
reasonable terms or at all. Our loan agreement with Korea First Bank limits our
ability to borrow money from other parties by prohibiting the use of our Korean
Internet data center as collateral for other loans and by requiring us to
maintain certain financial ratios.

         As of June 30, 2001 we were no longer in compliance with the financial
covenants of our existing credit facility with Korea First Bank and,
accordingly, we have reclassified this long-term debt as a current liability.
While we are no longer in compliance with the facility, we have continued to
make payments in a timely manner, and have neither been declared in default by
nor received notice of default from the lender. If declared to be in default by
the lender, however, such default would accelerate the repayment of the debt and
may permit the lender to foreclose

                                       23
<PAGE>

upon our new Internet data center in South Korea. In addition, a further
downturn in our financial situation, bankruptcy proceedings or other action
against us, based upon our financial condition, may result in non-compliance
with our other existing arrangements or further non-compliance with our Korea
facility. Our failure to adequately remedy any non-compliance with any of our
credit arrangements may cause the Company to be in default under one or more of
our credit arrangements and, if declared by the lenders, such defaults will
trigger cross defaults in our other credit arrangements, and accelerate
repayment of certain debts. Such events could materially adversely affect our
business, financial condition, results of operations and cash flows.

If we raise additional funds by issuing equity or convertible debt securities,
the percentage ownership of our stockholders will be diluted substantially.
Furthermore, any new securities could have rights, preferences and privileges
senior to those of our common stock. There is currently no agreement in place
with any source of financing, and there can be no assurance that we will be able
to raise additional funds or that such funds will be available on acceptable
terms or at all. Lack of additional funds will materially adversely affect us
and our business and may cause us to sell assets or to cease operations.
Consequently, our stockholders could incur a loss of their entire investment in
us.


RISK FACTORS

Our business, financial condition or operating results could be seriously harmed
by any of the following risks. In addition, the trading price of our common
stock could decline due to any of the following risks, and you may lose all or
part of any investment you make in our common stock.

                         Risks Related to Our Business


We may seek protection under the Federal Bankruptcy Code or seek the similar
statutory protections afforded in the different jurisdictions of the
Asia-Pacific region in which we operate or recently operated.

         We may seek protection under Chapter 11 of the Federal Bankruptcy Code
or similar statutes in Taiwan and/or South Korea. Additionally, we are subject
to the risk that creditors at any time, may seek to commence involuntary
bankruptcy proceedings against us both here in the United States and against our
subsidiaries in other jurisdictions of the Asia-Pacific region in which we
operate or recently operated.  If we file for Chapter 11 protection or institute
similar proceedings in a foreign jurisdiction or if involuntary proceedings are
commenced against us, by our creditors, our creditors or other parties in
interest may be permitted to propose their own plan, and we could be
unsuccessful in having a plan of reorganization confirmed which is acceptable to
the requisite number of creditors and equity holders entitled to vote on such a
plan.  This could lead to our inability to emerge from Chapter 11. Moreover,
once bankruptcy proceedings are commenced, either by the filing of a voluntary
petition or if an involuntary petition is filed against us, our creditors could
seek our liquidation. If a plan were consummated or if we were liquidated, it
would almost certainly result in our creditors receiving less than 100% of the
face value of their claims, and in the claims of our equity holders being
cancelled in whole.

         Even if we do propose a plan and it is accepted, we are unable to
predict at this time what treatment would be accorded under any such plan to
inter-company indebtedness, licenses, transfer of goods and services and other
inter-company and intra-company arrangements,

                                       24
<PAGE>

transactions and relationships.  In addition, during any bankruptcy or similar
proceeding, we would need court approval to take many actions out of the
ordinary course, which could result in our inability to manage the normal
operations of the company and which would cause us to incur additional costs
associated with the bankruptcy process. For example, we have liquidated our Hong
Kong subsidiary and ceased operations in Hong Kong. During this process a
provisional liquidator was appointed to handle all aspects of winding down the
Hong Kong subsidiary's operations and, other than in an advisory capacity,
management had no role in the administration of or operations of the Hong Kong
subsidiary.

We cannot assure you that we will have access to sufficient funds to meet our
operating needs, which will likely limit our ability to continue as a going
concern

     As previously announced, we have determined that our capital requirements
under our business plan for fiscal year 2001 are greater than available
resources. As discussed in this Form 10-Q and in our previous filings on Forms
10-Q and 10-K, there exist uncertainties as to our ability to continue as a
going concern. Our independent certified public accountants have included an
explanatory paragraph to this is effect in their audit report in our Form 10-K
with respect to our financial statements for the fiscal year ended 2000.

     Without obtaining additional financing, and excluding significant
expenditures required for the completion of the build-out of our Internet data
centers in Taiwan and South Korea, we currently anticipate that cash on hand and
anticipated cash flow from operations are inadequate to continue to fund our
operations in the ordinary course. We continue to carefully monitor our cash on
hand and are operating on a week-to-week basis. Any significant increase in
capital expenditures or other costs or any decrease in or elimination of
anticipated sources of revenue could cause us to further restrict our business
plan or to deplete our available cash. We need to find additional funding to
finance our operations. We have been attempting to obtain additional financing
for several months and have not succeeded. If we do not realize significant
additional revenue or raise additional debt or equity financing, we will be
unable to execute our business plan, and we may be unable to continue as a going
concern.

We may not be able to continue operating and may need to further modify our
business plan if we cannot raise additional financing

     We historically have been unable to generate sufficient cash flow from
operations to meet our operating needs and have relied upon financings to fund
our operations. In addition, due to our operating losses, declining cash
balances and declining stock value, recent changes in the financial markets and
a general decrease in investor interest in the Internet industry, it has become
extremely difficult, if not impossible, for us to attract equity or debt
financing, including vendor and lease financing, or strategic partners on
favorable terms or at all. Accordingly, we have revised our business plan
significantly and, we expect that if we continue to operate as a going concern,
it will be on a reduced capacity with operations in Taiwan and/or South Korea
only. In addition, we have developed a strategy to reduce expenses and capital
expenditure requirements, by selling non-strategic assets, negotiating with our
creditors for the reduction of and restructuring of payables, reducing our foot-
print in the Asia-Pacific region, reducing our workforce, and focusing on
filling our new Internet data centers in Taiwan and South Korea. We have already
begun to reduce expenses and capital expenditures and have sold some non-
strategic assets. However, despite the efforts currently underway, we do not
believe that these efforts will be sufficient to fund our operations, meet our
future capital expenditure and working capital requirements, or satisfy our debt
or contractual obligations to third parties, including satisfying the covenant
requirements of our existing debt. In addition to the foregoing, a failure to
meet our

                                      25
<PAGE>

future capital expenditures and working capital requirements may force us to
sell strategic assets, including, most notably, our new Internet data centers
and the land upon which they were built in either or both Taiwan and South
Korea.

     As the results of our efforts to date have not been sufficient, we are
looking at other alternatives to raise additional funding, including, but not
limited to, one or more of the following:

     .    exploring strategic alternatives, which may include a merger, asset
          sale, or another comparable transaction;

     .    raising additional capital to fund continuing operations by private
          placements of equity, debt securities and/or securing new loans which
          may by collateralized by our assets;

     .    negotiating with creditors to either reduce or restructure our current
          outstanding obligations;

     .    forming a joint venture with a strategic partner or partners to
          provide additional capital resources to fund operations; and

     .    executing additional cost-cutting measures which could include
          additional lay-offs and/or the closure or sale of certain business
          units and facilities.

     If we are unable to raise additional funds by consummating one of the
aforementioned alternatives we may not be able to grow our business or continue
operating and, as a result, may need to further modify our business plan or file
for bankruptcy under Chapter 11 of the Federal Bankruptcy Code. Funding
alternatives may not be available to us within the necessary timeframe, on
favorable terms or at all. The factors leading to and the existence of the
explanatory paragraph in the audit report in our Form 10-K with respect to our
financial statements for the year ended 2000 will likely have a material adverse
effect on our ability to obtain additional financing.

Our inability to raise capital has forced us to modify our business plan by
reducing the scope of our operations; however, we cannot assure you that we will
be successful in implementing our modified business plan

     Due to our cash shortage and our inability to access the capital markets,
we have modified our business plan significantly. Our modified business plan
expects that if we continue to operate as a going concern it will be on a
reduced capacity with operations in Taiwan and/or South Korea only. Furthermore,
it is anticipated that this reduced capacity will result in a significant
reduction in revenue on a going-forward basis.

     In an effort to continue as a going concern, in addition to exploring the
alternatives set forth in the risk factor "We may not be able to grow our
business or continue operating and may need to further modify our business plan
if we cannot raise additional financing" on page 25, we are focusing on filling
the Internet data centers we still have operational in Taiwan and South

                                       26
<PAGE>

Korea. We cannot assure you that we can successfully implement our new plan and,
even if we do successfully sell our non-strategic and, if necessary, strategic
assets, there are risks involved in our revised plan. We may encounter the
following risks in connection with the sale of non-strategic assets and
strategic:

     .    We may not be able to sell our assets at favorable prices or on
          favorable terms;

     .    We may be required to write down the carrying value of our assets;

     .    If we sign an agreement for the potential sale of a particular asset
          we cannot assure you that we will be successful in completing that
          sale; and

     .    Our agreements with purchasers may subject us to reductions in or
          adjustments to purchase price or to indemnification claims by such
          purchasers after the asset sales have been consummated to the extent,
          if any, that we are unable to achieve specified performance targets or
          that such purchasers are able to successfully assert a claim against
          us for a breach of a representation, warranty or covenant contained in
          such agreement.

     In addition, we may encounter the following risks in connection with a
reduction of expenses and capital expenditures:

     .    To the extent that we reduce our planned expenditures, we may not be
          able to fulfill certain of our contractual obligations and the parties
          with whom we have such contracts may assert a claim for breach of
          contract or assert a claim for anticipatory breach; and

     .    It is uncertain what effect such a reduction would have on our
          relationships with our customers, vendors and employees and our growth
          prospects and financial results. Our customers may choose to cease
          doing business with us if they perceive that our reductions could
          adversely affect the quality of the services we provide, and we may be
          unable to retain our employees if they perceive that our reductions
          could adversely affect our ability to pay wages and salaries as and
          when they become due.


Our existing indebtedness may complicate our financing efforts and adversely
affect our business, financial condition and results of operations.

     Our current indebtedness secured by our new Internet data centers in South
Korea and Taiwan, as well as any additional indebtedness incurred, may make it
more difficult for us to obtain additional debt financing. As of June 30, 2001
we were no longer in compliance with our existing credit facility with Korea
First Bank. While we are no longer in compliance with the facility, we have
neither been declared in default by nor received notice of default from the
lender. If declared to be in default by the lender, such default would
accelerate the repayment of the debt and may permit the lender to foreclose upon
our new Internet data center in South Korea. In addition, a further downturn in
our financial situation, bankruptcy proceedings or other action against us based
upon our financial condition may result in non-compliance with our other
existing arrangements or further non-compliance with our Korea facility. Our
failure to adequately remedy any non-compliance with any of our credit
arrangements may cause the

                                       27
<PAGE>

Company to be in default under more of our credit arrangements and, if declared
by the lenders, such defaults will trigger cross defaults in our other credit
arrangements, and accelerate repayment of certain debts. Such events may also
enable creditors in respect of those obligations to assert other remedies
against us. We cannot assure you that we would be able to cure any such events
of default. Any such events could have a material adverse effect upon us and the
foregoing factors could threaten our ability to continue as a going concern.

     In the event we are the subject of a bankruptcy proceedings or we are
declared in default under one of our outstanding mortgage agreements, we may be
forced to reorganize or possibly dissolve, and our stockholders may not receive
any proceeds upon liquidation. In addition, we may be delisted by the Nasdaq
National Market. Such events could materially affect in an adverse manner our
business, financial condition and results of operations.

We have a limited amount of cash to support our operating needs and are not able
to service our debt and repay creditors.

     As of December 31, 2000 and June 30, 2001, we had approximately $78.4
million and $8.5 million, respectively, of cash, cash equivalents, short-term
investments and marketable securities, including restricted amounts. Our cash,
cash equivalents, short-term investments marketable securities, and additional
cash generated by the expected proceeds from non-strategic and, if necessary,
strategic asset sales may not be sufficient to meet our anticipated cash needs.
Even if we successfully implement one or more of the alternatives we currently
have under consideration, we cannot assure you that we will not completely
deplete our cash resources. Other events, such as an unfavorable outcome in
pending litigation, could further affect our cash flow.

     The uncertainty as to our ability to continue as a going concern may
adversely affect our ability to retain or expand relationships with existing
customers and may make it more difficult for us to attract new customers. In the
event that we default on any payment of interest or principal on the mortgages,
such default will constitute an event of default under such mortgage agreement
and, as a result, the applicable bank could take steps to attach, seize or
auction the underlying land and buildings where our new Internet data centers
are located in Taiwan and South Korea. In addition, payment defaults could
result in litigation to enforce rights to receive payments on the mortgages or
the asserting of other claims.

We cannot assure you of the continued listing of our securities on the Nasdaq
National Market and other securities exchanges and associations.

     Our common stock is currently listed on the Nasdaq National Market. We must
satisfy a number of requirements to maintain its listing on the Nasdaq National
Market, including maintaining a minimum bid price for our common stock of $1.00
per share. As of August 10, 2001, the price of our common stock was $0.16. If
the common stock loses its Nasdaq National Market status, it would likely trade
on the Nasdaq Over the Counter Bulletin Board, which is viewed by most investors
as a less desirable, less liquid marketplace.

     Although our common stock is currently listed on The Nasdaq National
Market, we have been notified by Nasdaq that it has questions concerning, among
other things, our ability to maintain the minimum listing requirements and
initiates the process to terminate our de-listing from Nasdaq. Specifically, we
have received correspondence from Nasdaq stating that we do not meet the minimum
share price requirement, but that if at any time before October 8, 2001, the bid
price of our common stock is at least $1.00 for a minimum of ten consecutive
trading days, Nasdaq will re-examine whether we comply with the minimum listing
requirements. We cannot assure you that we will be able to satisfy the minimum
listing requirements on a going forward basis. In the event our common stock is
delisted, we may or may not choose to appeal the delisting. Even if we do decide
to appeal, we cannot assure you that an appeal would be successful.

                                       28
<PAGE>

     If our common stock is delisted from Nasdaq, the trading market for such
securities could be disrupted which could make it difficult for investors to
trade in our common stock. If our common stock is delisted from The Nasdaq
National Market we may or may not apply for listing on The Nasdaq SmallCap
Market, the OTC Bulletin Board or another quotation system or exchange for which
we could qualify. We cannot guarantee, however, that we would apply for listing
on another quotation system or exchange if we are delisted from The Nasdaq
National Market or that if we do apply for listing that we would be eligible
initially for such listing or that if we do become listed, that we would be able
to maintain eligibility.

We may depend on the ability to repatriate capital from our subsidiaries in
order to satisfy our debt obligations and repay creditors.

     Our operating cash flow and, consequently, our ability to service our debt
is partially dependent upon our ability to repatriate capital from our
subsidiaries. In addition, we may also depend on loans, advances and other
payments of funds to us by our subsidiaries. If we were to sell our non-
strategic and strategic assets in each country, for either the purpose of
streamlining operations, reorganizing or satisfying our obligations, after the
repayment of each subsidiary's in-country obligations, the net result would be a
significant amount of cash and cash equivalents in each country. If for some
reason these funds were restricted and we were unable to repatriate even a
portion of the amounts, we would be adversely affected. Our subsidiaries are
separate legal entities and have no obligation, contingent or otherwise, to pay
any amount due pursuant to our commitments and as a result may not make any
funds available for such purposes. Our subsidiaries' ability to make payments
may be subject to the availability of sufficient surplus funds, the terms of
such subsidiaries' financings, applicable law and other factors. Our
subsidiaries' creditors will have priority to the assets of those subsidiaries
over the claims, if any, as a stockholder that we may have against those assets
and claims that holders of our indebtedness may indirectly have. Our inability
to repatriate capital would severely undermine any efforts we take to reorganize
our business, either in or out of bankruptcy, or to further modify our business
plan.

We expect significant increases in our operating expenses and continued losses.

     We have never achieved profitability, have accumulated net losses of $223.4
million from our inception through June 30, 2001 and have had to rely on the
proceeds of the sale of equity securities and the incurrence of debt to fund our
operations. We believe that we will continue to incur losses for at least the
next several years and that our losses will increase significantly from current
levels. We expect to fund our growth through equity or debt financings or
business combination transactions, if available.

Our cost-cutting efforts may harm our business.

     Our management is implementing plans designed to reduce our cash
requirements through a combination of reductions in components of working
capital, equipment purchases and operating expenditures, including a significant
reduction in force. However, there can be no assurance that we will be able to
successfully implement these plans or that we will be able to do so without a
material adverse effect on our business, financial condition or results of
operations.

Any financing we obtain may significantly dilute the ownership of our existing
stockholders.

     If we raise additional funds by issuing equity or convertible debt
securities, the percentage ownership of our stockholders will be significantly
diluted. Furthermore, any new

                                       29
<PAGE>

securities could have rights, preferences and privileges senior to those of our
common stock. There is currently no agreement in place with any source of
financing, and there can be no assurance that we will be able to raise
additional funds or that such funds will be available on acceptable terms. Lack
of additional funds will materially adversely affect us and our business and may
cause us to cease operations or cause us to sell assets. Consequently, our
stockholders could incur a loss of their entire investment in us.

As a result of questions concerning our status as a going concern, our customers
and vendors may decide not to do business with us and we will have greater
difficulty in collecting revenue.

     Due to concerns regarding our ability to continue operations, customers and
vendors may decide not to conduct business with us, or may conduct business with
us on terms that are less favorable than those customarily extended by them.
Additionally, we are currently experiencing resistance in the marketplace and we
believe that one of the several factors for this resistance is related to
concerns regarding our ability to continue our business as a going concern. In
any event, if customers and vendors decide not to conduct business with us, our
net sales would further decrease, and our business will suffer significantly.

If we are unable to motivate and retain our personnel, it could have a material,
adverse effect on our business.

     Our success depends in large part on our ability to motivate and retain
highly-skilled employees on a timely basis. The tenuous viability of the
Company, our cost-cutting efforts as well as our recent and any future workforce
reduction will result in some disruption of our ongoing operations and impair
our efforts to motivate existing employees. Our failure to retain highly-skilled
personnel may limit the rate at which we generate revenue and develop new
products and services or product enhancements. This could have a material
adverse effect on our business, operating results and financial condition.

We are the subject of, and may be the subject of additional, class action suits,
which would divert significant resources away from our business.

     We are a defendant in several punitive class action lawsuits alleging
violations of the Federal securities laws. All of these lawsuits are at a very
early stage, and we are unable to predict their outcomes. These lawsuits may
adversely affect our ability to obtain financing necessary to continue our
operations. In addition an unfavorable outcome in any of these lawsuits could
have a material adverse effect on our prospects and financial condition. Even if
the litigation is resolved in our favor, the defense of that litigation will
entail considerable cost and diversion of efforts of management, either of which
are likely to adversely affect our results of operations. We believe that these
lawsuits are without merit and intend to vigorously defend against these
lawsuits.

                                       30
<PAGE>

Continuing uncertainty of the U.S. economy may have serious implications for the
growth and stability of our business and may negatively affect our stock price.

     The revenue growth and profitability, if any, of our business depends
significantly on the overall demand for dedicated hosting, co-location and
managed services, particularly in the service segments in which we compete.
Softening demand for these services caused by ongoing economic uncertainty may
continue to result in decreased revenues or earnings levels or growth rates. The
U.S. economy has weakened and market conditions continue to be challenging. This
has resulted in individuals and companies delaying or reducing expenditures for
purposes such as increasing their use of Internet services. Further delays or
reductions in Internet services expansion spending could have a material adverse
effect on demand for our services, and consequently on our business, operating
results, financial condition, prospects and stock price.

We may not grow our business or become profitable if we are not successful in
completing a change in our strategic focus.

     From inception in August 1995 until July 1999, we focused on providing
high-speed, leased-line Internet access in selected markets in the Asia-Pacific
region. In July 1999, we began to implement a significant change in our business
strategy to focus on providing dedicated hosting, co-location and managed
services throughout the Asia-Pacific region. Our inability to successfully
execute this business strategy could compromise our future growth and
profitability, if any.

Our Internet data center construction plans may be delayed, never be completed
or experience other significant problems, which would delay or prevent us from
realizing our ultimate profitability.

     Due to reductions in our footprint in the Asia-Pacific region, we currently
only operate two large-scale, high performance Internet data centers. We have a
limited track record for the operation of large-scale, high performance Internet
data centers. In addition construction delays, inability to obtain additional
adequate financing, inability to obtain necessary authorizations or
technological problems may affect our Internet data center operations, the
benefits of our substantial investment in these Internet data centers may be
delayed or never occur. In that case, we will be delayed or prevented from
realizing our ultimate profitability.

We will need to greatly expand our revenue base to benefit from our investments
in our Internet data centers.

     We have incurred and will continue to incur significant costs to establish
and operate our new Internet data centers. If we are unable to significantly
grow our revenue base, we will not be able to achieve the economies of scale
necessary to offset our fixed and other operating costs. We have limited
experience in attracting and servicing our hosting, co-location, managed
services and other value-added services customers. Our ability to attract and
retain additional customers for these services depends on a variety of factors
including the willingness of businesses to outsource their Internet operations
and the quality, reliability and cost-effectiveness of our services. If we are
unable to significantly increase our customer base for hosting, co-location,
managed services and other value added services, we will not realize our
expected growth or achieve profitability.

                                       31
<PAGE>

Our stock price has been extremely volatile in the past and is likely to be
extremely volatile in the future, which could lead to a high rate of attrition
of our employees and lost revenue and lost contracts with customers and vendors.

     The market price of our common stock has been and may continue to be
extremely volatile in the future. The stocks of Web-related and technology
companies like ours have experienced extreme price and volume fluctuations in
recent months. Although the market price of our stock will in part be based on
our business, financial condition and operating results, we expect that it will
also be affected to a significant degree by these market-wide and industry-wide
factors.

     Fluctuations in our stock price could continue to lead to employees leaving
us due to their perception of the value of their stock options in relation to
the price of our common stock. If this were to continue to occur, our business,
results of operations and financial condition could be harmed.

     Fluctuations in our stock price could also lead to a loss of revenue due to
our inability to engage new customers and vendors and to renew contracts with
our current customers and vendors. We are currently experiencing some resistance
in the marketplace and we believe that one of the several factors for this
resistance is related to our fluctuating stock price. Existing and potential
customers and vendors may perceive our fluctuating stock price as a sign of
instability and may therefore be unwilling to do business with us. If this were
to continue to occur, our business, results of operations and financial
condition could continue to be harmed.

Recent economic conditions in the securities markets may decrease our chances of
obtaining additional financing and may make the terms of any additional
financings or tender offers unfavorable to us or our shareholders.

     The market prices of the equity securities of many public companies and in
particular Internet technology companies have decreased in recent months as a
result of market conditions in the United States. These current economic
conditions make raising capital through equity financings more difficult to
obtain. Potential investors in our company may perceive an investment in us as
being risky due to the recent trends in our stock price and the stock prices of
similar companies. If this were to occur, raising additional capital through an
equity financing may not be obtainable or may only be obtainable on terms
unfavorable to us or the stockholders or both. Potential terms may have negative
consequences, such as dilution of stockholders or a further decline in our
common stock price.

     Any further declines in our common stock price resulting from current
economic conditions may make us more vulnerable to becoming acquired through a
tender offer. If this were to occur, we may be acquired at a price or on terms
unfavorable to the stockholders.

                                       32
<PAGE>

We have taken steps and may take further steps to reduce our expenses to help
maintain our viability. Failure to manage these and earlier cost reductions may
result in adverse effects on our business, operating results and financial
condition.

         In order to preserve our capital resources, we have taken steps and may
take further steps to streamline our business and reduce costs. These
cost-cutting efforts have included significant reductions in our workforce both
in April and June, and we may engage in additional workforce reductions. If we
do not properly manage reductions in our cost structure, it could have a
material adverse effect on our business, financial condition and results of
operations. Any failure to manage the impact of cost-cutting efforts on our
operations, our customer service, our ability to retain remaining personnel, or
our ability to recruit new employees in the future could have a material adverse
effect on our business, operating results and financial condition. In addition,
there will be costs associated with these cost-cutting efforts that could
materially adversely affect our operating results and financial condition.

We operate in a relatively new and evolving market with rapid technological
changes and uncertain prospects for growth. This market may evolve in a manner
that jeopardizes our prospects for growth and profitability.

         The market for our services in the Asia-Pacific region has only
recently begun to develop and is evolving rapidly. Projected growth of this
market may not be realized. The market for our services may not grow, our
services may not be adopted and businesses may not use these Internet-based
services to the degree or in the manner that we expect. In addition, if we are
not able to effectively respond to technological changes or if technological
advances diminish the benefits derived by our customers from the use of our
products and services, future demand for our services could be reduced. For
example, it is possible that businesses may find it cheaper, more secure or
otherwise preferable to host their web sites and applications internally and
decide not to outsource the management of their web sites and applications. In
addition, the market for our services has developed more slowly than we
originally expected. If we are not able to react quickly to changes in the
market, if the market fails to develop or continue to develop more slowly than
expected or if our services do not achieve market acceptance, we will not
achieve growth levels necessary to become profitable.

The potential market for Internet services in the Asia-Pacific region may
attract new and existing competitors, which could narrow our margins and limit
our growth prospects.

         The market for Internet access, as well as for hosting, co-location and
managed services, is extremely competitive and there are few substantial
barriers to entry. New market entrants or the creation of stronger competitors
through combinations could result in increased price competition, which would
make it difficult for us to attract new customers, retain existing customers, or
attain revenue and gross margin levels sufficient to generate a return on our
prior investment in our business.

         We are dependent upon businesses, such as national telecommunications
carriers that are monopolies or have significant regulatory advantages over us,
which provide us with resources we need to provide services in one or more
markets. These businesses either currently compete with us or may compete with
us in the future. Increasingly, Internet service providers, hosting companies,
telecommunications companies and equipment manufacturers based in North America
have announced plans to enter into or expand their operations in markets in the
Asia-Pacific region. For example, companies such as AboveNet Communications, and
its parent Metropolitan Fiber Networks, Exodus Communications, Level 3,
WorldCom, and Pihana Pacific

                                       33
<PAGE>

have announced plans to enter into or expand their current operations in the
Asia-Pacific region. When these companies expand their presence in the Asia-
Pacific region, customers may decide to use their services in the region instead
of ours.

         Many of our competitors have substantially greater financial, technical
and marketing resources, larger customer bases, longer operating histories,
greater name recognition and more established relationships in the industry than
we do. As a result, certain of these competitors may be able to develop and
expand their network infrastructures and service offerings more quickly, adapt
to new or emerging technologies and changes in customer requirements more
readily, take advantage of acquisition and other opportunities more effectively,
devote greater resources to the marketing and sale of their products and adopt
more aggressive pricing policies than we can. In addition, these competitors
have entered and will likely continue to enter into joint ventures or
consortiums to provide additional value-added services competitive with those
provided by us. We may not have, or be able to acquire, the resources or
expertise to compete successfully in the future, which could narrow our margins
and limit our growth prospects.

Our limited operating history makes forecasting difficult. Because most of our
expenses are based on planned operating results, failure to achieve forecast
revenue could significantly increase our net losses in any given period.

         As a result of our limited operating history, particularly since our
change in strategic focus in mid-1999, it is difficult to accurately forecast
our revenue, and we have limited meaningful historical financial data upon which
to base planned operating expenses. We base our current and future expense
levels on, among other factors, our operating plans, our financing needs and
availability, the anticipated dates that our new large-scale, high performance
Internet data centers will be completed and available for customer use, expected
use of our new Internet data centers and estimates of future revenue. Because
our significant expenses are to a large extent fixed in the short term, we may
be unable to adjust our spending in a timely manner to compensate for any
unexpected revenue shortfall. In addition, if we are unable to obtain additional
funding, we may not be able to adjust our spending levels downward in a timely
manner so as to maximize our available capital. This could significantly
increase our net losses in any given period or cause us to deplete our cash more
quickly than expected.

Our operating results are difficult to predict. If we fail to meet the
expectations of public market analysts and investors, the market price of our
common stock may decline significantly.

         Our annual and quarterly operating results have fluctuated in the past
and will continue to fluctuate significantly in the future due to a variety of
factors, many of which are outside of our control. For example, for several
quarters beginning in late 1997, our operating results were adversely affected
by the economic crisis in the Asia-Pacific region. It is possible that, in the
future, our quarterly operating results may fall below the expectations of
securities analysts and investors. In this event, the trading price of our
common stock may decline significantly.

                                       34
<PAGE>

We may be unable to hire and retain the skilled engineering and technical
personnel necessary to develop our business.

         Depending on the availability of funding, we may hire additional
engineering and technical personnel. Competition for these individuals with
relevant experience and expertise is intense, and we may not be able to attract,
assimilate or retain highly qualified personnel in the future. The market for
qualified engineering and technical personnel in the Asia-Pacific region is
extremely limited and finding individuals with relevant country specific
experience may be difficult. Our failure to attract and retain the highly
trained engineering and technical people who are integral to our business may
limit our growth rate and harm our business. We have had greater difficulty
attracting these personnel with equity incentives as a public company than we
did as a privately held company.

Our network is dependent upon the availability of adequate connectivity with
third party providers and any failure or delay in obtaining necessary
connectivity would harm our operations.

         We rely upon connectivity and bandwidth from Internet service providers
and local and international telecommunications carriers to operate our business.
In some of our markets, we are dependent on one or a limited number of
connectivity providers. Many of these carriers are our competitors. Because of
market and competitive factors, it is uncertain whether we will be able to
obtain the requisite network connectivity at commercially viable prices or that
the necessary connectivity will be available on a timely basis or at all.
Failure to obtain this connectivity would jeopardize our ability to conduct our
business in the Asia-Pacific region and would harm our operations.

We must offer services priced above the overall cost of bandwidth, and any
failure to do so could cause us to sell our services at a loss.

         We purchase our bandwidth capacity in amounts based upon projected
usage by our customers on a fixed-price basis in advance of the sale of our
services. We sell our services, by contract, on the basis of actual usage. If we
do not obtain adequate bandwidth capacity on acceptable terms and realize
appropriate customer volume for such bandwidth, we will not achieve positive
gross profit.

         We expect that the cost of obtaining bandwidth for the transport of
data over our network will decline over time as a result of, among other things,
the large amount of capital currently being invested to build network
infrastructure. We expect the prices we charge for data transported over our
network will also decline over time as a result of, among other things, the
lower cost of obtaining bandwidth and existing and new competition in the
markets we address. If we fail to accurately predict the decline in costs of
bandwidth, are unable to sell our services at acceptable prices, or fail to
offer additional services from which we can derive additional revenue, the value
of our services will be substantially reduced, our revenue will decrease and our
business, results of operations and financial condition will suffer.

                                       35
<PAGE>

If we lose the services of key members of our management, we may not be able to
effectively execute our business plan and our trading price may suffer.

         Our future success depends to a significant degree on the skills,
experience and efforts of our key personnel. In the past several months, we have
lost the services of a CEO, a COO, a Vice President of Internet and Data Center
Technology, a Vice President of Marketing, and a Vice President of Sales. We
promoted our President and CFO to CEO, hired a new President and COO, and a new
CFO. The loss of the services of any of these individuals could compromise our
ability to effectively operate our business. In addition, we have not obtained
key person life insurance on any of our key employees. If any of our key
employees left or was seriously injured and unable to work and we were unable to
find a qualified replacement, our business, results of operations and financial
condition could be harmed.

We could lose customers and be exposed to liability if our service to our
customers is disrupted or damaged or the security of confidential information
stored in our computer systems is compromised.

         Our success, in particular our ability to successfully provide our
services in a high quality and reliable manner, largely depends upon the
efficient and uninterrupted operation of our Internet data centers, including
our computer and communications hardware and software systems and the power and
cooling systems upon which they rely. Any of the acts or events described below
could lead to interruptions, physical or electronic loss of data, delays or
cessation of service to our customers or a decrease in responsiveness, which
could harm our relationships with our customers, result in liability damages and
reduce revenue. Our systems and operations are vulnerable to damage or
interruption from:

    .    earthquake, fire, flood and other natural disasters;

    .    failure of our internal systems, including failure of our computer
         systems or our telecommunications network, operator negligence,
         improper operation by or supervision of our employees;

    .    third party or systemic infrastructure failures, including Internet
         network outages, power and utility loss and problems with the satellite
         systems used for our data back-up; and

    .    disruptions due to human intervention, including computer viruses,
         interruption, break-ins, security breaches, misappropriation, denial of
         service, vandalism and similar disruptive problems caused by our
         customers or Internet hackers.

         Furthermore, any inappropriate use of the network by third parties
could potentially jeopardize the security of confidential information stored in
our computer systems and our customers' computer systems, which may result in
liability to us and act as a deterrent to potential customers. Although we
intend to continue to implement security measures, any measures we implement may
be circumvented in the future. The costs and resources required to eliminate
computer viruses and alleviate other security problems may divert resources from
other activities and may result in interruptions or delays to our customers that
could cause our business, results of operations and financial condition to
suffer.

                                       36
<PAGE>

Because of the significant stock ownership of our officers, directors and
significant stockholders, you will be unable to exert significant control over
our future direction.

         Based upon our shares outstanding as of August 1, 2001, our executive
officers and directors and their affiliates will together control approximately
38 percent of our outstanding common stock as a result of their shareholdings,
which if they act together, would enable them to significantly influence matters
requiring our stockholders' approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may delay, prevent or deter a change in control, could deprive our stockholders
of an opportunity to receive a premium for their common stock as part of a sale
of iAsiaWorks or our assets and might adversely affect the trading price of our
common stock.

Provisions of our certificate of incorporation and bylaws may make changes of
control difficult, even if they would be beneficial to stockholders.

         Anti-takeover provisions of Delaware law and in our certificate of
incorporation and bylaws may make a change in control of iAsiaWorks difficult,
even if a change in control would be beneficial to our stockholders. These
provisions may allow our board of directors to prevent or make changes in the
management and control of iAsiaWorks. In addition, under Delaware law, our board
of directors may adopt additional anti-takeover measures in the future. The
rights of holders and the price of our common stock could be adversely affected
by these anti-takeover provisions.


Our long-lived assets may be further impaired if we are unable to obtain the
financing necessary to expand our business to the level necessary to achieve
profitability and generate positive cash flows.

         We cannot assure you that we will be able to obtain financing in a
sufficient amount to expand our business to the level necessary to achieve
profitability and generate positive cash flow from operations. Our failure to do
so will likely result in our conclusion that the remaining carrying amount of
certain long-lived assets are not recoverable. Under generally accepted
accounting principles relating to the impairment of assets, we would then be
required to write off all, or an additional portion of long-lived assets,
including tangible fixed assets, which would have a material and adverse effect
on our business, results of operations and financial position.

The large number of shares that may be resold in the public market could cause
our stock price to decline.

         As our shares become eligible for public resale, the market price of
our common stock may drop if the holders of these shares sell them or are
perceived by the market as intending to sell them. Most of the shares we have
outstanding or assumable upon exercise of options or warrants became eligible
for public resale in January 2001. For a more detailed description of the
eligibility of the outstanding shares of our common stock for resale in the
public market, see our Registration Statement filed with the SEC, SEC File No.
333-35278.

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<PAGE>

Our business operations may be adversely affected by the California energy
crisis.

         Our principal executive offices are located in the Silicon Valley in
Northern California. California has been experiencing an energy crisis that has
resulted in disruptions in power supply and increases in utility costs to
consumers and businesses throughout the State. Should the energy crisis
continue, together with many other Silicon Valley companies, we may experience
power interruptions and shortages and be subject to significantly higher costs
of energy. Although we have not experienced any material disruption to our
business to date, if the energy crisis continues and power interruptions or
shortages occur in the future, they may adversely affect our business.

         Risks specific to the Internet, our industry and our markets

The political, legal and economic climate in the Asia-Pacific region is
volatile, uncertain, subject to change and presents risks that could materially
adversely affect our business.

         We currently operate throughout the Asia-Pacific region. As a result,
our results of operation and future growth depend on the economies in these
markets. There are certain risks inherent in conducting business in the
Asia-Pacific region that could affect our profitability, if any, including:

         .    political and economic instability;

         .    risk of expropriation;

         .    risk of currency exchange controls and repatriation;

         .    export restrictions, tariffs and other trade barriers;

         .    changes in regulatory requirements;

         .    legal restrictions on the business practices of United States
              companies operating outside of the United States, such as the
              Foreign Corrupt Practices Act;

         .    lack of clarity, transparency and consistency in the application
              of laws and regulations in various jurisdictions; and

         .    potential adverse tax consequences.

         Beginning in mid-1997, many countries in the Asia-Pacific region
experienced significant economic downturns and related difficulties. As a result
of the decline in the value of the region's currencies, many governments in the
Asia-Pacific region and companies operating in the region had difficulties
servicing foreign currency denominated debt and many corporate borrowers
defaulted on their payments. These currency fluctuations, as well as resulting
higher interest rates and other factors, materially adversely affected the
economies of many countries in the Asia-Pacific region. While the region has
generally shown signs of improvement in recent periods, the economic conditions
in the Asia-Pacific region may not continue to improve and any recent
improvements may not be sustained.

         Governmental regulation and the application of existing laws of
countries in the Asia-Pacific region often lack clarity and are subject to
change without notice. Such uncertainty and lack of transparency may result in
unexpected liabilities and violation of local law, especially with regard to
obtaining local and national government approvals, limitations on foreign
investments and the purchase of real property, and complying with zoning,
environmental, labor

                                       38
<PAGE>

and similar regulatory requirements. In particular, zoning and land use
regulations in the Asia-Pacific region often reflect the time lag, often
considerable, between telecommunications liberalizations and corresponding
amendments to zoning, use and other local land regulations to accommodate such
liberalizations. Applicable zoning regulations and use permits in the Asia-
Pacific region in certain countries where we operate do not explicitly allow for
the operation of Internet data centers, as land is zoned into broad categories,
such as commercial, industrial and residential, that do not always take account
of current business usage. If we violate these regulations, we may face
significant fines and penalties and may be unable to operate our facilities, all
of which could have a material adverse effect on our business, results of
operations and financial condition.

         Any adverse political, legal or economic development in the
Asia-Pacific region could materially adversely affect our markets and our
business. For example, any conflict between mainland China and Taiwan or between
North Korea and South Korea may also destabilize the region and render us unable
to transact business in the region. Similarly, while Hong Kong is a Special
Administrative region under the government of mainland China, with its own
government and legislature, it may not remain autonomous from mainland China.
Any loss of autonomy could affect the regulation of business in Hong Kong,
hinder our ability to operate in the Asia-Pacific region, and destabilize the
region. If any of these events were to occur, our business model would be
undermined.

Governmental regulation and the application of existing laws to the Internet may
slow the Internet's growth, increase our costs of doing business and create
potential liability for the dissemination of information over the Internet.

         Laws and regulations directly applicable to Internet communications are
becoming more prevalent. Uncertainty and new laws and regulations, as well as
the application of existing law to the Internet, in our markets could prevent or
limit our ability to operate in certain of our markets, expose us to compliance
costs and substantial liability and could result in costly and time consuming
litigation, all of which could materially harm our business, operating results
and financial condition.

         The international nature of the Internet and the possibility that we
may be subject to conflicting laws of, or the exercise of jurisdiction by,
different countries may make it difficult or impossible to comply with all the
laws that may govern our activities. Furthermore, the law relating to the
liability of online service providers for information carried on or disseminated
through their networks is currently unsettled.

Underdeveloped telecommunications and Internet infrastructure may limit the
growth of the Internet in the Asia-Pacific region and the growth of our
business.

         Access to the Internet requires advanced telecommunications
infrastructure. The telecommunications infrastructure in many parts of the
Asia-Pacific region is not as well developed as in the United States and is
owned and operated by current or former national monopoly telecommunications
carriers or may be subject to a restrictive regulatory environment. The quality
and continued development of telecommunications infrastructure in the
Asia-Pacific region will have a substantial impact on our ability to deliver our
services and on the market use and acceptance of the Internet in general.

         In addition, the recent growth in the use of the Internet has caused
frequent periods of performance degradation, requiring the upgrade of routers
and switches, telecommunications

                                       39
<PAGE>

links and other components forming the infrastructure of the Internet by
Internet service providers and other organizations with links to the Internet.
Any perceived degradation in the performance of the Internet as a whole could
undermine the benefits of our services. The quality of our services is
ultimately limited by and reliant upon the speed and reliability of the networks
operated by third parties. Consequently, the emergence and growth of the market
for our services is dependent on improvements being made to the entire Internet
infrastructure in the Asia-Pacific region to alleviate overloading and
congestion.

Inability to acquire sufficient power to facilitate our operations may limit our
growth in the Asia-Pacific region.

         The underdeveloped infrastructure in many countries in the Asia-Pacific
region may inhibit our ability to attain sufficient, reasonably priced sources
of electrical power to support our Internet data centers. The quality and
reliability of the available power sources may also interfere with the
uninterrupted operation of our services, which could adversely impact the
operation of our Internet data centers.

Currency fluctuations could decrease our revenue or increase our costs. In
addition, restrictions on currency exchange could prevent us from effectively
using our funds.

         We conduct business in multiple countries in the Asia-Pacific region
and generate revenue, expenses and liabilities in multiple Asia-Pacific
currencies. Gains and losses on the conversion of foreign payments may
contribute to fluctuations in our results of operations and fluctuating exchange
rates could cause reduced revenue and gross margins from our international
sales. Additionally, the U.S. Dollar value of overseas assets may decline if
exchange rates in the region weaken in relation to the U.S. Dollar. We currently
engage only in very limited currency hedging activities. In addition, some of
the countries in which we operate or plan to operate impose exchange controls.
As a result, we may not be able to freely convert the relevant local currencies
into other Asia-Pacific or non Asia-Pacific currencies, including U.S. dollars,
which could prevent us from effectively using our funds. Currency rate
fluctuations and exchange controls could negatively impact our financial
performance by increasing costs and offsetting revenue or income from our
operations.

Our business and prospects will suffer if the Internet does not develop into an
effective commercial and information medium in the Asia-Pacific region.

         The market for Internet services in the Asia-Pacific region has only
begun to develop. Because the Internet is an unproven medium for information,
advertising and other commercial services in the Asia-Pacific region, our future
operating results and prospects depend substantially on the increased acceptance
and use of the Internet for publication, distribution and commerce in the
Asia-Pacific region. Many potential customers may have limited experience with
the Internet, may not have devoted a significant portion of their available
funds to web site development and may not find the Internet to be effective for
promoting, distributing or conducting their products and services relative to
traditional means. Furthermore, critical issues concerning the commercial use of
the Internet in the Asia-Pacific region, such as security, reliability, cost,
ease of deployment, administration and quality of services, may affect the
adoption of the Internet to solve business needs.

ADDITIONAL DISCUSSION OF THESE AND OTHER RISK FACTORS IS DISCLOSED IN OUR ANNUAL
REPORT ON FORM 10-K, AS AMENDED, FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, AS WELL AS IN OUR

                                       40
<PAGE>

OTHER PUBLIC FILINGS.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


         We are exposed to market risk inherent in our operations, primarily
related to currency risk. This risk arises from transactions and operations
entered into in the normal course of business.

         Our subsidiaries primarily operate in foreign markets, and
predominantly have their local currencies as their functional currencies. These
subsidiaries do not have third party borrowings in currencies other than their
local currencies, and therefore there are no appropriate quantitative
disclosures.

         Our primary currency rate risk exposures relate to:

         .   the fact that approximately ninety-five percent (95)% of our
             revenues during the fiscal quarter ended June 30, 2001 were derived
             from operations in the Asia-Pacific region, and were denominated in
             currencies other than the U.S. dollar;

         .   the ability of our United States operations to satisfy cash flow
             requirements of predominantly U.S. dollar denominated long-term
             debt without the need to repatriate into the United States foreign
             earnings and profits, which are denominated in currencies other
             than the U.S. dollar; and

         .   our investments in foreign subsidiaries being primarily directly
             from us as the U.S. parent, resulting in U.S. dollar investments in
             foreign currency functional companies.

         We manage our currency rate risks through a variety of measures. We
operate on a decentralized regional basis with operations located in most major
Asia-Pacific markets. As a result, our individual markets are not necessarily
impacted by changes in currency exchange rates. In addition, in certain limited
instances in fiscal year 2000, we entered into, and expect to enter into
additional, forward exchange contracts in connection with inter-company
transactions. We do not expect these contracts to extend longer than one year.

PART II: OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         Beginning on March 23, 2001, several putative class action lawsuits
were filed against us, several of our officers and directors, and the
underwriters of our initial public offering in the United States District Court
for the Southern District of New York on behalf of all persons who purchased
shares of our stock between August 3, 2000 and November 27, 2000. On August 10,
2001, these actions were transferred to the United States District Court for the
Northern District of California. The plaintiffs allege claims under Sections 11,
12 and 15 of the Securities Act of 1933 and seek unspecified damages arising out
of, among other things, allegedly false or misleading statements in the
prospectus and registration statement issued in connection with our initial
public offering. These actions are at a very early stage and, accordingly, we
are unable to predict their ultimate outcome.

           However, we believe the foregoing actions are without merit and we
intend to defend against them vigorously. An unfavorable outcome in these
actions could have a material adverse

                                       41
<PAGE>

effect on our business, financial condition and results of operations. In
addition, even if the ultimate outcome is resolved in our favor, the defense of
such litigation could entail considerable cost and the diversion of efforts of
management, either of which could have a material adverse effect on our results
of operation.

         We are party to several actions which relate to our alleged failure or
alleged anticipated failure to pay contractual obligations. These actions have
been commenced by counterparties to agreements or instruments to which we or our
subsidiaries are parties, and seek payment of obligations under the agreements
or instruments allegedly breached or to be breached by us or our subsidiaries.
The parties bringing these actions seek payment and, in some cases,
extraordinary relief such as the attachment of assets. In certain cases,
plaintiffs are seeking punitive damages or asserting alleged tort claims
relating to alleged breaches or alleged anticipatory breaches by us or our
subsidiaries. Currently, total amounts sought by the plaintiffs in these actions
could be in excess of $2 million.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

         On August 8, 2000, we consummated our initial public offering of
common stock, $0.001 par value. The underwriters in the offering were Goldman
Sachs & Co., Morgan Stanley & Co. Incorporated and Salomon Smith Barney Inc.
The shares of common stock sold in the offering were registered under the
Securities Act of 1933, as amended, on a registration statement on Form S-1
(Reg. No. 333-35278) that was declared effective by the SEC on August 2, 2000.
All 9,000,000 shares of common stock registered under the registration
statement were sold at a price of $13.00 per share. The aggregate offering
amount registered was $117,000,000. In connection with the offering, we paid
an aggregate of $8,190,000 in underwriting discounts to the underwriters. The
net offering proceeds to us after deducting the underwriting discounts and
total expenses related to the offering were approximately $106,061,000. Of the
proceeds and the existing cash balance on the date of the IPO, as of June 30,
2001, approximately $113 million were used for the establishment of Internet
data center facilities in Hong Kong, South Korea and Taiwan, the hiring of
additional personnel and for general corporate purposes.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
Not applicable.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.

ITEM 5.  OTHER INFORMATION

RECENT EVENTS

         On June 6, 2001, JoAnn Patrick-Ezzell resigned as chairman of the board
of directors and as a director of iAsiaWorks, Inc.

         On July 3, 2001, in a move to reduce debt levels and costs and focus
its operating efforts on its Internet data centers in Taiwan and South Korea,
the Company entered into a Creditors Voluntary Liquidation of its Hong Kong
subsidiary and appointed a provisional liquidator to oversee the closure of the
business. As a result of this anouncement, the Company has written off goodwill
and other tangible assets recorded by its Hong Kong subsidiary and written down
the carrying value of its property and equipment at June 30, 2001 based on the
expected recoverable value to be generated by the liquidator.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

   a. Exhibits


Exhibit
Number            Description
------            -----------

10.31             Employment Agreement, dated April 30, 2001, by and between the
                  registrant and Nicholas Pianim

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<PAGE>

10.32             Employment Agreement, dated May 15, 2001, by and between the
                  registrant and Jon Engman

       b. Reports on Form 8-K

The Company filed one report on Form 8-K during the quarter ended June 30, 2001.
Information regarding the item reported on is as follows:



Date                        Item Reported On

April 26, 2001              The Company announced Paul H. Lambert's resignation
                            from its Board of Directors


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.



Date: August 14, 2001



                                                   IASIAWORKS, INC.



                                                   By: /s/ Jonathan F. Beizer
                                                       -------------------------
                                                       Jonathan F. Beizer
                                                       Chief Executive Officer

                                       43