##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549




---

FORM 10-K

[X]





For the fiscal year ended December 31, 1999

OR


[   ]





For the transition period from 
to

Commission File number 25737

USinternetworking, Inc.

|                                                                        |  |                                             
|----------------------------------------------------------------------- |  | --------------------------------------------
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Delaware(State or other jurisdiction of
	incorporation or organization) |  | 52-2078325(IRS Employer
	Identification No.)

One USi Plaza, Annapolis, MD 21401-7478

(Address of principal executive officers)


(Zip Code)


(410) 897-4400

(Registrants telephone number, including
area code)


Securities registered pursuant to Section 12(b) of the
Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 Par Value per Share



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

Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
 herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.  [   ]

The aggregate market value of voting Common Stock held by
non-affiliates of the registrant was approximately
$5.2 billion as of March 14, 1999.

The registrant had 96,345,190 shares of Common Stock
outstanding as of March 14, 2000.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information in the Registrants definitive Proxy
Statement for its 2000 Annual Meeting of Stockholders, which will
 be filed with the Securities and Exchange Commission pursuant to
 Regulation 14A no later than April 29, 2000 is
incorporated by reference in Part III of this Report.



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TABLE OF CONTENTS



|                                                                                              |  |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                                                                       
|Item 1. Business                                                                             
|Item 2. Properties                                                                           
|Item 3. Legal Proceedings                                                                    
|Item 4. Submission of Matters to a Vote of Security Holders                                  
|Part II                                                                                      
|Item 5. Market for Registrants Common Equity and Related Shareholder Matters                
|Item 6. Selected Historical Consolidated Financial Data                                      
|Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|Item 8. Financial Statements and Supplemental Data                                           
|Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                                                                     
|Item 10. Directors and Executive Officers of the Registrant                                  
|Item 11. Executive Compensation                                                              
|Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|Item 13. Certain Relationships and Related Transactions                                      
|PART IV                                                                                      
|Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES                                                                                   



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INDEX

|                                                                                                   |          |                                                                                                                                                            |                                                                                               |  |    |    | 
|-------------------------------------------------------------------------------------------------- | -------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  | -- | -- | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|PART I.                                                                                            |          |                                                                                                                                                            |                                                                                               |  |    |   
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Item 1.  |                                                                                                                                                            | Business                                                                                      |  |    | 1  | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Item 2.  |                                                                                                                                                            | Properties                                                                                    |  |    | 16 | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Item 3.  |                                                                                                                                                            | Legal Proceedings                                                                             |  |    | 17 | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Item 4.  |                                                                                                                                                            | Submission of Matters to a Vote of Security Holders                                           |  |    | 17 | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|PART II.                                                                                           |          |                                                                                                                                                            |                                                                                               |  |    |   
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Item 5.  |                                                                                                                                                            | Market for Registrants Common Equity and Related
        Stockholder Matters                 |  |    | 17 | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Item 6.  |                                                                                                                                                            | Selected Financial Data                                                                       |  |    | 20 | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Item 7.  |                                                                                                                                                            | Managements Discussion and Analysis of Financial Condition
        and Results of Operations |  |    | 23 | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Item 7A. |                                                                                                                                                            | Quantitative and Qualitative Disclosures About Market Risk                                    |  |    | 37 | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Item 8.  |                                                                                                                                                            | Financial Statements and Supplementary Data                                                   |  |    | 39 | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Item 9.  |                                                                                                                                                            | Changes in and Disagreements With Accountants on Accounting and
        Financial Disclosure  |  |    | 75 | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|PART III.                                                                                          |          |                                                                                                                                                            |                                                                                               |  |    |   
|Items 10., 11., 12. and 13. are incorporated by reference from USinternetworking Inc.s definitive |          |                                                                                                                                                            |                                                                                               | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |          | Proxy Statement which will be filed with the Securities and
        Exchange Commission, pursuant to Regulation 14A, not later than
        April 30, 2000 |                                                                                               |  | 76 |   
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|PART IV.                                                                                           |          |                                                                                                                                                            |                                                                                               |  |    |   
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Item 14. |                                                                                                                                                            | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              |  |    | 76 | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|SIGNATURES                                                                                         |          |                                                                                                                                                            | 80                                                                                            | 



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Unless otherwise indicated, all information in this report
reflects both a three-for-two stock split effected by a stock
dividend distributed on December 17, 1999 to all
stockholders of record at the close of business on
December 3, 1999 and an additional three-for-two stock split
 effected by an additional stock dividend distributed on or about
 March 28, 2000 to all stockholders of record at the close
of business on March 14, 2000.




PART I




Item 1.  Business

About USi

USis service offerings integrate leading packaged software
applications with computing hardware, network security and
operational support to meet the needs of middle market companies
for business functions such as e-commerce, sales force automation
 and customer support, messaging and collaboration and
professional services automation. We implement these applications
 in our data centers and enable our clients to access and utilize
 the applications over the Internet. We take full responsibility
for providing these services to our clients, freeing them from
the need to own and manage related computer systems, networks and
 software.

Market Trends

We believe that there are four key market trends that drive our
business opportunity:



| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | the increased acceptance of the applications hosting model;                                                
|
| |  | the rapid growth of e-commerce and Internet-based communications;                                          
|
| |  | the competitive need of middle market and global 1000 enterprises
	 to automate key business processes; and
|
| |  | the availability of Internet-enabled packaged software
	applications.                                      

The increased acceptance of the Application
Service Provider model.

The Application Service Provider model is being increasingly
validated by the emergence of new entrants into this market. The
pure play applications hosting companies today
include companies such as Aristasoft, Breakaway Solutions, Corio,
 FutureLink, Interliant, Interpath and Telecomputing. KPMG, a
leading systems integrator has announced a partnership with Qwest
 to provide application hosting solutions. USWeb/ CKS, another
systems integrator, also provides application hosting solutions.
The leading enterprise application companies such as Oracle,
Siebel and SAP are either in the process of or are already
providing application hosting solutions. The Web hosting
companies such as Concentric, Digex and Verio, either by
themselves or in partnership with other companies are expected to
 be participants in the Application Service Provider market.
International Data Corporation estimates that the market
opportunity in the high-end Application Service Provider market
will reach $2 billion by 2003, representing a four-year
compound annual growth rate of 91%.

The rapid growth of e-commerce and Internet-based
communications.

An increasing number of companies use the Internet to enable fast
 and efficient communications between various constituents of
their enterprises. The following examples illustrate this trend.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | E-commerce is becoming a critical element of many
	businesses strategies. Companies increasingly demand that
	their vendors communicate ordering, invoicing and payment
	transactions through Internet-enabled applications. International
	 Data Corporation estimates that commerce on the Internet will be
	 more than $1  trillion by 2003, reflecting a four-year
	compound annual growth rate of 85%.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Enterprises are relying on the Internet to communicate with
	employees who are increasingly dispersed due to globalization and
	 the development of alternative workplaces. According to
	Forrester Research, Inc. there are between 30 and 40 million
	 telecommuters or home-based workers in the United States.                                                                                                                                                            
|
| |  | To interact with customers, suppliers and remote employees
	efficiently, an increasing number of businesses are implementing
	mission-critical applications over intranets and extranets rather
	 than through dedicated private networks. Forrester Research,
	Inc. forecasts that the increasing demand for corporate intranets
	 and extranets will fuel growth rates in excess of 30% in
	distributed infrastructure services resulting in a
	$140 billion market in 2002.

As more companies implement mission-critical business
applications on the Internet, the demand for the outsourced
provision of key Internet infrastructure and services, or Web
hosting, has significantly increased. The outsourcing of Web
sites is occurring because businesses recognize that they do not
have an infrastructure sufficient to ensure reliable and
responsive deployment of mission-critical applications on the
Internet. Web site hosting providers address these concerns by
building substantial redundancy and capacious network bandwidth
into their facilities. Moreover, they provide a physically secure
 data center environment, which helps to address businesses
 security concerns as they begin to move proprietary business
information over the Internet.

The competitive need of middle market enterprises
to automate key business processes.

Middle market enterprises increasingly face competitive demands
to automate business processes, but they have frequently not been
 able to afford the functionality available to their larger
competitors. This has been exacerbated by the shortage of IT
professionals. We believe that these enterprises have a
significant need for packaged application software to improve
core business processes, reduce costs and enhance their global
competitive position.

We believe that many of the leading enterprise resource planning
software packages remain too complex and too costly to be
effective solutions for middle market companies. While many
enterprise resource planning providers have begun offering
products that are targeted for the middle market, implementation
of these packages generally still requires specialized skill sets
 and frequently takes three to twelve months. In addition, the
infrastructure required to support these packages, once
implemented, is also beyond the capabilities of many middle
market businesses. Faced with these costs and time frames, many
middle market companies choose to forgo the capabilities of
leading enterprise resource planning packages in favor of less
functional products. We believe that a lower cost, more easily
implemented approach would allow these middle market businesses
to capitalize on the functionality of leading enterprise resource
 planning packages and better position these businesses against
larger competitors.

The availability of Internet-enabled packaged
software applications.

Until recently, companies wanting to implement Internet
applications had to develop their own software applications or
customize existing packages. This made each implementation unique
 and costly. It also made implementation time frames and costs
unpredictable. Over the past two years, however, major packaged
application providers, such as Siebel, PeopleSoft, Lawson,
Oracle, J.D. Edwards and others, have released versions of
their software which can be accessed and used over the Internet.
Internet-enabled software is becoming an increasingly common
offering of providers of applications for distributed users such
as e-commerce, enterprise resource planning applications, and
sales force automation, where the increasing ubiquity of the
Internet makes it a cost-efficient mechanism for implementing
distributed functions.

We believe that the availability of Internet-enabled packaged
software makes it possible, for the first time, to implement
these applications on the Internet in predictable time frames,
with predictable costs, and without writing custom code.

2



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The USi Solution

We believe that we are well positioned to take advantage of these
 trends. We have established our iMAP services as a leading
single-source solution for the Internet-enabled application
software needs of middle market enterprises. We take
responsibility for the deployment and maintenance of the iMAP
best-of-breed packaged software applications. This allows our
clients to focus on their core competencies without mediating
among disparate vendors. Our iMAP solutions enable clients to buy
 these mission-critical functions as a service from a single
vendor, rather than as a collection of technologies from multiple
 vendors.

We have teamed with major packaged application software providers
 to implement our iMAP solutions. We have built a network of EDCs
 through which our clients business software applications
are deployed. The network offers fast, reliable and secure access
 to the client application web sites that we manage, which serve
as the Internet gateways for enterprises and their
employees, customers and partners to access and use business
application software and data. The servers are generally procured
 and maintained by us and dedicated to specific clients. Clients
can define specific groups, such as their sales force, customers,
 or investors, to have full or limited access to their web sites.
 Because our network is deployed globally, access to client
applications can be equally responsive in North America, Europe
and Asia. Moreover, geographically dispersed backup is designed
to ensure high reliability and data integrity. We provide
packaged application software and support along with our services
 on the basis of multi-year contracts paid on a monthly basis. We
 believe that the combination of our Internet communications
capability along with Internet-enabled software applications
makes our iMAP offerings the first truly integrated Internet
communications and computing solution.

Operate a specialized global network

We have constructed a highly reliable, fully redundant, global
network specifically designed to support our iMAP solutions. Our
network is designed to provide the fastest possible response
time, the highest level of security and 99.9% availability to our
 clients. We have EDCs in Annapolis, Silicon Valley, Amsterdam
and Tokyo. These EDCs are monitored and managed from our Global
Enterprise Management Center in Annapolis and a remote back-up
GEMC in Silicon Valley. The network is designed around dual
primary backbones connecting our EDCs and GEMCs. Our dedicated
network is linked to the Internet in North America via eight
major backbone providers, allowing our clients to bypass
congested public exchange points. In addition, our network is
linked with two backbone providers in each of Europe and Asia,
enabling us to provide global connectivity to our clients. Large
storage arrays in Annapolis and Silicon Valley can provide
real-time back-up of North American client sites, enabling us to
provide an unusually high level of data integrity. We use our
network operations platform, USiView, to proactively manage and
monitor our network systems, telecommunications hardware, network
 connectivity, operating systems and applications software.

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[IMAP SERVICES GRAPHIC]

This specialized network enables us to provide very high levels
of reliability, security and responsiveness to client
constituents, whether they access our applications through the
Internet or from behind a client LAN (as illustrated above).

Deliver integrated service offerings around
business processes

We have expert product teams that specialize in implementing iMAP
 solutions to support specific business processes. Our consulting
 and implementation teams have specific expertise in implementing
 our iMAP solutions for e-commerce, sales force automation and
customer support, human resource and financial management,
messaging and collaboration and professional services automation.
 Each team can integrate a specific application software package
and the required Internet communications services, which together
 provide a total solution for a specific business process. These
teams can implement applications and generate value for customers
 very quickly. For example, our typical implementation of Siebel
technology is designed to be completed in 45 days. We
believe that this provides a competitive advantage over a more
conventional implementation which requires six months to more
than a year for completion. The consulting and implementation
teams hand off the implemented application to our operations
group, which runs and maintains the application as well as
provides ongoing support to the client through our client care
organization.

Leverage strategic relationships with leading
software application providers

We have established relationships in key application areas with
vendors, including BroadVision and Microsoft in e-commerce; Ariba
 in business-to-business e-commerce; Siebel in sales force
automation, customer service and enterprise marketing; PeopleSoft
 and Lawson in human resources and financials;

4



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Implement services-based business model

We sell our iMAP solutions as a service, not as a technology.
Accordingly, our clients sign long-term contracts with fixed
monthly payments made as the service is delivered. We believe
that selling our iMAP solutions as a service reduces our
clients initial capital expenditures and makes it easier
for non-technical executives to purchase our products.

The USi Strategy

The focus of our strategy is to deliver timely, reliable and
secure iMAP services to our clients. We believe that by doing so
we will rapidly build our client base and secure long-term
relationships, especially with those clients in the middle
market. We intend to continue investing to maintain a value
advantage over our competitors and to capitalize on our first
mover advantages, as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Develop new business.We will continue to develop new
	business by soliciting potential clients through joint marketing
	campaigns with our hardware, software and integration partners,
	advertising in industry specific periodicals and newspapers,
	sponsoring seminars and trade shows in selected markets, and
	conducting targeted mass mailings of marketing material.                                                   
|
| |  | Cross-sell products to increase penetration of accounts.
	We are able to provide a range of packaged software applications
	and complex web hosting services to our clients. We actively seek
	 to increase our sales to clients by cross-selling our products
	and services. Our aim is to increase our implementation and
	provision of our clients mission-critical business
	processes.                                    
|
| |  | Expand our portfolio of iMAP solutions.We have entered
	into strategic partnerships with numerous application software
	vendors. These vendors are offering or developing additional
	applications in specific vertical market segments which we expect
	 to deploy in order to expand our portfolio of iMAP solutions.                                                                                                         
|
| |  | Enhance the capacity and functionality of our global network.We will continue to deploy enhanced value features into our
	network. In addition, as we begin to address clients located in
	Europe and Asia, we will expand our capacity in those regions.
	Today, we provide European and Asian mirror sites to our clients
	from collocated EDCs in Amsterdam and Tokyo.                                                       
|
| |  | Emphasize the iMAP brand.We have focused our sales and
	marketing efforts to distinguish iMAP as a branded product
	offering focused on the middle market and selected divisions of
	larger multi-national organizations. Our direct sales
	organization allows our sales representatives to understand each
	clients specific business needs better and provide the
	ongoing support that facilitates effective cross-selling.

iMAP Offerings

Our current iMAP offerings provide integrated solutions to meet
the needs of middle market and global 1000 clients implementing
distributed business functions, whether based on applications we
provide

5



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Leading packaged application and database software.Our
	application packages address major business process areas
	including e-commerce, sales force automation and customer
	support, human resource and financial management, messaging and
	collaboration and professional services automation. We have
	chosen to focus on mission-critical business processes that serve
	 distributed users. These processes can gain maximum value from
	Internet implementations, our management of database platforms
	and from our infrastructure.
|
| |  | USi-managed client application Web sites available via our
	global network.USi-managed client application Web sites are
	housed on dedicated USi-managed servers and available via a
	reliable, high-performance and secure global Internet network.
	Our network architecture is designed to ensure responsiveness and
	 allows clients to define which groups will have full or limited
	access to the Web site or the server.                                                                                                            
|
| |  | Consulting and systems integration services.iMAP
	consulting and systems integration services define, develop and
	offer a service that provides access to a combination of our
	network services, application software and related hardware
	necessary to provide our service and meet a specific
	clients needs. Within the iMAP solutions, we do not develop
	 software nor do we implement substantial customization of
	existing packages. Rather, modular packages applications are
	configured to meet a clients requirements.     
|
| |  | Integrated client service.Once implemented, iMAP
	solutions are efficiently managed in our network of EDCs. We
	provide client support twenty-four hours a day, seven days a
	week, from dedicated teams with specific knowledge of each client
	 implementation.                                                                                                                                                                                                                                                                           

In addition to the specific application areas that we support, we
 allow clients to host their own software applications in our
highly reliable and secure data center environment. In this
context, the iMAP offering consists of all of the above elements
other than the provision of application layer software. Clients
for this complex Web hosting realize all the reliability,
security and responsiveness benefits of our network; however, we
take no responsibility for the application itself. We believe
that many of our complex Web site management clients intend to
migrate to a USi-supported application over time.

Most of our iMAP contracts, including our contracts for complex
Web hosting, provide for a modest initial payment and are
generally not less than three years in length. However, client
contracts signed under our agreement with Siebel may have a term
as short as six months and we foresee that some Web hosting
contracts may also have shorter terms. Several of our earliest
iMAP contracts permit early termination without substantial
penalty. Our contracts provide for prospective payment reductions
 in the event that agreed service levels, as measured and
quantified by system performance benchmarks, are not met.

The USi Service Components





























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USis Special Applications Network

We designed our global network specifically to provide superior
performance for the iMAP offerings. By maintaining architectural
and operational control over our network up to the point at which
 the clients traffic leaves its ISP backbone or corporate
LAN, our network is designed to:



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | provide uptime of 99.9% or better to the entire network, which
	includes the dedicated customer server;
|
| |  | provide fast and predictable response time and access to customer
	 content globally; and              
|
| |  | provide reliable and customized network security.                                                      

Network uptime

Our global network is designed to ensure 99.9% uptime by
following four specific principles:



| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | avoiding incompatibility through standardization;                      
|
| |  | utilizing redundant components;                                        
|
| |  | offering the ability to mirror client servers in separate EDCs;
	and   
|
| |  | implementing USiView, our global end-to-end network management
	system.

Our network is designed around Cisco networking hardware, which
minimizes multi-vendor integration and reduces the risks of
hardware incompatibility and implementation delay. Cisco has
designated our network as a Cisco Powered Network, indicating
that Cisco has reviewed and approved the network design. Our
network architecture relies on redundancy of network hardware,
facilities infrastructure such as power supplies and
telecommunications circuits, which maximizes the network
availability. In addition, we have redundant EDCs, GEMCs and wide
 area networks connecting our EDCs. The wide-area network
connection can be used to dynamically mirror or provide a
duplicate site for each client at an alternative EDC location.
This mirroring feature protects the site from downtime resulting
from catastrophic failure at a specific geographic location. For
clients requiring real time disaster recovery, we use storage
arrays that enable real time data mirroring and are designed to
maintain the integrity of data to within minutes.

The GEMC staff manages and monitors the network systems
environment, telecommunications hardware and data content servers
 in all of our EDCs, both domestic and international, using
USiView, our global network operations technology, an end-to-end
network management platform. USiView consists of an integrated
suite of scalable software tools that allow the GEMC staff to
proactively monitor systems-level events, processes and
thresholds. USiView is the foundation of our systems and
operations management strategy, providing us with:



| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | a unified configuration and change management method;                                                                               
|
| |  | an event correlation facility that collects, processes and
	responds to management event information from a variety of
	sources; and
|
| |  | a central repository for inventory and asset management
	information.                                                               

Fast response time

In order to facilitate the faster response time, we have designed
 our PriorityPeering network to avoid congestion areas on the
Internet and have specifically designed our primary GEMC to
support our integrated network. We seek to avoid the known
Internet congestion points at the Metro Area Exchanges and at the
 network access points. In order to bypass the MAEs and network
access points, our network in North America connects directly
with eight major Internet Service Providers backbones,
which carry about 85% of all the traffic on the Internet today.
Client data is routed directly over an ISPs network to our
network, bypassing congested public exchange points.

7



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Network security

Each EDC features multiple levels of security to isolate private
information from public information. Private network
infrastructure is physically isolated with cabling, switches and
routers separately maintained from the hardware for the public
network infrastructure. In addition, access to the EDCs and GEMCs
 is restricted to authorized personnel by hand scan readers,
which also monitor and record entrances and departures. The
public network and the private network have minimal electronic or
 logical interconnection and are connected only through a
redundant firewall. The network also includes firewall products
that enforce data security and policy-based routing for clients
who prefer secure access to server resources. We believe that
these measures ensure complete separation and security between
its public and private networks.

Strategic Software Vendor Relationships

In developing our iMAP solutions, we have formed relationships
with some of the market-leading software providers whose
applications support critical business processes. These
application providers include BroadVision, Ariba, Siebel, Lawson,
 PeopleSoft, Microsoft, Niku and Sagent. We believe that we have
proven to be an attractive partner for these software companies
because of our strategy to deliver integrated solutions to middle
 market enterprises in a cost-effective service model. Each of
our software agreements is unique, but most allow us to deploy
packaged application software as a service without the need to
establish a separate licensing arrangement for each client. The
agreements also generally include co-marketing, specialized
product training and preferred pricing on the licenses to the
software. We plan to enter into additional agreements with other
software vendors over time.

Each of our key application software relationships is described
below.

BroadVision.We have agreed with BroadVision to offer
BroadVisions e-commerce application as an iMAP solution.
BroadVisions e-commerce application has been adopted by
enterprises across a broad range of industries. The agreement
with BroadVision allows us to offer a robust set of e-commerce
solutions for business-to-business and business-to-consumer
commerce. BroadVision has named us as its first certified
e-commerce application service provider worldwide.

Our agreement with BroadVision allows for attractive discounts on
 licenses. Our arrangement with BroadVision also provides for
flexible use of licenses worldwide, sharing of development
methodology, technical support, joint sales activity and
co-marketing. We maintain iMAP solutions engineers, trained and
certified on BroadVision applications, in nine major metropolitan
 areas.

Ariba.Ariba is a leading provider of intranet- and
Internet-based business-to-business electronic commerce
solutions. The companys products efficiently connect
requestors to approvers and buyers to suppliers to deliver an
automated solution for improving the acquisition and management
of the goods and services required to operate a company.

Our comprehensive partnership with Ariba includes product
development, application implementation and management services,
as well as cooperative sales and marketing. Under terms of the
agreement, USi is a preferred ASP for the Ariba ORMX solution.
Our arrangement with Ariba enables us to not only offer buyers
the Ariba ORMX solution as part of our iMAP portfolio, but it
also allows us the opportunity to provide other iMAP solutions to
 the suppliers that want to connect to the Ariba Network.

Siebel.Siebel is the recognized leader in providing
enterprise relationship management applications, a range of
product offerings that includes sales force automation, customer
service/help desk and enterprise marketing. We have entered into
an agreement with SiebelNet, Inc., a wholly owned subsidiary of
Siebel Systems, Inc., pursuant to which we serve as the exclusive
 application service provider of Siebel enterprise relationship
management applications for customers of SiebelNet that are
headquartered in North America. Under this agreement, SiebelNet
pays us a monthly fee for services including ready-to-service
hardware, network connectivity and client support.

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Our agreement with Siebel establishes a joint program in which
the Siebel sales force will offer outsourcing as a product
option. While Siebel, in most instances, retains control of the
application licensing, we implement the application in our EDCs,
provide on-going management and support, and provide our
consulting and implementation services. Enterprise relationship
management opportunities identified by our sales force are
handled in the same manner. In return for the exclusivity of this
 relationship, we have agreed not to offer any competing
enterprise relationship management applications as part of our
iMAP solutions. The agreement mandates joint marketing programs,
joint oversight of, and agreement on, the program to sell
enterprise relationship management application outsourcing
services, and commissioning of both Siebels and our sales
representatives participating in each sale.

We have extended our strategic partnership with Siebel Systems,
Inc., to include Siebel for Workgroups applications, a powerful
suite of e-business applications that automate the sales
marketing and service functions of small to mid-sized businesses
as a term license iMAP product. USis Workgroups offering is
 focused on providing mid-tier companies with Siebel business
applications functionality over secure Internet and dedicated
network connections, hosted and managed out of USis EDCs.
Additionally, USi provides as a free download from its web site
Siebel Sales, a single user sales marketing solution.

Lawson.Lawson is an established leader in the enterprise
resource planning software industry and one of the pioneers of
fully Internet-enabling its software products. Lawson is also a
recognized leader in selling its enterprise applications on a
worldwide basis. Lawsons product functionality includes
human resources, financial management, supply chain,
collaborative commerce, enterprise budgeting and procurement.
Lawson has selected USi as a global Application Service Provider.

Our agreement with Lawson provides that qualified new outsourcing
 leads identified by Lawson will be referred to USi for hosting
and application management. Outsourcing leads identified by USi
or Lawson will be jointly marketed and quoted. USi has committed
to provide marketing support and resources for our Lawson
offering. The term of the Lawson agreement is one year, and will
renew annually for up to five years unless either party provides
notice of termination prior to the end of any given year. In
October 1999, we purchased Conklin & Conklin, Inc.
a comprehensive provider of Lawson financial and human resources
system implementation services and a certified reseller of Lawson
 software licenses.

PeopleSoft.We have agreed with PeopleSoft to offer
PeopleSoft human resource and core financial applications as iMAP
 solutions. PeopleSoft is an established leader in the enterprise
 resource planning software industry and the recognized leader in
 human resource management solutions. We are one of 10 currently
certified PeopleSoft Application Service Providers.

Our agreement with PeopleSoft provides that opportunities
identified by our sales force be jointly marketed and quoted.
Opportunities identified by the PeopleSoft sales force may be
jointly marketed and quoted with us. Customers who elect
outsourcing through us will purchase our iMAP solutions. The
agreement also provides for the sharing of rapid deployment
methodologies, complete software support, the ability to joint
market products and services, shared visibility at industry
events, sharing of sales leads and joint training efforts.

Microsoft.We have agreed with Microsoft to offer
Microsofts Exchange and Site Server products as iMAP
solutions. Microsoft Exchange is the recognized leader in
messaging and collaboration management solutions. Microsoft Site
Server is a leading e-commerce platform.

Our multi-year Exchange agreement with Microsoft grants us the
right to distribute the Exchange software as part of our iMAP
solution on a pay-per-user licensing fee basis. Under our other
licensing agreement with Microsoft we implement, host and manage
e-commerce solutions based on Microsoft Site Server.

Niku.Niku is a leading developer of Professional Services
 Automation solutions.

Our agreement with Niku allows us to offer, as an iMAP solution,
up-front installation, training and conversion services for
Nikus PSA solutions. Under our agreement, we pay a
discounted fee for each Niku license included in any iMAP
solution.

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Sagent.We have agreed with Sagent to offer Sagent
Internet Enterprise Intelligence applications as an iMAP
solution. Sagent is currently fully prepared to service the
emerging Internet Enterprise Intelligence market with its single,
 integrated, fully Internet-enabled, data warehousing solution.
Oracle and Siebel have selected Sagent as the exclusive data
modeling and data movement technology upon which their data
warehouse products are based.

Our agreement with Sagent allows for attractive discounts on
licenses and services and grants us the right to distribute the
software as part of our iMAP solutions without the need to
establish a separate licensing arrangement for each client. The
agreement also provides for flexible use of the licenses
worldwide, access to rapid deployment methodology, software
support, joint marketing and visibility as a Sagent Premier
Partner at industry events, shared training resources and sharing
 of sales leads.

Sales and Marketing

We offer our products and services through a direct sales
organization based in the U.S. Each sales representative is
responsible for a limited number of client relationships. We
believe this approach enables our sales representatives to
understand each clients specific business needs thoroughly
and to provide top quality ongoing support. We currently have 45
sales representatives located throughout the U.S. We intend to
expand our sales organization into all major U.S. markets.

Our sales teams target medium-sized enterprises based in the U.S.
 with annual revenues ranging from $50 million to
$1 billion and selected divisions of larger multinational
organizations. Our sales strategy emphasizes that iMAP solutions
enable clients to avoid extensive initial capital outlays,
maintain focus on their core businesses, reduce technical and
integration risks and shorten implementation time for software
applications.

We have developed programs to attract and retain high quality,
motivated sales representatives that have the technical skills
and consultative selling experience necessary to sell our iMAP
solutions. In addition, our acquisitions have augmented our sales
 and technical team and have created opportunities for more rapid
 market penetration in their geographic region and access to
established business relationships for cross-selling.

We have established a marketing communications organization that
is responsible for the branding and marketing of all our iMAP
solutions and for distinguishing iMAP as a branded product
offering. The marketing organization is responsible for all new
service launches to ensure both internal execution and
marketplace acceptance. The marketing organization has developed
cooperative marketing and trade show participation programs in
conjunction with our strategic software and hardware partners.

USi and AT&T Corp. have entered into a cooperative market
agreement whereby USi and AT&T will jointly market and
deliver ASP services to mid-market and high-growth companies.
AT&T sales channels will refer customers seeking to leverage
our applications and services expanding the sales channel for all
 of our iMAP offerings. We will utilize AT&Ts domestic
and international frame, ATM, and IP Services to connect and
deliver the functionality of our iMAP services.

Under the agreement, we have been named the first Platinum
Member of AT&Ts Ecosystem for ASPs. Additionally,
 we have named AT&T our Preferred Network Services
Provider, whereby AT&T becomes the recommended network
provider to our customers for Frame and ATM connectivity
requirements. AT&T and USi will initially focus on marketing
in the DC/ Northern Virginia/ Maryland area, with additional
areas to be added later. Sales may also occur outside of the
target geographic markets. The initial term is one year with an
optional two year extension.

The Agreement may be terminated by either party for cause or,
after six months, if certain performance objectives are not
met. In connection with entering into the agreement we will issue
 AT&T warrants to acquire up to 150,000 shares of common
 stock at an exercise price of $32.00 per share. As part of the
agreement, we will also agree to nominate for election as a
director a designee of AT&T.

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We are a party to a marketing agreement with U S WEST
Communications, Inc., the incumbent local exchange carrier in
fourteen western states. By the terms of that agreement,
U S WEST gained exclusive rights to market some of our
iMAP products in its fourteen-state region. We make our products
available to U S WEST at a discount and provide
technical support during the sales process. Due to the pending
acquisition of U S WEST by Qwest, a competitor of
USis, U S WEST and USi have mutually agreed to
transition out of the marketing agreement. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Risk
Factors. The markets we serve are highly competitive and many of
our competitors have much greater resources.

Client Care

A central element of the iMAP solution is a high level of
responsive personalized service, referred to as client care.
Through our client care process, a specific technical account
manager is assigned to each client and support teams are
designated to back up the account managers. This structure is
designed to ensure service is available twenty-four hours a day,
seven days a week. Assigned support teams comprise senior client
support specialists, network engineers, and packaged application
engineers. The teams have further support from a group of
product-specific application engineers who are trained in the
specific software applications that we offer.

Clients

We target primarily North American-based middle market
enterprises and divisions of larger multinational organizations.
We believe that these organizations will gain the most
competitive advantage from iMAP solutions and that they provide
the greatest opportunity for the outsourcing of information
technology operations. Currently, business software application
vendors are providing software predominantly to larger
organizations. Historically, attempts to market to middle market
enterprises have generally been unsuccessful due to the high
up-front costs to obtain the required software, the long lead
time to integrate the software into the specific business process
 and the competition for and shortage of IT resources in middle
market companies.

We currently have clients for both our iMAP offerings and
traditional information technology services. Revenues from iMAP
services comprise 61% of total revenue for the year ended
December 31, 1999. As of December 31, 1999 we had 109
signed contracts with 88 clients for our iMAP services,
representing over $140.0 million in expected contract
revenue (assuming payments over the full contract terms) and
approximately $43.1 million of 12 month backlog, which
we define as revenue under contract expected to be recognized in
the next 12 months. As of December 31, 1999, selected
clients of ours include:

|                       |                  |                             |             |                         | 
|---------------------- | ---------------- | --------------------------- | ----------- | ----------------------- | 
|Actuate Software       |                  | Intraware                   |             | Sagent                 
|AllBooks4Less.com      |                  | Knoll Pharmaceutical        |             | Samsung                
|Baltimore Sun          |                  | Lattice Partners            |             | Service Hub            
|Clarus                 |                  | Legg Mason                  |             | Star Telecommunications
|CornerStone Brands     |                  | Liberty Financial Companies |             | Sunburst Hospitality   
|DEBTCOLLECT.COM        |                  | liveprint.com               |             | TeleChoice             
|Franklin Covey         |                  | LHS Communications          |             | The Luggage Center     
|GE Capital Investments |                  | Loan Market Resources       |             | U S WEST               
|Health Care Online     |                  | LocalVoice.com              |             | V Technologies         
|Herman Miller          |                  | Niku                        |             | Ventana                
|Hershey Foods          |                  | Perfumania.com              |             | WeTheShoppers.com      
|HP Shopping Village    |                  | PSDI                        |             | XL Capital             
|                       | (hpshopping.com) |                             | rdental.com |                         | 
|INSLAW                 |                  | Rhythms NetConnections      |             |                        

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Competition

The market for Internet-related services is extremely
competitive. We anticipate that competition will continue to
intensify as the use of the Internet grows. The tremendous growth
 and potential market size of the Internet market have attracted
many start-ups as well as extensions of existing businesses from
different industries. In the market for Internet-enabled
application software and network solutions, we compete on the
basis of performance, price, software functionality and overall
network design. While our competition comes from many industry
segments, we believe that no single segment provides the
integrated, single-source solution that we provide.

Our current and potential competitors include Applications
Service Providers and companies focused on the application
hosting business such as Aristasoft, Breakaway Solutions, Corio,
FutureLink, Interliant, Interpath, NaviSite and Telecomputing;
Web hosting companies, such as Concentric, Digex and Exodus;
enterprise applications vendors, such as Oracle, Siebel and SAP;
business Internet Service Providers, such as MCI WorldCom, PSINet
 and Verio; telecommunications companies, such as AT&T, GTE,
and Qwest (which has agreed to acquire our customer and
significant stockholder, U S WEST); and systems
integrators, such as Andersen Consulting, EDS, IBM and KPMG.
While we believe that our network of proprietary EDCs together
with our level of service, support and targeted business focus
distinguish us from these competitors, some of these competitors
have significantly greater market presence, brand recognition,
and financial, technical and personnel resources than we do, and
have extensive coast-to-coast Internet networks.

We compete with national, regional and local commercial systems
integrators who bundle their services with software and hardware
providers and perform a facilities management outsourcing role
for the customer. These competitors generally have greater name
recognition or more extensive experience than we do. Andersen
Consulting, EDS and PricewaterhouseCoopers, among others, provide
 professional consulting services in the use and integration of
software applications in single-project client engagements. Large
 systems integrators may establish strategic relationships with
software vendors to offer services similar to our iMAP offerings.
 We expect that regional systems integrators are likely to
compete with us based on local customer awareness and
relationships with hardware and software companies. Additionally,
 regional systems integrators may align themselves with ISPs to
offer complex Web site management combined with professional
implementation services.

We compete with hardware and software companies in providing
packaged application solutions as well as network infrastructure.
 In order to build market share, both hardware and software
providers may establish strategic relationships to enhance their
service offerings. IBM currently provides applications
outsourcing for its Lotus Notes products and other non-IBM
software applications. J.D. Edwards & Company, a
developer of enterprise resource planning software, is offering
its software in an outsourced model. Oracle is offering Oracle
Business Online, a hosted enterprise resource planning
application software solution. SAP has formed an outsourcing
organization which is developing key partnerships with leading
consulting firms to offer SAP software. We believe that
additional hardware and software providers, potentially including
 our strategic partners, may enter the outsourcing market in the
future.

All of the major long distance companies, including AT&T, MCI
 WorldCom, Qwest Communications and Sprint, offer Internet access
 services. Qwest has partnered with KPMG to deliver hosted
enterprise resource planning solutions over the Internet, and
Qwest has agreed to acquire our customer and substantial
stockholder, U S WEST. In order to address the Internet
 connectivity requirements of the current business customers of
long distance and local carriers, we believe that there is a move
 toward horizontal integration through acquisitions of, joint
ventures with, and purchasing connectivity from, ISPs.
Accordingly, we expect that we will experience increased
competition from the traditional telecommunications carriers.
Many of these telecommunications carriers, in addition to their
substantially greater network coverage, market presence, and
financial, technical and personnel resources, also have large
existing commercial customer bases. We believe that our local
presence, our strong technical and data-oriented sales force and
our offering of branded software applications are important
features distinguishing us from the telecommunications companies.

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It is possible that new competitors or alliances may emerge and
gain market share. Such competitors could materially affect our
ability to obtain new contracts. Further, competitive pressure
could require us to reduce the price of our products and services
 thus affecting our business, financial condition and results
from operations.

Management

The following sets forth certain information regarding our
current directors and executive officers as of December 31,
1999.

|                        |  |     |    |          |  |                                                                                       
|----------------------- |  | --- | -- | -------- |  | --------------------------------------------------------------------------------------
|Name                    |  | Age |    | Position
|                        |  |     |    |         
|Christopher R. McCleary |  |     | 47 |          |  | Chief Executive Officer and Chairman of the Board                                     
|                       
|                       
|                       
|                       
|Stephen E. McManus      |  |     | 50 |          |  | President  E-Commerce Business Unit and Director                                     
|                       
|                       
|                       
|                       
|Jeffery L. McKnight     |  |     | 56 |          |  | Executive Vice President                                                              
|                       
|                       
|                       
|                       
|Andrew A. Stern         |  |     | 42 |          |  | Executive Vice President                                                              
|                       
|                       
|                       
|                       
|Harold C. Teubner, Jr.  |  |     | 53 |          |  | Executive Vice President and Chief Financial Officer                                  
|                       
|                       
|                       
|                       
|Gary J. Rogers          |  |     | 49 |          |  | Senior Vice President, Worldwide Sales                                                
|                       
|                       
|                       
|                       
|Lance H. Conklin        |  |     | 49 |          |  | President and General Manager of Lawson Business Unit                                 
|                       
|                       
|                       
|                       
|Michael S. Harper       |  |     | 34 |          |  | President and General Manager of PeopleSoft Business Unit                             
|                       
|                       
|                       
|                       
|Alistair Johnson-Clague |  |     | 49 |          |  | President and General Manager of Siebel Business Unit                                 
|                       
|                       
|                       
|                       
|Matthew D. Kanter       |  |     | 37 |          |  | President and General Manager of USi New York                                         
|                       
|                       
|                       
|                       
|Nicholas Magliato       |  |     | 34 |          |  | President and General Manager of Enterprise Messaging and
	Collaboration Business Unit
|                       
|                       
|                       
|                       
|Mark J. McEneaney       |  |     | 36 |          |  | Senior Vice President and Corporate Controller                                        
|                       
|                       
|                       
|                       
|William T. Price        |  |     | 38 |          |  | Vice President, Secretary and General Counsel                                         
|                       
|                       
|                       
|                       
|R. Dean Meiszer(2)      |  |     | 43 |          |  | Director                                                                              
|                       
|                       
|                       
|                       
|Benjamin Diesbach(1)    |  |     | 53 |          |  | Director                                                                              
|                       
|                       
|                       
|                       
|David J. Poulin(2)      |  |     | 41 |          |  | Director                                                                              
|                       
|                       
|                       
|                       
|Ray A. Rothrock(2)      |  |     | 45 |          |  | Director                                                                              
|                       
|                       
|                       
|                       
|Frank A. Adams(1)       |  |     | 54 |          |  | Director                                                                              
|                       
|                       
|                       
|                       
|William F. Earthman(1)  |  |     | 48 |          |  | Director                                                                              
|                       
|                       
|                       
|                       
|John H. Wyant           |  |     | 53 |          |  | Director                                                                              
|                       
|                       
|                       
|                       
|Joseph R. Zell          |  |     | 40 |          |  | Director                                                                              
|                       
|                       
|                       
|                       
|Michael C. Brooks(1)(2) |  |     | 54 |          |  | Director                                                                              
|                       
|                       
|                       
|                       
|Cathy M. Brienza        |  |     | 51 |          |  | Director                                                                              




|    |                                     
|--- | ------------------------------------
|(1) | Member of the compensation committee
|   
|(2) | Member of the audit committee       

Christopher R. McClearyis a co-founder of USi and
has served as the Chairman and Chief Executive Officer of USi
since January 1998. Prior to founding USi, he was the
Chairman and Chief Executive Officer of DIGEX, Inc. from
January 1996 to December 1997. Prior to serving at
DIGEX, Mr. McCleary served as Vice President and General
Manager for Satellite Telephone Service at American Mobile
Satellite Corporation, a satellite communications company, from
October 1990 to January 1996.

Stephen E. McManusis a co-founder of USi and has
served as a director since April 1998. He served as
President of USi until June 1999, at which time he became
President of our E-Commerce Business Unit. Prior to joining USi,
Mr. McManus was Director of U.S. Sales for the telecommunications
 unit of Data General Corporation from January 1998 to
March 1998. From June 1995 to December 1997
Mr. McManus served as a Branch Manager for Silicon Graphics.
 Prior to joining Silicon Graphics,

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Jeffery L. McKnighthas been Executive Vice
President since December 1998. He originally joined USi in
June of 1998 as Senior Vice President of Client Care. Previously,
 he held senior marketing and operations positions with
Aeronautical Radio, Inc., or ARINC, the communications arm of all
 of the domestic airlines from May 1989 to July 1997.
Prior to ARINC, he held senior operations positions with System
One, Inc. from February 1963 to April 1989.

Andrew A. Sternhas been Executive Vice President
since June of 1999. He originally joined USi on July 24,
1998 as Executive Vice President and Chief Financial Officer.
Prior to joining USi, Mr. Stern held positions at USF&G
Corporation, an insurance company, from May 1993 to
July 1998, most recently as Executive Vice President,
Strategic Planning and Reinsurance Operations. In addition,
Mr. Stern was a partner of Booz Allen & Hamilton,
an international management and technology consulting firm with
whom he was employed from August 1981 to May 1993.

Harold C. Teubner, Jr.has been Executive Vice
President and Chief Financial Officer of USi since
October 1999. From July 1998 until joining
USi,Mr. Teubner worked as an independent consultant in the
technology industry. Mr. Teubner served as the Executive Vice
President and Chief Operating Officer at Concept Five
Technologies from July 1997 to July 1998. During
September 1996, Mr. Teubner served as COO of Nat
Systems International, a French software company. Prior to
joining Concept Five Technologies, Mr. Teubner was President
 and CEO of Visix Software, a company that builds high-end,
object oriented, application development tools. Mr. Teubner
was with Visix from July 1995 to June 1996.
Mr. Teubner held positions with Sybase Inc. from
January 1988 to April 1995. While at Sybase,
Mr. Teubner served as the Senior Vice President of North
American Operations from July 1992 to April 1995.

Gary J. Rogersjoined USi in October 1999 as
Senior Vice President, Worldwide Sales. Prior to joining USi,
Mr. Rogers was with CMS/ Data, a division of PC Docs Group
International, Inc. from September 1997 to
September 1999. While at CMS/ Data, Rogers served in various
 capacities including: Vice President, Sales and Marketing and
President, Chief Operating Officer. From May 1994 to July
1997, Mr. Rogers was with SQL Financials International, Inc.
 where he worked as Vice President of Sales and Regional Sales
Manager. Mr. Rogers was an Area Sales Manager with The ASK
Group/ Ingres from August 1990 to April 1994.

Lance H. Conklinhas been President and General
Manager, Lawson Business Unit since October of 1999.
Mr. Conklin was a Vice-President and Co-Founder of
Conklin & Conklin, Inc., a leading reseller and systems
integrator of Lawson Software applications, from June 1982
until October 1999 when USi acquired Conklin &
Conklin, Inc.

Michael Harperjoined USi in April of 1998 as Vice
President of Product Marketing. In January of 1999,
Mr. Harper was promoted to Vice President and General
Manager of PeopleSoft Business Unit. In July of 1999, Harper was
named President and General Manager, PeopleSoft Business Unit.
Prior to joining USi,Mr. Harper served as the Mid-Atlantic
Systems Manager for Silicon Graphics, Inc. from July 1997 to
 April 1998 with responsibility for pre-sales and
professional service to federal and commercial customers. Prior
to Silicon Graphics, Mr. Harper was with IBM in various
marketing, sales and professional service capacities from
July 1989 to July 1994.

Alistar Johnson-Claguejoined USi in October of
1999 as the President & General Manager, Siebel Business
Unit. Prior to joining USi, Mr. Johnson-Clague was with
Avent Inc., from December 1998 to June of 1999. From August
of 1985 to December of 1998 Mr. Johnson-Clague served in
various capacities while at JBA Holdings Plc, including:
President/ CEO  Computer Solutions Division,
President  US Software Solutions Division, General
Manager-JBA (Northern) Ltd., and General Sales Manager-JPA
Southeast.

Matthew D. Kanterhas been President and General
Manager of USi New York since July 1999. He originally
joined USi in October of 1998 as Vice President and General
Manager of USi New York. Prior

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Nick Magliatohas been President and General
Manager of Enterprise Messaging and Collaboration Business Unit
since July 1999. Previously he served as the General Manager
 of the Private Networking Unit for DIGEX from March 1996 to
 May 1998. Prior to that, he was Director-Land Mobile
Product, Sales and Distribution, for American Mobile Satellite
Corporation from March 1994 to March 1996.

Mark J. McEneaneyjoined USi in April 1998 as
its Vice President and Corporate Controller. In October 1999
 Mr. McEneaney was promoted to Senior Vice President and
Controller. Prior to USi, he was Chief Financial Officer of
Questar Builders, Inc., from November 1997 to
March 1998 and of William Ryan Homes, Inc. from
April 1995 to October 1997.

William T. Pricehas been Vice President, Secretary
 and General Counsel of USi since April 1998. Prior to
joining USi, Mr. Price was the senior trial associate in the
 Baltimore-based law firm of Albright, Brown &
Goertemiller from April 1997 to April 1998, where he
represented major corporate clients in antitrust, copyright,
intellectual property and other commercial matters in various
state and federal courts. Prior to joining Albright,
Brown & Goertemiller, Mr. Price was a litigator and
 Managing Attorney for the New York based law firm of
Finklestein and Levine. Mr. Price was with Finklestein and
Levine from April 1993 to October 1996.

R.  Dean Meiszerhas been a director of USi
since it was founded. Currently, Mr. Meiszer serves as the
President of Lattice Communications, Ltd. Lattice Communications
was formed in October 1997 by the principals and associates
of Crisler Company to own, operate, and manage wireless
transmission towers and related businesses. Meiszer has been
President and Managing Director of The Crisler Company, a
Cincinnati-based investment firm, since May 1989. Prior to
Crisler, Mr. Meiszer was Senior Vice President of Society
Bank from March 1978 to May 1989.

Benjamin Diesbachwas appointed to the board of
directors in May 1998 as a designee of Mr. McCleary in
his role as Chief Executive Officer of USi. He has been President
 of Midwest Research, Inc., a consulting firm, since he formed it
 in January 1995. Prior to forming Midwest Research,
Mr. Diesbach was Chief Executive Officer of Continental
Broadcasting, Ltd., a broadcasting company, from
September 1993 to January 1995.

David J. Poulinwas appointed to the board of
directors in May 1998 as a designee of Mr. McCleary in
his role as Chief Executive Officer. He has been the head hockey
coach at the University of Notre Dame since May 1995. Prior
to joining Notre Dame as hockey coach, Mr. Poulin played in
the National Hockey League for 13 years.

Ray A. Rothrockwas appointed to the board of
directors in June 1998 as a designee of the Venrock Group.
He has been a General Partner of Venrock Associates, the high
technology venture capital investment firm of the Rockefeller
Family, since June 1988. Mr. Rothrock serves on the
boards of directors of CheckPoint Software Technology and Fogdog
Sports, Inc. and several private companies including Qpass,
PrintNation.com, Appliant.com, SteelEye Technologies, Reciprocal,
 Inc., Shym Technology and Simba Technology.

Frank A. Adamswas appointed to the board of
directors in June 1998 as a designee of the Grotech Group.
He is the President and Chief Executive Officer of Grotech
Capital Group, which he co-founded in August 1984.
Mr. Adams has served as President of the Mid-Atlantic
Venture Association since July 1985. He has served on the
board of directors of a number of technology companies including
Thunderbird Technologies, Inc. and EPIC Therapeutics, Inc.

William F. Earthmanwas appointed to the board of
directors in June 1998 as a designee of the Massey Burch
Group. He has been a Partner of Massey Burch Capital Corporation
since January 1994. Prior to becoming a Partner at Massey
Burch Capital Corporation, Mr. Earthman served from

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John H. Wyantwas appointed to the board of
directors in June 1998 as a designee of the Blue Chip Group.
 He is the Managing Partner and President of Blue Chip Venture
Company, which he founded in 1990. Mr. Wyant is currently a
director of Regent Communications, Inc., Zaring Homes, Inc.,
Delicious Brands, Inc. and Ciao Cucina Corporation. He previously
 served as a director of DIGEX.

Joseph R. Zellwas appointed to the board of
directors in July 1998 as a designee of U S WEST.
Mr. Zell has informed us that he will resign as a director
effective February 1, 2000, upon acceptance of his
resignation by the board of directors. We expect the board of
directors to accept his resignation prior to our 2000 annual
meeting. Since December 1991, he has held several positions
with the !NTERPRISE Networking division of U S WEST
Communications, Inc., including Director of Product Development
for !NTERPRISE, Executive Director of Applications Innovation,
President of U S WESTs Wholesale Division and
Vice President of Markets and innovation at !NTERPRISE. He has
been President of the division since March 1997.

Michael C. Brookswas appointed to the board of
directors in December 1998 as a designee of the Whitney
Group. He has been a general partner of J. H. Whitney
& Co. since 1984. He is also a director of SunGard Data
Systems, Inc., Pegasus Communications Corporation, Media Metrix,
Inc., Homestore.com, Inc., VitaminShoppe.com, Inc. and various
other private companies.

Cathy M. Brienzawas appointed to the board of
directors in May 1999 as a designee of Waller-Sutton Media
Partners, L.P. Since July 1997, Ms. Brienza has been a
member of Waller-Sutton Media, L.L.C., the general partner of
Waller-Sutton Media Partners, L.P. Prior to joining Waller-Sutton
 Media, she was a principal of Sutton Capital Associates, Inc.,
and its affiliated companies, which engaged in the ownership and
operation of cable television and cellular telephone systems.




Item 2.  Properties

We are headquartered in Annapolis, Maryland. Our training and
conference facilities are located in a building we own in
Annapolis, Maryland. We believe that the building we own, due to
its age, may contain limited amounts of asbestos containing
materials. We do not believe that the limited asbestos presence
would subject us to any material liability.

On April 30, 1999, we purchased land and a building in
Annapolis, Maryland for $11.8 million. The seller financed
$7.1 million of the purchase price through a first mortgage
note and will lend us an additional $1.5 million for
construction costs if we meet certain conditions. We are
primarily finished renovating this building, which became our
headquarters in November of 1999. Total cost of these renovations
 are anticipated to be $12 million.

In December of 1999, we obtained additional financing for the
acquisition and renovations to our headquarters in the amount of
$4.75 million from a major institutional lender. Partial
payment of the loan is guaranteed by the Maryland Industrial
Development Financing Authority.

We lease space in a number of other locations, primarily for EDC
and GEMC installations and to house our consulting and
implementation staff. We believe that our leased facilities are
adequate to meet our current needs in the markets in which we
have begun to deploy our services, and that additional facilities
 are available to meet our expansion needs in our target markets
for the foreseeable future.

Our leases are for terms varying from 30 to 84 months and
generally contain renewal options of two to three years as well
as rent escalation clauses. During 1999 we incurred approximately
 $3.2 million in rent expense.

16



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##### Table of Contents






Item 3.  Legal Proceedings

From time to time we may be involved in litigation that arises in
 the normal course of business operations. As of the date of this
 prospectus, we are not a party to any litigation that we believe
 could reasonably be expected to have a material adverse effect
on our business or results of operations.




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

No matters were submitted to a vote of security holders during
the fourth quarter of 1999.




Part II




Item 5.  Market for Registrants Common
Equity and Related Shareholder Matters

On April 9, 1999, we sold 15.525 million shares of our
common stock pursuant to a Registration Statement on Form S-1
(Registration No. 333-70717), which was declared effective
by the Commission on April 9, 1999. Credit Suisse First
Boston Corporation was the managing underwriter. The net proceeds
 were approximately $132.8 million, all of which will be
used:



| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | to continue expanding and enhancing our network and facilities,
|
| |  | to add additional services to our iMAP offerings, and          
|
| |  | for working capital and other general corporate purposes.      

In addition, we used some of the proceeds to pay accrued
dividends on our shares of convertible preferred stock. Some of
the net proceeds may also be used:



| |   |                                                           
| | - | ----------------------------------------------------------
| |  | to repay current or future debts,                         
|
| |  | to fund acquisitions or acquire complementary products, or
|
| |  | to obtain the right to use complementary technologies.    

On February 17, 2000, we sold 3 million shares of our
common stock and some of our shareholders sold an aggregate of
7.35 million shares of our common stock pursuant to a
Registration Statement on Form S-1 (Registration No. 333-95543),
which was declared effective by the Commission on
February 17, 2000. Credit Suisse First Boston Corporation
was the managing underwriter. The net proceeds were approximately
 $119.0 million, all of which will be used:



| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | to continue expanding and enhancing our network and facilities;                                                 
|
| |  | to increase marketing efforts;                                                                                  
|
| |  | to invest in licenses, research and product development in order
	to add new applications to our iMAP offerings;
|
| |  | to finance debt service;                                                                                        
|
| |  | to acquire complementary products; and                                                                          
|
| |  | for working capital and other general corporate purposes.                                                       

Some of the net proceeds we receive may also be used;



| |   |                                                                    
| | - | -------------------------------------------------------------------
| |  | to repay current or future debts;                                  
|
| |  | to obtain the right to use complementary technologies; and         
|
| |  | to fund acquisitions that we may pursue on an opportunistic
	basis.

17



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##### Table of Contents



Common Stock Price Range

Our common stock has been traded on The Nasdaq National Market
under the symbol USIX since the completion of our
initial public offering in April 1999. All sales prices
below have been adjusted to reflect our three-for-two stock split
 effected by means of a stock dividend distributed on
December 17, 1999 and an additional three-for-two stock
split to be effected by means of a stock dividend to all
shareholders of record at the close of business on March 14,
 2000 which will be distributed on or about March 28, 2000.

The following table sets forth, for the periods indicated, the
high and low prices of our common stock on The Nasdaq National
Market for the second, third and fourth quarters of 1999 and the
first quarter of 2000 from the commencement of trading on
April 9, 1999 through February 17, 2000.

|                              |                                        |      |   |       |  |  |   |       | 
|----------------------------- | -------------------------------------- | ---- | - | ----- |  |  | - | ----- | 
|                              |                                        | High |   | Low  
|                              |                                        |      |   |      
|Year Ended December 31, 1999: |                                        |      |   |       |  |  |   |      
|                             
|                             
|                             
|                             
|                              | Second Quarter (from April 9, 1999)    |      | $ | 26.67 |  |  | $ | 10.22 | 
|                             
|                             
|                             
|                             
|                              | Third Quarter                          |      |   | 18.64 |  |  |   | 6.36  | 
|                             
|                             
|                             
|                             
|                              | Fourth Quarter                         |      |   | 46.59 |  |  |   | 11.28 | 
|                             
|                             
|                             
|                             
|Year Ended December 31, 2000: |                                        |      |   |       |  |  |   |      
|                             
|                             
|                             
|                             
|                              | First Quarter (through March 14, 2000) |      | $ | 66.67 |  |  | $ | 28.67 | 

The last sale price of the common stock on The Nasdaq National
Market on March 14, 2000 was $53.67.

Dividend Policy

We have never paid cash dividends on our common stock and have no
 plans to do so in the forseeable future. The declaration and
payment of any dividends in the future will be determined by the
board of directors and will depend on a number of factors,
including our earnings, capital requirements and overall
financial condition. The payment of dividends is also restricted
by the terms of our indebtedness.

Recent Sales of Unregistered Securities

Set forth in chronological order is information regarding all
securities sold and employee stock options granted by the Company
 since January 14, 1998. Further included is the
consideration, if any, received by the Company for such
securities, and information relating to the section of the
Securities Act of 1933, as amended (the Securities
Act), and the rules of the Securities and Exchange
Commission under which exemption from registration was claimed.
All awards of options did not involve any sale under the
Securities Act. None of these securities were registered under
the Securities Act. Except as described below, no sale of
securities involved the use of an underwriter and no commissions
were paid in connection with the sales of any securities.



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | At various times during the period from January 1998 through
	 March 22, 1999, the Company granted to employees and
	directors options to purchase an aggregate of
	7,710,455 shares of Common Stock with exercise prices
	ranging from $1.17 per share to $2.67 per share. The
	issuance of these securities were not registered under the
	Securities Act in reliance upon Rule  701 of the rules
	promulgated under the Securities Act.
|
| | 2. | On January 14, 1998, the Company issued
	1,406,250 shares of Common Stock to Christopher R.
	McCleary for $5,000 in cash.                                                                                                                                                                                                                                                                                                                 
|
| | 3. | On April 1, 1998, the Company issued 1,617,187 shares
	of Common Stock to Stephen E. McManus and Christopher Poelma
	 for an aggregate purchase price of $57,500. The purchase price
	for the Common Stock was paid with cash and notes payable to the
	Company.                                                                                                                                                                          
|
| | 4. | On May 31, 1998, the Company issued 38,333.33 shares of
	 Series A Preferred Stock for an aggregate purchase price of
	 $23 million to the Initial Series A Investors. The
	purchase price for such shares was                                                                                                                                                                                                                            

18



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##### Table of Contents



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | paid in cash at the time of the issuance. The Company
	simultaneously issued 1,666.67 shares of Series A
	Preferred Stock for an aggregate purchase price of $1 
	million to Christopher R. McCleary. The purchase price for
	such shares was paid by the forgiveness by Mr. McCleary of
	$1 million of debt that the Company owed him.                                                                                                                                                                                                                                                           
|
| | 5. | On June 18, 1998, the Company issued 5,000 shares of
	Series A Preferred Stock for an aggregate purchase price of
	$3 million to certain of the Initial Series A
	Purchasers. The Company simultaneously issued
	5,833.33 shares of Series A Preferred Stock for
	$3.5 million to U S WEST. The purchase price for
	such shares was paid in cash at the time of issuance.                                                                                                                                                                                                                         
|
| | 6. | On June 19, 1998, the Company issued 3,000 shares of
	Series A Preferred Stock for an aggregate purchase price of
	$1.6 million to HAGC Partners, Chris Horgan (who later
	transferred his interest to his affiliate, Southeastern
	Technology Fund, L.P.) and the Account Management Purchasers. The
	 purchase price for such shares was paid in cash at the time of
	issuance. The Company simultaneously issued 1,166.67 shares
	of Series A Preferred Stock for a purchase price of $700,002
	 to USi Partners. The purchase price for such shares was paid in
	cash at the time of issuance.
|
| | 7. | On July 27, 1998, the Company issued to Andrew A. Stern
	 1,406,250 shares of Common Stock with a fair market value
	of $1,000,000. Mr.  Stern paid $5,000 in cash for these
	shares, and the remainder was recorded as a compensation expense
	to the Company.                                                                                                                                                                                                                                                                                                                                   
|
| | 8. | On September 8, 1998, the Company issued convertible
	promissory notes in the aggregate amount of $9,095,000, together
	with warrants to purchase 2,192,512 shares of Common Stock
	for $1.53 per share, to certain of the existing holders of
	the Series A Preferred Stock. The purchase price for such
	notes and warrants was paid in cash at the time of issuance. The
	Company also issued warrants to purchase 112,500 shares of
	Common Stock for $7.11 per share, to IIT as part of the
	purchase price paid in the acquisition of IIT.                                                  
|
| | 9. | On September 22, 1998, the Company issued warrants to
	purchase 167,409 shares of Common Stock for $1.49 per
	share to Trans America Business Credit in connection with loans
	the Company obtained from it.                                                                                                                                                                                                                                                                                                                                                                                      



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10. | On September 30, 1998, the Company issued warrants to purchase
	971 shares of Series B Preferred Stock for
	$1,050.00 per share, to Venture Lending and Leasing in
	connection with loans the Company obtained from it.                                                                                                                                                                                                                                                                                                            
|   
|11. | On October 2, 1998, the Company issued warrants to purchase
	140,625 shares of Common Stock for $7.11 per share, to
	ACR as part of the purchase price paid in the acquisition of ACR.                                                                                                                                                                                                                                                                                                                                             
|   
|12. | On December 16, 1998, the Company issued convertible
	promissory notes in the aggregate amount of $8 million to
	certain of the existing holders of the Series A Preferred
	Stock. The purchase price for such notes was paid in cash at the
	time of issuance.                                                                                                                                                                                                                                                                    
|   
|13. | On December 18, 1998, the Company issued warrants to
	purchase 40,178 shares of Common Stock for $1.49 per
	share, to Leasing Technology, Inc. in connection with loans the
	Company obtained from it.                                                                                                                                                                                                                                                                                                                             
|   
|14. | On December 24, 1998, the Company issued convertible
	promissory notes in the amount of $5 million to U S WEST.
	The purchase price for such notes was paid in cash at the time of
	 issuance.                                                                                                                                                                                                                                                                                                                                     
|   
|15. | On December 31, 1998, the Company issued
	59,278.56 shares of Series B Preferred Stock for an
	aggregate purchase price of $62,242,500 to certain holders of the
	 convertible promissory notes described above, certain holders of
	 Series A Preferred Stock, and a number of new investors. Of
	 the total purchase price for such shares, $40,147,500 was paid
	in cash and $22,095,000 was paid by conversion of outstanding
	convertible promissory notes with an equivalent principal amount,
	 all at the time of issuance.
|   
|16. | On October 29, 1999 the Company issued $100,000,000 7%
	Convertible Subordinated Notes Due November 1, 2004. The
	purchase price of such notes was paid in cash at the time of
	issuance. The                                                                                                                                                                                                                                                                                                                                      

19



---



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | issuance of these notes was not registered under the Securities
	Act in reliance on the exemption from registration provided by
	Section 4(2) of the Securities Act, and resales of these Notes
	have been exempt from registration under Rule 144A.                                                                                                                                                                                               
|   
|17. | On November 5, 1999 the Company issued $25,000,000 7%
	Convertible Subordinated Notes Due November 1, 2004. The
	purchase price of such notes was paid in cash at the time of
	issuance. The issuance of these notes was not registered under
	the Securities Act in reliance on the exemption from registration
	 provided by Section 4(2) of the Securities Act, and resales of
	these Notes have been exempt from registration under
	Rule 144A.

The issuances and resales of the securities above were made in
reliance on one or more exemptions from registration under the
Securities Act, including those provided by Section 4(2) and
Rules 144A and 701 thereunder. The purchasers of these securities
 represented that they had adequate access, through their
employment with the Company or otherwise, to information about
the Company.

On April 8, 1999, in connection with
USinternetworkings initial public offering, a Registration
Statement on Form S-1 (No. 333-70717) was declared
effective by the Securities and Exchange Commission, pursuant to
which 15,525,000 shares of USinternetworkings common
stock were offered and sold for the account of USinternetworking
at a price of $9.33 per share. Generating gross offering proceeds
 of $144.9 million. The managing underwriters were Credit
Suisse First Boston, Bear, Stearns & Co. Inc., BT Alex.
Brown and Legg Mason Wood Walker Incorporated. After deducting
approximately $10.1 million in underwriting discounts and
$2.0 million in other related expenses, the net proceeds to
USinternetworking were approximately $132.8 million.

The net proceeds to USinternetworking were invested in
short-term, investment-grade interest-bearing securities.
USinternetworking used a portion of the net proceeds to pay
accrued dividends on its preferred stock. USinternetworking has
no specific plans at this time for the use of the remaining
proceeds and expects to use such proceeds for working capital and
 general corporate purposes.

(d) the Company filed its first registration statement under
 the Securities Act effective April 8, 1999, File
No. 333-70717. From the effective date of the registration
statement to December 31, 1999, the Companys use of
the net offering proceeds was as follows:

|                                |                                                        |   |             |            | 
|------------------------------- | ------------------------------------------------------ | - | ----------- | ---------- | 
|                               
|                               
|                               
|                               
|Net offering proceeds to issuer |                                                        | $ | 132,800,000 |           
|                                |                                                        |   |             |           
|Use of proceeds:                |                                                        |   |             |           
|                               
|                               
|                               
|                               
|                                | Property, equipment and software licenses              |   | $           | 78,388,000 | 
|                               
|                               
|                               
|                               
|                                | Working capital                                        |   |             | 1,845,000  | 
|                               
|                               
|                               
|                               
|                                | Repayment to indebtness                                |   |             | 5,336,000  | 
|                               
|                               
|                               
|                               
|                                | Payments to former shareholders of acquired businesses |   |             | 19,291,000 | 
|                               
|                               
|                               
|                               
|Temporary investments:          |                                                        |   |             |           
|                               
|                               
|                               
|                               
|                                | Available-for-sale securities                          |   |             | 24,109,000 | 
|                               
|                               
|                               
|                               
|Other expenses:                 |                                                        |   |             |           
|                               
|                               
|                               
|                               
|                                | Payment of accrued dividends                           |   |             | 3,831,000  | 
|                                |                                                        |   |             |           
|                                |                                                        | $ | 132,800,000 |           
|                                |                                                        |   |             |           




Item 6.  Selected Historical Consolidated
Financial Data

The following table summarizes:



| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our historical consolidated financial data for the period from
	our date of inception, January 14, 1998, through
	December 31, 1998 and as of December 31, 1998;
|
| |  | our historical consolidated financial data for the year ended
	December 31, 1999 and as of December 31, 1999.                                                   

20



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The selected financial data have been derived from, and is
qualified by reference to, our audited consolidated financial
statements for the periods presented. Our audited consolidated
financial statements for the period from our inception through
December 31, 1998 include the results of I.I.T.
Holding, Inc., or IIT, from September 8, 1998 through
December 31, 1998 and the results of Advanced Communication
Resources, Inc., or ACR, from October 2, 1998 through
December 31, 1998. Our audited consolidated financial
statements for the year ended December 31, 1999 include the
results of Conklin & Conklin, Inc. from October 8,
1999 through December 31, 1999.

You should also read Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the financial statements and related notes of USi and IIT
included in Part II, item 7 of this Form 10-K.

In the table below:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Series B preferred stock is not presented as a part of
	our stockholders equity in 1998 because it was mandatorily
	redeemable upon the eighth anniversary of its issuance (the
	Series B was converted into common stock upon the closing of
	 our initial public offering); and                                                                                                                                                                               
|
| |  | we do not present 3,023,438 shares of common stock held by
	three officers as part of our stockholders equity in 1998
	because we would have been obligated to repurchase these shares
	at fair market value if any of these officers had died or had
	become disabled before our initial public offering. See
	Note 12 of the Notes to USis Consolidated Financial
	Statements. These provisions terminated upon the consummation of
	our initial public offering.

USinternetworking, Inc.

|                                                                                |                                     |                                       |         |                   |        |   |          |        |         | 
|------------------------------------------------------------------------------- | ----------------------------------- | ------------------------------------- | ------- | ----------------- | ------ | - | -------- | ------ | ------- | 
|                                                                                |                                     | Period from                           |         |                  
|                                                                                |                                     | January 14, 1998                      |         |                  
|                                                                                |                                     | (date of inception)                   |         |                  
|                                                                                |                                     | through                               |         | Year ended       
|                                                                                |                                     | December 31, 1998                     |         | December 31, 1999
|                                                                                |                                     |                                       |         |                  
|                                                                                |                                     |                                      
|                                                                                |                                     | (in thousands, except per share data)
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Statement of Operations Data:                                                   |                                     |                                       |         |                   |        |   |          |       
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Revenue                                                                         |                                     | $                                     | 4,122   |                   |        | $ | 35,513   |       
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Costs and expenses:                                                             |                                     |                                       |         |                   |        |   |          |       
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Direct cost of services             |                                       |         | 3,425             |        |   |          | 23,570 |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Network and infrastructure costs    |                                       |         | 2,186             |        |   |          | 16,239 |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Selling, general and administrative |                                       |         | 25,240            |        |   |          | 63,998 |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Non-cash stock compensation expense |                                       |         | 231               |        |   |          | 10,351 |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Depreciation and amortization       |                                       |         | 3,179             |        |   |          | 22,480 |        
|                                                                                |                                     |                                       |         |                   |        |   |          |       
|                                                                                |                                     | Total costs and expenses              |         |                   | 34,261 |   |          |        | 136,638 | 
|                                                                                |                                     |                                       |         |                   |        |   |          |       
|Operating loss                                                                  |                                     |                                       | (30,139 | )                 |        |   | (101,125 | )     
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Other income (expense):                                                         |                                     |                                       |         |                   |        |   |          |       
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Interest income                     |                                       |         | 367               |        |   |          | 4,114  |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Interest expense                    |                                       |         | (2,681            | )      |   |          | (6,307 | )      
|                                                                                |                                     |                                       |         |                   |        |   |          |       
|Net loss                                                                        |                                     | $                                     | (32,453 | )                 |        | $ | (103,318 | )     
|                                                                                |                                     |                                       |         |                   |        |   |          |       
|Basic and diluted loss per common share attributable to common
	stockholders(a) |                                     | $                                     | (27.09  | )                 |        | $ | (1.95    | )     
|                                                                                |                                     |                                       |         |                   |        |   |          |       

|                              |  |                |        |              |  |   |         | 
|----------------------------- |  | -------------- | ------ | ------------ |  | - | ------- | 
|                              |  | December 31,   |        | December 31,
|                              |  | 1998           |        | 1999        
|                              |  |                |        |             
|                              |  |               
|                              |  | (in thousands)
|                             
|                             
|                             
|                             
|Balance Sheet Data:           |  |                |        |              |  |   |         | 
|                             
|                             
|                             
|                             
|Cash and cash equivalents     |  | $              | 43,802 |              |  | $ | 112,303 | 
|                             
|                             
|                             
|                             
|Available-for-sale securities |  |                |       |              |  |   | 31,707  | 
|                             
|                             
|                             
|                             
|Working capital               |  |                | 22,551 |              |  |   | 117,167 | 

21



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##### Table of Contents



|                                                                                                          |  |                |         |              |  |  |         | 
|--------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | ------------ |  |  | ------- | 
|                                                                                                          |  | December 31,   |         | December 31,
|                                                                                                          |  | 1998           |         | 1999        
|                                                                                                          |  |                |         |             
|                                                                                                          |  |               
|                                                                                                          |  | (in thousands)
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Total assets                                                                                              |  |                | 106,516 |              |  |  | 325,454 | 
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Current portion of long-term debt and capital lease obligations                                           |  |                | 3,262   |              |  |  | 18,421  | 
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Short-term obligations expected to be refinanced                                                          |  |                | 5,282   |              |  |  | 2,117   | 
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Long-term debt, capital lease obligations, and convertible
	subordinated notes, excluding current portion |  |                | 8,659   |              |  |  | 168,671 | 
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Series B Convertible Redeemable Preferred Stock                                                           |  |                | 62,242  |              |  |  |        | 
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Common stock subject to repurchase                                                                        |  |                | 4,145   |              |  |  |        | 
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Stockholders (deficit) equity                                                                            |  |                | (2,467  | )            |  |  | 102,461 | 




|    |                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | In March 2000, the Company approved a three for two stock split
	of common stock, options and warrants, for holders of record as
	of March 14, 2000. The per share data has been restated to
	retroactively reflect the stock split.

On September 8, 1998, we acquired I.I.T. Holding, Inc.
and its two wholly-owned subsidiaries, International Information
Technology Inc., a U.S. subsidiary, and International Information
 Technology IIT, C.A., a Venezuelan subsidiary. We refer to these
 businesses collectively as IIT. IITs operations commenced
on May 20, 1994 upon the incorporation of the U.S.
subsidiary. The Venezuelan subsidiary was formed on March 6,
 1996. For accounting purposes, IIT is the predecessor of USi,
which was incorporated in January 1998.

The following table summarizes:



| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the historical consolidated financial data of IIT for the fiscal
	years ended December 31, 1995, 1996 and 1997 and as of
	December 31, 1995, 1996 and 1997; and
|
| |  | the historical consolidated operating statement data of IIT for
	the eight month period ended August 31, 1997; and                                             
|
| |  | the historical consolidated operating statement data of IIT for
	the period from January 1, 1998 through September 7,
	1998.                                   

The financial statement data for periods prior to 1996 and eight
months ended August 31, 1997 have been derived from the
unaudited financial statements of IIT. The selected financial
data as of December 31, 1996 and 1997 and for the years then
 ended and the selected financial data for the period from
January 1, 1998 through September 7, 1998, has been
derived from, and is qualified by reference to, the audited
consolidated financial statements of IIT included elsewhere in
this report. You should also read Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the financial statements and related notes
of USi and IIT included in this report.

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Predecessor  I.I.T. Holding, Inc.

|                                                                                      |                                              |                                       |        |            |     |              |        |       |     |             |           |       |       |   |           |       |       |   |           |       |       | 
|------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------- | ------ | ---------- | --- | ------------ | ------ | ----- | --- | ----------- | --------- | ----- | ----- | - | --------- | ----- | ----- | - | --------- | ----- | ----- | 
|                                                                                      |                                              |                                       |        |            |     |              |        |       |     | Period from
|                                                                                      |                                              |                                       |        |            |     |              |        | Eight |     | January 1, 
|                                                                                      |                                              |                                       |        | months     |     | 1998        
|                                                                                      |                                              | Year ended December 31,               |        | ended      |     | to          
|                                                                                      |                                              |                                       |        | August 31, |     | September 7,
|                                                                                      |                                              | 1995                                  |        | 1996       |     | 1997         |        | 1997  |     | 1998       
|                                                                                      |                                              |                                       |        |            |     |              |        |       |     |            
|                                                                                      |                                              |                                       |        |            |     |             
|                                                                                      |                                              | (in thousands, except per share data) |        |            |     |             
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Statement of Operation Data:                                                          |                                              |                                       |        |            |     |              |        |       |     |             |           |       |       |   |           |       |       |   |           |      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Revenue                                                                               |                                              | $                                     | 801    |            |     | $            | 747    |       |     | $           | 2,812     |       |       | $ | 1,499     |       |       | $ | 4,406     |      
|                                                                                      |                                              |                                       |        |            |     |              |        |       |     |             |           |       |       |   |           |       |       |   |           |      
|Costs and expenses                                                                    |                                              |                                       |        |            |     |              |        |       |     |             |           |       |       |   |           |       |       |   |           |      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Cost of revenue                              |                                       |        | 613        |     |              |        | 519   |     |             |           | 1,881 |       |   |           | 1,112 |       |   |           | 2,976 |      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Selling, general and administrative expenses |                                       |        | 77         |     |              |        | 204   |     |             |           | 1,844 |       |   |           | 1,260 |       |   |           | 1,809 |      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Depreciation and amortization                |                                       |        | 7          |     |              |        | 14    |     |             |           | 30    |       |   |           | 15    |       |   |           | 28    |      
|                                                                                      |                                              |                                       |        |            |     |              |        |       |     |             |           |       |       |   |           |       |       |   |           |      
|                                                                                      |                                              | Total costs and expenses              |        |            | 697 |              |        |       | 737 |             |           |       | 3,755 |   |           |       | 2,387 |   |           |       | 4,813 | 
|                                                                                      |                                              |                                       |        |            |     |              |        |       |     |             |           |       |       |   |           |       |       |   |           |      
|Operating (loss) income                                                               |                                              |                                       | 104    |            |     |              | 10     |       |     |             | (943      | )     |       |   | (888      | )     |       |   | (407      | )    
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Interest expense                                                                      |                                              |                                       | (5     | )          |     |              | (3     | )     |     |             | (9        | )     |       |   | (1        | )     |       |   | (17       | )    
|                                                                                      |                                              |                                       |        |            |     |              |        |       |     |             |           |       |       |   |           |       |       |   |           |      
|Income (loss) before income taxes                                                     |                                              |                                       | 99     |            |     |              | 7      |       |     |             | (952      | )     |       |   | (889      | )     |       |   | (424      | )    
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Provision (benefit) for income taxes                                                  |                                              |                                       | 28     |            |     |              | 15     |       |     |             | (58       | )     |       |   | (58       | )     |       |   |          |      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Net income (loss)                                                                     |                                              | $                                     | 71     |            |     | $            | (8     | )     |     | $           | (894      | )     |       | $ | (831      | )     |       | $ | (424      | )    
|                                                                                      |                                              |                                       |        |            |     |              |        |       |     |             |           |       |       |   |           |       |       |   |           |      
|Basic and diluted income (loss) per common share
	attributable to common stockholders |                                              | $                                     | 747.37 |            |     | $            | (84.21 | )     |     | $           | (9,410.53 | )     |       | $ | (8,747.37 | )     |       | $ | (4,464.37 | )    
|                                                                                      |                                              |                                       |        |            |     |              |        |       |     |             |           |       |       |   |           |       |       |   |           |      

|                                                                          |  |                    |     |      |  |      |     |  |  |   |     | 
|------------------------------------------------------------------------- |  | ------------------ | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                                                                          |  |                   
|                                                                          |  | As of December 31,
|                                                                          |  |                   
|                                                                          |  | 1995               |     | 1996 |  | 1997
|                                                                          |  |                    |     |      |  |     
|                                                                          |  |                   
|                                                                          |  | (in thousands)    
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Balance Sheet Data:                                                       |  |                    |     |      |  |      |     |  |  |   |     | 
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Cash and cash equivalents                                                 |  | $                  |    |      |  | $    | 70  |  |  | $ | 14  | 
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Working capital                                                           |  |                    | 70  |      |  |      | 14  |  |  |   | 42  | 
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Total assets                                                              |  |                    | 147 |      |  |      | 348 |  |  |   | 769 | 
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Long-term debt and capital lease obligations, excluding current
	position |  |                    | 47  |      |  |      | 11  |  |  |   | 16  | 
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Stockholders equity                                                      |  |                    | 66  |      |  |      | 45  |  |  |   | 132 | 




Item 7.  Managements Discussion and
Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read together
with the financial statements and related notes of USi and IIT
included in this report. The discussion in this report contains
forward-looking statements that involve risks and uncertainties,
such as statements of our plans, objectives, expectations and
intentions. The cautionary statements made in this report apply
to all related forward-looking statements wherever they appear in
 this report. Our actual results could differ materially from
those anticipated in such forward-looking statements. Factors
that could cause or contribute to differences include those
discussed in Risk Factors, as well as those discussed
 elsewhere in this report. The forward-looking statements
contained in this report are made as of the date of this report,
and we assume no obligation to update these forward-looking
statements or to update the reasons actual results could differ
materially from those anticipated in these forward-looking
statements. See Risk Factors.

Overview

I.I.T. Holding, Inc., the predecessor of USi for accounting
purposes, specialized in systems analysis and design and systems
integration solutions. IIT provided PeopleSoft human resources
management and

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We acquired IIT in September 1998 as a part of our program
to develop a new Internet-based service offering. IIT provides
implementation capabilities that enable us to provide human
resource and financial management functionality as part of our
iMAP service offerings.

We have developed an advanced, integrated service offering that
provides our clients the ability to use leading business software
 applications through our state-of-the-art Internet-based
network. During 1998, we devoted substantially all of our efforts
 to developing our network infrastructure, recruiting and
training personnel, establishing strategic business partnerships
with application software providers, completing two strategic
acquisitions and raising capital. During our first full year of
operations in 1999, we continued the development activities
started in 1998 and began to market and sell our new iMAP product
 offerings. We have incurred a cumulative net loss since
inception and expect to incur additional losses for at least the
next twelve months, due primarily to additional start-up costs
related to implementation of our services and the continued
expansion and enhancement of our network. As of December 31,
 1999, we had an accumulated deficit of approximately $135.8
million. As of December 31, 1999, we had 109 signed
contracts with 88 clients accounting for total revenue, assuming
payment over the full contract terms, of over
$140.0 million. While we have experienced significant growth
 in revenue under contract in recent periods and currently expect
 substantial, although potentially lower, growth in revenue under
 contract throughout 2000, prior growth rates should not be
considered as necessarily indicative of future growth rates or
operating results for 2000. See Risk Factors 
Our business is difficult to evaluate because we have a limited
operating history;  We expect to incur
losses and experiences negative cash flow;
 The markets we serve are highly competitive and
 many of our competitors have much greater resources; and
 Our growth could be limited if we are unable to
 attract and retain qualified personnel.

In October 1999, we purchased the assets of
Conklin & Conklin, Inc. a comprehensive provider of
Lawson financial and human resources system implementation
services and a certified reseller of Lawson software licenses.
The purchase price consisted of cash of $7.7 million,
assumed liabilities of $1.5 million, and a $2.0 million
 secured note. The secured note is due on October 8, 2001,
and bears interest at 10%, with interest payable monthly until
the maturity date. In addition, the purchase price consists of
contingent payments of up to $4.6 million in cash. Portions
of the contingent payments can be earned by Conklin shareholders
through January 2002 upon the attainment of specified
financial milestones.

In April 1999, we completed an initial public offering of
our common stock. The net proceeds from the sale of the
15,525,000 shares of common stock were approximately
$132.8 million. The initial public offering of common stock
met the criteria for the automatic conversion of our outstanding
Series A Convertible Preferred Stock and Series B
Redeemable Convertible Preferred Stock into common stock. In
addition, the repurchase rights lapsed with respect to all common
 stock subject to repurchase.

In November 1999, we completed the sale of our 7%
convertible subordinated promissory notes for net proceeds of
approximately $119.9 million.

In February 2000, we completed a secondary offering of our common
 stock. The net proceeds from the sale of 3,000,000 shares of
common stock were approximately $119.0 million.

Revenue.We generate revenue from iMAP services and
information technology services. Revenues from professional IT
services are recognized as services are provided. iMAP revenues
consist of implementation fees and monthly recurring fees for
services. Implementation fees are generally paid in advance and
are deferred and recognized ratably over the term of the iMAP
service contract. Monthly iMAP service fees are consideration for
 access to our network of EDCs hosting application software, and
the implementation and management of that software. iMAP
contracts generally have a three-to-five year term and revenues
are recognized ratably over the contract term. Payments received
in advance of revenue recognition, even if non-refundable, are
recorded as deferred revenue. Some contracts permit termination

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Costs and expenses.We incur operating costs and expenses
related to the delivery of iMAP and professional IT services.
They include direct costs of service, network and infrastructure,
 general and administrative, sales and marketing, product
research and development, stock compensation, depreciation and
amortization expenses. Since inception, we have incurred expenses
 consisting primarily of compensation and benefits, recruiting,
occupancy and consulting. We have expensed all start-up costs as
incurred.

We incur up-front costs related to the delivery of iMAP services.
 Product research and development costs and the cost to operate
our network and data centers are recognized as period costs.
Costs related to the acquisition of hardware are capitalized and
depreciated over the estimated useful life of the hardware of
five years. Costs related to the acquisition of software licenses
 are capitalized and amortized over the lesser of either three
years or the term of the individual client contract, depending on
 the nature of the software license agreement. Amortization is
based on a straight-line basis over the remaining useful life.
Direct costs related to the integration of software applications
for a client on our network are capitalized and amortized over
the related contract period.

Historical Results of Operations  USinternetworking

Comparison of the year ended December 31,
1999 to the period ended December 31, 1998

Revenue.For the year ended December 31, 1999, we
generated $21.7 million in iMAP revenue and
$13.8 million in professional IT services revenue. For the
period January 14, 1998, our date of inception, through
December 31, 1998 we generated $0.1 million in iMAP
revenue and $4.0 million in professional IT services
revenue. The increase of $21.6 million in iMAP revenue is a
result of signing a total of 102 iMAP client contracts during
1999. The 1998 professional IT services revenue can be
attributable to our subsidiaries IIT ($2.0 million) and ACR
($2.0 million) which were acquired during the third and
fourth quarters of 1998, respectively. The increase of
$9.8 million in professional IT services revenue can be
attributed to a full year of operations during 1999.

Gross margins, direct costs of services, network and
infrastructure costs.For the year ended December 31,
1999, we incurred $14.8 million and $8.8 million of direct
costs related to the delivery of our iMAP and professional IT
services, respectively. For the period from January 14,
1998, our date of inception, through December 31, 1998, we
incurred $0.9 million and $2.5 million of direct costs
related to the delivery of our iMAP and professional IT services,
 respectively. Additionally, we incurred $16.2 million of
costs related to the maintenance of our network and
infrastructure for the year ended December 31, 1999 and
$2.2 million of such costs during the period ended
December 31, 1998. Gross margins, including iMAP network and
 infrastructure costs, for the year ended December 31, 1999
were (42.5)% and 35.9% for iMAP and professional IT services,
respectively. Gross margins for professional IT services for the
period ended December 31, 1998 were 37.6%.

General and administrative expenses.For the year ended
December 31, 1999, we incurred $22.0 million of general
 and administrative expenses compared to $19.4 million for
the period from January 14, 1998, our date of inception,
through December 31, 1998. The increase of $2.6 million
 reflects the costs required to support an additional 59 general
and administrative personnel during a full year of operations in
1999, offset by one time start-up costs incurred in 1998.

Sales and marketing expenses.For the year ended
December 31, 1999, we incurred $36.6 million of sales
and marketing expenses compared to $5.1 million for the
period from January 14, 1998, our date of inception, through
 December 31, 1998. The increase of $31.5 million
reflects the costs associated with our increased efforts to
market and brand our service offerings, and the sales commissions
 related to the increase in iMAP revenue for the year ended
December 31, 1999.

Product research and development expenses.For the year
ended December 31, 1999, we incurred $5.4 million of
product research and development expenses compared to
$0.7 million for the period from

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Non-cash stock compensation expense.For the year ended
December 31, 1999, we incurred $10.4 million in
non-cash compensation expense. Of this amount, $8.5 million
resulted from employee stock options issued at an exercise price
of $2.67 and an estimated fair market value of $8.87 to
$14.89 per share at the date of grant. We will record an
additional $26.5 million over the next two years in relation
 to those options. The remaining amount of $1.9 million
resulted from our contribution of common stock to the employee
benefit plan and the amortization of unearned compensation from
restricted stock grants. There was minimal non-cash stock
compensation expense for the comparable period in 1998.

Depreciation and amortization.Depreciation and
amortization for the year ended December 31, 1999 totaled
$22.5 million. Of this amount, $6.0 million represents
the amortization of the goodwill recorded upon our acquisitions
of ACR, IIT and Conklin; the remaining $16.5 million
represents depreciation of our property and equipment and the
amortization of our prepaid software licenses. As described in
the Change in Accounting Estimate below, depreciation
 expense for 1999 was approximately $2.9 million lower as a
result of changing our useful life of computer equipment from 3
to 5 years. There was minimal depreciation and no
amortization expense for the comparable period in 1998.

Interest income and expense.For the year ended
December 31, 1999, we incurred $6.3 million in interest
 expense principally from increased borrowings including
$1.5 million of expense from our convertible subordinated
notes. We generated $4.1 million of interest income
principally from the investment of the proceeds from our initial
public offering and convertible subordinated notes offering. We
had minimal interest income and expense during the period ended
December 31, 1998.

Historical Results of Operations  Predecessor

Comparison of the period ended September 7,
1998 to the period ended August 31, 1997

Revenue.Revenues for the period ended September 7,
1998, increased 194% over the period ended August 31, 1997.
This increase is attributable to the growth in IITs
PeopleSoft implementation services.

Gross margins, costs of sales and services.IIT incurred
$3.0 million and $1.1 million of expenses in the
delivery of its PeopleSoft implementation services for the
periods ended September 7, 1998 and August 31, 1997,
respectively. As a result, IITs PeopleSoft implementation
services generated gross margins of 32.4% and 25.8% for the
periods ended September 7, 1998 and August 31, 1997,
respectively. The improved gross margins from period to period is
 attributable to a reduction in the use of subcontractors, an
increase in IITs staff utilization and continued
improvement in the demand for PeopleSoft implementation services.

Selling, general and administrative expenses.IIT incurred
 $1.8 million and $1.3 million of selling, general and
administrative expenses for the periods ended September 7,
1998, and August 31, 1997, respectively. Selling, general
and administrative expenses for the period ended August 31,
1997 include $1.0 million attributable to non-cash
compensation expense related to the issuance of stock to three of
 IITs officers. Selling, general and administrative
expenses increased $1.3 million for the period ended
September 7, 1998, as a result of bonuses and related
payroll taxes. The remaining increase of approximately
$0.2 million is attributable to the additional selling,
general and administrative support required to support IITs
 growing customer base.

Comparison of the years ended December 31,
1997 to the year ended December 31, 1996

Revenue.Revenues for 1997 over 1996 increased 276%. The
significant increase in 1997 is attributable to growth in
IITs PeopleSoft implementation services.

Gross margin, costs of sales and services.IIT incurred
$0.5 million and $1.9 million of expenses in the
delivery of services for the years ended December 31, 1996
and 1997, respectively. As a result, IIT

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Selling general and administrative expenses.IIT incurred
$0.2 million and $1.8 million in selling, general and
administrative expenses for the years ended December 31,
1996 and 1997, respectively. The primary factor in the
$1.6 million increase from 1996 to 1997 is due to
$1.0 million of non-cash compensation expense related to the
 issuance of stock to three of IITs officers. The remaining
 increase is attributable to the additional support required for
IITs growing customer base.

Future Assessment of Recoverability and Impairment of Goodwill

In connection with our acquisitions of IIT, ACR and Conklin we
recorded goodwill that is being amortized on a straight line
basis over its estimated useful life. At December 31, 1999,
the unamortized portion of these intangibles was
$29.6 million, which represented 9.1% of total assets and
28.9% of stockholders equity. Goodwill represents the
amount that we paid for these acquired businesses in excess of
the fair value of the acquired tangible and separately measurable
 intangible net assets. We have estimated the useful life of our
goodwill to be five years based upon several factors, the most
significant of which is the susceptibility of acquired businesses
 to change as a result of technological advances and the rapidly
changing needs of their customers.

We periodically review the carrying value and recoverability of
our unamortized goodwill and other intangible assets for
impairment. If the facts and circumstances suggest that the
goodwill or other intangible assets may be impaired, the carrying
 value of this goodwill will be adjusted by an immediate charge
against income during the period of the adjustment. The length of
 the remaining amortization period may also be shortened, which
will result in an increase in the amount of goodwill amortization
 during the period of adjustment and each period thereafter until
 fully amortized. Once adjusted, there can be no assurance that
there will not be further adjustments for impairment and
recoverability in future periods. We have integrated the acquired
 businesses into our primary iMAP service offerings. Therefore,
in evaluating impairment a principal factor we consider is the
failure to achieve expected cash flows from operations.

Change in Accounting Estimate

On July 1, 1999, we changed our estimate of the useful life
of our computer equipment from three to five years. The change in
 estimate will be accounted for prospectively, with depreciation
expense for periods subsequent to June 30, 1999 calculated
so as to depreciate the remaining book value of the equipment at
June 30, 1999 equally over the revised estimated useful life
 which has an annual impact of reducing depreciation expense by
approximately $6 million.

Liquidity and Capital Resources

At December 31, 1999, we had cash and cash equivalents of
$112.3 million and available-for-sale securities of
$31.7 million.

For the year ended December 31, 1999, we have used
$78.2 million in operating activities, $121.7 million
in investing activities and generated $268.4 million through
 financing activities. Included in financing activities was
$132.8 million raised from an initial public common stock
offering in April 1999. We invested these proceeds primarily
 in marketable securities. During 1999, we purchased
$147.0 million of marketable securities and sold
$115.6 million of marketable securities. We used the
proceeds of the sale of the marketable securities to fund our
current operations.

We have used debt and capital leases to partially finance our
capital investments for the development of our infrastructure and
 the hardware required to support the increase in our iMAP
clients. As of December 31, 1999, we had obtained
commitments for secured financing from several sources, including

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In the fourth quarter of 1999, we issued $125 million in
principal amount of subordinated convertible notes. The net
proceeds from the issuance were approximately
$119.9 million. The subordinated convertible notes pay
interest at 7% and are convertible into common stock at the
holders option at a price of $24.85 per common share.

In April 1999 we purchased an office building for
$11.8 million. The seller financed $7.1 million of the
purchase price through a first mortgage note due May 2006
bearing interest at 7.5% per annum. We spent approximately
$9 million in 1999 on improvements to the building and have
obtained financing for $4.75 million of these improvements.

We believe that these resources, together with the net proceeds
received from the issuance of our common stock in the February
offering, will be sufficient to fund our operations for at least
the next twelve months. The majority of the base infrastructure
required to provide our iMAP services has been purchased. As a
result, our capital expenditures for the next several years will
now largely be success-based, consisting of software licenses,
hardware and the expansion of existing data center facilities
required to implement iMAP solutions for our new customers. These
 new customer contracts are expected to have an average term of
three to five years; however, we anticipate that many of our
customers will renew their contracts due to the cost and
complexity of switching service providers.

If we expand more rapidly than currently anticipated, if our
working capital needs exceed our current expectations or if we
make acquisitions, we will need to raise additional capital from
equity or debt sources. We cannot be sure that we will be able to
 obtain the additional financing to satisfy our cash requirements
 or to implement our growth strategy on acceptable terms or at
all. If we cannot obtain such financing on terms acceptable to
us, we may be forced to curtail our planned business expansion
and may be unable to fund our ongoing operations. We are
presently pursuing a variety of sources of other debt financing,
but no additional commitments have been obtained to date.

Year 2000 Compliance

Year 2000 Issue.The Year 2000 issue is a result of
computer programs or systems, which store or process date-related
 information using only two digits to represent the year. These
programs or systems may not be able to properly distinguish
between a year in the 1900s and a year in the 2000s.
Failure of these programs or systems to distinguish between the
two centuries could cause the programs or systems to yield
erroneous results or even to fail.

Effect on USi.To date, we have not experienced any
material difficulties associated with the Year 2000 and we
have not incurred any material liability or costs due to the
Year 2000 issue. Our total expenses related to
Year 2000 compliance through the end of 1999 were
$1.0 million. We do not anticipate that we will incur any
material additional costs due to Year 2000 compliance.

Risk Factors

Investing in our common stock involves risk. You should
carefully consider the risks and uncertainties described below
before making an investment decision. These risks and
uncertainties are not the only ones that we face or that may
adversely affect our business. If any of the following risks or
uncertainties actually occur, our business, financial condition
or results of operations could be materially adversely affected.
This report also contains forward-looking statements that involve
 risks and uncertainties. Our actual results may differ from
those described in the forward-looking statements. This could
occur because of the risks described below and elsewhere in this
report.

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Our business is difficult to evaluate because we have a
limited operating history.

We began operating in January 1998. Our limited operating
history makes predicting future results difficult. Since our
inception, we have focused on developing our business and only
since September 1998 have we begun to contract with
customers for our iMAP offerings. Because of our limited
operating history and the emerging nature of our markets, our
historical financial information is of limited value in
projecting our future results. Therefore, it is difficult to
evaluate our business and prospects.

We expect to continue to incur losses and experience negative
cash flow.

We expect to have significant operating losses and to record
significant net cash outflow before financing in the near term.
Our business has not generated sufficient cash flow to fund our
operations without resorting to external sources of capital.
Starting up our company and building our network required
substantial capital and other expenditures. As a result, we
reported a net loss of $103.3 million for the year ended
1999 and EBITDA of negative $65.5 million for the same period.
Further developing our business and expanding our network will
require significant additional capital and other expenditures.

We may need additional capital to fund our operations and
finance our growth, and we may not be able to obtain it on terms
acceptable to us or at all.

We believe that the net proceeds from the sale of the common
stock, together with cash on hand and our existing and
anticipated debt and capital lease financing, will be sufficient
to fund our operations for at least the next twelve months.
However, if we expand more rapidly than currently anticipated, if
 our working capital needs exceed our current expectations or if
we make acquisitions, we will need to raise additional capital
from equity or debt sources. If we cannot obtain financing on
terms acceptable to us or at all, we may be forced to curtail our
 planned business expansion and may be unable to fund our ongoing
 operations.

Our historical revenues were derived from services that we do
not expect to be the focus of our business in the future.

We derive a portion of our revenue from professional services. We
 acquired two professional services businesses in the fall of
1998 and their services are substantively different than our iMAP
 offerings. As a result, historical financial information of the
acquired businesses does not reflect the results we expect from
our core business offering in the future.

Our success depends on the acceptance and increased use of
Internet-based business software solutions, and we cannot be sure
 that this will happen.

Our business model depends on the adoption of Internet-based
business software solutions by commercial users. Our business
could suffer dramatically if Internet-based solutions are not
accepted or not perceived to be effective. The market for
Internet services, private network management solutions and
widely distributed Internet-enabled packaged application software
 has only recently begun to develop and is now evolving rapidly.

The growth of Internet-based business software solutions could
also be limited by:



| |   |                                                               
| | - | --------------------------------------------------------------
| |  | concerns over transaction security and user privacy;          
|
| |  | inadequate network infrastructure for the entire Internet; and
|
| |  | inconsistent performance of the Internet.                     

We cannot be certain that this market will continue to grow or to
 grow at the rate we anticipate.

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The growth in demand for outsourced business software
applications by middle market companies is highly uncertain.

Growth in demand for and acceptance of outsourced business
software applications, including our iMAP offerings, by middle
market companies is highly uncertain. We believe that many of our
 potential customers are not fully aware of the benefits of
outsourced solutions. It is possible that these solutions may
never achieve market acceptance. If the market for our products
does not grow or grows more slowly than we currently anticipate,
our business, financial condition and operating results would be
materially adversely affected.

Our business strategy may not effectively address our market
and we may never realize a return on the resources we have
invested to execute our strategy.

We have made substantial investments to pursue our strategy.
These investments include:



| |   |                                                                  
| | - | -----------------------------------------------------------------
| |  | building a global network of data centers;                       
|
| |  | allying with particular software providers;                      
|
| |  | expanding our work force;                                        
|
| |  | investing to develop unique service offerings; and               
|
| |  | developing implementation resources around specific applications.

These investments may not be successful. More cost effective
strategies may be available to compete in this market. We may
have chosen to focus on the wrong application areas or to work
with the wrong partners. Potential customers may not value the
specific product features in which we have invested. There is no
assurance that our strategy will prove successful.

The markets we serve are highly competitive and many of our
competitors have much greater resources.

Our current and potential competitors include Application Service
 Providers and companies focused on the application hosting
business, such as Aristasoft, Breakaway Solutions, Corio,
FutureLink, Interliant, Interpath, NaviSite and Telecomputing;
Web hosting companies, such as Concentric, Digex and Exodus;
enterprise applications vendors, such as Oracle, Siebel and SAP;
business Internet Service Providers, such as MCI WorldCom, PSINet
 and Verio; telecommunications companies, such as AT&T, GTE
and Qwest (which has agreed to acquire our customer and
significant stockholder, U S WEST); and systems
integrators, such as Andersen Consulting, EDS, IBM and KPMG. Our
strategic partners and suppliers could also become competitors
either directly or through strategic relationships with some of
our other competitors. These relationships may take the form of
strategic investments or marketing or other contractual
arrangements.

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. We cannot
be sure that we will have the resources or expertise to compete
successfully in the future. Our competitors may be able to:



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | more quickly develop and expand their network infrastructures and
	 service offerings;
|
| |  | better adapt to new or emerging technologies and changing
	customer needs;            
|
| |  | take advantage of acquisitions and other opportunities more
	readily;                 
|
| |  | negotiate more favorable licensing agreements with software
	application vendors;     
|
| |  | devote greater resources to the marketing and sale of their
	products; and            
|
| |  | adopt more aggressive pricing policies.                                               

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Some of our competitors may also be able to provide customers
with additional benefits at lower overall costs. We cannot be
sure that we will be able to match cost reductions by our
competitors. In addition, we believe that there is likely to be
consolidation in our markets. Consolidation could increase price
competition and other competitive forces in ways that materially
adversely affect our business, results of operations and
financial condition. Finally, there are few substantial barriers
to entry, and we have no patented technology that would bar
competitors from our market.

We will require a significant amount of cash to service our
indebtedness.

Our ability to make payments on our indebtedness and to fund
planned capital expenditures, development and operating costs
will depend on our ability to generate cash in the future through
 sales of our services. We cannot assure you that our available
liquidity will be sufficient to service our indebtedness or to
fund our other cash needs. We may need to refinance all or a
portion of our indebtedness on or before maturity, but we may not
 be able to do so on commercially reasonable terms, or at all.
Without sufficient funds to service our indebtedness, we would
have serious liquidity constraints and would need to seek
additional financing from other sources, but we may not be able
to do so on commercially reasonable terms, or at all.

The significant amount of our indebtedness could adversely
affect our financial health.

The issuance of the subordinated convertible notes in October
1999 increased our indebtedness and, therefore, made us highly
leveraged. The following chart shows certain important as
adjusted credit statistics, assuming we had completed the
February 2000 offering and had applied the proceeds as intended.

|                            |  |                         |         | 
|--------------------------- |  | ----------------------- | ------- | 
|                            |  | As of December 31, 1999
|                            |  | As adjusted            
|                            |  |                        
|                            |  | (dollars in thousands) 
|                           
|                           
|                           
|                           
|Total long term liabilities |  | $                       | 170,788 | 
|                           
|                           
|                           
|                           
|Stockholders equity        |  |                         | 221,481 | 
|                           
|                           
|                           
|                           
|Debt to equity ratio        |  |                         | 0.77:1  | 

Our leverage could have important consequences to you. For
example, it could:



| |   |                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | make it more difficult for us to satisfy our obligations with
	respect to our indebtedness;                                                                                                                                                                    
|
| |  | increase our vulnerability to general adverse economic and
	industry conditions;                                                                                                                                                                               
|
| |  | limit our ability to fund future working capital, capital
	expenditures, acquisitions and other general corporate
	requirements;                                                                                                                               
|
| |  | require us to dedicate a substantial portion of our cash flow
	from operations to repaying indebtedness, thereby reducing the
	availability of our cash flow to fund working capital, capital
	expenditures, acquisitions and other general corporate purposes;
|
| |  | limit our flexibility in planning for, or reacting to, changes in
	 our business and industry; and                                                                                                                                                             
|
| |  | limit our ability to borrow additional funds.                                                                                                                                                                                                                  

Any additional borrowings would further increase the amount of
our leverage and the associated risks.

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Others may seize the market opportunity we have identified
because we may not effectively execute our strategy.

If we fail to execute our strategy in a timely or effective
manner, our competitors may be able to seize the marketing
opportunities we have identified. Our business strategy is
complex and requires that we successfully and simultaneously
complete many tasks. In order to be successful, we will need to:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | build and operate a highly reliable, complex global network;                            
|
| |  | negotiate effective partnerships and develop economically
	attractive service offerings;
|
| |  | attract and retain iMAP customers;                                                      
|
| |  | attract and retain highly skilled employees;                                            
|
| |  | integrate acquired companies into our operations;                                       
|
| |  | evolve our business to gain advantages in an increasingly
	competitive environment; and 
|
| |  | expand our international operations.                                                    

In addition, although most of our management team has worked
together for approximately one year, there can be no assurance
that we will be able to successfully execute all elements of our
strategy.

We plan to expand very rapidly, and managing our growth may be
 difficult.

We have rapidly expanded our operations since USi was founded in
January 1998. We expect our business to continue to grow
both geographically and in terms of the number of products and
services we offer. We cannot be sure that we will successfully
manage our growth. In order to successfully manage our growth we
must:



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | enlarge our network and infrastructure;                                     
|
| |  | improve our management, financial and information systems and
	controls; and
|
| |  | expand, train and manage our employee base effectively.                     

There will be additional demands on our customer service support
and sales, marketing and administrative resources as we increase
our service offerings and expand our target markets. The strains
imposed by these demands are magnified by the relatively early
stage of our operations. If we cannot manage our growth
effectively, our business, financial condition or results of
operations could be adversely affected.

Our growth could be limited if we are unable to attract and
retain qualified personnel.

We believe that our short- and long-term success depends largely
on our ability to attract and retain highly skilled technical,
managerial and marketing personnel. We particularly require
additional management personnel in the areas of application
integration and technical support. Individuals with information
technology skills are in short supply and competition for
application integration personnel is particularly intense. We may
 not be able to hire the necessary personnel to implement our
business strategy, or we may need to pay higher compensation for
employees than we currently expect. We cannot be sure that we
will succeed in attracting and retaining the personnel we need to
 continue to grow.

We depend on a limited number of key personnel who would be
difficult to replace.

Our success also depends in significant part on the continued
services of our key technical, sales and senior management
personnel. Losing one or more of our key employees could have a
material adverse effect on our business, results of operations
and financial condition. We have employment agreements with most
of our vice presidents and other key employees, including
Christopher R. McCleary, Stephen E. McManus,
Jeffery L. McKnight, Andrew A. Stern, Harold C.
Teubner, Jr. and Gary J. Rogers.

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We may not be able to deliver our iMAP services if third
parties do not provide us with key components of our
infrastructure.

We depend on other companies to supply key components of our
telecommunications infrastructure and systems and network
management solutions. Any failure to obtain needed products or
services in a timely fashion and at an acceptable cost could have
 a material adverse effect on our business, results of operations
 and financial condition. Although we lease redundant capacity
from multiple suppliers, a disruption in telecommunications
capacity could prevent us from maintaining our standard of
service. Some of the key components of our system and network are
 available only from sole or limited sources in the quantities
and quality we demand. For example, the hardware we use to
support our real-time mirroring and disaster recovery functions
is supplied only by EMC Corporation. We buy these components from
 time to time, do not carry significant inventories of them and
have no guaranteed supply arrangements with our vendors.

Our ability to provide our iMAP services depends on strategic
relationships with software vendors that we may not be able to
maintain.

Our iMAP offerings are central to our business strategy. We
obtain software products under license agreements with
BroadVision, Ariba, Siebel, PeopleSoft, Lawson, Microsoft, Niku
and Sagent and package them as part of our iMAP solutions. The
agreements are for terms ranging from one to three years. All the
 agreements may be terminated upon a breach of the agreement,
subject to cure periods. The agreement with PeopleSoft may be
terminated by either party for convenience upon 90 days
notice after an annual review, scheduled to first occur on or
about June 22, 2000. Under an earlier version of our
contract, PeopleSoft on one occasion notified us of its intention
 to terminate the agreement. After significant discussion, the
issues in dispute were resolved, our agreement with PeopleSoft
was renegotiated and PeopleSoft retracted its notification of its
 intent to terminate the agreement. However, we cannot be sure
that one or more of our agreements with software vendors will not
 be terminated in the future. If these agreements were to be
terminated or not renewed or we otherwise could not continue to
use this software, we might have to discontinue products or
services or delay or reduce their introduction unless we could
find, license and package equivalent technology.

All but one of our agreements with software vendors are
non-exclusive. Our agreement with SiebelNet, Inc., a wholly
owned subsidiary of Siebel Systems, Inc., gives us
exclusivity as the Application Service Provider of Siebel
enterprise relationship management applications for direct
customers of SiebelNet headquartered in North America. Our
vendors may choose to compete with us directly or to enter into
strategic relationships with our competitors. These relationships
 may take the form of strategic investments or marketing or other
 contractual arrangements. Our competitors may also license and
utilize the same technology in competition with us. We cannot be
sure that the vendors of technology used in our products will
continue to support this technology in its current form. Nor can
we be sure that we will be able to adapt our own products to
changes in this technology. In addition, we cannot be sure that
the financial or other difficulties of our vendors will not have
a material adverse effect upon the technologies incorporated in
our products, or that, if these technologies become unavailable,
we will be able to find suitable alternatives.

Technology may change faster than we can update our network
and technology.

The markets we serve are characterized by rapidly changing
technology, evolving industry standards, emerging competition and
 the frequent introduction of new services, software and other
products. Our success depends partly on our ability to enhance
existing or develop new products, software and services that meet
 changing customer needs in a timely and cost-effective way. We
cannot be sure, however, that we will do some or all of these
things. For example, if software application architecture changes
 in significant ways, the software for which we have licenses
could become obsolete, we may be forced to update our hardware
and network configurations or we may be forced to replace our
mirroring technology. This may require substantial time and
expense, and even then we cannot be sure that we will succeed in
adapting our businesses to these and other technological
developments.

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We could be harmed if our systems are not compatible with
other products and services.

We believe that our ability to compete successfully also depends
on the continued compatibility of our services with products,
services and architectures offered by various vendors. Our
failure to conform to a prevailing standard, or the failure of a
common standard to emerge, could have a material adverse effect
on our business, results of operations and financial condition.
Although we will work with vendors to test new products, we
cannot be sure that their products will be compatible with ours
or that they will adequately address changing customer needs.
Although we currently plan to support emerging standards, we
cannot be sure what new industry standards will develop. We also
cannot be sure that we will be able to conform to these new
standards quickly enough to stay competitive. In addition, we
cannot be sure that products, services or technologies developed
by others will not make ours noncompetitive or obsolete.

The loss of a key customer could decrease our revenues.

During the year ended December 31, 1999, sales to SiebelNet
accounted for approximately 16% of our revenues. We expect sales
to SiebelNet to continue to constitute a significant portion of
our revenues in the near term. During that period, if our sales
to SiebelNet decrease, our business will suffer.

If we cannot obtain additional application software we will be
 unable to expand or enhance our iMAP service offerings.

Our business strategy also depends on obtaining additional
application software. We cannot be sure, however, that we will be
 able to obtain the new or enhanced applications we may need to
keep our iMAP solutions competitive. If we cannot obtain these
applications and as a result must discontinue, delay or reduce
the availability of our iMAP solutions or other products or
services, our business, results of operations and financial
condition may be materially adversely affected.

Developing and expanding our operations will depend, among
other things, on our managements ability to successfully
integrate newly acquired operations.

In October 1999, we acquired Conklin &
Conklin, Inc. We cannot be sure that we will be able to
continue to successfully integrate the business of Conklin into
our own, or that the Conklin business will perform as expected.
In addition, we cannot be sure that we will be able to
successfully integrate any business acquired in the future into
our own. Our failure to successfully integrate an acquired
company or its subsequent underperformance could have a material
adverse effect on our business, results of operations and
financial condition.

We may undertake additional acquisitions which pose risks to
our business.

From time to time, we may undertake additional acquisitions. If
we do, our risks may increase because:



| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | we may pay more for the acquired company than the value we
	realize from the acquisition;                                                    
|
| |  | we may not fully understand the business we acquire;                                                                                         
|
| |  | we may be entering markets in which we have little or no direct
	prior experience;                                                           
|
| |  | our ongoing business may be disrupted and resources and
	management time diverted; and                                                       
|
| |  | our accounting for acquisitions could require us to amortize
	substantial goodwill, adversely affecting our reported results of
	 operations.

In addition, once we have made an acquisition we will face
additional risks:



| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | it may be difficult to assimilate acquired operations and
	personnel;                         
|
| |  | we may not be able to retain the management and other key
	personnel of the acquired business;
|
| |  | we may not be able to maintain uniform standards, controls,
	procedures and policies; and     

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| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | changing management may impair relationships with an acquired
	businesss employees or customers.

We may make investments in entities that we do not control.

In the future, we may make investments in joint ventures or other
 entities over which we do not exercise control. We may make
these investments in connection with entering into strategic
partnerships with software vendors, systems integrators or
Internet Service Providers or as strategic investments. Our
inability to control the entity in which we may invest may have
consequences on our ability to receive distributions from such
entity or to implement our business plan. Debt agreements, if
entered into by a non-control entity, may restrict or prohibit
such entity from paying distributions to us. Applicable state or
local law may also limit the amount that a non-control entity is
permitted to pay a distribution on its equity interest, and we
may not be able to influence the payment of dividends. If any of
the other investors in a non-control entity fail to observe their
 commitments, that entity may not be able to operate according to
 its business plans or we may be required to increase our level
of commitment to give effect to the plan. In addition, our
ability to implement a business plan for a non-control entity may
 be limited or non-existent.

Because we have international operations, we face additional
risks related to foreign political and economic conditions.

We have established EDCs in Europe and Japan. We intend to expand
 further into international markets. We cannot be sure that we
will be able to obtain the necessary telecommunications
infrastructure in a cost-effective manner or compete effectively
in international markets. In addition, there are risks inherent
in conducting business internationally. These include:



| |   |                                                        
| | - | -------------------------------------------------------
| |  | unexpected changes in regulatory requirements;         
|
| |  | export restrictions;                                   
|
| |  | tariffs and other trade barriers;                      
|
| |  | challenges in staffing and managing foreign operations;
|
| |  | differing technology standards;                        
|
| |  | employment laws and practices in foreign countries;    
|
| |  | political instability;                                 
|
| |  | fluctuations in currency exchange rates;               
|
| |  | imposition of currency exchange controls; and          
|
| |  | potentially adverse tax consequences.                  

Any of these could adversely affect our international operations.
 We cannot be sure that one or more of these factors will not
have a material adverse effect on our current or future
international operations and, consequently, on our business,
results of operations and financial condition.

Government regulation and legal uncertainties could add
additional costs to doing business on the Internet and could
limit our clients use of the Internet.

Laws and regulations directly applicable to communications or
commerce over the Internet are becoming more prevalent. The
adoption or modification of laws or regulations relating to the
Internet could adversely affect our business. In recent sessions,
 the United States Congress has enacted Internet laws regarding
childrens privacy, copyrights, taxation and the
transmission of sexually explicit material and other similar
proposals are continuously being considered. The European Union
recently enacted its own privacy regulations. The law of the
Internet, however, remains largely unsettled, even in areas where
 there has been some legislative action. It may take years to
determine whether and how existing laws such as

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The outcome of proposals put to a vote of stockholders will be
 determined by our existing principal stockholders, executive
officers and directors.

Our executive officers, directors, existing 5% or greater
stockholders and their affiliates, in the aggregate, will own
shares representing approximately 58.6% of our outstanding voting
 capital stock after the completion of the February 2000
secondary offering. As a result, these persons, acting together,
are able to control all matters submitted to our stockholders for
 approval and to control our management and affairs. For example,
 these people, acting together, control the election and removal
of directors and any merger, consolidation or sale of all or
substantially all of our assets.

The trading price of our common stock could be subject to
significant fluctuations.

The trading price of our common stock has been volatile. Factors
such as announcements of fluctuations in our or our
competitors operating results and market conditions for
Internet related and other technology stocks in general could
have a significant impact on the future trading price of our
common stock. In particular, the trading price of the common
stock of many Internet related and other technology companies has
 experienced extreme price and volume fluctuations, which have at
 times been unrelated to the operating performance of such
companies whose stocks were affected. In addition, the trading
price of our common stock could be subject to significant
fluctuations in response to variations in our prospects and
operating results, which may in turn be affected by changes in
interest rates and other factors. There can be no assurance that
these factors will not have an adverse effect on the trading
price of our common stock.

The market price of our common stock could be affected by the
substantial number of shares that are eligible for future sale.

As of March 14, 2000, we had 96,345,190 shares of
common stock issued and outstanding, excluding
1,257,709 shares issuable upon the exercise of warrants,
25,403,652 shares issuable upon the exercise of options
granted under our 1998 Stock Option Plan and
7,545,272 shares issuable upon conversion of our convertible
 notes. We cannot predict the effect, if any, that future sales
of shares of common stock, including common stock issuable upon
conversion of the notes, or the availability of shares of common
stock for future sale, will have on the market price of common
stock prevailing from time to time.

Intellectual property infringement claims against us, even
without merit, could cost a significant amount of money to defend
 and divert managements attention away from our business.

As the number of software products in our target markets
increases and the functionality of these products further
overlap, software industry participants may become increasingly
subject to infringement claims. Someone may even claim that our
technology infringes their proprietary rights. Any infringement
claims, even if without merit, can be time consuming and
expensive to defend. They may divert managements attention
and resources and could cause service implementation delays. They
 also could require us to enter into costly royalty or licensing
agreements. If successful, a claim of product infringement
against us and our inability to license the infringed or similar
technology could adversely affect our business.

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We could be required to use our financial resources to
repurchase shares of common stock from U S WEST.

We could be required to repurchase for cash some of the shares of
 our capital stock owned by U S WEST. This would
require us to divert our resources at a time of rapid growth. If
we engage in activities in which U S WEST would be
prohibited from engaging and we were considered an affiliate of
U S WEST under regulations of the Federal
Communications Commission, U S WEST could force us to
repurchase the number of shares required to make us no longer an
affiliate. We are not presently considered an affiliate of
U S WEST under these regulations. See Certain
Relationships and Related Transactions  Purchases of
Series A Preferred Stock. Although we believe the
possibility of this occurring is remote, repurchasing the shares
held by U S WEST could be costly.

Forward-looking statements contained in this prospectus are
subject to risks and uncertainties.

This report includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
These statements relate to, among other things, analyses and
other information that are based on forecasts of future results
and estimates of amounts not yet determinable. These statements
also relate to our future prospects, developments and business
strategies.

These forward-looking statements are identified by their use of
terms and phrases such as anticipate,
believe, could, estimate,
expect, intend, may,
plan, predict, project,
will or the negative of those or other variations, or
 comparable expressions, including references to assumptions.
These statements are contained in sections entitled
Prospectus Summary, Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, Business
and other sections of this report.

The forward-looking statements in this report, including
statements concerning projections of our future results,
operating profits and earnings, are based on current expectations
 and are subject to risks and uncertainties that could cause
actual results to differ materially from those expressed or
implied by those statements. The risks and uncertainties include
but are not limited to our continued ability to:



| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| |  | build and operate a highly reliable, complex global network;                                                 
|
| |  | establish and maintain relationships with key software vendors
	and develop economically attractive products;
|
| |  | attract and retain iMAP customers;                                                                           
|
| |  | attract and retain highly skilled employees;                                                                 
|
| |  | effectively manage our rapid growth; and                                                                     
|
| |  | evolve our business to gain advantages in an increasingly
	competitive environment.                          

Our risks are more specifically described in Risk
Factors. If one or more of these risks or uncertainties
materializes, or if underlying assumptions prove incorrect, our
actual results may vary materially from those expected, estimated
 or projected. Given these uncertainties, you should not place
undue reliance on forward-looking statements.

We undertake no obligation to update forward-looking statements
or risk factors other than as required by applicable law, whether
 as a result of new information, future events or otherwise.




Item 7A.  Quantitative and Qualitative
Disclosures About Market Risk

We are exposed to market risk from changes in interest rates. In
addition, changes in the quoted market price of our common stock
will effect the fair value of convertible subordinated notes.

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Interest Rate Risk

The fair value of our cash and cash equivalents would not be
significantly impacted by either a 10% increase or a 10% decrease
 in interest rates due to the short-term nature of our portfolio.

Our earnings and financial position are affected by changes in
interest rates as a result of our purchase of various fixed rate
municipal bonds included in available-for-sale investments. If
market interest rates for municipal bonds increase by 10%, the
fair value of our available-for-sale investments will decrease,
and unrealized gains/losses recognized as other comprehensive
income will decrease by an estimated $0.7 million.
Conversely, if market interest rates for municipal bonds decrease
 by 10%, the fair value of our available-for-sale investments
will increase, and unrealized gains/ losses recognized as other
comprehensive income will increase by an estimated
$0.8 million. These amounts are determined by discounting
future cash flows using hypothetical interest rates.

We have financed capital expansion through various long-term debt
 instruments bearing interest at both fixed and variable interest
 rates. At December 31, 1999, the fair value of this debt is
 not significantly impacted by either a 10% increase or a 10%
decrease in interest rates.

Other Market Risk

Our convertible subordinated notes bear interest at 7% through
November 1, 2004. The market value of these notes is
affected by fluctuations in the quoted market value of our common
 stock. If the quoted market value of our common stock increases
by 10%, the estimated fair value of the notes will increase by an
 estimated $35 million. Conversely, if the quoted market
value of our common stock decreases by 10%, the estimated fair
value of the notes will decrease by an estimated
$35 million.

These analyses do not consider the effects of the reduced level
of overall economic activity that could exist in such an
environment. Further, in the event of a change of such magnitude,
 we would likely take actions to further mitigate our exposure to
 the change. However, due to the uncertainty of the specific
actions that would be taken and their possible effects, the
sensitivity analysis assumes no changes in our financial
structure.

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##### Table of Contents






Item 8.  Financial Statements and Supplemental
Data

INDEX TO FINANCIAL STATEMENTS

|                                                                            |                                                                                                                                                                     |  |  |    | 
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Consolidated Financial Statements of USinternetworking, Inc.                |                                                                                                                                                                     |  |  |   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Report of Independent Auditors                                                                                                                                      |  |  | 40 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Consolidated Balance Sheets as of December 31, 1998 and
	1999.                                                                                                      |  |  | 41 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Consolidated Statements of Operations for the period
	January 14, 1998 (date of inception) through
	December 31, 1998 and for the year ended December 31,
	1999.    |  |  | 42 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Consolidated Statement of Stockholders Equity (Deficit) for
	 the period January 14, 1998 (date of inception) through
	December 31, 1998.                          |  |  | 43 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Consolidated Statement of Stockholders Equity (Deficit) for
	 the year ended December 31, 1999.                                                                    |  |  | 44 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Consolidated Statements of Cash Flows for the period
	January 14, 1998 (date of inception) through
	December 31, 1998 and for the year ended December 31,
	1999.    |  |  | 45 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Notes to Consolidated Financial Statements                                                                                                                          |  |  | 46 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Consolidated Financial Statements of I.I.T. Holding, Inc. and
	Subsidiaries |                                                                                                                                                                     |  |  |   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Report of Independent Auditors                                                                                                                                      |  |  | 65 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Report of Independent Auditors                                                                                                                                      |  |  | 66 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Consolidated Balance Sheets as of December 31, 1997, 1996
	and September 7, 1998.                                                                                   |  |  | 67 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Consolidated Statements of Operations for the years ended
	December 31, 1997 and 1996 for the period from
	January 1, 1998 through September 7, 1998.               |  |  | 68 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Consolidated Statements of Stockholders Equity for the
	years ended December 31, 1997 and 1996 and for the period
	from January 1, 1998 through September 7, 1998. |  |  | 69 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Consolidated Statements of Cash Flows for the years ended
	December 31, 1997 and 1996 and for the period from
	January  1, 1998 through September 7, 1998.          |  |  | 70 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Notes to Consolidated Financial Statements                                                                                                                          |  |  | 71 | 

39



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##### Table of Contents



Report of Independent Auditors

The Board of Directors and Stockholders



We have audited the accompanying consolidated balance sheets of
USinternetworking, Inc. (the Company) as of
December 31, 1998 and 1999, and the related consolidated
statements of operations, stockholders equity
(deficit) and cash flows for the period from
January 14, 1998 (date of inception) through
December 31, 1998 and for the year ended December 31,
1999. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
 about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to
 above present fairly, in all material respects, the consolidated
 financial position of USinternetworking, Inc. as of
December 31, 1998 and 1999, and the consolidated results of
its operations and its cash flows for the period from
January 14, 1998 (date of inception) through
December 31, 1998 and for the year ended December 31, 1999,
in conformity with accounting principles generally accepted in
the United States.



| |                      
| | ---------------------
| | /s/ Ernst & Young LLP









40



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##### Table of Contents



USinternetworking, Inc.

Consolidated Balance Sheets

|                                                                                                                                                          |                                                                                                                                                       |                           |                                      |                                                      |            |            |             |              |             |             |             | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------------------------------------ | ---------------------------------------------------- | ---------- | ---------- | ----------- | ------------ | ----------- | ----------- | ----------- | 
|                                                                                                                                                          |                                                                                                                                                       | December 31,              |                                      | December 31,                                        
|                                                                                                                                                          |                                                                                                                                                       | 1998                      |                                      | 1999                                                
|                                                                                                                                                          |                                                                                                                                                       |                           |                                      |                                                     
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|ASSETS                                                                                                                                                   
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Current assets:                                                                                                                                           |                                                                                                                                                       |                           |                                      |                                                      |            |            |             |             
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Cash and cash equivalents                                                                                                                             |                           | $                                    | 43,802,465                                           |            |            | $           | 112,302,621  |            
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Available-for-sale securities                                                                                                                         |                           |                                      |                                                     |            |            |             | 31,706,991   |            
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Accounts receivable, less allowance of $142,000 and $543,447 in
	1998 and 1999, respectively                                                          |                           |                                      | 2,882,119                                            |            |            |             | 16,557,356   |            
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Due from officer                                                                                                                                      |                           |                                      |                                                     |            |            |             | 1,900,000    |            
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Prepaid expenses and other current assets                                                                                                             |                           |                                      | 3,017,959                                            |            |            |             | 6,904,595    |            
|                                                                                                                                                          |                                                                                                                                                       |                           |                                      |                                                      |            |            |             |             
|                                                                                                                                                          |                                                                                                                                                       | Total current assets      |                                      |                                                      | 49,702,543 |            |             |              | 169,371,563 |            
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Deferred iMAP costs, net of accumulated amortization of
	$2,415,848 in 1999                                                                               |                                                                                                                                                       |                           |                                     |                                                      |            |            | 8,899,837   |             
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Software licenses, net of accumulated amortization of $3,728,103
	in 1999                                                                                 |                                                                                                                                                       |                           | 9,596,760                            |                                                      |            |            | 10,806,710  |             
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Property and equipment, net of accumulated depreciation of
	$1,567,885 and $14,319,115 in 1998 and 1999, respectively                                     |                                                                                                                                                       |                           | 21,640,145                           |                                                      |            |            | 101,166,670 |             
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Goodwill, net of accumulated amortization of $1,611,763 and
	$7,566,763 in 1998 and 1999, respectively                                                    |                                                                                                                                                       |                           | 25,137,296                           |                                                      |            |            | 29,646,621  |             
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Deferred financing costs and other assets, net of accumulated
	amortization of $128,029 in 1999                                                           |                                                                                                                                                       |                           | 439,734                              |                                                      |            |            | 5,562,771   |             
|                                                                                                                                                          |                                                                                                                                                       |                           |                                      |                                                      |            |            |             |             
|                                                                                                                                                          |                                                                                                                                                       |                           |                                      | Total assets                                         |            | $          | 106,516,478 |              |             | $           | 325,454,172 | 
|                                                                                                                                                          |                                                                                                                                                       |                           |                                      |                                                      |            |            |             |             
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                           
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Current liabilities:                                                                                                                                      |                                                                                                                                                       |                           |                                      |                                                      |            |            |             |             
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Accounts payable                                                                                                                                      |                           | $                                    | 6,571,767                                            |            |            | $           | 13,145,394   |            
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Accrued compensation                                                                                                                                  |                           |                                      | 4,870,690                                            |            |            |             | 8,187,517    |            
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Other accrued expenses                                                                                                                                |                           |                                      | 1,569,570                                            |            |            |             | 3,385,262    |            
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Deferred revenue                                                                                                                                      |                           |                                      | 51,247                                               |            |            |             | 9,066,452    |            
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Due to former shareholders of acquired businesses                                                                                                     |                           |                                      | 10,826,735                                           |            |            |             |             |            
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Current portion of capital lease obligations                                                                                                          |                           |                                      | 1,503,947                                            |            |            |             | 5,834,076    |            
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Current portion of long-term debt                                                                                                                     |                           |                                      | 1,757,588                                            |            |            |             | 12,586,553   |            
|                                                                                                                                                          |                                                                                                                                                       |                           |                                      |                                                      |            |            |             |             
|                                                                                                                                                          |                                                                                                                                                       | Total current liabilities |                                      |                                                      | 27,151,544 |            |             |              | 52,205,254  |            
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Short-term obligations expected to be refinanced                                                                                                          |                                                                                                                                                       |                           | 5,282,450                            |                                                      |            |            | 2,116,753   |             
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Capital lease obligations, less current portion                                                                                                           |                                                                                                                                                       |                           | 3,427,254                            |                                                      |            |            | 11,385,029  |             
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Long-term debt, less current portion                                                                                                                      |                                                                                                                                                       |                           | 5,231,794                            |                                                      |            |            | 32,286,111  |             
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Dividends payable                                                                                                                                         |                                                                                                                                                       |                           | 1,503,004                            |                                                      |            |            |            |             
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Convertible subordinated notes                                                                                                                            |                                                                                                                                                       |                           |                                     |                                                      |            |            | 125,000,000 |             
|                                                                                                                                                          |                                                                                                                                                       |                           |                                      |                                                      |            |            |             |             
|                                                                                                                                                          |                                                                                                                                                       |                           | Total liabilities                    |                                                      |            | 42,596,046 |             |              |             | 222,993,147 |            
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Commitments and contingent liabilities                                                                                                                    |                                                                                                                                                       |                           |                                     |                                                      |            |            |            |             
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Series B Convertible Redeemable Preferred Stock, $.01 par
	value, 115,000 shares authorized, 59,279 shares issued and
	outstanding in 1998, none in 1999. |                                                                                                                                                       |                           | 62,242,500                           |                                                      |            |            |            |             
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Common stock subject to repurchase, 3,023,438 shares issued and
	outstanding in 1998, none in 1999.                                                       |                                                                                                                                                       |                           | 4,145,000                            |                                                      |            |            |            |             
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Stockholders equity (deficit):                                                                                                                           |                                                                                                                                                       |                           |                                      |                                                      |            |            |             |             
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Series A Convertible Preferred Stock, $.01 par value,
	110,000 shares authorized, 55,000 shares issued and outstanding
	in 1998, none in 1999.        |                           |                                      | 550                                                  |            |            |             |             |            
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Common stock, $.001 par value, 450,000,000 shares
	authorized, 1,406,250 and 92,065,911 shares issued and
	outstanding in 1998 and 1999, respectively |                           |                                      | 1,406                                                |            |            |             | 92,066       |            
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Additional paid-in capital                                                                                                                            |                           |                                      | 29,984,288                                           |            |            |             | 241,861,378  |            
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Note receivable from officer for purchase of common stock                                                                                             |                           |                                      |                                                     |            |            |             | (2,250,000   | )          
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Unearned compensation                                                                                                                                 |                           |                                      |                                                     |            |            |             | (1,782,433   | )          
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Accumulated deficit                                                                                                                                   |                           |                                      | (32,453,312                                          | )          |            |             | (135,771,335 | )          
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Accumulated other comprehensive income                                                                                                                |                           |                                      |                                                     |            |            |             | 311,349      |            
|                                                                                                                                                          |                                                                                                                                                       |                           |                                      |                                                      |            |            |             |             
|                                                                                                                                                          |                                                                                                                                                       |                           | Total stockholders equity (deficit) |                                                      |            | (2,467,068 | )           |              |             | 102,461,025 |            
|                                                                                                                                                          |                                                                                                                                                       |                           |                                      |                                                      |            |            |             |             
|                                                                                                                                                          |                                                                                                                                                       |                           |                                      | Total liabilities and stockholders equity (deficit) |            | $          | 106,516,478 |              |             | $           | 325,454,172 | 
|                                                                                                                                                          |                                                                                                                                                       |                           |                                      |                                                      |            |            |             |             

See accompanying notes.


41



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##### Table of Contents



USinternetworking, Inc.

Consolidated Statements of Operations

|                                                                             |                                     |                                              |             |              |             |   |              |            |              |  
|---------------------------------------------------------------------------- | ----------------------------------- | -------------------------------------------- | ----------- | ------------ | ----------- | - | ------------ | ---------- | ------------ | -
|                                                                             |                                     | For the period from                          |             |             
|                                                                             |                                     | January 14, 1998                             |             |             
|                                                                             |                                     | (date of inception)                          |             |             
|                                                                             |                                     | through                                      |             | Year ended  
|                                                                             |                                     | December 31,                                 |             | December 31,
|                                                                             |                                     | 1998                                         |             | 1999        
|                                                                             |                                     |                                              |             |             
|Revenue                                                                      |                                     | $                                            | 4,122,449   |              |             | $ | 35,512,760   |           
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Costs and expenses:                                                          |                                     |                                              |             |              |             |   |              |           
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Direct cost of services             |                                              |             | 3,425,111    |             |   |              | 23,570,279 |             
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Network and infrastructure costs    |                                              |             | 2,185,893    |             |   |              | 16,238,568 |             
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | General and administrative          |                                              |             | 19,426,575   |             |   |              | 22,051,990 |             
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Sales and marketing                 |                                              |             | 5,123,334    |             |   |              | 36,595,021 |             
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Product research and development    |                                              |             | 690,388      |             |   |              | 5,351,678  |             
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Non-cash stock compensation expense |                                              |             | 231,135      |             |   |              | 10,350,729 |             
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Depreciation and amortization       |                                              |             | 3,179,648    |             |   |              | 22,480,006 |             
|                                                                             |                                     |                                              |             |              |             |   |              |           
|                                                                             |                                     | Total costs and expenses                     |             |              | 34,262,084  |   |              |            | 136,638,271  |  
|                                                                             |                                     |                                              |             |              |             |   |              |           
|Operating loss                                                               |                                     |                                              | (30,139,635 | )            |             |   | (101,125,511 | )         
|                                                                             |                                     |                                              |             |              |             |   |              |           
|Other income (expense):                                                      |                                     |                                              |             |              |             |   |              |           
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Interest income                     |                                              |             | 367,411      |             |   |              | 4,114,732  |             
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Interest expense                    |                                              |             | (2,681,088   | )           |   |              | (6,307,244 | )           
|                                                                             |                                     |                                              |             |              |             |   |              |           
|                                                                             |                                     |                                              | (2,313,677  | )            |             |   | (2,192,512   | )         
|                                                                             |                                     |                                              |             |              |             |   |              |           
|                                                                             |                                     | Net loss                                     |             |              | (32,453,312 | ) |              |            | (103,318,023 | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Dividends accrued on Series A and Series B Convertible
	Preferred Stock      |                                     |                                              | (1,503,004  | )            |             |   | (2,328,150   | )         
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Accretion of common stock subject to repurchase to fair value                |                                     |                                              | (3,903,865  | )            |             |   | (23,938,069  | )         
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Accretion of Series B Convertible Redeemable Preferred Stock
	 to fair value |                                     |                                              | (236,991    | )            |             |   | (99,252      | )         
|                                                                             |                                     |                                              |             |              |             |   |              |           
|                                                                             |                                     | Net loss attributable to common stockholders |             | $            | (38,097,172 | ) |              | $          | (129,683,494 | )
|                                                                             |                                     |                                              |             |              |             |   |              |           
|Basic and diluted loss per common share attributable to common
	stockholders |                                     | $                                            | (27.09      | )            |             | $ | (1.95        | )         
|                                                                             |                                     |                                              |             |              |             |   |              |           

See accompanying notes.

42



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##### Table of Contents



USinternetworking, Inc.

Consolidated Statement of Stockholders Equity (Deficit)

For the Period From January 14, 1998 (date of inception)
through December 31, 1998

|                               |                                                                                                                                                                              |                 |        |              |  |            |     |            |  |          |           |              |  |              |       |         |  |   |            |            |   |   |   |   |  |   |   |   |  |   |             |             |  
|------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------- | ------ | ------------ |  | ---------- | --- | ---------- |  | -------- | --------- | ------------ |  | ------------ | ----- | ------- |  | - | ---------- | ---------- | - | - | - | - |  | - | - | - |  | - | ----------- | ----------- | -
|                               |                                                                                                                                                                              |                 |        |              |  |            |     |            |  |          |           |              |  |             
|                               |                                                                                                                                                                              | Series A        |        |              |  |            |     |            |  |          |           |              |  |             
|                               |                                                                                                                                                                              | Convertible     |        |              |  |            |     |            |  |          |           |             
|                               |                                                                                                                                                                              | Preferred Stock |        | Common Stock |  | Additional |     | Note       |  |          |           |             
|                               |                                                                                                                                                                              |                 |        |              |  | Paid-in    |     | Receivable |  | Unearned |           | Accumulated 
|                               |                                                                                                                                                                              | Shares          |        | Par Value    |  | Shares     |     | Par Value  |  | Capital  |           | From Officer |  | Compensation |       | Deficit
|                               |                                                                                                                                                                              |                 |        |              |  |            |     |            |  |          |           |              |  |              |       |        
|Balance at January  14, 1998.  |                                                                                                                                                                              |                 |       |              |  | $          |    |            |  |          |          |              |  | $            |      |         |  | $ |           |            |   | $ |  |   |  | $ |  |   |  | $ |            |            
|                              
|                              
|                              
|                              
|                               | Issuance of common stock to founder upon inception                                                                                                                           |                 |        |             |  |            |     |           |  |          |           | 1,406,250    |  |              |       | 1,406   |  |   |            | 3,594      |   |   |   |  |  |   |   |  |  |   |             |            |  
|                              
|                              
|                              
|                              
|                               | Issuance of Series  A Convertible Preferred Stock on
	May 28, 1998 for cash                                                                                                  |                 |        | 38,333       |  |            |     | 383        |  |          |           |             |  |              |       |        |  |   |            | 22,999,617 |   |   |   |  |  |   |   |  |  |   |             |            |  
|                              
|                              
|                              
|                              
|                               | Issuance of Series  A Convertible Preferred Stock on
	May 28, 1998 in exchange for $1,000,000 note                                                                           |                 |        | 1,667        |  |            |     | 17         |  |          |           |             |  |              |       |        |  |   |            | 999,983    |   |   |   |  |  |   |   |  |  |   |             |            |  
|                              
|                              
|                              
|                              
|                               | Issuance of Series  A Convertible Preferred Stock on
	June 22, 1998 for cash                                                                                                 |                 |        | 6,167        |  |            |     | 62         |  |          |           |             |  |              |       |        |  |   |            | 3,699,938  |   |   |   |  |  |   |   |  |  |   |             |            |  
|                              
|                              
|                              
|                              
|                               | Issuance of Series  A Convertible Preferred Stock on
	July 2, 1998 for cash                                                                                                  |                 |        | 5,833        |  |            |     | 58         |  |          |           |             |  |              |       |        |  |   |            | 3,499,942  |   |   |   |  |  |   |   |  |  |   |             |            |  
|                              
|                              
|                              
|                              
|                               | Issuance of Series  A Convertible Preferred Stock on
	July 30, 1998 for cash                                                                                                 |                 |        | 3,000        |  |            |     | 30         |  |          |           |             |  |              |       |        |  |   |            | 1,799,970  |   |   |   |  |  |   |   |  |  |   |             |            |  
|                              
|                              
|                              
|                              
|                               | Transaction costs associated with the issuance of Series A
	Convertible Preferred Stock                                                                                      |                 |        |             |  |            |     |           |  |          |           |             |  |              |       |        |  |   |            | (205,225   | ) |   |   |  |  |   |   |  |  |   |             |            |  
|                              
|                              
|                              
|                              
|                               | Issuance of warrants to purchase 112,500 shares of common stock
	associated with the acquisition of I.I.T on September 8,
	1998.                                             |                 |        |             |  |            |     |           |  |          |           |             |  |              |       |        |  |   |            | 40,000     |   |   |   |  |  |   |   |  |  |   |             |            |  
|                              
|                              
|                              
|                              
|                               | Issuance of warrants to purchase 2,192,512 shares of common stock
	 in connection with $9,095,000 of debt on September 7, 1998.                                              |                 |        |             |  |            |     |           |  |          |           |             |  |              |       |        |  |   |            | 1,948,930  |   |   |   |  |  |   |   |  |  |   |             |            |  
|                              
|                              
|                              
|                              
|                               | Issuance of warrants to purchase 167,409 shares of common stock
	in connection with a $5,000,000 financing commitment on
	September 22, 1998.                                |                 |        |             |  |            |     |           |  |          |           |             |  |              |       |        |  |   |            | 148,810    |   |   |   |  |  |   |   |  |  |   |             |            |  
|                              
|                              
|                              
|                              
|                               | Issuance of warrants to purchase 971 shares of Series B
	Convertible Redeemable Preferred Stock in connection with a
	$10,000,000 financing commitment on September 30, 1998 |                 |        |             |  |            |     |           |  |          |           |             |  |              |       |        |  |   |            | 606,875    |   |   |   |  |  |   |   |  |  |   |             |            |  
|                              
|                              
|                              
|                              
|                               | Issuance of warrants to purchase 140,625 shares of common stock
	associated with the acquisition of ACR on October 2, 1998.                                                  |                 |        |             |  |            |     |           |  |          |           |             |  |              |       |        |  |   |            | 50,000     |   |   |   |  |  |   |   |  |  |   |             |            |  
|                              
|                              
|                              
|                              
|                               | Issuance of warrants to purchase 40,179 shares of common stock in
	 connection with a $2,000,000 financing commitment on
	December  18, 1998.                                |                 |        |             |  |            |     |           |  |          |           |             |  |              |       |        |  |   |            | 35,714     |   |   |   |  |  |   |   |  |  |   |             |            |  
|                              
|                              
|                              
|                              
|                               | Dividends accrued on Series A Convertible Preferred Stock                                                                                                                    |                 |        |             |  |            |     |           |  |          |           |             |  |              |       |        |  |   |            | (1,503,004 | ) |   |   |  |  |   |   |  |  |   |             |            |  
|                              
|                              
|                              
|                              
|                               | Accretion of common stock subject to repurchase to fair value                                                                                                                |                 |        |             |  |            |     |           |  |          |           |             |  |              |       |        |  |   |            | (3,903,865 | ) |   |   |  |  |   |   |  |  |   |             |            |  
|                              
|                              
|                              
|                              
|                               | Accretion of Series B Convertible Redeemable Preferred Stock to
	fair value                                                                                                  |                 |        |             |  |            |     |           |  |          |           |             |  |              |       |        |  |   |            | (236,991   | ) |   |   |  |  |   |   |  |  |   |             |            |  
|                              
|                              
|                              
|                              
|                               | Net loss for the period January 14, 1998 through
	December  31, 1998.                                                                                                        |                 |        |             |  |            |     |           |  |          |           |             |  |              |       |        |  |   |            |           |   |   |   |  |  |   |   |  |  |   |             | (32,453,312 | )
|                               |                                                                                                                                                                              |                 |        |              |  |            |     |            |  |          |           |              |  |              |       |         |  |   |            |            |   |   |   |   |  |   |   |   |  |   |             |            
|Balance at December  31, 1998. |                                                                                                                                                                              |                 | 55,000 |              |  | $          | 550 |            |  |          | 1,406,250 |              |  | $            | 1,406 |         |  | $ | 29,984,288 |            |   | $ |  |   |  | $ |  |   |  | $ | (32,453,312 | )          
|                               |                                                                                                                                                                              |                 |        |              |  |            |     |            |  |          |           |              |  |              |       |         |  |   |            |            |   |   |   |   |  |   |   |   |  |   |             |            

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                               |                                                                                                                                                                              |               |   |               |  |   |            |             |  
|------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------- | - | ------------- |  | - | ---------- | ----------- | -
|                               |                                                                                                                                                                              | Accumulated   |   | Total        
|                               |                                                                                                                                                                              | Other         |   | Stockholders
|                               |                                                                                                                                                                              | Comprehensive |   | Equity       
|                               |                                                                                                                                                                              | Income        |   | (Deficit)    
|                               |                                                                                                                                                                              |               |   |              
|Balance at January  14, 1998.  |                                                                                                                                                                              | $             |  |               |  | $ |           |            
|                              
|                              
|                              
|                              
|                               | Issuance of common stock to founder upon inception                                                                                                                           |               |   |              |  |   |            | 5,000       |  
|                              
|                              
|                              
|                              
|                               | Issuance of Series  A Convertible Preferred Stock on
	May 28, 1998 for cash                                                                                                  |               |   |              |  |   |            | 23,000,000  |  
|                              
|                              
|                              
|                              
|                               | Issuance of Series  A Convertible Preferred Stock on
	May 28, 1998 in exchange for $1,000,000 note                                                                           |               |   |              |  |   |            | 1,000,000   |  
|                              
|                              
|                              
|                              
|                               | Issuance of Series  A Convertible Preferred Stock on
	June 22, 1998 for cash                                                                                                 |               |   |              |  |   |            | 3,700,000   |  
|                              
|                              
|                              
|                              
|                               | Issuance of Series  A Convertible Preferred Stock on
	July 2, 1998 for cash                                                                                                  |               |   |              |  |   |            | 3,500,000   |  
|                              
|                              
|                              
|                              
|                               | Issuance of Series  A Convertible Preferred Stock on
	July 30, 1998 for cash                                                                                                 |               |   |              |  |   |            | 1,800,000   |  
|                              
|                              
|                              
|                              
|                               | Transaction costs associated with the issuance of Series A
	Convertible Preferred Stock                                                                                      |               |   |              |  |   |            | (205,225    | )
|                              
|                              
|                              
|                              
|                               | Issuance of warrants to purchase 112,500 shares of common stock
	associated with the acquisition of I.I.T on September 8,
	1998.                                             |               |   |              |  |   |            | 40,000      |  
|                              
|                              
|                              
|                              
|                               | Issuance of warrants to purchase 2,192,512 shares of common stock
	 in connection with $9,095,000 of debt on September 7, 1998.                                              |               |   |              |  |   |            | 1,948,930   |  
|                              
|                              
|                              
|                              
|                               | Issuance of warrants to purchase 167,409 shares of common stock
	in connection with a $5,000,000 financing commitment on
	September 22, 1998.                                |               |   |              |  |   |            | 148,810     |  
|                              
|                              
|                              
|                              
|                               | Issuance of warrants to purchase 971 shares of Series B
	Convertible Redeemable Preferred Stock in connection with a
	$10,000,000 financing commitment on September 30, 1998 |               |   |              |  |   |            | 606,875     |  
|                              
|                              
|                              
|                              
|                               | Issuance of warrants to purchase 140,625 shares of common stock
	associated with the acquisition of ACR on October 2, 1998.                                                  |               |   |              |  |   |            | 50,000      |  
|                              
|                              
|                              
|                              
|                               | Issuance of warrants to purchase 40,179 shares of common stock in
	 connection with a $2,000,000 financing commitment on
	December  18, 1998.                                |               |   |              |  |   |            | 35,714      |  
|                              
|                              
|                              
|                              
|                               | Dividends accrued on Series A Convertible Preferred Stock                                                                                                                    |               |   |              |  |   |            | (1,503,004  | )
|                              
|                              
|                              
|                              
|                               | Accretion of common stock subject to repurchase to fair value                                                                                                                |               |   |              |  |   |            | (3,903,865  | )
|                              
|                              
|                              
|                              
|                               | Accretion of Series B Convertible Redeemable Preferred Stock to
	fair value                                                                                                  |               |   |              |  |   |            | (236,991    | )
|                              
|                              
|                              
|                              
|                               | Net loss for the period January 14, 1998 through
	December  31, 1998.                                                                                                        |               |   |              |  |   |            | (32,453,312 | )
|                               |                                                                                                                                                                              |               |   |               |  |   |            |            
|Balance at December  31, 1998. |                                                                                                                                                                              | $             |  |               |  | $ | (2,467,068 | )          
|                               |                                                                                                                                                                              |               |   |               |  |   |            |            

See accompanying notes.

43



---



##### Table of Contents



USinternetworking, Inc.

Consolidated Statement of Stockholders Equity (Deficit)
(continued)

For the Year Ended December 31, 1999

|                               |                                                                                             |                                   |        |              |   |            |     |            |   |          |            |              |   |              |        |         |   |   |             |             |   |   |            |            |   |   |            |            |   |   |              |              |   | 
|------------------------------ | ------------------------------------------------------------------------------------------- | --------------------------------- | ------ | ------------ | - | ---------- | --- | ---------- | - | -------- | ---------- | ------------ | - | ------------ | ------ | ------- | - | - | ----------- | ----------- | - | - | ---------- | ---------- | - | - | ---------- | ---------- | - | - | ------------ | ------------ | - | 
|                               |                                                                                             |                                   |        |              |   |            |     |            |   |          |            |              |   |             
|                               |                                                                                             | Series A                          |        |              |   |            |     |            |   |          |            |              |   |             
|                               |                                                                                             | Convertible                       |        |              |   |            |     |            |   |          |            |             
|                               |                                                                                             | Preferred Stock                   |        | Common Stock |   | Additional |     | Note       |   |          |            |             
|                               |                                                                                             |                                   |        |              |   | Paid-in    |     | Receivable |   | Unearned |            | Accumulated 
|                               |                                                                                             | Shares                            |        | Par Value    |   | Shares     |     | Par Value  |   | Capital  |            | From Officer |   | Compensation |        | Deficit
|                               |                                                                                             |                                   |        |              |   |            |     |            |   |          |            |              |   |              |        |        
|Balance at January  1, 1999.   |                                                                                             |                                   | 55,000 |              |   | $          | 550 |            |   |          | 1,406,250  |              |   | $            | 1,406  |         |   | $ | 29,984,288  |             |   | $ |           |            |   | $ |           |            |   | $ | (32,453,312  | )           
|                              
|                              
|                              
|                              
|                               | Dividends accrued on Series A and Series B Convertible
	Preferred Stock                     |                                   |        |             |   |            |     |           |   |          |            |             |   |              |        |        |   |   |             | (2,328,150  | ) |   |            |           |   |   |            |           |   |   |              |             |  
|                              
|                              
|                              
|                              
|                               | Accretion of common stock subject to repurchase to fair value                               |                                   |        |             |   |            |     |           |   |          |            |             |   |              |        |        |   |   |             | (23,938,069 | ) |   |            |           |   |   |            |           |   |   |              |             |  
|                              
|                              
|                              
|                              
|                               | Accretion of Series B Convertible Redeemable Preferred Stock
	 to fair value                |                                   |        |             |   |            |     |           |   |          |            |             |   |              |        |        |   |   |             | (99,252     | ) |   |            |           |   |   |            |           |   |   |              |             |  
|                              
|                              
|                              
|                              
|                               | Conversion of Series A Convertible Preferred Stock to common
	 stock                        |                                   |        | (55,000      | ) |            |     | (550       | ) |          |            | 27,843,737   |   |              |        | 27,844  |   |   |             | (27,294     | ) |   |            |           |   |   |            |           |   |   |              |             |  
|                              
|                              
|                              
|                              
|                               | Conversion of Series B Convertible Redeemable Preferred
	Stock to common stock              |                                   |        |             |   |            |     |           |   |          |            | 41,680,197   |   |              |        | 41,680  |   |   |             | 62,200,820  |   |   |            |           |   |   |            |           |   |   |              |             |  
|                              
|                              
|                              
|                              
|                               | Reclassification of common stock subject to repurchase to common
	stock                     |                                   |        |             |   |            |     |           |   |          |            | 3,023,438    |   |              |        | 3,023   |   |   |             | 28,848,911  |   |   |            |           |   |   |            | (633,184   | ) |   |              |             |  
|                              
|                              
|                              
|                              
|                               | Issuance of common stock upon initial public offering                                       |                                   |        |             |   |            |     |           |   |          |            | 15,525,000   |   |              |        | 15,525  |   |   |             | 144,884,475 |   |   |            |           |   |   |            |           |   |   |              |             |  
|                              
|                              
|                              
|                              
|                               | Initial public offering issuance costs                                                      |                                   |        |             |   |            |     |           |   |          |            |             |   |              |        |        |   |   |             | (12,072,427 | ) |   |            |           |   |   |            |           |   |   |              |             |  
|                              
|                              
|                              
|                              
|                               | Issuance of common stock upon exercise of stock options                                     |                                   |        |             |   |            |     |           |   |          |            | 837,860      |   |              |        | 838     |   |   |             | 982,153     |   |   |            |           |   |   |            |           |   |   |              |             |  
|                              
|                              
|                              
|                              
|                               | Issuance of common stock upon exercise of stock options in
	exchange for note               |                                   |        |             |   |            |     |           |   |          |            | 843,750      |   |              |        | 844     |   |   |             | 2,249,156   |   |   |            | (2,250,000 | ) |   |            |           |   |   |              |             |  
|                              
|                              
|                              
|                              
|                               | Issuance of common stock upon exercise of warrants                                          |                                   |        |             |   |            |     |           |   |          |            | 1,113,977    |   |              |        | 1,114   |   |   |             | 3,085,086   |   |   |            |           |   |   |            |           |   |   |              |             |  
|                              
|                              
|                              
|                              
|                               | Contribution of common stock to employee benefit plan                                       |                                   |        |             |   |            |     |           |   |          |            | 54,738       |   |              |        | 55      |   |   |             | 600,365     |   |   |            |           |   |   |            |           |   |   |              |             |  
|                              
|                              
|                              
|                              
|                               | Issuance of restricted common stock                                                         |                                   |        |             |   |            |     |           |   |          |            | 141,750      |   |              |        | 142     |   |   |             | 2,008,858   |   |   |            |           |   |   |            | (2,009,000 | ) |   |              |             |  
|                              
|                              
|                              
|                              
|                               | Repurchase of common stock                                                                  |                                   |        |             |   |            |     |           |   |          |            | (404,786     | ) |              |        | (405    | ) |   |             | (3,022,193  | ) |   |            |           |   |   |            |           |   |   |              |             |  
|                              
|                              
|                              
|                              
|                               | Amortization of unearned compensation                                                       |                                   |        |             |   |            |     |           |   |          |            |             |   |              |        |        |   |   |             |            |   |   |            |           |   |   |            | 859,751    |   |   |              |             |  
|                              
|                              
|                              
|                              
|                               | Stock compensation expense for issuance of common stock options
	at below fair market value |                                   |        |             |   |            |     |           |   |          |            |             |   |              |        |        |   |   |             | 8,504,648   |   |   |            |           |   |   |            |           |   |   |              |             |  
|                              
|                              
|                              
|                              
|                               | Comprehensive income:                                                                       |                                   |        |             |   |            |     |           |   |          |            |             |   |              |        |        |   |   |             |            |   |   |            |           |   |   |            |           |   |   |              |             |  
|                              
|                              
|                              
|                              
|                               | Net loss for the period January 1, 1999 through
	December 31, 1999.                         |                                   |        |             |   |            |     |           |   |          |            |             |   |              |        |        |   |   |             |            |   |   |            |           |   |   |            |           |   |   |              | (103,318,023 | )
|                              
|                              
|                              
|                              
|                               | Other comprehensive income-unrealized gain on marketable
	securities                        |                                   |        |             |   |            |     |           |   |          |            |             |   |              |        |        |   |   |             |            |   |   |            |           |   |   |            |           |   |   |              |             |  
|                              
|                              
|                              
|                              
|                               |                                                                                             | Total comprehensive income (loss) |        |              |  |            |     |            |  |          |            |              |  |              |        |         |  |   |             |             |  |   |            |            |  |   |            |            |  |   |              |              |  | 
|                               |                                                                                             |                                   |        |              |   |            |     |            |   |          |            |              |   |              |        |         |   |   |             |             |   |   |            |            |   |   |            |            |   |   |              |             
|Balance at December  31, 1999. |                                                                                             |                                   |       |              |   | $          |    |            |   |          | 92,065,911 |              |   | $            | 92,066 |         |   | $ | 241,861,378 |             |   | $ | (2,250,000 | )          |   | $ | (1,782,433 | )          |   | $ | (135,771,335 | )           
|                               |                                                                                             |                                   |        |              |   |            |     |            |   |          |            |              |   |              |        |         |   |   |             |             |   |   |            |            |   |   |            |            |   |   |              |             

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                               |                                                                                             |                                   |         |               |  |   |             |              |              |  
|------------------------------ | ------------------------------------------------------------------------------------------- | --------------------------------- | ------- | ------------- |  | - | ----------- | ------------ | ------------ | -
|                               |                                                                                             | Accumulated                       |         | Total        
|                               |                                                                                             | Other                             |         | Stockholders
|                               |                                                                                             | Comprehensive                     |         | Equity       
|                               |                                                                                             | Income                            |         | (Deficit)    
|                               |                                                                                             |                                   |         |              
|Balance at January  1, 1999.   |                                                                                             | $                                 |        |               |  | $ | (2,467,068  | )           
|                              
|                              
|                              
|                              
|                               | Dividends accrued on Series A and Series B Convertible
	Preferred Stock                     |                                   |         |              |  |   |             | (2,328,150   | )           
|                              
|                              
|                              
|                              
|                               | Accretion of common stock subject to repurchase to fair value                               |                                   |         |              |  |   |             | (23,938,069  | )           
|                              
|                              
|                              
|                              
|                               | Accretion of Series B Convertible Redeemable Preferred Stock
	 to fair value                |                                   |         |              |  |   |             | (99,252      | )           
|                              
|                              
|                              
|                              
|                               | Conversion of Series A Convertible Preferred Stock to common
	 stock                        |                                   |         |              |  |   |             |             |             
|                              
|                              
|                              
|                              
|                               | Conversion of Series B Convertible Redeemable Preferred
	Stock to common stock              |                                   |         |              |  |   |             | 62,242,500   |             
|                              
|                              
|                              
|                              
|                               | Reclassification of common stock subject to repurchase to common
	stock                     |                                   |         |              |  |   |             | 28,218,750   |             
|                              
|                              
|                              
|                              
|                               | Issuance of common stock upon initial public offering                                       |                                   |         |              |  |   |             | 144,900,000  |             
|                              
|                              
|                              
|                              
|                               | Initial public offering issuance costs                                                      |                                   |         |              |  |   |             | (12,072,427  | )           
|                              
|                              
|                              
|                              
|                               | Issuance of common stock upon exercise of stock options                                     |                                   |         |              |  |   |             | 982,991      |             
|                              
|                              
|                              
|                              
|                               | Issuance of common stock upon exercise of stock options in
	exchange for note               |                                   |         |              |  |   |             |             |             
|                              
|                              
|                              
|                              
|                               | Issuance of common stock upon exercise of warrants                                          |                                   |         |              |  |   |             | 3,086,203    |             
|                              
|                              
|                              
|                              
|                               | Contribution of common stock to employee benefit plan                                       |                                   |         |              |  |   |             | 600,420      |             
|                              
|                              
|                              
|                              
|                               | Issuance of restricted common stock                                                         |                                   |         |              |  |   |             |             |             
|                              
|                              
|                              
|                              
|                               | Repurchase of common stock                                                                  |                                   |         |              |  |   |             | (3,022,598   | )           
|                              
|                              
|                              
|                              
|                               | Amortization of unearned compensation                                                       |                                   |         |              |  |   |             | 859,751      |             
|                              
|                              
|                              
|                              
|                               | Stock compensation expense for issuance of common stock options
	at below fair market value |                                   |         |              |  |   |             | 8,504,648    |             
|                              
|                              
|                              
|                              
|                               | Comprehensive income:                                                                       |                                   |         |              |  |   |             |             |             
|                              
|                              
|                              
|                              
|                               | Net loss for the period January 1, 1999 through
	December 31, 1999.                         |                                   |         |              |  |   |             | (103,318,023 | )           
|                              
|                              
|                              
|                              
|                               | Other comprehensive income-unrealized gain on marketable
	securities                        |                                   |         | 311,349       |  |   |             | 311,349      |             
|                               |                                                                                             |                                   |         |               |  |   |             |             
|                               |                                                                                             | Total comprehensive income (loss) |         |               |  |   |             |              | (103,006,674 | )
|                               |                                                                                             |                                   |         |               |  |   |             |             
|Balance at December  31, 1999. |                                                                                             | $                                 | 311,349 |               |  | $ | 102,461,025 |             
|                               |                                                                                             |                                   |         |               |  |   |             |             

See accompanying notes.

44



---



##### Table of Contents



USinternetworking, Inc.

Consolidated Statements of Cash Flows

|                                                                                                              |                                              |                                                |             |                   |            |   |              |            |             |  
|------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ---------------------------------------------- | ----------- | ----------------- | ---------- | - | ------------ | ---------- | ----------- | -
|                                                                                                              |                                              | For the period from                            |             |                  
|                                                                                                              |                                              | January 14, 1998                               |             |                  
|                                                                                                              |                                              | (date of inception)                            |             |                  
|                                                                                                              |                                              | through                                        |             |                  
|                                                                                                              |                                              | December 31,                                   |             | Year ended       
|                                                                                                              |                                              | 1998                                           |             | December 31, 1999
|                                                                                                              |                                              |                                                |             |                  
|Operating Activities                                                                                          |                                              |                                                |             |                   |            |   |              |           
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Net loss                                                                                                      |                                              | $                                              | (32,453,312 | )                 |            | $ | (103,318,023 | )         
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Adjustments to reconcile net loss to net cash used in operating
	activities:                                  |                                              |                                                |             |                   |            |   |              |           
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              | Depreciation                                 |                                                |             | 1,567,885         |            |   |              | 16,525,006 |            
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              | Amortization                                 |                                                |             | 1,611,763         |            |   |              | 5,955,000  |            
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              | Non-cash stock compensation expense          |                                                |             | 231,135           |            |   |              | 10,350,729 |            
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              | Non-cash interest expense                    |                                                |             | 2,011,904         |            |   |              | 379,925    |            
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              | Changes in operating assets and liabilities: |                                                |             |                   |            |   |              |            |            
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              |                                              | Accounts receivable                            |             |                   | 43,293     |   |              |            | (13,675,237 | )
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              |                                              | Prepaid expenses and other current assets      |             |                   | (3,052,457 | ) |              |            | (3,886,636  | )
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              |                                              | Deferred iMAP costs                            |             |                   |           |   |              |            | (8,899,837  | )
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              |                                              | Accounts payable                               |             |                   | 4,333,579  |   |              |            | 4,456,874   |  
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              |                                              | Accrued compensation                           |             |                   | 4,287,023  |   |              |            | 3,316,827   |  
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              |                                              | Accrued expenses and other current liabilities |             |                   | 234,800    |   |              |            | 1,565,692   |  
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              |                                              | Deferred revenue                               |             |                   |           |   |              |            | 9,015,205   |  
|                                                                                                              |                                              |                                                |             |                   |            |   |              |           
|Net cash used in operating activities                                                                         |                                              |                                                | (21,184,387 | )                 |            |   | (78,214,475  | )         
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Investing Activities                                                                                          |                                              |                                                |             |                   |            |   |              |           
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Due from officer                                                                                              |                                              |                                                |            |                   |            |   | (1,900,000   | )         
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Purchases of property and equipment                                                                           |                                              |                                                | (20,127,849 | )                 |            |   | (79,858,273  | )         
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Purchases of available-for-sale securities                                                                    |                                              |                                                |            |                   |            |   | (147,014,320 | )         
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Sales of available-for-sale securities                                                                        |                                              |                                                |            |                   |            |   | 115,618,678  |           
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Acquisitions, net of cash acquired                                                                            |                                              |                                                | (16,899,991 | )                 |            |   | (8,464,325   | )         
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Change in other assets                                                                                        |                                              |                                                | (59,080     | )                 |            |   | (102,438     | )         
|                                                                                                              |                                              |                                                |             |                   |            |   |              |           
|Net cash used in investing activities                                                                         |                                              |                                                | (37,086,920 | )                 |            |   | (121,720,678 | )         
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Financing Activities                                                                                          |                                              |                                                |             |                   |            |   |              |           
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Proceeds from issuance of Series A Convertible Preferred
	Stock                                               |                                              |                                                | 31,794,775  |                   |            |   |             |           
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Proceeds from loan from officer, subsequently converted into
	Series A Convertible Preferred Stock            |                                              |                                                | 1,000,000   |                   |            |   |             |           
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Proceeds (expenses) from issuance of Series B
	Convertible Redeemable Preferred Stock                         |                                              |                                                | 39,910,509  |                   |            |   | (99,252      | )         
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Proceeds from issuance of common stock and common stock subject
	to repurchase, net of issuance cost          |                                              |                                                | 15,000      |                   |            |   | 132,827,573  |           
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Proceeds from the exercise of warrants                                                                        |                                              |                                                |            |                   |            |   | 73,605       |           
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Proceeds from exercise of employee stock options                                                              |                                              |                                                |            |                   |            |   | 982,991      |           
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Proceeds from issuance of long-term debt                                                                      |                                              |                                                | 9,486,969   |                   |            |   | 38,149,514   |           
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Proceeds from issuance of notes, subsequently converted into
	Series B Convertible Redeemable Preferred Stock |                                              |                                                | 22,095,000  |                   |            |   |             |           
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Proceeds from issuance of convertible subordinated notes, net of
	issuance costs                              |                                              |                                                |            |                   |            |   | 119,851,371  |           
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Dividends paid to preferred stockholders                                                                      |                                              |                                                |            |                   |            |   | (3,831,154   | )         
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Payment to former shareholders of acquired businesses                                                         |                                              |                                                |            |                   |            |   | (10,826,735  | )         
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Payments on long-term debt                                                                                    |                                              |                                                | (1,804,876  | )                 |            |   | (5,683,824   | )         
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Payments on capital lease obligations                                                                         |                                              |                                                | (423,605    | )                 |            |   | (3,008,780   | )         
|                                                                                                              |                                              |                                                |             |                   |            |   |              |           
|Net cash provided by financing activities                                                                     |                                              |                                                | 102,073,772 |                   |            |   | 268,435,309  |           
|                                                                                                              |                                              |                                                |             |                   |            |   |              |           
|Net increase in cash and cash equivalents                                                                     |                                              |                                                | 43,802,465  |                   |            |   | 68,500,156   |           
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Cash and cash equivalents at beginning of period                                                              |                                              |                                                |            |                   |            |   | 43,802,465   |           
|                                                                                                              |                                              |                                                |             |                   |            |   |              |           
|Cash and cash equivalents at end of period                                                                    |                                              | $                                              | 43,802,465  |                   |            | $ | 112,302,621  |           
|                                                                                                              |                                              |                                                |             |                   |            |   |              |           

See accompanying notes.

45



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##### Table of Contents



USinternetworking, Inc.

Notes to Consolidated Financial Statements

1.  Summary of Significant Accounting Policies

Description of Business

USinternetworking, Inc., (the Company) was
incorporated on January 14, 1998 principally to provide
clients the ability to use leading business software applications
 through the Companys Internet-based network. The Company
is an Internet Managed Application Provider.SM
 The Companys iMAP services integrate Internet
communications, data center management, packaged software
applications, implementation and support to meet the technology
needs of businesses in a number of areas. These areas include
sales force automation, customer support, e-commerce, and human
resource and financial systems. The Company also makes its
infrastructure available to clients who want to run their own
applications in a highly reliable and secure Internet environment
 and provides information technology consulting services.

Basis of Presentation

The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries.
Intercompany transactions and balances have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all money market accounts and all other
investments with a maturity of three months or less when
purchased to be cash equivalents.

Investments

Available-for-sale securities are carried at fair value with the
unrealized gains and losses, net of tax, reported as other
comprehensive income. Realized gains and losses and declines in
value judged to be other than temporary on available-for-sale
securities are included in investment income. The cost of
securities sold is based on the specific identification method.
Interest and dividends on securities classified as
available-for-sale are included in investment income.

At December 31, 1999, available-for-sale securities
consisted principally of corporate and government agency
obligations.

Deferred Costs

Direct costs related to the implementation of software under iMAP
 contracts are deferred and expensed ratably over the term of the
 related contract. Costs related to the issuance of debt are
deferred and expensed over the term of the debt using the
interest method.

Software Licenses

The Company capitalizes the costs associated with the purchase of
 licenses for major business process application software used in
 providing iMAP services. The licenses specify the maximum number
 of users permitted to utilize the license in connection with the
 Companys service, and whether the licenses may be later
transferred to subsequent users by the Company. All amounts are
non-refundable, regardless of the actual number of users assigned
 a license in connection with iMAP services.

46



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)



1.  Summary of Significant Accounting
Policies  (Continued)


Transferable licenses are amortized over their estimated useful
life of three years. Non-transferable licenses are amortized over
 the lesser of the minimum contract period for iMAP clients
subject to these licenses, or three years. Amortization commenced
 in January 1999, the date that transferable and
non-transferable licenses were first available to generate
revenue, and the average amortization period is expected to be
three years.

The Company also purchases maintenance services from its software
 vendors under agreements that require annual payments for
software maintenance, including technical support and software
upgrades. These payments are included in prepaid expenses and
amortized ratably over the annual service period.

Property and Equipment
and Accounting Changes

Property and equipment is stated at cost less accumulated
depreciation. Depreciation is computed for owned assets using the
 straight-line method over estimated useful lives of the assets.
Assets under capital leases are amortized using the straight-line
 method over the lesser of the lease term or the estimated useful
 life of the assets.

Estimated useful lives for furniture and equipment range from
five to seven years. Computer hardware and software, is
depreciated over three to five years. Buildings are depreciated
over 25 years, and leasehold improvements are depreciated
over the term of the related lease.

On July 1, 1999, the Company changed its estimate of the
useful life of its computer equipment from three to five years.
The change in estimate will be accounted for prospectively, with
depreciation expense for periods subsequent to June 30, 1999
 calculated so as to depreciate the remaining book value of the
equipment at June 30, 1999 equally over the revised
estimated useful life.

The effect of this change was to decrease depreciation expense
and net loss by $2,901,656 for the year ended December 31,
1999. Basic and diluted loss per share for the year ended
December 31, 1999 was lower by $0.05 per share as a result
of the change.

On January 1, 1999, the Company adopted Statement of
Position 98-1 (SOP 98-1), Accounting for the Costs
 of Computer Software Developed or Obtained for Internal Use.SOP 98-1 requires the capitalization of direct costs incurred
 in connection with developing or obtaining software for
internal-use, including external direct costs of materials and
services and payroll and payroll related costs for employees who
are directly associated with and devote time to an internal use
software development project. In 1998, the Company expensed
approximately $1 million of costs related to the
implementation of internal-use software. During 1999, the Company
 capitalized $2.3 million of costs related to the
implementation of internal-use software which is included in
computers and software at December 31, 1999.

Advertising Costs

The Company expenses advertising as incurred. Advertising expense
 totaled approximately $700,000 and $2.5 million in 1998 and
 1999, respectively.

Impairment of Long-Lived
Assets

Long-lived assets, consisting principally of software licenses,
property and equipment and goodwill, are evaluated for possible
impairment through a review of undiscounted expected future cash
flows. If the sum of the undiscounted expected future cash flows
is less than the carrying amount of the asset, an impairment loss
 is recognized.

47



---



##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)



1.  Summary of Significant Accounting
Policies  (Continued)


Short-term Obligations
Expected to be Refinanced

At December 31, 1998 and 1999, the Company had liabilities
for the purchase of fixed assets for which the Company had
outstanding commitments to finance on a long-term basis. The
Company has executed or will execute these financings early in
the subsequent year, and therefore classified the long-term
portion of the liabilities due based on the subsequent financings
 in the accompanying balance sheets. These obligations will bear
interest at rates from 9% to 17% per annum, and will mature in
varying installments through October 2001.

Revenue Recognition

The Company generates revenue from iMAP services and information
technology services. Revenues from professional IT services are
recognized as services are provided. iMAP revenues consist of
implementation fees and monthly recurring fees for services.

Implementation fees are generally paid in advance, and are
deferred and recognized ratably over the term of the iMAP service
 contract. Monthly iMAP service fees are consideration for access
 to the Companys network of Enterprise Data Centers hosting
 application software, and the implementation and management of
that software. iMAP contracts generally have a two to five year
term, and revenues are recognized ratably over the contract term.
 Payments received in advance of revenue recognition, even if
non-refundable, are recorded as deferred revenue. Some contracts
permit termination without cause by the clients. Contracts
permitting termination without cause generally provide for
termination payments to the Company that will be recognized as
revenue when collectibility is assured.

Product Research and
Development

The Company incurs product research and development costs related
 to expanding its portfolio of iMAP solutions. These costs
primarily include labor costs associated with the testing of new
product offerings including the evaluation of hardware and
software applications functionality in an iMAP environment.
Product research and development costs are expensed as incurred.

Goodwill Amortization

The Company amortizes goodwill arising from purchase business
combinations on a straight-line basis over its estimated useful
life of 5 years.

Stock-Based Compensation

The Company records compensation expense for all stock-based
compensation plans using the intrinsic value method prescribed by
 Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees(APB No. 25).
Under APB No. 25, if the exercise price of the
Companys employee stock-based awards equals or exceeds the
estimated fair value of the underlying stock on the date of
grant, no compensation expense is generally recognized.

Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation(Statement
No. 123) encourages companies to recognize expense for
 stock-based awards based on their estimated fair value on the
date of grant. Statement No. 123 requires the disclosure of
pro forma net income or loss in the notes to the financial
statements if the fair value method is not elected. The Company
supplementally discloses in Note 15 to these consolidated
financial statements the pro forma information as if the fair
value method had been adopted.

48



---



##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)



1.  Summary of Significant Accounting
Policies  (Continued)


Income Taxes

The Company uses the liability method in accounting for income
taxes. Under this method, deferred income tax assets and
liabilities are determined based on differences between financial
 reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.

Stock Splits

In February 1999, the Companys Board of Directors
approved an 8 for 1 reverse stock split of common stock, options
and warrants which became effective on April 8, 1999.
Accordingly, all share and per share data including stock option,
 warrant and loss per share information have been restated in the
 consolidated financial statements to retroactively reflect the
stock split.

In November 1999, the Board of Directors approved a 3 for 2
stock split of common stock, options and warrants for holders of
record on December 3, 1999. Accordingly, all share and per
share data including stock option, warrant and loss per share
information have been restated in the consolidated financial
statements to retroactively reflect the stock split.

Reclassifications

Certain amounts in the 1998 consolidated financial statements
have been reclassified to conform to the 1999 presentation.

2.  Acquisitions

On September 8, 1998, the Company acquired all of the
outstanding common stock of I.I.T. Holding, Inc. (IIT), a
provider of Internet and intranet consulting, integration and
support services principally to commercial companies located
throughout the United States and South America. The initial
purchase price consisted of cash of $12,887,000 and warrants to
purchase 112,500 shares of common stock for $7.11 per share
valued at $40,000. Direct acquisition costs of $394,968 were also
 incurred. The acquisition was accounted for using the purchase
method of accounting, and the results of operations of IIT are
included in the accompanying consolidated statements of
operations commencing September 8, 1998. At the acquisition
date, $14,131,788 of goodwill was recorded.

Additional contingent consideration was payable to the former
shareholders of IIT to the extent that defined amounts of
revenue, earnings before interest, income taxes, depreciation and
 amortization (EBITDA), and employee retention percentages (as
related to the operations of IIT) in 1998 were exceeded. At
December 31, 1998, the Company determined that the amount of
 additional consideration due to the sellers was $2,326,735, and
therefore recorded that amount as due to former shareholders of
acquired businesses and as additional goodwill. The contingent
consideration was paid in May 1999.

On October 2, 1998, the Company acquired all of the
outstanding common stock of Advanced Communication Resources,
Inc. (ACR), a New York based systems integrator focused on the
financial services industry. The initial purchase price
aggregated $6,050,000, consisting of cash of $2,500,000, a
$3,500,000 secured promissory note due in January 1999
bearing interest at 8.25%, and warrants to purchase
140,625 shares of common stock for $7.11 per share
valued at $50,000. Direct acquisition costs of $338,916 were also
 incurred. The acquisition was accounted for using the purchase
method of accounting, and the results of operations of ACR are
included in the accompanying consolidated statements of
operations commencing October 2, 1998. At the acquisition
date, $5,290,535 of goodwill was recorded.

49



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)



2.  Acquisitions  (Continued)


Additional contingent consideration was payable to the former
shareholders of ACR to the extent that defined amounts of
revenue, EBITDA, and employee retention percentages (as related
to the operations of ACR) in 1998 were exceeded. At
December 31, 1998, the Company determined that the amount of
 additional consideration due to the sellers was $5,000,000, and
therefore recorded that amount as due to former shareholders of
acquired businesses and as additional goodwill. The contingent
consideration was paid in January 1999.

On October 8, 1999, the Company purchased the assets of
Conklin & Conklin, Inc. (Conklin), a
comprehensive provider of Lawson financial and human resources
system implementation services and a certified reseller of Lawson
 software licenses. The initial purchase price aggregated
$11.2 million, and consisted of cash of $7.7 million,
assumed liabilities of $1.5 million, and a $2.0 million
 secured note due on October 8, 2001. Additional contingent
cash consideration of up to $4.6 million will be payable to
the extent that specified financial milestones are achieved over
a 26 month period, and any such payment will result in the
recording of additional goodwill. The acquisition was accounted
for as a purchase, and goodwill of approximately $9.4 million was
 recorded at the acquisition date, and is being amortized over
its estimated useful life of five years.

The results of operations of Conklin are included in the
accompanying consolidated statement of operations commencing
October 8, 1999. The following summarizes unaudited pro
forma consolidated results of operations for 1998 and 1999
assuming the Conklin acquisition had occurred at the beginning of
 each period. The results are not necessarily indicative of what
would have occurred had this transaction been consummated as of
the beginning of each period, or of future operations of the
Company (in thousands):

|                                        |  |                     |         |                   |  |   |          |  
|--------------------------------------- |  | ------------------- | ------- | ----------------- |  | - | -------- | -
|                                        |  | For the period from |         |                  
|                                        |  | January 14, 1998    |         |                  
|                                        |  | (date of inception) |         |                  
|                                        |  | through             |         | Year ended       
|                                        |  | December 31, 1998   |         | December 31, 1999
|                                        |  |                     |         |                  
|                                        |  |                    
|                                        |  | (unaudited)        
|                                       
|                                       
|                                       
|                                       
|Revenue                                 |  | $                   | 15,486  |                   |  | $ | 44,086   |  
|                                       
|                                       
|                                       
|                                       
|Net loss                                |  | $                   | (31,739 | )                 |  | $ | (103,882 | )
|                                       
|                                       
|                                       
|                                       
|Basic and diluted loss per common share |  | $                   | (22.57  | )                 |  | $ | (1.56    | )

50



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

3.  Loss Per Share

The following table sets forth the computation of basic and
diluted loss per common share:

|                                        |                                                                                                                 |                     |             |                   |   |   |              |              |  
|--------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ------------------- | ----------- | ----------------- | - | - | ------------ | ------------ | -
|                                        |                                                                                                                 | For the period from |             |                  
|                                        |                                                                                                                 | January 14, 1998    |             |                  
|                                        |                                                                                                                 | (date of inception) |             |                  
|                                        |                                                                                                                 | through             |             | Year ended       
|                                        |                                                                                                                 | December 31, 1998   |             | December 31, 1999
|                                        |                                                                                                                 |                     |             |                  
|Numerator:                              |                                                                                                                 |                     |             |                   |   |   |              |             
|                                       
|                                       
|                                       
|                                       
|                                        | Net loss                                                                                                        |                     | $           | (32,453,312       | ) |   | $            | (103,318,023 | )
|                                       
|                                       
|                                       
|                                       
|                                        | Dividends on Series A Convertible Preferred Stock                                                               |                     |             | (1,503,004        | ) |   |              | (2,328,150   | )
|                                       
|                                       
|                                       
|                                       
|                                        | Accretion of common stock subject to repurchase to fair value                                                   |                     |             | (3,903,865        | ) |   |              | (23,938,069  | )
|                                       
|                                       
|                                       
|                                       
|                                        | Accretion of Series B Convertible Redeemable Preferred Stock
	 to fair value                                    |                     |             | (236,991          | ) |   |              | (99,252      | )
|                                        |                                                                                                                 |                     |             |                   |   |   |              |             
|                                        |                                                                                                                 | $                   | (38,097,172 | )                 |   | $ | (129,683,494 | )           
|                                        |                                                                                                                 |                     |             |                   |   |   |              |             
|Denominator:                            |                                                                                                                 |                     |             |                   |   |   |              |             
|                                       
|                                       
|                                       
|                                       
|                                        | Weighted-average number of shares of common stock outstanding and
	 not subject to repurchase during the period |                     |             | 1,406,250         |   |   |              | 66,503,639   |  
|                                        |                                                                                                                 |                     |             |                   |   |   |              |             
|Basic and diluted loss per common share |                                                                                                                 | $                   | (27.09      | )                 |   | $ | (1.95        | )           
|                                        |                                                                                                                 |                     |             |                   |   |   |              |             

Basic loss per share is based upon the average number of shares
of common stock outstanding during the periods. The 1998
computation excludes 3,023,438 shares of common stock subject to
repurchase.

Diluted loss per common share is equal to basic loss per common
share because if potentially dilutive securities were included in
 the computation, the result would be anti-dilutive. These
potentially dilutive securities consist of common stock subject
to repurchase, convertible preferred stocks, stock options and
warrants in the 1998 period, and stock options and warrants in
the 1999 period.

4.  Supplemental Disclosure of Cash Flow Information

The Company acquired equipment totaling $5,188,489 and
$15,812,110 under leases classified as capital leases for the
period from January 14, 1998 (date of inception) through
December 31, 1998 and for the year ended December 31,
1999, respectively. The Company also acquired $7,500,000 and
$3,000,000 of equipment in 1998 and 1999 that was included in
accounts payable and short-term obligations expected to be
refinanced at December 31, 1998 and 1999, respectively.

Interest paid was approximately $368,000 and $5,902,000 for the
period from January 14, 1998 (date of inception) through
December 31, 1998 and for the year ended December 31,
1999, respectively.

In December 1998, $22,095,000 of notes payable and a
$1,000,000 loan from an officer of the Company were converted
into Series B Convertible Redeemable Preferred Stock.

In 1998, the Company purchased all of the capital stock of IIT
and ACR for approximately $27.8 million. In conjunction with
 these acquisitions, assets with a fair market value of
approximately $30.8 million were acquired and liabilities of
 approximately $3.0 million were assumed.

In 1999, the Company purchased the assets of Conklin for
approximately $11.2 million. In conjunction with this
acquisition, assets with a fair market value of approximately
$9.7 million were acquired and liabilities of approximately
$1.5 million were assumed.

51



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)



4.  Supplemental Disclosure of Cash Flow
Information  (Continued)


In July 1998, the Company sold 1,406,250 shares of
common stock to an executive officer for $5,000. The common stock
 at the date of issuance had an appraised estimated fair value of
 $0.71 per share, or $1,000,000. The difference between the
estimated fair value of the common stock of $1,000,000 and the
amount paid of $5,000 ($995,000) was recorded as unearned
compensation and is being amortized over the 22 month period
 in which it is earned. Other non-cash compensation of $5,000
related to common stock issuances was also recorded in 1998.

During 1999, the Company issued 141,750 shares of restricted
 common stock to executive officers at a weighted average price
of $14.17 per share. The restricted common stock at the date
 of issuance had an aggregate quoted market value of $2,009,000,
which was recorded as stockholders equity.

5.  Available-For-Sale Securities

The following is a summary of available-for-sale securities at
December 31, 1999:

|                           |  |   |            | 
|-------------------------- |  | - | ---------- | 
|                          
|                          
|                          
|                          
|Corporate commercial paper |  | $ | 8,958,808  | 
|                          
|                          
|                          
|                          
|Corporate bonds            |  |   | 10,548,183 | 
|                          
|                          
|                          
|                          
|Municipal bonds            |  |   | 12,200,000 | 
|                           |  |   |            | 
|                           |  | $ | 31,706,991 | 
|                           |  |   |            | 

At December 31, 1999, aggregate unrealized gains of $311,349
 are recorded in other comprehensive income. At December 31,
 1999, the Company has approximately $19.5 million of
investments that mature within one year and $12.2 million of
 investments that mature beyond ten years. These investments are
classified as current as the Company views its available-for-sale
 investments as available for use in its current operations.

6.  Property and Equipment

Property and equipment consists of the following:

|                          |       |              |            |              |  |   |             |             | 
|------------------------- | ----- | ------------ | ---------- | ------------ |  | - | ----------- | ----------- | 
|                          |       | December 31, |            | December 31,
|                          |       | 1998         |            | 1999        
|                          |       |              |            |             
|Building and land         |       | $            | 959,124    |              |  | $ | 19,534,132  |            
|                         
|                         
|                         
|                         
|Furniture and fixtures    |       |              | 779,332    |              |  |   | 4,120,661   |            
|                         
|                         
|                         
|                         
|Equipment and automobiles |       |              | 2,151,877  |              |  |   | 3,353,722   |            
|                         
|                         
|                         
|                         
|Computers and software    |       |              | 16,018,565 |              |  |   | 79,430,230  |            
|                         
|                         
|                         
|                         
|Leasehold improvements    |       |              | 3,299,132  |              |  |   | 9,047,040   |            
|                          |       |              |            |              |  |   |             |            
|                          |       |              | 23,208,030 |              |  |   | 115,485,785 |            
|                         
|                         
|                         
|                         
|Accumulated depreciation  |       |              | (1,567,885 | )            |  |   | (14,319,115 | )          
|                          |       |              |            |              |  |   |             |            
|                          | Total |              | $          | 21,640,145   |  |   | $           | 101,166,670 | 
|                          |       |              |            |              |  |   |             |            

During 1999, the Company capitalized $346,106 of interest
associated with assets under construction. Substantially all
property and equipment is collateralized under financing
arrangements.

52



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

7.  Capital Lease Obligations

The Company has entered into capital lease agreements to acquire
certain equipment. Property and equipment includes the following
amounts for leases that have been capitalized.

|                         |       |              |           |              |  |   |            |            | 
|------------------------ | ----- | ------------ | --------- | ------------ |  | - | ---------- | ---------- | 
|                         |       | December 31, |           | December 31,
|                         |       | 1998         |           | 1999        
|                         |       |              |           |             
|Computers and software   |       | $            | 5,188,489 |              |  | $ | 21,000,599 |           
|                        
|                        
|                        
|                        
|Accumulated amortization |       |              | (349,716  | )            |  |   | (4,367,137 | )         
|                         |       |              |           |              |  |   |            |           
|                         | Total |              | $         | 4,838,773    |  |   | $          | 16,633,462 | 
|                         |       |              |           |              |  |   |            |           

Amortization of leased property is included in depreciation and
amortization expense.

Future minimum payments under capital lease obligations consist
of the following at December 31, 1999:

|                                           |                              |   |            |            | 
|------------------------------------------ | ---------------------------- | - | ---------- | ---------- | 
|                                          
|                                          
|                                          
|                                          
|2000                                       |                              | $ | 8,147,628  |           
|                                          
|                                          
|                                          
|                                          
|2001                                       |                              |   | 7,799,455  |           
|                                          
|                                          
|                                          
|                                          
|2002                                       |                              |   | 3,783,135  |           
|                                          
|                                          
|                                          
|                                          
|2003                                       |                              |   | 730,080    |           
|                                          
|                                          
|                                          
|                                          
|2004                                       |                              |   | 2,388      |           
|                                           |                              |   |            |           
|                                           | Total minimum lease payments |   |            | 20,462,686 | 
|                                          
|                                          
|                                          
|                                          
|Amounts representing interest              |                              |   | (3,243,581 | )         
|                                           |                              |   |            |           
|Present value of capital lease obligations |                              |   | 17,219,105 |           
|                                          
|                                          
|                                          
|                                          
|Current portion                            |                              |   | (5,834,076 | )         
|                                           |                              |   |            |           
|Capital lease obligations, non-current     |                              | $ | 11,385,029 |           
|                                           |                              |   |            |           

8.  Long-Term Debt and Convertible Subordinated
Notes

Long-term debt consists of the following:

|                                                                                                                                                                                                                                                                                                                                                                                                                   |  |              |           |              |  |   |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | --------- | ------------ |  | - | ---------- | 
|                                                                                                                                                                                                                                                                                                                                                                                                                   |  | December 31, |           | December 31,
|                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 1998         |           | 1999        
|                                                                                                                                                                                                                                                                                                                                                                                                                   |  |              |           |             
|Notes payable to banks due in June and July 2001 and bearing
	 interest at 9.0% per annum. These notes are payable in aggregate
	 monthly installments of principal and interest of $8,893 with
	all unpaid principal and interest due at maturity. These notes
	are secured by mortgages on the real property purchased with the
	proceeds and with $106,913 in letters of credit pledged as
	additional security |  | $            | 857,206   |              |  | $ | 828,127    | 
|                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                  
|Notes payable due August 1, 2001 through October 1,
	2002 and bearing interest at 12.1% to 17.1% per annum. These
	notes are payable in aggregate monthly installments of principal
	and interest of $585,252 and are collateralized by certain
	furniture, fixtures, equipment and software                                                                                                                       |  |              | 2,216,082 |              |  |   | 15,148,548 | 

53



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)



8.  Long-Term Debt and Convertible Subordinated
Notes  (Continued)


|                                                                                                                                                                                                                                                                                                                                              |       |              |           |              |  |   |            |            | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- | ------------ | --------- | ------------ |  | - | ---------- | ---------- | 
|                                                                                                                                                                                                                                                                                                                                              |       | December 31, |           | December 31,
|                                                                                                                                                                                                                                                                                                                                              |       | 1998         |           | 1999        
|                                                                                                                                                                                                                                                                                                                                              |       |              |           |             
|Notes payable due January 1, 2002 and October 1, 2001
	and bearing interest at 11.9% and 17.1% per annum, respectively.
	The notes are payable in aggregate monthly installments of
	principal and interest of $367,028 with all unpaid principal and
	interest due at maturity. These notes are collateralized by
	certain software licenses |       | $            | 4,501,175 |              |  | $ | 5,025,976  |           
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|Note payable due on June 1, 2002 and bearing interest at 14%
	 per annum. This note is payable in aggregate monthly
	installments of principal and interest of $391,694 and is
	collateralized by certain equipment                                                                                                                           |       |              |          |              |  |   | 9,868,975  |           
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|Note payable due on May 1, 2006 and bearing interest at 7.5%
	 per annum. The note is payable in aggregate monthly installments
	 of principal and interest of $49,295 with all unpaid principal
	and interest due at maturity. The note is secured by a mortgage
	on the real property purchased with the proceeds                           |       |              |          |              |  |   | 7,012,681  |           
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|Notes payable due on March 1, 2001 and bearing interest at
	6.6% per annum. These notes are payable in aggregate monthly
	installments of principal and interest ranging from $10,908 to
	$28,237 and are collateralized by the general assets of the
	Company                                                                                |       |              |          |              |  |   | 562,162    |           
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|Notes payable due between February 28, 2003 and
	March 11, 2004 and bearing interest at rates ranging from
	8.25% to 10.25% per annum. The notes are payable in aggregate
	monthly installments of principal and interest ranging from $533
	to $1,274 and are secured by automobiles purchased with the
	proceeds                            |       |              | 107,630   |              |  |   | 117,012    |           
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|Note payable due on December 29, 2003 bearing interest at
	9.8% per annum. The note is payable in monthly principal
	installments of $98,958 plus interest and is collateralized by a
	$750,000 certificate of deposit and certain building improvements                                                                                      |       |              |          |              |  |   | 4,750,000  |           
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|Note payable to former shareholders of Conklin, bearing interest
	at 10% per annum and due with accrued interest on October 8,
	 2001                                                                                                                                                                                                         |       |              |          |              |  |   | 2,000,000  |           
|                                                                                                                                                                                                                                                                                                                                              |       |              |           |              |  |   |            |           
|                                                                                                                                                                                                                                                                                                                                              | Total |              |           | 7,682,093    |  |   |            | 45,313,481 | 
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|Less: current portion                                                                                                                                                                                                                                                                                                                         |       |              | 1,757,588 |              |  |   | 12,586,553 |           
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                             
|Less: discounts                                                                                                                                                                                                                                                                                                                               |       |              | 692,711   |              |  |   | 440,817    |           
|                                                                                                                                                                                                                                                                                                                                              |       |              |           |              |  |   |            |           
|                                                                                                                                                                                                                                                                                                                                              |       | $            | 5,231,794 |              |  | $ | 32,286,111 |           
|                                                                                                                                                                                                                                                                                                                                              |       |              |           |              |  |   |            |           

Aggregate maturities of long-term debt at December 31, 1999
are as follows:

|                    |       |   |            |            | 
|------------------- | ----- | - | ---------- | ---------- | 
|                   
|                   
|                   
|                   
|2000                |       | $ | 12,586,553 |           
|                   
|                   
|                   
|                   
|2001                |       |   | 16,640,735 |           
|                   
|                   
|                   
|                   
|2002                |       |   | 8,046,459  |           
|                   
|                   
|                   
|                   
|2003                |       |   | 1,290,796  |           
|                   
|                   
|                   
|                   
|2004                |       |   | 132,223    |           
|                   
|                   
|                   
|                   
|2005 and thereafter |       |   | 6,616,715  |           
|                    |       |   |            |           
|                    | Total |   | $          | 45,313,481 | 
|                    |       |   |            |           

54



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)



8.  Long-Term Debt and Convertible Subordinated
Notes  (Continued)


In 1999, the Company issued $125 million (principal amount
at maturity) of Convertible Subordinated Notes (the
Notes), due November 1, 2004. Interest on the
Notes accrues at 7% per annum, payable semi-annually on May 1 and
 November 1 of each year, commencing May 1, 2000. A holder
may, at any time prior to maturity, convert the principal amount
of the Notes into shares of common stock at a conversion price of
 $16.57 per share. The Company has the option to redeem the Notes
 after November 5, 2002 through October 31, 2003 for
101.75% of the principal amount.

9.  Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in
 estimating its fair value disclosures of its significant
financial instruments:

Cash and cash equivalents

The carrying amounts reported for cash and cash equivalents
approximate fair value.

Available-for-sale
securities

Available-for-sale securities are stated at quoted market value.

Accounts receivable and
accounts payable

The carrying amounts of accounts receivable and accounts payable
and accrued expenses approximate fair value because of the
short-term nature of those transactions.

Long-term debt

The fair values of the long-term debt are estimated using a
discounted cash flow analysis, based on the Companys
incremental borrowing rates for similar types of borrowing
arrangements at December 31, 1999.

Convertible subordinated
notes

The fair values of the convertible subordinated notes are
estimated using quoted market rates as of December 31, 1999.

The carrying amounts and fair values of the Companys
financial instruments follows:

|                               |  |                   |            |                   |  |                |            |            |  |   |             |  |  |   |             | 
|------------------------------ |  | ----------------- | ---------- | ----------------- |  | -------------- | ---------- | ---------- |  | - | ----------- |  |  | - | ----------- | 
|                               |  |                   |            |                  
|                               |  | December 31, 1998 |            | December 31, 1999
|                               |  |                   |            |                  
|                               |  | Carrying Value    |            | Fair Value        |  | Carrying Value |            | Fair Value
|                               |  |                   |            |                   |  |                |            |           
|Cash and cash equivalents      |  | $                 | 43,802,465 |                   |  | $              | 43,802,465 |            |  | $ | 112,302,621 |  |  | $ | 112,302,621 | 
|                              
|                              
|                              
|                              
|Available-for-sale securities  |  |                   |           |                   |  |                |           |            |  |   | 31,706,991  |  |  |   | 31,706,991  | 
|                              
|                              
|                              
|                              
|Long-term debt                 |  |                   | 7,682,093  |                   |  |                | 7,682,093  |            |  |   | 44,872,664  |  |  |   | 45,911,984  | 
|                              
|                              
|                              
|                              
|Convertible subordinated notes |  |                   |           |                   |  |                |           |            |  |   | 125,000,000 |  |  |   | 362,187,500 | 

10.  Initial Public Offering

In April 1999, the Company completed an initial public
offering of 15,525,000 shares of common stock which resulted in
net proceeds of $132,827,573, after deducting underwriting
discounts, commissions and offering expenses. Upon the closing of
 the offering, the Series A Preferred Stock and
Series B Preferred Stock automatically converted into
69,523,933 shares of common stock, and the common stock

55



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)



10.  Initial Public Offering  (Continued)


subject to repurchase no longer became mandatorily redeemable by
the Company upon the occurrence of certain events. (See
Notes 11 and 12.)

11.  Preferred Stock

The Company has authorized the issuance of up to 225,000 shares
of preferred stock, par value $.01 per share, of which 110,000
has been designated Series A Convertible Preferred Stock
(Series A) and 115,000 has been designated
Series B Convertible Redeemable Preferred Stock
(Series B). During 1998, the Company issued
55,000 shares of Series A for a total aggregate purchase
price of $33.0 million, and 59,279 shares of Series B
for a total aggregate purchase price of $62.2 million,
including $22.1 million of Series B issued upon
conversion of notes payable. Upon the conversion of notes payable
 with a face value of $9,095,000 into Series B, unamortized
debt discount of approximately $1,350,000 was recorded as
additional interest expense.

Series A:

Conversion

The Series A outstanding at December 31, 1998
automatically converted into shares of common stock upon the
closing of the initial public offering in April 1999. Each share
of Series A was converted into 506.25 shares of common
stock.

Dividends

The holders of the Series A were entitled to receive
cumulative quarterly dividends at the annual rate of $48 per
share. All accrued dividends were paid at the closing of the
initial public offering in April 1999.

Voting Rights

Each share of Series A had substantially the same voting
rights as the number of shares of common stock into which it was
converted. In addition, certain corporate actions required the
consent of two-thirds of the outstanding shares of Series A.

Series B:

Conversion

The Series B outstanding at December 31, 1998
automatically converted into shares of common stock upon the
closing of the initial public offering in April 1999. Each share
of Series B was converted into 703.12 shares of common
stock.

Dividends

The holders of the Series B were entitled to receive
cumulative quarterly dividends at the annual rate of $84 per
share. All accrued dividends were paid at the closing of the
initial public offering in April 1999.

Voting Rights

Each share of Series B had substantially the same voting
rights as the number of shares of common stock into which it was
converted.

56



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

12.  Common Stock Subject to Repurchase

The Company sold 3,023,438 shares of common stock to three
officers that at December 31, 1998 required the Company to
repurchase the common stock at fair value in the event of
disability or death. These agreements were amended on
February 25, 1999 to void the repurchase obligation upon
death or disability upon the closing of an initial public
offering of the common stock.

The Company initially recorded the common stock subject to
repurchase at an amount equal to the consideration received of
$1,010,000 (purchase price of $1,057,500, less $47,500
represented by notes receivable). The common stock subject to
repurchase was accreted to its estimated fair value during all
periods the common stock was subject to repurchase through
charges to additional paid-in capital. The estimated value per
share of $1.39 at December 31, 1998 was determined through
an independent appraisal of the Companys common stock.
Additional accretion in 1999 prior to the April initial public
offering was recorded based on valuations consistent with the
expected initial public offering price. As a result of the
initial public offering in April 1999, these shares are no
longer subject to mandatory repurchase by the Company, and their
accreted value at that date of $28,218,750 was reclassified to
stockholders equity.

13.  Stock Warrants

In 1998, in connection with the issuance of debt or capital
leases, the Company issued warrants to purchase 2,400,001 shares
of common stock and warrants to purchase 971 shares of
Series B. The warrants to purchase Series B converted
into warrants to purchase 682,734 shares of common stock in
April 1999 upon the closing of the initial public offering. The
warrants expire from 2003 through 2008, and are exerciseable for
$1.49 or $1.53 per share.

Upon issuance, the Company estimated the fair value of the
warrants using a Black-Scholes option pricing model with the
following weighted-average assumptions: risk-free interest rate
of 5.50%, dividend yield of 0%; volatility factor of the expected
 market price of the Companys common stock of 40%; and a
weighted-average expected life of the warrant of 10 years.
The range of values assigned to the warrants was $0.35 to $0.93
per share, and the total value assigned was $2,740,329. This
amount was recorded as additional paid-in capital, and a
corresponding debt discount was recorded that is being recognized
 as additional interest expense over the term of the related debt
 or capital lease.

Also, as discussed in Note 2, the Company issued warrants to
purchase 253,125 shares of common stock in connection with
the acquisition of IIT and ACR. These warrants expire in 2008 and
 are exerciseable for $7.11 per share. The Company estimated
 the value of these warrants considering the various terms,
including the exercise price of the warrants, the estimated fair
value of the Companys common stock, and the length of time
the warrants are exercisable. The aggregate value assigned to
these warrants was $90,000.

During 1999, warrants to purchase 1,113,977 shares of common
 stock were exercised for proceeds of $3,086,203. A summary of
warrants outstanding at December 31, 1999 is as follows:

|                 |           |                |  |                 |      |  |  |  |                | 
|---------------- | --------- | -------------- |  | --------------- | ---- |  |  |  | -------------- | 
|Number of Shares |           | Exercise Price |  | Expiration Date
|                 |           |                |  |                
|                 | 83,705    |                |  | $               | 1.49 |  |  |  | September 2005 | 
|                 | 2,138,281 |                |  | $               | 1.53 |  |  |  | September 2008 | 
|                 |           |                |  |                 |      |  |  |  |                | 
|                 | 2,221,986 |                |  |                 |      |  |  |  |                | 
|                 |           |                |  |                 |      |  |  |  |                | 

57



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

14.  Shares Reserved for Future Issuance

The Company at December 31, 1999 has reserved 23,478,794
shares of common stock for future issuance upon the exercise of
stock options eligible for granting or previously granted under
the 1998 Stock Option Plan (see Note 15), 7,545,272 shares of
common stock issuable upon the conversion of the subordinated
notes and 2,221,986 shares of common stock attributable to
outstanding warrants.

15.  Stock Compensation Plan

Stock Options

Effective July 2, 1998, the Company adopted the 1998 Stock
Option Plan of USinternetworking, Inc. (the Plan)
which is administered by the Compensation Committee of the Board
of Directors. The Plan, as amended, provides for the granting of
either qualified or non-qualified options to purchase an
aggregate of up to 25,160,063 shares of common stock to
eligible employees, officers, directors and consultants of the
Company.

A summary of the Companys stock option activity follows:

|                                           |  |                     |           |                   |  |           |      |          |  |  |            |   |  |   |      | 
|------------------------------------------ |  | ------------------- | --------- | ----------------- |  | --------- | ---- | -------- |  |  | ---------- | - |  | - | ---- | 
|                                           |  |                     |           |                   |  |          
|                                           |  | For the period from |           |                   |  |          
|                                           |  | January 1, 1998     |           |                   |  |          
|                                           |  | (date of inception) |           |                  
|                                           |  | through             |           | Year ended       
|                                           |  | December 31, 1998   |           | December 31, 1999
|                                           |  |                     |           |                  
|                                           |  |                     |           | Weighted          |  |           |      | Weighted
|                                           |  |                     |           | Average           |  |           |      | Average 
|                                           |  | Number of           |           | Exercise          |  | Number of |      | Exercise
|                                           |  | Options             |           | Price             |  | Options   |      | Price   
|                                           |  |                     |           |                   |  |           |      |         
|Outstanding at beginning of year           |  |                     |          |                   |  | $         |     |          |  |  | 3,785,062  |   |  | $ | 1.17 | 
|                                          
|                                          
|                                          
|                                          
|Granted                                    |  |                     | 3,845,532 |                   |  |           | 1.17 |          |  |  | 10,735,674 |   |  |   | 7.57 | 
|                                          
|                                          
|                                          
|                                          
|Exercised                                  |  |                     |          |                   |  |           |     |          |  |  | (1,681,269 | ) |  |   | 1.93 | 
|                                          
|                                          
|                                          
|                                          
|Forfeited                                  |  |                     | (60,470   | )                 |  |           | 1.17 |          |  |  | (920,394   | ) |  |   | 2.53 | 
|                                           |  |                     |           |                   |  |           |      |          |  |  |            |   |  |   |      | 
|Outstanding and exercisable at end of year |  |                     | 3,785,062 |                   |  | $         | 1.17 |          |  |  | 11,919,073 |   |  | $ | 6.77 | 
|                                           |  |                     |           |                   |  |           |      |          |  |  |            |   |  |   |      | 

Weighted average fair value of options granted during 1999 is as
follows:

|                                       |  |           |           |                  |  |                  |       |  |  |   |       | 
|-------------------------------------- |  | --------- | --------- | ---------------- |  | ---------------- | ----- |  |  | - | ----- | 
|                                       |  | Number of |           | Weighted Average |  | Weighted Average
|                                       |  | Shares    |           | Exercise Price   |  | Fair Value      
|                                       |  |           |           |                  |  |                 
|Fair value equal to exercise price     |  |           | 4,476,495 |                  |  | $                | 11.08 |  |  | $ | 9.11  | 
|                                      
|                                      
|                                      
|                                      
|Fair value greater than exercise price |  |           | 5,509,593 |                  |  | $                | 3.82  |  |  | $ | 9.43  | 
|                                      
|                                      
|                                      
|                                      
|Exercise price greater than fair value |  |           | 749,586   |                  |  | $                | 14.99 |  |  | $ | 10.66 | 

58



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)



15.  Stock Compensation Plan  (Continued)


Exercise prices for options outstanding as of December 31,
1999 ranged from $1.17 to $46.59 as follows:

|                |  |             |            |                  |  |                       |       |  |  |  |      | 
|--------------- |  | ----------- | ---------- | ---------------- |  | --------------------- | ----- |  |  |  | ---- | 
|                |  |             |            | Weighted Average |  | Weighted Average     
|                |  |             |            | Exercise Prices  |  | Remaining Contractual
|Range of        |  | Options     |            | of Options       |  | Life of Options      
|Exercise Prices |  | Outstanding |            | Outstanding      |  | Outstanding          
|                |  |             |            |                  |  |                      
|$ 1.17-$ 1.49   |  |             | 2,745,195  |                  |  | $                     | 1.19  |  |  |  | 8.7  | 
|$ 2.67          |  |             | 3,699,540  |                  |  |                       | 2.67  |  |  |  | 9.3  | 
|$ 6.67-$ 9.11   |  |             | 2,756,235  |                  |  |                       | 8.23  |  |  |  | 9.7  | 
|$10.14-$14.89   |  |             | 1,921,392  |                  |  |                       | 12.03 |  |  |  | 9.7  | 
|$15.50-$21.95   |  |             | 235,088    |                  |  |                       | 18.43 |  |  |  | 9.8  | 
|$23.50-$35.11   |  |             | 470,086    |                  |  |                       | 28.95 |  |  |  | 9.9  | 
|$37.79-$46.59   |  |             | 91,537     |                  |  |                       | 41.59 |  |  |  | 10.0 | 
|                |  |             |            |                  |  |                       |       |  |  |  |      | 
|                |  |             | 11,919,073 |                  |  |                       |       |  |  |  |      | 
|                |  |             |            |                  |  |                       |       |  |  |  |      | 

All options granted vested immediately at the date of grant.
Shares of common stock purchased pursuant to these options will
be subject to the Companys right to repurchase them at the
option exercise price upon the termination of the holders
employment or business relationship with the Company. The
repurchase right will lapse with respect to one-third of the
shares purchasable upon exercise of an option on the first
anniversary of the date of grant of the option. The repurchase
right with respect to the remainder of the shares purchasable
upon exercise of an option will lapse in equal quarterly
installments over the subsequent eight calendar quarters. The
options expire 10 years from the date of issuance. At
December 31, 1999, the weighted- average remaining
contractual life of outstanding options is 9.3 years.

Certain options granted in 1999 are exercisable at prices less
than the fair market value of the Companys common stock at
the date of grant. The Company will record stock compensation
expense of approximately $35.0 million as a result of these
1999 option grants that will be recognized ratably over the
four-year period that the employees earn the right to retain the
shares obtained upon exercise of the stock options without regard
 to continued employment. For the year ended December 31,
1999, the Company recorded non-cash stock compensation expense of
 $8.5 million related to these grants.

Restricted Stock Grants

During 1999, the Company issued for no consideration
141,750 shares of common stock to four officers. The common
stock vests over a maximum four year period from the date of
issuance. The common stock at the issuance date had an aggregate
fair value of $2,009,000, which is being recognized as
compensation expense over the vesting period. During 1999, the
Company recognized as compensation expense $452,708 under these
arrangements. At December 31, 1999, 20,250 shares of
these restricted stock awards are vested.

Pro Forma Information

For the year ended December 31, 1998, pro forma net loss and
 loss per share information required by Statement No. 123
was determined using the minimum value method. The minimum value
method calculates the fair value of options as the excess of the
estimated fair value of the underlying stock at the date of grant
 over the present value of both the exercise price and the
expected dividend payments, each discounted at the risk-free
rate, over the expected life of the option. In determining the
estimated fair value of granted stock options under the minimum
value method, the risk-free interest rate was assumed

59



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)



15.  Stock Compensation Plan  (Continued)


to be 5.50%, the dividend yield was estimated to be 0% and the
expected life of granted options was assumed to be four years.

The grant-date fair value of all options granted during 1998
using the minimum value method was less than $.01, thus no pro
forma information has been presented. The exercise price at the
grant-date of all options granted through December 31, 1998
was greater than the market value of the underlying common stock
on the grant date, as determined by independent appraisal. As a
result, the Company has not recognized compensation expense
related to these options.

For the year ended December 31, 1999, pro forma net loss and
 loss per share information required by Statement No. 123
has been determined as if the Company had accounted for its
stock-based awards using the fair value method. The fair value of
 these awards was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted
average assumptions for 1999: risk-free interest rate of 5.67%,
dividend yield of 0%, volatility factors of the expected market
price of the Companys common stock of 1.28, and an expected
 life of 4 years.

The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no vesting
 restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Companys stock-based awards have
characteristics significantly different from those of traded
options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily
 provide a reliable single measure of the fair value of its
stock-based awards.

For purposes of pro forma disclosures, the estimated fair value
of the awards is amortized to expense over the period the
employees earn the right to retain the shares obtained upon
exercise of the stock options or upon the issuance of restricted
common stock. The Companys pro forma net loss is
$116.8 million for the year ended December 31, 1999.
Pro forma basic and diluted loss per share is $1.75 for the year
ended December 31, 1999.

Pro forma compensation expense from stock-based awards reflects
only the vesting of 1998 and 1999 awards in 1999. Not until 2001
is the full effect of recognizing compensation expense for
stock-based awards representative of the possible effects on
pro-forma net income (loss) for future years.

16.  Income Taxes

At December 31, 1999, the Company has a U.S. federal net
operating loss carryforward of $107.7 million. Included in
the net operating loss is approximately $4.6 million that
will not result in future tax benefits and will be recorded to
stockholders equity. This carryforward expires in 2019. The
 amount available to be used in any given year will be limited by
 operation of certain provisions of the Internal Revenue Code.
The Company also has state net operating loss carryforwards
available, the utilization of which will be similarly limited.
The Company has established a valuation allowance with respect to
 these federal and state loss carryforwards.

60



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)



16.  Income Taxes  (Continued)


Significant components of the Companys deferred tax assets
and liabilities at December 31 are as follows:

|                                                |                                                                |                              |             |           |            |   |             |            |            | 
|----------------------------------------------- | -------------------------------------------------------------- | ---------------------------- | ----------- | --------- | ---------- | - | ----------- | ---------- | ---------- | 
|                                                |                                                                | 1998                         |             | 1999     
|                                                |                                                                |                              |             |          
|Deferred tax assets:                            |                                                                |                              |             |           |            |   |             |           
|                                               
|                                               
|                                               
|                                               
|                                                | Net operating loss carryforwards                               |                              | $           | 7,855,560 |            |   | $           | 42,582,874 |           
|                                               
|                                               
|                                               
|                                               
|                                                | Start-up and organizational costs capitalized for tax purposes |                              |             | 3,632,867 |            |   |             | 2,565,709  |           
|                                               
|                                               
|                                               
|                                               
|                                                | Allowance for doubtful accounts                                |                              |             |          |            |   |             | 214,933    |           
|                                               
|                                               
|                                               
|                                               
|                                                | Accrued vacation                                               |                              |             |          |            |   |             | 493,172    |           
|                                               
|                                               
|                                               
|                                               
|                                                | Accrued compensation                                           |                              |             |          |            |   |             | 229,583    |           
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred revenue                                               |                              |             |          |            |   |             | 2,514,797  |           
|                                               
|                                               
|                                               
|                                               
|                                                | Non-cash compensation expense                                  |                              |             |          |            |   |             | 3,542,634  |           
|                                               
|                                               
|                                               
|                                               
|                                                | Other                                                          |                              |             | 192,230   |            |   |             | 168,406    |           
|                                                |                                                                |                              |             |           |            |   |             |           
|                                                |                                                                | Total deferred tax assets    |             |           | 11,680,657 |   |             |            | 52,312,108 | 
|                                                |                                                                |                              |             |           |            |   |             |           
|Deferred tax liabilities:                       |                                                                |                              |             |           |            |   |             |           
|                                               
|                                               
|                                               
|                                               
|                                                | Stock options                                                  |                              |             |          |            |   |             | 1,821,929  |           
|                                               
|                                               
|                                               
|                                               
|                                                | Tax over book depreciation                                     |                              |             | 314,930   |            |   |             | 278,374    |           
|                                               
|                                               
|                                               
|                                               
|                                                | Prepaid maintenance contracts                                  |                              |             |          |            |   |             | 958,268    |           
|                                               
|                                               
|                                               
|                                               
|                                                | Other                                                          |                              |             | 467,169   |            |   |             | 174,325    |           
|                                                |                                                                |                              |             |           |            |   |             |           
|                                                |                                                                | Total deferred tax liability |             |           | 782,099    |   |             |            | 3,232,896  | 
|                                                |                                                                |                              |             |           |            |   |             |           
|Net future income tax benefit                   |                                                                |                              | 10,898,558  |           |            |   | 49,079,212  |           
|                                               
|                                               
|                                               
|                                               
|Valuation allowance for net deferred tax assets |                                                                |                              | (10,898,558 | )         |            |   | (49,079,212 | )         
|                                                |                                                                |                              |             |           |            |   |             |           
|Net deferred tax assets                         |                                                                | $                            |            |           |            | $ |            |           
|                                                |                                                                |                              |             |           |            |   |             |           

The reconciliation of the reported income tax expense to the
amount that would result by applying the U.S. federal statutory
rate to the net loss is as follows:

|                                           |       |                     |             |                   |  |   |             |   | 
|------------------------------------------ | ----- | ------------------- | ----------- | ----------------- |  | - | ----------- | - | 
|                                           |       | For the period from |             |                  
|                                           |       | January 14, 1998    |             |                  
|                                           |       | (date of inception) |             |                  
|                                           |       | through             |             | Year ended       
|                                           |       | December 31, 1998   |             | December 31, 1999
|                                           |       |                     |             |                  
|Tax benefit at U.S. statutory rate         |       | $                   | (11,358,659 | )                 |  | $ | (36,161,308 | )
|                                          
|                                          
|                                          
|                                          
|State income taxes, net of federal benefit |       |                     | (984,188    | )                 |  |   | (4,373,033  | )
|                                          
|                                          
|                                          
|                                          
|Non-deductible goodwill                    |       |                     | 559,839     |                   |  |   | 2,056,250   |  
|                                          
|                                          
|                                          
|                                          
|Non-deductible meals and entertainment     |       |                     | 39,108      |                   |  |   | 315,870     |  
|                                          
|                                          
|                                          
|                                          
|Non-deductible interest expense            |       |                     | 704,166     |                   |  |   | 92,330      |  
|                                          
|                                          
|                                          
|                                          
|Non-deductible transactions costs          |       |                     | 154,777     |                   |  |   |            |  
|                                          
|                                          
|                                          
|                                          
|Other                                      |       |                     | (13,601     | )                 |  |   | (110,763    | )
|                                          
|                                          
|                                          
|                                          
|Change in valuation allowance              |       |                     | 10,898,558  |                   |  |   | 38,180,654  |  
|                                           |       |                     |             |                   |  |   |             |  
|                                           | Total |                     | $           |                  |  |   | $           |  | 
|                                           |       |                     |             |                   |  |   |             |  

17.  Operating Leases

The Company conducts a significant amount of its operations from
leased facilities under operating leases that have terms of up to
 seven years and that generally contain renewal options of two to
 three years

61



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)



17.  Operating Leases  (Continued)


and rent escalation clauses. Future minimum payments under
noncancellable operating leases with initial terms of one year or
 more consist of the following at December 31, 1999:

|           |  |   |            | 
|---------- |  | - | ---------- | 
|          
|          
|          
|          
|2000       |  | $ | 4,789,202  | 
|          
|          
|          
|          
|2001       |  |   | 3,696,091  | 
|          
|          
|          
|          
|2002       |  |   | 3,327,853  | 
|          
|          
|          
|          
|2003       |  |   | 2,308,908  | 
|          
|          
|          
|          
|2004       |  |   | 1,005,636  | 
|          
|          
|          
|          
|Thereafter |  |   | 1,217,488  | 
|           |  |   |            | 
|           |  | $ | 16,345,178 | 
|           |  |   |            | 

The Company incurred rent expense of $718,416 and $3,181,911
during the period from January 14, 1998 (date of inception)
through December 31, 1998 and for the year ended
December 31, 1999, respectively.

18.  Employee Benefit Plan

The Company established a defined contribution benefit plan
effective July 1, 1998. The plan covers substantially all
employees who have 30 days of service with the Company.
Participants may contribute from 1% to 15% of their annual
compensation to the plan. The Company makes matching
contributions of common stock up to 6% of the participants
contributions pursuant to the terms of the plan. No contributions
 were made by the Company in 1998. In 1999, the Company
contributed to the plan 54,738 shares of common stock with a fair
 value of $600,420.

19.  Related Party Transactions

During 1998, the Company received a non-interest bearing loan
from an officer in the amount of $1,000,000. The loan was
subsequently converted into 1,667 shares of Series A
Convertible Preferred Stock.

In September 1999, the Company loaned $2,250,000 to an
officer to purchase 843,750 shares of common stock pursuant
to a stock option exercise. The loan is evidenced by a full
recourse note that bears interest at 5% per annum, and is payable
 on or before July 31, 2000. The Company has classified the
note as a reduction of stockholders equity at
December 31, 1999. Additionally, the Company loaned the same
 officer $1.9 million evidenced by a note bearing interest
at 7% per annum and payable within 90 days on demand. The
purpose of the loan was to fund the officers tax liability
resulting from the exercise of the options described above.

20.  Business and Geographic Segment Information

During 1998 and through June 1999, the Company was organized
 into two business unitsiMAP and Professional IT Services.
In the third quarter of 1999, the Company changed the manner in
which it manages its operations and reports the activities of
those operations. The Company is now organized into seven
business units that offer unique software solutions. These
operating segments have been aggregated for reporting purposes
into two segments, as follows:



| |   |                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Enterprise Wide Solutions  provides enterprise
	relationship management, financial management, human resource,
	and professional services automation software product offerings;
	and

62



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)



20.  Business and Geographic Segment
Information  (Continued)




| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | E-Commerce and Web-Based Solutions  provides
	electronic commerce, enhanced messaging and decision support
	product offerings.

Management believes that the aggregation of the operating
segments helps users of the financial statements better
understand performance. The combined operating segments have
similar economic characteristics and products and meet other
criteria for aggregation. Both business units utilize an
Internet-based network, which enables clients to use leading
business software applications without the burden of owning or
managing the underlying technology. These services are delivered
to customers through a network of Enterprise Data Centers located
 in Maryland, California, Amsterdam and Tokyo.

The Company evaluates the performance of its new operating
segments based on contribution margin, or revenues less variable
direct costs. This contribution margin excludes an allocation of
network and infrastructure costs, selling, general and
administrative costs, product research and development costs,
non-cash stock compensation expense, and depreciation and
amortization.

The Company does not prepare information regarding segment
assets. The accounting policies used by the reportable segments
are the same as those used by the Company as described in
Note 1 to the consolidated financial statements.

The following table sets forth information on the Companys
reportable segments. The 1998 data has been restated to conform
to the new segment classifications.

|                                 |                                    |                     |   |                   |   |  |   |            | 
|-------------------------------- | ---------------------------------- | ------------------- | - | ----------------- | - |  | - | ---------- | 
|                                 |                                    | For the period from |   |                  
|                                 |                                    | January 14, 1998    |   |                  
|                                 |                                    | (date of inception) |   |                  
|                                 |                                    | through             |   | Year ended       
|                                 |                                    | December 31, 1998   |   | December 31, 1999
|                                 |                                    |                     |   |                  
|Revenue:                         |                                    |                     |   |                   |   |  |   |           
|                                
|                                
|                                
|                                
|                                 | Enterprise Wide Solutions          |                     | $ | 2,138,290         |   |  | $ | 17,928,199 | 
|                                
|                                
|                                
|                                
|                                 | E-Commerce and Web-Based Solutions |                     |   | 1,984,159         |   |  |   | 17,584,561 | 
|                                 |                                    |                     |   |                   |   |  |   |           
|                                 | Consolidated                       |                     | $ | 4,122,449         |   |  | $ | 35,512,760 | 
|                                 |                                    |                     |   |                   |   |  |   |           
|Segment operating profit (loss): |                                    |                     |   |                   |   |  |   |           
|                                
|                                
|                                
|                                
|                                 | Enterprise Wide Solutions          |                     | $ | (20,876           | ) |  | $ | 9,008,909  | 
|                                
|                                
|                                
|                                
|                                 | E-Commerce and Web-Based Solutions |                     |   | 718,214           |   |  |   | 2,933,572  | 
|                                 |                                    |                     |   |                   |   |  |   |           
|                                 | Consolidated                       |                     | $ | 697,338           |   |  | $ | 11,942,481 | 
|                                 |                                    |                     |   |                   |   |  |   |           

63



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)



20.  Business and Geographic Segment
Information  (Continued)


A reconciliation of segment operating profit to net loss during
the periods presented is as follows:

|                                          |  |                     |             |                   |  |   |              |  
|----------------------------------------- |  | ------------------- | ----------- | ----------------- |  | - | ------------ | -
|                                          |  | For the period from |             |                  
|                                          |  | January 14, 1998    |             |                  
|                                          |  | (date of inception) |             |                  
|                                          |  | through             |             | Year ended       
|                                          |  | December 31, 1998   |             | December 31, 1999
|                                          |  |                     |             |                  
|Segment operating profit for all segments |  | $                   | 697,338     |                   |  | $ | 11,942,481   |  
|                                         
|                                         
|                                         
|                                         
|Network and infrastructure costs          |  |                     | (2,185,893  | )                 |  |   | (16,238,568  | )
|                                         
|                                         
|                                         
|                                         
|General and administrative                |  |                     | (19,426,575 | )                 |  |   | (22,051,990  | )
|                                         
|                                         
|                                         
|                                         
|Sales and marketing                       |  |                     | (5,123,334  | )                 |  |   | (36,595,021  | )
|                                         
|                                         
|                                         
|                                         
|Product research and development          |  |                     | (690,388    | )                 |  |   | (5,351,678   | )
|                                         
|                                         
|                                         
|                                         
|Non-cash stock compensation expense       |  |                     | (231,135    | )                 |  |   | (10,350,729  | )
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |                     | (3,179,648  | )                 |  |   | (22,480,006  | )
|                                         
|                                         
|                                         
|                                         
|Interest income                           |  |                     | 367,411     |                   |  |   | 4,114,732    |  
|                                         
|                                         
|                                         
|                                         
|Interest expense                          |  |                     | (2,681,088  | )                 |  |   | (6,307,244   | )
|                                          |  |                     |             |                   |  |   |              |  
|Net loss                                  |  | $                   | (32,453,312 | )                 |  | $ | (103,318,023 | )
|                                          |  |                     |             |                   |  |   |              |  

Revenues from one customer of the Companys Enterprise Wide
Solutions segment accounted for approximately 16% of the
Companys consolidated revenue for the year ended
December 31, 1999.

21.  Subsequent Events

In March 2000, the Board of Directors approved a 3 for 2 stock
split of common stock, options, and warrants for holders of
record on March 14, 2000. Accordingly, all share and per
share data including stock option, warrant, and loss per share
information have been restated in the consolidated financial
statements to retroactively reflect the stock split.

On January 14, 2000, the Company increased its authorized
shares of common stock from 75,000,000 shares to
450,000,000 shares. The increase is reflected in the
accompanying balance sheet at December 31, 1999.

64



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)



21.  Subsequent Events  (Continued)


Report of Independent Auditors

The Board of Directors and Stockholders



We have audited the accompanying consolidated balance sheets of
I.I.T. Holding, Inc. and subsidiaries as of December 31,
1996 and 1997, and September 7, 1998, and the related
consolidated statements of operations, stockholders equity
(deficit), and cash flows for the years ended December 31,
1996 and 1997, and for the period from January 1, 1998
through September 7, 1998. These financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 1996 and
1997 financial statements of International Information Technology
 IIT, C.A., a wholly-owned subsidiary, which statements reflect
total assets of $68,247 and $76,361 as of December 31, 1996
and 1997, respectively, and total revenues of $3,336 and $147,797
 for the period from March 6, 1996 (inception) through
December 31, 1996 and for the year ended December 31,
1997, respectively. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion,
insofar as it relates to data included for International
Information Technology IIT, C.A., is based solely on the report
of the other auditors.

We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
 about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other
auditors, the consolidated financial statements referred to above
 present fairly, in all material respects, the consolidated
financial position of I.I.T. Holding, Inc. and subsidiaries as of
 December 31, 1996 and 1997, and September 7, 1998 and
the consolidated results of their operations and their cash flows
 for the years ended December 31, 1996 and 1997, and for the
 period from January 1, 1998 through September 7, 1998,
 in conformity with accounting principles generally accepted in
the United States.



| |                      
| | ---------------------
| | /s/ Ernst & Young LLP





65



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##### Table of Contents



Report Of Independent Auditors

The Board of Directors



We have audited the accompanying balance sheets of International
Information Technology IIT, C.A., at December 31, 1997 and
for the period from March 5, 1996 (date of inception)
through December 31, 1996, and the related statements of
operations, changes in stockholders equity and cash flows
for the years then ended (not presented separately herein). These
 financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with U.S. generally
accepted auditing standards. Those standards require that we plan
 and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of International Information Technology IIT, C.A. at
December 31, 1997 and for the period from March 5, 1996
 (date of inception) through December 31, 1996, and the
results of its operations and its cash flows for the years then
ended in conformity with U.S. generally accepted accounting
principles.

At December 31, 1997 and 1996, the accompanying financial
statements have been prepared assuming that the Company will
continue its ongoing operations, despite of the negative
stockholders equity, which shows uncertainty about the
Companys ability to continue in operation. These financial
statements do not include any adjustments that could result as a
consequence of this uncertainty.

BASSAN & ASSOCIADOS S.C.









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I.I.T. Holding, Inc. and Subsidiaries

Consolidated Balance Sheets

|                                                  |                                                                     |                           |                                            |              |         |         |         |           |         |         |          |            |           |           | 
|------------------------------------------------- | ------------------------------------------------------------------- | ------------------------- | ------------------------------------------ | ------------ | ------- | ------- | ------- | --------- | ------- | ------- | -------- | ---------- | --------- | --------- | 
|                                                  |                                                                     |                           |                                            |             
|                                                  |                                                                     | December 31,              |                                            |             
|                                                  |                                                                     |                           |                                            | September 7,
|                                                  |                                                                     | 1996                      |                                            | 1997         |         | 1998   
|                                                  |                                                                     |                           |                                            |              |         |        
|                                                 
|                                                 
|                                                 
|                                                 
|ASSETS                                           
|                                                 
|                                                 
|                                                 
|                                                 
|Current assets:                                   |                                                                     |                           |                                            |              |         |         |         |           |         |         |          |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Cash and cash equivalents                                           |                           | $                                          | 69,563       |         |         | $       | 14,443    |         |         | $        | 331,013    |          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Accounts receivable  trade, less allowance of $50,000
	in 1998     |                           |                                            | 225,500      |         |         |         | 634,215   |         |         |          | 1,299,469  |          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Other current assets                                                |                           |                                            | 2,451        |         |         |         | 13,902    |         |         |          | 68,799     |          
|                                                  |                                                                     |                           |                                            |              |         |         |         |           |         |         |          |           
|                                                  |                                                                     | Total current assets      |                                            |              | 297,514 |         |         |           | 662,560 |         |          |            | 1,699,281 |          
|                                                 
|                                                 
|                                                 
|                                                 
|Equipment and vehicles:                           |                                                                     |                           |                                            |              |         |         |         |           |         |         |          |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Computer equipment                                                  |                           |                                            | 30,407       |         |         |         | 116,850   |         |         |          | 161,449    |          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Vehicles                                                            |                           |                                            | 45,119       |         |         |         | 45,119    |         |         |          |           |          
|                                                  |                                                                     |                           |                                            |              |         |         |         |           |         |         |          |           
|                                                  |                                                                     |                           | 75,526                                     |              |         |         | 161,969 |           |         |         | 161,449  |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Less: accumulated depreciation                                      |                           |                                            | (25,831      | )       |         |         | (56,084   | )       |         |          | (55,700    | )        
|                                                  |                                                                     |                           |                                            |              |         |         |         |           |         |         |          |           
|                                                  |                                                                     |                           | 49,695                                     |              |         |         | 105,885 |           |         |         | 105,749  |           
|                                                 
|                                                 
|                                                 
|                                                 
|Other assets                                      |                                                                     |                           | 654                                        |              |         |         | 618     |           |         |         |         |           
|                                                  |                                                                     |                           |                                            |              |         |         |         |           |         |         |          |           
|                                                  |                                                                     |                           | Total assets                               |              | $       | 347,863 |         |           | $       | 769,063 |          |            | $         | 1,805,030 | 
|                                                  |                                                                     |                           |                                            |              |         |         |         |           |         |         |          |           
|                                                 
|                                                 
|                                                 
|                                                 
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)   
|                                                 
|                                                 
|                                                 
|                                                 
|Current liabilities:                              |                                                                     |                           |                                            |              |         |         |         |           |         |         |          |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Bank overdraft                                                      |                           | $                                          |             |         |         | $       | 157,056   |         |         | $        |           |          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Accounts payable                                                    |                           |                                            | 13,899       |         |         |         | 7,162     |         |         |          | 53,787     |          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Accrued expenses                                                    |                           |                                            | 60,000       |         |         |         | 366,685   |         |         |          | 1,974,395  |          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Current portion of note payable                                     |                           |                                            | 4,443        |         |         |         | 10,036    |         |         |          |           |          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Current portion of capital lease obligations                        |                           |                                            |             |         |         |         | 18,230    |         |         |          | 9,803      |          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Unsecured demand note payable to stockholder, non-interest
	bearing |                           |                                            | 99,951       |         |         |         | 62,160    |         |         |          | 8,500      |          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Client advances                                                     |                           |                                            | 55,824       |         |         |         |          |         |         |          |           |          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Current deferred income taxes                                       |                           |                                            | 49,270       |         |         |         |          |         |         |          |           |          
|                                                  |                                                                     |                           |                                            |              |         |         |         |           |         |         |          |           
|                                                  |                                                                     | Total current liabilities |                                            |              | 283,387 |         |         |           | 621,329 |         |          |            | 2,046,485 |          
|                                                  |                                                                     |                           |                                            |              |         |         |         |           |         |         |          |           
|Note payable                                      |                                                                     |                           | 10,676                                     |              |         |         |        |           |         |         |         |           
|                                                 
|                                                 
|                                                 
|                                                 
|Capital lease obligations, net of current portion |                                                                     |                           |                                           |              |         |         | 15,953  |           |         |         | 8,596    |           
|                                                 
|                                                 
|                                                 
|                                                 
|Deferred income taxes                             |                                                                     |                           | 9,103                                      |              |         |         |        |           |         |         |         |           
|                                                 
|                                                 
|                                                 
|                                                 
|Commitments and contingent liabilities            |                                                                     |                           |                                           |              |         |         |        |           |         |         |         |           
|                                                 
|                                                 
|                                                 
|                                                 
|Stockholders equity (deficit):                   |                                                                     |                           |                                            |              |         |         |         |           |         |         |          |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Common stock                                                        |                           |                                            | 2,724        |         |         |         | 3,197     |         |         |          | 475        |          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Additional paid-in capital                                          |                           |                                            |             |         |         |         | 1,001,843 |         |         |          | 1,004,565  |          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Accumulated other comprehensive income (loss)                       |                           |                                            | 835          |         |         |         | (20,918   | )       |         |          | 21,365     |          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Retained earnings (deficit)                                         |                           |                                            | 41,138       |         |         |         | (852,341  | )       |         |          | (1,276,456 | )        
|                                                  |                                                                     |                           |                                            |              |         |         |         |           |         |         |          |           
|                                                  |                                                                     |                           | 44,697                                     |              |         |         | 131,781 |           |         |         | (250,051 | )         
|                                                  |                                                                     |                           |                                            |              |         |         |         |           |         |         |          |           
|                                                  |                                                                     |                           | Total liabilities and stockholders equity |              | $       | 347,863 |         |           | $       | 769,063 |          |            | $         | 1,805,030 | 
|                                                  |                                                                     |                           |                                            |              |         |         |         |           |         |         |          |           

See accompanying notes.


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I.I.T. Holding, Inc. and Subsidiaries

Consolidated Statements of Operations

|                                                |                            |                         |         |                 |  |                   |           |           |  |   |           |           | 
|----------------------------------------------- | -------------------------- | ----------------------- | ------- | --------------- |  | ----------------- | --------- | --------- |  | - | --------- | --------- | 
|                                                |                            |                         |         | For the period 
|                                                |                            | Year ended December 31, |         | January 1, 1998
|                                                |                            |                         |         | through        
|                                                |                            | 1996                    |         | 1997            |  | September 7, 1998
|                                                |                            |                         |         |                 |  |                  
|Consulting revenue                              |                            | $                       | 747,023 |                 |  | $                 | 2,812,011 |           |  | $ | 4,405,560 |          
|                                               
|                                               
|                                               
|                                               
|Cost of revenue                                 |                            |                         | 519,261 |                 |  |                   | 1,881,031 |           |  |   | 2,976,499 |          
|                                                |                            |                         |         |                 |  |                   |           |           |  |   |           |          
|Gross profit                                    |                            |                         | 227,762 |                 |  |                   | 930,980   |           |  |   | 1,429,061 |          
|                                               
|                                               
|                                               
|                                               
|Operating expenses:                             |                            |                         |         |                 |  |                   |           |           |  |   |           |          
|                                               
|                                               
|                                               
|                                               
|                                                | General and administrative |                         |         | 131,037         |  |                   |           | 778,342   |  |   |           | 1,803,611 | 
|                                               
|                                               
|                                               
|                                               
|                                                | Sales and marketing        |                         |         | 73,305          |  |                   |           | 62,943    |  |   |           | 4,632     | 
|                                               
|                                               
|                                               
|                                               
|                                                | Stock compensation expense |                         |         |                |  |                   |           | 1,002,316 |  |   |           |          | 
|                                               
|                                               
|                                               
|                                               
|                                                | Depreciation               |                         |         | 13,556          |  |                   |           | 30,253    |  |   |           | 27,580    | 
|                                                |                            |                         |         |                 |  |                   |           |           |  |   |           |          
|                                                |                            |                         | 217,898 |                 |  |                   | 1,873,854 |           |  |   | 1,835,823 |          
|                                                |                            |                         |         |                 |  |                   |           |           |  |   |           |          
|Income (loss) from operations                   |                            |                         | 9,864   |                 |  |                   | (942,874  | )         |  |   | (406,762  | )        
|                                               
|                                               
|                                               
|                                               
|Interest expense                                |                            |                         | (2,917  | )               |  |                   | (8,977    | )         |  |   | (17,353   | )        
|                                                |                            |                         |         |                 |  |                   |           |           |  |   |           |          
|Income (loss) before provision for income taxes |                            |                         | 6,947   |                 |  |                   | (951,851  | )         |  |   | (424,115  | )        
|                                               
|                                               
|                                               
|                                               
|Provision (benefit) for income taxes            |                            |                         | 14,832  |                 |  |                   | (58,372   | )         |  |   |          |          
|                                                |                            |                         |         |                 |  |                   |           |           |  |   |           |          
|Net loss                                        |                            | $                       | (7,885  | )               |  | $                 | (893,479  | )         |  | $ | (424,115  | )        
|                                                |                            |                         |         |                 |  |                   |           |           |  |   |           |          

See accompanying notes.


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I.I.T. Holding, Inc. and Subsidiaries

Consolidated Statements of Stockholders Equity (Deficit)

|                              |                                               |                                                     |       |            |   |               |           |           |   |       |         |   |         |   |            |   |          |   |          |           |          |  
|----------------------------- | --------------------------------------------- | --------------------------------------------------- | ----- | ---------- | - | ------------- | --------- | --------- | - | ----- | ------- | - | ------- | - | ---------- | - | -------- | - | -------- | --------- | -------- | -
|                              |                                               |                                                     |       |            |   | Accumulated   |           |           |   |      
|                              |                                               |                                                     |       | Additional |   | Other         |           | Retained  |   |      
|                              |                                               | Common                                              |       | Paid-In    |   | Comprehensive |           | Earnings  |   |      
|                              |                                               | Stock                                               |       | Capital    |   | Income        |           | (Deficit) |   | Total
|                              |                                               |                                                     |       |            |   |               |           |           |   |      
|Balances at January 1, 1996   |                                               | $                                                   | 1,000 |            |   | $             |          |           |   | $     |        |   |         | $ | 49,023     |   |          | $ | 50,023   |          
|                             
|                             
|                             
|                             
|                              | Issuance of common stock                      |                                                     |       | 1,724      |   |               |           |          |   |       |         |  |         |   |            |  |          |   |          | 1,724     |         
|                             
|                             
|                             
|                             
|                              | Comprehensive income:                         |                                                     |       |            |   |               |           |           |   |       |         |   |         |   |            |   |          |   |          |           |         
|                             
|                             
|                             
|                             
|                              |                                               | Net loss                                            |       |            |  |               |           |           |  |       |         |   |        |   |            |   | (7,885   | ) |          |           | (7,885   | )
|                             
|                             
|                             
|                             
|                              |                                               | Other comprehensive income  translation adjustment |       |            |  |               |           |           |  |       |         |   | 835     |   |            |   |         |   |          |           | 835      |  
|                              |                                               |                                                     |       |            |   |               |           |           |   |       |         |   |         |   |            |   |          |   |          |          
|                              | Total comprehensive income (loss)             |                                                     |       |           |   |               |           |          |   |       |         |  |         |   |            |  |          |   |          | (7,050    | )       
|                              |                                               |                                                     |       |            |   |               |           |           |   |       |         |   |         |   |            |   |          |   |          |          
|Balances at December 31, 1996 |                                               |                                                     | 2,724 |            |   |               |          |           |   |       | 835     |   |         |   | 41,138     |   |          |   | 44,697   |          
|                             
|                             
|                             
|                             
|                              | Stock grant to employees for no consideration |                                                     |       | 473        |   |               |           | 1,001,843 |   |       |         |  |         |   |            |  |          |   |          | 1,002,316 |         
|                             
|                             
|                             
|                             
|                              | Comprehensive income:                         |                                                     |       |            |   |               |           |           |   |       |         |   |         |   |            |   |          |   |          |           |         
|                             
|                             
|                             
|                             
|                              |                                               | Net loss                                            |       |            |  |               |           |           |  |       |         |   |        |   |            |   | (893,479 | ) |          |           | (893,479 | )
|                             
|                             
|                             
|                             
|                              |                                               | Other comprehensive income  translation adjustment |       |            |  |               |           |           |  |       |         |   | (21,753 | ) |            |   |         |   |          |           | (21,753  | )
|                              |                                               |                                                     |       |            |   |               |           |           |   |       |         |   |         |   |            |   |          |   |          |          
|                              | Total comprehensive income (loss)             |                                                     |       |           |   |               |           |          |   |       |         |  |         |   |            |  |          |   |          | (915,232  | )       
|                              |                                               |                                                     |       |            |   |               |           |           |   |       |         |   |         |   |            |   |          |   |          |          
|Balances at December 31, 1997 |                                               |                                                     | 3,197 |            |   |               | 1,001,843 |           |   |       | (20,918 | ) |         |   | (852,341   | ) |          |   | 131,781  |          
|                             
|                             
|                             
|                             
|                              | Corporate reorganization                      |                                                     |       | (2,722     | ) |               |           | 2,722     |   |       |         |  |         |   |            |  |          |   |          |          |         
|                             
|                             
|                             
|                             
|                              | Comprehensive income:                         |                                                     |       |            |   |               |           |           |   |       |         |   |         |   |            |   |          |   |          |           |         
|                             
|                             
|                             
|                             
|                              |                                               | Net loss                                            |       |            |  |               |           |           |  |       |         |   |        |   |            |   | (424,115 | ) |          |           | (424,115 | )
|                             
|                             
|                             
|                             
|                              |                                               | Other comprehensive income  translation adjustment |       |            |  |               |           |           |  |       |         |   | 42,283  |   |            |   |         |   |          |           | 42,283   |  
|                              |                                               |                                                     |       |            |   |               |           |           |   |       |         |   |         |   |            |   |          |   |          |          
|                              | Total comprehensive income (loss)             |                                                     |       |           |   |               |           |          |   |       |         |  |         |   |            |  |          |   |          | (381,832  | )       
|                              |                                               |                                                     |       |            |   |               |           |           |   |       |         |   |         |   |            |   |          |   |          |          
|Balances at September 7, 1998 |                                               | $                                                   | 475   |            |   | $             | 1,004,565 |           |   | $     | 21,365  |   |         | $ | (1,276,456 | ) |          | $ | (250,051 | )        
|                              |                                               |                                                     |       |            |   |               |           |           |   |       |         |   |         |   |            |   |          |   |          |          

See accompanying notes.


69



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I.I.T. Holding, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

|                                                                                           |                                   |                         |         |                 |         |                   |          |           |          |   |          |        |           |  
|------------------------------------------------------------------------------------------ | --------------------------------- | ----------------------- | ------- | --------------- | ------- | ----------------- | -------- | --------- | -------- | - | -------- | ------ | --------- | -
|                                                                                           |                                   |                         |         | For the period 
|                                                                                           |                                   | Year ended December 31, |         | January 1, 1998
|                                                                                           |                                   |                         |         | through        
|                                                                                           |                                   | 1996                    |         | 1997            |         | September 7, 1998
|                                                                                           |                                   |                         |         |                 |         |                  
|Operating activities                                                                       |                                   |                         |         |                 |         |                   |          |           |          |   |          |       
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Net loss                                                                                   |                                   | $                       | (7,885  | )               |         | $                 | (893,479 | )         |          | $ | (424,115 | )     
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Adjustments to reconcile net loss to net cash provided by
	(used in) operating activities: |                                   |                         |         |                 |         |                   |          |           |          |   |          |       
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                           | Non-cash compensation expense     |                         |         |                |         |                   |          | 1,002,316 |          |   |          |       |          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                           | Depreciation                      |                         |         | 13,556          |         |                   |          | 30,253    |          |   |          | 27,580 |          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                           | Deferred taxes                    |                         |         | 14,832          |         |                   |          | (58,372   | )        |   |          |       |          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                           | Change in assets and liabilities: |                         |         |                 |         |                   |          |           |          |   |          |        |          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                           |                                   | Accounts receivable     |         |                 | (72,937 | )                 |          |           | (408,715 | ) |          |        | (665,254  | )
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                           |                                   | Other current assets    |         |                 | (1,655  | )                 |          |           | (11,415  | ) |          |        | (54,897   | )
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                           |                                   | Other assets            |         |                 |        |                   |          |           |         |   |          |        | 618       |  
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                           |                                   | Accounts payable        |         |                 | 13,899  |                   |          |           | (6,737   | ) |          |        | 46,625    |  
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                           |                                   | Accrued expenses        |         |                 | 59,200  |                   |          |           | 306,685  |   |          |        | 1,607,710 |  
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                           |                                   | Client advances         |         |                 | 55,824  |                   |          |           | (55,824  | ) |          |        |          |  
|                                                                                           |                                   |                         |         |                 |         |                   |          |           |          |   |          |       
|Net cash provided by (used in) operating activities                                        |                                   |                         | 74,834  |                 |         |                   | (95,288  | )         |          |   | 538,267  |       
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Investing activities                                                                       |                                   |                         |         |                 |         |                   |          |           |          |   |          |       
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Acquisition of equipment and vehicle                                                       |                                   |                         | (19,989 | )               |         |                   | (41,779  | )         |          |   | (44,948  | )     
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Sale of vehicle                                                                            |                                   |                         |        |                 |         |                   |         |           |          |   | 17,504   |       
|                                                                                           |                                   |                         |         |                 |         |                   |          |           |          |   |          |       
|Net cash used in investing activities                                                      |                                   |                         | (19,989 | )               |         |                   | (41,779  | )         |          |   | (27,444  | )     
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Financing activities                                                                       |                                   |                         |         |                 |         |                   |          |           |          |   |          |       
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Issuance of common stock                                                                   |                                   |                         | 1,724   |                 |         |                   |         |           |          |   |         |       
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Proceeds (repayments) from note payable to stockholder                                     |                                   |                         | 68,890  |                 |         |                   | (37,791  | )         |          |   | (53,660  | )     
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Bank overdraft                                                                             |                                   |                         | (50,733 | )               |         |                   | 157,056  |           |          |   | (157,056 | )     
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Repayments of note payable                                                                 |                                   |                         | (5,998  | )               |         |                   | (5,083   | )         |          |   | (10,036  | )     
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Repayments of capital leases                                                               |                                   |                         |        |                 |         |                   | (10,482  | )         |          |   | (15,784  | )     
|                                                                                           |                                   |                         |         |                 |         |                   |          |           |          |   |          |       
|Net cash provided by (used in) financing activities                                        |                                   |                         | 13,883  |                 |         |                   | 103,700  |           |          |   | (236,536 | )     
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Effect of exchange rate changes on cash                                                    |                                   |                         | 835     |                 |         |                   | (21,753  | )         |          |   | 42,283   |       
|                                                                                           |                                   |                         |         |                 |         |                   |          |           |          |   |          |       
|Net increase (decrease) in cash and cash equivalents                                       |                                   |                         | 69,563  |                 |         |                   | (55,120  | )         |          |   | 316,570  |       
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Cash and cash equivalents at beginning of year                                             |                                   |                         |        |                 |         |                   | 69,563   |           |          |   | 14,443   |       
|                                                                                           |                                   |                         |         |                 |         |                   |          |           |          |   |          |       
|Cash and cash equivalents at end of year                                                   |                                   | $                       | 69,563  |                 |         | $                 | 14,443   |           |          | $ | 331,013  |       
|                                                                                           |                                   |                         |         |                 |         |                   |          |           |          |   |          |       
|Supplemental information                                                                   |                                   |                         |         |                 |         |                   |          |           |          |   |          |       
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Interest paid                                                                              |                                   | $                       | 2,917   |                 |         | $                 | 8,977    |           |          | $ | 19,735   |       
|                                                                                           |                                   |                         |         |                 |         |                   |          |           |          |   |          |       
|Schedule of noncash investing activities                                                   |                                   |                         |         |                 |         |                   |          |           |          |   |          |       
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Property and equipment acquired under capital leases                                       |                                   | $                       |        |                 |         | $                 | 44,465   |           |          | $ |         |       
|                                                                                           |                                   |                         |         |                 |         |                   |          |           |          |   |          |       

See accompanying notes.


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##### Table of Contents



I.I.T. Holding, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

1.  Summary of Significant Accounting Policies

Reorganization and Basis
Of Presentation

I.I.T. Holding, Inc. and subsidiaries (the Company)
provides internet consulting, integration, and support services
to commercial companies in the United States and South America.
I.I.T. Holding, Inc. was formed in February 1998 when the
shareholders of International Information Technology Inc. and
International Information Technology IIT, C.A., enterprises under
 common control, exchanged their stock for 100% of the stock of
I.I.T. Holding, Inc. The accompanying consolidated financial
statements for all periods presented include the combined
financial position and results of operations of the companies
previously under common control. All significant intercompany
transactions have been eliminated in preparation of the
consolidated financial statements.

Conversion to U.S.
Dollars

The financial information for a Venezuelan subsidiary includes
financial information converted from Venezuelan Bolivares to U.S.
 Dollars.

Assets and liabilities were converted at the rate in effect at
the balance sheet date and the statement of operations was
converted at the average rate during the periods.

Use of Estimates

The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles,
requires management to make estimates and assumptions that affect
 the reported amounts of assets and liabilities and disclosure of
 contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company
considers all highly-liquid instruments, including certificates
of deposit, purchased with a maturity of three months or less to
be cash equivalents.

Concentration of Credit
Risk

Financial instruments that subject the Company to concentrations
of credit risk consist primarily of accounts receivable. The
Company grants credit in the normal course of business to its
clients. As part of this ongoing procedure, the Company monitors
the creditworthiness of its clients. The Company does not believe
 that it is subject to any unusual credit risk beyond the normal
credit risk inherent in its business.

For the period ended September 7, 1998, two customers
accounted for 24% ($1,042,674), and 10% ($457,784) of total
revenue, and three customers accounted for 38% ($508,212), 13%
($177,874) and 10% ($139,758) of accounts receivable at
September 7, 1998.

For the year ended December 31, 1997, three clients
accounted for 33% ($927,964), 17% ($478,042), and 11% ($309,321)
of total revenues, and three clients accounted for 44%
($279,055), 16% ($101,474), and 11% ($69,764) of accounts
receivable at December 31, 1997. For the year ended
December 31, 1996, three clients accounted for 57%
($425,803), 29% ($216,637), and 11% ($82,173) of total revenues,
and three clients accounted for 42% ($94,710), 24% ($54,120), and
 11% ($24,805) of accounts receivable at December 31, 1996.

71



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##### Table of Contents



I.I.T. Holding, Inc. and Subsidiaries


Notes to the Consolidated Financial Statements 
(Continued)



1.  Summary of Significant Accounting
Policies  (continued)


Revenue Recognition

Revenue is recognized in the period the services are performed.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising
expense was approximately $73,000 and $30,000 in 1997 and 1996,
respectively. Advertising expense was approximately $27,000 for
the period ended September 7, 1998.

New Accounting
Pronouncements

In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No. 130). SFAS
No. 130 establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 130 only
impacts display as opposed to actual amounts recorded.
Comprehensive income includes net income and all other non-owner
changes in equity that are excluded from net income, such as
foreign currency translation adjustments. SFAS No. 130 was
adopted in 1998.

In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related
Information(SFAS No. 131). This Statement requires that
 public business enterprises report certain information about
operating segments in complete sets of financial statements of
the enterprise and in condensed financial statements of interim
periods issued to shareholders. It also requires that public
business enterprises report certain information about their
product and services, the geographic areas in which they operate,
 and their major customers. The Company adopted the provisions of
 SFAS No. 131 in 1998 which did not have a significant
impact on the Companys definition of operating segments and
 related disclosures.

2.  Leases

The Company has entered into various capital leases for computer
equipment during 1997. Computer equipment acquired under capital
lease obligations was approximately $44,000. Depreciation expense
 was $11,116 and $6,000 for the period ended September 7,
1998 and for the year ended December 31, 1997, respectively.

Future lease payments under capital and operating leases are
summarized as follows:

|                                                                               |      |                              |        |                  |        |   |        |        |         | 
|------------------------------------------------------------------------------ | ---- | ---------------------------- | ------ | ---------------- | ------ | - | ------ | ------ | ------- | 
|                                                                               |      | Capital Leases               |        | Operating Leases
|                                                                               |      |                              |        |                 
|Four months ended December 31, 1998                                            |      | $                            | 3,703  |                  |        | $ | 14,884 |       
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | 1999 |                              |        | 13,503           |        |   |        | 54,454 |        
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | 2000 |                              |        | 5,844            |        |   |        | 39,165 |        
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | 2001 |                              |        |                 |        |   |        | 517    |        
|                                                                               |      |                              |        |                  |        |   |        |       
|                                                                               |      | Total minimum lease payments |        |                  | 23,050 |   |        | $      | 109,020 | 
|                                                                               |      |                              |        |                  |        |   |        |       
|Less amounts representing interest                                             |      |                              | 4,651  |                  |        |   |        |       
|                                                                               |      |                              |        |                  |        |   |        |       
|Present value of minimum lease payments (including current
	portion of $9,803) |      | $                            | 18,399 |                  |        |   |        |       
|                                                                               |      |                              |        |                  |        |   |        |       

72



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##### Table of Contents



I.I.T. Holding, Inc. and Subsidiaries


Notes to the Consolidated Financial Statements 
(Continued)



2.  Leases  (continued)


Rent expense was $47,476, $32,000 and $17,000 for the period
ended September 7, 1998, and for the years ended
December 31, 1997 and 1996, respectively.

Capital leases have effective interest rates which range from 6%
to 25%.

3.  Accrued Expenses

Accrued expenses are comprised of the following:

|                                           |                        |              |        |        |  |                   |         |         |  |   |           |           | 
|------------------------------------------ | ---------------------- | ------------ | ------ | ------ |  | ----------------- | ------- | ------- |  | - | --------- | --------- | 
|                                           |                        |              |        |       
|                                           |                        | December 31, |        |       
|                                           |                        |              |        |       
|                                           |                        | 1996         |        | 1997   |  | September 7, 1998
|                                           |                        |              |        |        |  |                  
|Accrued bonuses, payroll and payroll taxes |                        | $            | 60,000 |        |  | $                 | 287,120 |         |  | $ | 1,763,891 |          
|                                          
|                                          
|                                          
|                                          
|Accrued consulting                         |                        |              |       |        |  |                   | 67,965  |         |  |   | 124,236   |          
|                                          
|                                          
|                                          
|                                          
|Accrued expenses                           |                        |              |       |        |  |                   | 11,600  |         |  |   | 86,268    |          
|                                           |                        |              |        |        |  |                   |         |         |  |   |           |          
|                                           | Total accrued expenses |              | $      | 60,000 |  |                   | $       | 366,685 |  |   | $         | 1,974,395 | 
|                                           |                        |              |        |        |  |                   |         |         |  |   |           |          

4.  Employee Benefit Plan

The Company has established a defined contribution benefit plan
effective January 1, 1998. The plan covers substantially all
 employees of the Company who are 21 years of age or older.
Participants may contribute up to 15% of their annual
compensation to the plan, and the Company matches up to 3% of
annual compensation. In 1998, the Company recorded contributions
to the plan of $37,502.

5.  Note Payable

The note payable, which matured in 1997, was due to a financing
organization, and required monthly installments of $552,
including interest at 9.90%.

6.  Common Stock

Upon reorganization in February 1998, the Company was
authorized to issue 100 shares of common stock with a par value
of $5.00 per share. At September 7, 1998, 95 shares were
issued and outstanding.

7.  Stock Compensation Expense

In August 1997, the sole stockholder of the Company
transferred 473 shares of the outstanding common stock to
management employees for no consideration. An independent
appraisal was obtained which estimated the fair value of the
shares on the date of transfer at $1,002,316. This transfer was
treated as a contribution to additional paid-in capital by the
sole stockholder, with an offsetting charge to compensation
expense. In 1997, the Company recorded compensation expense of
$1,002,316 relating to the transfer of these shares.

8.  Income Taxes

Deferred income tax assets and liabilities are determined based
upon differences between financial reporting and the tax basis of
 assets and liabilities and are measured using the enacted tax
rate and laws that will be in effect when the differences are
expected to reverse.

73



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##### Table of Contents



I.I.T. Holding, Inc. and Subsidiaries


Notes to the Consolidated Financial Statements 
(Continued)



8.  Income Taxes  (continued)


The components of the income tax provision are as follows:

|         |       |                         |        |              |  |                   |         |         |   |   |   |   | 
|-------- | ----- | ----------------------- | ------ | ------------ |  | ----------------- | ------- | ------- | - | - | - | - | 
|         |       |                         |        |             
|         |       | Year ended December 31, |        |             
|         |       |                         |        | Period ended
|         |       | 1996                    |        | 1997         |  | September 7, 1998
|         |       |                         |        |              |  |                  
|Current  |       | $                       |       |              |  | $                 |        |         |   | $ |  |  
|        
|        
|        
|        
|Deferred |       |                         | 14,832 |              |  |                   | (58,372 | )       |   |   |  |  
|         |       |                         |        |              |  |                   |         |         |   |   |   |  
|         | Total |                         | $      | 14,832       |  |                   | $       | (58,372 | ) |   | $ |  | 
|         |       |                         |        |              |  |                   |         |         |   |   |   |  

Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities
 for financial reporting purposes and the amounts used for income
 tax purposes. Significant components of net deferred income
taxes are as follows:

|                          |                                             |                                  |         |              |         |      |          |          |         |  |          |          |         | 
|------------------------- | ------------------------------------------- | -------------------------------- | ------- | ------------ | ------- | ---- | -------- | -------- | ------- |  | -------- | -------- | ------- | 
|                          |                                             |                                  |         |             
|                          |                                             | December 31,                     |         |             
|                          |                                             |                                  |         | September 7,
|                          |                                             | 1996                             |         | 1997         |         | 1998
|                          |                                             |                                  |         |              |         |     
|Deferred tax assets:      |                                             |                                  |         |              |         |      |          |          |         |  |          |         
|                         
|                         
|                         
|                         
|                          | Payroll accrual                             |                                  | $       | 23,964       |         |      | $        | 71,734   |         |  | $        | 53,801   |        
|                         
|                         
|                         
|                         
|                          | Bonus accrual                               |                                  |         |             |         |      |          | 30,934   |         |  |          | 365,395  |        
|                         
|                         
|                         
|                         
|                          | Other accruals                              |                                  |         | 5,239        |         |      |          | 40,537   |         |  |          | 50,849   |        
|                         
|                         
|                         
|                         
|                          | Contributions                               |                                  |         | 40           |         |      |          |         |         |  |          |         |        
|                         
|                         
|                         
|                         
|                          | Stock compensation                          |                                  |         |             |         |      |          | 219,150  |         |  |          |          |        
|                         
|                         
|                         
|                         
|                          | U.S. net operating loss carryforward        |                                  |         | 11,871       |         |      |          | 163,092  |         |  |          | 143,267  |        
|                          |                                             |                                  |         |              |         |      |          |          |         |  |          |         
|                          |                                             | Total deferred tax assets        |         |              | 41,114  |      |          |          | 525,447 |  |          |          | 613,312 | 
|                         
|                         
|                         
|                         
|                          | Valuation allowance for deferred tax assets |                                  |         |             |         |      |          | (279,506 | )       |  |          | (431,882 | )      
|                          |                                             |                                  |         |              |         |      |          |          |         |  |          |         
|                          | Net deferred tax assets                     |                                  |         | 41,114       |         |      |          | 245,941  |         |  |          | 181,430  |        
|                         
|                         
|                         
|                         
|Deferred tax liabilities: |                                             |                                  |         |              |         |      |          |          |         |  |          |         
|                         
|                         
|                         
|                         
|                          | Accounts receivable                         |                                  |         | (90,065      | )       |      |          | (235,744 | )       |  |          | (176,808 | )      
|                         
|                         
|                         
|                         
|                          | Depreciation                                |                                  |         | (9,103       | )       |      |          | (9,570   | )       |  |          | (3,995   | )      
|                         
|                         
|                         
|                         
|                          | Other                                       |                                  |         | (319         | )       |      |          | (627     | )       |  |          | (627     | )      
|                          |                                             |                                  |         |              |         |      |          |          |         |  |          |         
|                          |                                             |                                  | (99,487 | )            |         |      | (245,941 | )        |         |  | (181,430 | )       
|                          |                                             |                                  |         |              |         |      |          |          |         |  |          |         
|                          |                                             | Total net deferred tax liability |         | $            | (58,373 | )    |          | $        |        |  |          | $        |        | 
|                          |                                             |                                  |         |              |         |      |          |          |         |  |          |         

At September 7, 1998 the Companys U.S. subsidiary has
net operating loss carryforwards of approximately $359,000
available to offset future taxable income of the U.S. operations.
 These carryforwards begin to expire in 2012.

The Companys Venezuelan subsidiary had cumulative net
operating losses in the amount of $110,000 through
December 31, 1997. These net operating losses resulted in
net deferred tax assets of approximately $23,000 and $5,000 at
December 31, 1997 and 1996, respectively. Management has
determined that it is more likely than not that these net
operating losses will not be utilized; therefore, a full
valuation allowance was recorded against these deferred tax
assets at December 31, 1997 and 1996. During the period from
 January 1, 1998 through September 7, 1998, the
subsidiary utilized approximately $92,000 of the net operating
loss carryforward, and increased the valuation allowance by
approximately $2,500 to $25,500, which fully offsets the net
deferred tax asset of $25,500 at September 7, 1998. The
remaining net operating loss carryforward of approximately
$18,000 will expire in 2000.

74



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##### Table of Contents



I.I.T. Holding, Inc. and Subsidiaries


Notes to the Consolidated Financial Statements 
(Continued)

9.  Geographic Segment Information

The Company is engaged in one business segment. This segment
includes providing internet consulting, integration, and support
services principally to commercial companies located throughout
the United States and South America. The following table presents
 information regarding geographic segments for the period from
January 1, 1998 through September 7, 1998 and the years
 ended December 31, 1997 and 1996. There were no service
transfers between the United States and South America. Operating
profit (loss) is total service revenue less cost of service
revenue, general and administrative expenses, sales and marketing
 and depreciation.

|                         |  |      |  |               |           |               |  |       |         |   |  |   |           |  
|------------------------ |  | ---- |  | ------------- | --------- | ------------- |  | ----- | ------- | - |  | - | --------- | -
|                         |  |      |  | United States |           | South America |  | Total
|                         |  |      |  |               |           |               |  |      
|Consulting revenue:      |  | 1998 |  | $             | 3,896,502 |               |  | $     | 509,058 |   |  | $ | 4,405,560 |  
|                         |  | 1997 |  |               | 2,664,214 |               |  |       | 147,797 |   |  |   | 2,812,011 |  
|                         |  | 1996 |  |               | 743,687   |               |  |       | 3,336   |   |  |   | 747,023   |  
|                        
|                        
|                        
|                        
|Depreciation:            |  | 1998 |  | $             | 21,819    |               |  | $     | 5,761   |   |  | $ | 27,580    |  
|                         |  | 1997 |  |               | 26,919    |               |  |       | 3,334   |   |  |   | 30,253    |  
|                         |  | 1996 |  |               | 12,720    |               |  |       | 836     |   |  |   | 13,556    |  
|                        
|                        
|                        
|                        
|Operating profit (loss): |  | 1998 |  | $             | (382,361  | )             |  | $     | (24,401 | ) |  | $ | (406,762  | )
|                         |  | 1997 |  |               | (844,036  | )             |  |       | (98,838 | ) |  |   | (942,874  | )
|                         |  | 1996 |  |               | 39,481    |               |  |       | (29,617 | ) |  |   | 9,864     |  
|                        
|                        
|                        
|                        
|Interest expense:        |  | 1998 |  | $             | 5,420     |               |  | $     | 11,933  |   |  | $ | 17,353    |  
|                         |  | 1997 |  |               | 4,782     |               |  |       | 4,195   |   |  |   | 8,977     |  
|                         |  | 1996 |  |               | 2,345     |               |  |       | 572     |   |  |   | 2,917     |  
|                        
|                        
|                        
|                        
|Identifiable assets:     |  | 1998 |  | $             | 1,646,768 |               |  | $     | 158,262 |   |  | $ | 1,805,030 |  
|                         |  | 1997 |  |               | 692,702   |               |  |       | 76,361  |   |  |   | 769,063   |  
|                         |  | 1996 |  |               | 279,616   |               |  |       | 68,247  |   |  |   | 347,863   |  

10.  Impact of Year 2000 (unaudited)

Some older computer programs were written using two digits rather
 than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a
date using 00 as the year 1900 rather than the year
2000. This could cause a system failure or miscalculations
causing disruptions of operations, including, among other things,
 a temporary inability to process transactions, send invoices, or
 engage in similar normal business activities.

The Company is assessing the modifications or replacement of its
software that may be necessary for its computer systems to
function properly with respect to the dates in the year 2000 and
thereafter. The Company does not believe that the cost of either
modifying existing software or converting to new software will be
 significant or that the year 2000 issue will pose significant
operational problems for its computer systems.




Item 9.  Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure

None.

75



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##### Table of Contents






PART III




Item 10.  Directors and Executive Officers of the
 Registrant

The information with respect to directors and executive officers
required by this Item 10 is incorporated in this report by
reference to the information set forth under the caption
Directors and Executive Officers in our definitive
Proxy Statement for our 2000 Annual Meeting of Stockholders,
which will be filed with the Commission no later than
April 29, 2000.




Item 11.  Executive Compensation

The information required by this Item 11 is incorporated in
this report by reference to the information set forth under the
caption Executive Compensation in our definitive
Proxy Statement which will be filed with the Commission no later
than April 29, 2000. The sections entitled
Compensation Committee Report on Executive
Compensation and Performance Graph in the Proxy
 Statement are not incorporated herein by reference. Information
relating to certain filings on Forms 3, 4 and 5 is contained
 in the Proxy Statement under the caption
Section 16(a) Beneficial Ownership Reporting
Compliance.




Item 12.  Security Ownership of Certain
Beneficial Owners and Management

The information required by this Item 12 is incorporated in
this report by reference to the information set forth under the
caption Security Ownership of Certain Beneficial Owners and
 Management in our definitive Proxy Statement which will be
 filed with the Commission no later than April 29, 2000.




Item 13.  Certain Relationships and Related
Transactions

The information required by this Item 13 is incorporated in
this report by reference to the information set forth under the
caption Certain Relationships and Related
Transactions in our definitive Proxy Statement which will
be filed with the Commission no later than April 29, 2000.




PART IV




Item 14.  Exhibits, Financial Statement
Schedules, and Reports on Form 8-K

Financial Statements

See Part II, Item 8 hereof.

Financial Statement Schedules

All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instruction or are
inapplicable and have therefore been omitted.

Exhibits.

|        |        |             |  |                                                                                                                                                                               
|------- | ------ | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|No.     |        | Description
|        |        |            
|        | 3.1(d) |             |  | Second Amended and Restated Certificate of Incorporation of the
	Company.                                                                                                     
|        | 3.2(d) |             |  | Amended and Restated Bylaws of the Company.                                                                                                                                   
|        | 3.3(g) |             |  | First Amendment to the Companys Second Amended and Restated
	 Certificate of Incorporation.                                                                                  
|        | 4.1(b) |             |  | Specimen Certificate for shares of Common Stock, $.001 par value,
	 of the Company.                                                                                           
|        | 4.2(c) |             |  | Indenture for the 7% Convertible Subordinated Notes due
	November 1, 2004 between the Company, as issuer, and the
	Bank of New York, as Trustee, dated as of October 29, 1999.

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|        |             |             |  |                                                                                                                                                                                                                                                  
|------- | ----------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |             |            
|No.     |             | Description
|        |             |            
|        | 10.1(b)     |             |  | Stock Purchase Agreement between the Company and the Initial
	Series A Purchasers dated June 18, 1998.                                                                                                                                           
|        | 10.2(b)     |             |  | Stock Purchase Agreement between the Company and certain of the
	Initial Series A Purchases dated September 18, 1998.                                                                                                                            
|        | 10.3(b)     |             |  | Stock Purchase Agreement between the Company and
	U S WEST dated June 18, 1998.                                                                                                                                                                  
|        | 10.4(b)     |             |  | Stock Purchase Agreement between the Company and the Account
	Management Purchasers dated June 19, 1998.                                                                                                                                         
|        | 10.5(b)     |             |  | Stock Purchase Agreement between the Company and HAGC Partners
	dated June 19, 1998.                                                                                                                                                             
|        | 10.6(b)     |             |  | Stock Purchase Agreement between the Company and Chris Horgen
	dated June 19, 1998.                                                                                                                                                              
|        | 10.7(b)     |             |  | Stock Purchase Agreement between the Company and USi Partners,
	Ltd. dated June 19, 1998.                                                                                                                                                        
|        | 10.8(b)     |             |  | Stock Purchase Agreement among the Company, IIT Holding, Inc.,
	Luis Sebastian Alegrett, Michael Mai, Carlos E. Bravo, and
	Vincente Perez de Tudela dated August 28, 1998.                                                                      
|        | 10.9(b)     |             |  | Amended and Restated Stock Purchase Agreement among the Company,
	Advanced Communication Resources, Inc., Matthew D. Kanter,
	The Benjamin Kanter 1997 QSST Trust, the Ronald Kanter 1997 QSST
	Trust and David S. Walden dated October  2, 1998.
|        | 10.10(b)    |             |  | Stock Purchase Agreement between the Company and certain other
	parties dated December 31, 1998.                                                                                                                                                 
|        | 10.11(b)    |             |  | Amended and Restated Stockholders Agreement between the Company
	and certain other parties dated December 31, 1998.                                                                                                                              
|        | 10.12(b)    |             |  | Employment Agreement between the Company and Christopher R.
	McCleary dated May 29, 1998.                                                                                                                                                        
|        | 10.13(b)    |             |  | Employment Agreement between the Company and Stephen E.
	McManus dated June 2, 1998.                                                                                                                                                             
|        | 10.14(b)    |             |  | Employment Agreement between the Company and Andrew A. Stern
	 dated July 27, 1998.                                                                                                                                                              
|        | 10.15(b)    |             |  | Employment Agreement between the Company and Jeffrey L.
	McKnight dated December 15, 1998.                                                                                                                                                       
|        | 10.16(b)(f) |             |  | iMAP Agreement between the Company and U S WEST, Inc.
	dated January 15, 1999.                                                                                                                                                                   
|        | 10.17(b)    |             |  | Note Purchase Agreement among the Company and the Account
	Management Purchasers dated September 8, 1998.                                                                                                                                        
|        | 10.18(b)    |             |  | Note Purchase Agreement between the Company and Southeastern
	Technology Fund, L.P. dated September 8, 1998.                                                                                                                                     
|        | 10.19(b)(f) |             |  | Software License and Services Agreement between the Company and
	Broadvision, Inc. dated July 22, 1998.                                                                                                                                          
|        | 10.20(e)    |             |  | Note Purchase Agreement among the Company and the Account
	Management Purchasers dated September 8, 1998.                                                                                                                                        
|        | 10.21(e)    |             |  | Note Purchase Agreement between the Company and the Southeastern
	Technology Fund, L.P. dated September 8, 1998.                                                                                                                                 
|        | 10.22(b)    |             |  | Note Purchase Agreement between the Company and certain other
	parties dated September 8, 1998.                                                                                                                                                  
|        | 10.23(e)    |             |  | Note Purchase Agreement between the Company and
	U S WEST, Inc. dated September 8, 1998.                                                                                                                                                         

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|        |             |             |  |                                                                                                                                                                     
|------- | ----------- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |             |            
|No.     |             | Description
|        |             |            
|        | 10.24(b)    |             |  | Note Purchase Agreement between the Company and certain other
	parties dated December 16, 1998.                                                                     
|        | 10.25(b)    |             |  | Note Purchase Agreement between the Company and
	U S WEST dated December 29, 1998.                                                                                  
|        | 10.26(b)(f) |             |  | SiebelNet Agreement between the Company and SiebelNet, Inc. dated
	 January 31, 1999.                                                                               
|        | 10.27(b)(f) |             |  | Marketing Services Agreement by and between the Company, and
	U S WEST Communications Services, Inc. and
	U S WEST Interprise America, Inc. dated
	January 31, 1999.
|        | 10.28(b)    |             |  | Lease Agreement between Consortium One  Annapolis, LLC
	 and the Company dated April 3, 1998.                                                                      
|        | 10.29(b)    |             |  | Amended and Restated Stock Option Plan.                                                                                                                             
|        | 10.30(b)    |             |  | Nonqualified Stock Option Agreement between USi and Christopher
	McCleary dated March 19, 1999.                                                                     
|        | 21.1(d)     |             |  | Subsidiaries of the Company.                                                                                                                                        
|        | 23.1(a)     |             |  | Consent of Ernst & Young LLP, independent auditors
	(regarding the Companys financial statements).                                                                 
|        | 23.2(a)     |             |  | Consent of Ernst & Young LLP, independent auditors
	(regarding IIT financial statements).                                                                           
|        | 23.3(a)     |             |  | Consent of Bassan & Associados S.C., independent
	auditors (regarding IIT financial statements).                                                                    
|        | 27.1(a)     |             |  | Financial Data Schedule                                                                                                                                             






|    |                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Filed herewith.                                                                                                                                                                                                           
|   
|(b) | Incorporated by reference to the Companys Registration
	Statement on Form S-1, as amended
	(Reg. No. 333-70717)                                                                                                          
|   
|(c) | Incorporated by reference to the Companys Quarterly Report
	on Form 10-Q for the quarter ended September 30, 1999
	filed by the Company on November 15, 1999.                                                            
|   
|(d) | Incorporated by reference to the Companys Registration
	Statement on Form S-1, as amended
	(Reg. No. 333-93299).                                                                                                         
|   
|(e) | Not filed, in accordance with Instruction No. 2 to
	Item 601 of Regulation S-K, because the contract is
	substantially identical to Exhibit 10.22 except as to the parties
	 thereto and the principal amount of the note.
|   
|(f) | Confidential treatment obtained as to certain portions.                                                                                                                                                                   
|   
|(g) | Incorporated by reference to the Companys Registration
	Statement on Form S-1, as amended
	(Reg. No. 333-95543).                                                                                                         

Reports on Form 8-K.

We filed a Current Report on Form 8-K dated October 21,
 1999, under which we filed a press release relating to the
announcement of our intention, subject to market and other
conditions, to raise approximately $100 million in gross
proceeds through an offering of convertible subordinated notes to
 qualified institutional investors.

We filed a Current Report on Form 8-K dated October 22,
 1999 under which we filed exhibits relating to our recent
purchase of the assets of Conklin & Conklin, Inc.
(Conklin) for $8.0 million in cash,
$0.6 million in assumed debt and $2.0 million
represented by a secured note. Because the Conklin acquisition
did not involve the acquisition of a significant business under
Rule 305(a) or Rule 11-01(b) of Regulation S-X,
financial statements of Conklin or pro forma financial
information for the Conklin acquisition were not filed.

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We filed a Current Report on Form 8-K dated October 28,
 1999 under which we filed a press release relating to our recent
 placement of $100,000,000 aggregate principal amount of 7%
Convertible Subordinated Notes due November 1, 2004.

We filed a Current Report on Form 8-K dated December 9,
 1999 under which we filed a press release relating to our Board
of Directors approval of a three for two stock split of our
common stock for all shareholders of record at the close of
business on December 3, 1999.

We filed a Current Report on Form 8-K dated
February 18, 2000 under which we filed a press release
relating to the announcement of our cooperative marketing
agreement with AT&T.

We filed a Current Report on Form 8-K dated March 6,
2000 under which we filed a press release relating to our Board
of Directors approval of a three for two stock split of our
common stock for all shareholders of record at the close of
business on March 14, 2000.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, as
amended, USinternetworking, Inc. has duly caused this
registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Annapolis, Maryland on
 March 23, 2000.



| |                        
| | -----------------------
| | USINTERNETWORKING, INC.



| |     |                            
| | --- | ---------------------------
| | By: | /s/ CHRISTOPHER R. MCCLEARY

| |                          
| | -------------------------
| |                          
| | Christopher R. McCleary  
| | Chairman of the Board and
| | Chief Executive Officer  

Pursuant to the requirements of the Securities Act of 1934, as
amended, this Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.

|                                                   |  |                                                                                                      |  |      |                | 
|-------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | ---- | -------------- | 
|Name                                               |  | Title                                                                                                |  | Date
|                                                   |  |                                                                                                      |  |     
|/s/ CHRISTOPHER R. MCCLEARYChristopher R. McCleary |  | Chairman of the Board and
	Chief Executive Officer
	(Principal Executive Officer)                    |  |      | March 23, 2000 | 
|/s/ STEPHEN E. MCMANUSStephen E. McManus           |  | President  E-Commerce
	Business Unit and Director                                                   |  |      | March 23, 2000 | 
|/s/ HAROLD C. TEUBNER, JR.Harold C. Teubner, Jr.   |  | Executive Vice President and
	Chief Financial Officer
	(Principal Financial and
	Accounting Officer) |  |      | March 23, 2000 | 
|/s/ R. DEAN MEISZERR. Dean Meiszer                 |  | Director                                                                                             |  |      | March 23, 2000 | 
|Benjamin Diesbach                                  |  | Director                                                                                             |  |      | March 23, 2000 | 
|/s/ RAY A. ROTHROCKRay A. Rothrock                 |  | Director                                                                                             |  |      | March 23, 2000 | 
|/s/ FRANK A. ADAMSFrank A. Adams                   |  | Director                                                                                             |  |      | March 23, 2000 | 
|/s/ WILLIAM F. EARTHMANWilliam F. Earthman         |  | Director                                                                                             |  |      | March 23, 2000 | 
|/s/ JOHN H. WYANTJohn H. Wyant                     |  | Director                                                                                             |  |      | March 23, 2000 | 
|Joseph R. Zell                                     |  | Director                                                                                             |  |      | March 23, 2000 | 
|Michael C. Brooks                                  |  | Director                                                                                             |  |      | March 23, 2000 | 

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|                                     |  |          |  |      |                | 
|------------------------------------ |  | -------- |  | ---- | -------------- | 
|Name                                 |  | Title    |  | Date
|                                     |  |          |  |     
|/s/ DAVID J. POULINDavid J. Poulin   |  | Director |  |      | March 23, 2000 | 
|/s/ CATHY M. BRIENZACathy M. Brienza |  | Director |  |      | March 23, 2000 | 

81