##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549




---

FORM 10-K







For the fiscal year ended December 31, 2000

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 
  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
$207.3 million as of March 23, 2001.

The registrant had 143,958,315 shares of Common Stock
outstanding as of March 23, 2001.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information in the Registrants definitive Proxy
Statement for its 2001 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A on or about April 9, 2001 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                                    
|Employment Agreement - Christopher R. McCleary
|Consent of Ernst & Young LLP                  
|Consent of Ernst & Young LLP                  
|Consent of Bassan & Associados S.C.           



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INDEX

|                                                                                         |          |                                                                                                                                                     |                                                                                        |  |    |    | 
|---------------------------------------------------------------------------------------- | -------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- |  | -- | -- | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|PART I.                                                                                  |          |                                                                                                                                                     |                                                                                        |  |    |   
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Item 1.  |                                                                                                                                                     | Business                                                                               |  |    | 1  | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Item 2.  |                                                                                                                                                     | Properties                                                                             |  |    | 10 | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Item 3.  |                                                                                                                                                     | Legal Proceedings                                                                      |  |    | 10 | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Item 4.  |                                                                                                                                                     | Submission of Matters to a Vote of Security Holders                                    |  |    | 11 | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|PART II.                                                                                 |          |                                                                                                                                                     |                                                                                        |  |    |   
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Item 5.  |                                                                                                                                                     | Market for Registrants Common Equity and Related
	Stockholder Matters                 |  |    | 11 | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Item 6.  |                                                                                                                                                     | Selected Consolidated Financial Data                                                   |  |    | 14 | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Item 7.  |                                                                                                                                                     | Managements Discussion and Analysis of Financial Condition
	and Results of Operations |  |    | 17 | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Item 8.  |                                                                                                                                                     | Financial Statements and Supplemental Data                                             |  |    | 35 | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Item 9.  |                                                                                                                                                     | Changes in and Disagreements with Accountants on Accounting and
	Financial Disclosure  |  |    | 73 | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|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,
	on or about April 9, 2001 |                                                                                        |  | 73 |   
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|PART IV.                                                                                 |          |                                                                                                                                                     |                                                                                        |  |    |   
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Item 14. |                                                                                                                                                     | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                       |  |    | 73 | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|SIGNATURES                                                                               |          |                                                                                                                                                     | 77                                                                                     | 



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##### Table of Contents






PART I

From time to time, USinternetworking, Inc.TM
(USiTM) may report, through its press releases and/or
Securities and Exchange filings, certain matters that would be
characterized as forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 (the
Reform Act). These statements are subject to risks
and uncertainties that could cause actual results to differ
materially from those projected. This report contains statements
that constitute forward-looking statements. These statements
appear in a number of places in this report and include
statements regarding the intent, belief or current expectations
of USi, its directors or officers, primarily with respect to the
future operating performance of the Company. Readers are
cautioned that such forward-looking statements are not
guarantees of future performance and involve risks and
uncertainties, and that actual results may vary materially from
those in the forward-looking statements as a result of various
factors. The information contained in this report identifies
certain important factors that could cause such differences,
beginning on page 26 below and elsewhere in this report.




Item 1.  Business

Overview

USi was established in 1998 as a full service, enterprise
Application Service Provider (ASP) delivering the functionality
of complex enterprise software as a service. Full
Service means we take total responsibility for delivering
the latest enterprise, e-business, and managed web hosting
solutions over our proprietary Global Service
PlatformSM (GSPSM). Our GSP environment is
designed specifically to provide superior performance for ASP
solutions. Our GSP environment is located in secure, fully
redundant data centers that we control and operate and from
which our technicians and engineers provide 24 by 7 monitoring
and support. Our ASP services are primarily delivered as
Internet Managed Applications ProviderSM
(iMAPSM) offerings, which seamlessly integrate the
hardware and software, networking and security, and 24 by 7
Client Care we provide to our clients. We also back our iMAP
offerings with some of the highest service level guarantees in
the industry. Our full service, comprehensive approach enables
our clients organizations to gain the competitive
advantage of advanced applications and web-based technologies,
without having to divert time and resources from their core
businesses.

Our services are primarily delivered through two business units:



| |   |                                                     
| | - | ----------------------------------------------------
| |  | the Enterprise Application Business Unit (EABU), and
| |  | the E-Business Services Unit (EBSU).                

The EABU focuses on providing solutions for financial and human
resource management, customer relationship management, messaging
and procurement business process needs. The EBSU solutions
include e-business B2B and B2C solutions, Enterprise Portal
solutions, and AppHostSM solutions for clients who
want to run their own applications in USis robust
environment.

The ASP Market

The Gartner Group forecasts that by the end of 2004, the world
wide ASP market will be worth just over $25 billion. We
believe that the trends that have fueled the growth to date will
continue to be prevalent factors in the ASP markets future
growth:



| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | Scarcity of skilled IT Professionals                                                                                                         
| |  | Increasing opportunities for businesses to gain advantage by
	shifting business processes onto the Internet                                  
| |  | Increasing complexity and availability of web-enabled software
	business applications                                                        
| |  | Increasing need of businesses to reduce costs and focus
	resources on their own core competencies rather than on their
	software applications

We primarily target large enterprise clients (1,000 employees
and above), which, according to industry estimates, make up the
fastest growing market for ASP services. We believe that our
full service

1



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The USi Value Proposition

By delivering complex, enterprise scale software functionality
as a service, we enable clients to focus their scarce IT and
management resources on their own core business, while
simultaneously improving the speed of deployment, the quality of
on-going operations and reducing the total cost of ownership of
the clients software applications. We have leveraged our
experiences, gained from implementing complex applications in
the GSP environment, to continually refine our solutions. As a
result, we believe we can provide our solutions more rapidly,
more reliably, and more economically than other solution
providers or the clients themselves.

The USi Strategy

Our ability to consistently deliver our value proposition to
enterprise clients stems from the experience and expertise we
have developed in the areas of application knowledge and
integration, and infrastructure design and operations. Most of
our competitors have strength in one or the other of these
areas, but not both. Our iMAP services are designed around an
integrated approach to application deployment and ongoing
operations and support. As a result, we can often demonstrate a
higher level of reliability and security than our competitors.

Moreover, the experience we have gained providing integrated
solutions to 168 clients has taught us valuable lessons that we
have incorporated into our designs, our implementation
approaches, and our operating processes. These improvements have
enabled us to reduce implementation times, enhance reliability,
and reduce our own costs. We believe that by continually
reinvesting our experience to improve subsequent
implementations, we can continue to add more value as our client
base grows, and we can do so at increasingly lower costs.

We are able to provide a range of solutions to our clients. We
actively seek to increase our sales to our growing enterprise
client base by cross-selling our products and services. We have
also begun to focus our product development and marketing
efforts on specific vertical markets such as Financial Services
and the Federal Government. Increasing our vertical focus
enhances the relevance and value of our prior experience to our
new clients and prospects within those vertical markets.

Our specialized and proprietary GSP environment provides our
clients with a reliable solution hosted in total security,
enabling us to take complete responsibility for the
clients software application needs. The GSP environment
was designed and engineered to ensure network and application
uptime, quickly and accurately scale to meet our clients
evolving needs, protect our clients data, and allow our
staff to proactively monitor our clients services.

The GSP environment includes:



| |   |                                                                         
| | - | ------------------------------------------------------------------------
| |  | USiOASISSM  service provisioning, and
	management platform             
|
| |  | USiViewSM  service monitoring platform                                 
|
| |  | USiSANSM shared data management platform                               
|
| |  | USiLinkSM  private IP networking service                               
|
| |  | USiPriorityPeeringSM  public IP networking
	service                    
|
| |  | USiTotalSecurityArchitectureSM  integrated
	security management service
|
| |  | USiIntegrateSM  flexible and reliable EAI
	service                     

We have built and institutionalized our own integrated service
delivery methodology called the iMAP Process. Our team
organization, roles, responsibilities, workflows, quality
assurance, and other matrices are

2



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We believe that leveraging the economies of scale and skill
allowed by our growing client base will enable us to achieve
profitability. We believe the experiences gained through
servicing our enterprise client base and designing, engineering
and operating our GSP environment will enable USi to maintain a
market leadership position.

USi Services

We offer a full range of complementary value-added services
designed to satisfy the rapidly evolving requirements in the ASP
market. Our iMAP offerings encompass e-business services and
enterprise application services, and typically include
application consulting and integration as well as managed
hosting and ongoing support. We also offer stand-alone
consulting services. Our iMAP contracts usually provide for a
modest up-front payment and are generally not less than three
years in length. Our iMAP contracts provide for payment
reductions in the event that agreed upon service levels, as
measured and quantified by system performance benchmarks, are
not met.

iMAP Offerings

Our iMAP offerings integrate two basic components:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Application consulting, systems integration, and integrated
	client services. Our application consultants are experts in
	major business process areas including e-business, customer
	relationship management, human resource and financial
	management, procurement, and messaging and collaboration. iMAP
	consulting and systems integration teams define, develop and
	offer a service that is fully integrated within the environment
	in which it is operating. Our application experts design client
	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, guaranteed by industry
	leading service level agreements.
|
| |  | USi-managed hosting platforms via our GSP environment.
	USi-managed client application hosting platforms are housed in
	one of two primary data centers on dedicated USi-managed servers
	and available via our reliable, high-performance and secure
	global Internet network. Our network architecture is designed to
	ensure responsiveness and maintain the security of the
	applications we manage.                                                                                                                                                                                                                                                                                                                                 

Once implemented, iMAP offerings are efficiently managed by our
client care experts who provide support twenty-four hours a day,
seven days a week, based on special training of the specific
functional and technical aspects of each client implementation.
The application consulting teams that implement each client
system are in place to support the application over the life of
the relationship.

E-Business Services

The e-business services includes e-business, B2B and B2C
solutions, enterprise portal solutions, and AppHost solutions
for clients custom application requirements. e-business
solutions are based on both Microsoft Commerce Server
2000/BizTalk platforms and on BroadVision based platforms.
Portal Solutions are based primarily on Plumtree, along with
CS2K toolset and Broadvision InfoExchange. Apphost Solutions
provide application hosting managed support, including platforms
based on BEA WebLogic Server, Oracle RDBMS, Microsoft SQL
Server, Windows 2000, Windows NT and UNIX.

The e-business services area constituted over 50% of our iMAP
business as of December 31, 2000. The majority of our
business in the year 2000 was centered around e-business and B2C
opportunities, primarily utilizing the BroadVision set of
applications. However, looking forward into 2001, we expect a
shift of business toward B2B and enterprise Portal
opportunities, and an emphasis on Microsoft based solutions. The
AppHost business represented the balance of the business in this
area, and we expect continuing demand for our managed hosting
business in 2001.

3



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Enterprise Applications
Services

The Enterprise Applications Services are focused on providing
solutions for financial management, human resource management,
customer relationship management, and messaging and procurement
business process needs. Application expertise in the PeopleSoft
and Lawson applications provides the basis for the iMAP
offerings for financial management and human resource management
services. Our relationship with Siebel is the basis for our set
of services related to ebusiness customer relationship
management. In messaging, we are the industrys largest
provider of hosted solutions providing Microsoft Exchange, and
have implemented and supported large enterprise clients with
over 10,000 end users. Finally, we have implemented procurement
solutions based on Ariba to large enterprise clients.

The Enterprise Applications Services represented just under 50%
of our iMAP business as of December 31, 2000. With the
increasing demand for these front office application products,
we expect to see a greater emphasis on Enterprise based
opportunities in 2001.

Consulting Services

Our application and technology experts are also utilized to
supplement our iMAP offerings by providing consulting services
to both iMAP and non-iMAP clients. We leverage the expertise
gained by over 200 client implementations to provide application
implementation and support services, networking consulting,
database administration consulting, business process support and
supplemental staffing services to clients. In 2000, consulting
services accounted for approximately 15% of our revenue.

USis Global Network

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



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | provide uptime of 99.5% or better to the entire network solution                        
|
| |  | provide fast and predictable response time and access to
	customer content globally; and
|
| |  | provide reliable and customized platform security.                                      

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 redundant network hardware,
facilities infrastructure such as power supplies and
telecommunications circuits. This infrastructure design supports
geographical data replication to ensure that high available
client requirements can be achieved seamlessly.

Our 24 by 7 Global Enterprise Management CenterTM
(GEMCTM) staff manages and monitors the entire GSP
environment, including the network systems environment,
telecommunications hardware and data content servers in all of
our data centers. The GEMC engineers use USiView, our global
enterprise management system, which we have developed over the
past 3 years, to meet the specific needs of application
hosting. USiView consists of an integrated suite of scalable
software tools that allow the USi staff to proactively monitor
systems-level events, processes and thresholds.

In order to facilitate the rapid user session response, 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 (MAEs)
and at the network access points (NAPs). In order to bypass the
MAEs and NAPs, 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.

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Security is paramount to our GSP environment. We employ a 24 by
7 security team to ensure that our clients data are
protected. Each client solution is secured by multiple levels of
security. Every one of our customers has dedicated, redundant
firewalls. Every WAN connection is physically diverse and
separated from all other connections and network services. In
addition, access to our data centers is restricted to authorized
personnel by card and/ or hand scan readers, which also monitor
and record entrances and departures. We believe that these
measures ensure complete separation and security between the
public and private networks.

Strategic Software Vendor Relationships

In developing our iMAP offerings, we have formed relationships
with some of the best of breed software application providers
including Ariba, BroadVision, Lawson, Microsoft, Oracle,
PeopleSoft, Plumtree and Siebel. Each of our software agreements
is unique, but most allow us to deploy packaged application
software as a service to a client without transferring title to
the licensed software. The agreements also generally include
co-marketing, specialized product training and preferred pricing
on the licenses to the software.

We are certified as a Microsoft Gold Certified Partner for
Hosting and Application Services. As a Microsoft Gold Certified
Partner for Hosting and Application Services, USi receives
exclusive benefits from Microsoft Corp., including usage of the
Gold Certified Partner logo, priority lead referrals, early
access to product information and inclusion in various business
development and marketing activities reserved for Gold Certified
Partners.

We are the first ASP to provide a hosted corporate portal as
part of the Plumtree Hosted Solutions Program. Through our
agreement with Plumtree, our clients can take advantage of a new
model for deploying the Plumtree Corporate Portal platform. Our
agreement with Plumtree includes joint go to market
strategy targeting mid to large enterprises, product development
and testing, implementation and customer support, sales force
training, and lead referral programs.

Sales and Marketing

We offer our services via a direct sales organization which is
managed geographically throughout the U.S. The sales management
teams manage the sales representatives, who own the relationship
with the client opportunity, as well as the sales engineers, who
own the specific application and hosting technical knowledge
specific to the services being offered. In addition, our
business development team cultivates sales opportunities through
relationships with our hardware and software systems integrator
channel partners. Our sales relationship with the client is
relationship-centric, meaning that our clients become long term
opportunities for selling service upgrades and cross-selling our
services.

Clients

We target primarily North American-based enterprises and
divisions of larger multinational organizations. We believe that
these organizations will gain the most competitive advantage
from our iMAP offerings 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.
International Data Corporation projects that large enterprise
businesses (1,000 employees or more) to be the fastest
growing ASP market segment.

We currently have clients for both our iMAP offerings and
traditional information technology services. Revenues from our
iMAP offerings comprised 85% of total revenue for the year ended
December 31, 2000. As of December 31, 2000 we had
233 signed contracts with 168 clients for our iMAP
offerings, representing over $354 million in expected
contract revenue (assuming payments over the full contract
terms) and approximately

5



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|                                                                                                                                                                               |  |                                                                                                                                                             |  |                                                                                                                          |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | 
|AARP Services, Inc.
	AllBooks4Less.com
	Amadeus Global Travel
	  Distribution S.A.
	American Cancer Society
	Blue Cross Blue Shield of
	  Michigan
	Cystic Fibrosis Foundation |  | General Growth PropertiesGMAC Home ServicesHershey FoodsHPdirect, Inc.Legg MasonLiberty Financial CompaniesProvidian Bancorp ServicesRand McNally & Company |  | Rohm & Haas Company
	Senco Products, Inc.
	Sony Electronics Inc.s
	  eMarker Business
	Sunburst Hospitality
	XL Capital

We were the first ASP on the federal governments GSA
schedule. We have entered into contracts with a number of
government agencies, such as the Federal Railroad
Administration, which can be terminated for convenience by the
government. The loss of these contracts would not have a
material adverse effect on our business.

For the year ended December 31, 2000, sales to SiebelNet
accounted for approximately 10.2% of our revenues.

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. 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 &
infrastructure. 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:



| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | In-house corporate IT staff                                                                          
|
| |  | Other ASPs                                                                                          
|
| |  | Web-hosting and managed hosting service providers                                                    
|
| |  | Local, regional, and national commercial Internet Service
	Providers and telecommunications companies
|
| |  | Local, regional and national commercial systems integrators                                          
|
| |  | Hardware and enterprise software application vendors                                                 

Our competitors may operate in one or more of these areas and
include such companies as Accenture, AT&T, Corio, Digex,
EDS, IBM, Oracle, Qwest Communications, SAP and Sprint. While we
believe our full service methodology of delivering
best of breed software applications sets us apart from these
competitors, some of these competitors have significantly
greater network coverage, market presence, and financial,
technical and personnel resources than we do.

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.

Intellectual Property Rights

We rely on a combination of copyright, trademark, service mark
and trade secret laws and contractual restrictions in order to
establish and protect certain proprietary rights which are
important to our business. We obtained federal trademark
protection for USinternetworking on
October 19, 1999, USi logo on

6



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Research and Development

We incur product research and development costs related to
expanding our portfolio of iMAP offerings. 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 offering environment.

Employees

As of March 23, 2001, we employed approximately
1,134 full-time employees, of which approximately 78% were
technicians and engineers. None of our employees are covered by
a collective bargaining agreement. We believe that our employee
relations are good.

Management

The following sets forth certain information regarding our
current directors and executive officers as of December 31,
2000.

|                        |  |     |    |          |  |                                                                       
|----------------------- |  | --- | -- | -------- |  | ----------------------------------------------------------------------
|Name                    |  | Age |    | Position
|                        |  |     |    |         
|Christopher R. McCleary |  |     | 48 |          |  | Chairman of the Board                                                 
|                       
|                       
|                       
|                       
|Andrew A. Stern         |  |     | 43 |          |  | Chief Executive Officer and Director                                  
|                       
|                       
|                       
|                       
|Harold C. Teubner, Jr.  |  |     | 54 |          |  | Executive Vice President and Chief Operating Officer                  
|                       
|                       
|                       
|                       
|Gary J. Rogers          |  |     | 50 |          |  | Senior Vice President, Worldwide Marketing and Sales                  
|                       
|                       
|                       
|                       
|Mary T. Weaver          |  |     | 47 |          |  | Senior Vice President and Chief Administrative Officer                
|                       
|                       
|                       
|                       
|Mark J. McEneaney       |  |     | 37 |          |  | Senior Vice President and Chief Financial Officer                     
|                       
|                       
|                       
|                       
|Stephen E. McManus      |  |     | 51 |          |  | President  E-Business Services Unit and Director                     
|                       
|                       
|                       
|                       
|Michael S. Harper       |  |     | 35 |          |  | President and General Manager of Enterprise Application Business
	Unit
|                       
|                       
|                       
|                       
|William T. Price        |  |     | 39 |          |  | Vice President, Secretary and General Counsel                         
|                       
|                       
|                       
|                       
|Frank A. Adams(1)       |  |     | 55 |          |  | Director                                                              
|                       
|                       
|                       
|                       
|Cathy M. Brienza        |  |     | 52 |          |  | Director                                                              
|                       
|                       
|                       
|                       
|Michael C. Brooks(1)    |  |     | 56 |          |  | Director                                                              
|                       
|                       
|                       
|                       
|Benjamin Diesbach(1)    |  |     | 54 |          |  | Director                                                              
|                       
|                       
|                       
|                       
|William F. Earthman(1)  |  |     | 49 |          |  | Director                                                              
|                       
|                       
|                       
|                       
|R. Dean Meiszer(2)      |  |     | 44 |          |  | Director                                                              
|                       
|                       
|                       
|                       
|David J. Poulin(2)      |  |     | 42 |          |  | Director                                                              
|                       
|                       
|                       
|                       
|Ray A. Rothrock(2)      |  |     | 46 |          |  | Director                                                              
|                       
|                       
|                       
|                       
|John H. Wyant           |  |     | 54 |          |  | Director                                                              
|                       
|                       
|                       
|                       
|Joseph R. Zell          |  |     | 41 |          |  | 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 of USi since July 2000. He also
served as Chairman and Chief Executive Officer from January 1998
to July 2000. 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

7



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##### Table of Contents





Andrew A. Sternhas been Chief Executive Officer
and a Director since July 2000. Previously, he served as
Executive Vice President and Chief Operating Officer, with
responsibility for the Companys Business Units, Sales, and
Marketing. He originally joined USi in July 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 Operating Officer of USi since
July 2000. From May to June 2000, Mr. Teubner was
Executive Vice President of Network Applications Group. He
joined USi as Executive Vice President and Chief Financial
Officer in 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. Rogershas been Senior Vice President,
Worldwide Marketing and Sales since January 2001. Mr. Rogers
joined 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,
he 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.

Mary T. Weaverhas been Chief Administrative
Officer since August 2000. She was promoted to Senior Vice
President and Chief Administrative Officer in February 2001. She
is responsible for USis administrative functions including
Human Resources, Management Information Systems, Facilities,
Telecommunications, Legal, Corporate Asset Security, Internal
Communications and Administration. Ms. Weaver joined USi as
Vice President Solutions Engineering for the Enterprise
Application Business Unit in July 2000. From October 1988 to May
2000 she was with The Hunter Group, where she served most
recently as Senior Vice President of Human Resources Information
Technology and Facilities and was a member of the board of
directors. Ms. Weavers prior roles at The Hunter Group
included Senior Vice President of Education Services and
CFO/Treasurer. She is a CPA in the state of Maryland.

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 and in May 2000 was promoted to Chief
Financial Officer. 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. Mr. McEneaney held
several positions with Ernst & Young from January 1986
through March 1995, most recently Senior Manager in the
audit department.

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-Business Services 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,

8



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Michael Harperhas been President and General
Manager, Enterprise Application Business Unit since January
2001. Mr. Harper joined USi in April 1998 as Vice President of
Product Marketing. In January 1999, Mr. Harper was promoted
to Vice President and General Manager of our PeopleSoft Business
Unit. In July 1999, Mr. Harper was named President and
General Manager of the 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.

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.

Frank A. Adamswas appointed to the board of
directors in June 1998 as a designee of the Grotech Capital
Group. He is the Managing General Partner of Grotech Capital
Group, which he co-founded in August 1984. Mr. Adams
served as President of the Mid-Atlantic Venture Association from
July 1985 through December 1998 and is currently its
Chairman. He has served on the board of directors of a number of
technology companies including Thunderbird Technologies, Inc.
Interspec, DIGEX and Quality Software Products.

Cathy M. Brienzawas appointed to the board of
directors in May 1999 as a designee of Waller-Sutton Media
Partners, L.P. She is a principal and co-founder of WallerSutton
2000, L.P., and, since July 1997, 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.

Michael C. Brookswas appointed to the board of
directors in December 1998 as a designee of the Whitney
Group. He joined Venrock Associates in May 2000 as a General
Partner, where he concentrates on information technology,
focusing on the Internet. Prior to joining Venrock, Mr. Brooks
was a general partner of J. H. Whitney & Co. from
1984. He is also a director of SunGard Data Systems, Inc. and
several private companies.

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.

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
January 1990 as a Vice President of Massey Burch Investment
Group. Prior to Massey Burch, he worked for the investment banks
J.C. Bradford & Co. from September 1975 to
October 1981, Prudential-Bache Securities from October 1981
to November 1985 and First Nashville Corp. from
December 1985 to December 1989. He currently serves on
the board of directors of several private companies.

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 January 1999 by the principals and associates
of Crisler Company to own, operate, and manage wireless
transmission towers and related businesses. Mr. Meiszer has been
President and Managing Director of The Crisler Company, a

9



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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 of USi. 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 Technologies and
several private companies.

John H. Wyantwas appointed to the board of
directors in June 1998 as a designee of the Blue Chip
Group. He is a General Partner and President of Blue Chip
Venture Company, which he founded in 1990. Mr. Wyant is
currently a director of Regent Communications, @plan, and
several private companies. 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,
and appointed as an independent outside director in April 2000.
He is President and Chief Executive Officer, and a director of
Convergent Communications, Inc. From November 1991 to
April 2000, he 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 was President of the
division from March 1997 to April 2000.




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
which our headquarters resides in Annapolis, Maryland for
$11.8 million. The seller financed $8.6 million of the
purchase price through a first mortgage note. A second mortgage
of $4.75 million was obtained on the property in
December 1999. The second mortgage was provided by a major
institutional lender and partially guaranteed by the State of
Maryland.

In May 2000, a limited liability company, GEMC Properties,
LLC, of which we are the sole member, purchased the land and
building in which our original data center resides in Annapolis,
Maryland for $9 million. GEMC Properties, LLC, obtained
financing for the purchase in the amount of $6,750,000 from a
major institutional lender.

We lease space in a number of other locations, primarily for
data center installations and to house our sales, 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 2000 we incurred
approximately $7.8 million in rent expense.




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 report, 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.

10



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##### Table of Contents






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 2000.




Part II




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

On April 9, 1999, we sold 15,525,000 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
have been 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 were also 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 3,000,000 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 $119.2 million, all of which has been 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 received were also 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.

On November 15, 2000, we sold 3,126,038 shares of our
common stock for an aggregate purchase price of $10,000,000 to
Acqua Wellington North American Funds Equities, Ltd. This sale
was pursuant to a registration statement on Form S-3
(Registration no. 333-47858), which was declared effective
by the Commission on November 15, 2000. The proceeds have
been and will be used for general corporate purposes, including
working capital to fund anticipated operating losses, expenses
and capital expenditures.

On February 15, 2001, we sold 1,612,755 shares of our
common stock for an aggregate purchase price of $5,000,000 to
Acqua Wellington North American Funds Equities, Ltd. This sale
was pursuant to a

11



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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.

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, each
of the four quarters of 2000 and the first quarter of 2001:

|                              |                                        |      |   |       |  |  |   |       | 
|----------------------------- | -------------------------------------- | ---- | - | ----- |  |  | - | ----- | 
|                              |                                        | 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                          |      | $ | 66.67 |  |  | $ | 28.67 | 
|                             
|                             
|                             
|                             
|                              | Second Quarter                         |      |   | 40.81 |  |  |   | 15.94 | 
|                             
|                             
|                             
|                             
|                              | Third Quarter                          |      |   | 21.88 |  |  |   | 6.50  | 
|                             
|                             
|                             
|                             
|                              | Fourth Quarter                         |      |   | 6.25  |  |  |   | 2.28  | 
|                             
|                             
|                             
|                             
|Year Ended December 31, 2001: |                                        |      |   |       |  |  |   |      
|                             
|                             
|                             
|                             
|                              | First Quarter (through March 23, 2001) |      | $ | 5.19  |  |  | $ | 1.22  | 

The last sale price of the common stock on The Nasdaq National
Market on March 23, 2001 was $1.44

Holders

As of March 23, 2001, there were 2,791 stockholders of
record and approximately 64,960 beneficial stockholders of
record of our common stock.

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

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| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 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 a total of
	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 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.                                                         

13



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 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.                                                                             
|   
|18. | On June 30, 2000, the Company issued a warrant to purchase
	80,000 shares of common stock for $20.44 per share, to AT&T
	Corp. in connection with a joint marketing agreement with the
	Company.                                                                                                                                                                                                                                                                                                                               
|   
|19. | On November 3, 2000, the Company issued 9,007,353 shares of
	its common stock with certain registration rights for an
	aggregate purchase price of $30,625,000 to the Company Chairman
	Christopher R. McCleary, Chief Executive Officer Andrew A.
	Stern, certain venture investors, Microsoft, Inc., CFE, Inc. (a
	wholly owned subsidiary of GE Capital) and Aether Systems. The
	Company also issued to these holders warrants to purchase
	3,152,573 shares of common stock for $4.08 per share.                          
|   
|20. | On December 1, 2000 the Company issued warrants to purchase
	18,394 shares of common stock for $3.00 per share, to TCG
	Holdings, LLC, two of its employees and one independent
	consultant in connection with Innovative Software Engineering
	Practices, Inc.s (a wholly-owned subsidiary of TGC
	Holdings, LLC) consulting work for the Company.                                                                                                                                                                           
|   
|21. | On January 2, 2001, the Company issued 27,022,059 shares of
	its common stock with certain registration rights for an
	aggregate purchase price of $91,875,000 to the Company Chairman
	Christopher R. McCleary, Chief Executive Officer Andrew A.
	Stern, certain venture investors, Microsoft, Inc., CFE, Inc. (a
	wholly owned subsidiary of GE Capital) and Aether Systems. The
	Company also issued to these holders warrants to purchase
	9,457,721 shares of common stock for $4.08 per share.                          

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.




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 two years
	ended December 31, 2000 and as of December 31, 1999
	and 2000.                                    

14



---



##### Table of Contents



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. Our audited consolidated
financial statements for the year ended December 31, 2000
include the results of EnableVision, LLC from September 1,
2000 through December 31, 2000.

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        |        | Year ended       
|                                                                                |                                     | December 31, 1998                     |         | December 31, 1999 |        | December 31, 2000
|                                                                                |                                     |                                       |         |                   |        |                  
|                                                                                |                                     |                                      
|                                                                                |                                     | (in thousands, except per share data)
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Statement of Operations Data:                                                   |                                     |                                       |         |                   |        |                   |          |        |         |   |          |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Revenue                                                                         |                                     | $                                     | 4,122   |                   |        | $                 | 35,513   |        |         | $ | 109,544  |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Costs and expenses:                                                             |                                     |                                       |         |                   |        |                   |          |        |         |   |          |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Direct cost of services             |                                       |         | 3,425             |        |                   |          | 23,570 |         |   |          | 69,609  |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Network and infrastructure costs    |                                       |         | 2,186             |        |                   |          | 16,239 |         |   |          | 26,718  |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Selling, general and administrative |                                       |         | 25,239            |        |                   |          | 63,999 |         |   |          | 101,944 |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Non-cash stock compensation expense |                                       |         | 231               |        |                   |          | 10,351 |         |   |          | 20,998  |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Depreciation and amortization       |                                       |         | 3,180             |        |                   |          | 22,480 |         |   |          | 52,687  |        
|                                                                                |                                     |                                       |         |                   |        |                   |          |        |         |   |          |        
|                                                                                |                                     | Total costs and expenses              |         |                   | 34,261 |                   |          |        | 136,639 |   |          |         | 271,956 | 
|                                                                                |                                     |                                       |         |                   |        |                   |          |        |         |   |          |        
|Operating loss                                                                  |                                     |                                       | (30,139 | )                 |        |                   | (101,126 | )      |         |   | (162,412 | )      
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Other income (expense):                                                         |                                     |                                       |         |                   |        |                   |          |        |         |   |          |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Interest income                     |                                       |         | 367               |        |                   |          | 4,115  |         |   |          | 8,813   |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Interest expense                    |                                       |         | (2,681            | )      |                   |          | (6,307 | )       |   |          | (21,361 | )      
|                                                                                |                                     |                                       |         |                   |        |                   |          |        |         |   |          |        
|Net loss                                                                        |                                     | $                                     | (32,453 | )                 |        | $                 | (103,318 | )      |         | $ | (174,960 | )      
|                                                                                |                                     |                                       |         |                   |        |                   |          |        |         |   |          |        
|Net loss attributable to common stockholders                                    |                                     | $                                     | (38,097 | )                 |        | $                 | (129,683 | )      |         | $ | (174,960 | )      
|                                                                                |                                     |                                       |         |                   |        |                   |          |        |         |   |          |        
|Basic and diluted loss per common share attributable to common
	stockholders(a) |                                     | $                                     | (27.09  | )                 |        | $                 | (1.95    | )      |         | $ | (1.80    | )      
|                                                                                |                                     |                                       |         |                   |        |                   |          |        |         |   |          |        

15



---



##### Table of Contents



|                                                                                                          |  |                |         |              |  |              |         |              |  |   |         |  |  |   |         | 
|--------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | ------------ |  | ------------ | ------- | ------------ |  | - | ------- |  |  | - | ------- | 
|                                                                                                          |  | Actual         |         | Actual       |  | Actual       |         | Pro forma   
|                                                                                                          |  | December 31,   |         | December 31, |  | December 31, |         | December 31,
|                                                                                                          |  | 1998           |         | 1999         |  | 2000         |         | 2000(b)     
|                                                                                                          |  |                |         |              |  |              |         |             
|                                                                                                          |  |               
|                                                                                                          |  | (in thousands)
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Balance Sheet Data:                                                                                       |  |                |         |              |  |              |         |              |  |   |         |  |  |   |         | 
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Cash and cash equivalents                                                                                 |  | $              | 43,802  |              |  | $            | 112,302 |              |  | $ | 56,962  |  |  | $ | 143,171 | 
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Available-for-sale securities                                                                             |  |                |        |              |  |              | 31,707  |              |  |   |        |  |  |   |        | 
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Working capital                                                                                           |  |                | 22,551  |              |  |              | 117,166 |              |  |   | 2,506   |  |  |   | 79,515  | 
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Total assets                                                                                              |  |                | 106,516 |              |  |              | 325,454 |              |  |   | 418,783 |  |  |   | 510,390 | 
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Current portion of long-term debt and capital lease obligations                                           |  |                | 3,262   |              |  |              | 18,421  |              |  |   | 43,822  |  |  |   | 57,622  | 
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|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 |              |  |   | 193,425 |  |  |   | 186,720 | 
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Series B Convertible Redeemable Preferred Stock                                                           |  |                | 62,242  |              |  |              |        |              |  |   |        |  |  |   |        | 
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Common stock subject to repurchase                                                                        |  |                | 4,145   |              |  |              |        |              |  |   |        |  |  |   |        | 
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Stockholders (deficit) equity                                                                            |  |                | (2,467  | )            |  |              | 102,461 |              |  |   | 116,983 |  |  |   | 201,495 | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | In March 2000, we 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.                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(b) | On January 2, 2001 we completed additional financing including
	the sale of 27,022,059 shares of common stock for gross proceeds
	of $91,875. In addition, the Company borrowed $15,000 under a
	new revolving credit facility with GE Capital Corporation. After
	giving effect to transaction fees and repayment and cash
	collateralization of certain long-term debt facilities, the
	Company received net proceeds of $86,209 from these
	transactions. The pro forma information at December 31,
	2000 reflects both of these transactions. See notes 11 and 21 to
	the Companys Consolidated Financial Statements for further
	information.

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, 1996 and 1997 and as of
	December 31, 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 the periods 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.

16



---



##### Table of Contents



Predecessor  I.I.T. Holding, Inc.

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

|                                                                          |  |                |     |      |  |   |     | 
|------------------------------------------------------------------------- |  | -------------- | --- | ---- |  | - | --- | 
|                                                                          |  |               
|                                                                          |  | As of         
|                                                                          |  | December 31,  
|                                                                          |  |               
|                                                                          |  | 1996           |     | 1997
|                                                                          |  |                |     |     
|                                                                          |  |               
|                                                                          |  | (in thousands)
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Balance Sheet Data:                                                       |  |                |     |      |  |   |     | 
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Cash and cash equivalents                                                 |  | $              | 70  |      |  | $ | 14  | 
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Working capital                                                           |  |                | 14  |      |  |   | 41  | 
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Total assets                                                              |  |                | 348 |      |  |   | 769 | 
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Long-term debt and capital lease obligations, excluding current
	position |  |                | 11  |      |  |   | 16  | 
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Stockholders equity                                                      |  |                | 45  |      |  |   | 132 | 




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

You should read the following discussion of our results of
operations and financial condition in conjunction with our
consolidated financial statements and related notes included
elsewhere in this Form 10-K. This discussion contains
forward-looking statements based on current expectations that
involve risks and uncertainties. Actual results and the timing
of certain events may differ significantly from those projected
in such forward-looking statements due to a number of factors.
Dollar amounts stated herein are in thousands except per share
amounts.

Overview

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 GSP
environment. 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
offerings. In 2000, we completed our development activities,
increased our client base, and expanded our iMAP offerings. We
have incurred a cumulative net loss since inception and expect
to incur additional losses for at least the next twelve months
primarily because we have developed our network infrastructure
and the overhead to support it in anticipation of a larger
client base in the next several years. As of December 31,
2000, we

17



---



##### Table of Contents





In September 2000, we purchased the assets of EnableVision, LLC,
a comprehensive provider of Lawson financial and human resources
system implementation services. The purchase price consisted of
cash of $2,000 and 290,640 shares of restricted stock
valued at $4,000 on the purchase date.

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 $7,700, assumed liabilities of $1,500, and
a $2,000 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 $4,600
in cash. Portions of the contingent payments can be earned by
Conklin shareholders through December 2001 upon the attainment
of specified financial milestones.

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 fees for the Companys iMAP services. iMAP
service fees are consideration for access to our network of
Enterprise Data Centers or 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 and recognized ratably over the
term of the iMAP service contract. Some contracts permit
termination without cause by the clients. Contracts permitting
termination without cause generally provide for termination
payments to us that will be recognized as revenue when
collectibility is assured.

Costs and expenses. We incur operating costs and expenses
related to the delivery of iMAP and professional IT services.
They include direct cost of services, network and infrastructure
costs, general and administrative, sales and marketing, product
research and development, non-cash stock compensation, and
depreciation and amortization expenses.

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 terms of the software license
agreement. Amortization is recorded 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, Inc.

Revenue

|                         |               |                   |        |                   |  |                   |        |        |  |   |       |       | 
|------------------------ | ------------- | ----------------- | ------ | ----------------- |  | ----------------- | ------ | ------ |  | - | ----- | ----- | 
|                         |               | Year ended        |        | Year ended        |  | Period ended     
|                         |               | December 31, 2000 |        | December 31, 1999 |  | December 31, 1998
|                         |               |                   |        |                   |  |                  
|iMAP                     |               | $                 | 92,908 |                   |  | $                 | 21,743 |        |  | $ | 69    |      
|                        
|                        
|                        
|                        
|Professional IT services |               |                   | 16,636 |                   |  |                   | 13,770 |        |  |   | 4,053 |      
|                         |               |                   |        |                   |  |                   |        |        |  |   |       |      
|                         | Total revenue |                   | $      | 109,544           |  |                   | $      | 35,513 |  |   | $     | 4,122 | 
|                         |               |                   |        |                   |  |                   |        |        |  |   |       |      
|                        
|Enterprise Applications  |               | $                 | 48,792 |                   |  | $                 | 17,928 |        |  | $ | 2,138 |      
|                        
|                        
|                        
|                        
|E-Business Services      |               |                   | 60,752 |                   |  |                   | 17,585 |        |  |   | 1,984 |      
|                         |               |                   |        |                   |  |                   |        |        |  |   |       |      
|                         | Total revenue |                   | $      | 109,544           |  |                   | $      | 35,513 |  |   | $     | 4,122 | 
|                         |               |                   |        |                   |  |                   |        |        |  |   |       |      

18



---



##### Table of Contents



Direct cost of services

|                           |                                                                     |                   |        |                   |  |                   |        |        |  |   |       |       | 
|-------------------------- | ------------------------------------------------------------------- | ----------------- | ------ | ----------------- |  | ----------------- | ------ | ------ |  | - | ----- | ----- | 
|                           |                                                                     | Year ended        |        | Year ended        |  | Period ended     
|                           |                                                                     | December 31, 2000 |        | December 31, 1999 |  | December 31, 1998
|                           |                                                                     |                   |        |                   |  |                  
|iMAP                       |                                                                     | $                 | 59,016 |                   |  | $                 | 14,743 |        |  | $ | 895   |      
|                          
|                          
|                          
|                          
|Professional IT services   |                                                                     |                   | 10,593 |                   |  |                   | 8,827  |        |  |   | 2,530 |      
|                          
|                          
|                          
|                          
|Network and infrastructure |                                                                     |                   | 26,718 |                   |  |                   | 16,239 |        |  |   | 2,186 |      
|                           |                                                                     |                   |        |                   |  |                   |        |        |  |   |       |      
|                           | Total direct cost of services and network and infrastructure
	costs |                   | $      | 96,327            |  |                   | $      | 39,809 |  |   | $     | 5,611 | 
|                           |                                                                     |                   |        |                   |  |                   |        |        |  |   |       |      
|                          
|Enterprise Applications    |                                                                     | $                 | 31,977 |                   |  | $                 | 8,919  |        |  | $ | 2,159 |      
|                          
|                          
|                          
|                          
|E-Business Services        |                                                                     |                   | 37,632 |                   |  |                   | 14,651 |        |  |   | 1,266 |      
|                          
|                          
|                          
|                          
|Network and infrastructure |                                                                     |                   | 26,718 |                   |  |                   | 16,239 |        |  |   | 2,186 |      
|                           |                                                                     |                   |        |                   |  |                   |        |        |  |   |       |      
|                           | Total direct cost of services and network and infrastructure
	costs |                   | $      | 96,327            |  |                   | $      | 39,809 |  |   | $     | 5,611 | 
|                           |                                                                     |                   |        |                   |  |                   |        |        |  |   |       |      

Comparison of the year ended
December 31, 2000 to the year ended December 31,
1999

Revenue. For the year ended December 31, 2000, we
generated $109,544 of revenue as compared to $35,513 for the
same prior year period.

The increase of $71,165 in iMAP revenue is attributable to the
increase in client iMAP contracts. At December 31, 2000, we
had 233 iMAP contracts versus 109 at December 31, 1999.
Included in our 2000 iMAP revenues was a termination fee of
$3,198 related to the early termination of an enterprise
application contract. Professional IT services revenue increased
$2,866 in 2000, mainly due to the increased revenue from Conklin
& Conklin, Inc., acquired in October 1999.

The increase of $30,864 in Enterprise Applications revenue is
mainly attributable to additional iMAP contracts for our
financial management, human resource and customer relationship
management products. At December 31, 2000, we had
112 Enterprise Application iMAP contracts compared to
39 at the end of the prior year. The increase of $43,167 in
E-Business Services is mainly attributable to additional client
iMAP contracts for our e-commerce and e-business products. At
December 31, 2000, we had 121 E-Business Services contracts
compared to 70 at the end of the prior year.

Gross margins, direct costs of services, network and
infrastructure costs (excluding non-cash stock compensation
expense). For the year ended December 31, 2000, we
incurred $96,327 for direct costs of services and network and
infrastructure costs as compared to $39,809 for the same prior
year period.

For the year ended December 31, 2000, we incurred $59,016
and $10,593 of direct costs related to the delivery of our iMAP
and professional IT services, respectively. For the same period
in 1999, we incurred $14,743 of direct costs related to iMAP
services and $8,827 of direct costs related to professional IT
services. The increase in iMAP services costs is directly
attributable to our increase in iMAP contracts. In addition, we
also wrote-off $220 of deferred iMAP costs related to the early
termination of a contract for which we received a termination
fee. We also wrote-off $3,193 of deferred iMAP costs related to
contracts with early stage clients who experienced unexpected
financial difficulties in the last six months of 2000.

In addition, we incurred $26,718 of costs related to the
maintenance of our network and infrastructure costs for the year
ended December 31, 2000 and $16,239 in related costs during
the same period in 1999. The increase of $10,479 is attributable
to costs required to complete our infrastructure buildout and to
support our increase in iMAP contracts.

For the year ended December 31, 2000, we incurred $31,977
and $37,632 of direct costs related to the delivery of our
enterprise applications and e-business services, respectively.
For the same period in 1999, we incurred $8,919 related to
Enterprise Applications and $14,651 of direct costs related to
E-Business Services. Both increases are directly attributable to
incremental client costs associated with our increase in iMAP
client contracts.

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Gross margins, including iMAP network and infrastructure costs,
for the year ended December 31, 2000 were 8% and 36% for
iMAP and professional IT services, respectively. These margins
for the comparable 1999 period were (43)% and 36%, respectively.
The increase in our iMAP services margin is due to the fact we
built an infrastructure base in 1998 and 1999 to support a large
number of clients. During 2000 we began to utilize the excess
capacity that we had developed. Our margins for iMAP services
are expected to continue to improve because our business model
contemplates a much smaller increase in network and
infrastructure costs as revenues increase.

Segment operating profit margins, which exclude iMAP networking
and infrastructure costs, for enterprise applications were 34%
and 50% for the year ended December 31, 2000 and 1999,
respectively. The decrease in operating profit margin from the
prior period is due to a high-margin contract becoming a smaller
percentage of revenue and margins for the year ended
December 31, 2000 as compared to the same period in 1999.
Segment operating profit margins for E-Business Services
improved to 38% for the year ended December 31, 2000 as
compared to 17% for the same period in 1999. This improvement
reflects the utilization of the investment made in 1999 to
support the increase in iMAP contracts. Our margins for the year
ended December 31, 2000 for these operating segments are
more indicative of expected performance than in the same prior
year period.

General and administrative expenses. For the year ended
December 31, 2000, we incurred $27,615 of general and
administrative expenses compared to $22,052 for the same period
in 1999. The increase of $5,563 principally reflects the costs
associated with increased executive, finance, human resource,
corporate information systems and facilities personnel required
to support the growth in operations.

Sales and marketing expenses. For the year ended
December 31, 2000, we incurred $68,943 of sales and
marketing expenses compared to $36,595 for the same period in
1999. The increase of $32,348 reflects the costs associated with
our increased efforts to market and brand our service offerings,
the sales commissions related to the increase in iMAP revenue,
and the increase in sales, marketing, business unit management
and product management personnel required to manage the growth
in operations. In addition, we also incurred $981 of non-cash
expense related to the issuance of common stock warrants in
connection with a cooperative marketing agreement. This
agreement was later terminated in October 2000.

Product research and development expenses. For the year
ended December 31, 2000, we incurred $3,276 of product
research and development expenses compared to $5,352 for the
same period in 1999. The decrease of $2,076 is due to the fact
that we developed a majority of our iMAP offerings in 1998 and
1999. We expect our research and development expenses to decline
further in future periods.

Non-cash stock compensation expense. For the year ended
December 31, 2000, we incurred a total of $20,998 in
non-cash stock compensation expenses compared to $10,351 for the
same period in 1999. Of the $10,647 increase, $6,136 reflects
the periods expense in connection with employee stock
options we granted for nominal exercise prices in lieu of cash
bonuses. The remaining amount of $4,511 reflects the
Companys contribution of common stock to an employee
benefit plan and the amortization of unearned compensation for
awards in prior periods. We expect to incur up to $14,384 in
non-cash stock compensation expense through 2002 related to the
intrinsic value of 1999 and 2000 stock option grants. We also
expect to incur up to an additional $14,565 of non-cash stock
compensation expense over the next three to four years as a
result of a stock option swap program implemented in
November 2000. This program allowed employees to exchange
stock options granted since January 2000 at a rate of two
options for one share of restricted stock.

Depreciation and amortization. For the year ended
December 31, 2000, we incurred $52,687 in depreciation and
amortization expenses, compared to $22,480 for the same period
in 1999. Of the $30,207 increase, $28,006 represents
depreciation of our increasing investment in property and
equipment and the amortization of our prepaid software licenses.
The remaining amount of $2,201 represents the amortization of
the goodwill recorded upon our acquisitions of Conklin, ACR, IIT
and EnableVision.

Interest income and expense. For the year ended
December 31, 2000, we incurred $21,361 in interest expense
and generated $8,813 of interest income. For the year ended
December 31, 1999, we incurred

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We generated interest income in 2000 from the temporary
investment of the proceeds of our February 2000 common
stock offering and November 1999 debt offering. During the
same prior year period, we generated interest income from the
temporary investment of the proceeds of our initial public
offering.

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 $21,743 in iMAP revenue and $13,770 in professional IT
services revenue. For the period January 14, 1998, our date
of inception, through December 31, 1998 we generated $69 in
iMAP revenue and $4,053 in professional IT services revenue. The
increase of $21,674 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 ($2,000) and ACR ($2,000) which were acquired
during the third and fourth quarters of 1998, respectively. The
increase of $9,717 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 $14,743 and $8,827 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
$895 and $2,530 of direct costs related to the delivery of our
iMAP and professional IT services, respectively. Additionally,
we incurred $16,239 of costs related to the maintenance of our
network and infrastructure for the year ended December 31,
1999 and $2,186 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 (43)% and 36% for iMAP and professional IT services,
respectively. Gross margins for professional IT services for the
period ended December 31, 1998 were 38%.

General and administrative expenses.For the year ended
December 31, 1999, we incurred $22,052 of general and
administrative expenses compared to $19,426 for the period from
January 14, 1998, our date of inception, through
December 31, 1998. The increase of $2,626 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 $36,595 of sales and
marketing expenses compared to $5,123 for the period from
January 14, 1998, our date of inception, through
December 31, 1998. The increase of $31,472 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 $5,352 of product
research and development expenses compared to $690 for the
period from January 14, 1998, our date of inception,
through December 31, 1998. The increase of $4,662 reflects
the costs associated with the continued development of our new
products and infrastructure during a full year of operations for
the year ended December 31, 1999, compared to start-up
activities during 1998.

Non-cash stock compensation expense.For the year ended
December 31, 1999, we incurred $10,351 in non-cash
compensation expense. Of this amount, $8,588 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 $26,500 over
the next two years in relation to those options. The

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Depreciation and amortization.Depreciation and
amortization for the year ended December 31, 1999 totaled
$22,480. Of this amount, $5,955 represents the amortization of
the goodwill recorded upon our acquisitions of ACR, IIT and
Conklin; the remaining $16,525 represents depreciation of our
property and equipment and the amortization of our prepaid
software licenses. Depreciation expense for 1999 was
approximately $382 lower as a result of changing our useful life
of computer equipment from 3 to 5 years in July 1999. 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 $6,307 in interest expense
principally from increased borrowings including $1,458 of
expense from our convertible subordinated notes. We generated
$4,115 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
$3,000 and $1,100 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 $1,800 and $1,300 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 $1,000 attributable to non-cash compensation
expense related to the issuance of stock to three of IITs
officers. Selling, general and administrative expenses increased
$1,300 for the period ended September 7, 1998, as a result
of bonuses and related payroll taxes. The remaining increase of
approximately $200 is attributable to the additional selling,
general and administrative support required to support
IITs growing customer base.

Future Assessment of Recoverability and Impairment of
Goodwill

In connection with our acquisition of IIT, ACR, Conklin, and
EnableVision LLC, we recorded goodwill that is being amortized
on a straight-line basis over its estimated useful life. At
December 31, 2000, the unamortized portion of these
intangibles was $27,560, which represented 7% of total assets
and 24% 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 between three to 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

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Liquidity and Capital Resources

At December 31, 2000, we had cash and cash equivalents of
$56,962. On January 2, 2001 we closed a series of debt and
equity transactions resulting in gross proceeds of $107,000. Had
these transactions closed on December 31, 2000, our cash
and cash equivalents position would have been $143,171 after
giving effect to transaction fees and repayment and cash
collateralization of certain long term debt facilities. Cash in
excess of operating requirements is invested in high grade
liquid financial instruments with maturities less than 90 days.

In addition to the financings described above which occurred on
January 2, 2001, we raised an additional $186,475 of
capital during 2000 of which $159,721 was equity and $26,754 was
long term debt. The equity was raised primarily through a
secondary common stock offering of $119,200 which closed in
February of 2000 and a private equity offering of $40,521 which
closed in November of 2000. The long term debt was principally
in the form of capitalized lease obligations through various
vendor financing programs. Payments of debt amortization,
including amortization of capital leases amounted to $42,037.
All of the long-term fixed asset financing is collateralized by
the incremental infrastructure assets deployed to fulfill
customer requirements.

For the year ended December 31, 2000, we used $118,605 in
operating activities, $85,403 in investing activities and raised
$148,668 (net of debt repayments), as described above, through
financing activities. Cash used in operating activities was used
to fund working capital needs. Specifically, we used
approximately $21,000 to fund implementation costs associated
with iMAP clients added during the year. Additionally, our
accounts receivable balance increased approximately $18,800 as a
result of the growth in new iMAP contracts during the year. The
accounts receivable balance was $35,312 at December 31,
2000, which includes unbilled accounts receivable of $11,737.
During 2000, we wrote-off $2,649 and reserved an additional
$1,242 of accounts receivable related to several early-stage
companies that were experiencing financial difficulty. At
December 31, 2000, our accounts receivable balance is
comprised primarily of amounts due from larger, more stable
companies with no specific industry or customer concentration.
Cash used in investing activities was primarily used to purchase
computing hardware and software required to support the increase
in our iMAP clients and shared infrastructure. During 2000, the
Company purchased $108,611 in property and equipment, compared
to $79,858 purchased in 1999. This increase is due to the
increase in iMAP clients signed in 2000 as compared to 1999.

Cash will be required in 2001 to fund capital expenditures,
which are estimated to be approximately $100,000, as well as to
continue to fund operating activities. Included in the capital
expenditures estimate is $8,701 related to committed facilities
costs. In addition, the cash resources on hand subsequent to the
closing of the January 2, 2001 series of transactions, we
have the following financing sources available:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In January, we closed a sale-leaseback of certain computing
	hardware which netted us $17,500 in proceeds.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | On January 2, 2001, we closed a $50,000 revolving line of
	credit led by GE Capital. Availability under this line is based
	upon accounts receivable balance and our 12 month backlog, which
	is the committed revenue we expect to obtain from our iMAP
	contracts over the next 12 months. The line requires that we
	meet certain financial covenants and is secured by substantially
	all of our assets. As of February 28, 2001, we used
	approximately $16,000 of the line. Of the remaining $34,000, an
	additional $18,000 is currently available.
|
| |  | $41,000 of lease financing for HP products, of which $13,100 has
	been funded and $16,900 is currently available. Another $11,000
	will be made available after the conclusion of the quarter                                                                                                                                                                                                                                                                                                                                                             

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | ending March 31, 2001, contingent upon the Company
	achieving certain operating metrics. All commitments expire
	June 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | $20,000 in long-term fixed asset financing from Compaq, of which
	$6,600 has been funded and $13,400 remains available. This
	commitment expires June  30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | $20,000 in long-term fixed asset financing from Sun
	Microsystems, of which $4,300 has been funded, $6,900 expired on
	December 31, 2000, and $8,800 remains available. This
	commitment expires June 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | We have entered into an agreement with Acqua Wellington North
	American Equities Fund Ltd. for the sale of up to $140,000 of
	common stock, depending on the market price of our common stock
	over the next 28 months. We may sell these shares at its sole
	discretion, depending upon its needs. The shares will be sold at
	a 4% to 6% discount based on the market price of our common
	stock at the time of the draw. The amount of stock sold in a
	given draw period is based on the stock price during such draw
	period. At $3 per share, we could sell $5,000 in stock per draw
	period. At $10 per share, we could sell $35,000 in stock
	per draw. Below $3 per share, Acqua Wellington has the option
	not to purchase our equity. As of March 23, 2001, we had
	$135,000 available under this line.

We believe that these resources and our existing cash and cash
equivalents will be sufficient to fund our operations, including
planned levels of capital expenditure for the foreseeable future
assuming the successful implementation of our current business
model. The majority of the base infrastructure required to
provide our iMAP offerings has been purchased. As a result, we
expect that 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 offerings 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.

Restructuring

In December 2000, we accrued a restructuring charge of $2,110
related to severance costs associated with the involuntary
termination of certain employees of USi and non-cancellable
lease costs associated with the closing of three sales offices.
We anticipate that substantially all of this restructuring
accrual will be paid in 2001.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133
was later amended by the Financial Accounting Standards Board in
1999 and 2000 upon the issuance of SFAS No. 137 and
SFAS No. 138. These standards, which we adopted on
January 1, 2001, provide a comprehensive and consistent
method for the recognition and measurement of derivatives and
hedging activities. The adoption of SFAS No. 133 and
its amendment did not have a material impact on the consolidated
financial statements.

In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements. We adopted the
provisions of SAB No. 101 in our consolidated
financial statements for the year ended December 31, 2000.
The

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Item 7A.  Quantitative and Qualitative
Disclosures About Market Risk

We are exposed to market risk from changes in interest rates.
Market risk is the risk of loss to future earnings, to fair
value or to future cash flows that may result from the changes
in the price of financial instruments. Changes in the quoted
market price of our common stock affects the fair value of our
convertible subordinated notes. At December 31, 2000, we
had $125,000 of convertible subordinated notes outstanding,
bearing interest at 7%, that mature November 1, 2004. The
estimated fair value of these notes was $65,625 at
December 31, 2000, which represents an 82% decrease in the
estimated fair value from December 31, 1999. We continue to
manage our exposure to this risk through our regular operating
and financing activities. There have been no other significant
changes in our interest rate risk and other market risks.

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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 Form 10K 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 Form 10K. Dollar amounts herein are in thousands.

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 as well as
expanding our infrastructure and work force to service our
growing customer base required substantial capital and other
expenditures. As a result, we reported a net loss of $174,960
for the year ended December 31, 2000 and EBITDA of negative
$71,179 for the same period. For the year ended
December 31, 1999, we reported a net loss of $103,318 and
EBITDA of negative $65,533 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 may need additional capital to fund our operations and
finance our growth. While we have recently raised a significant
amount of additional capital, there can be, however, no
assurance that we will not need to raise additional capital or
that such efforts will be successful. If we raise additional
funds by selling our common stock or securities convertible into
common stock, the relative ownership of our existing investors
could be diluted or the new investors could obtain terms more
favorable than those of our existing investors. If we cannot
obtain financing on terms acceptable to us or at all, we may be
forced to curtail our planned business expansion.

Our business is difficult to evaluate because we have a
limited operating history in a relatively new market.

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. Additionally, our market, the
Application Service Provider (or ASP) market is
relatively new and has not yet received universal acceptance by
the enterprises we target. Therefore, it is difficult to
evaluate our business and prospects.

Our indebtedness could adversely affect our financial
health.

Our debt leverage is indicated in the chart below.

|                            |  |                   |         |                   |  |   |         | 
|--------------------------- |  | ----------------- | ------- | ----------------- |  | - | ------- | 
|                            |  | December 31, 2000 |         | December 31, 2000
|                            |  |                   |         |                  
|                            |  | Actual            |         | Pro Forma        
|                           
|                           
|                           
|                           
|Total long term liabilities |  | $                 | 193,425 |                   |  | $ | 186,720 | 
|                           
|                           
|                           
|                           
|Stockholders equity        |  | $                 | 116,983 |                   |  | $ | 201,495 | 
|                           
|                           
|                           
|                           
|Debt to equity ratio        |  |                   | 1.65:1  |                   |  |   | 0.93:1  | 

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



| |   |                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | limit our ability to fund future working capital, capital
	expenditures, acquisitions and other general corporate
	requirements;                                                                                                                               
|
| |  | limit our ability to borrow additional funds;                                                                                                                                                                                                                  
|
| |  | 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;
|
| |  | 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; and                                                                                                                                                                           
|
| |  | limit our flexibility in planning for, or reacting to, changes
	in our business and industry.                                                                                                                                                                  

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

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.

If we fail to meet covenants or default under our equipment
leases or revolving line of credit, our ability to service our
clients could be harmed.

We have financed a large percentage of our hardware purchases
under various lease and sale-leaseback agreements. We have also
entered into a revolving line of credit with General Electric
Credit Corp. which is secured by the majority of our
unencumbered assets. Some of these agreements and the credit
line contain financial covenants and cross-default provisions
which, if triggered, could have a material adverse effect on our
business and our ability to service our clients.

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.

27



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The growth in demand for outsourced business software
applications is now beginning, but the future is still
uncertain.

Future demand for and acceptance of outsourced business software
applications, including our iMAP offerings is uncertain.
While there has been a significant level of initial adoption of
the ASP model, we believe that many of our potential customers
are still not fully aware of the benefits of outsourced
solutions. In addition, the rate of initial adoption may be
slowed by performance or financial problems among Application
Service Providers. It is possible that our iMAP offerings may
never achieve broad market acceptance. If the market for our
offerings 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 and acquiring 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 competitors may include such companies as Accenture,
AT&T, Corio, Digex, EDS, IBM, Oracle, Qwest Communications,
SAP and Sprint. While we believe that our GSP environment,
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.

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.                                              
|
| |  | hire our employees                                                                   

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.

28



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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 clients;                                                        
|
| |  | 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 two years, there can be no assurance
that we will be able to successfully execute all elements of our
strategy.

Our quarterly operating results may fluctuate due to the
nature of our ASP business and other factors affecting our
revenues and costs, which could cause our stock price to
fall.

Our financial results will also vary over time as our ASP
business matures. For our iMAP clients, we recognize all fees,
including upfront and monthly fees, over the balance of the
contractual relationship. Important factors that could cause our
quarterly results and stock price to fluctuate materially
include:



| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | the number of clients we obtain in order to scale our business;                                                                          
|
| |  | the level of service we provide to our clients;                                                                                          
|
| |  | cost of capital associated with the services we provide to our
	clients;                                                                 
|
| |  | the loss of or change in our relationship with important clients;                                                                        
|
| |  | the timing and magnitude of expanding our operations and of
	other capital expenditures;                                                 
|
| |  | changes in our pricing policies or those of our competitors;                                                                             
|
| |  | potential changes in the accounting standards associated with
	accounting or stock or warrant issuances and for revenue
	recognition; and
|
| |  | the loss of key members of, or other changes in, our management.                                                                         

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. In addition, we expect our business to
continue to grow in geographic scope, number of customers 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;                                     
|
| |  | maintain a high level of client service and support;                        
|
| |  | improve our management, financial and information systems and
	controls; and
|
| |  | train, manage and integrate 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

29



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Network outages could negatively affect our revenues.

We have built and currently maintain a very sophisticated data
center network to provide availability to our clients
applications over the Internet and private connections. Complex
networks are subject to the risk of outages. Over the course of
our operating history, portions of our network have experienced
network outages lasting from minutes to hours. Each of our
clients contracts contain service level guarantees which
initially provide for revenue credits, and eventually
termination of the contract, if access to the clients
application is compromised. The total amount of service fee
credits provided to our clients during our operating history due
to network outages has not been material.

Factors both in and outside of our control could cause
additional outages to our network which could cause a loss in
revenue.

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. Depending upon our growth,
we may 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, especially
if our stock price declines or remains low.

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 our
Chief Executive Officer, Andrew A. Stern.

We may not be able to deliver our iMAP offerings 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. 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 offerings 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 licenses, marketing and maintenance under
agreements with Ariba, BroadVision, Lawson, Microsoft, Oracle,
PeopleSoft, Plumtree, and Siebel and package them as part of our
iMAP offerings. The license agreements are for terms ranging
from one to four years. All the agreements may be terminated
upon a breach of the agreement, subject to cure periods. We
cannot be sure that one or more of our agreements with software
vendors will not be

30



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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. This
exclusivity could be terminated or altered in the future. 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.

We will need to perform software upgrades for our customers,
and any inability to successfully perform these upgrades could
cause interruptions or errors in our customers software
applications, which could increase our costs and delay market
acceptance of our services.

Our software vendors from time to time will upgrade their
software applications, and at such time we will be required to
implement these software upgrades for our customers.
Implementing software upgrades can be a complicated and costly
process, particularly implementation of an upgrade
simultaneously across multiple customers. Accordingly, we cannot
assure you that we will be able to perform these upgrades
successfully or at a reasonable cost. We may also experience
difficulty implementing software upgrades to a large number of
customers, particularly if different software vendors release
upgrades simultaneously. If we are unable to perform software
upgrades successfully and to a large customer base, our
customers could be subject to increased risk of interruptions or
errors in their business-critical software, our reputation and
business would likely suffer and the market would likely delay
the acceptance of our services. It will also be difficult for us
to predict the timing of these upgrades, the cost to us of these
upgrades and the additional resources that we may need to
implement these upgrades. Additionally, if we evolve our
business model to charge customers for the cost of software
upgrades, we may lose prospective customers who choose not to
pay for these upgrades. Therefore, any such upgrades could
strain our development and engineering resources, require
significant unexpected expenses and cause us to miss our
financial forecasts or those of securities analysts. Any of
these problems could impair our customer relations and our
reputation and subject us to litigation.

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.

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

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The loss of a key customer could decrease our revenues.

For the year ended December 31, 2000, sales to SiebelNet
accounted for approximately 10.2% 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 may suffer.

If we cannot obtain additional application software, we will
be unable to expand or enhance our iMAP 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 offerings competitive. If we cannot obtain
these applications and as a result must discontinue, delay or
reduce the availability of our iMAP offerings 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 August 2000, we acquired the assets of EnableVision,
LLC. We cannot be sure that our integration of EnableVision will
result in the EnableVision business performing as we expect. 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 under performance 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        
|
| |  | 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 August 2000, we invested $5,000 in C3i, Inc., a customer
relationship management service company in New York City. In the
future, we may make additional 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

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

We have established redundant EDC capabilities in Europe and
Asia. 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 those
governing intellectual property, privacy, libel and taxation
apply to the Internet. In addition, the growth and development
of the market for online commerce may prompt calls for more
stringent consumer protection laws, both in the United States
and abroad, that may impose additional burdens on companies
conducting business online. For example, Germany and the
European Union have enforced laws and regulations on content
distributed over the Internet that are more strict than those
currently in place in the United States.

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

As of March 23, 2001, our executive officers, directors,
existing 5% or greater stockholders and their affiliates, in the
aggregate, own shares representing approximately 52% of our
outstanding voting capital

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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 have had
and could continue to have a significant impact on the 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 prices 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 prices 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 23, 2001, we had 143,958,315 shares of
common stock issued and outstanding, excluding
13,882,691 shares issuable upon the exercise of warrants
and 20,459,553 shares issuable upon the exercise of options
granted under our Stock Option Plans and 7,545,272 shares
issuable upon conversion of 7% Convertible Subordinated
Promissory Notes. We cannot predict the effect, if any, that
future sales of the notes or shares of common stock, including
common stock issuable upon conversion of the notes, or the
availability of the notes or 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 and hardware products in our target
markets increases and the functionality of these products
further overlap, software and hardware 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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Item 8.  Financial Statements and Supplemental
Data

INDEX TO FINANCIAL STATEMENTS

|                                                                            |                                                                                                                                                                                |  |  |    | 
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | -- | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Consolidated Financial Statements of USinternetworking,
	Inc.               |                                                                                                                                                                                |  |  |   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Report of Independent Auditors                                                                                                                                                 |  |  | 36 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Consolidated Balance Sheets as of December 31, 2000 and 1999                                                                                                                   |  |  | 37 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Consolidated Statements of Operations for the years ended
	December 31, 2000 and 1999 and for the period
	January 14, 1998 (date of inception) through
	December 31, 1998      |  |  | 38 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Consolidated Statement of Stockholders Equity for the year
	ended December 31, 2000                                                                                           |  |  | 39 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Consolidated Statements of Stockholders Equity (Deficit)
	for the period January 14, 1998 (date of inception) through
	December 31, 1998 and the year ended December 31, 1999 |  |  | 40 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Consolidated Statements of Cash Flows for the years ended
	December 31, 2000 and 1999 and for the period
	January 14, 1998 (date of inception) through
	December 31, 1998      |  |  | 41 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Notes to Consolidated Financial Statements                                                                                                                                     |  |  | 42 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Consolidated Financial Statements of I.I.T. Holding, Inc. and
	Subsidiaries |                                                                                                                                                                                |  |  |   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Report of Independent Auditors                                                                                                                                                 |  |  | 62 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Report of Independent Auditors                                                                                                                                                 |  |  | 63 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Consolidated Balance Sheets as of December 31, 1997, 1996
	and September 7, 1998                                                                                               |  |  | 64 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Consolidated Statements of Operations for the years ended
	December 31, 1997 and 1996 for the period from
	January 1, 1998 through September 7, 1998                           |  |  | 65 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | 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             |  |  | 66 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | 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                      |  |  | 67 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Notes to Consolidated Financial Statements                                                                                                                                     |  |  | 68 | 

35



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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, 2000 and 1999, and the related consolidated
statements of operations, stockholders equity (deficit)
and cash flows for the years then ended and for the period from
January 14, 1998 (date of inception) through
December 31, 1998. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule 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, 2000 and 1999, and the consolidated results of
its operations and its cash flows for the years then ended and
for the period from January 14, 1998 (date of inception)
through December 31, 1998, in conformity with accounting
principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.



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





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USinternetworking, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

|                                                                                                               |                                                                                                                                             |                           |                                            |              |         |         |         |          |         |         |         | 
|-------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------------------------------------------ | ------------ | ------- | ------- | ------- | -------- | ------- | ------- | ------- | 
|                                                                                                               |                                                                                                                                             |                          
|                                                                                                               |                                                                                                                                             | December 31,             
|                                                                                                               |                                                                                                                                             |                          
|                                                                                                               |                                                                                                                                             | 2000                      |                                            | 1999        
|                                                                                                               |                                                                                                                                             |                           |                                            |             
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|ASSETS                                                                                                        
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Current assets:                                                                                                |                                                                                                                                             |                           |                                            |              |         |         |         |         
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                               | Cash and cash equivalents                                                                                                                   |                           | $                                          | 56,962       |         |         | $       | 112,302  |        
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                               | Available-for-sale securities                                                                                                               |                           |                                            |             |         |         |         | 31,707   |        
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                               | Accounts receivable, less allowance of $1,785 in 2000 and $543
	in 1999                                                                     |                           |                                            | 35,312       |         |         |         | 16,557   |        
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                               | Due from officer                                                                                                                            |                           |                                            | 2,158        |         |         |         | 1,900    |        
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                               | Prepaid software maintenance costs                                                                                                          |                           |                                            | 9,115        |         |         |         | 2,466    |        
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                               | Prepaid expenses and other current assets                                                                                                   |                           |                                            | 7,334        |         |         |         | 4,439    |        
|                                                                                                               |                                                                                                                                             |                           |                                            |              |         |         |         |         
|                                                                                                               |                                                                                                                                             | Total current assets      |                                            |              | 110,881 |         |         |          | 169,371 |        
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Deferred iMAP costs, net of accumulated amortization of $18,820
	in 2000 and $2,416 in 1999                    |                                                                                                                                             |                           | 29,943                                     |              |         |         | 8,900   |         
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Software licenses, net of accumulated amortization of $9,727 in
	2000 and $3,728 in 1999                       |                                                                                                                                             |                           | 20,548                                     |              |         |         | 10,807  |         
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Property and equipment, net of accumulated depreciation of
	$52,336 in 2000 and $14,319 in 1999                |                                                                                                                                             |                           | 218,563                                    |              |         |         | 101,167 |         
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Goodwill, net of accumulated amortization of $15,723 in 2000 and
	$7,567 in 1999                               |                                                                                                                                             |                           | 27,560                                     |              |         |         | 29,646  |         
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Deferred financing costs and other assets, net of accumulated
	amortization of $1,232 in 2000 and $128 in 1999 |                                                                                                                                             |                           | 11,288                                     |              |         |         | 5,563   |         
|                                                                                                               |                                                                                                                                             |                           |                                            |              |         |         |         |         
|                                                                                                               |                                                                                                                                             |                           |                                            | Total assets |         | $       | 418,783 |          |         | $       | 325,454 | 
|                                                                                                               |                                                                                                                                             |                           |                                            |              |         |         |         |         
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                          
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Current liabilities:                                                                                           |                                                                                                                                             |                           |                                            |              |         |         |         |         
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                               | Accounts payable                                                                                                                            |                           | $                                          | 23,259       |         |         | $       | 13,145   |        
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                               | Accrued compensation                                                                                                                        |                           |                                            | 14,718       |         |         |         | 8,188    |        
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                               | Other accrued expenses                                                                                                                      |                           |                                            | 6,098        |         |         |         | 3,385    |        
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                               | Deferred revenue                                                                                                                            |                           |                                            | 20,478       |         |         |         | 9,066    |        
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                               | Current portion of capital lease obligations                                                                                                |                           |                                            | 21,802       |         |         |         | 5,834    |        
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                               | Current portion of long-term debt                                                                                                           |                           |                                            | 22,020       |         |         |         | 12,587   |        
|                                                                                                               |                                                                                                                                             |                           |                                            |              |         |         |         |         
|                                                                                                               |                                                                                                                                             | Total current liabilities |                                            |              | 108,375 |         |         |          | 52,205  |        
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Short-term obligations expected to be refinanced                                                               |                                                                                                                                             |                           |                                           |              |         |         | 2,117   |         
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Capital lease obligations, less current portion                                                                |                                                                                                                                             |                           | 39,238                                     |              |         |         | 11,385  |         
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Long-term debt, less current portion                                                                           |                                                                                                                                             |                           | 29,187                                     |              |         |         | 32,286  |         
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Convertible subordinated notes                                                                                 |                                                                                                                                             |                           | 125,000                                    |              |         |         | 125,000 |         
|                                                                                                               |                                                                                                                                             |                           |                                            |              |         |         |         |         
|                                                                                                               |                                                                                                                                             |                           | Total liabilities                          |              |         | 301,800 |         |          |         | 222,993 |        
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Commitments and contingent liabilities                                                                         |                                                                                                                                             |                           |                                           |              |         |         |        |         
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|Stockholders equity:                                                                                          |                                                                                                                                             |                           |                                            |              |         |         |         |         
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                               | Preferred stock, $.001 par value, 1,000,000 shares
	authorized, none issued and outstanding                                                 |                           |                                            |             |         |         |         |         |        
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                               | Common stock, $.001 par value, 450,000,000 shares
	authorized; issued and outstanding shares of 115,063,871 in 2000
	and 92,065,911 in 1999 |                           |                                            | 115          |         |         |         | 92       |        
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                               | Additional paid-in capital                                                                                                                  |                           |                                            | 444,878      |         |         |         | 241,861  |        
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                               | Note receivable from officer for purchase of common stock                                                                                   |                           |                                            | (2,250       | )       |         |         | (2,250   | )      
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                               | Unearned compensation                                                                                                                       |                           |                                            | (15,029      | )       |         |         | (1,782   | )      
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                               | Accumulated deficit                                                                                                                         |                           |                                            | (310,731     | )       |         |         | (135,771 | )      
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                              
|                                                                                                               | Accumulated other comprehensive income                                                                                                      |                           |                                            |             |         |         |         | 311      |        
|                                                                                                               |                                                                                                                                             |                           |                                            |              |         |         |         |         
|                                                                                                               |                                                                                                                                             |                           | Total stockholders equity                 |              |         | 116,983 |         |          |         | 102,461 |        
|                                                                                                               |                                                                                                                                             |                           |                                            |              |         |         |         |         
|                                                                                                               |                                                                                                                                             |                           | Total liabilities and stockholders equity |              | $       | 418,783 |         |          | $       | 325,454 |        
|                                                                                                               |                                                                                                                                             |                           |                                            |              |         |         |         |         

See accompanying notes.


37



---



##### Table of Contents



USinternetworking, Inc.

Consolidated Statements of Operations

(In thousands, except per share amounts)

|                                                                             |                                      |                                              |          |                     |          |                     |          |        |          |   |         |        |         |  
|---------------------------------------------------------------------------- | ------------------------------------ | -------------------------------------------- | -------- | ------------------- | -------- | ------------------- | -------- | ------ | -------- | - | ------- | ------ | ------- | -
|                                                                             |                                      |                                              |          |                     |          | For the period from
|                                                                             |                                      |                                              |          |                     |          | January 14, 1998   
|                                                                             |                                      |                                              |          | (date of inception)
|                                                                             |                                      | Year ended December 31,                      |          | through            
|                                                                             |                                      |                                              |          | December 31,       
|                                                                             |                                      | 2000                                         |          | 1999                |          | 1998               
|                                                                             |                                      |                                              |          |                     |          |                    
|Revenue                                                                      |                                      | $                                            | 109,544  |                     |          | $                   | 35,513   |        |          | $ | 4,122   |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Costs and expenses:                                                          |                                      |                                              |          |                     |          |                     |          |        |          |   |         |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Direct cost of services              |                                              |          | 69,609              |          |                     |          | 23,570 |          |   |         | 3,425  |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Network and infrastructure costs     |                                              |          | 26,718              |          |                     |          | 16,239 |          |   |         | 2,186  |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | General and administrative           |                                              |          | 27,615              |          |                     |          | 22,052 |          |   |         | 19,426 |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Sales and marketing                  |                                              |          | 68,943              |          |                     |          | 36,595 |          |   |         | 5,123  |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Product research and development     |                                              |          | 3,276               |          |                     |          | 5,352  |          |   |         | 690    |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Restructuring charge                 |                                              |          | 2,110               |          |                     |          |       |          |   |         |       |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Non-cash stock compensation expense: |                                              |          |                     |          |                     |          |        |          |   |         |        |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                      | Direct cost of services                      |          |                     | 3,146    |                     |          |        | 1,638    |   |         |        |        |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                      | Network and infrastructure costs             |          |                     | 4,821    |                     |          |        | 2,526    |   |         |        |        |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                      | General and administrative                   |          |                     | 7,266    |                     |          |        | 2,904    |   |         |        | 231     |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                      | Sales and marketing                          |          |                     | 5,724    |                     |          |        | 3,259    |   |         |        |        |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                      | Product research and development             |          |                     | 41       |                     |          |        | 24       |   |         |        |        |  
|                                                                             |                                      |                                              |          |                     |          |                     |          |        |          |   |         |       
|                                                                             |                                      |                                              | 20,998   |                     |          |                     | 10,351   |        |          |   | 231     |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Depreciation and amortization        |                                              |          | 52,687              |          |                     |          | 22,480 |          |   |         | 3,180  |        
|                                                                             |                                      |                                              |          |                     |          |                     |          |        |          |   |         |       
|                                                                             |                                      | Total costs and expenses                     |          |                     | 271,956  |                     |          |        | 136,639  |   |         |        | 34,261  |  
|                                                                             |                                      |                                              |          |                     |          |                     |          |        |          |   |         |       
|Operating loss                                                               |                                      |                                              | (162,412 | )                   |          |                     | (101,126 | )      |          |   | (30,139 | )     
|                                                                             |                                      |                                              |          |                     |          |                     |          |        |          |   |         |       
|Other income (expense):                                                      |                                      |                                              |          |                     |          |                     |          |        |          |   |         |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Interest income                      |                                              |          | 8,813               |          |                     |          | 4,115  |          |   |         | 367    |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Interest expense                     |                                              |          | (21,361             | )        |                     |          | (6,307 | )        |   |         | (2,681 | )      
|                                                                             |                                      |                                              |          |                     |          |                     |          |        |          |   |         |       
|                                                                             |                                      |                                              | (12,548  | )                   |          |                     | (2,192   | )      |          |   | (2,314  | )     
|                                                                             |                                      |                                              |          |                     |          |                     |          |        |          |   |         |       
|                                                                             |                                      | Net loss                                     |          |                     | (174,960 | )                   |          |        | (103,318 | ) |         |        | (32,453 | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Dividends accrued on Series A and Series B Convertible
	Preferred Stock      |                                      |                                              |         |                     |          |                     | (2,328   | )      |          |   | (1,503  | )     
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Accretion of common stock subject to repurchase to fair value                |                                      |                                              |         |                     |          |                     | (23,938  | )      |          |   | (3,904  | )     
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Accretion of Series B Convertible Redeemable Preferred
	Stock to fair value  |                                      |                                              |         |                     |          |                     | (99      | )      |          |   | (237    | )     
|                                                                             |                                      |                                              |          |                     |          |                     |          |        |          |   |         |       
|                                                                             |                                      | Net loss attributable to common stockholders |          | $                   | (174,960 | )                   |          | $      | (129,683 | ) |         | $      | (38,097 | )
|                                                                             |                                      |                                              |          |                     |          |                     |          |        |          |   |         |       
|Basic and diluted loss per common share attributable to common
	stockholders |                                      | $                                            | (1.80    | )                   |          | $                   | (1.95    | )      |          | $ | (27.09  | )     
|                                                                             |                                      |                                              |          |                     |          |                     |          |        |          |   |         |       

See accompanying notes.

38



---



##### Table of Contents



USinternetworking, Inc.

Consolidated Statement of Stockholders Equity

Year Ended December 31, 2000

(In thousands, except share amounts)

|                             |                                                                                     |                                                                                          |             |            |   |            |     |              |   |              |         |         |   |   |        |   |   |   |         |         |   |   |          |   |          |  
|---------------------------- | ----------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ----------- | ---------- | - | ---------- | --- | ------------ | - | ------------ | ------- | ------- | - | - | ------ | - | - | - | ------- | ------- | - | - | -------- | - | -------- | -
|                             |                                                                                     |                                                                                          |             |            |   |            |     |              |   |             
|                             |                                                                                     | Common Stock                                                                             |             | Additional |   | Note       |     |              |   |             
|                             |                                                                                     |                                                                                          |             | Paid-in    |   | Receivable |     | Unearned     |   | Accumulated 
|                             |                                                                                     | Shares                                                                                   |             | Par Value  |   | Capital    |     | From Officer |   | Compensation |         | Deficit
|                             |                                                                                     |                                                                                          |             |            |   |            |     |              |   |              |         |        
|Balance at January 1, 2000   |                                                                                     |                                                                                          | 92,065,911  |            |   | $          | 92  |              |   | $            | 241,861 |         |   | $ | (2,250 | ) |   | $ | (1,782  | )       |   | $ | (135,771 | )
|                            
|                            
|                            
|                            
|                             | Issuance of common stock for cash, net of offering costs of
	$6,903                 |                                                                                          |             | 15,133,391 |   |            |     | 15           |   |              |         | 159,706 |   |   |        |  |   |   |         |        |   |   |          |  |         
|                            
|                            
|                            
|                            
|                             | Issuance of restricted stock in connection with employee option
	conversion program |                                                                                          |             | 4,789,406  |   |            |     | 5            |   |              |         | 15,815  |   |   |        |  |   |   |         | (15,820 | ) |   |          |  |         
|                            
|                            
|                            
|                            
|                             | Issuance of warrants in connection with marketing agreement                         |                                                                                          |             | 80         |   |            |     |             |   |              |         | 981     |   |   |        |  |   |   |         |        |   |   |          |  |         
|                            
|                            
|                            
|                            
|                             | Issuance of common stock upon acquisition of EnableVision, LLC                      |                                                                                          |             | 290,640    |   |            |     |             |   |              |         | 4,000   |   |   |        |  |   |   |         |        |   |   |          |  |         
|                            
|                            
|                            
|                            
|                             | Issuance of common stock upon exercise of stock options                             |                                                                                          |             | 1,458,610  |   |            |     | 2            |   |              |         | 3,008   |   |   |        |  |   |   |         |        |   |   |          |  |         
|                            
|                            
|                            
|                            
|                             | Issuance of common stock to employee stock purchase plan and
	employee benefit plan |                                                                                          |             | 311,800    |   |            |     |             |   |              |         | 2,890   |   |   |        |  |   |   |         |        |   |   |          |  |         
|                            
|                            
|                            
|                            
|                             | Issuance of common stock upon exercise of warrants                                  |                                                                                          |             | 1,047,989  |   |            |     | 1            |   |              |         | 1,599   |   |   |        |  |   |   |         |        |   |   |          |  |         
|                            
|                            
|                            
|                            
|                             | Repurchase of common stock upon exercise of warrants                                |                                                                                          |             | (33,956    | ) |            |     |             |   |              |         | (1,600  | ) |   |        |  |   |   |         |        |   |   |          |  |         
|                            
|                            
|                            
|                            
|                             | Stock compensation expense from issuance of common stock options                    |                                                                                          |             |           |   |            |     |             |   |              |         | 16,618  |   |   |        |  |   |   |         |        |   |   |          |  |         
|                            
|                            
|                            
|                            
|                             | Amortization of unearned compensation                                               |                                                                                          |             |           |   |            |     |             |   |              |         |        |   |   |        |  |   |   |         | 2,573   |   |   |          |  |         
|                            
|                            
|                            
|                            
|                             | Comprehensive income:                                                               |                                                                                          |             |            |   |            |     |              |   |              |         |         |   |   |        |   |   |   |         |         |   |   |          |   |         
|                            
|                            
|                            
|                            
|                             |                                                                                     | Net loss for the year ended December 31, 2000                                            |             |            |  |            |     |              |  |              |         |         |  |   |        |   |  |   |         |         |  |   |          |   | (174,960 | )
|                            
|                            
|                            
|                            
|                             |                                                                                     | Other comprehensive income  reclassification
	adjustment for gains included in net loss |             |            |  |            |     |              |  |              |         |         |  |   |        |   |  |   |         |         |  |   |          |   |         |  
|                            
|                            
|                            
|                            
|                             |                                                                                     | Total comprehensive income (loss)                                                        |             |            |  |            |     |              |  |              |         |         |   |   |        |   |  |   |         |         |  |   |          |   |         |  
|                             |                                                                                     |                                                                                          |             |            |   |            |     |              |   |              |         |         |   |   |        |   |   |   |         |         |   |   |          |  
|Balance at December 31, 2000 |                                                                                     |                                                                                          | 115,063,871 |            |   | $          | 115 |              |   | $            | 444,878 |         |   | $ | (2,250 | ) |   | $ | (15,029 | )       |   | $ | (310,731 | )
|                             |                                                                                     |                                                                                          |             |            |   |            |     |              |   |              |         |         |   |   |        |   |   |   |         |         |   |   |          |  

[Additional columns below]

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

|                             |                                                                                     |                                                                                          |     |               |      |   |         |         |          |  
|---------------------------- | ----------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | --- | ------------- | ---- | - | ------- | ------- | -------- | -
|                             |                                                                                     | Accumulated                                                                              |     |              
|                             |                                                                                     | Other                                                                                    |     | Total        
|                             |                                                                                     | Comprehensive                                                                            |     | Stockholders
|                             |                                                                                     | Income                                                                                   |     | Equity       
|                             |                                                                                     |                                                                                          |     |              
|Balance at January 1, 2000   |                                                                                     | $                                                                                        | 311 |               |      | $ | 102,461 |        
|                            
|                            
|                            
|                            
|                             | Issuance of common stock for cash, net of offering costs of
	$6,903                 |                                                                                          |     |              |      |   |         | 159,721 |         
|                            
|                            
|                            
|                            
|                             | Issuance of restricted stock in connection with employee option
	conversion program |                                                                                          |     |              |      |   |         |        |         
|                            
|                            
|                            
|                            
|                             | Issuance of warrants in connection with marketing agreement                         |                                                                                          |     |              |      |   |         | 981     |         
|                            
|                            
|                            
|                            
|                             | Issuance of common stock upon acquisition of EnableVision, LLC                      |                                                                                          |     |              |      |   |         | 4,000   |         
|                            
|                            
|                            
|                            
|                             | Issuance of common stock upon exercise of stock options                             |                                                                                          |     |              |      |   |         | 3,010   |         
|                            
|                            
|                            
|                            
|                             | Issuance of common stock to employee stock purchase plan and
	employee benefit plan |                                                                                          |     |              |      |   |         | 2,890   |         
|                            
|                            
|                            
|                            
|                             | Issuance of common stock upon exercise of warrants                                  |                                                                                          |     |              |      |   |         | 1,600   |         
|                            
|                            
|                            
|                            
|                             | Repurchase of common stock upon exercise of warrants                                |                                                                                          |     |              |      |   |         | (1,600  | )       
|                            
|                            
|                            
|                            
|                             | Stock compensation expense from issuance of common stock options                    |                                                                                          |     |              |      |   |         | 16,618  |         
|                            
|                            
|                            
|                            
|                             | Amortization of unearned compensation                                               |                                                                                          |     |              |      |   |         | 2,573   |         
|                            
|                            
|                            
|                            
|                             | Comprehensive income:                                                               |                                                                                          |     |               |      |   |         |         |         
|                            
|                            
|                            
|                            
|                             |                                                                                     | Net loss for the year ended December 31, 2000                                            |     |               |     |   |         |         | (174,960 | )
|                            
|                            
|                            
|                            
|                             |                                                                                     | Other comprehensive income  reclassification
	adjustment for gains included in net loss |     |               | (311 | ) |         |         | (311     | )
|                             |                                                                                     |                                                                                          |     |               |      |   |         |        
|                             |                                                                                     | Total comprehensive income (loss)                                                        |     |               |     |   |         |         | (175,271 | )
|                             |                                                                                     |                                                                                          |     |               |      |   |         |        
|Balance at December 31, 2000 |                                                                                     | $                                                                                        |    |               |      | $ | 116,983 |        
|                             |                                                                                     |                                                                                          |     |               |      |   |         |        

See accompanying notes.

39



---



##### Table of Contents



USinternetworking, Inc.

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

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

Through December 31, 1998 and the year ended


December 31, 1999


(In thousands, except share amounts)

|                              |                                                                                                                                |                                   |            |            |   |            |    |              |   |   |         |         |   |   |        |        |   | 
|----------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | --------------------------------- | ---------- | ---------- | - | ---------- | -- | ------------ | - | - | ------- | ------- | - | - | ------ | ------ | - | 
|                              |                                                                                                                                |                                   |            |            |   |           
|                              |                                                                                                                                | Common Stock                      |            | Additional |   | Note      
|                              |                                                                                                                                |                                   |            | Paid-in    |   | Receivable
|                              |                                                                                                                                | Shares                            |            | Par Value  |   | Capital    |    | From Officer
|                              |                                                                                                                                |                                   |            |            |   |            |    |             
|Balance at January 14, 1998   |                                                                                                                                |                                   |           |            |   | $          |   |              |   | $ |        |         |   | $ |       |       
|                             
|                             
|                             
|                             
|                              | Issuance of common stock to founder upon inception                                                                             |                                   |            | 1,406,250  |   |            |    | 1            |   |   |         | 3       |   |   |        |       |  
|                             
|                             
|                             
|                             
|                              | Issuance of 53,333 shares of $.01 par value Series A
	Convertible Preferred Stock for cash, net of offering costs of
	$205     |                                   |            |           |   |            |    |             |   |   |         | 31,795  |   |   |        |       |  
|                             
|                             
|                             
|                             
|                              | Issuance of 1,667 shares of Series A Convertible Preferred
	Stock on May 28, 1998 in exchange for $1,000 note                  |                                   |            |           |   |            |    |             |   |   |         | 1,000   |   |   |        |       |  
|                             
|                             
|                             
|                             
|                              | Issuance of warrants to purchase common stock associated with
	various acquisitions and financing commitments                  |                                   |            |           |   |            |    |             |   |   |         | 2,830   |   |   |        |       |  
|                             
|                             
|                             
|                             
|                              | Dividends accrued on Series  A Convertible Preferred Stock                                                                     |                                   |            |           |   |            |    |             |   |   |         | (1,503  | ) |   |        |       |  
|                             
|                             
|                             
|                             
|                              | Accretion of common stock subject to repurchase to fair value                                                                  |                                   |            |           |   |            |    |             |   |   |         | (3,904  | ) |   |        |       |  
|                             
|                             
|                             
|                             
|                              | Accretion of Series B Convertible Redeemable Preferred Stock to
	fair value                                                    |                                   |            |           |   |            |    |             |   |   |         | (237    | ) |   |        |       |  
|                             
|                             
|                             
|                             
|                              | Net loss for the period January 14, 1998 through
	December 31, 1998                                                            |                                   |            |           |   |            |    |             |   |   |         |        |   |   |        |       |  
|                              |                                                                                                                                |                                   |            |            |   |            |    |              |   |   |         |         |   |   |        |       
|Balance at December 31, 1998  |                                                                                                                                |                                   | 1,406,250  |            |   | $          | 1  |              |   | $ | 29,984  |         |   | $ |       |       
|                             
|                             
|                             
|                             
|                              | Dividends accrued on Series  A and Series B
	Convertible Redeemable Preferred Stock                                            |                                   |            |           |   |            |    |             |   |   |         | (2,328  | ) |   |        |       |  
|                             
|                             
|                             
|                             
|                              | Accretion of Series B Convertible Redeemable Preferred
	Stock and common stock subject to repurchase to fair value             |                                   |            |           |   |            |    |             |   |   |         | (24,037 | ) |   |        |       |  
|                             
|                             
|                             
|                             
|                              | Conversion of 55,000 shares of Series A and
	59,279 shares of Series B Convertible Redeemable
	Preferred Stock to common stock |                                   |            | 69,523,934 |   |            |    | 70           |   |   |         | 62,173  |   |   |        |       |  
|                             
|                             
|                             
|                             
|                              | Reclassification of common stock subject to repurchase to common
	stock                                                        |                                   |            | 3,023,438  |   |            |    | 3            |   |   |         | 28,849  |   |   |        |       |  
|                             
|                             
|                             
|                             
|                              | Issuance of common stock upon initial public offering, net of
	offering costs of $12,072                                       |                                   |            | 15,525,000 |   |            |    | 16           |   |   |         | 132,812 |   |   |        |       |  
|                             
|                             
|                             
|                             
|                              | Issuance of common stock upon exercise of stock options                                                                        |                                   |            | 1,681,610  |   |            |    | 2            |   |   |         | 3,231   |   |   |        | (2,250 | )
|                             
|                             
|                             
|                             
|                              | Issuance of common stock upon exercise of warrants                                                                             |                                   |            | 1,113,977  |   |            |    | 1            |   |   |         | 3,085   |   |   |        |       |  
|                             
|                             
|                             
|                             
|                              | Issuance of common stock to employee benefit plan                                                                              |                                   |            | 54,738     |   |            |    |             |   |   |         | 600     |   |   |        |       |  
|                             
|                             
|                             
|                             
|                              | Issuance of restricted common stock                                                                                            |                                   |            | 141,750    |   |            |    |             |   |   |         | 2,009   |   |   |        |       |  
|                             
|                             
|                             
|                             
|                              | Repurchase of common stock                                                                                                     |                                   |            | (404,786   | ) |            |    | (1           | ) |   |         | (3,022  | ) |   |        |       |  
|                             
|                             
|                             
|                             
|                              | Amortization of unearned compensation                                                                                          |                                   |            |           |   |            |    |             |   |   |         |        |   |   |        |       |  
|                             
|                             
|                             
|                             
|                              | Stock compensation expense from issuance of common stock options                                                               |                                   |            |           |   |            |    |             |   |   |         | 8,505   |   |   |        |       |  
|                             
|                             
|                             
|                             
|                              | Comprehensive income:                                                                                                          |                                   |            |           |   |            |    |             |   |   |         |        |   |   |        |       |  
|                             
|                             
|                             
|                             
|                              | Net loss for the year ended December 31, 1999.                                                                                 |                                   |            |           |   |            |    |             |   |   |         |        |   |   |        |       |  
|                             
|                             
|                             
|                             
|                              | Other comprehensive income- unrealized gain on marketable
	securities                                                          |                                   |            |           |   |            |    |             |   |   |         |        |   |   |        |       |  
|                             
|                             
|                             
|                             
|                              |                                                                                                                                | Total comprehensive income (loss) |            |            |  |            |    |              |  |   |         |         |  |   |        |        |  | 
|                              |                                                                                                                                |                                   |            |            |   |            |    |              |   |   |         |         |   |   |        |       
|Balance at December 31, 1999. |                                                                                                                                |                                   | 92,065,911 |            |   | $          | 92 |              |   | $ | 241,861 |         |   | $ | (2,250 | )     
|                              |                                                                                                                                |                                   |            |            |   |            |    |              |   |   |         |         |   |   |        |       

[Additional columns below]

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

|                              |                                                                                                                                |                                   |        |             |   |               |          |               |   |   |     |     |   |   |         |          |          |  
|----------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | --------------------------------- | ------ | ----------- | - | ------------- | -------- | ------------- | - | - | --- | --- | - | - | ------- | -------- | -------- | -
|                              |                                                                                                                                |                                   |        |             |   | Accumulated   |          | Total        
|                              |                                                                                                                                |                                   |        |             |   | Other         |          | Stockholders
|                              |                                                                                                                                | Unearned                          |        | Accumulated |   | Comprehensive |          | Equity       
|                              |                                                                                                                                | Compensation                      |        | Deficit     |   | Income        |          | (Deficit)    
|                              |                                                                                                                                |                                   |        |             |   |               |          |              
|Balance at January 14, 1998   |                                                                                                                                | $                                 |       |             |   | $             |         |               |   | $ |    |     |   | $ |        |         
|                             
|                             
|                             
|                             
|                              | Issuance of common stock to founder upon inception                                                                             |                                   |        |            |   |               |          |              |   |   |     |    |   |   |         | 4        |         
|                             
|                             
|                             
|                             
|                              | Issuance of 53,333 shares of $.01 par value Series A
	Convertible Preferred Stock for cash, net of offering costs of
	$205     |                                   |        |            |   |               |          |              |   |   |     |    |   |   |         | 31,795   |         
|                             
|                             
|                             
|                             
|                              | Issuance of 1,667 shares of Series A Convertible Preferred
	Stock on May 28, 1998 in exchange for $1,000 note                  |                                   |        |            |   |               |          |              |   |   |     |    |   |   |         | 1,000    |         
|                             
|                             
|                             
|                             
|                              | Issuance of warrants to purchase common stock associated with
	various acquisitions and financing commitments                  |                                   |        |            |   |               |          |              |   |   |     |    |   |   |         | 2,830    |         
|                             
|                             
|                             
|                             
|                              | Dividends accrued on Series  A Convertible Preferred Stock                                                                     |                                   |        |            |   |               |          |              |   |   |     |    |   |   |         | (1,503   | )       
|                             
|                             
|                             
|                             
|                              | Accretion of common stock subject to repurchase to fair value                                                                  |                                   |        |            |   |               |          |              |   |   |     |    |   |   |         | (3,904   | )       
|                             
|                             
|                             
|                             
|                              | Accretion of Series B Convertible Redeemable Preferred Stock to
	fair value                                                    |                                   |        |            |   |               |          |              |   |   |     |    |   |   |         | (237     | )       
|                             
|                             
|                             
|                             
|                              | Net loss for the period January 14, 1998 through
	December 31, 1998                                                            |                                   |        |            |   |               |          | (32,453       | ) |   |     |    |   |   |         | (32,453  | )       
|                              |                                                                                                                                |                                   |        |             |   |               |          |               |   |   |     |     |   |   |         |         
|Balance at December 31, 1998  |                                                                                                                                | $                                 |       |             |   | $             | (32,453  | )             |   | $ |    |     |   | $ | (2,468  | )       
|                             
|                             
|                             
|                             
|                              | Dividends accrued on Series  A and Series B
	Convertible Redeemable Preferred Stock                                            |                                   |        |            |   |               |          |              |   |   |     |    |   |   |         | (2,328   | )       
|                             
|                             
|                             
|                             
|                              | Accretion of Series B Convertible Redeemable Preferred
	Stock and common stock subject to repurchase to fair value             |                                   |        |            |   |               |          |              |   |   |     |    |   |   |         | (24,037  | )       
|                             
|                             
|                             
|                             
|                              | Conversion of 55,000 shares of Series A and
	59,279 shares of Series B Convertible Redeemable
	Preferred Stock to common stock |                                   |        |            |   |               |          |              |   |   |     |    |   |   |         | 62,243   |         
|                             
|                             
|                             
|                             
|                              | Reclassification of common stock subject to repurchase to common
	stock                                                        |                                   |        | (633        | ) |               |          |              |   |   |     |    |   |   |         | 28,219   |         
|                             
|                             
|                             
|                             
|                              | Issuance of common stock upon initial public offering, net of
	offering costs of $12,072                                       |                                   |        |            |   |               |          |              |   |   |     |    |   |   |         | 132,828  |         
|                             
|                             
|                             
|                             
|                              | Issuance of common stock upon exercise of stock options                                                                        |                                   |        |            |   |               |          |              |   |   |     |    |   |   |         | 983      |         
|                             
|                             
|                             
|                             
|                              | Issuance of common stock upon exercise of warrants                                                                             |                                   |        |            |   |               |          |              |   |   |     |    |   |   |         | 3,086    |         
|                             
|                             
|                             
|                             
|                              | Issuance of common stock to employee benefit plan                                                                              |                                   |        |            |   |               |          |              |   |   |     |    |   |   |         | 600      |         
|                             
|                             
|                             
|                             
|                              | Issuance of restricted common stock                                                                                            |                                   |        | (2,009      | ) |               |          |              |   |   |     |    |   |   |         |         |         
|                             
|                             
|                             
|                             
|                              | Repurchase of common stock                                                                                                     |                                   |        |            |   |               |          |              |   |   |     |    |   |   |         | (3,023   | )       
|                             
|                             
|                             
|                             
|                              | Amortization of unearned compensation                                                                                          |                                   |        | 860         |   |               |          |              |   |   |     |    |   |   |         | 860      |         
|                             
|                             
|                             
|                             
|                              | Stock compensation expense from issuance of common stock options                                                               |                                   |        |            |   |               |          |              |   |   |     |    |   |   |         | 8,505    |         
|                             
|                             
|                             
|                             
|                              | Comprehensive income:                                                                                                          |                                   |        |            |   |               |          |              |   |   |     |    |   |   |         |         |         
|                             
|                             
|                             
|                             
|                              | Net loss for the year ended December 31, 1999.                                                                                 |                                   |        |            |   |               |          | (103,318      | ) |   |     |    |   |   |         | (103,318 | )       
|                             
|                             
|                             
|                             
|                              | Other comprehensive income- unrealized gain on marketable
	securities                                                          |                                   |        |            |   |               |          |              |   |   |     | 311 |   |   |         | 311      |         
|                              |                                                                                                                                |                                   |        |             |   |               |          |               |   |   |     |     |   |   |         |         
|                              |                                                                                                                                | Total comprehensive income (loss) |        |             |  |               |          |               |  |   |     |     |  |   |         |          | (103,007 | )
|                              |                                                                                                                                |                                   |        |             |   |               |          |               |   |   |     |     |   |   |         |         
|Balance at December 31, 1999. |                                                                                                                                | $                                 | (1,782 | )           |   | $             | (135,771 | )             |   | $ | 311 |     |   | $ | 102,461 |         
|                              |                                                                                                                                |                                   |        |             |   |               |          |               |   |   |     |     |   |   |         |         

See accompanying notes.

40



---



##### Table of Contents



USinternetworking, Inc.

Consolidated Statements of Cash Flows

(In thousands)

|                                                                                                              |                                              |                                           |          |                     |         |                     |          |        |         |   |         |       |        |  
|------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------------------- | -------- | ------------------- | ------- | ------------------- | -------- | ------ | ------- | - | ------- | ----- | ------ | -
|                                                                                                              |                                              |                                           |          |                     |         | For the period from
|                                                                                                              |                                              |                                           |          | January 14, 1998   
|                                                                                                              |                                              | Year ended                                |          | (date of inception)
|                                                                                                              |                                              | December 31,                              |          | through            
|                                                                                                              |                                              |                                           |          | December 31,       
|                                                                                                              |                                              | 2000                                      |          | 1999                |         | 1998               
|                                                                                                              |                                              |                                           |          |                     |         |                    
|Operating Activities                                                                                          |                                              |                                           |          |                     |         |                     |          |        |         |   |         |      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Net loss                                                                                                      |                                              | $                                         | (174,960 | )                   |         | $                   | (103,318 | )      |         | $ | (32,453 | )    
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Adjustments to reconcile net loss to net cash used in operating
	activities:                                  |                                              |                                           |          |                     |         |                     |          |        |         |   |         |      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              | Depreciation                                 |                                           |          | 44,531              |         |                     |          | 16,525 |         |   |         | 1,568 |       
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              | Amortization                                 |                                           |          | 8,156               |         |                     |          | 5,955  |         |   |         | 1,612 |       
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              | Non-cash stock compensation expense          |                                           |          | 20,998              |         |                     |          | 10,351 |         |   |         | 231   |       
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              | Non-cash interest and other expense          |                                           |          | 1,245               |         |                     |          | 379    |         |   |         | 2,012 |       
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              | Changes in operating assets and liabilities: |                                           |          |                     |         |                     |          |        |         |   |         |       |       
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              |                                              | Accounts receivable                       |          |                     | (18,755 | )                   |          |        | (13,675 | ) |         |       | 43     |  
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              |                                              | Prepaid software maintenance costs        |          |                     | (6,649  | )                   |          |        | (2,466  | ) |         |       |       |  
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              |                                              | Prepaid expenses and other current assets |          |                     | (2,896  | )                   |          |        | (1,421  | ) |         |       | (3,053 | )
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              |                                              | Deferred iMAP costs                       |          |                     | (21,043 | )                   |          |        | (8,900  | ) |         |       |       |  
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              |                                              | Accounts payable                          |          |                     | 10,113  |                     |          |        | 4,457   |   |         |       | 4,334  |  
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              |                                              | Accrued compensation                      |          |                     | 6,530   |                     |          |        | 3,317   |   |         |       | 4,287  |  
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              |                                              | Other accrued expenses                    |          |                     | 2,713   |                     |          |        | 1,566   |   |         |       | 235    |  
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              |                                              | Deferred revenue                          |          |                     | 11,412  |                     |          |        | 9,015   |   |         |       |       |  
|                                                                                                              |                                              |                                           |          |                     |         |                     |          |        |         |   |         |      
|Net cash used in operating activities                                                                         |                                              |                                           | (118,605 | )                   |         |                     | (78,215  | )      |         |   | (21,184 | )    
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Investing Activities                                                                                          |                                              |                                           |          |                     |         |                     |          |        |         |   |         |      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Due from officer                                                                                              |                                              |                                           | (258     | )                   |         |                     | (1,900   | )      |         |   |        |      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Purchases of property and equipment                                                                           |                                              |                                           | (108,611 | )                   |         |                     | (79,858  | )      |         |   | (20,129 | )    
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Purchases of available-for-sale securities                                                                    |                                              |                                           | (17,546  | )                   |         |                     | (147,014 | )      |         |   |        |      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Sales of available-for-sale securities                                                                        |                                              |                                           | 48,941   |                     |         |                     | 115,619  |        |         |   |        |      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Acquisitions, net of cash acquired                                                                            |                                              |                                           | (2,000   | )                   |         |                     | (8,464   | )      |         |   | (16,900 | )    
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Change in other assets                                                                                        |                                              |                                           | (5,929   | )                   |         |                     | (103     | )      |         |   | (59     | )    
|                                                                                                              |                                              |                                           |          |                     |         |                     |          |        |         |   |         |      
|Net cash used in investing activities                                                                         |                                              |                                           | (85,403  | )                   |         |                     | (121,720 | )      |         |   | (37,088 | )    
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Financing Activities                                                                                          |                                              |                                           |          |                     |         |                     |          |        |         |   |         |      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Proceeds from issuance of Series A Convertible Preferred
	Stock                                               |                                              |                                           |         |                     |         |                     |         |        |         |   | 31,795  |      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Proceeds from loan from officer, subsequently converted into
	Series A Convertible Preferred Stock            |                                              |                                           |         |                     |         |                     |         |        |         |   | 1,000   |      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Proceeds (expenses) from issuance of Series B
	Convertible Redeemable Preferred Stock                         |                                              |                                           |         |                     |         |                     | (99      | )      |         |   | 39,911  |      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Proceeds from issuance of common stock, net of issuance cost                                                  |                                              |                                           | 159,721  |                     |         |                     | 132,828  |        |         |   | 15      |      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Proceeds from exercise of warrants                                                                            |                                              |                                           |         |                     |         |                     | 73       |        |         |   |        |      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Proceeds from exercise of employee stock options                                                              |                                              |                                           | 3,010    |                     |         |                     | 983      |        |         |   |        |      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Proceeds from issuance of common stock to employee stock
	purchase plan                                       |                                              |                                           | 1,220    |                     |         |                     |         |        |         |   |        |      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Proceeds from issuance of long-term debt                                                                      |                                              |                                           | 26,754   |                     |         |                     | 38,150   |        |         |   | 9,487   |      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Proceeds from issuance of notes, subsequently converted into
	Series B Convertible Redeemable Preferred Stock |                                              |                                           |         |                     |         |                     |         |        |         |   | 22,095  |      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Proceeds from issuance of convertible subordinated notes, net of
	issuance costs                              |                                              |                                           |         |                     |         |                     | 119,851  |        |         |   |        |      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Dividends paid to preferred stockholders                                                                      |                                              |                                           |         |                     |         |                     | (3,831   | )      |         |   |        |      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Payment to former shareholders of acquired businesses                                                         |                                              |                                           |         |                     |         |                     | (10,827  | )      |         |   |        |      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Payments on long-term debt                                                                                    |                                              |                                           | (20,685  | )                   |         |                     | (5,684   | )      |         |   | (1,805  | )    
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Payments on capital lease obligations                                                                         |                                              |                                           | (21,352  | )                   |         |                     | (3,009   | )      |         |   | (424    | )    
|                                                                                                              |                                              |                                           |          |                     |         |                     |          |        |         |   |         |      
|Net cash provided by financing activities                                                                     |                                              |                                           | 148,668  |                     |         |                     | 268,435  |        |         |   | 102,074 |      
|                                                                                                              |                                              |                                           |          |                     |         |                     |          |        |         |   |         |      
|Net change in cash and cash equivalents                                                                       |                                              |                                           | (55,340  | )                   |         |                     | 68,500   |        |         |   | 43,802  |      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Cash and cash equivalents at beginning of period                                                              |                                              |                                           | 112,302  |                     |         |                     | 43,802   |        |         |   |        |      
|                                                                                                              |                                              |                                           |          |                     |         |                     |          |        |         |   |         |      
|Cash and cash equivalents at end of period                                                                    |                                              | $                                         | 56,962   |                     |         | $                   | 112,302  |        |         | $ | 43,802  |      
|                                                                                                              |                                              |                                           |          |                     |         |                     |          |        |         |   |         |      

See accompanying notes.


41



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##### Table of Contents



USinternetworking, Inc.

Notes to Consolidated Financial Statements

(In thousands, except share and per share amounts)


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.

Unbilled Accounts
Receivable

Accounts receivable includes unbilled amounts related to revenue
which has been recorded either as deferred revenue or earned
revenue in accordance with the Companys stated revenue
recognition policy. At December 31, 2000 and 1999, accounts
receivable included $11,737 and $3,050 of unbilled accounts
receivable, respectively.

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.

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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

(In thousands, except share and per share amounts)




1.  Summary of Significant Accounting
Policies  (Continued)


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.

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

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 twenty-five years, and leasehold improvements are
depreciated over the term of the related lease.

Advertising Costs

The Company expenses advertising as incurred. Advertising
expense totaled approximately $963, $2,439, and $700 in 2000,
1999, and for the period from January 14, 1998 (date of
inception) through December 31, 1998, 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.

Short-term Obligations
Expected to be Refinanced

At December 31, 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
executed these financings early in 2000, and therefore in 1999
classified as long-term a portion of the liabilities based on
the terms of the subsequent financings.

43



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

(In thousands, except share and per share amounts)




1.  Summary of Significant Accounting
Policies  (Continued)


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
fees for the Companys iMAP services.

iMAP service fees are recognized ratably over the term of the
contract, which have terms of up to five years. Payments
received in advance of revenue recognition, even if
non-refundable, are recorded as deferred revenue. Amounts
included in deferred revenue are generally recognized as revenue
within 12 months. 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 the
functionality of hardware and software applications 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 ranging from three to five 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.

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.

44



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

(In thousands, except share and per share amounts)


1.  Summary of Significant Accounting
Policies  (Continued)

Stock Splits

In 2000 and 1999, the Companys Board of Directors approved
the following stock splits of common stock, options and warrants:

|                 |  |                            
|---------------- |  | ---------------------------
|Date of record   |  | Description                
|                 |  |                            
|March 14, 2000   |  | 3 for 2 stock split        
|December 3, 1999 |  | 3 for 2 stock split        
|April 8, 1999    |  | 1 for 8 reverse stock split

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 all of these stock splits.

Reclassifications

Certain amounts in the 1999 consolidated financial statements
have been reclassified to conform to the 2000 presentation.

Adoption of Recent
Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 was later amended by the
Financial Accounting Standards Board in 1999 and 2000 upon the
issuance of SFAS No. 137 and SFAS No. 138. These
standards, which the Company adopted on January 1, 2001,
provide a comprehensive and consistent method for the
recognition and measurement of derivatives and hedging
activities. The adoption of SFAS No. 133 and its amendments
did not have a material impact on the consolidated financial
statements.

In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements. The Company adopted the
provisions of SAB No. 101 in its consolidated financial
statements for the year ended December 31, 2000. The
adoption of this pronouncement did not have any impact on the
Companys revenue recognition policies, financial position
or results of operations.

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 and warrants to
purchase 112,500 shares of common stock for $7.11 per share
valued at $40. Direct acquisition costs of $395 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, $14,132 of goodwill was recorded and is being amortized
over its estimated useful life of five years.

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

45



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

(In thousands, except share and per share amounts)




2.  Acquisitions  (Continued)


due to the sellers was $2,327, 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, consisting of cash of $2,500, a $3,500
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. Direct
acquisition costs of $339 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, $5,291 of
goodwill was recorded and is being amortized over its estimated
useful life of five years.

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, 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
$11,200, and consisted of cash of $7,700, assumed liabilities of
$1,500, and a $2,000 secured note due on October 8, 2001.
Additional contingent cash consideration of up to $4,600 will be
payable to the extent that specified financial milestones are
achieved through December 31, 2001, and any such payment
will result in the recording of additional goodwill. The
acquisition was accounted for as a purchase, and goodwill of
approximately $9,400 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 statements of operations commencing
October 8, 1999.

On September 1, 2000, the Company acquired assets of
EnableVision LLC, a provider of Lawson financial and human
resources system implementation services. The purchase price
aggregated $6,000, consisting of $2,000 in cash and
$4,000 million in restricted stock of the Company. The
acquisition was accounted for as a purchase, and goodwill of
approximately $6,000 was recorded at the acquisition date and is
being amortized over its estimated useful life of three years.
The results of operations of EnableVision are included in the
accompanying consolidated statements of operations commencing
September 1, 2000.

The following combined unaudited pro forma consolidated results
of operations of the Company give effect to the acquisition of
EnableVision and Conklin as though they occurred on
January 1, 1999. The

46



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

(In thousands, except share and per share amounts)




2.  Acquisitions  (Continued)


results are not necessarily indicative of what would have
occurred had these transactions been consummated as of the
beginning of the period, or of future operations of the Company.

|                                        |  |              |          |      |  |   |          |  
|--------------------------------------- |  | ------------ | -------- | ---- |  | - | -------- | -
|                                        |  |             
|                                        |  | Year ended  
|                                        |  | December 31,
|                                        |  |             
|                                        |  | 2000         |          | 1999
|                                        |  |              |          |     
|                                        |  |             
|                                        |  | (unaudited) 
|                                       
|                                       
|                                       
|                                       
|Revenue                                 |  | $            | 112,634  |      |  | $ | 48,831   |  
|                                       
|                                       
|                                       
|                                       
|Net loss                                |  | $            | (174,396 | )    |  | $ | (102,646 | )
|                                       
|                                       
|                                       
|                                       
|Basic and diluted loss per common share |  | $            | (1.79    | )    |  | $ | (1.54    | )

3.  Loss Per Share

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

|                                        |                                                                                                                |              |           |                     |   |                   |           |            |   |   |          |           |  
|--------------------------------------- | -------------------------------------------------------------------------------------------------------------- | ------------ | --------- | ------------------- | - | ----------------- | --------- | ---------- | - | - | -------- | --------- | -
|                                        |                                                                                                                |              |           | For the period from
|                                        |                                                                                                                | Year ended   |           | January 14, 1998   
|                                        |                                                                                                                | December 31, |           | (date of inception)
|                                        |                                                                                                                |              |           | through            
|                                        |                                                                                                                | 2000         |           | 1999                |   | December 31, 1998
|                                        |                                                                                                                |              |           |                     |   |                  
|Numerator:                              |                                                                                                                |              |           |                     |   |                   |           |            |   |   |          |          
|                                       
|                                       
|                                       
|                                       
|                                        | Net loss                                                                                                       |              |           | $(174,960           | ) |                   |           | $(103,318  | ) |   |          | $(32,453  | )
|                                       
|                                       
|                                       
|                                       
|                                        | Dividends on Series A Convertible Preferred Stock                                                              |              |           |                    |   |                   |           | (2,328     | ) |   |          | (1,503    | )
|                                       
|                                       
|                                       
|                                       
|                                        | Accretion of common stock subject to repurchase to fair value                                                  |              |           |                    |   |                   |           | (23,938    | ) |   |          | (3,904    | )
|                                       
|                                       
|                                       
|                                       
|                                        | Accretion of Series B Convertible Redeemable Preferred
	Stock to fair value                                    |              |           |                    |   |                   |           | (99        | ) |   |          | (237      | )
|                                        |                                                                                                                |              |           |                     |   |                   |           |            |   |   |          |          
|                                        |                                                                                                                |              | $(174,960 | )                   |   |                   | $(129,683 | )          |   |   | $(38,097 | )        
|                                        |                                                                                                                |              |           |                     |   |                   |           |            |   |   |          |          
|Denominator:                            |                                                                                                                |              |           |                     |   |                   |           |            |   |   |          |          
|                                       
|                                       
|                                       
|                                       
|                                        | Weighted-average number of shares of common stock outstanding
	and not subject to repurchase during the period |              |           | 97,397,673          |   |                   |           | 66,503,639 |   |   |          | 1,406,250 |  
|                                        |                                                                                                                |              |           |                     |   |                   |           |            |   |   |          |          
|Basic and diluted loss per common share |                                                                                                                | $            | (1.80     | )                   |   | $                 | (1.95     | )          |   | $ | (27.09   | )        
|                                        |                                                                                                                |              |           |                     |   |                   |           |            |   |   |          |          

Basic loss per share is based upon the average number of shares
of common stock outstanding during the periods. The computation
excludes 4,787,060, 141,750 and 3,023,438 shares of unvested
restricted common stock and common stock subject to repurchase
for 2000, 1999 and 1998, respectively.

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 unvested restricted
common stock, convertible preferred stocks, stock options and
warrants in the 1998 period; and unvested restricted common
stock, stock options and warrants in the 2000 and 1999 periods.

4.  Supplemental Disclosure of Cash Flow
Information

The Company acquired equipment totaling $65,184, $15,812 and
$5,188 under leases classified as capital leases for the years
ended December 31, 2000 and 1999 and for the period from
January 14, 1998

47



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

(In thousands, except share and per share amounts)




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


(date of inception) through December 31, 1998,
respectively. The Company also acquired $3,000 and $7,500 of
equipment in 1999 and 1998 that was included in accounts payable
and short-term obligations expected to be refinanced at
December 31, 1999 and 1998, respectively.

Interest paid was approximately $21,376, $5,902 and $368 for the
years ended December 31, 2000 and 1999 and for the period
from January 14, 1998 (date of inception) through
December 31, 1998, respectively.

In December 1998, $22,095 of notes payable and a $1,000
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 $27,800. In conjunction with these
acquisitions, assets with a fair market value of approximately
$30,800 were acquired and liabilities of approximately $3,000
were assumed.

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

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

5.  Available-For-Sale Securities

The following is a summary of available-for-sale securities:

|                           |  |              |        | 
|-------------------------- |  | ------------ | ------ | 
|                           |  | December 31,
|                           |  | 1999        
|                           |  |             
|Corporate commercial paper |  | $            | 8,959  | 
|                          
|                          
|                          
|                          
|Corporate bonds            |  |              | 10,548 | 
|                          
|                          
|                          
|                          
|Municipal bonds            |  |              | 12,200 | 
|                           |  |              |        | 
|                           |  | $            | 31,707 | 
|                           |  |              |        | 

These investments are classified as current as the Company views
its available-for-sale investments as available for use in its
current operations.

6.  Restructuring Charge

In December 2000, the Company accrued a restructuring charge of
$2,110. The restructuring charge consisted of accrued severance
costs of $727 related to the involuntary termination of three
employees of the Company and non-cancelable lease obligations of
$1,383 related to the closing of three sales offices. The
Company anticipates that substantially all of the restructuring
costs will be paid by December 31, 2001. The accrued
restructuring charge of $2,110 is included in other accrued
expenses in the accompanying 2000 consolidated balance sheet.

48



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

(In thousands, except share and per share amounts)


7.  Property and Equipment

Property and equipment consists of the following:

|                          |       |              |         |         |  |   |         |         | 
|------------------------- | ----- | ------------ | ------- | ------- |  | - | ------- | ------- | 
|                          |       |             
|                          |       | December 31,
|                          |       | 2000         |         | 1999   
|                          |       |              |         |        
|Building and land         |       | $            | 42,430  |         |  | $ | 19,534  |        
|                         
|                         
|                         
|                         
|Furniture and fixtures    |       |              | 5,820   |         |  |   | 4,121   |        
|                         
|                         
|                         
|                         
|Equipment and automobiles |       |              | 11,328  |         |  |   | 3,354   |        
|                         
|                         
|                         
|                         
|Computers and software    |       |              | 199,436 |         |  |   | 79,430  |        
|                         
|                         
|                         
|                         
|Leasehold improvements    |       |              | 11,885  |         |  |   | 9,047   |        
|                          |       |              |         |         |  |   |         |        
|                          |       |              | 270,899 |         |  |   | 115,486 |        
|                         
|                         
|                         
|                         
|Accumulated depreciation  |       |              | (52,336 | )       |  |   | (14,319 | )      
|                          |       |              |         |         |  |   |         |        
|                          | Total |              | $       | 218,563 |  |   | $       | 101,167 | 
|                          |       |              |         |         |  |   |         |        

Substantially all property and equipment is collateralized under
financing arrangements.

8.  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,
|                         |       | 2000         |         | 1999  
|                         |       |              |         |       
|Computers and software   |       | $            | 79,356  |        |  | $ | 21,001 |       
|                        
|                        
|                        
|                        
|Accumulated amortization |       |              | (20,688 | )      |  |   | (4,368 | )     
|                         |       |              |         |        |  |   |        |       
|                         | Total |              | $       | 58,668 |  |   | $      | 16,633 | 
|                         |       |              |         |        |  |   |        |       

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, 2000:

|                                           |                              |   |         |        | 
|------------------------------------------ | ---------------------------- | - | ------- | ------ | 
|                                          
|                                          
|                                          
|                                          
|2001                                       |                              | $ | 27,199  |       
|                                          
|                                          
|                                          
|                                          
|2002                                       |                              |   | 27,290  |       
|                                          
|                                          
|                                          
|                                          
|2003                                       |                              |   | 10,272  |       
|                                          
|                                          
|                                          
|                                          
|2004                                       |                              |   | 2       |       
|                                           |                              |   |         |       
|                                           | Total minimum lease payments |   |         | 64,763 | 
|                                          
|                                          
|                                          
|                                          
|Amounts representing interest              |                              |   | (3,723  | )     
|                                           |                              |   |         |       
|Present value of capital lease obligations |                              |   | 61,040  |       
|                                          
|                                          
|                                          
|                                          
|Current portion                            |                              |   | (21,802 | )     
|                                           |                              |   |         |       
|Capital lease obligations, non-current     |                              | $ | 39,238  |       
|                                           |                              |   |         |       

49



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

(In thousands, except share and per share amounts)


9.  Long-Term Debt and Convertible Subordinated
Notes

Long-term debt consists of the following:

|                                                                                                                                                                                                                                                                                                                                                                                                         |  |              |        |      |  |   |        | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                                                                                                                                                                                                                                                                                                                                                                                                         |  |             
|                                                                                                                                                                                                                                                                                                                                                                                                         |  | December 31,
|                                                                                                                                                                                                                                                                                                                                                                                                         |  | 2000         |        | 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 $9
	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 $107 in letters of credit pledged as
	additional security |  | $            | 795    |      |  | $ | 828    | 
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|Notes payable due July 1, 2001 through May 1, 2003 and
	bearing interest at 11.3% to 15.4% per annum. These notes are
	payable in aggregate monthly installments of principal and
	interest of $722 and are collateralized by certain furniture,
	fixtures, equipment and software                                                                                                                       |  |              | 13,568 |      |  |   | 15,149 | 
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|Notes payable due August 1, 2001 through March 1, 2002
	and bearing interest at 10.0% to 15.4% per annum. The notes are
	payable in monthly or quarterly payments of $158 and $2,892,
	respectively, with all unpaid principal and interest due at
	maturity. These notes are collateralized by certain software
	licenses.                                                                              |  |              | 9,030  |      |  |   | 5,026  | 
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|Notes payable due on June 1, 2002 and bearing interest at
	12.4% to 13.1% per annum. The notes are payable in aggregate
	monthly installments of principal and interest of $446 and are
	collateralized by certain equipment                                                                                                                                                                             |  |              | 7,235  |      |  |   | 9,869  | 
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|Notes payable due on February 1, 2005 and May 1, 2006
	and bearing interest at 7.5% per annum. The notes are payable in
	aggregate monthly installments of principal and interest of $30
	and $49, respectively, with all unpaid principal and interest
	due at maturity. The notes are secured by a mortgage on the real
	property purchased with the proceeds                                          |  |              | 8,232  |      |  |   | 7,013  | 
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|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 $11 to $28
	and are collateralized by the general assets of the Company                                                                                                                                                    |  |              | 154    |      |  |   | 562    | 
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|Notes payable due between March 17, 2003 and
	September 4, 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 of $1
	per note and are secured by automobiles purchased with the
	proceeds                                                                                                    |  |              | 99     |      |  |   | 117    | 
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|Note payable due on December 29, 2003 bearing interest at
	9.8% per annum. The note is payable in monthly principal
	installments of $99 plus interest and is collateralized by a
	$750 certificate of deposit and certain building improvements                                                                                                                                                         |  |              | 3,563  |      |  |   | 4,750  | 
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                        
|Note payable due June 1, 2010 and bearing interest at 8.80%
	per annum. The note is payable in aggregate monthly installments
	of principal and interest of $55 with all unpaid principal and
	interest due at maturity. This note is secured by a mortgage on
	the real property purchased with the proceeds                                                                                            |  |              | 6,719  |      |  |   |       | 

50



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

(In thousands, except share and per share amounts)




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


|                                                                                                                                               |       |              |        |        |  |   |        |        | 
|---------------------------------------------------------------------------------------------------------------------------------------------- | ----- | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                                                                                                                                               |       |             
|                                                                                                                                               |       | December 31,
|                                                                                                                                               |       | 2000         |        | 1999  
|                                                                                                                                               |       |              |        |       
|Note payable to former shareholders of Conklin & Conklin,
	bearing interest at 10% per annum and due with accrued interest
	on October 8, 2001 |       | $            | 2,000  |        |  | $ | 2,000  |       
|                                                                                                                                               |       |              |        |        |  |   |        |       
|                                                                                                                                               | Total |              |        | 51,395 |  |   |        | 45,314 | 
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|Less: current portion                                                                                                                          |       |              | 22,020 |        |  |   | 12,587 |       
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|Less: discounts                                                                                                                                |       |              | 188    |        |  |   | 441    |       
|                                                                                                                                               |       |              |        |        |  |   |        |       
|                                                                                                                                               |       | $            | 29,187 |        |  | $ | 32,286 |       
|                                                                                                                                               |       |              |        |        |  |   |        |       

Aggregate maturities of long-term debt at December 31, 2000
are as follows:

|                    |       |   |        |        | 
|------------------- | ----- | - | ------ | ------ | 
|                   
|                   
|                   
|                   
|2001                |       | $ | 22,020 |       
|                   
|                   
|                   
|                   
|2002                |       |   | 13,472 |       
|                   
|                   
|                   
|                   
|2003                |       |   | 2,273  |       
|                   
|                   
|                   
|                   
|2004                |       |   | 567    |       
|                   
|                   
|                   
|                   
|2005                |       |   | 6,545  |       
|                   
|                   
|                   
|                   
|2006 and thereafter |       |   | 6,518  |       
|                    |       |   |        |       
|                    | Total |   | $      | 51,395 | 
|                    |       |   |        |       

The Company entered into an interest rate swap agreement for a
notional amount of $4,750. The effective date of the interest
rate swap is January 1, 2000 and it expires on
December 29, 2003. Under the terms of the swap, the Company
will pay a fixed rate of 9.8% per annum and the Company will
receive a variable rate of LIBOR plus 2.2%. The Company has
designated the swap as a cash flow hedge and the net interest
rate differential to be paid or received is being recognized as
an adjustment to interest expense. Changes in the fair value of
the swap as a result of changes in market interest rates are not
recognized.

In 1999, the Company issued $125,000 (principal amount at
maturity) of convertible subordinated notes, due
November 1, 2004. Interest 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 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.

10.  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.

51



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

(In thousands, except share and per share amounts)




10.  Fair Value of Financial
Instruments  (Continued)


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, 2000 and 1999.

Convertible subordinated
notes

The fair values of the convertible subordinated notes are
estimated using quoted market rates as of December 31, 2000
and 1999.

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

|                               |  |                   |         |                   |  |                |        |            |  |   |         |  |  |   |         | 
|------------------------------ |  | ----------------- | ------- | ----------------- |  | -------------- | ------ | ---------- |  | - | ------- |  |  | - | ------- | 
|                               |  |                   |         |                  
|                               |  | December 31, 2000 |         | December 31, 1999
|                               |  |                   |         |                  
|                               |  | Carrying Value    |         | Fair Value        |  | Carrying Value |        | Fair Value
|                               |  |                   |         |                   |  |                |        |           
|Cash and cash equivalents      |  | $                 | 56,962  |                   |  | $              | 56,962 |            |  | $ | 112,302 |  |  | $ | 112,302 | 
|                              
|                              
|                              
|                              
|Available-for-sale securities  |  |                   |        |                   |  |                |       |            |  |   | 31,707  |  |  |   | 31,707  | 
|                              
|                              
|                              
|                              
|Long-term debt                 |  |                   | 51,207  |                   |  |                | 51,802 |            |  |   | 44,873  |  |  |   | 45,912  | 
|                              
|                              
|                              
|                              
|Convertible subordinated notes |  |                   | 125,000 |                   |  |                | 65,625 |            |  |   | 125,000 |  |  |   | 362,188 | 

11.  Stockholders Equity

Common Stock Purchase
Agreements and Subsequent Events

On November 8, 2000, the Company entered into a common
stock purchase agreement, pursuant to which it sold its common
stock totaling 3,126,038 shares to Acqua Wellington North
American Equities Fund, Ltd. (Acqua Wellington) in
exchange for cash proceeds of $10,000. On November 13,
2000, the Company entered into a subsequent common stock
purchase agreement with Acqua Wellington under which the Company
may, at its discretion, sell up to $140,000 of registered common
stock from time to time over the succeeding 28-month period. The
common stock can be sold during periods consisting of
18 trading days. In addition, the Company may grant to
Acqua Wellington an option to purchase up to an equal amount of
common stock during the same 18 trading day periods. The
amount of common stock sold in a given 18 day period is
dependent upon the average weighted market price of the
Companys common stock during this period. Acqua Wellington
has the option not to purchase the Companys common stock
if the stock price falls below $3 per share. Acqua
Wellington purchases the common stock at a discount to the then
current market price, ranging from 4% to 6%, depending on the
Companys market capitalization at the time the Company
requires Acqua Wellington to purchase its common stock. On
February 15, 2001, the Company completed the first sale of
its common stock under the November 13, 2000 agreement,
issuing 1,612,755 shares to Acqua Wellington in exchange for
cash proceeds of $5,000.

On November 13, 2000, the Company entered into common stock
purchase agreements with eighteen investors consisting of
several existing stockholders, the Company Chairman
Christopher R. McCleary, Chief Executive Officer
Andrew A. Stern and eight new strategic investors (the
Investors). Under these agreements, the Investors
committed to purchase $122,500 of the Companys common
stock, at a purchase price of $3.40 per share, which was
determined based on the average of the closing price of the
common

52



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

(In thousands, except share and per share amounts)




11.  Stockholders Equity 
(Continued)


stock for the preceding 20 days. In connection with these
financing transactions, in November 2000, the Company issued
9,007,353 shares of common stock to the Investors for cash
proceeds of $30,625. The Company also issued warrants to the
Investors to purchase 3,152,574 shares of common stock at an
exercise price of $4.08 per share. The number of shares subject
to the warrant may be adjusted to prevent dilution and each
warrant will expire five years after its issuance.

Preferred Stock

The Company has authorized the issuance of up to 1,000,000
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 $33,000, and 59,279 shares of Series B for a total
aggregate purchase price of $62,200, including $22,100 of
Series B issued upon conversion of notes payable. Upon the
conversion of notes payable with a face value of $9,095 into
Series B, unamortized debt discount of approximately $1,350
was recorded as additional interest expense.

In April 1999, the Company completed an initial public
offering of 15,525,000 shares of common stock which resulted in
net proceeds of $132,828, 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
69,523,934 shares of common stock, and the common stock subject
to repurchase no longer became mandatorily redeemable by the
Company upon the occurrence of certain events. (See
Note 12.) The holders of the Series A and
Series B preferred stock were entitled to receive
cumulative quarterly dividends which were paid at the closing of
the initial public offering.

12.  Common Stock Subject to Repurchase

The Company sold 3,023,438 shares of common stock to three
officers in 1998 that 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. 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 were no longer subject
to mandatory repurchase by the Company, and their accreted value
at that date of $28,219 was reclassified to stockholders
equity.

53



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

(In thousands, except share and per share amounts)


13.  Stock Warrants

The Company has outstanding warrants to purchase common stock at
December 31, 2000, as follows:

|                 |           |                |  |                 |       |  |  |  |                | 
|---------------- | --------- | -------------- |  | --------------- | ----- |  |  |  | -------------- | 
|Number of Shares |           | Exercise Price |  | Expiration Date
|                 |           |                |  |                
|                 | 1,174,004 |                |  | $               | 1.52  |  |  |  | September 2008 | 
|                 | 18,394    |                |  | $               | 3.00  |  |  |  | December 2004  | 
|                 | 3,152,574 |                |  | $               | 4.08  |  |  |  | December 2005  | 
|                 | 80,000    |                |  | $               | 20.44 |  |  |  | June 2005      | 
|                 |           |                |  |                 |       |  |  |  |                | 
|                 | 4,424,972 |                |  |                 |       |  |  |  |                | 
|                 |           |                |  |                 |       |  |  |  |                | 
|                 |           |                |  |                 |       |  |  |  |                | 

14.  Shares Reserved for Future Issuance

The Company at December 31, 2000 has reserved 26,984,245
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 and the 2000 Board Approved Plan (see
Note 15), 7,545,272 shares of common stock issuable upon the
conversion of the subordinated notes and 4,424,972 shares of
common stock issuable upon the exercise of outstanding warrants.

15.  Stock Compensation Plan

Stock Options

Effective October 18, 2000, the Company adopted the
USinternetworking, Inc. 2000 Board Approved Plan (the 2000
Plan), which is administered by the Board of Directors.
The 2000 Plan provides for the granting of non-qualified options
to purchase an aggregate of up to 5,000,000 shares of
common stock to eligible employees.

Effective July 2, 1998, the Company adopted the 1998 Stock
Option Plan of USinternetworking, Inc. (the Plan)
which is also administered by 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
|                                           |  | Year ended December 31, |             | January 1, 1998    
|                                           |  |                         |             | (date of inception)
|                                           |  |                         |             |                     |  | through          
|                                           |  | 2000                    |             | 1999                |  | December 31, 1998
|                                           |  |                         |             |                     |  |                  
|                                           |  |                         |             | Weighted            |  |                   |       | Weighted |  |           |            | Weighted
|                                           |  |                         |             | Average             |  |                   |       | Average  |  |           |            | Average 
|                                           |  | Number of               |             | Exercise            |  | Number of         |       | Exercise |  | Number of |            | Exercise
|                                           |  | Options                 |             | Price               |  | Options           |       | Price    |  | Options   |            | Price   
|                                           |  |                         |             |                     |  |                   |       |          |  |           |            |         
|Outstanding at beginning of year           |  |                         | 11,919,073  |                     |  | $                 | 6.77  |          |  |           | 3,785,062  |          |  | $ | 1.17 |  |  |  |          |   |  | $ |     | 
|                                          
|                                          
|                                          
|                                          
|Granted                                    |  |                         | 22,175,739  |                     |  |                   | 25.98 |          |  |           | 10,735,674 |          |  |   | 7.57 |  |  |  | 3,845,532 |   |  |   | 1.17 | 
|                                          
|                                          
|                                          
|                                          
|Exercised                                  |  |                         | (1,494,549  | )                   |  |                   | 2.04  |          |  |           | (1,681,269 | )        |  |   | 1.93 |  |  |  |          |   |  |   |     | 
|                                          
|                                          
|                                          
|                                          
|Cancelled                                  |  |                         | (10,900,643 | )                   |  |                   | 24.52 |          |  |           |           |          |  |   |     |  |  |  |          |   |  |   |     | 
|                                          
|                                          
|                                          
|                                          
|Forfeited                                  |  |                         | (227,181    | )                   |  |                   | 5.50  |          |  |           | (920,394   | )        |  |   | 2.53 |  |  |  | (60,470   | ) |  |   | 1.17 | 
|                                           |  |                         |             |                     |  |                   |       |          |  |           |            |          |  |   |      |  |  |  |           |   |  |   |      | 
|Outstanding and exercisable at end of year |  |                         | 21,472,439  |                     |  | $                 | 17.38 |          |  |           | 11,919,073 |          |  | $ | 6.77 |  |  |  | 3,785,062 |   |  | $ | 1.17 | 
|                                           |  |                         |             |                     |  |                   |       |          |  |           |            |          |  |   |      |  |  |  |           |   |  |   |      | 

54



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

(In thousands, except share and per share amounts)




15.  Stock Compensation Plan 
(Continued)


During 2000 and 1999, the Company granted options to purchase
common stock when the quoted market price of common stock was
equal to, less than, or in excess of the exercise price of the
granted options. The following table summarizes the
weighted-average fair values and exercise prices of granted
stock options:

|                                                       |  |           |            |                  |  |                  |       |  |  |   |       | 
|------------------------------------------------------ |  | --------- | ---------- | ---------------- |  | ---------------- | ----- |  |  | - | ----- | 
|                                                       |  | Number of |            | Weighted Average |  | Weighted Average
|                                                       |  | Shares    |            | Exercise Price   |  | Fair Value      
|                                                       |  |           |            |                  |  |                 
|2000                                                   |  |           |            |                  |  |                  |       |  |  |   |       | 
|                                                       |  |           |            |                  |  |                  |       |  |  |   |       | 
|Market price equal to exercise price on grant date     |  |           | 20,413,118 |                  |  | $                | 26.94 |  |  | $ | 22.68 | 
|                                                      
|                                                      
|                                                      
|                                                      
|Market price greater than exercise price on grant date |  |           | 689,871    |                  |  | $                | 6.38  |  |  | $ | 22.33 | 
|                                                      
|                                                      
|                                                      
|                                                      
|Exercise price greater than market price on grant date |  |           | 1,072,750  |                  |  | $                | 20.32 |  |  | $ | 3.30  | 
|                                                      
|                                                      
|                                                      
|                                                      
|1999                                                   |  |           |            |                  |  |                  |       |  |  |   |       | 
|                                                       |  |           |            |                  |  |                  |       |  |  |   |       | 
|Market price equal to exercise price on grant date     |  |           | 5,226,081  |                  |  | $                | 11.08 |  |  | $ | 9.11  | 
|                                                      
|                                                      
|                                                      
|                                                      
|Market price greater than exercise price on grant date |  |           | 5,509,593  |                  |  | $                | 3.82  |  |  | $ | 9.43  | 

Options granted in 1998 had a fair value at the date of grant of
less than $0.01 per share.

Exercise prices for options outstanding as of December 31,
2000 ranged from $1.17 to $85.31 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   |  |             | 1,691,707  |                  |  | $                     | 1.19  |  |  |  | 7.6 | 
|$ 2.31-$ 3.25   |  |             | 2,620,321  |                  |  |                       | 2.67  |  |  |  | 7.6 | 
|$ 3.56-$ 5.00   |  |             | 316,651    |                  |  |                       | 3.96  |  |  |  | 4.8 | 
|$ 6.50-$ 9.72   |  |             | 2,786,261  |                  |  |                       | 8.19  |  |  |  | 8.4 | 
|$10.13-$15.00   |  |             | 1,932,856  |                  |  |                       | 12.06 |  |  |  | 8.6 | 
|$15.50-$23.00   |  |             | 3,732,894  |                  |  |                       | 19.20 |  |  |  | 9.6 | 
|$23.50-$35.11   |  |             | 8,245,685  |                  |  |                       | 30.40 |  |  |  | 6.9 | 
|$35.46-$48.00   |  |             | 119,364    |                  |  |                       | 41.98 |  |  |  | 8.5 | 
|$56.87-$85.31   |  |             | 26,700     |                  |  |                       | 61.12 |  |  |  | 7.8 | 
|                |  |             |            |                  |  |                       |       |  |  |  |     | 
|                |  |             | 21,472,439 |                  |  |                       |       |  |  |  |     | 
|                |  |             |            |                  |  |                       |       |  |  |  |     | 

Most options granted vest immediately at the date of grant. Most
of the 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 or one-quarter 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 either 5
or 10 years from the date of issuance. At December 31,
2000, the weighted- average remaining contractual life of
outstanding options is 7.8 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 $30,614 as a result of these 1999
option grants that will be recognized ratably over the four-

55



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

(In thousands, except share and per share amounts)




15.  Stock Compensation Plan 
(Continued)


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 2000 and 1999, the Company
recorded non-cash stock compensation expense of $9,094 and
$8,500, respectively, 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, which is being recognized as compensation
expense over the vesting period.

In November 2000, the Company offered its employees a voluntary
option to surrender and cancel certain outstanding stock option
agreements in exchange for awards of restricted stock. Under the
terms of the arrangement, each employee that elected to
participate agreed to cancel all stock options issued during a
specified period. In conjunction with this arrangement, the
Company cancelled stock option agreements for the purchase of
8,347,125 shares of common stock and issued 4,271,058 shares of
restricted nonvested common stock. The common stock vests over
periods up to 48 months. The common stock at the grant date
had an aggregate fair value of $13,881, which is being
recognized as compensation expense over the vesting period.

During 2000, the Company issued for no consideration
572,000 shares of common stock to certain executives as a
retention bonus. The common stock vests over a four year period
from the date of issuance. The common stock at the issuance date
had an aggregate fair value of $2,065, which is being recognized
as compensation expense over the vesting period.

The Company recognized stock compensation expense of $1,170 in
2000 and $453 in 1999 related to all restricted stock grants. At
December 31, 2000, 443,426 shares of common stock
issued in connection with these grants are vested, and
4,339,617 shares are unvested.

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 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 $0.01, 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 years ended December 31, 2000 and 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

56



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

(In thousands, except share and per share amounts)




15.  Stock Compensation Plan 
(Continued)


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
assumptions:

|                                |  |                         |         |      |  |  |         | 
|------------------------------- |  | ----------------------- | ------- | ---- |  |  | ------- | 
|                                |  |                        
|                                |  | Year ended December 31,
|                                |  |                        
|                                |  | 2000                    |         | 1999
|                                |  |                         |         |     
|Risk free interest rate         |  |                         | 6.32%   |      |  |  | 5.67%   | 
|                               
|                               
|                               
|                               
|Expected dividend yield         |  |                         | 0%      |      |  |  | 0%      | 
|                               
|                               
|                               
|                               
|Expected option life            |  |                         | 4 years |      |  |  | 4 years | 
|                               
|                               
|                               
|                               
|Expected stock price volatility |  |                         | 1.34    |      |  |  | 1.28    | 

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 $305,562
and $116,800 for the years ended December 31, 2000 and
1999, respectively. Pro forma basic and diluted loss per share
attributable to common stock holders is $3.14 and $2.15 for the
years ended December 31, 2000 and 1999, respectively.

16.  Income Taxes

At December 31, 2000, the Company has a U.S. federal net
operating loss carryforward of $295,000. This carryforward
begins to expire in 2018. 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.

57



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

(In thousands, except share and per share amounts)




16.  Income Taxes  (Continued)


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

|                                                |                                                                |                              |          |         |         |   |         |        |        | 
|----------------------------------------------- | -------------------------------------------------------------- | ---------------------------- | -------- | ------- | ------- | - | ------- | ------ | ------ | 
|                                                |                                                                | 2000                         |          | 1999   
|                                                |                                                                |                              |          |        
|Deferred tax assets:                            |                                                                |                              |          |         |         |   |         |       
|                                               
|                                               
|                                               
|                                               
|                                                | Net operating loss carryforwards                               |                              | $        | 116,754 |         |   | $       | 42,583 |       
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred revenue                                               |                              |          | 8,099   |         |   |         | 2,514  |       
|                                               
|                                               
|                                               
|                                               
|                                                | Start-up and organizational costs capitalized for tax purposes |                              |          | 1,796   |         |   |         | 2,566  |       
|                                               
|                                               
|                                               
|                                               
|                                                | Book over tax amortization                                     |                              |          | 1,033   |         |   |         |       |       
|                                               
|                                               
|                                               
|                                               
|                                                | Allowance for doubtful accounts                                |                              |          | 706     |         |   |         | 215    |       
|                                               
|                                               
|                                               
|                                               
|                                                | Restructuring charges                                          |                              |          | 692     |         |   |         |       |       
|                                               
|                                               
|                                               
|                                               
|                                                | Accrued vacation                                               |                              |          | 170     |         |   |         | 493    |       
|                                               
|                                               
|                                               
|                                               
|                                                | Accrued compensation                                           |                              |          |        |         |   |         | 230    |       
|                                               
|                                               
|                                               
|                                               
|                                                | Non-cash compensation expense                                  |                              |          | 8,305   |         |   |         | 3,543  |       
|                                               
|                                               
|                                               
|                                               
|                                                | Other                                                          |                              |          | 218     |         |   |         | 168    |       
|                                                |                                                                |                              |          |         |         |   |         |       
|                                                |                                                                | Total deferred tax assets    |          |         | 137,773 |   |         |        | 52,312 | 
|                                                |                                                                |                              |          |         |         |   |         |       
|Deferred tax liabilities:                       |                                                                |                              |          |         |         |   |         |       
|                                               
|                                               
|                                               
|                                               
|                                                | Stock options                                                  |                              |          | 3,543   |         |   |         | 1,822  |       
|                                               
|                                               
|                                               
|                                               
|                                                | Tax over book depreciation                                     |                              |          | 12,696  |         |   |         | 279    |       
|                                               
|                                               
|                                               
|                                               
|                                                | Prepaid maintenance contracts                                  |                              |          | 3,589   |         |   |         | 958    |       
|                                               
|                                               
|                                               
|                                               
|                                                | Other                                                          |                              |          | 18      |         |   |         | 174    |       
|                                                |                                                                |                              |          |         |         |   |         |       
|                                                |                                                                | Total deferred tax liability |          |         | 19,846  |   |         |        | 3,233  | 
|                                                |                                                                |                              |          |         |         |   |         |       
|Net future income tax benefit                   |                                                                |                              | 117,927  |         |         |   | 49,079  |       
|                                               
|                                               
|                                               
|                                               
|Valuation allowance for net deferred tax assets |                                                                |                              | (117,927 | )       |         |   | (49,079 | )     
|                                                |                                                                |                              |          |         |         |   |         |       
|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 of 35% to the net loss is as follows:

|                                                   |       |                         |         |                     |  |                     |         |   |  |   |         |   | 
|-------------------------------------------------- | ----- | ----------------------- | ------- | ------------------- |  | ------------------- | ------- | - |  | - | ------- | - | 
|                                                   |       |                         |         |                     |  | For the period from
|                                                   |       |                         |         | January 14, 1998   
|                                                   |       | Year ended December 31, |         | (date of inception)
|                                                   |       |                         |         | through            
|                                                   |       | 2000                    |         | 1999                |  | December 31, 1998  
|                                                   |       |                         |         |                     |  |                    
|Tax benefit at U.S. statutory rate                 |       | $                       | (61,236 | )                   |  | $                   | (36,161 | ) |  | $ | (11,359 | )
|                                                  
|                                                  
|                                                  
|                                                  
|State income taxes, net of federal benefit         |       |                         | (7,893  | )                   |  |                     | (4,373  | ) |  |   | (984    | )
|                                                  
|                                                  
|                                                  
|                                                  
|Non-deductible goodwill                            |       |                         | 1,961   |                     |  |                     | 2,056   |   |  |   | 560     |  
|                                                  
|                                                  
|                                                  
|                                                  
|Non-deductible expenses                            |       |                         | 515     |                     |  |                     | 408     |   |  |   | 743     |  
|                                                  
|                                                  
|                                                  
|                                                  
|Non-deductible non-qualified stock option exercise |       |                         | (1,954  | )                   |  |                     |        |   |  |   | 155     |  
|                                                  
|                                                  
|                                                  
|                                                  
|Other                                              |       |                         | (241    | )                   |  |                     | (111    | ) |  |   | (14     | )
|                                                  
|                                                  
|                                                  
|                                                  
|Change in valuation allowance                      |       |                         | 68,848  |                     |  |                     | 38,181  |   |  |   | 10,899  |  
|                                                   |       |                         |         |                     |  |                     |         |   |  |   |         |  
|                                                   | Total |                         | $       |                    |  |                     | $       |  |  |   | $       |  | 
|                                                   |       |                         |         |                     |  |                     |         |   |  |   |         |  

58



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

(In thousands, except share and per share amounts)


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 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, 2000:

|           |  |   |        | 
|---------- |  | - | ------ | 
|          
|          
|          
|          
|2001       |  | $ | 6,704  | 
|          
|          
|          
|          
|2002       |  |   | 6,332  | 
|          
|          
|          
|          
|2003       |  |   | 4,951  | 
|          
|          
|          
|          
|2004       |  |   | 3,329  | 
|          
|          
|          
|          
|2005       |  |   | 2,241  | 
|          
|          
|          
|          
|Thereafter |  |   | 722    | 
|           |  |   |        | 
|           |  | $ | 24,279 | 
|           |  |   |        | 

The Company incurred rent expense of $7,848, $3,182, and $718 in
2000, 1999, and 1998, 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. The Company
contributed to the plan 172,520 and 54,738 shares of common
stock with fair values of $1,669 and $600 for the years ended
December 31, 2000 and 1999, respectively.

19.  Related Party Transactions

In September 1999, the Company loaned $2,250 to an officer to
purchase 843,750 shares of common stock pursuant to a stock
option exercise. Additionally, the Company loaned the same
officer $1,900 to fund the officers tax liability
resulting from the exercise of the options described above. In
July 2000, the Company consolidated both loans plus accrued
interest of $99 into one full recourse note totaling $4,249,
bearing interest at 9% per annum, and payable within 90 days on
demand. The Company has classified the portion that represents
the stock option exercise, or $2,250, as a reduction of
stockholders equity at December 31, 2000.

20.  Business and Geographic Segment Information

The Company is organized into two business units that offer
unique software solutions. These operating segments are as
follows:



| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Enterprise Applications  provides financial
	and human resource management, customer relationship management
	and procurement business process needs; and
|
| |  | E-Business Services  provides e-business (B2B)
	and (B2C) solutions, Enterprise Portal solutions, and AppHost
	solutions.                                

59



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

(In thousands, except share and per share amounts)




20.  Business and Geographic Segment
Information  (Continued)


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, Europe and Asia.

The Company evaluates the performance of its 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.

|                                 |                         |              |   |                     |  |                   |   |        |  |  |   |       |  
|-------------------------------- | ----------------------- | ------------ | - | ------------------- |  | ----------------- | - | ------ |  |  | - | ----- | -
|                                 |                         |              |   | For the period from
|                                 |                         | Year ended   |   | January 14, 1998   
|                                 |                         | December 31, |   | (date of inception)
|                                 |                         |              |   | through            
|                                 |                         | 2000         |   | 1999                |  | December 31, 1998
|                                 |                         |              |   |                     |  |                  
|Revenue:                         |                         |              |   |                     |  |                   |   |        |  |  |   |      
|                                
|                                
|                                
|                                
|                                 | Enterprise Applications |              | $ | 48,792              |  |                   | $ | 17,928 |  |  | $ | 2,138 |  
|                                
|                                
|                                
|                                
|                                 | E-Business Services     |              |   | 60,752              |  |                   |   | 17,585 |  |  |   | 1,984 |  
|                                 |                         |              |   |                     |  |                   |   |        |  |  |   |      
|                                 | Consolidated            |              | $ | 109,544             |  |                   | $ | 35,513 |  |  | $ | 4,122 |  
|                                 |                         |              |   |                     |  |                   |   |        |  |  |   |      
|Segment operating profit (loss): |                         |              |   |                     |  |                   |   |        |  |  |   |      
|                                
|                                
|                                
|                                
|                                 | Enterprise Applications |              | $ | 16,815              |  |                   | $ | 9,009  |  |  | $ | (21   | )
|                                
|                                
|                                
|                                
|                                 | E-Business Services     |              |   | 23,120              |  |                   |   | 2,934  |  |  |   | 718   |  
|                                 |                         |              |   |                     |  |                   |   |        |  |  |   |      
|                                 | Consolidated            |              | $ | 39,935              |  |                   | $ | 11,943 |  |  | $ | 697   |  
|                                 |                         |              |   |                     |  |                   |   |        |  |  |   |      

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

|                                          |  |                         |          |                     |  |                     |          |   |  |   |         |  
|----------------------------------------- |  | ----------------------- | -------- | ------------------- |  | ------------------- | -------- | - |  | - | ------- | -
|                                          |  |                         |          |                     |  | For the period from
|                                          |  |                         |          | January 14, 1998   
|                                          |  | Year ended December 31, |          | (date of inception)
|                                          |  |                         |          | through            
|                                          |  | 2000                    |          | 1999                |  | December 31, 1998  
|                                          |  |                         |          |                     |  |                    
|Segment operating profit for all segments |  | $                       | 39,935   |                     |  | $                   | 11,943   |   |  | $ | 697     |  
|                                         
|                                         
|                                         
|                                         
|Network and infrastructure costs          |  |                         | (26,718  | )                   |  |                     | (16,239  | ) |  |   | (2,186  | )
|                                         
|                                         
|                                         
|                                         
|General and administrative                |  |                         | (27,615  | )                   |  |                     | (22,052  | ) |  |   | (19,426 | )
|                                         
|                                         
|                                         
|                                         
|Sales and marketing                       |  |                         | (68,943  | )                   |  |                     | (36,595  | ) |  |   | (5,123  | )
|                                         
|                                         
|                                         
|                                         
|Product research and development          |  |                         | (3,276   | )                   |  |                     | (5,352   | ) |  |   | (690    | )
|                                         
|                                         
|                                         
|                                         
|Restructuring charge                      |  |                         | (2,110   | )                   |  |                     |         |   |  |   |        |  
|                                         
|                                         
|                                         
|                                         
|Non-cash stock compensation expense       |  |                         | (20,998  | )                   |  |                     | (10,351  | ) |  |   | (231    | )
|                                         
|                                         
|                                         
|                                         
|Depreciation and amortization             |  |                         | (52,687  | )                   |  |                     | (22,480  | ) |  |   | (3,180  | )
|                                         
|                                         
|                                         
|                                         
|Interest income                           |  |                         | 8,813    |                     |  |                     | 4,115    |   |  |   | 367     |  
|                                         
|                                         
|                                         
|                                         
|Interest expense                          |  |                         | (21,361  | )                   |  |                     | (6,307   | ) |  |   | (2,681  | )
|                                          |  |                         |          |                     |  |                     |          |   |  |   |         |  
|Net loss                                  |  | $                       | (174,960 | )                   |  | $                   | (103,318 | ) |  | $ | (32,453 | )
|                                          |  |                         |          |                     |  |                     |          |   |  |   |         |  

60



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##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

(In thousands, except share and per share amounts)


20.  Business and Geographic Segment
Information  (Continued)

Revenues from one customer of the Companys Enterprise
Applications segment accounted for approximately 10% and 16% of
the Companys consolidated revenue for the years ended
December 31, 2000 and 1999, respectively.

21.  Subsequent Events

On January 2, 2001, the Company issued the remaining
27,022,059 shares of common stock to the Investors for net cash
proceeds of $86,209 and warrants to purchase 9,457,721 shares of
common stock at an exercise price of $4.08 per share. On
January 2, 2001, the Company entered into a revolving
credit facility with CS First Boston and GE Capital Corporation
to borrow up to $50,000 for general corporate purposes and to
refinance certain existing indebtedness. The credit facility
bears interest at the election of the Company at either the
prime rate or LIBOR plus variable margin percentages and is due
on January 2, 2004. The amount which can be borrowed
against the facility is based on a percentage of eligible
accounts receivable and 12-month contract backlog. This facility
has certain financial covenants and is secured by substantially
all assets of the Company not otherwise encumbered.

On January 2, 2001, the Company borrowed $15,000 under this
revolving credit facility. The proceeds were used to early
retire $7,905 of existing debt, working capital, finance
transaction related expenses and for general corporate purposes.
In the first quarter of 2001, the Company will record an
extraordinary loss on the early extinguishment of debt of
approximately $931 related to the debt retirement.

22.  Quarterly Financial Data (Unaudited)

The following is a summary of the quarterly results of
operations for the years ended December 31, 2000 and 1999:

|                                     |  |      |         |    |  |    |         |    |  |   |         |   |  |   |         |  
|------------------------------------ |  | ---- | ------- | -- |  | -- | ------- | -- |  | - | ------- | - |  | - | ------- | -
|                                     |  |     
|                                     |  | 2000
|                                     |  |     
|                                     |  | Q1   |         | Q2 |  | Q3 |         | Q4
|                                     |  |      |         |    |  |    |         |   
|Revenue                              |  | $    | 17,790  |    |  | $  | 26,223  |    |  | $ | 28,268  |   |  | $ | 37,263  |  
|                                    
|                                    
|                                    
|                                    
|Gross profit                         |  |      | 450     |    |  |    | 2,714   |    |  |   | 3,008   |   |  |   | 7,045   |  
|                                    
|                                    
|                                    
|                                    
|Net loss                             |  |      | (39,646 | )  |  |    | (41,973 | )  |  |   | (47,752 | ) |  |   | (45,589 | )
|                                    
|                                    
|                                    
|                                    
|Basic and diluted net loss per share |  |      | (0.42   | )  |  |    | (0.43   | )  |  |   | (0.49   | ) |  |   | (0.44   | )

|                                     |  |      |         |    |  |    |         |    |  |   |         |   |  |   |         |  
|------------------------------------ |  | ---- | ------- | -- |  | -- | ------- | -- |  | - | ------- | - |  | - | ------- | -
|                                     |  |     
|                                     |  | 1999
|                                     |  |     
|                                     |  | Q1   |         | Q2 |  | Q3 |         | Q4
|                                     |  |      |         |    |  |    |         |   
|Revenue                              |  | $    | 4,392   |    |  | $  | 6,683   |    |  | $ | 9,777   |   |  | $ | 14,661  |  
|                                    
|                                    
|                                    
|                                    
|Gross profit                         |  |      | (1,702  | )  |  |    | (2,044  | )  |  |   | (660    | ) |  |   | 110     |  
|                                    
|                                    
|                                    
|                                    
|Net loss                             |  |      | (17,691 | )  |  |    | (23,595 | )  |  |   | (27,767 | ) |  |   | (34,265 | )
|                                    
|                                    
|                                    
|                                    
|Basic and diluted net loss per share |  |      | (31.03  | )  |  |    | (0.29   | )  |  |   | (0.31   | ) |  |   | (0.37   | )

Gross profit is defined as revenue less direct cost of services
and network and infrastructure costs.

61



---



##### Table of Contents



USinternetworking, Inc.


Notes to Consolidated Financial Statements 
(Continued)

(In thousands, except share and per share amounts)




22.  Quarterly Financial Data
(Unaudited)  (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





62



---



##### 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.









63



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##### Table of Contents



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.


64



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##### Table of Contents



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.


65



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##### Table of Contents



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.


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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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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.

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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 |                  |        |   |        |       
|                                                                               |      |                              |        |                  |        |   |        |       

69



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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.

70



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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.

71



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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.

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

None.




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 9, 2001.




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 9, 2001. 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 9,
2001.




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 9, 2001.




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

Schedule II  Valuation of Qualifying Accounts

All other 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.                              

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|        |             |             |  |                                                                                                                                                                                                                                                  
|------- | ----------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |             |            
|No.     |             | Description
|        |             |            
|        | 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.                                                                   
|        | 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(a)(j) |             |  | Employment Agreement between the Company and Christopher R.
	McCleary dated November 10, 2000.                                                                                                                                                   
|        | 10.13(b)    |             |  | Employment Agreement between the Company and Stephen E.
	McManus dated June 2, 1998.                                                                                                                                                             
|        | 10.14(h)    |             |  | Employment Agreement between the Company and Andrew A.
	Stern dated July 21, 2000.                                                                                                                                                               
|        | 10.15(b)    |             |  | Note Purchase Agreement among the Company and the Account
	Management Purchasers dated September 8, 1998.                                                                                                                                        
|        | 10.16(b)    |             |  | Note Purchase Agreement between the Company and Southeastern
	Technology Fund, L.P. dated September 8, 1998.                                                                                                                                     
|        | 10.17(b)(f) |             |  | Software License and Services Agreement between the Company and
	Broadvision, Inc. dated July 22, 1998.                                                                                                                                          
|        | 10.18(e)    |             |  | Note Purchase Agreement among the Company and the Account
	Management Purchasers dated September 8, 1998.                                                                                                                                        
|        | 10.19(e)    |             |  | Note Purchase Agreement between the Company and the Southeastern
	Technology Fund, L.P. dated September 8, 1998.                                                                                                                                 
|        | 10.20(b)    |             |  | Note Purchase Agreement between the Company and certain other
	parties dated September 8, 1998.                                                                                                                                                  

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|        |             |             |  |                                                                                                                                       
|------- | ----------- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |             |            
|No.     |             | Description
|        |             |            
|        | 10.21(e)    |             |  | Note Purchase Agreement between the Company and
	U S WEST, Inc. dated September 8, 1998.                                              
|        | 10.22(b)    |             |  | Note Purchase Agreement between the Company and certain other
	parties dated December 16, 1998.                                       
|        | 10.23(b)    |             |  | Note Purchase Agreement between the Company and
	U S WEST dated December 29, 1998.                                                    
|        | 10.24(b)(f) |             |  | SiebelNet Agreement between the Company and SiebelNet, Inc.
	dated January 31, 1999.                                                  
|        | 10.25(b)    |             |  | Amended and Restated 1998 Stock Option Plan.                                                                                          
|        | 10.26(b)    |             |  | Nonqualified Stock Option Agreement between USi and Christopher
	McCleary dated March 19, 1999.                                       
|        | 10.27(i)    |             |  | Common Stock Purchase Agreement between the Company and Acqua
	Wellington North American Equities Fund, Ltd. Dated
	November 13, 2000.
|        | 10.28(i)    |             |  | Common Stock Purchase Agreement between the Company and certain
	other parties dated November 13, 2000.                               
|        | 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).                                      






|    |                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 10.20 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).                                                                                                        
|   
|(h) | Incorporated by reference to the Companys Quarterly Report
	on Form 10-Q for the quarter ended September 30, 2000 filed
	by the Company on November 14, 2000.                                                           
|   
|(i) | Incorporated by reference to the Company Current Report on Form
	8-K for the event dated November 13, 2000 filed by the
	Company on November 22, 2000.                                                                   
|   
|(j) | Confidential treatment requested as to certain portions.                                                                                                                                                                 

Reports on Form 8-K.

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.

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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.

We filed a Current Report on Form 8-K dated April 24,
2000 under which we filed a press release relating to the
election of Ken Sichau to the board of directors.

We filed a Current Report on Form 8-K dated July 26,
2000 under which we filed a press release relating to the
election of Andrew A. Stern as Chief Executive Officer of
the Company, and a press release in connection with the
Companys second quarter financial results.

We filed a Current Report on Form 8-K dated
October 26, 2000 under which we filed a press release
relating to the Companys third quarter conference call.

We filed a Current Report on Form 8-K dated
November 22, 2000 under which we filed a press release
relating to the Company signing commitments for over
$300 million in equity and commercial credit facilities
from financial and strategic investors and lenders.

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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 29, 2001.



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



| |     |                   
| | --- | ------------------
| | By: | /s/ANDREW A. STERN

| |                                     
| | ------------------------------------
| |                                     
| | Andrew A. Stern                     
| | Chief Executive Officer and Director
| | (Principal 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                              |  |      |  | 
|/s/ MARK J. MCENEANEYMark J. McEneaney             |  | Senior Vice President and
	Chief Financial Officer |  |      |  | 
|/s/ STEPHEN E. MCMANUSStephen E. McManus           |  | President  E-Business
	Services Unit and Director |  |      |  | 
|/s/ FRANK A. ADAMSFrank A. Adams                   |  | Director                                           |  |      |  | 
|/s/ CATHY M. BRIENZACathy M. Brienza               |  | Director                                           |  |      |  | 
|/s/ MICHAEL C. BROOKSMichael C. Brooks             |  | Director                                           |  |      |  | 
|Benjamin Diesbach                                  |  | Director                                           |  |      |  | 
|/s/ WILLIAM F. EARTHMANWilliam F. Earthman         |  | Director                                           |  |      |  | 
|/s/ R. DEAN MEISZERR. Dean Meiszer                 |  | Director                                           |  |      |  | 
|/s/ DAVID J. POULINDavid J. Poulin                 |  | Director                                           |  |      |  | 
|/s/ RAY A. ROTHROCKRay A. Rothrock                 |  | Director                                           |  |      |  | 
|/s/ JOHN H. WYANTJohn H. Wyant                     |  | Director                                           |  |      |  | 
|/s/ JOSEPH R. ZELLJoseph R. Zell                   |  | Director                                           |  |      |  | 

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SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

USinternetworking, Inc.

December 31, 2000

(in thousands)


|                                                                             |                                |                                                  |  |                  |     |                     |  |              |       |                |  |  |  |  |  |   |       |     |  |   |       | 
|---------------------------------------------------------------------------- | ------------------------------ | ------------------------------------------------ |  | ---------------- | --- | ------------------- |  | ------------ | ----- | -------------- |  |  |  |  |  | - | ----- | --- |  | - | ----- | 
|                                                                             |                                |                                                  |  |                  |     |                     |  |             
|                                                                             |                                |                                                  |  | Additions        |     |                     |  |             
|                                                                             |                                |                                                  |  |                  |     |                     |  |             
|                                                                             |                                | Balance at                                       |  | Charged to Costs |     | Charged to Other    |  | Deductions  |       | Balance at End
|Description                                                                  |                                | Beginning of Period                              |  | and Expenses     |     | Accounts  Describe |  | Describe     |       | of Period     
|                                                                             |                                |                                                  |  |                  |     |                     |  |              |       |               
|Year Ended December 31, 2000:                                                |                                |                                                  |  |                  |     |                     |  |              |       |                |  |  |  |  |  |   |       |     |  |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Deducted from assets accounts: |                                                  |  |                  |     |                     |  |              |       |                |  |  |  |  |  |   |       |     |  |   |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                | Allowance for doubtful accounts                  |  | $                | 543 |                     |  | $            | 3,891 |                |  |  |  |  |  | $ | 2,649 | (1) |  | $ | 1,785 | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Accrued liabilities:           |                                                  |  |                  |     |                     |  |              |       |                |  |  |  |  |  |   |       |     |  |   |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                | Other accrued liabilities  restructuring charge |  | $                | 0   |                     |  | $            | 2,110 |                |  |  |  |  |  | $ | 0     |     |  | $ | 2,110 | 
|                                                                             |                                |                                                  |  |                  |     |                     |  |              |       |                |  |  |  |  |  |   |       |     |  |  
|Year Ended December 31, 1999:                                                |                                |                                                  |  |                  |     |                     |  |              |       |                |  |  |  |  |  |   |       |     |  |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Deducted from asset accounts:  |                                                  |  |                  |     |                     |  |              |       |                |  |  |  |  |  |   |       |     |  |   |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                | Allowance for doubtful accounts                  |  | $                | 142 |                     |  | $            | 415   |                |  |  |  |  |  | $ | 14    | (1) |  | $ | 543   | 
|                                                                             |                                |                                                  |  |                  |     |                     |  |              |       |                |  |  |  |  |  |   |       |     |  |  
|Period from January 14, 1998 (date of inception) through
	December 31, 1998: |                                |                                                  |  |                  |     |                     |  |              |       |                |  |  |  |  |  |   |       |     |  |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Deducted from asset accounts:  |                                                  |  |                  |     |                     |  |              |       |                |  |  |  |  |  |   |       |     |  |   |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                | Allowance for doubtful accounts                  |  | $                | 0   |                     |  | $            | 142   |                |  |  |  |  |  | $ | 0     | (1) |  | $ | 142   | 
|                                                                             |                                |                                                  |  |                  |     |                     |  |              |       |                |  |  |  |  |  |   |       |     |  |  




|    |                                                       
|--- | ------------------------------------------------------
|(1) | Uncollectible accounts written-off, net of recoveries.

78