SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Quarterly Period ended March 31, 2001

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from __________ to _________

Commission file number: 000-26103

---------------------------------------------------------
CAIS INTERNET, INC.
(Exact name of registrant as specified in it charter)

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

Delaware 52-2066769
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Idenfication No.)

1255 22nd Street, N.W., Fourth Floor, Washington, D.C. 20037
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (202) 715-1300
Former name, former address, and former
year, if changed since last report: Not applicable

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate the number of outstanding shares of each of the registrant's
classes of Common Stock, as of the latest practicable date.

Title of each class
- -------------------
Common Stock, $.01 par value
23,656,790 shares outstanding on May 1, 2001

CAIS INTERNET, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2001

INDEX

Page
PART I - FINANCIAL INFORMATION Number

Item 1. Financial Statements:

Consolidated Condensed Balance Sheets as of March 31, 2001 and
December 31, 2000............................................. 4

Consolidated Condensed Statements of Operations for the Three
Months Ended March 31, 2001 and 2000.......................... 5

Consolidated Condensed Statements of Changes in Stockholders'
Deficit for the Three Months Ended March 31, 2001............. 6

Consolidated Condensed Statements of Cash Flows for the Three
Months Ended March 31, 2001 and 2000.......................... 7

Notes to Consolidated Condensed Financial Statements.......... 8

Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations................ 16

Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 22

PART II - OTHER INFORMATION

Item 1. Legal Proceedings............................................. 22

Item 2. Changes in Securities and Use of Proceeds..................... 24

Item 6. Exhibits and Reports on Form 8-K.............................. 24

Signatures............................................................ 25

This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. The factors discussed below
under the caption "Risks and Other Important Factors," among others, and in the
Company's 2000 Annual Report on Form 10-K could cause actual results to differ
materially from those indicated by forward-looking statements made herein and
presented elsewhere by management from time to time. Such forward-looking
statements represent management's current expectations and are inherently
uncertain. Investors are warned that actual results may differ from management's
expectations.

This Quarterly Report on Form 10-Q contains trademarks of the Registrant and
its affiliates, and may contain trademarks, trade names and service marks of
other parties. References to the Company, CAIS Internet, CAIS or the Registrant
are to CAIS Internet, Inc. and its subsidiaries.

CAIS INTERNET, INC.
Consolidated Condensed Balance Sheets
(in thousands, except share amounts)

March 31, 2001 December 31, 2000
--------------- -----------------
(Unaudited)

Current assets
Cash and cash equivalents.................................................. $ 18,310 $ 68,646
Accounts receivable, net of allowance for doubtful
accounts of $3,764 and $3,836, respectively.............................. 7,593 3,706
Prepaid expenses and other current assets.................................. 7,796 8,010
--------- --------
Total current assets.................................................... 33,699 80,362

Property and equipment, net...................................................... 82,066 82,287
Deferred debt financing costs, net............................................... 784 1,036
Intangible assets and goodwill, net.............................................. 6,127 6,848
Restricted cash.................................................................. 40,500 40,500
Other assets..................................................................... 5,960 6,033
--------- --------
Total assets............................................................ $ 169,136 $217,066
========= ========
Current liabilities
Accounts payable and accrued expenses...................................... $ 71,559 $100,479
Current portion of long-term debt and vendor promissory notes.............. 43,603 40,960
Current portion of obligations under capital lease......................... 675 1,220
Unearned revenues.......................................................... 355 232
--------- --------
Total current liabilities............................................... 116,192 142,891

Vendor promissory notes, net of current portion.................................. 25,581 19,977
Deferred gain on sale of assets.................................................. 40,500 40,500
Capital lease obligations, net of current portion................................ 1,703 1,895
Other long-term liabilities...................................................... 1,665 1,765
--------- --------
Total liabilities....................................................... 185,641 207,028
--------- --------
Series C cumulative mandatory redeemable convertible preferred stock;
$0.01 par value; 125,000 shares authorized, issued and outstanding
(aggregate liquidation preference of $15,000).............................. 15,000 15,000
--------- --------
Series D cumulative mandatory redeemable convertible preferred stock;
$0.01 par value; 9,620,393 shares authorized; 7,367,123 shares
issued and outstanding (aggregate liquidation preference of $106,492 and
$104,945, respectively).................................................... 106,492 104,945
--------- --------
Series F cumulative mandatory redeemable convertible preferred stock;
$0.01 par value; 56,617 shares authorized; 40,342 shares
issued and outstanding (aggregate liquidation preference of $41,872 and
$41,166, respectively)..................................................... 41,872 41,166
--------- --------
Series G cumulative mandatory redeemable convertible preferred stock;
$0.01 par value; 28,051 shares authorized; 20,270 shares
issued and outstanding (aggregate liquidation preference of $20,929 and
$20,625, respectively)..................................................... 20,929 20,625
--------- --------
Commitments and contingencies (Note 4)

Stockholders' deficit
Common stock, $0.01 par value; 100,000,000 shares authorized;
24,303,259 and 24,289,722 shares issued and 23,656,790 and 23,643,253
shares outstanding, respectively......................................... 243 243
Additional paid-in capital................................................. 223,928 223,925
Warrants outstanding....................................................... 63,376 63,376
Deferred compensation...................................................... (629) (1,014)
Treasury stock, 646,469 shares of common stock............................. (17,073) (17,073)
Accumulated deficit........................................................ (470,643) (441,155)
--------- --------
Total stockholders' deficit............................................. (200,798) (171,698)
--------- --------
Total liabilities and stockholders' deficit............................. $ 169,136 $217,066
========= ========

The accompanying notes are an integral part of these consolidated condensed
balance sheets.

CAIS INTERNET, INC.
Consolidated Condensed Statements of Operations
(in thousands, except per share amounts)
(unaudited)

Three Months Ended
March 31,
2001 2000
------ ------

Net revenues:
Data connectivity......................................... $ 7,626 $ 2,806
Hospitality............................................... 2,379 1,139
Equipment/software........................................ 66 2,922
-------- --------
Total net revenues...................................... 10,071 6,867
-------- --------
Cost of revenues:
Data connectivity......................................... 6,409 2,769
Hospitality............................................... 7,080 2,191
Equipment/software........................................ 47 1,052
-------- --------
Total cost of revenues.................................. 13,536 6,012
-------- --------
Operating expenses:
Selling, general and administrative....................... 15,278 18,486
Research and development.................................. 241 1,185
Depreciation and amortization............................. 3,769 5,752
Non-cash compensation..................................... 385 419
Impairment of long-lived assets........................... 2,350 --
-------- --------
Total operating expenses................................ 22,023 25,842
-------- --------
Loss from operations............................................. (25,488) (24,987)

Interest income (expense), net:
Interest income........................................... 904 655
Interest expense.......................................... (2,028) (317)
-------- --------
Total interest income (expense), net.................... (1,124) 338
-------- --------
Net loss......................................................... (26,612) (24,649)
Dividends and accretion on preferred stock................ (2,876) (58,848)
-------- --------
Net loss attributable to common stockholders..................... $(29,488) $(83,497)
======== ========
Basic and diluted loss per share attributable to common
stockholders.................................................... $ (1.25) $ (3.64)
======== ========

Basic and diluted weighted-average shares outstanding............ 23,650 22,918
======== ========

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

CAIS INTERNET, INC.
Consolidated Condensed Statement of
Changes in Stockholders' Deficit
(in thousands)
(unaudited)

Redeemable Convertible Preferred Stock
-----------------------------------------------------------------------------------------------------------
Series C Series D Series F Series G
-----------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
-------- ---------- -------- ---------- ---------- ----------- -------- --------

December 31, 2000....... 125 $ 15,000 7,367 $104,945 40 $ 41,166 20 $ 20,625
Accrued and
cash dividends on
preferred shares....... -- -- -- 1,547 -- 706 -- 304
Exercise of stock
options................ -- -- -- -- -- -- -- --
Amortization of
unearned compensation.. -- -- -- -- -- -- -- --
Net loss................ -- -- -- -- -- -- -- --
----- -------- -------- -------- -------- --------- -------- ---------
March 31, 2001........... 125 $15,000 7,367 $106,492 40 $ 41,872 20 $ 20,929
===== ======== ======== ======== ======== ========= ======== =========

(continued)

Stockholders' Deficit
------------------------------------------------------------------------------------------------------
Common Stock Additional
------------ Paid-In Warrants Deferred Treasury Accumulated
Shares Par Capital Outstanding Compensation Stock Deficit Total
------ ----- ----------- ----------- ------------ --------- ----------- ---------

December 31, 2000... 24,290 $ 243 $223,925 $ 63,376 $(1,014) $(17,073) $(441,155) $(171,698)
Accrued and cash
dividends on
preferred shares.. -- -- -- -- -- -- (2,876) (2,876)
Exercise of stock
options........... 13 -- 3 -- -- -- -- 3
Amortization of
unearned
compensation...... -- -- -- -- 385 -- -- 385
Net loss........... -- -- -- -- -- -- (26,612) (26,612)
------ ----- -------- -------- ------- -------- --------- ---------
March 31, 2001...... 24,303 $ 243 $223,928 $ 63,376 $ (629) $(17,073) $(470,643) $(200,798)
====== ===== ======== ======== ======= ======== ========= =========

(concluded)

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

CAIS INTERNET, INC.
Consolidated Condensed Statements of Cash Flows
(in thousands)
(unaudited)

Three Months Ended
March 31,
2001 2000
------ ------

Cash flows from operating activities:
Net loss........................................................... $(26,612) $(24,649)
Adjustments to reconcile net loss to net cash
used in operating activities:
Non-cash compensation............................................. 385 419
Amortization of debt discount and deferred debt
financing costs.................................................. 252 123
Impairment of long-lived assets................................... 2,350 --
Depreciation and amortization..................................... 3,769 5,752
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable, net........................................ (3,887) (859)
Prepaid expenses and other current assets....................... (2,266) (1,960)
Other assets.................................................... 76 (291)
Accounts payable and accrued expenses........................... (20,207) (2,065)
Unearned revenues............................................... 123 193
Other long-term liabilities..................................... (100) (30)
-------- --------
Net cash used in operating activities......................... (46,117) (23,367)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment................................ (2,827) (28,730)
Purchases of restricted investments................................ -- (3,865)
Purchases of short-term investments................................ -- (12,846)
Cash paid for acquisitions/investments............................. (392) (1,189)
Payment of visitor-based and multi-family network
contract rights................................................... -- (3,190)
Proceeds from sale of investments.................................. 1,280 --
Net advances on notes receivable................................... (536) --
Net payments received on related party accounts receivable......... -- 25
-------- -------
Net cash used in investing activities......................... (2,475) (49,795)
-------- --------
Cash flows from financing activities:
Borrowings under long-term debt.................................... -- 14,848
Repayments under long-term debt.................................... (1,010) --
Principal payments under capital lease obligations................ (737) (131)
Net proceeds from issuance of Series D preferred stock............. -- 67,588
Proceeds from issuance of common stock............................. 3 689
-------- --------
Net cash (used in) provided by financing activities........... (1,744) 82,994
-------- --------
Net (decrease) increase in cash and cash equivalents.................. (50,336) 9,832
Cash and cash equivalents, beginning of period........................ 68,646 17,120
-------- --------
Cash and cash equivalents, end of period.............................. $ 18,310 $ 26,952
======== ========

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

CAIS INTERNET, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2001
(unaudited)

1. Business Description:

Overview

CAIS Internet, Inc. (the Company) is a nationwide supplier of broadband
Internet access solutions and provides price competitive high speed Internet
services and bundled data solutions to businesses nationwide. The Company offers
always-on, broadband Internet access to commercial and residential customers
through its various bandwidth products in 29 major metropolitan areas throughout
the U.S. It also provides service to certain hotel properties utilizing several
different technology platforms. All of the Company's broadband services utilize
its own tier-one, nationwide Internet network and several proprietary
technologies. The Company also maintains unmanned business centers and Internet
kiosks nationwide to deliver broadband Internet access and content to public
venues, such as airports, retail centers, hotel lobbies and cruise ships.

During the fourth quarter of 2000, the Company commenced a complete
strategic review of its business lines, including analysis of capital deployment
and profitability. The Company determined that the projected revenues from hotel
and multi-family properties were insufficient to continue operating many of
these properties in a cost effective manner. In response to this analysis and
changing equity market conditions, the Company determined that its new strategy
would focus on a restructuring of the Company's business goals to capitalize on
its already existing network bandwidth investment by expanding the core Data
Connectivity segment data broadband solutions of digital subscriber line (DSL),
always-on bandwidth access, web hosting services, colocation, and virtual
private network (VPN). The Company believes that focusing on these areas will
have the effect of reducing operating losses, conserving capital, and maximizing
shareholder value.

Organization

CAIS Internet, Inc. was incorporated under the name CGX Communications,
Inc. (CGX) as a "C" corporation in Delaware in December 1997 to serve as a
holding company for two operating entities, CAIS, Inc., a Virginia "S"
Corporation, and Cleartel Communications Limited Partnership (Cleartel), a
District of Columbia limited partnership. The Company completed a reorganization
in October 1998 such that CAIS Inc. and Cleartel became wholly-owned
subsidiaries of the Company. In February 1999, the Company spun-off Cleartel to
the Company's stockholders and changed its name from CGX Communications, Inc. In
May 1999, the Company became a public company through the completion of an
initial public offering (IPO) of its common stock.

Going Concern and Other Important Risk Factors

The Company has suffered significant losses and negative cash flows from
operations since inception. These operating losses and negative cash flows are
expected to continue for additional periods in the future. At March 31, 2001,
current liabilities exceeded current assets by approximately $82,493,000. For
the three months ended March 31, 2001, the Company incurred a net loss and
negative cash flows from operations of approximately $26,612,000 and
$46,117,000, respectively, and has negative stockholders' equity of
approximately $200,798,000 at March 31, 2001. If the Company is unable to raise
additional capital before the end of the second quarter of 2001, the Company may
not be able to meet its projected obligations for fiscal year 2001. As a result
of this material uncertainty, there is substantial doubt about the Company's
ability to continue to operate as a going concern for a reasonable period of
time.

Management plans to raise additional capital through the sale of equity,
additional borrowings, the sale of non-strategic assets, including intellectual
property and proprietary technology, or the sale of selected operations.
Although management believes it has the ability to generate additional equity
and cash through such financing transactions, those transactions may be dilutive
and there can be no assurances that adequate funds will be available, or
available on terms that are reasonable or acceptable to the Company. If the
Company is unable to generate additional financing and adequate cash, there will
be a material and adverse effect on the financial condition of the Company, to
the extent that a restructuring, sale, or liquidation of the Company will be
required, in whole or in part. The consolidated condensed financial statements
do not include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and

classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.

The Company is subject to various risks in connection with the operation of
its business. These risks include, but are not limited to, regulations,
dependence on effective billing and information systems, intense competition,
continued operations of its major suppliers, and rapid technological change. The
DSL industry is suffering from significant operating losses and limited capital
availability. The continued viability of these suppliers is critical to the
Company's future business plans. In addition to the need for capital, the
Company's future plans are substantially dependent on the ability to transition
the Company to its new business model and eliminate operating losses as soon as
possible. There can be no assurance that the Company will be successful in its
efforts.

2. Summary of Significant Accounting Policies:

Basis of Presentation

The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Operating results for the three months ended March 31, 2001 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K.

Consolidated Condensed Financial Statements

The consolidated condensed financial statements include the results of the
Company and its wholly-owned subsidiaries. These results include CAIS, Inc.,
CAIS Software Solutions (CAISSoft) formerly known as Atcom, Inc. (Atcom) and
Business Anywhere USA, Inc. (Business Anywhere) for all periods presented. All
significant inter-company transactions and accounts have been eliminated.
Substantially all of the assets of CAISSoft were sold in December 2000.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Net Loss Per Share

SFAS No. 128, "Earnings Per Share," requires dual presentation of basic and
diluted earnings per share on the face of the statements of operations. Basic
earnings per share excludes dilution and is computed by dividing income or loss
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.

Basic and diluted loss per share is based on the weighted-average number of
shares of common stock outstanding during the period. Stock options, warrants
and preferred shares are not reflected in diluted loss per share since their
effect would be antidilutive. As of March 31, 2001, there were options and
warrants to purchase approximately 9,527,000 shares of common stock, and Series
C, D, F and G preferred shares which, upon their conversion, would cause the
issuance of approximately 9,745,000 shares of common stock.

Comprehensive Income

Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting of
Comprehensive Income", requires "comprehensive income" and the components of
"other comprehensive income" to be reported in the financial statements and/or
notes thereto. Since the Company does not have any components of "other
comprehensive

income", reported net loss is the same as "comprehensive loss" for the three
months ended March 31, 2001 and 2000.

Recently Adopted Accounting Pronouncements

The FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of SFAS No. 133," in July
1999. SFAS No. 133 is effective January 1, 2001. The statement requires
companies to record derivatives on the balance sheet as assets or liabilities
measured at fair value. Gains or losses resulting from changes in the fair
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The adoption of
SFAS No. 133 did not have a material effect on the Company's results of
operations or financial position for the quarter ended March 31, 2001.

Excess of Cost over Net Assets Acquired (Goodwill)

Goodwill and other intangibles were recorded as a result of the
acquisitions by the Company of Atcom and Business Anywhere in September 1999,
Hub Internet Services, Inc. (Hub Internet) in February 2000, and QuickATM, LLC
(QuickATM) in March 2000. Goodwill and acquired intangibles are amortized on a
straight-line basis over three years. Amortization of goodwill and acquired
intangibles was approximately $654,000 and $3,693,000 for the three months ended
March 31, 2001 and 2000, respectively.

Hospitality and Multi-family Contract Rights

The Company made up-front contract payments in 1999 and 2000 to its
hospitality and multi-family contract partners in connection with entering into
long-term master agreements. These payments give the Company various
installation and marketing rights to provide high-speed Internet services to
customers in hotels and apartment buildings. The net balance of these payments
was zero as of March 31, 2001 and December 31, 2000 as the Company wrote off
approximately $20,283,000 of intangible assets related to contract rights in the
fourth quarter of 2000 as part of the impairment of long-lived assets analysis.
Prior to the fourth quarter of 2000, the payments were amortized over the term
of the agreements, ranging from five to seven years. Amortization expense of
these costs for the three months ended March 31, 2001 and 2000 was approximately
$67,000 and $670,000, respectively. The Company does not plan to make any
payments for contract rights in the future.

Non-cash Compensation

The Company accounts for its stock option plan under APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company has adopted SFAS No.
123, "Accounting for Stock-Based Compensation," for disclosure purposes. The
Company has recognized non-cash compensation expense on certain stock options
granted to management in 1997, 1998 and 1999 at exercise prices less than the
estimated fair market value at the dates of the grants. The non-cash
compensation expense is recorded over the vesting periods of the options and was
approximately $385,000 and $419,000 for the three months ended March 31, 2001
and 2000, respectively.

Impairment of Long-Lived Assets

Long-lived assets including identifiable intangible assets to be held and
used and goodwill are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be fully
recoverable. To determine recoverability of its long-lived assets, the Company
evaluates the probability that future undiscounted net cash flows will be less
than the carrying amount of such assets. If future estimated undiscounted net
cash flows are less than the carrying amount of long-lived assets, then such
assets are written down to their estimated fair value. The Company considers
expected cash flows and estimated future operating results, trends, and other
available information in assessing whether the carrying value of the assets is
impaired.

The Company's estimates of anticipated net revenues, the remaining
estimated lives of tangible and intangible assets, or both, could be reduced
significantly in the future due to changes in technology, regulation, available
financing, or intense competition, or actual building usage penetration results.
As a result, the carrying amount of long-lived assets could be reduced
materially in the future.

In the fourth quarter of 2000, the Company recorded a write down of
approximately $161,187,000 for fixed assets and $20,283,000 for intangible
contract rights related to the Company's hospitality segment. In connection with
the termination of service to properties in 2001, the Company may incur
additional impairment charges. Management believes that such cost could be as
high as $7,000,000 and would be recognized upon the incurrence of such charges.

During the fourth quarter of 2000, the Company invested $1,200,000 in a
hospitality portal media venture and committed to invest an additional
$1,150,000 into the entity. During the first quarter of 2001, the Company
invested $967,000 into the entity pursuant to its commitment. Management has
determined this investment to be impaired based on revised cash flow prospects
of the entity. Accordingly, an impairment charge of $2,350,000 was recognized in
the quarter ended March 31, 2001 which includes the Company's remaining
obligation to the entity.

3. Financing and Debt:

The Company and Nortel Networks Inc. (Nortel) entered into a five-year,
$30 million equipment financing line of credit, dated as of June 4, 1999, and
several amendments. As of March 31, 2001 and December 31, 2000, the Company had
an outstanding balance of approximately $11.1 million and $12.1 million under
this credit facility, respectively. The facility required the Company to meet
certain financial covenants including revenue targets and leverage and debt
service ratios.

In November 2000, the credit facility was amended such that the maximum
borrowings were limited to approximately $16,100,000. The amendment also
terminated borrowing availability as of November 30, 2000, modified the
repayment terms, and increased the interest rate on the facility to LIBOR plus
6% (11.57% - 13.00% at March 31, 2001). If the Company raises a minimum of
$75 million in debt or equity while any balance is outstanding, the Company
agreed to pay any remaining balance due to Nortel at that time. The Company
repaid $4,000,000 of the outstanding balance in December 2000 and is required to
repay the remaining balance in equal monthly installments over the 2001 calendar
year. Although the Company made the January 2001 payment of approximately
$1,010,000, the Company has not made the required payments

for February and March 2001, and is in default under the agreement. The Company
has received a Notice of Default from Nortel, and is in discussions with Nortel
regarding a resolution of the current default status.

The Company and Cisco Systems Capital Corporation (Cisco Capital) entered
into a three-year, $50 million equipment financing line of credit, dated as of
June 30, 1999, and several amendments. As of March 31, 2001 and December 31,
2000, the Company had borrowed approximately $26.5 million under this credit
facility. Borrowings outstanding as of March 31, 2001 incur interest at
approximately 12.4 percent. Borrowings under the facility were permitted during
the first two years of the facility provided the Company met certain financial
performance requirements, including EBITDA targets, revenue targets and leverage
ratios. Borrowings under the facility are secured by a first priority lien in
all assets of the Company, other than its property securing the Nortel facility,
in which assets Cisco Capital will have a second priority lien. As of March 31,
2001, the Company was not in compliance with certain financial covenants, and,
as a result, the availability for additional borrowings has been suspended. The
Company is in discussions with Cisco Capital regarding a resolution to the
current default status, including the use of the $40.5 million escrow account
established in the sale of CAISSoft assets to Cisco to repay outstanding debt,
net of $13.5 million to be paid to satisfy the Science Applications
International Corporation (SAIC) attachment described in Note 4.

In the first quarter of 2001, the Company refinanced approximately
$9,259,000 of its March 31, 2001 outstanding accounts payables into vendor
promissory notes, with most of the principal due in 2002 and 2003. The vendor
promissory notes require quarterly interest payments at a rate of 10% per annum
with principal to be repaid in equal quarterly installments over 2002 and 2003.
The restructuring of these payables into vendor promissory notes has been
recorded in the accompanying consolidated condensed financial statements.

Deferred debt financing costs represent direct financing costs incurred in
connection with entering into the equipment financing agreements. The Company
has approximately $784,000 and $1,036,000 of unamortized deferred debt financing
costs remaining as of March 31, 2001 and December 31, 2000, respectively. The
deferred debt financing costs are being amortized using the effective interest
rate method over the terms of the equipment financing agreements and are
included in interest expense. Amortization expense totaled approximately
$252,000 and $165,000, for the three months ended March 31, 2001 and 2000,
respectively.

4. Commitments and Contingencies:

Litigation

From time to time, the Company has been, and expects to continue to be,
subject to legal proceedings and claims in connection with the business.

The Company is currently involved in a number of legal proceedings, some of
which, as described below, could have a material adverse effect on the business,
financial position, results of operations or cash flows. Additionally, the
Company's present and possible future legal proceedings and claims, whether with
or without merit, could be expensive to defend, divert management's attention,
and consume management time and resources. There can be no assurance concerning
the outcome of any current or future legal proceedings or claims.

In January 2001, Science Applications International Corporation (SAIC), one
of the Company's larger accounts payable creditors, filed a complaint against
the Company in the Superior Court for the State of California, County of San
Diego for non-payment of outstanding invoices totaling approximately
$15,067,781. Most of the charges related to labor for hotel and multi-family
building installations of Internet connections and other related services during
2000. All of the invoiced amounts are recorded as current liabilities on the
Company's March 31, 2001 consolidated condensed balance sheet. The Company filed
an answer to the complaint in March 2001 and also filed a cross-complaint
alleging that SAIC breached its contract with the Company and made false
representations and promises without any intent to perform. On April 30, 2001,
the Company and SAIC entered into a Settlement Agreement. Under the terms of the
settlement, CAIS will pay to SAIC $13.5 million from the $40.5 million escrow
established in connection with the sale of certain assets of CAISSoft to Cisco,
which payment is due on the earlier of May 31, 2001 or the first date on which
proceeds from the escrow can be released. Release of the funds from the escrow
must be approved by Cisco. The Company has reached an agreement in principal
with Cisco for such release; however, the Company cannot guarantee that such
release will be forthcoming. If Cisco does not agree to release the necessary
funds from the escrow, SAIC will be entitled to file a stipulated judgment for
$15,067,781 with the Court and demand payment for that amount.

The Company is a defendant in a lawsuit filed in January 2001 in the U.S.
District Court for Central District Court of California, Santa Ana Division by
Kim Kao, an officer of its wholly-owned subsidiary, Business Anywhere, and his
wife, Amy Hsiao. The plaintiffs were the primary stockholders of Business
Anywhere prior to its purchase by the Company and Mr. Kao is currently the
General Manager of that business unit. The lawsuit alleges breach by the Company
of the merger agreement in which the former shareholders of Business Anywhere
sold their interests, as well as breach by the Company of Mr. Kao's employment
agreement, and seeks damages of approximately $5,300,000. On April 6, 2001, an
order was issued by the court compelling arbitration of all the plaintiff's
claims. A companion order was issued staying the court action pending the
outcome of arbitration. Although the Company does not believe this lawsuit has
any merit, the Company is currently unable to predict the outcome of the case,
or reasonably estimate a range of possible loss.

the Company breached an agreement to provide high-speed Internet services to its
hotel franchisees. On May 2, 2001, the Company and Sholodge reached a final
settlement of this claim. In exchange for the Company's agreement to pay
Sholodge $200,000, Sholodge released all claims relating to the subject
agreement.

The Company was named as a defendant in an action filed by eFront Media,
Inc. (eFront) in the California Superior Court, County of Orange, in February
2001. The lawsuit alleges breach by the Company of certain Internet Web services
agreements, as a result of the Company's alleged failure to properly service Web
sites owned and maintained by the plaintiff, and seeks damages in excess of
$4,700,000, in addition to interest and attorney's fees. The Company has filed
its Answer to the complaint. On May 10, 2001, the Company filed a Motion to
Transfer Venue -- seeking transfer of the case to the U.S. District Court for
the Eastern District of Virginia, Alexandria Division. In addition, the Company
filed a collection action for approximately $800,000 in February 2001 against
eFront in the Alexandria Division of the United States District Court for the
Eastern District of Virginia for non-payment of contractual web services
obligations. eFront has failed to file an Answer or otherwise appear in this
lawsuit within the time allowed by the Federal Rules of Civil Procedure and
Local Rules. The Company is currently determining an appropriate responsive
action. Although the Company does not believe that the lawsuit filed by eFront
has any merit, the Company is currently unable to predict the outcome of the
case, or reasonably estimate a range of possible loss.

In February 2001, Prudential Securities Incorporated (Prudential),
successor in interest to Volpe Brown Whelan and Co., LLC (Volpe), filed a
complaint against the Company for breach of a contract between Volpe and the
Company to provide certain investment banking and related services. Prudential
alleges that the Company failed to pay Volpe for its services, and seeks
approximately $3,600,000, plus interest. In March 2001, the Company filed an
answer to the complaint and also filed a counterclaim for $15,000,000 against
Prudential for breach of contract, fraudulent misrepresentation and negligent
misrepresentation. No discovery has been conducted in this case, and an initial
scheduling hearing is scheduled for May 2001. Although the Company does not
believe this lawsuit has any merit, the Company is currently unable to predict
the outcome of the case, or reasonably estimate a range of possible loss.

The Company was named as a defendant in a complaint filed in January 2001
in the U.S. District Court for the Northern District of Texas by VirtuaLINC
Corporation. The complaint seeks damages in an amount as yet undetermined, but
alleged to be in excess of $10,000,000. In particular, VirtuaLINC alleges in the
complaint that the Company and VirtuaLINC agreed in 1999 to provide high-speed
Internet services to hotels, that the Company would provide the initial
connections to the hotels, and then VirtuaLINC would be involved with providing
high-speed Internet services and video services to the hotels. VirtuaLINC
alleges breach of contract, tortious interference with contract, breach of
fiduciary duty and tortious interference with prospective business relations by
the Company. The complaint has not yet been served on the Company. Although the
Company does not believe this lawsuit has any merit, the Company is currently
unable to predict the outcome of the case, or reasonably estimate a range of
possible loss.

In February, 2001, Excelsus Technologies, Inc. (Excelsus) filed a
complaint against the Company in San Diego Superior Court, State of California.
In the complaint, Excelsus seeks damages for the alleged breach by the Company
of agreements for the development by Excelsus and corresponding purchase by the
Company of various products. In May 2001, a settlement of this lawsuit was
reached by the parties. Under terms of the settlement, the Company will pay
Excelsus approximately $2.6 million over a series of payments with final payment
due no later than December 31, 2003. In return, Excelsus, in addition to other
obligations, is to dismiss its lawsuit.

On May 4, 2001, Prime Hospitality Corp. (Prime) instituted a demand for
arbitration against the Company by filing a claim with the American Arbitration
Association. The claim alleges that the Company failed to perform "conditions of
the Master Agreement For Hotel Internet Service dated 11/16/00 and Amendment to
CAIS Agreement dated 01/24/00" entered between Prime and the Company. In
particular, Prime alleges that the Company failed to pay to Prime the sum of
$1,512,050 allegedly due under the Agreement plus "an amount to be determined
for ongoing obligations under the agreement." Prime seeks an award of money
damages in the amount of $1,512,050, plus an additional amount for ongoing
damages, pre- and post-judgment interest and costs. The Company has not yet made
an appearance in this action and an arbitration date has not been scheduled.
Although the Company does not believe this claim has any merit, the Company is
currently unable to predict the outcome of the arbitration, or reasonably
estimate a range of possible loss.

The Company has also received legal correspondence from several trade
creditors regarding the timing of payment of past due accounts payable balances.
All amounts are recorded as current liabilities in the March 31, 2001 and
December 31, 2000 consolidated condensed balance sheets. The Company is in
discussions with these vendors regarding the resolution of certain disputes
relating to these charges and the timing of the payments.

The Company has also received correspondence from several hotel and multi-
family entities regarding its contractual obligations under master or individual
contracts to provide high-speed Internet service to properties. As a result of
the change in business strategy due to limited capital availability, the Company
has notified the owners of many installed properties that they will be
discontinuing service in the near future. In addition, the Company has
indicated that it is no longer financially possible to install service in new
properties. Although the Company believes that the amount of financial damages
to properties is minimal due to low usage penetration and low revenue share
percentages, the Company cannot predict whether any of these property owners,
in addition to Prime described above, will decide to file suit in the future.

Network Capacity

The Company and Qwest entered into a twenty-year Indefeasible Right of Use
(IRU) agreement, dated as of September 28, 1999. The Company purchased
approximately $44 million of capacity on Qwest's fiber network, of which
approximately $14.5 million is included in accrued expenses in the accompanying
consolidated condensed balance sheets as of March 31, 2001 and December 31,
2000. The Qwest capacity will support the delivery of the Company's network
services to 29 metropolitan areas across the United States.

The Company has received correspondence from Qwest, notifying the Company
that it is in default of its IRU agreement and requesting payment of the
outstanding balance of $14.5 million. Qwest has also asserted that the Company's
failure to pay the obligation could result in termination of the IRU agreement.
The Company

is in discussions with Qwest regarding a renegotiation of the payment obligation
and terms.

Regulatory Matters

At the present time, ISPs like the Company are not subject to direct
regulation by the Federal Communications Commission (FCC) even though they
provide Internet access through transmission over public telephone lines.
However, as the growth of the Internet industry continues, there has been
considerable discussion and debate about whether the industry should be
subjected to regulation. This regulation could include universal service
subsidies for local telephone services and enhanced communications systems for
schools, libraries and certain health care providers. Local telephone companies
could be allowed to charge ISPs for the use of their local telephone network to
originate calls, similar to charges currently assessed on long distance
telecommunications companies. In addition, many state and local government
officials have asserted the right or indicated a willingness to impose taxes on
Internet-related services and commerce, including sales, use and excise taxes.

5. Segment Reporting:

The Company has two reportable segments: Data Connectivity and Hospitality.
The Data Connectivity segment comprises high speed Internet services and bundled
data solutions provided to businesses nationwide. The Hospitality segment
comprises Internet access solutions provided to hotels and other public venues
and business center solutions. The accounting principles for both segments are
the same as those applied in the consolidated condensed financial statements.
Shared network expenses and corporate overhead are allocated to the segments
based on estimated usage. This reporting methodology is a change from that
utilized in the Company's 2000 filings in which Data Connectivity was referred
to as Internet Services and Hospitality was referred to as Networks. Further,
in the year 2000 filings, the revenues and costs of the Data Connectivity
Segment were reported on an incremental basis, without any allocations of shared
network expenses and corporate overhead, since the Company's expansion and
capital expenditures were driven by expected growth in the Hospitality
segment. The new methodology for 2001 reflects the Company's revised business
plan and focus on the Data Connectivity segment. Year 2000 segment information
has been restated to be consistent with the new methodology. Interest is
allocated based upon the respective percentage of losses before interest of the
two segments.

The following is a summary of information about each of the Company's
reportable segments that is used by the Company to measure the segment's
operations (in thousands, unaudited):

Three Months Ended March 31, 2001
------------------------------------------
Data
Connectivity Hospitality Consolidated
------------- ------------ -------------

Revenues $ 7,626 $ 2,445 $ 10,071
Depreciation and amortization 1,667 2,102 3,769
Interest income (expense), net (456) (668) (1,124)
Segment losses (10,791) (15,821) (26,612)
Segment assets 52,028 48,300 100,328
Expenditures for segment assets 192 2,635 2,827

Three Months Ended March 31, 2000
------------------------------------------
Data
Connectivity Hospitality Consolidated
------------- ------------ -------------

Revenues $ 2,806 $ 4,061 $ 6,867
Depreciation and amortization 339 5,413 5,752
Interest income (expense), net 117 221 338
Segment losses (8,511) (16,138) (24,649)
Segment assets 55,228 127,044 182,272
Expenditures for segment assets -- 28,730 28,730

The following is a reconciliation of the reportable segments' assets to the
Company's consolidated totals (in thousands, unaudited):

March 31, March 31,
2001 2000
--------- ---------

Assets
Total assets for reportable segments $100,328 $182,272
Total current assets, excluding reportable segment assets 23,688 61,093
Deferred financing and offering costs, net 784 1,260
Receivable from officer -- 450
Restricted cash 40,500 --
Other long term assets, excluding reportable segment assets 3,836 2,436
-------- --------
Consolidated total assets $169,136 $247,511
======== ========

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

The following discussion should be read in conjunction with the
Consolidated Condensed Financial Statements and the Notes thereto contained
elsewhere in this report.

The cautionary statements set forth below and elsewhere in this Report
identify important risks and uncertainties that could materially adversely
affect our business, financial condition, results of operations or prospects.

The Company

The Company is a nationwide supplier of broadband Internet access solutions
and provides price competitive high speed Internet services and bundled data
solutions to businesses nationwide. The Company offers always-on, broadband
Internet access to commercial and residential customers through its various
bandwidth products in 29 major metropolitan areas throughout the U.S. It also
provides service to certain hotel properties utilizing several different
technology platforms. All of the Company's broadband services utilize its own
tier-one, nationwide Internet network and several proprietary technologies. The
Company also maintains unmanned business centers and Internet kiosks nationwide
to deliver broadband Internet access and content to public venues, such as
airports, retail centers, hotel lobbies and cruise ships.

Organization

CAIS Internet, Inc. was incorporated under the name CGX Communications,
Inc. ("CGX") as a "C" corporation in Delaware in December 1997 to serve as a
holding company for two operating entities, CAIS, Inc., a Virginia "S"
Corporation, and Cleartel Communications Limited Partnership ("Cleartel"), a
District of Columbia limited partnership. The Company completed a reorganization
in October 1998, as a result of which CAIS and Cleartel became wholly-owned
subsidiaries of the Company. In February 1999, the Company spun-off Cleartel to
the Company's stockholders and changed its name from CGX Communications, Inc. In
May 1999, the Company became a public company through the completion of an
initial public offering ("IPO") of its common stock.

Liquidity, Going Concern Risk and Capital Resources

As of March 31, 2001, the Company had cash and cash equivalents of
approximately $18.3 million exclusive of restricted cash of $40.5 million which
is held in escrow from the sale of CAIS Software Solutions, Inc. (CAISSoft)
assets to Cisco Systems Inc. (Cisco). Total current liabilities as of March 31,
2001 exceeded current assets by approximately $82.5 million. Current liabilities
include $37.6 million due to Cisco Systems Capital Corporation (Cisco Capital)
and Nortel Networks, Inc (Nortel) related to equipment financing lines of
credit.

The Company will require additional financing to continue operations by the
end of the second quarter of 2001. If such sources of financing are insufficient
or unavailable, the Company would further reduce headcount, defer payments, sell
operating assets and or seek protection under appropriate bankruptcy statutes.

Management plans to raise additional capital through the sale of equity,
additional borrowings, the sale of non-strategic assets, including intellectual
property and proprietary technology, or the sale of selected operations. These
transactions would be dilutive to existing shareholders and there can be no
assurances that adequate funds will be available, or available on terms that are
reasonable or acceptable to the Company. As a result of this material
uncertainty, there is substantial doubt about the Company's ability to continue
to operate as a going concern for a reasonable period of time. If the Company is
unable to generate additional financing and adequate cash by the end of the
second quarter of 2001, there will be a material and adverse effect on the
financial condition of the Company, to the extent that a restructuring, sale, or
liquidation of the Company will be required, in whole or in part.

The Company commenced a number of initiatives before year-end 2000 to
improve liquidity and will continue to pursue some of those initiatives in 2001.
Those include:

. In December 2000, the Company sold certain assets of CAISSoft to Cisco for
net proceeds of approximately $102 million, which have been used to fund
operations and to reduce outstanding financial obligations. In connection
with that transaction, an additional $40.5 million was placed into escrow,
to be released upon the resolution of certain contingencies, of which $13.5
million is to be paid to SAIC.

. The Company has undertaken several initiatives to improve its capital
structure. Approximately $9,259,000 of trade payables were restructured into
vendor promissory notes and capital leases in the first quarter of 2001 with
most of the principal due in 2002 and 2003. Negotiations are continuing with
other vendors regarding this restructuring.

. The Company is in default of a revenue target with Cisco Capital and is in
discussions regarding the current default status, including the use of $13.5
million of the $40.5 million escrow account for the SAIC settlement discussed
in this report. During the first quarter of 2001, the Company failed to make
several required principal repayments to Nortel and has received a notice of
default. The Company is in discussion with Nortel regarding a resolution of
the current default status. In addition, the Company has received
correspondence from Qwest, notifying CAIS that it is in default of its IRU
agreement and requesting payment of the outstanding balance of $14.5 million.
The Company is in discussions with Qwest regarding a renegotiation of the
payment obligation and terms.

. In connection with operating expense reductions and the revisions to the
Company's business plan, employee headcount has been reduced from 801 as of
September 30, 2000 to 650 as of December 31, 2000 and 410 at May 1, 2001.
This downsizing, along with related overhead cost reductions, is expected to
result in a considerable cost savings in 2001 in selling, general and
administrative expenses over calendar year 2000.

. The Company undertook an analysis of future cash flow streams from its
installed hospitality properties. Of the 716 hotels installed with high
speed Internet service, the Company believes that only a portion of the
properties can be serviced in a cost-effective manner. These typically tend
to be the larger properties in larger cities that have the infrastructure
and meeting room facilities to support greater usage and revenues. The
Company is in discussions with the low-performing properties to renegotiate
terms of the business arrangement to allow CAIS to cover its recurring cost
shortfall of operating that hotel. For those non-performing hotels who do
not agree to cover the recurring operating cost shortfall, the Company will
begin termination of service sometime during the second quarter of 2001.

. The Company has also determined that the capital and monthly recurring costs
associated with operation of its multifamily business line do not permit an
acceptable return on assets. Accordingly, beginning in 2001, the Company has
discontinued the provision of services to customers in most multi-family
buildings. At March 31, 2001, the Company is continuing to provide service to
customers in 33 multi-family buildings.

. As a result of the termination of service to some hotels and all multi-family
properties, the Company has also begun to eliminate any of the applicable
costs. Wherever cost-efficient, the Company is also recovering its equipment
from the properties.

During the three months ended March 31, 2001, the Company financed its
operations with cash remaining from the sale of certain CAISsoft assets to
Cisco. Net cash used in operating activities for the three months ended March
31, 2001 and 2000 was approximately $46.1 million and $23.4 million,
respectively. During the three months ended March 31, 2001, the Company paid
down accounts payable and accrued expenses by $20.2 million, of which $8.2
million related to payments to vendors who agreed to accept vendor promissory
notes and capital lease as a restructuring of obligations.

During the three months ended March 31, 2001 and 2000, cash flows used in
investing activities were approximately $2.5 million and $49.8 million,
respectively.

Investing activities in the three months ended March 31, 2001 and 2000 include
approximately $2.8 million and $28.7 million, respectively, in purchases of
property and equipment, primarily related to the deployment of the Company's
technologies and services in hotels, apartment communities and other public
areas and the build-out of the Company's nationwide network. Additionally, the
Company spent approximately zero and $3,190,000 respectively, in contract
rights related to properties in the three months ended March 31, 2001 and 2000.

A description of the Company's capital equipment credit facilities follows:

The Company and Nortel entered into a five-year, $30 million equipment
financing line of credit, dated as of June 4, 1999, and several amendments. As
of March 31, 2001 and December 31, 2000, the Company had an outstanding balance
of approximately $11.1 million and $12.1 million under this credit facility,
respectively. The facility required the Company to meet certain financial
covenants including revenue targets and leverage and debt service ratios.

In November 2000, the credit facility was amended such that the maximum
borrowings were limited to approximately $16,100,000. The amendment also
terminated borrowing availability as of November 30, 2000, modified the
repayment terms, and increased the interest rate on the facility to LIBOR plus
6% (11.57%-13.00% at March 31, 2001). If the Company raises a minimum of $75
million in debt or equity while any balance is outstanding, the Company agreed
to pay any remaining balance due to Nortel at that time. The Company repaid
$4,000,000 of the outstanding balance in December 2000 and is required to repay
the remaining balance in equal monthly installments over the 2001 calendar year.
Although the Company made the January 2001 payment of approximately $1,010,000,
the Company has not made the required payments for February and March 2001, and
is in default of the agreement. The Company has received a Notice of Default
from Nortel, and is in discussions with Nortel regarding a resolution of the
current default status.

The Company and Cisco Capital entered into a three-year, $50 million
equipment financing line of credit, dated as of June 30, 1999, and several
amendments. As of March 31, 2001 and December 31, 2000, the Company had borrowed
approximately $26.5 million under this credit facility. Borrowings outstanding
as of March 31, 2001 incur interest at approximately 12.4 percent. Borrowings
under the facility were permitted during the first two years of the facility
provided the Company met certain financial performance requirements, including
EBITDA targets, revenue targets and leverage ratios. Borrowings under the
facility are secured by a first priority lien on all assets of the Company,
other than its property securing the Nortel facility, in which assets Cisco
Capital will have a second priority lien. As of March 31, 2001, the Company is
not in compliance with certain financial covenants and, as a result, the
availability for additional borrowings has been suspended. The Company is in
discussions with Cisco Capital regarding a resolution to the current default
status, including the use the $40.5 million escrow account established in the
sale of CAISSoft assets to Cisco to repay outstanding debt, net of $13.5 million
to be paid to satisfy the SAIC attachment.

In the first quarter of 2001, the Company refinanced approximately
$9,259,000 of its outstanding accounts payables into vendor promissory notes,
with most of the principal due in 2002 and 2003. The vendor promissory notes
require quarterly interest payments at a rate of 10% per annum with principal to
be repaid in equal quarterly installments over 2002 and 2003. The restructuring
of these payables into vendor promissory notes has been recorded in the
accompanying consolidated condensed financial statements.

Transition of Business Strategy

Since the Company's IPO in May 1999, the Company's goal had been to become
a leader in the delivery of broadband Internet access, content, software and
systems to large new markets nationwide. This primarily entailed a strategy of
rapidly installing hardware and software in a large number of hospitality and
multi-family properties to provide Internet services. As an additional source of
revenue, the Company marketed broadband data connections and services to
businesses nationwide in these serviced markets.

By virtue of the network it built to support its primary hospitality and
multi-family business model, CAIS became a fully operational tier-one ISP, with
a nationwide broadband OC-12 and OC-3 network with 29 POPs in major metropolitan
areas throughout the country. While the Company's primary business focus to date
has been on the hospitality and multi-family access market, CAIS's Internet
business currently supports over 16,000 customers nationwide with data
connectivity services, primarily DSL, always-on access and web hosting.

The Company's key business strategy, offering high speed Internet services
to the hospitality and multi-family markets, required a substantial investment
in capital expenditures and overhead structure due to the high costs of
installation and customer service. The Company's original business models
indicated a breakeven point of approximately 2-3 years for a hotel property and
3-4 years for a multi-family property. Since most hotel contracts were for five
years and most multi-family contracts were for seven years, the later years of
the contract with higher usage levels allowed for a sufficient rate of return
over the life of the contract.

However, the change in the current capital markets and other factors has
forced CAIS to reassess its primary business model and turn its focus to its
potentially lucrative ISP services and business model where the Company already
has the infrastructure, the nationwide network, a full suite of data product
offerings, and a trained sales team necessary to compete in an efficient and
cost-effective manner.

The hospitality and multi-family business model was based on the continued
availability of additional capital to meet the Company's building rollout
forecasts, a specific level of projected building installation costs, minimal
technical problems, and average customer penetration rates across most
properties. In addition to other challenges, the Company's costs of installation
were higher than expected during fiscal year 2000 and the lack of capital
available for technology and telecommunication companies forced the Company to
make significant modifications to the business plan to conserve cash and reduce
operating losses and building installation expenditures. The Company, similar to
other Internet providers in the hospitality and multi-family businesses, did not
have the available capital for the rollout of a sufficient number of buildings
that would provide critical mass to achieve acceptable profit margin returns
over the life of existing building contracts.

During the fourth quarter of 2000, the Company announced that it would
undertake a complete strategic review of its business lines, including analysis
of capital deployment and profitability. In response to changing equity market
conditions, the Company indicated that its strategy would focus on maximizing
profits rather than accelerated growth. The Company also reported that, in the
short term, it would reduce the building installation schedule in order to
conserve capital and improve EBITDA results.

The Company has begun to implement a new business model, and is undertaking
a restructuring of its business goals to capitalize on its under-exploited
status as one of the nation's few tier-one nationwide ISPs, streamline the
Company and maximize shareholder value. The Company's main focus will now be in
the following two areas:

DATA CONNECTIVITY SEGMENT
-------------------------
. Expand the core Internet Services segment through sales of retail and
wholesale dedicated bandwidth connections and web hosting and co-
location services to businesses nationwide. CAIS will increase its
emphasis on direct sales of bundled data broadband solutions such as
Virtual Private Network (VPN), Web hosting and colocation services with
a retail focus primarily on mid-market businesses that require dedicated
Internet connectivity. The Company believes that its national network is
under-utilized and provides an opportunity to provide multi-location
connectivity and VPN services to a wide range of customers.

HOSPITALITY SEGMENT
-------------------
. Continue to provide high-speed Internet service to certain larger
profitable hotels and utilize the business center, meeting room and
kiosk products as the core offerings for growth of properties.

Statements of Operations

The Company records revenues for all services when the services are
provided to customers. Amounts for services billed in advance of the service
period and cash received in advance of revenues earned are recorded as unearned
revenues and recognized as revenue when earned. Upfront charges in connection
with service contracts are recognized ratably over the contract period. Customer
contracts for

Internet access, DSL and web hosting services are typically for periods ranging
from one to three years. The Company typically charges an installation fee for
the new dedicated access customers. This installation fee is amortized over the
estimated life of the customer, typically eighteen months. Revenues from
equipment sales are recorded when title to the equipment passes to the
purchaser.

Cost of revenues include recurring expenses for the long haul bandwidth
lease and local interconnection charges from national and local fiber providers.
It also includes wholesale DSL resale charges, equipment costs and amortization
of DSL installation and equipment charges incurred in connection with term
contracts.

Research and development costs include internal research and development
activities and external product development agreements.

Selling, general and administrative expenses are incurred in the areas of
sales and marketing, customer support, network operations and maintenance,
engineering, research and development, accounting and administration.

Operating results for any period are not necessarily indicative of results
for any future period. In addition, the operating results for any interim period
are not necessarily indicative of the results that might be expected for the
entire year.

Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000

Net revenues. Net revenues for the three months ended March 31, 2001
increased 47% to approximately $10,071,000 from approximately $6,867,000 for the
three months ended March 31, 2000. Net revenues increased primarily due to an
increase of approximately $4,820,000 in data connectivity service revenues and
$1,240,000 in hospitality service revenues. The increases were due to an
increase in the number of customers for these services. Software and equipment
sales decreased by $2,856,000 due to the sale of CAISSoft assets to Cisco in the
fourth quarter of 2000.

Cost of revenues. Cost of revenues for the three months ended March 31,
2001 totaled approximately $13,536,000 or 134% of net revenues, compared to
approximately $6,012,000 or 88% of net revenues for the three months ended March
31, 2000. This increase resulted primarily from increases of approximately
$3,640,000 in data connectivity service charges for customer connectivity,
equipment and installation and $4,889,000 in hospitality service charges for
bandwidth, local loop and network installation. Cost of equipment and software
decreased by $1,005,000 due to sale of CAISSoft assets to Cisco.

Selling, general and administrative. Selling, general and administrative
expenses for the three months ended March 31, 2001 totaled approximately
$15,278,000 or 152% of net revenues, compared to approximately $18,486,000 or
269% of net revenues for the three months ended March 31, 2000. This decrease
resulted primarily from decreases of $916,000 related to payroll and payroll
related administrative costs, and $2,292,000 related to marketing, advertising,
and other administrative expenses.

Research and development. Research and development for the three months
ended March 31, 2001 totaled approximately $241,000 or 2% of net revenues,
compared to approximately $1,185,000 or 17% of net revenues for the three months
ended March 31, 2000. This decrease resulted from research and development labor
costs associated with the CAISSoft assets sold in December 2000.

Depreciation and amortization. Depreciation and amortization totaled
approximately $3,769,000 for the three months ended March 31, 2001, compared to
approximately $5,752,000 for the three months ended March 31, 2000. This
decrease resulted from the write-off of long-lived assets related to the
impairment analysis in the fourth quarter of 2000. As a result, amortization
related to goodwill decreased by $3,040,000 and amortization related to contract
fees decreased by $732,000. Capital depreciation increased by $1,788,000 due to
the expansion of the Company's network in fiscal year 2000.

Non-cash compensation. Non-cash compensation totaled approximately
$385,000 for the three months ended March 31, 2001, compared to approximately
$419,000 for the three months ended March 31, 2000.

Impairment of long-lived assets. Impairment of long-lived assets totaled
approximately $2,350,000 for the three months ended March 31, 2001. This expense
was attributable to the write-off of the Company's actual and committed
investment in a hospitality portal media venture. There was no comparable
expense during the three months ended March 31, 2000.

Interest income (expense), net. Interest income (expense), net totaled
expense of approximately $1,124,000 for the three months ended March 31, 2001,
compared to income of approximately $338,000 for the three months ended March
31, 2000. This expense total was attributable primarily to interest related to
the Company's financing agreements and increased indebtedness from March 2000 to
March 2001.

Net loss. Net loss totaled approximately $26,612,000 for the three months
ended March 31, 2001, compared to approximately $24,649,000 for the three months
ended March 31, 2000, due to the foregoing factors.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

At March 31, 2001, the Company had debt in the aggregate amount of $71.6
million, $37.5 million of which is subject to variable interest rates. A change
of interest rates would affect its obligations under these agreements. Increases
in interest rates would increase the interest expense associated with future
borrowings and borrowings under its equipment financing agreements. An increase
of 1% in interest rates would increase interest expense by approximately
$375,000 per year.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, the Company has been, and expects to continue to be,
subject to legal proceedings and claims in connection with the business.

In January 2001, SAIC, one of the Company's larger accounts payable
creditors, filed a complaint against the Company in the Superior Court for the
State of California, County of San Diego for non-payment of outstanding invoices
totaling approximately $15,067,781. Most of the charges related to labor for
hotel and multi-family building installations of Internet connections and other
related services during 2000. All of the invoiced amounts are recorded as
current liabilities on the Company's March 31, 2001 consolidated condensed
balance sheet. The Company filed an answer to the complaint in March 2001 and
also filed a cross-complaint alleging that SAIC breached its contract with the
Company and made false representations and promises without any intent to
perform. On April 30, 2001, the Company and SAIC entered into a Settlement
Agreement and Mutual Release. Under the terms of the settlement, CAIS will pay
to SAIC $13.5 million from the $40.5 million escrow established in connection
with the sale of certain assets of CAISSoft to Cisco, which payment is due on
the earlier of May 31, 2001 or the first date on which proceeds from the escrow
can be released. Release of the funds from the escrow must be approved by Cisco.
The Company has reached an agreement in principal with Cisco for such release;
however, the Company cannot guarantee that such release will be forthcoming. If
Cisco does not agree to release the necessary funds from escrow, SAIC will be
entitled to file a stipulated judgment for $15,067,781 with the Court and demand
payment for that amount.

The Company was a respondent in a demand for arbitration filed in January
2001, with the American Arbitration Association by Sholodge Franchise Systems,
Inc. (Sholodge). Sholodge sought approximately $5,000,000 in damages, alleging
that the Company breached an agreement to provide high-speed Internet services
to its hotel franchisees. On May 2, 2001, the Company and Sholodge reached a
final settlement of this claim. In exchange for the Company's agreement to pay
Sholodge $200,000, Sholodge released all claims relating to the subject
agreement.

The Company was named as a defendant in an action filed by eFront Media,
Inc. (eFront) in the California Superior Court, County of Orange, in February
2001. The lawsuit alleges breach by the Company of certain Internet web services
agreements, as a result of the Company's alleged failure to properly service web
sites owned and maintained by the plaintiff, and seeks damages in excess of
$4,700,000, in addition to interest and attorney's fees. The Company has filed
its answer to the complaint. On May 10, 2001, the Company filed a Motion to
Transfer Venue -- seeking transfer of the case to the U.S. District Court for
the Eastern District of Virginia, Alexandria Division. In addition, the Company
filed a collection action for approximately $800,000 in February 2001 against
eFront in the Alexandria Division of the United States District Court for the
Eastern District of Virginia for non-payment of contractual web services
obligations. Efront has failed to file an Answer or otherwise appear in this
lawsuit within the time allowed by the Federal Rules of Civil procedure and
Local Rules. The Company is currently determining an appropriate responsive
action. Although the Company does not believe that the lawsuit filed by eFront
has any merit, the Company is currently unable to predict the outcome of the
case, or reasonably estimate a range of possible loss.

On May 4, 2001, Prime Hospitality Corp. (Prime) instituted a demand for
arbitration against the Company by filing a claim with the American Arbitration
Association. The claim alleges that the Company failed to perform "conditions of
the Master Agreement For Hotel Internet Service dated 11/16/00 and Amendment to
CAIS Agreement dated 01/24/00" entered between Prime and the Company. In
particular, Prime alleges that the Company failed to pay to Prime the sum of
$1,512,050 allegedly due under the Agreement plus "an amount to be determined
for ongoing obligations under the agreement." Prime seeks an award of money
damages in the amount of $1,512,050, plus an additional amount for ongoing
damages, pre and post-judgment interest and costs. The Company has not yet made
an appearance in this action and an arbitration date has not been scheduled.
Although the Company does not believe this claim has any merit, the Company is
currently unable to predict the outcome of the arbitration, or reasonably
estimate a range of possible loss.

The Company has also received legal correspondence from several trade
creditors regarding the timing of payment of past due accounts payable balances.
All amounts are recorded as current liabilities in the December 31, 2000
consolidated balance sheet. The Company is in discussions with these vendors
regarding the resolution of certain disputes relating to these charges and the
timing of the payments.

The Company has also received correspondence from several hotel and multi-
family entities regarding its contractual obligations under master or individual
contracts to provide high-speed Internet service to properties. As a result of
the change in business strategy due to limited capital availability, the Company
has notified the owners of many installed properties that they will be
discontinuing service in the near future. In addition, the Company has indicated
that it is no longer financially possible to install service in new properties.
Although the Company believes that the amount of financial damages to properties
is minimal due to low usage penetration and low revenue share percentages, the
Company cannot predict whether any of these property owners, in addition to
Prime, described above, will decide to file suit in the future.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

SALES OF UNREGISTERED SECURITIES

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

A. EXHIBITS

See Exhibit Index.

B. REPORTS ON FORM 8-K

On March 19, 2001, the Company filed a Current Report on Form 8-K which
included as an Exhibit the Company's press release dated March 19, 2001. The
Company announced that Michael Lee had been hired as the Company's new President
and Chief Executive Officer (CEO) and will join the Company's Board of
Directors. The Company also announced that William Caldwell, IV, outgoing CEO,
will remain with the Company as Vice Chairman of the Board of Directors, and
John Saer, an executive of KKR, will join the Board of Directors while
Ulysses G. Auger, Sr. will resign from the Board.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Washington, D.C., on
the dates indicated.

CAIS Internet, Inc.

Signature Capacity Date
--------- -------- ----

/s/ Michael Lee President and May 16, 2001
_____________________________ Chief Executive Officer
Michael Lee

/s/ Andrew P. Hines Executive Vice President/ May 16, 2001
_____________________________ Chief Financial Officer
Andrew P. Hines (Principal Financial and
Accounting Officer)

CAIS INTERNET, INC.

EXHIBIT INDEX

Exhibit
No. Description
- -------- -----------

10.1 Offer of employment dated March 27, 2001 between CAIS Internet,
Inc. and Peter Benedict.

10.2 Offer of employment dated April 11, 2001 between CAIS Internet,
Inc. and Michael Martinez.