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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________

Form 10-K

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

For the Fiscal Year Ended August 31, 2002

Commission File Number: 0-17932

_______________________

Interland, Inc.

(Exact name of registrant as specified in its charter)

|                                                                         |  |                                                
|------------------------------------------------------------------------ |  | -----------------------------------------------
|Minnesota
(State or other jurisdiction
of incorporation or organization) |  | 41-1404301
(I.R.S. Employer
Identification No.)

303 Peachtree Center Avenue, Suite 500, Atlanta, GA 30303(Address, including Zip Code, of principal executive offices)

(404) 260-2477(Registrants telephone number, including area code)

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

Common Stock, par value $.01 per share
Registered on The Nasdaq National Market

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, and (2) has been subject to such filing
requirements for the past 90 days.
  Yesþ
    No  o

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. o

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of November 15, 2002 was approximately $263 million.

The number of outstanding shares of the registrants Common Stock on November
15, 2002 was 141,381,601.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the registrants 2003 Annual Meeting of
Shareholders, are incorporated by reference into Part III of this Annual Report
on Form 10-K.

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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                                  
|                                                  | ITEM 4A. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT                                  
|PART II                                          
|                                                  | ITEM 5. Market For Registrant's Common Equity And Related Shareholder Matters                
|                                                  | ITEM 6. Selected Financial Data (In thousands)                                               
|                                                  | 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 SUPPLEMENTARY DATA                                          
|PART III                                         
|PART IV                                          
|SIGNATURES                                       
|EX-2.08(B) AMENDMENT AGREEMENT AND PLAN OF MERGER
|EX-10.108(A) EMPLOYMENT AGREEMENT                
|EX-10.108(B) AMENDMENT TO EMPLOYMENT AGREEMENT   
|EX-10.113 PROMISSORY NOTE                        
|EX-10.114 CREDIT AGREEMENT                       
|EX-10.115(2) MICROSOFT SERVICES PROVIDER LICENSE 
|EX-21.01 SUBSIDIARIES OF THE REGISTRANT          
|EX-23.01 CONSENT OF INDEPENDENT ACCOUNTANTS      
|EX-24.01 POWER OF ATTORNEY                       



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PART I




ITEM 1.  Business

Statements contained in this Form 10-K that are not purely historical are
forward-looking statements and are being provided in reliance upon the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
All forward-looking statements are made as of the date hereof and are based on
current management expectations and information available to the Company as of
such date. The Company assumes no obligation to update any forward-looking
statement. It is important to note that actual results could differ materially
from historical results or those contemplated in the forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties, and include risk associated with our target markets and risks
pertaining to our ability to successfully integrate the operations and
personnel of recent acquisitions, competition and other trend information. Factors that could cause actual results to
differ materially include, but are not limited to, those identified in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
OperationsCertain Factors and in other Company filings with the Securities
and Exchange Commission. All references to Interland or the Company in
this Annual Report on Form 10-K mean Interland, Inc., a Minnesota corporation,
and all entities owned or controlled by Interland, Inc., except where it is
made clear that the term only means the parent company.

General

Interland is a leading Web hosting company that offers a broad range of
business-class hosting products and services, including shared and dedicated
hosting services, electronic commerce and other application hosting services,
and other Web hosting-related products and services. Historically the Company
had provided a variety of computer products and related services through PC
Systems, its computer manufacturing business, and SpecTek, its memory products
business. During fiscal 2001, the Company discontinued both its PC Systems
business and SpecTek (see the footnote entitled Discontinued Operations to
the consolidated financial statements of the Company included elsewhere in this
Annual Report on Form 10-K). As a result, following the disposition of these
business segments, the Company's ongoing business is that of a Web hosting company.

The current Web hosting business was formed through the acquisition and
integration of eleven companies between 1999 and 2002. On August 2, 1999, the
Company acquired 100% of the outstanding stock of NetLimited, Inc. d.b.a.
HostPro, a Web and applications hosting provider. On September 2, 1999, the
Company acquired the property and equipment of Micron Internet Services,
formerly a division of Micron Technology, a provider of dedicated, nationwide
dial-up and broadband Internet access, virtual private network solutions and
e-commerce services. On December 14, 1999, the Company acquired LightRealm,
Inc., (LightRealm), a Kirkland, Washington-based Web and applications hosting
and Internet access company serving small and medium sized businesses. On
March 16, 2000, the Company acquired Worldwide Internet Publishing Corporation,
(Worldwide Internet), a Boca-Raton, Florida-based Web hosting company that
also served small- and medium-sized businesses. On August 6, 2001, the Company
acquired Interland, Inc. (Interland-Georgia), an Atlanta, Georgia-based
provider of a broad range of Web hosting, applications hosting and other
related Web-based business solutions specifically designed to meet the needs of
small and medium-sized businesses. In connection with the acquisition of
Interland-Georgia, Micron Electronics, Inc., (MEI), changed its name to
Interland, Inc. and its trading symbol to INLD.

In October 2001, January 2002 and May 2002, the Company acquired the small
business-focused shared and dedicated Web hosting customer accounts of
Interliant, Inc., (Interliant), AT&T Corp., (AT&T), and Burlee Networks
LLC, (Burlee), respectively, resulting in the recognition of approximately
$25.4 million of acquired intangible assets. The final purchase price of these
account acquisitions is contingent upon certain revenue thresholds earned over
a future period of time, and accordingly, the final purchase price for these
acquisitions is subject to change. These intangible assets are being amortized
over a three-year useful life.

On February 8, 2002, the Company acquired CommuniTech.Net, Inc.,
(CommuniTech.Net), a Kansas City, Missouri-based Web hosting company. On May
3, 2002, the Company acquired Dialtone, Inc., (Dialtone), a Ft. Lauderdale,
Florida-based dedicated web-hosting company.

As of August 1, 2002, the Company acquired iNNERHOST, Inc., (iNNERHOST), a
Miami, Florida based web-hosting company.

The Companys operations are reported on a fiscal basis with its fiscal
year ending on August 31. All references contained herein including annual and
quarterly periods are on a fiscal basis. The Companys securities

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are registered on the Nasdaq National Market and uses the trading symbol
INLD. The Companys principal executive offices are located at 303 Peachtree
Center Avenue, Suite 500, Atlanta, Georgia 30303. The Companys telephone number is
(404) 260-2477 and its Web site is located at www.interland.com. Information
contained in the Companys Web site is not part of this annual report.

Corporate Strategy

Interlands continuing strategic objective is to be the leading provider
of standardized Web hosting products and services to small and medium sized
businesses. The Company intends to profitably serve its target market by
achieving scale and efficiency in its operations.

Interland believes the most profitable segment of the Web hosting market
is serving small- and medium-sized businesses (SMBs). This market is large,
growing and may be served with standardized products and services.
Standardization of products and services permits the use of standardized
processes, and of a higher degree of automation in many areas of operation,
including the sales process. This approach stands in sharp contrast to that of
other web hosting companies which focus on providing labor-intensive, customized solutions
to larger enterprises. By delivering business-class Web hosting solutions for
SMBs in a scaleable and efficient manner, Interland believes that it can offer
better value to its customers, leading to growing market share and profits. On
the other hand, certain aspects of the SMB market present substantial
challenges and risks. (See Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations  Certain Factors -Interlands
target market presents substantial risks.)

The primary goal of the merger of Micron
Electronics, Inc. (MEI) and Interland-Georgia
in fiscal 2001, and of the subsequent acquisitions, was to create a new company with much greater scale. In order
to maximize the benefits of its new size, the Company has undergone
and continued to execute a rigorous
merger and integration process in fiscal 2002. This process has resulted in
the identification and execution of numerous cost synergy initiatives, greatly
enhancing the Companys operational efficiency. To further accelerate its
profitability objectives, the Company has embarked in fiscal 2002 on an effort
to acquire additional web hosting accounts from its competitors. The Company
believes that its acquisition strategy will
permit the Company to spread its fixed costs over a larger base, and to derive
a greater percentage of profit from incremental revenues. Interlands
fundamental strategy for fiscal 2003 is to integrate all acquired accounts and
assets into a centralized and efficient infrastructure. At the same time, the
Company is implementing a number of system and environmental improvement
programs. The objective is to create a stable base upon which Interland can
deploy its organic growth strategy through fiscal 2003 and beyond.

Finally, the Company enjoys a strong financial position with low debt, a
substantial cash balance and, as a result, a business that is not
expected to require additional capitalization in order to fulfill its
strategic goals.

Products and Services

Interland offers an integrated suite of Web and applications hosting and
related business services designed to specifically address the needs of small-
and medium-sized businesses. These services include:



| |  |  | Shared hosting;                                    
| | - |  | ---------------------------------------------------
|
| |  |  | Dedicated hosting and managed services;            
|
| |  |  | E-commerce and other applications hosting services;
|
| |  |  | Domain name registration services; and             
|
| |  |  | Other Web hosting-related products and services.   

Most of the Companys hosting revenues are generated from recurring
monthly fees. The remainder is derived from one-time setup fees for
installation. The Company commonly sells its services under agreements having
terms of one to twenty-four months, but provides that the customer may
nonetheless cancel during an initial thirty-day trial
period. Customers pay for the services either in a lump sum in
advance, or monthly, but the Company has instituted a process of
converting as many customers as possible to monthly payments. During fiscal
2002, the Company derived 93.2% of its revenues from hosting and other
hosting-related services. The balance of the revenues was generated primarily
by other related services.

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Shared hosting

Shared hosting services range from entry-level starter packages to
business e-commerce shared Web hosting products. Interlands shared hosting
packages minimize the cost for customers by providing hosting services for
multiple customers on a single shared server, spreading the cost of the service
over many users. Starter packages are designed for Web sites with relatively
low volumes of traffic and provide a Web presence at minimal cost. The
Companys products are scalable solutions that make it simple to upgrade to
more full-featured services. The majority of the Companys customers currently
use its shared hosting services.

Interlands services feature easy-to-use control panels and extensive
on-line documentation that allow customers to easily control their own
applications. Business e-commerce packages feature important e-commerce
services including Secure Socket Layer encryption for e-commerce transactions,
shopping carts and database technology to conduct product and service sales
online. Through the Companys other business relationships, its customers can
also obtain merchant account and online payment processing services.

On September 16, 2002 the Company introduced a new shared hosting product,
blueHALO, which is designed to integrate network operations onto a common
architecture and to implement a full suite of internal systems to support the
Companys hosting services. This product positions the Company as a market
leader by enabling it to deliver a new hosting standard based on
technology that is designed to provide greater reliability and
performance. Key technical features of blueHALO include
redundant firewall protection, load balancing, multiple web server
arrays, duplicate network attached storage units and a disk backup
system.

Dedicated hosting

In contrast to a shared hosting environment, which hosts multiple
customers on one server, dedicated hosting employs one or more servers
dedicated to a single customer. Dedicated hosting provides a customer with
increased performance, server access, the ability to use custom applications,
greater security and higher levels of technical support. Interland provides
both managed and unmanaged dedicated services. For dedicated managed hosting
services, the Company monitors, administers and troubleshoots the software
that operates the client server. For unmanaged dedicated hosting services, the
customer administers the server remotely, with the Company providing the
hardware monitoring and network and hardware support. Dedicated hosting
services are targeted for Web sites that generally require sophisticated
databases for critical application needs or typically experience high user
traffic volumes. The Companys managed services are targeted to those who need
the complex services required for mission-critical Web sites, but do not want
to administer their own server. The dedicated services come with proprietary
control panel technology, which enables customers to setup and maintain Web
sites on the server.

Interland offers dedicated Web hosting services for major computer
platforms, including Microsoft NT, Windows and Linux. Since its acquisition of
Dialtone, Interland has achieved a leadership position in the dedicated hosting
market.

E-commerce and other applications hosting services

Interlands applications hosting services allow customers to outsource to
it the deployment, configuration, hosting, management and support of various
software applications. The Companys applications hosting services allow
customers to deploy a software application more quickly and with reduced
initial costs. In addition, many small- and medium-sized businesses do not
have the internal technical resources to support multiple software
applications. The Company therefore believes that outsourcing these functions
to it is a desirable alternative for these
businesses. The types of applications the Company hosts for customers include
collaboration tools, business tools, mail-service tools and e-commerce
applications. Currently, the applications the Company hosts consist mainly of
Microsoft Exchange Server, Office Server Extension and various e-commerce and
security products.

Other web hosting-related products and services

Interland also makes
available other complementary products and services
including domain name registration, Web site design, technical consulting and
Web site marketing tools. The Company believes these value-added products and
services will enable it to provide its customers with a single vendor with the
necessary tools to create, host and maintain a successful Web presence. The
Company believes that the outsourcing of these functions is a desirable and
increasingly preferred alternative for small- and medium-sized businesses.

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Sales and Marketing

Interland utilizes multiple sales and distribution channels in an effort
to maximize its market share. These channels include direct sales through both
sales professionals and online sales, indirect sales through reseller and
private-label arrangements, and other channels.

Direct sales



| |  | In-bound and out-bound sales professionals, which are predominantly located
in Atlanta, Georgia for shared hosting and predominantly located in
Miami,
Florida for the dedicated hosting, carry out direct sales efforts.                                                                                                                                                                                                                                                                                            
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In-bound sales force                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Interlands in-bound sales force responds to incoming inquiries about
products and services generated by Web, direct mail, advertising and
business referrals. The Companys sales force is trained in a relationship
selling approach that allows them to assess the hosting needs of customers
and to recommend the appropriate solutions. This methodology gives
customers a one-on-one consulting relationship with a sales professional in
which the specific needs of the customer are appropriately addressed.
|
| |  | Out-bound sales force                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Interlands out-bound sales force generates new business through
telemarketing, direct mail and Internet contact.                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | In addition to initial training, every sales specialist attends
on-going weekly training sessions to enhance product knowledge and selling
skills. Training is also performed through an on-demand web-based training
tool. This emphasis on training ensures that all sales personnel are
proficient with regards to technological advances and the latest service
offerings.                                                                                                                                       
|
| |  | Online sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | The Companys Internet marketing sales programs offer an automated
online sales interface to potential customers. This enables customers to
purchase services at any time directly from Interlands Web site without the
involvement of Company personnel                                                                                                                                                                                                                                                            

Indirect sales



| |  | Indirect sales efforts are carried out through resellers and private-label
relationships and other channels.                                                                                                                                                                                                                                                             
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Resellers and private label relationships                                                                                                                                                                                                                                                                                                                                
|
| |  | Interland currently has a network of more than 4,300 active resellers,
large channel and private-label relationship partners, including system
integrators, value-added hardware and software resellers, Web developers,
Web consulting companies and Internet service providers. These resellers
allow the Company to reach a larger customer audience cost effectively.
|
| |  | Other sales and distribution channels                                                                                                                                                                                                                                                                                                                                    
|
| |  | Interland also pursues sales through a number of other indirect
channels, including Internet marketing, customer referrals and industry
referrals.                                                                                                                                                                                                                       
|
| |  | Internet marketing                                                                                                                                                                                                                                                                                                                                                       
|
| |  | A portion of Interlands new customers comes from online sales referred
to the Companys Web site through the Companys online advertising efforts
and from its marketing partners Web sites.                                                                                                                                                                           
|
| |  | Customer referrals                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Interland considers customer referrals an excellent source of new
customers. Many new customers have come to the Company through referrals
from other customers who have had a good relationship with the Company. The
Company rewards its customers for these referrals with discounts on their
services.                                                               
|
| |  | Industry referrals                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Interland has received many referral customers from other providers of
Internet related services, including Web designers and other Internet
industry professionals. These other service providers who work with the
Company on a regular basis have experience with and knowledge of the
Companys services that make them a valuable source of new customers.          

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Marketing

Interland markets its products and services through a variety of means,
including its Web sites, print advertising in Internet-related trade
publications and other periodicals, direct mail campaigns and online
advertising. Other marketing activities include participation in industry
events and affiliate relationships, including cooperative marketing with
related services.

Key Strategic Relationships

Interland has established and intends to continue to forge strategic
relationships with leading technology providers, including major software,
hardware, development and Internet marketing organizations, to enhance its
products and services. These relationships enable the Company to more quickly
gain access to innovative technologies, to provide more creative solutions for
its customers and to allow it to offer its customers resources that would
otherwise be prohibitively expensive for them to acquire. The Company is also
able to build upon the research, development and expertise of these companies
in developing and launching new products. The Company believes that these
relationships will enable it to continue to provide its customers with the
necessary tools to create, host and maintain a successful Web presence and to
have access to sophisticated e-commerce and applications solutions. These
relationships also provide the Company with opportunities to market to
customers to which it might not otherwise have access.

Microsoft Corporation

Interland is a Microsoft Certified Solution Partner and is currently
engaged in various initiatives with Microsoft, including a development, license
and co-marketing agreement. The Company has agreed to develop software and
related materials that will enable the installation of packaged hosted service
on Microsofts Windows 2000 and NT platforms and has granted Microsoft a
perpetual, irrevocable license to the software. The Company will pay Microsoft
five percent of the total gross revenues that it receives from licensing or
otherwise exploiting the software for five years following Microsofts
acceptance of the software. In return, Microsoft provides the Company with an
opportunity to be involved in beta programs and training initiatives for
Microsofts IIS program and the Windows 2000 and Exchange Server products. The
agreement will continue until terminated by either party for cause or by
Microsoft if the Company fails to deliver the software or related
documentation. The Company has entered into an updated application services
agreement that revises the framework under which it can obtain and license
various Microsoft products. The updated agreement governs the Companys use of
Exchange Server, Office Server Extension and other products in its hosting
operations and requires the Company to include particular licensing terms in
its sub-licenses to end-users. Under the agreement, the Company pays Microsoft
on a per-processor or unique-individual-user basis for each of the covered
products. The agreement expires in 2005. To date the development of the
software has not been completed and released.

Verizon

On October 10, 2000,
the Company entered into a business relationship with Verizon, a
leading provider of communications and information services. Under
this service provider relationship, Verizon has the right to market
and sell a version of the Company's products and services to its
business customers. Terms of the relationship run through October 9,
2004.

Customers

Interland typically provides hosting services directly to end-user
business customers. The Company also provides hosting services to Web
developers, Web consulting firms and other organizations that bundle the
Companys services with their own products or services for sale to their
end-user customers. As of August 31, 2002, the Company had approximately
220,000 paid shared hosting customer accounts and managed more than 7,500 dedicated
servers, many of which have multiple web sites.

Network Infrastructure, Technology and Operations

To provide a secure and reliable hosting environment, Interland has
constructed a managed infrastructure, consisting of data centers, a redundant
Internet communications backbone, enterprise management software and an
advanced network. The Company operates data centers in Atlanta,
Georgia, Los Angeles, California, Seattle, Washington, Kansas City,
Missouri, and in Miami and Fort Lauderdale, Florida.

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Data centers

The primary data
centers, located in Atlanta, Georgia and Miami, Florida include:



| |  |  | network operations centers that are managed and monitored 24 hours per day, every day of the year;    
| | - |  | ------------------------------------------------------------------------------------------------------
|
| |  |  | monitoring of all critical systems;                                                                   
|
| |  |  | redundant network hardware;                                                                           
|
| |  |  | parallel-redundant backup power generators;                                                           
|
| |  |  | fire suppression systems;                                                                             
|
| |  |  | cooling systems that include independent full-grade mechanical systems;                               
|
| |  |  | security, including security guards and video monitoring and entry restriction via access devices; and
|
| |  |  | multiple tier-1 backbones providing Internet connectivity.                                            

Proprietary technology

In addition to
blueHALO, Interland has developed various proprietary
technologies that are designed to allow customers to order, change and manage
their Web hosting accounts easily regardless of their level of technical
expertise. Proprietary technologies also enable the Company to automate a
number of back-end functions and processes. For example, the Companys
provisioning system automatically activates customer initiated web site changes
within minutes of its entry. The Companys administration page technology lets
customers modify their Web sites from the Internet without having to contact
the Companys support staff. This technology provides the Company with the
opportunity to achieve greater operational efficiencies and allows the customer
to change passwords, protect specific directories, and to create database
sources without the assistance of the Companys technical
support staff. Although the Company believes that its suite of
technology offers its customers significant benefits, the Company
does not believe that its competitive advantage depends upon
protected intellectual property.

Network operations centers

Interland monitors its network operations 24 hours a day, every day of the
year with technical experts in Windows 2000 and NT and Linux operating
platforms. The network operations center personnel monitor each piece of
equipment, including routers, switches and servers, as well as all Internet and
communication connections. The systems used in the network operations centers
are designed to allow its systems engineers and administrators and support
staff to be promptly alerted to problems, and the Company has documented
procedures for rapidly resolving technical problems that arise.

International Revenues

Interlands international revenues from continuing operations totaled
$10.6 million, $10.6 million and $3.1 million in 2002, 2001 and 2000,
respectively. International revenues are denominated and paid in U.S. dollars.
These amounts represent revenues from international customers generated and
supported in the U.S. However the Company has no network operations outside of
the United States.

Competition

Interland believes that the primary competitive factors in the mass-market
segment of the Internet web hosting industry include features, customer
service, ease of use and price. At the higher end of the market, reliability
and technical expertise tend to drive the purchasing decision. Although the
market is intensely competitive, the Company believes that it compares
favorably with its competition on the mass-market dimensions.

Current and potential competitors in the market include Web hosting
service providers, applications hosting providers, Internet service providers,
telecommunications companies, large information technology firms that provide a
wide array of information technology services and computer hardware suppliers.
The Companys competitors may operate in one or more of these areas and include
companies such as Affinity Internet, XO Communications, Verio and
Rackspace.

The small and medium size business, or SMB, hosting market is highly
fragmented, with a large number of competitors, most of whom have market share
of less than 1%. Interland believes it has a market share of

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approximately 10%, placing the Company in the industrys leading position,
and that its next closest competitor is Verio. There also are numerous smaller web hosting
providers, and other companies that offer web hosting not as their main product
line, for instance, Internet service providers, competitive local exchange
carriers, and Internet companies such as Yahoo and Amazon.

The Company does not consider itself to be in direct competition with
companies such as WorldCom or Exodus. Those companies provide high-end
services that are highly customized, require the user to have technical
expertise and generally fall at a price point of several thousand dollars per
month. Interlands solutions are standardized, do not require the user to have
technical expertise, and begin at a price point of approximately $20 per month.
Interland believes that it can sell standardized solutions to a larger
customer base on a more efficient and profitable basis than can providers of
high-end, customized solutions.

Intellectual Property

Interland relies on a combination of laws (including patent, copyright,
trademark, service mark and trade secret laws) and contractual restrictions to
establish and protect proprietary rights in its services. As of August 31,
2002, the Company owned three issued U.S. patents and had thirty-four additional patent
applications on file but not yet issued. Patent No. 6363398B1 issued March 26
2002, is for Database Access Using Active Server Pages and expires
November 25, 2017. Patent No. 5999941
issued December 7, 1999, is also for Database Access Using
Active Server Pages and expires November 25, 2017.
Patent No. 6364439B1 issued April 2, 2002, is for Computer Storage Systems for
Computer Facilities and expires March 31, 2020. Interland has entered into confidentiality and other
agreements with its employees and contractors, including agreements in which
the employees and contractors assign their rights in inventions to it. It has
also entered into nondisclosure agreements with its suppliers, distributors and
some customers in order to limit access to and disclosure of its proprietary
information. Nonetheless, neither the intellectual property laws nor
contractual arrangements, nor any of the other steps the Company has taken to
protect its intellectual property can ensure that others will not use its
technology, or that others will not develop similar technologies.

Interland licenses or leases many technologies used in its Internet
application services. The Company expects that it and its customers
increasingly will be subject to third-party infringement claims as the number
of Web sites and third-party service providers for Web-based businesses grows.
Although the Company does not believe that its technologies or services
infringe the proprietary rights of any third parties, the Company
can not be sure that third parties will not assert claims against it in the
future or that these claims will not be successful. Although it has
discontinued operations as a manufacturer of personal computers in the
electronics industry, the Company is nonetheless subject to litigation arising
from its past activities. It is not uncommon in the electronics industry for
patent, trademark and other intellectual property rights claims to be asserted
against companies, including component suppliers and personal computer
manufacturers. Periodically, the Company is made aware that technology it has
used in these discontinued operations may have infringed on intellectual
property rights held by others. The Company has evaluated all such claims and,
if necessary and appropriate, sought to obtain licenses for the use of such
technology. If the Company or its suppliers were unable to obtain licenses
necessary to use intellectual property in its discontinued operations products
or processes, it may be legally liable to the owner of such intellectual
property. Moreover, even in those instances where the Company is justified in
denying claims that it has infringed on the intellectual property rights of
others, it may nonetheless be forced to defend legal actions taken against the
Company relating to allegedly protected technology, and such legal actions may
require the Company to expend substantial funds. See Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Certain Factors  Interland faces risks relating to existing litigation.

Government Regulation

Interland is not currently subject to direct federal, state or local
government regulation, other than regulations that apply to businesses
generally. This could change in the future  see Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Certain Factors  Interlands business may be impacted by government regulation
and legal uncertainties.

Employees

The Company employs approximately 745 individuals as of August 31, 2002.
All of the Companys employees are located in the United States,
and none is
represented by a labor organization with respect to

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employment by the Company. As of August 31, 2002, the Company has never had an
organized work stoppage and it considers its employee relations to be
satisfactory.

ENVIRONMENTAL REGULATIONS

Some risks of costs and liabilities related to environmental matters have
been inherent in the Companys discontinued operations, as with many similar
businesses, and its operations are subject to certain federal, state and local
environmental regulatory requirements relating to environmental and waste
management. In connection with the Companys discontinued operations, it
periodically generated and handled limited amounts of materials that were
considered hazardous waste under applicable law. The Company contracted for
the off-site disposal of these materials. The Company believes it has operated
in compliance with applicable environmental regulations. The Company
employs diesel fuel to power some of its backup generators. This fuel
is stored in tanks which must be monitored to avoid spills and leaks,
which could lead to violation of environmental regulations. The
Company believes it employs appropriate safeguards to comply with
applicable regulations.




ITEM 2.  PROPERTIES

Interland leases
several facilities including approximately 214,500
square feet in Atlanta, Georgia, 25,600 square feet in Boise, Idaho, 18,300
square feet in Los Angeles, California, 43,800 square feet in Bellevue,
Washington, 45,000 square feet in Tukwila, Washington, 1,200 square feet in
Seattle, Washington, 19,200 square feet in Kansas City, Missouri, 12,100 square
feet in Ft. Lauderdale, Florida, and 64,100 square feet in Miami, Florida.




ITEM 3.  LEGAL PROCEEDINGS

Interland defended a
contract dispute lawsuit filed on October 2, 2001, in Dallas
County, Texas Court seeking damages of approximately
$2.1 million for goods purchased by our PC Systems business. The
Company removed the case to federal court and counterclaimed for
legal fees owed by the plaintiff for legal fees they had agreed to
indemnify the Company for that were incurred on an unrelated patent
lawsuit. These legal fees amounted to approximately
$1.3 million. This claim was settled during the fourth quarter
of fiscal 2002 for $1.1 million.

Interland is
defending an employee class action lawsuit filed in the U.S. District
Court for Idaho. In this case five individual plaintiffs claim they
were employees of Micron Electronics Inc. (MET) between
1999 and April 2001. The plaintiffs claim that they, and other
similarly situated employees, did not receive overtime pay to which
they were entitled under the Fair Labor Standards Act. Interland
disputes these claims and believes the plaintiffs were not entitled
to any material additional wages. The court conditionally certified a
class of not more than 800 former employees and notices of the
litigation are being sent to these persons to give them the
opportunity to opt in to the litigation. The parties are
continuing to conduct discovery. At this early stage of the
litigation Interland is unable to estimate its total expenses,
possible loss or range of loss that may ultimately be connected with
the matter. This potential liability remains with Interland even
though it sold the PC Systems business.

Periodically, the
Company is made aware that technology it used in its discontinued
operations may have infringed on intellectual property rights held by
others. The Company has evaluated all such claims and, if necessary
and appropriate, sought to obtain licenses for the use of such
technology. If the Company or its suppliers were unable to obtain
licenses necessary to use intellectual property in its discontinued
operations products or processes, it may be forced to defend legal
across taken against it relating to allegedly protected technology.
The Company evaluates all such claims and has accrued a liability and
charged operations for the estimated costs of settlement or
adjudication of claims for alleged infringement as of the respective
dates of the balance sheets included in this report.

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In accordance with SFAS No. 5 Accounting for Contingencies the Company
has adequately reserved for the contingencies arising from the above legal
matters where an outcome was deemed to probable and the loss amount could be
reasonably estimated. As such, the Company does not believe that the
anticipated outcome of the aforementioned proceedings will have a
materially adverse impact on its results of operations or financial
condition.

The Company is party to various other legal actions arising in the normal
course of business, none of which is expected to have a material adverse effect
on its business, financial position, results of operations and cash flows.




ITEM 4.  Submission Of Matters To A Vote Of Security Holders

None

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ITEM 4A.   EXECUTIVE OFFICERS AND DIRECTORS
OF THE REGISTRANT

The executive
officers and directors of the Company and their ages as of
November 26, 2002, were as follows:

|                         |  |     |    |          |  |                                                                          
|------------------------ |  | --- | -- | -------- |  | -------------------------------------------------------------------------
|Name                     |  | Age |    | Position
|                         |  |     |    |         
|Joel J. Kocher           |  |     | 46 |          |  | Chairman of the Board of Directors, President and Chief Executive
Officer
|Allen L. Shulman         |  |     | 54 |          |  | Senior Vice President, Chief Financial Officer, and General Counsel      
|Savino R. Sid Ferrales |  |     | 52 |          |  | Senior Vice President and Chief Human Resources Officer                  
|John Harper              |  |     | 41 |          |  | Senior Vice President of Operations                                      
|Robert T. Slezak         |  |     | 45 |          |  | Director                                                                 
|Robert Lee               |  |     | 53 |          |  | Director                                                                 
|John B. Balousek         |  |     | 56 |          |  | Director                                                                 
|Edward Shapiro           |  |     | 37 |          |  | Director                                                                 

Joel J. Kocheris Chairman, President
and Chief Executive Officer. He joined the
Company in January 1998 as President, Chief Operating Officer, and Director,
and was appointed Chairman and Chief Executive Officer in June 1998. Prior to
joining the Company, he served as Executive Vice President and then Chief
Executive Officer of Artistsoft, Inc., a computer networking and telephony
company, from August 1997 to January 1998. From December 1996 until August
1997, Mr. Kocher served as President and Chief Operating Officer at Power
Computing Corporation, a personal computer company. From 1987 to
1994, Kocher held several senior executive positions with Dell
Computer Corporation, including President, Worldwide Sales, Marketing
and Services.

Allen L. Shulmanwas elected as Senior Vice President, Chief Financial Officer, and General Counsel
in October 2002, after serving as Vice President and General Counsel
since joining the Company in November 2001. Mr. Shulman served as General Counsel of CheckFree
Corporation from May 1997 until October 2001 and additionally as Chief
Financial Officer from August 1998 to June 2000. From 1983 to 1996, Mr. Shulman
held a number of executive positions with United Refrigerated Services, Inc.,
including Chief Operating Officer, Chief Financial Officer, and General
Counsel. From 1974 to 1983 he practiced law in New Jersey and in
Chicago, where he was a partner in the firm of Conklin & Adler.

Savino R. Sid Ferraleshas served as Senior Vice President and Chief
Human Resources Officer since February 1998. From December 1997 to January
1998, Mr. Ferrales performed human resource consulting work for Micron
Electronics, Inc. Prior to that, he served as Vice President of Human
Resources at Power Computing Corporation from March 1997 to November 1997.
From June 1995 to February 1997, Mr. Ferrales served as Vice-President,
Worldwide Human Resources, for Digital Equipment Corporation. From 1994 to
June 1995, he was a principal in OMC Group, a human resources consulting firm.
From January 1989 to June 1995, he served as Vice President of Human Resources
at Dell Computer Corporation. He has over twenty-five years experience in human
resources and organization development with several high technology companies,
including more than ten years at Motorola, Inc.

John M. Harperhas served as
Senior Vice President of Operations since July 29, 2002. He is
responsible for overseeing the Companys Operations, Information Technology and
Technical Support departments, as well as developing the products, platforms,
systems and processes that will support Interlands strategic growth
initiatives. John brings to Interland 16 years of leadership and management
experience with leading technology companies, including serving as Chief
Technology Officer for Verado Holdings, as Vice President of Engineering for
Exodus, and as Chief Technology Officer for Genuity.

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Robert Leehas served as a member on the Board of Directors since April
1999. He is currently also a Director on the boards of CIDCO and iAsiaWorks,
both publicly held companies, as well as several privately held firms. From
1995 to May 1998, Mr. Lee served as President of Business Communications
Services for Pacific Bell. Mr. Lee also served as Executive Vice President,
California Market Group, for Pacific Bell from 1993 to 1995.

John B. Balousekhas served as a member of the Board of Directors since
August 1999. He currently serves as a Director on the boards of Geoworks
Corporation and several privately held firms. From 1998 to 1999, Mr. Balousek
served as Executive Vice President and a founder of PhotoAlley.com, a
San-Francisco-based start-up company providing electronic commerce services.
He served as Chairman and CEO of True North Technologies, a digital and
interactive services company of True North Communications, parent company of
Foote Cone & Belding Communications, Inc., a global advertising and
communications company, from March to July 1996. Mr. Balousek continued to
serve as a Director of True North Communications until January 1997. From 1991
to February 1996, Mr. Balousek served as President, Chief Operating Officer and
Director of Foote Cone & Belding Communications.

Robert T. Slezakhas served as a member on the Board of Directors since
August 2001. He currently also serves as a Director on the boards of
Matrix Bancorp, Inc. and BAM! Entertainment, Inc. Mr. Slezak has
worked as an independent management consultant since November 1999. From 1989
to November 1999, Mr. Slezak served as Chief Financial Officer of Ameritrade
Holding Corporation, managing the accounting, finance, tax, mergers and
acquisitions and regulatory reporting functions of this online brokerage firm.

Edward L. Shapirohas served as a member of the Board of Directors since January
2002. He is currently a partner with PAR Capital Management, Inc. He also has held
the positions of vice president with Wellington Management Company
LLC., and financial
analyst with Morgan Stanley & Co. Mr. Shapiro earned his B.S. in Economics from the
University of Pennsylvania Wharton School and an MBA from UCLAs Anderson
School of Management.

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PART II




ITEM 5.  Market For Registrants Common Equity And Related Shareholder Matters

Interlands common stock trades on the NASDAQ National Market under the
symbol INLD. Prior to August 7, 2001, the Companys stock traded under the
symbol MUEI on the NASDAQ National Market. The following table shows for the
fiscal periods indicated the high and low sales prices for the Companys common
stock, as reported by the NASDAQ National Market:

| |      |  |  |                                        |  |      |       |     |  |   |      | 
| | ---- |  |  | -------------------------------------- |  | ---- | ----- | --- |  | - | ---- | 
| |      |  |  |                                        |  | High |       | Low
| |      |  |  |                                        |  |      |       |    
| | 2002 |  |  | Fourth
Quarter ended August 31, 2002   |  | $    | 3.28  |     |  | $ | 2.49 | 
| |      |  |  | Third
Quarter ended May 31, 2002       |  |      | 3.20  |     |  |   | 1.78 | 
| |      |  |  | Second
Quarter ended February 28, 2002 |  |      | 3.00  |     |  |   | 1.79 | 
| |      |  |  | First
Quarter ended November 30, 2001  |  |      | 2.30  |     |  |   | 1.04 | 
| | 2001 |  |  | Fourth
Quarter ended August 31, 2001   |  | $    | 1.84  |     |  | $ | 1.11 | 
| |      |  |  | Third
Quarter ended May 31, 2001       |  |      | 4.00  |     |  |   | 1.50 | 
| |      |  |  | Second
Quarter ended February 28, 2001 |  |      | 5.00  |     |  |   | 3.03 | 
| |      |  |  | First
Quarter ended November 30, 2000  |  |      | 14.44 |     |  |   | 5.25 | 

Holders Of Record

On August 30, 2002, the closing price of Interlands common stock as
reported on the Nasdaq National Market was $2.55. As of August 30, 2002, there
were approximately 1,710 shareholders of record.

Dividends

Interland has not declared or paid any cash dividend and does not foresee
paying any cash dividends in the foreseeable future.




ITEM 6.  Selected Financial Data(In thousands)

The following selected historical consolidated statement of income data
for the years ended August 31, 2002, 2001 and 2000, and the historical
consolidated balance sheet data as of August 31, 2002 and 2001 have been
derived from the Companys audited consolidated financial statements and
related notes included elsewhere in this Annual Report on Form 10-K. The
Company has disposed of its PC Systems and SpecTek business segments, which are
reported separately as discontinued operations. See the note entitled
Discontinued Operations in the Companys consolidated financial statements
included elsewhere in this Annual Report on Form 10-K. The selected historical
consolidated statement of income data below reflects the results of the
Companys continuing operations, the Web hosting business.

In fiscal 2002, the Company acquired three Web and applications hosting
companies, as well as Web hosting accounts from Interliant, Inc., Burlee and
AT&T. In fiscal 2001, the Company acquired Interland, Inc., an Atlanta, Georgia
based Web and applications hosting company serving small- and medium-sized
businesses, and, in connection with the acquisition of Interland-Georgia, the
Company changed its name from Micron Electronics, Inc., to Interland, Inc. and
its trading symbol to INLD. In fiscal 2000, the Company acquired two Web and
applications hosting companies. These acquisitions are reflected in the
consolidated financial statements as of the date of acquisition. See the note
entitled Acquisitions in the Companys consolidated financial statements
included elsewhere in this Annual Report on Form 10-K.

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The information contained below should be read together with Managements
Discussion and Analysis of Financial Condition and Results of Operations and
the consolidated financial statements and the notes thereto included elsewhere
in this Annual Report on Form 10-K. Results of operations for the periods
presented are not necessarily indicative of results of operations for future
periods.

|                                         |                                                  |                               |   |         |       |      |   |          |       |      |   |         |       |   |   |         |      |  |   |             |      | 
|---------------------------------------- | ------------------------------------------------ | ----------------------------- | - | ------- | ----- | ---- | - | -------- | ----- | ---- | - | ------- | ----- | - | - | ------- | ---- |  | - | ----------- | ---- | 
|                                         |                                                  | Fiscal
Years Ended August 31,
|                                         |                                                  |                              
|(In thousands, except per share amounts) |                                                  | 2002                          |   | 2001    |       | 2000 |   | 1999     |       | 1998
|                                         |                                                  |                               |   |         |       |      |   |          |       |     
|                                         |                                                  |                               |   |         |       |      |   |          |       |      |   |         |       |   |   |         |      |  |   | (unaudited)
|Statements of income data:               |                                                  |                               |   |         |       |      |   |          |       |      |   |         |       |   |   |         |      |  |   |            
|                                         | Revenues from continuing operations              |                               | $ | 101,628 |       |      | $ | 60,752   |       |      | $ | 32,862  |       |   | $ | 464     |      |  | $ |            |     
|                                         | Income (loss) from continuing operations         |                               |   | (5,272  | )     |      |   | (145,717 | )     |      |   | (26,192 | )     |   |   | 5,187   |      |  |   | 5,081       |     
|                                         | Net
Income (loss)                                |                               |   | (11,293 | )     |      |   | (357,194 | )     |      |   | 41,543  |       |   |   | 36,524  |      |  |   | 47,953      |     
|                                         | Earnings (loss) per share, continuing operations |                               |   |         |       |      |   |          |       |      |   |         |       |   |   |         |      |  |   |             |     
|                                         |                                                  | Basic
and Diluted             |   | $       | (0.04 | )    |   | $        | (1.46 | )    |   | $       | (0.27 | ) |   | $       | 0.05 |  |   | $           | 0.05 | 
|                                         | Net
Income (loss) per share                      |                               |   |         |       |      |   |          |       |      |   |         |       |   |   |         |      |  |   |             |     
|                                         |                                                  | Basic
and Diluted             |   | $       | (0.08 | )    |   | $        | (3.58 | )    |   | $       | 0.43  |   |   | $       | 0.38 |  |   | $           | 0.50 | 
|Balance sheet data:                      |                                                  |                               |   |         |       |      |   |          |       |      |   |         |       |   |   |         |      |  |   |            
|                                         | Total assets                                     |                               | $ | 395,278 |       |      | $ | 429,280  |       |      | $ | 563,920 |       |   | $ | 502,826 |      |  | $ | 452,414     |     
|                                         | Total debt                                       |                               |   | 31,166  |       |      |   | 39,106   |       |      |   | 1,971   |       |   |   | 9,993   |      |  |   | 14,183      |     
|                                         | Shareholders equity                             |                               |   | 297,730 |       |      |   | 296,430  |       |      |   | 506,580 |       |   |   | 458,499 |      |  |   | 416,894     |     

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ITEM 7.  Managements Discussion And Analysis Of Financial Condition and
Results Of Operations

Statements contained in this Form 10-K that are not purely historical are
forward-looking statements and are being provided in reliance upon the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Words such as anticipates, expects, intends, plans, believes,
seeks, estimates, and similar expressions identify forward-looking
statements. These forward-looking statements include but are not limited to
statements regarding Interlands expectations of the Companys future liquidity
needs, its expectations regarding the business and financial results of the
combined company, its expectations regarding its future operating results
including its planned increase in its revenues levels and the actions the
Company expects to take in order to maintain its existing customers and expand
its operations and customer base. All forward-looking statements are made as
of the date hereof and are based on current management expectations and
information available to it as of such date. The Company assumes no obligation
to update any forward-looking statement. It is important to note that actual
results could differ materially from historical results or those contemplated
in the forward-looking statements. Forward-looking statements involve a number
of risks and uncertainties, and include risks associated with our
target markets and risks pertaining to our ability to successfully
integrate the operations and personnel of the recent acquisitions,
competition and other trend information. Factors that could
cause actual results to differ materially include, but are not
limited to risk pertaining to our target markets and risks associated
with our ability to successfully integrate the operations and
personnel of recent acquisitions, those identified in Risk Factors and in the Companys other filings with
the Securities and Exchange Commission. All yearly references are to the
Companys fiscal years ended August 31, 2002, August 31, 2001 or August 31,
2000 unless otherwise indicated. All quarterly references are also on a fiscal
basis, unless otherwise indicated. All tabular dollar amounts are stated in
thousands.

Overview

Interland is a leading Web hosting company focused on small and medium
businesses. Interland offers a broad range of business-class hosting products
and services, including shared and dedicated hosting services, electronic
commerce and other applications hosting services, and other Web hosting-related
products and services. Prior to its transformation in fiscal 2001, the Company
had provided a variety of computer products and related services through its PC
Systems, SpecTek, and Web hosting business segments. During fiscal 2001, the
Company discontinued its PC Systems business, its computer manufacturing
business, and SpecTek, its memory products business. See the note entitled
Discontinued Operations to the consolidated financial statements included
elsewhere in this Annual Report on Form 10-K. Following the disposition of
these business segments, the Companys ongoing operations became
exclusively those of a Web hosting company
in fiscal 2001.

The current Web hosting business was formed through the acquisition and
integration of eight companies between 1999 and 2002. On August 2, 1999, the
Company acquired 100% of the outstanding stock of NetLimited, Inc. d.b.a.
HostPro, a Web and applications hosting provider. On September 2, 1999, the
Company acquired the property and equipment of Micron Internet Services,
formerly a division of Micron Technology, a provider of dedicated, nationwide
dial-up and broadband Internet access, virtual private network solutions and
e-commerce services. On December 14, 1999, the Company acquired LightRealm,
Inc. a Kirkland, Washington-based Web and applications hosting and Internet
access company serving small and medium sized businesses. On March 16, 2000,
the Company acquired Worldwide Internet Publishing Corporation, a Boca-Raton,
Florida-based Web hosting company that also served small- and medium-sized
businesses. On August 6, 2001, the Company acquired Interland, Inc.
(Interland-Georgia), an Atlanta, Georgia-based provider of a broad range of
Web hosting, applications hosting and other related Web-based business
solutions specifically designed to meet the needs of small- and medium-sized
businesses. In connection with the acquisition of Interland-Georgia, Micron
Electronics, Inc. changed its name to Interland, Inc. and its trading symbol to
INLD. On February 8, 2002, the Company acquired CommuniTech.Net, a Kansas
City, Missouri based web-hosting company. On May 3, 2002, the Company acquired
Dialtone, a Fort Lauderdale based leading dedicated web hosting company.
As of August 1, 2002, the Company acquired iNNERHOST, a Miami, Florida based
web hosting company serving the small and medium businesses.

Interlands business is rapidly evolving as a result of the acquisitions
detailed above. The Company also has a limited operating history as a web
hosting company. The Companys rapid annual hosting revenue growth has
been the result of its acquisitions. The significant progress
realized in the reduction of operating expenses as percentage of revenues is
directly related to the continuing integration of those acquired companies. As
a result, the Company does not believe its historical financial results are
indicative of expected future results. The Company may reduce the pace of its
acquisitions in favor of organic growth strategies. In addition, a number of
expense reduction opportunities resulting from the continuing integration of
previously acquired companies remains.

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Revenues are generated by providing shared and dedicated hosting services,
e-commerce and other applications hosting services, and other Web
hosting-related products and services. Revenues are recognized as the services
are provided. Hosting contracts generally are for service periods ranging from
one to 24 months and typically require initial fees. These fees, including
set-up fees for hosting services, are deferred and recognized ratably over the
customers expected service period.

Cost of revenues is mainly comprised of compensation and other expenses
for data center and provisioning operations, Internet connectivity and other
related telecommunications expense, and depreciation and amortization of
capital and intangibles related to data center equipment and operations.

Interlands operating expenses consist of:



| |  |  | Sales, marketing and technical support, which is mainly
comprised of compensation costs and costs associated with technical
support and marketing of the Companys products and services.
Compensation costs include salaries and related benefits,
commissions and bonuses. Marketing expenses include the costs of
direct mail, advertising, including online placement and other mass market programs; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | General and administrative, which is mainly comprised of
compensation and related expenses, occupancy costs, and depreciation
and amortization of capital and intangible assets related to the
engineering, development and administrative functions.                                                                                                                                                        

The Company intends to continue investing in programs to enhance the
efficiency and centralization of its infrastructure to reduce operating
expenses. The Company will continue investing in the development of future
services such as the recently launched blueHALO shared hosting platform in
order to differentiate its offerings in the market place. In addition, the
Company intends to continue to expand and develop new sales channels and
relationships. The Company expects to achieve positive cash flows from ongoing
operations during the fourth quarter of fiscal 2003. Given its
significant cash reserves, the Company is in a strong position to enhance its
lead in the small and medium enterprise hosting (SMB) market.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management based this discussion and analysis of our financial condition
and results of operations upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our critical accounting
policies and estimates, including those related to revenue recognition,
valuation of accounts receivable, property, plant and equipment, long-lived
assets, intangible assets, and contingencies. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources.

We believe the
following critical accounting policies reflect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements. These judgments and estimates affect the reported
amounts of assets and liabilities and the reported amounts of revenues and
expenses during the reporting periods.



| |  |  | Revenue Recognition Revenues from continuing operations are
primarily from shared and dedicated Internet web hosting services.
Hosting contracts generally are for service periods ranging from one
to twenty-four months and include one time set up fees. Although
billings are in advance of service delivery, the Company defers revenue recognition until the services are provided and revenue
is earned. The initial set up fees are deferred and recognized as
revenue ratably over the customers service period. Deferred
revenue on the Companys consolidated balance sheet represent the
liability for advance billings to customers for services not yet
provided. Since the Company does allow for free cancellations during
the first 30-day period, a provision has been established for
estimated cancellations.                                                                                                                                                                                                                      
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Valuation of Accounts Receivable Judgment is required when
the Company assesses the likelihood of ultimate realization of
recorded accounts receivables, including assessing the probability
of collection and the current credit-worthiness of our customers. If
the financial condition of the Companys customers were to
deteriorate, or their operating climate were to change, resulting in
an impairment of either their ability or willingness to make
payments, additional allowances may be required. Due to the
competition in the market place, the Company has experienced a 14%
decline in our average monthly revenue per customer from $46.72 in
fiscal 2001 to $40.25 in fiscal 2002, and continues to experience
average monthly customer turnover rates in the 3.0% to 4.0% range for
2001 and 2002. Significant portions of customer payments are made by credit card.
Each month management reviews historical charge-back and
cancellation patterns and records an allowance based on historical
results. Additionally, each month

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| |   |  | management reviews the aged receivables balance and records an
allowance for uncollectible accounts based on the age of the
outstanding receivable balances and trends in outstanding balances.
As a result of these analyses, the Company believes that the current
allowance for uncollectible accounts is adequate to cover any bad
debts as of the date of the balance sheet. The Company has
experienced an increase in bad debt expense and customer turnover
during the account migration and integration process following our
acquisitions.                                                                                                                                                                                          
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Property, Plant, Equipment and Long Lived Assets- The
Company utilizes significant amounts of property, plant and
equipment in providing service to our customers. For financial
statement reporting purposes the Company uses straight-line
depreciation for property and equipment over our estimate of their
useful lives. The Company uses estimated useful lives of two to ten years for equipment and
software. Changes in technology or changes in the intended use of
property, plant and equipment may cause the estimated period of use
or the value of these assets to change. We perform an annual
analysis to confirm the appropriateness of estimated economic useful
lives for each category of property, plant, and equipment.



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Additionally, long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. Estimates and assumptions
used in both setting depreciable lives and testing for recoverability
require management judgment.



| |  |  | Goodwill and Intangible Assets In accordance with SFAS No.
142 the Company periodically evaluates goodwill and intangible
assets for potential impairment. The Company tests for the impairment
of goodwill and intangible assets annually by determining whether the
Companys carrying value exceeds its fair value. Fair
value is ascertained by using quoted values of the Companys
stock and by using discounted values of expected future cash flows. If impairment exists, we measure
the impairment through the use of discounted cash flows. Our
judgments regarding the existence of impairment indicators are based
on legal factors, market conditions, and operational considerations.
Future events could cause us to conclude that impairment indicators
exist and that goodwill and other intangible assets associated with
our acquired businesses are impaired. Goodwill is no longer
amortized, but instead is subject to impairment tests at least
annually. Other intangible assets are amortized over our estimate
of their period of benefit (three to seven years).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Contingencies The Company is subject to proceedings,
lawsuits and other claims related to class action lawsuits and other
legal and regulatory proceedings that arise in the ordinary course
of business. We are required to assess the likelihood of any
adverse judgments or outcomes to these matters as well as potential
ranges of probable losses. A determination of the amount of loss
accrual required, if any, for these contingencies are made after
careful analysis of each individual issue. We consult with legal
counsel and other experts where necessary to assess any
contingencies. The required accrual may change in the future due to
new developments in each matter or changes in approach such as a
change in settlement strategy in dealing with these matters.                                                                                                                                                                                                                                                                                                  
|
| |  |  | Discontinued Operations
During fiscal 2001, the Company discontinued the
operations of its PC Systems and SpecTek business segments. These
segments have been accounted for as discontinued operations in
accordance with APB No. 30 and in this regard an estimate of all
retained liabilities was recorded. This amount is subject to final
settlement, which could result in a revision to the estimated loss or
disposal of discontinued operations. Related amounts in the financial
statements and corresponding notes for all periods presented have
been classified as part of discontinued operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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| |  |  | Restructuring and Acquisition Related Liabilities-The
Company has remaining reserves related to our restructuring program
approved and implemented in the fourth quarter of fiscal year 2001
in connection with our acquisition of Interland-Georgia. These
remaining liabilities represent our estimate of future lease
payments for data centers and office facilities being exited that
cannot be recovered through subleases and termination penalties for
bandwidth and data connectivity contracts we are no longer
utilizing.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Discontinued Operations

PC Systems

The Company discontinued the operations of its PC Systems business
segment, which has been accounted for as discontinued operations in accordance
with Accounting Principles Board Opinion (APB) No. 30, Reporting the Results
of Operations  Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
On May 31, 2001, the Company sold its PC Systems business to GTG PC Holdings,
LLC, (GTG PC) an affiliate of the Gores Technology Group. Under the terms of
the agreement, GTG PC received assets, which included $76.5 million in cash,
and assumed specified liabilities of the PC Systems business. The Company
retained all liabilities of the PC Systems business not assumed by GTG PC,
including, for example, liabilities for taxes arising prior to the closing of
the transaction, employee termination and related expenses and any contingent
liabilities arising prior to the closing date.

Through May 31, 2003, or for the applicable statute of limitations with
respect to taxes and government contracts, the Company is obligated to
indemnify the purchaser and affiliated entities for any breaches of the
representations and warranties contained in the agreement. In addition, the
Company is obligated for an indefinite period of time to indemnify the
purchaser and affiliated entities for any breaches in covenants. The agreement
provides that the maximum aggregate liability of the Company for
indemnification under the agreement is $10.0 million. To date the Company has
not made any indemnification payments in regard to these matters.

In fiscal 2001, the Company
recognized an initial estimated loss on disposal of the PC
Systems business of $212.2 million. In fiscal 2002 the Company recognized
an estimated additional loss on the disposal of the PC Systems of
$6.0 million. Included in the loss recognized in fiscal 2002 is a
$3.8 million charge in connection with the resolution of
disputed obligations owed to the Company by GTG PC Holdings, LLC an affiliate
of the Gores Technology Group. In addition, the Company wrote down certain
sales tax receivable balances to their net realizable value, which resulted in
a charge of $0.7 million. The Company also accrued
$0.7 million in contingent liabilities, and $0.6 million in
legal expenses related to the disposal of discontinued operations.

SpecTek

In fiscal 2001, the Company has discontinued the operations of its SpecTek business
segment, which has been accounted for as discontinued operations in accordance
with APB No. 30. Pursuant to the Amended and Restated Component Recovery
Agreement (as amended, the Component Recovery Agreement), dated effective
September 2, 1999, Micron Technology, Inc. (MTI), exercised its rights to purchase the assets of the
SpecTek business. On March 22, 2001, the Company entered into a Purchase
Agreement (the Purchase Agreement) to sell all assets primarily used by
SpecTek and certain land, buildings and intellectual property assets to MTI.
Pursuant to the terms of the Purchase Agreement, the Company transferred the
land, buildings and intellectual property to MTI on March 22, 2001 and received
$18 million of cash in excess of the historical cost from MTI. This amount has
been recorded, net of tax, as an increase in additional paid in capital. The
Company has leased back a portion of the land and buildings from MTI and has
also been granted a license to use certain of the intellectual property. In
addition, MTI agreed to pay the Company for the March 1, 2001 net book value of
the assets used by SpecTek, less any outstanding intercompany payables. Net
proceeds from the sale of the SpecTek assets under the Purchase Agreement were
$39.6 million.

Results Of Continuing Operations

The Companys consolidated financial information presents the net effect
of discontinued operations separate from the results of the Companys
continuing operations. Historical financial information has been

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reclassified to consistently present the discontinued operations, and the
discussion and analysis that follows generally focuses on continuing
operations. The following table sets forth, for the periods indicated, certain
data derived from the Companys consolidated statements of operations as a
percentage of revenues:

|                                             |                                        |                          |       |                   |       |            |        |            |       |  |        |      |       | 
|-------------------------------------------- | -------------------------------------- | ------------------------ | ----- | ----------------- | ----- | ---------- | ------ | ---------- | ----- |  | ------ | ---- | ----- | 
|                                             |                                        |                          |       | Fiscal Year Ended
|                                             |                                        |                          |       |                  
|                                             |                                        |                          |       | August 31,        |       | August 31, |        | August 31,
|                                             |                                        |                          |       | 2002              |       | 2001       |        | 2000      
|                                             |                                        |                          |       |                   |       |            |        |           
|Revenues                                     |                                        |                          | 100.0 | %                 |       |            | 100.0  | %          |       |  | 100.0  | %   
|Cost of revenues                             |                                        |                          | 54.3  |                   |       |            | 64.9   |            |       |  | 74.1   |     
|                                             |                                        |                          |       |                   |       |            |        |            |       |  |        |     
|                                             |                                        | Gross margin             |       |                   | 45.7  |            |        |            | 35.1  |  |        |      | 25.9  | 
|Operating expenses:                          |                                        |                          |       |                   |       |            |        |            |       |  |        |     
|                                             | Sales, marketing and technical support |                          |       | 51.2              |       |            |        | 61.2       |       |  |        | 79.6 |      
|                                             | General and administrative             |                          |       | 45.8              |       |            |        | 59.4       |       |  |        | 70.2 |      
|                                             | Goodwill amortization                  |                          |       |                  |       |            |        | 11.2       |       |  |        | 15.0 |      
|                                             | Bad debt expense                       |                          |       | 10.4              |       |            |        | 3.7        |       |  |        | 1.7  |      
|                                             | Restructuring costs                    |                          |       | (1.3              | )     |            |        | 181.5      |       |  |        |     |      
|                                             | Merger and integration costs           |                          |       | 8.0               |       |            |        | 2.8        |       |  |        |     |      
|                                             | Other expense (income) net             |                          |       | 0.7               |       |            |        | (2.7       | )     |  |        | 1.9  |      
|                                             |                                        |                          |       |                   |       |            |        |            |       |  |        |     
|                                             |                                        | Total operating expenses |       |                   | 114.8 |            |        |            | 317.1 |  |        |      | 168.4 | 
|                                             |                                        |                          |       |                   |       |            |        |            |       |  |        |     
|Operating loss                               |                                        |                          | (69.1 | )                 |       |            | (282.0 | )          |       |  | (142.5 | )   
|Loss on investments, net                     |                                        |                          |      |                   |       |            | (8.9   | )          |       |  | (1.8   | )   
|Interest income, net                         |                                        |                          | 0.7   |                   |       |            | 13.7   |            |       |  | 34.9   |     
|                                             |                                        |                          |       |                   |       |            |        |            |       |  |        |     
|Loss from continuing operations before taxes |                                        |                          | (68.4 | )                 |       |            | (277.2 | )          |       |  | (109.4 | )   
|Income tax benefit                           |                                        |                          | 63.2  |                   |       |            | 37.3   |            |       |  | 29.7   |     
|                                             |                                        |                          |       |                   |       |            |        |            |       |  |        |     
|Net loss from continuing operations          |                                        |                          | (5.2  | )%                |       |            | (239.9 | )%         |       |  | (79.7  | )%  
|                                             |                                        |                          |       |                   |       |            |        |            |       |  |        |     

The loss from continuing operations for the fiscal year 2002 was $5.3 million,
or $(0.04) per share basic and diluted, on revenues of $101.6 million, compared
to a loss in 2001 of $145.7 million, or $(1.46) per share basic and diluted,
on revenues of $60.8 million, and a loss in 2000 of $26.2 million, or $(0.27)
per share basic and diluted. The results of continuing operations in fiscal
2001 includes the operating activities of Interland-Georgia from August 6,
2001, the period from the date of acquisition to the end of the
fiscal year. The results of continuing operations in fiscal 2002,
include the operating activities of:



| |  |  | Interland-Georgia for twelve
months           
| | - |  | ----------------------------------------------
| |  |  | CommuniTech.Net for
approximately seven months
| |  |  | Dialtone for approximately
four months; and   
| |  |  | iNNERHOST for one month                       

|                |  |                   |         |            |  |            |        |  |  |   |        | 
|--------------- |  | ----------------- | ------- | ---------- |  | ---------- | ------ |  |  | - | ------ | 
|                |  | Fiscal Year Ended
|                |  |                  
|                |  | August 31,        |         | August 31, |  | August 31,
|Revenues        |  | 2002              |         | 2001       |  | 2000      
|                |  |                   |         |            |  |           
|                |  | (In thousands)   
|Hosting revenue |  | $                 | 94,699  |            |  | $          | 42,576 |  |  | $ | 18,555 | 
|Other revenue   |  |                   | 6,929   |            |  |            | 18,176 |  |  |   | 14,307 | 
|                |  |                   |         |            |  |            |        |  |  |   |        | 
|Total revenues  |  | $                 | 101,628 |            |  | $          | 60,752 |  |  | $ | 32,862 | 
|                |  |                   |         |            |  |            |        |  |  |   |        | 

Comparison of the Years Ended August 31, 2002, 2001, and 2000

Revenues

Total revenues increased 67.3% to $101.6 million during fiscal 2002 from
$60.8 million in fiscal 2001 and $32.9 million in fiscal 2000.

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Hosting revenues increased 122.3% to $94.7 million during fiscal 2002 from
$42.6 million in fiscal 2001 and $18.6 million in fiscal 2000. Hosting revenues
are comprised of shared and dedicated hosting services and domain name
registrations. The growth in hosting revenues for fiscal 2002 has been
virtually entirely driven by acquisitions.

Other revenues decreased 62.1% to $6.9 million during fiscal 2002 from
$18.2 million in fiscal 2001 and $14.3 million in fiscal 2000. Other revenues
are comprised of e-commerce and other applications hosting services, other Web
hosting-related products and services, internet connectivity fees and equipment
sales to customers. The decrease is the result of the sale of consumer dial-up
accounts in 2001 and 2002, and the Companys strategy to move away from the
sale of hardware. The sale of these accounts and the change in strategy is not
expected to have a substantial impact on future operating income.

As of August 31,
2002, the Company had approximately 220,000 paid shared hosting
customer accounts and managed more than 7,500 dedicated servers, many
of which have multiple web sites.

Cost of Revenues

Cost of revenues increased 40.1% to $55.2 million in fiscal 2002 from
$39.4 million in fiscal 2001 and $24.3 million in fiscal 2000. During fiscal
2002, the increasing cost of revenues was primarily related to expenses
associated with acquired facilities such as depreciation of data centers and
equipment, telecommunications and Internet access costs, technical personnel
costs and rent. The Companys cost of revenues as a percentage of revenues
decreased to 54.3% during fiscal 2002 from 64.9% in fiscal 2001 and 74.1% in
fiscal 2000. The Company anticipates that the cost of revenues will decline as
a percentage of revenues as the Company continues to grow and execute its
strategy to achieve a more cost-effective scale of operations.

Operating Expenses

Sales, Marketing and Technical Support

Sales, marketing and technical support expenses increased 40.0% to $52.1
million during fiscal 2002 from $37.2 million in fiscal 2001 and $26.2 million
in fiscal 2000. The increase in sales and marketing expenses from $25.9
million in fiscal 2001 to $33.8 million in fiscal 2002 was primarily related to
increased amortization expenses pertaining to the acquisition of customer
accounts. This amortization can arise both from transactions in which
we acquire only customer accounts and from acquisitions of customer
accounts in connection with the acquisition of a corporation through
merger or stock purchase. The increase in technical support expenses from $11.3 million in
fiscal 2001 to $18.2 million in fiscal 2002 reflected the
additional resources needed to the support the increased size of the customer
account base generated by recent acquisitions.

General and Administrative

General and administrative expenses increased 29.0% to $46.6 million
during fiscal 2002 from $36.1 million in fiscal 2001 and $23.1 million in
fiscal 2000. The increase in general and administrative expenses during fiscal
2002 was primarily related to additional depreciation expenses
generated by acquired companies, and additional reserve requirements
for occupancy expenses associated with facilities obtained from
legacy entities but which the company has previously planned on
abandoning.

Goodwill Amortization

Effective September 1, 2001, the Company adopted SFAS No. 142 which
eliminates goodwill amortization starting in fiscal 2002. Prior to that date,
goodwill resulting from previous acquisitions, was amortized in accordance with
generally accepted accounting principles. SFAS No. 142 required the Company
to adopt certain provisions as part of the Interland-Georgia business
combination, and as a result, the goodwill and intangible assets acquired as
part of the combination were accounted for in accordance with the amortization
and non-amortization provisions of SFAS 142.

Bad Debt Expense

Bad debt expenses increased 377.2% to $10.5 million during fiscal 2002
from $2.2 million in fiscal 2001 and $.6 million in fiscal 2000. The
increase in bad debt expense during fiscal 2002 was primarily related to the
acquisitions of customer accounts of Interland-Georgia, CommuniTech.Net,
Dialtone, Interliant, and AT&T. Following these transactions,
the Company
experienced short-term customer churn and breakage during the account
integration and migration process. In connection with the acquisition of
Interland-Georgia and the restructuring plan, which included the consolidation
of data centers and internal business systems, including billing
terms and applications
and other financial applications, the Company also addressed internal
customer credit and billing function issues. The combination of higher than
expected customer churn and the integration and consolidation of our billing
and collection functions during the year resulted in unusually high bad debt
expense for

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the year ended August 31, 2002. In response to the higher bad debt expense,
the Company increased its collection efforts in the third quarter of FY 2002
to bring the past due accounts back down to a more normal level.
Furthermore, the Companys initiative to convert term contracts
to monthly payment terms is also expected to reduce bad debt
expense going forward. This level of
bad debt has not been inherent in the Companys business historically, and
based on process improvements the Company has implemented, the
Company expects that bad debt expense levels will return to a lower level in fiscal
2003.

Merger, Integration and Restructuring Costs

In connection with the acquisition of Interland-Georgia in August 2001,
the Company adopted a restructuring plan to close certain offices and data
centers, discontinue the use and development of certain software and eliminate
other redundant assets. As a result, the Company recorded a restructuring
charge of $110.3 million. The restructuring charge included $9.4 million
related to the closure of offices and data centers, the write-off of
$69.7 million of goodwill and intangible assets relating to prior acquisitions, $26.9 million for asset write-downs, $0.7 million related to personnel termination
costs and $3.6 million related to other costs. During fiscal
2002, the Company
utilized $2.3 million of these reserves in connection with executing the
aforementioned restructuring plans and recorded a reserve write down of $1.3
million leaving a balance of $8.8 million as of August 31, 2002. The
restructuring activities of the Company are substantially complete. The
remaining reserves are related to lease payments on abandoned facilities and
remaining payments on terminated bandwidth contracts. In addition, the Company
incurred $8.1 million and $1.7 million in merger and integration costs in 2002
and 2001, primarily related to the Interland-Georgia and other acquisitions
completed in those years. Included in the $8.1 million of merger and
integration expenses for fiscal 2002 was $4.2 million for employee termination
benefits, $2.5 million for relocation costs, $0.7 million for employee
retention bonuses, $0.2 million for legal services, and $0.5 million for other
non-capitalizable costs related to the merger and integration of the Companys
recent acquisitions including Interland-Georgia, CommuniTech.Net, Dialtone, and
iNNERHOST.

Other Expense (Income), net

During fiscal 2002 the Company completed the sale of its remaining
Boise-based consumer dial-up accounts and certain data center assets. The sale
resulted in a net loss of $0.7 million, which is reported in the Statement of
Operations under Other expense (income), net. The sale of these accounts is
not expected to have a substantial impact on operating income and cash flows.

In fiscal 2001, the Company sold many of its consumer dial-up accounts for
$3.8 million and recognized a resulting gain of $2.5 million, which is included
in the Statement of Operations under the Other expense (income), net.

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Loss on Investments, Net

The Company incurred no gains or losses from investment activity during
fiscal 2002. Loss on investments, net for the fiscal year ended 2001 increased
to $5.4 million from $.6 million in 2000. The loss in 2001 consists of a loss
on investments of $9.9 million net of a gain on the sale of an investment of
$4.5 million. The Company incurred a loss on its equity share of the losses of
Bird on a Wire, Inc. (BOAW), as well as the Companys loss on disposal of its
investment therein ($4.9 million) and write-off of its investment in Innuity, Inc.
($5.0 million). On May 28, 2001, BOAW entered into a definitive agreement to
sell its assets. After settling BOAW liabilities, the Company received net
proceeds of $1.5 million. Partially offsetting these losses was a gain of $4.5
million generated by the Companys September 29, 2000 sale of its remaining 10%
interest in MCMS, Inc. (MCMS).

Interest Income, Net

Interest income, net, decreased 91.0% to $ 0.8 million during fiscal 2002
from $8.3 million in fiscal 2001 and $11.5 million in fiscal 2000. Interest
income, net consists of interest income earned on the Companys invested cash
and liquid investments of $4.0 million, less interest expense on debt (primarily capital
leases) of $3.2 million. The reduction in interest income, net is primarily due to the lower
levels of cash and liquid investments that were available for investment and
lower interest rates during fiscal 2002.

Income Tax Provision

The effective income tax benefit rate on continuing operations was
approximately 92% for fiscal 2002, 13% for fiscal 2001 and 27% for fiscal 2000.
The rate principally reflects the federal statutory rate, net of the effect of
state taxes, tax-exempt securities and non-deductible goodwill amortization.
The change in the effective income tax rates primarily reflects tax benefits
resulting from a change in the Internal Revenue Code regarding the carryback of
net operating losses, as well as a valuation allowance on certain tax assets.
On March 9, 2002, a tax law entitled the Job Creation and Worker Assistance
Act of 2002 was passed. The provision of this act that benefited the Company
directly during 2002 was the ability to carryback tax losses to the previous
five years. During the third quarter the Company received approximately $66
million in cash relating to the carryback tax refunds and income tax
receivables. This tax refund has significantly added to the Companys cash
position but has also reduced the amount of tax net operating losses that are
available for carryforward to future years.

Earnings Before Interest, Taxes, depreciation and Amortization (EBITDA)

The Companys EBITDA (loss from continuing operations, excluding interest
income (expense), income taxes, depreciation and amortization) was a loss of
$33.5 million for the fiscal year 2002 as compared with a loss of $152.1 million for the same period of the prior year. The decrease in the EBITDA loss
was due to the successful execution of the Companys merger, integration and
restructuring plans, in conjunction with additional revenues and gross margins
for the periods offset by increased sales, technical support, general and
administrative personnel costs pertaining to and generated by the Companys
acquisitions of Interland-Georgia, CommuniTech.Net and Dialtone. Included in
the Companys fiscal 2002 net loss from continuing operations were $8.1 million
of merger and integration charges, $0.7 million loss on the sale of
connectivity accounts, and a reduction of expense in connection with the
reversal of previously established restructuring reserves in the amount of
$1.3 million. Included in the Companys fiscal 2001 net loss from continuing
operations is $112.0 million of restructuring, merger, and integration charges.
Management believes it is useful to separately identify these items included
in the Companys results as these are generally non-recurring in nature. EBITDA is not
an indicator of performance under generally accepted accounting principles and
may not be comparable to information reported by other companies. In addition,
it does not replace gross profit (loss), net income (loss), or operating income
(loss) as indicators of our operating performance.

Reconciliation of net loss from continuing operations to EBITDA loss is as
follows:

|                                    |                               |   |                   |         |            |   |            |         |   |   |         |         |  
|----------------------------------- | ----------------------------- | - | ----------------- | ------- | ---------- | - | ---------- | ------- | - | - | ------- | ------- | -
|                                    |                               |   | Fiscal Year Ended
|                                    |                               |   |                  
|                                    |                               |   | August 31,        |         | August 31, |   | August 31,
|                                    |                               |   | 2002              |         | 2001       |   | 2000      
|                                    |                               |   |                   |         |            |   |           
|                                    |                               |   | (In thousands)   
|Net loss from continuing operations |                               | $ | (5,272            | )       |            | $ | (145,717   | )       |   | $ | (26,192 | )      
|                                    | Depreciation and amortization |   |                   | 36,718  |            |   |            | 24,585  |   |   |         | 12,257  |  
|                                    | Income tax benefit            |   |                   | (64,241 | )          |   |            | (22,694 | ) |   |         | (9,748  | )
|                                    | Interest income, net          |   |                   | (752    | )          |   |            | (8,317  | ) |   |         | (11,476 | )
|                                    |                               |   |                   |         |            |   |            |         |   |   |         |        
|EBITDA loss                         |                               | $ | (33,547           | )       |            | $ | (152,143   | )       |   | $ | (35,159 | )      
|                                    |                               |   |                   |         |            |   |            |         |   |   |         |        

Liquidity and Capital Resources

On January 22, 2002, the Securities and Exchange Commission issued FR-61,
Commission Statement about Managements Discussion and Analysis of Financial
Condition and Results of Operations.The release sets forth certain views of
the Commission regarding disclosure that should be considered by registrants.
Disclosure matters addressed by the release are liquidity and capital resources
including off-balance sheet arrangements, certain trading activities that
include non-exchange traded contracts accounted for at fair value, and effects
of transactions with related and certain other parties.

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The following table discloses aggregate information about our contractual
obligations as of August 31, 2002 and the periods in which payments are due:

|                                              |  |       |      |        |  |           |      |           |  |         |      |  |  |   |      |  |  |       |      | 
|--------------------------------------------- |  | ----- | ---- | ------ |  | --------- | ---- | --------- |  | ------- | ---- |  |  | - | ---- |  |  | ----- | ---- | 
|                                              |  |       |      |        |  |           |      |           |  |         |      |  |  |   |      |  |  | After
|Contractual Obligations (In millions)         |  | Total |      | 1 year |  | 2-3 years |      | 4-5 years |  | 5 years
|                                              |  |       |      |        |  |           |      |           |  |        
|Long-term debt                                |  | $     | 6.7  |        |  | $         | 6.1  |           |  | $       | 0.6  |  |  | $ |     |  |  | $     |     | 
|Operating
leases and other future commitments |  |       | 61.6 |        |  |           | 17.9 |           |  |         | 18.1 |  |  |   | 12.1 |  |  |       | 13.5 | 
|Capital leases                                |  |       | 27.2 |        |  |           | 14.9 |           |  |         | 12.3 |  |  |   |     |  |  |       |     | 
|                                              |  |       |      |        |  |           |      |           |  |         |      |  |  |   |      |  |  |       |      | 
|Total contractual cash obligations            |  | $     | 95.5 |        |  | $         | 38.9 |           |  | $       | 31.0 |  |  | $ | 12.1 |  |  | $     | 13.5 | 
|                                              |  |       |      |        |  |           |      |           |  |         |      |  |  |   |      |  |  |       |      | 

As of August 31,
2002, the Company had $62.7 million in cash and cash equivalents as
noted on the Companys consolidated balance sheet and statement
of cash flows. In addition, the Company had $50.9 million in short
and long-term investments and $34.3 million in short and long-term
restricted investments representing a total cash position of $147.9
million. This represents a
decrease of $60.2 million compared to August 31, 2001. Cash used during the
twelve month period includes $55.5 million for operations (net
of $88.0 million of tax refunds received during the year),
$5.6 million for capital
expenditures, $18.3 million for repayments of debt and capital lease obligations, $9.8 million for
the re-purchase of the Companys common stock, $42.5 million for business
acquisitions, $15.0 million for discontinued operations
liabilities, and $2.7 million for notes issued to a related party. Partially offsetting these uses
of cash was $1.1 million of proceeds received from the issuance of Company
stock.

On May 31, 2001, the Company sold its PC Systems business to GTG PC
Holdings, LLC, (GTG PC) an affiliate of the Gores Technology Group. Under
the terms of the agreement, GTG PC received assets, which included $76.5
million in cash, and assumed specified liabilities of the PC Systems business.
The Company retained certain liabilities, including contingent liabilities
arising prior to the sale. Through May 31, 2003, or for the applicable statute
of limitations with respect to taxes and government contracts, the Company is
obligated to indemnify GTG PC and affiliated entities for any breaches of the
representations and warranties contained in the agreement. In addition, the
Company is obligated for an indefinite period of time to indemnify GTG PC and
affiliated entities for any breaches in covenants. The agreement provides that
the maximum aggregate liability of the Company for indemnification under the
agreement is $10.0 million. Claims related to this indemnification could result
in an additional cash payment by the Company to GTG PC and a corresponding
increase to the loss on disposal of discontinued operations.
Currently there are no outstanding claims.

On July 20, 2001, the Company entered into a financing arrangement with a
financial institution, under which the Company executed a $5.4 million credit
agreement. At August 31, 2002 the outstanding balance on the
facility was $5.4
million bearing an interest rate of prime less 100 basis points or 3.75%.
Additionally, in July 2001, the Company entered into a financing arrangement
for a sale and leaseback of up to $14.6 million for certain equipment,
primarily computer hardware. In January 2002, the Company repurchased certain
assets from the financial institution at a total cost of $2.9 million. In
connection with the repurchase, approximately $3.3 million of cash and
equivalents became unrestricted lowering the total pledged amount of cash and
equivalents securing the lease line to $21.6 million. The
restrictions prevent the Company from utilizing the related cash and
cash equivalent balances, however, the amount of restricted cash and
cash equivalents is reduced as the facility is paid off.

During the third quarter ended May 31, 2002, the Companys merchant bank
reduced the amount of restricted cash collateralizing the Companys merchant
banking activity by $12.5 million bring the total restricted collateral amount
required under the merchant agreement down to $10.0 million. The
collateral is in the form of a certificate of deposit with the
merchant bank.

Prior to the acquisition of Dialtone Inc., (Dialtone), Dialtone entered
into a $2 million line of credit with a financial institution, which bears
interest at a rate of prime plus 150 basis points. In connection with the
acquisition of Dialtone, Interland acquired the line of credit and as of August
31, 2002, the balance was $0.6 million bearing a weighted average interest rate
of approximately 5.75%.

Prior to the acquisition of iNNERHOST, Inc., iNNERHOST executed a $1.3 million note
to finance the construction of a data center. The note bears an interest rate
of 10%. In connection with the acquisition of iNNERHOST the Company assumed
this obligation, which had an outstanding balance of $1.0 million at August
31, 2002. Also prior to acquisition, iNNERHOST executed several term loans to
finance equipment purchases. The Company has assumed these debts, which have
an interest rate of 12% and an outstanding balance of $0.3 million at August
31, 2002.

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The Company anticipates making capital expenditures of approximately $10.0
million during fiscal 2003, generally for server equipment and related software
and other expenditures related to new customer growth. Included in the
expected $10.0 million of fiscal 2003 capital expenditures is the Companys
plan to invest in infrastructure optimization and improvement
projects. The Company also expects to use approximately
$7.0 million to support discontinued operations.

The Companys strategy includes acquisitions of businesses and customers
and these acquisitions may be accomplished through the issuance of shares,
payment of cash or debt.

The Company does not
expect to begin to generate positive cash flow from ongoing operations
until the fourth quarter of fiscal 2003. The Company believes it has adequate cash resources to fund operations and planned capital
expenditures for at least one year from the balance sheet date. The Companys
future success is dependent upon its ability to achieve positive cash flow
prior to the depletion of cash resources and to raise funds, thereafter, if
needed. Management, however, cannot provide absolute assurance that the
Companys cash flows will be adequate to allow it to continue operations
subsequent to the one-year time period, although, the Companys current
financial forecast does indicate that there will be sufficient cash balances on
hand until the Company reaches positive cash flows from ongoing operations.

Recently Issued Accounting Standards

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. The statement provides accounting and reporting
standards for recognizing obligations related to asset retirement costs
associated with the retirement of tangible long-lived assets. Under this
statement, legal obligations associated with the retirement of long-lived
assets are to be recognized at their fair value in the period in which they are
incurred if a reasonable estimate of fair value can be made. The fair value of
the asset retirement costs is capitalized as part of the carrying amount of the
long-lived asset and subsequently allocated to expense using a systematic and
rational method over the assets useful life. Any subsequent changes to the
fair value of the liability due to passage of time or changes in the amount or
timing of estimated cash flows is recognized as an accretion expense. The
Company will be required to adopt this statement in its fiscal year 2003
starting on September 1, 2002, and does not believe it will have a
material impact on its financial condition.

In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which is effective for fiscal
years beginning after Dec 15, 2001. This statement supercedes FASB Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. However, it retains the fundamental provisions of
SFAS No. 121 for the recognition and measurement of the impairment of
long-lived assets to be held and used and the measurement of long-lived assets
to be disposed of by sale. Impairment of Goodwill is not included in the scope
of SFAS No. 144 and will be treated in accordance with the accounting standards
established in SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS
No. 144, long-lived assets are to be measured at the lower of carrying amount
or fair value less cost to sell, whether reported in continuing or discontinued
operations. The statement applies to all long-lived assets, including
discontinued operations, and replaces the provisions of APB Opinion No. 30,
Reporting the Results of Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of segments of a business. The
Company adopted this statement in its fiscal 2003 starting on
September 1, 2002.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendments of FASB Statement No. 13 and Technical
Corrections, which is effective for transactions occurring after May 15, 2002.
The Statement rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, which required all gains and losses from
extinguishments of debt to be aggregated and classified as an extraordinary
item (net of related income tax effect), if material. The criteria in APB
Opinion No. 30 will now be used to classify those gains and losses. Also SFAS
No. 64 amended SFAS No. 4 and is no longer necessary because of this
rescission. The Statements amends SFAS No. 13, Accounting for Leases, to
eliminate an inconsistency between the accounting for sale-leaseback
transactions and certain lease modifications that have economic effects that
are similar to sale-leaseback transactions. The amendment requires that a lease
modification results in recognition of a gain or loss in the financial
statements, is subject to SFAS No. 66 Accounting for Sales of Real

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Estate if the leased asset is real estate (including integral equipment),
and is subject to the sale-leaseback rules of SFAS No. 98 Accounting for
Leases: Sale-Leaseback Transactions Involving Real Estate, Sales-Type Leases of
Real Estate, Definition of the Lease Term, and Initial Direct Costs of Direct
Financing Leases. The Company adopted this Statement in its fiscal 2003
starting from September 1, 2002.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The principal difference between this Statement and Issue 94-3
relates to its requirements for recognition of a liability for a cost
associated with an exit or disposal activity. This Statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under Issue 94-3, a liability for an exit cost
as defined in Issue 94-3 was recognized at the date of an entitys commitment
to an exit plan. This Statement also establishes that fair value is the
objective for initial measurement of the liability. The provisions of this
Statement are effective for exit or disposal activities that are initiated
after December 31, 2002. The Company adopted this Statement in its fiscal
2003 starting from September 1, 2002. The Company is currently analyzing the
impact the adoption of this pronouncement may have on its consolidated
financial position, results of operations, or cash flows.

Certain Factors

You should carefully consider the following factors and all other information
contained in this Form 10-K before you make any investment decisions with
respect to the Companys securities. The risks and uncertainties described
below are not the only risks the Company faces.

Interland has incurred operating losses since inception, and it expects to
incur losses for at least the next three quarters.The Company has incurred
net losses and losses from operations for all but one of each quarterly period
from inception through fiscal 2002. Interland does not expect to generate
positive cash flow from continuing operations until the fourth quarter of
fiscal 2003. In some cases operating expenses will increase as a result of
adapting network infrastructure to accommodate additional customers, increasing
sales and marketing efforts, broadening customer support capabilities,
integrating recently acquired businesses, and expanding administrative
resources in anticipation of future growth. To the extent that increases in
expenses are not offset by increases in revenues, the Companys
operating losses will increase.

Because Interlands historical financial
information is not representative of its
future results, investors and analysts will have difficulty analyzing
Interlands future earnings potential.Since the Company has sold its non-hosting businesses, its
historical financial information, contained in previous filings with the
Securities and Exchange Commission, will not be representative of its future
operating results. Excluding the operations of the non-hosting
businesseswhich are classified as discontinued operations in the Companys
financial statementsnon-Web hosting revenues represented approximately 7% and
30% of the Companys total revenues for fiscal 2002 and 2001, respectively.
Furthermore, the Companys financial results for fiscal 2002 reflect the
partial impacts of three company and three account acquisitions completed
during the year. In addition, the Companys financial results for fiscal 2001
only reflect the integration of Interland-Georgia for 25 days. By contrast
web-hosting revenues constituted 93% of the Companys total revenues in fiscal
2002.

Interland has a limited operating history and its business model is still
evolving, which makes it difficult to evaluate its prospects.The Companys
limited operating history makes evaluating its business operations and
prospects difficult. The Companys range of service offerings has changed
since its inception and its business model is still new and developing.
Specifically, the Company business has changed from being primarily a seller of
personal computers and related accessories to being exclusively a web hosting
company. As a result, the revenues and income potential of the Companys
business, as well as the potential benefits of acquisitions and integrations
will be difficult to evaluate.

Interlands quarterly operating results will fluctuate and its future revenues
and profitability are not certain.The Companys past operating results have
been subject to fluctuations, on a quarterly and an annual basis. Interland
may also experience significant fluctuations in quarterly and annual operating
results due to a wide variety of factors. Because of these fluctuations,
comparisons of operating results from period to period are not meaningful

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and should not be relied upon as an indicator of future performance. Factors
that cause operating results to fluctuate include, but are not limited to:



| |  |  | demand for and market acceptance of the Companys services;                                                                 
| | - |  | ----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | introductions of new services or enhancements by Interland and its competitors;                                             
|
| |  |  | technical difficulties or system downtime affecting the
Internet generally or the Companys hosting operations specifically;
|
| |  |  | customer retention;                                                                                                         
|
| |  |  | increased competition and consolidation within the Web hosting and applications hosting markets;                            
|
| |  |  | changes in the Companys pricing policies and the pricing policies of its competitors;                                      
|
| |  |  | gains or losses of key strategic relationships.                                                                             

The Company cannot provide assurances as to the extent to which it will be
successful in achieving plans to increase the size of its customer base, the
amount of services it offers or the amount of the increase in revenues it will
experience during the next fiscal year, or beyond. In addition, relatively
large portions of Interlands expenses are fixed in the short-term, and
therefore its results of operations are particularly sensitive to fluctuations
in revenues. Also, if the Company were unable to continue using third-party
products in its service offerings, its service development costs would increase
significantly.

In addition, the terrorist acts of September 11, 2001 have contributed to
an uncertain economic environment and the Company cannot predict the impact of
these events, any subsequent terrorist acts or of any related military action,
on its customers or business. The Company believes that, in light of these
events, some businesses may curtail spending on information technology, which
could also affect its quarterly results in the future.

Interlands stock price will be volatile which could
cause your investment in the Company's common stock to decrease significantly.The market price of the Companys
common stock has experienced a significant volatility during the last fiscal
year. The price has been and is likely to continue to be highly volatile due
to several factors, such as:



| |  |  | Companys failure to experience the benefits of merger and
acquisitions as quickly as anticipated, or at all in the way the
financial analysts expected;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | variations in actual and anticipated operating results;                                                                                                 
|
| |  |  | variations in actual and anticipated operating results of customers or competitors;                                                                     
|
| |  |  | the volatility of stock within the sectors within which the Company conducts business;                                                                  
|
| |  |  | general decline in economic conditions; and                                                                                                             
|
| |  |  | reductions in the volume of trading in the Companys common stock.                                                                                      

During the 52 week period ended November 5, 2002 , the high and low closing price for the
Companys common stock was $3.28 and $1.36 respectively.

Interland operates in a new and evolving market.The market for Web hosting
and applications hosting services for small- and medium-sized businesses
is new and evolving rapidly. The Companys future
growth, if any, will depend upon the willingness of small- and medium-sized
businesses to outsource Web and applications hosting services, the Companys
ability to increase its average revenues per customer, and its ability to
retain customers. For the year ended August 31, 2002 the Companys average
monthly revenue per customer account was $40.25 and our average monthly
customer turnover rate was 3.8%; as compared to $46.72 and 3.3% for the year
ended August 31, 2001. The market for Interlands services may not develop
further, consumers may not widely adopt its services and significant numbers of
businesses or organizations may not use the Internet for commerce and
communication. If this market fails to develop further or develops more slowly
than expected, or if the Companys services do not achieve broader market
acceptance, the Company will not be able to grow its customer base. In
addition, the Company must be able to differentiate itself from its competition
through its service offerings and brand recognition. These activities may be
more expensive than the Company anticipates, and it may not be successful in
differentiating itself, achieving market acceptance of its services or selling
additional services to its existing customer base.

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Because Interlands target markets are volatile, the Company may
face a loss of customers or a high level of non-collectible accounts.The Company intends to
concentrate on serving small- and medium-sized businesses (SMB). The SMB
market contains many businesses that will not be successful, and are
consequently they present a substantially greater risk for non-collectible
accounts receivable, and for non-renewal. Moreover, a significant portion of
this target market is highly sensitive to price, and may be lost to a low-cost
competitor. Because few businesses in this target market employ trained
technologists, they tend to generate a high number of customer service and
technical support calls. The expense of responding to these calls is
considerable, and the expense is likely to increase in direct proportion to
revenue, potentially limiting the scalability of the business. Additionally,
if the customer becomes dissatisfied with the Companys response to such calls,
cancellation, non-payment, or non-renewal becomes more likely. Interlands
strategy for minimizing the negative aspects of its target market include:



| |  |  | continued expenditure on sales and marketing to replace failing customers;                                                      
| | - |  | --------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | capitalizing on planned efficiencies to become a profitable provider at the lowest sustainable price;                           
|
| |  |  | automating customer care and technical support to reduce the cost per
call, and to minimize the time spent by Company personnel;
|
| |  |  | intensive training and supervision of customer care and technical
support personnel to maximize customer satisfaction.          

The Company can give no assurance, however, that any of these measures
will be successful, and the Companys failure to manage these risks will
decrease revenues and profitability.

If the Company does not successfully integrate the operations and personnel of
its recent acquisitions in a timely manner, business will be disrupted and
operating results will be negatively affected.The Companys acquisitions
involve risks related to the integration and management of these companies
operations and personnel. Integration will be a complex, time consuming and
expensive process and may disrupt the Companys business if not completed in a
timely and efficient manner. The Company must operate as a combined
organization utilizing common information and telecommunications systems,
operating procedures, financial controls and human resources practices.

The Company may encounter substantial difficulties, costs and delays
involved in integrating the operations of all affiliated companies, including:



| |  |  | potential incompatibility of business cultures;                                                                                                    
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | potential conflicts in marketing or other important relationships;                                                                                 
|
| |  |  | potential operating inefficiencies and increased costs
associated with having and integrating different information and
telecommunications systems;
|
| |  |  | potential decline in the level of customer service and
customer satisfaction; and                                                                  
|
| |  |  | the loss of key employees and diversion of the attention of
management from other ongoing business concerns.                                       

The benefits of the acquisitions of Interland-Georgia, CommuniTech.Net,
Dialtone, and iNNERHOST may be less than expected and the costs associated
with these acquisitions could be higher than expected, which could harm the
Companys financial results and cause a decline in the value of its common
stock.The Company expects to realize cost reductions due to synergies created
by recent acquisitions in areas such as integration and expansion of nationwide
technical support capabilities over a larger customer base, integration of
information and telecommunications systems, marketing the larger combined
business, elimination of excess data center capacity and economies of scale for
the combined companys telecommunications costs.

Through August 31, 2002, as part of the integration with Interland-Georgia, the Company has:



| |  |  | reduced 480 positions from its total headcount;                     
| | - |  | --------------------------------------------------------------------
|
| |  |  | reduced the number of facilities by three; and,                     
|
| |  |  | incurred approximately $9.8 million of merger and integration costs.

Although the Company expects that it will realize cost synergies, it
cannot guarantee that it will realize these cost synergies or firmly state the
amount of any specific cost synergies. The Company expects to incur costs

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associated with the consolidation and integration of the companies services
and operations. If the total costs of consolidation and integration activities
exceed estimates, or if the cost synergies are less than expected, the
Companys revenues and profitability would suffer. Any shortfall in
anticipated operating results could cause the market price of the Companys
common stock to decline. In addition, the market price of Interlands common
stock will decline significantly if it does not experience the business
benefits of the acquisitions and accompanying synergies as quickly or in as
great amounts as security analysts expect.

The Company has incurred significant accounting charges relating to its recent
acquisitions of Interland-Georgia, CommuniTech.Net,
Dialtone, and iNNERHOST which will delay projected achievement of profitability for the Web hosting
business.The Company has accounted for all company acquisitions using the
purchase method of accounting. Under this accounting method the purchase price
is allocated to assets acquired and liabilities assumed. The following
acquisitions have been recorded:



| |  |  | Interland-Georgia Based upon the purchase price of
$127.2 million, the Company has recorded $17.5 million of intangible
assets and $103.0 million of goodwill on its balance sheet, which
resulted in annual amortization expense of the intangible assets of
$3.4 million in fiscal 2002.                                                                                                                                                                                                                                                                                                                                            
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | CommuniTech.Net Based on a purchase price of $11.0 million,
the Company has recorded $3.7 million of intangible assets and $6.9
million of goodwill on its balance sheet, which resulted in annual
amortization expense of intangible assets of $0.7 million in fiscal
2002.                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | Dialtone Based on a purchase price of $15.8 million, the
Company has recorded $4.2 million of intangible assets and $10.1
million of goodwill on its balance sheet, which resulted in annual
amortization expense of intangible assets of $0.5 million in fiscal
2002.                                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | iNNERHOST Based on the purchase price of
$17.6 million, the
Company has recorded $12.8 million of intangible assets, which
resulted in annual amortization expense of intangible assets of $0.2
million in fiscal 2002. The purchase price allocation for iNNERHOST
is preliminary pending the completion of the related valuation
analysis that will be completed in the second quarter of fiscal
2003. As such, there has not yet been an allocation of the purchase
price to goodwill.
  Goodwill will be evaluated annually for
impairment and any potential impairment will affect the Companys
financial results in the future.

If the Company acquires additional companies, customer accounts or
technologies, it may record additional goodwill and intangible
assets, and may face difficulties in integrating those acquisitions.As part of its strategy to grow the Web
hosting business, the Company has made a number of acquisitions and
investments, and it may continue to pursue acquisitions of businesses or assets
that it believes are complementary to its business. The Company will be
required to record material goodwill and other intangible assets in the likely
event the purchase price of the acquired businesses exceeds the fair value of
the net assets acquired. In the past, this has resulted in significant
amortization charges, and these charges may increase in future periods as the
Company continues its acquisition strategy. The acquired businesses may not
achieve the revenues and earnings anticipated to be achieved. If the Company
acquires another company, it will likely raise the same risks, uncertainties
and disruptions as discussed above with respect to its recent acquisitions.
For example, the Company may not be able to successfully assimilate the
additional personnel, operations, acquired technology and customer accounts
into its business. Furthermore, the Company may have to incur debt or issue
equity securities to pay for any additional future acquisitions or investments,
the issuance of which could be dilutive to existing shareholders. As a result,
there could be a material adverse effect on the Companys future financial
condition and results of operations.

Interland could incur liabilities in the future relating to its PC Systems
business, which could cause additional operating losses.The Company could incur liabilities arising from the sale of the PC
Systems business to GTG PC. According to the terms of the agreement with GTG
PC, the Company agreed to retain liabilities relating to the operation of the
PC systems business arising prior to the closing of the transaction, including
liabilities for taxes, contingent liabilities and liabilities for accounts
payable accrued prior to the closing. The Company also agreed to indemnify GTG
PC and its affiliates for any breach of the Companys representations and
warranties contained in the agreement for a period of two years, or for the
applicable statute of limitations for matters related to taxes. This
indemnification obligation is capped at $10.0 million. Except for claims for
fraud or injunctive relief, this indemnity is the exclusive remedy for any
breach of the Companys representations, warranties and covenants contained in
the agreement with GTG PC. Accordingly, in the future, Interland could be
required to make payments to GTG PC and its affiliates in accordance with the
agreement in which it sold the PC Systems business, which could adversely
affect its future results of operations.

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Interland could incur additional losses related to its restructuring.The
Company may incur additional losses if the Company underestimated the costs
associated with its restructuring. In connection with the acquisition of
Interland-Georgia in August 2001, the Company adopted a restructuring plan to
close several offices and data centers, discontinue the use and development of
software and eliminate other redundant assets. As a result, the Company
recorded a restructuring charge of $110.3 million. The restructuring charge
included $9.4 million related to the closure of offices and data centers, the
write-off of $69.7 million of goodwill and intangible assets relating to prior
acquisitions, $26.9 million for asset write-downs, $0.7 million related to
personnel termination costs and $3.6 million related to other costs. The
balance of the
restructuring reserve at August 31, 2001 after payments and write downs was $12.5
million. The balance of the restructuring reserve at August 31, 2002 is $8.8
million and reflects reductions
of $2.3 million for payments made, $1.9 million related to the settlement of
data connectivity contract obligations, and an increase of
$0.5 million to reflect the net impact of revised facility exit plans and lease
termination settlements recorded during fiscal 2002.
The Company accrued liabilities, which the Company believes are adequate to cover
all of the costs associated with the restructuring. However, if the estimates
are inadequate, the Company will have to record additional restructuring
charges

Interland may be required to pay sales and use taxes related to its
discontinued operations.During the third quarter of 1997, the Company began
to collect and remit applicable sales or use taxes in nearly all states, although its mail order subsidiary briefly ceased collecting such taxes in several states, during portions of 1999 and 2000. The
Company is a party to agreements with nearly all states, which generally limit
its liability, if any, for non-remittance of sales and use taxes prior to such
agreements effective dates. The Company has previously accrued a liability
for the estimated settlement cost of issues related to sales and use taxes not
covered by such agreements. Management believes the resolution of any matters
relating to the non-remittance of sales or use taxes will not materially affect
the Companys business, financial position and results of operations. This potential liability will remain with Interland even though it sold
the PC Systems business.

Interland may not effectively execute its Web hosting strategy and, as a
result, others may seize the market opportunity that it has identified.If
Interland fails to execute its Web hosting strategy in a timely or effective
manner, its competitors will be able to seize the opportunity the Company had
identified to address the Web hosting needs of small- and medium-sized
businesses. Interlands business strategy is complex and requires that it
successfully and simultaneously complete many tasks, and the failure to
complete any one of these following tasks may jeopardize its strategy as a whole.



| |  |  | market its services and build its brand name effectively;                                    
| | - |  | ---------------------------------------------------------------------------------------------
|
| |  |  | develop new products and services;                                                           
|
| |  |  | continue to enhance the efficiency of its infrastructure to accommodate additional customers;
|
| |  |  | continue to expand its customer base;                                                        
|
| |  |  | continue to respond to competitive developments;                                             
|
| |  |  | influence and respond to emerging industry standards and other changes; and                  
|
| |  |  | attract, retain and motivate qualified personnel.                                            

Because Interland faces intense competition, it may not be able
to operate profitably in its markets.The Web hosting and applications hosting
markets are highly competitive and are becoming more so, which could hinder our ability to successfully market our products and
services. The Company may not have the resources, expertise or other competitive factors to
compete successfully in the future. Because there are few
substantial barriers to entry, and the Company expects that it will face
additional competition from existing competitors and new market entrants in the
future. Many of Interlands competitors
have greater name recognition and more established relationships in the
industry and greater resources. As a result, these competitors may be able to:



| |  |  | develop and expand their network infrastructures and service offerings more rapidly;                                                 
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | adapt to new or emerging technologies and changes in customer requirements more quickly;                                             
|
| |  |  | take advantage of acquisition and other opportunities more readily; and                                                              
|
| |  |  | devote greater resources to the marketing and sale of their
services and adopt more aggressive pricing policies than the Company
can.

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Current and potential competitors in the market include Web hosting
service providers, applications hosting providers, Internet service providers,
telecommunications companies, large information technology firms that provide a
wide array of information technology services and computer hardware suppliers.
These competitors may operate in one or more of these areas and include
companies such as Affinity, XO Communications and Verio.

Interlands ability to successfully market its services could be substantially
impaired if it is unable to deploy new Internet applications or if new Internet
applications it deploys prove to be unreliable, defective or incompatible.The
Company cannot provide assurances that it will not experience difficulties that
could delay or prevent the successful development, introduction or marketing of
new Internet application services in the future. If any newly introduced
Internet applications suffer from reliability, quality or compatibility
problems, market acceptance of Interlands services will be hindered and its ability to
attract new customers will be adversely affected. The Company cannot assure
that new applications it deploys will be free from any reliability, quality or
compatibility problems. If the Company incurs increased costs or is unable,
for technical or other reasons, to host and manage new Internet applications or
enhancements of existing applications, its ability to successfully market its
services will be impaired. In addition, the Company cannot provide assurances
that its customers will accept new services or applications.

Impairment of Interlands intellectual property rights could negatively affect
its business or could allow competitors to minimize any advantage that
Interlands proprietary technology may give it.The
Company currently has no patented technology that would
preclude or inhibit competitors from entering the Web hosting market that it
serves. While the Company has filed, and may file patent applications on particular aspects
of its technology, it cannot be sure that it will receive any patents. While
it is the Companys practice to enter into
agreements with all employees and with some of its customers
and suppliers to prohibit or restrict the disclosure of
proprietary information, the Company cannot be sure that these contractual
arrangements or the other steps it takes to protect its proprietary rights will
prove sufficient to prevent illegal use of its proprietary rights or to deter
independent, third-party development of similar proprietary assets.

Effective copyright, trademark, trade secret and patent
protection may not be available in every country in which the Companys
products and services are offered. The Company is currently, and may
in the future, be involved in legal disputes relating to the validity or
alleged infringement of its intellectual property
rights. Intellectual property litigation is
typically extremely costly and can be disruptive to business operations by
diverting the attention and energies of management and key technical personnel.
In addition, adverse decisions will subject the Company to liabilities,
require it to seek licenses from others, prevent it from using, licensing or
selling certain of its products and services, or cause disruptions to its
operations or the markets in which it competes, which will decrease
profitability.

Periodically, the
Company is made aware of claims, or potential claims, that technology it uses may
infringe on intellectual property rights held by others. The Company has
accrued a liability and charged operations for the estimated costs of
settlement or adjudication of certain asserted and unasserted claims for
alleged infringement relating to its discontinued operations prior to the
balance sheet date. Resolution of these claims could be costly and
decrease profitability.

Interland could face unanticipated losses from
litigation.Interland is defending
an employee class action lawsuit filed in the U.S. District Court for Idaho.
In this case five individual plaintiffs claim they were employees of Micron
Electronics between 1999 and April 2001. The plaintiffs claim that they, and
other similarly situated employees, did not receive overtime pay to which they
were entitled under the Fair Labor Standards Act. Interland disputes these
claims and believes the plaintiffs are not entitled to any material additional
wages. The court conditionally certified a class of not more than 800 former
employees and notices of the litigation are being sent to these persons to give
them the opportunity to opt in to the litigation. The parties are continuing
to conduct discovery. At this early stage of the litigation Interland is
unable to estimate its total expenses, possible loss or range of loss that may

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ultimately be connected with the matter. This potential liability remains with
Interland even though it sold the PC Systems business.

Periodically, the Company is made aware that technology it used in its
discontinued operations may have infringed on intellectual property rights held
by others. The Company has evaluated all such claims and, if necessary and
appropriate, sought to obtain licenses for the use of such technology. If the
Company or its suppliers were unable to obtain licenses necessary to use
intellectual property in its discontinued operations products or processes, it
may be forced to defend legal actions taken against it relating to allegedly
protected technology. The Company evaluates all such claims and has accrued a
liability and charged operations for the estimated costs of settlement or
adjudication of claims for alleged infringement as of the respective dates of
the balance sheets included in this report. Resolution of these claims could
have a material adverse effect on future results of operations and cash flows.

If Interland is unable to attract and retain
key personnel, it may not be able to compete effectively in its market.The future success of
Interland will depend, in part, on its ability to attract and retain key
management, technical and sales and marketing personnel. The Company attempts
to enhance its management and technical expertise by recruiting qualified
individuals who possess desired skills and experience in certain targeted
areas. The Company experiences strong competition for such personnel in the
Web hosting industry. The Companys inability to retain employees and attract
and retain sufficient additional employees, and information technology,
engineering and technical support resources could adversely affect
its ability to remain competitive in its markets. The Company may
face the loss of key personnel which could limit the ability of the
Company to develop and market its products and services.

If the Company is unable to obtain sufficient telecommunications network
capacity at reasonable costs, it will not be able to provide services at prices
acceptable to its customers, thereby reducing demand for its services.The
success of Interland will depend upon the capacity, reliability and security of
its network infrastructure, including the capacity leased from its
telecommunications network suppliers. Interlands network currently delivers
service through Cable & Wireless, McLeod, Qwest, Electric Lightwave, Genuity,
WorldCom, Level 3, XO, Sprint and Touch America. Some of these suppliers are
also competitors. The Companys operating results depend, in part, upon the
pricing and availability of telecommunications network capacity from a limited
number of providers. If capacity is not available as the Companys customers
usage increases, the Companys network will not be able to achieve or maintain
sufficiently high data transmission capacity, reliability or performance. In
addition, the Companys business would suffer if its network suppliers
increased the prices for their services and it were unable to pass along any
increased costs to its customers. Any failure on the part of the Company or the
part of its third-party suppliers to achieve or maintain high data transmission
capacity, reliability or performance could significantly reduce the Companys
ability to handle the expected increase on customer demand for its services,
damage its business reputation and increase its costs.

Interland depends on its reseller sales channel to market and sell many of its
services. Interland does not control its resellers, and if it fails to develop
or maintain good relations with resellers, it may not achieve the growth in
customers and revenues that it expects.An element of the strategy for the
Companys growth is to further develop the use of third parties that resell its
services. Many of these resellers are Web development or Web consulting
companies that also sell Interlands Web hosting services, but that generally
do not have established customer bases to which they can market these services.
The Company is not currently dependent on any one reseller to generate a
significant level of business, but it has benefited from business generated by
the reseller channel. Although Interland attempts to provide its resellers
with incentives such as price discounts on its services that the resellers seek
to resell at a profit, the failure of its services to be commercially accepted
in some markets, whether as a result of a resellers performance or otherwise,
could cause its current resellers to discontinue their relationships with us.

Changes in technology and industry standards
may cause Interland's products to be non-competitive or increase its
product costs. In
the Web and applications hosting industry, service providers must keep pace
with evolving technologies in order to offer relevant, sophisticated services
on a timely basis to meet rapidly changing customer demands. The future
success of Interland will depend, in part, upon its ability to offer services
that incorporate leading technologies, address the increasingly sophisticated
and varied needs of its current and prospective Web and applications hosting
customers and respond to technological advances and emerging industry standards
and practices on a timely and cost-effective basis. The market for Web hosting
services is characterized by rapidly changing and unproven technologies,
evolving industry standards, changes in customer needs, emerging competition
and frequent introductions of new services. To be successful, the Company must
continually improve the performance, features and reliability of its services,
including its proprietary technologies, and modify its business strategies
accordingly. Interland could also incur substantial costs if it needs to
modify its services or infrastructure in order to adapt to these changes.
Technological advances

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may have the effect of encouraging some of the Companys current or future
customers to rely on in-house personnel and equipment to furnish the services
that it currently provides. If the Company is unable to maintain the
compatibility of its services with products offered by its vendors, it will
lose or fail to attract customers.

Interland believes that its ability to compete successfully also depends
upon the continued compatibility of its services with products offered by
various vendors. Enhanced or newly developed third-party products may not be
compatible with its infrastructure, and these products may not adequately
address the needs of its customers. Although Interland currently intends to
support emerging standards, industry standards may not be established, and,
even if they are established, the Company may not be able to conform to these
new standards in a timely fashion in order to maintain a competitive position
in the market. The Companys failure to conform to the prevailing standard, or
the failure of a common standard to emerge, will cause it to lose customers or
fail to attract new customers. In addition, products, services or technologies
developed by others could render the Companys services noncompetitive or
obsolete.

Interlands ability to attract customers is dependent on the reliable
performance and growth of use of the Internet.Use of the Internet for
retrieving, sharing and transferring information among businesses, consumers,
suppliers and partners has recently begun to increase rapidly. The adoption of
the Internet for information retrieval and exchange, commerce and
communication, particularly by those enterprises that have historically relied
upon alternative means of information gathering, commerce and communications
generally requires the adoption of a new medium of conducting business and
exchanging information. If the Internet as a commercial or business medium
fails to develop further or develops more slowly than expected, the Company
will not be able to grow its customer base as quickly as desired and its
customers would be less likely to require more complex, higher services from
it.

Interland is vulnerable to system failures, which could harm its reputation,
cause its customers to seek reimbursement for services and cause its customers
to seek another provider for services.The Company must be able to operate the
systems that manage its network around the clock without interruption. Its
operations will depend upon its ability to protect its network infrastructure,
equipment and customer files against damage from human error, fire,
earthquakes, hurricanes, floods, power loss, telecommunications failures,
sabotage, intentional acts of vandalism and similar events. Although the
Company has attempted to build redundancy into its networks, its networks are
currently subject to various points of failure. For example, a problem with
one of its routers (devices that move information from one computer network to
another) or switches could cause an interruption in the services the Company
provides to a portion of its customers. In the past, the Company has
experienced periodic interruptions in service. In addition, failure of any of
its telecommunications providers to provide the data communications capacity
that the Company requires, as a result of human error, a natural disaster or
other operational disruption, could result in interruptions in services. Any
future interruptions could:



| |  |  | cause customers or end users to seek damages for losses incurred;             
| | - |  | ------------------------------------------------------------------------------
|
| |  |  | require the Company to replace existing equipment or add redundant facilities;
|
| |  |  | damage the Companys reputation for reliable service;                         
|
| |  |  | cause existing customers to cancel their contracts; or                        
|
| |  |  | make it more difficult for the Company to attract new customers.              

Interlands data centers and networks may be vulnerable to security breaches.
A significant barrier to electronic commerce and communications is the need for
secure transmission of confidential information over public networks. Some of
the Companys services rely on security technology licensed from third parties
that provides the encryption and authentication necessary to effect the secure
transmission of confidential information. Despite the design and
implementation of a variety of network security measures by the Company,
unauthorized access, computer viruses, accidental or intentional actions and
other disruptions could occur. In the past, the Company has experienced, and
in the future it may experience, delays or interruptions in service as a result
of the accidental or intentional actions of Internet users, current and former
employees or others. In addition, inappropriate use of the network by third
parties could also potentially jeopardize the security of confidential
information, such as credit card and bank account numbers stored in the
Companys computer systems. These security problems could result in the
Companys liability and could also cause the loss of existing customers and
potential customers. In addition, third parties could interfere with the
operation of customers Web sites through intentional attacks including causing
an overload of traffic to these Web sites.

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Although the Company continues to implement industry-standard security
measures, third parties may be able to overcome any measures that it
implements. The costs required to eliminate computer viruses and alleviate
other security problems could be prohibitively expensive and the efforts to
address such problems could result in interruptions, delays or cessation of
service to customers, and harm the Companys reputation and growth. Concerns
over the security of Internet transactions and the privacy of users may also
inhibit the growth of the Internet, especially as a means of conducting
commercial transactions.

Disruption of Interlands services caused by unknown software defects could
harm its business and reputation.The Companys service offerings depend on
complex software, including proprietary software tools and software licensed
from third parties. Complex software often contains defects, particularly when
first introduced or when new versions are released. The Company may not
discover software defects that affect its new or current services or
enhancements until after they are deployed. Although Interland has not
experienced any material software defects to date, it is possible that defects
may occur in the software. These defects could cause service interruptions,
which could damage its reputation or increase its service costs, cause it to
lose revenue, delay market acceptance or divert its development resources.

Providing services to customers with critical Web sites and Web-based
applications could potentially expose Interland to lawsuits for customers lost
profits or other damages.Because the Companys Web hosting and applications
hosting services are critical to many of its customers businesses, any
significant interruption in those services could result in lost profits or
other indirect or consequential damages to its customers as well as negative
publicity and additional expenditures for it to correct the problem. Although
the standard terms and conditions of the Companys customer contracts disclaim
liability for any such damages, a customer could still bring a lawsuit against
it claiming lost profits or other consequential damages as the result of a
service interruption or other Web site or application problems that the
customer may ascribe to it. A court might not enforce any limitations on its
liability, and the outcome of any lawsuit would depend on the specific facts of
the case and legal and policy considerations even if the Company believes it
would have meritorious defenses to any such claims. In such cases, it could be
liable for substantial damage awards. Such damage awards might exceed its
liability insurance by unknown but significant amounts, which would seriously
harm its business.

Interland could face liability for information distributed through its network.
The law relating to the liability of online services companies for information
carried on or distributed through their networks is currently unsettled.
Online services companies could be subject to claims under both United States
and foreign law for defamation, negligence, copyright or trademark
infringement, violation of securities laws or other theories based on the
nature and content of the materials distributed through their networks.
Several private lawsuits seeking to impose such liability upon other entities
are currently pending against other companies. In addition, organizations and
individuals have sent unsolicited commercial e-mails from servers hosted by
service providers to massive numbers of people, typically to advertise products
or services. This practice, known as spamming, can lead to complaints
against service providers that enable such activities, particularly where
recipients view the materials received as offensive. The Company may, in the
future, receive letters from recipients of information transmitted by its
customers objecting to such transmission. Although the Company prohibits its
customers by contract from spamming, it cannot provide assurances that its
customers will not engage in this practice, which could subject it to claims
for damages.

In addition, the Company may become subject to proposed legislation that
would impose liability for or prohibit the transmission over the Internet of
some types of information. Other countries may also enact legislation or take
action that could impose liability on the Company or cause it not to be able to
operate in those countries. The imposition upon the Company and other online
services of potential liability for information carried on or distributed
through its systems could require it to implement measures to reduce its
exposure to this liability, which may require it to expend substantial
resources, or to discontinue service offerings. The increased attention
focused upon liability issues as a result of these lawsuits and legislative
proposals also could affect the growth of Internet use.

Interlands business operates in an
uncertain legal environment, where future government regulation and
lawsuits could restrict Interlands business or cause unexpected
losses. Due to the increasing
popularity and use of the Internet, laws and regulations with respect
to the Internet may be adopted at federal, state and local levels, covering
issues such as user privacy, freedom of expression, pricing, characteristics
and quality of products and services, taxation, advertising, intellectual
property rights, information security and the convergence of traditional
telecommunications services with Internet communications. The Company cannot
fully predict the nature of future legislation and the manner in which
government authorities may interpret and enforce. As a result, Interland and
its customers could be subject to potential liability under future legislation,
which in turn could have a material adverse effect on the Companys business.
For example, if legislation were adopted in the

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U.S. or internationally that makes transacting business over the Internet less
favorable or otherwise curtails the growth of the Internet, the Companys
business would suffer. The adoption of any such laws or regulations might
decrease the growth of the Internet, which in turn could decrease the demand
for the Companys services or increase the cost of doing business or in some
other manner harm its business.

In addition, applicability to the Internet of existing laws governing
issues such as property ownership, copyright and other intellectual property
issues, taxation, libel, obscenity and personal privacy is uncertain. These
laws generally pre-date the advent of the Internet and related technologies
and, as a result, do not consider or address the unique issues of the Internet
and related technologies. Changes to laws intended to address these issues
could create uncertainty in the marketplace that could reduce demand for the
Companys services or increase the cost of doing business as a result of costs
of litigation or increased service delivery costs.

Instability in international markets or changes in
international regulations could cause Interland to lose its ability
to collect its international revenue. The Company derived
approximately 10% of its revenues from international sales for the year ended
August 31, 2002, although the Company does not have operations outside the
United States. International business is subject to a number of special risks,
including:



| |  |  | different regulatory requirements;                                                
| | - |  | ----------------------------------------------------------------------------------
|
| |  |  | different privacy, censorship and liability standards and regulations;            
|
| |  |  | less protective intellectual property laws;                                       
|
| |  |  | different technology standards;                                                   
|
| |  |  | unexpected changes in, or imposition of, regulatory requirements;                 
|
| |  |  | tariffs and other barriers and restrictions;                                      
|
| |  |  | general geopolitical risks such as political and economic instability;            
|
| |  |  | hostilities among countries and changes in diplomatic and trade relationships; and
|
| |  |  | other factors beyond the control of the Company.                                  




ITEM 7A.  Quantitative And Qualitative Disclosures About Market Risk

Substantially all of the Companys liquid investments and a majority of
its debt are at fixed interest rates, and therefore the fair value of these
instruments is affected by changes in market interest rates. As of August 31,
2002, approximately 65% of the Companys liquid investments mature within three
months and 28% mature within one year. As of August 31, 2002, management
believes the reported amounts of liquid investments and debt to be reasonable
approximations of their fair values. Generally, the fair market value of fixed
interest rate investment securities will increase as interest rates fall and
decrease as interest rates rise. The Company does not use derivative
financial instruments in its investment portfolio. The portfolio has been
primarily comprised of commercial paper rated A1/P1, bank certificates rated AA
or better, and corporate medium-term notes rated AA or better. At August 31,
2002, the Companys investment portfolio included fixed rate securities with an
estimated fair value of $114.6 million. The interest rate changes affect the
fair market values but do not impact earnings or cash flows

The fair market value of long term fixed interest rate debt is also
subject to interest rate risk. Generally, the fair market of fixed interest
rate debt will increase as interest rates fall and decrease as interest rates
rise. The interest rate changes affect the fair market values but do not
impact earnings or cash flow. The estimated fair value of the Companys
long-term debt at August 31, 2002 was $31.2 million.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                            |                                                                                                            |  |      |    | 
|------------------------------------------- | ---------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                            |                                                                                                            |  | Page
|                                            |                                                                                                            |  |     
|Consolidated Financial Statements:          |                                                                                                            |  |      |   
|                                            | Consolidated Statements of Operations for the Fiscal Years Ended August 31, 2002, 2001, and 2000           |  |      | 36 | 
|                                            | Consolidated Balance Sheets as of August 31, 2002 and 2001                                                 |  |      | 37 | 
|                                            | Consolidated Statements of Shareholders Equity for the
Fiscal Years Ended August 31, 2002, 2001, and 2000 |  |      | 38 | 
|                                            | Consolidated Statements of Cash Flows for the Fiscal Years Ended August 31, 2002, 2001, and 2000           |  |      | 39 | 
|                                            | Notes to Consolidated Financial Statements                                                                 |  |      | 40 | 
|Report of Independent Accountants           |                                                                                                            |  | 65   |   
|Quarterly Financial Information (Unaudited) |                                                                                                            |  | 66   |   
|Financial Statement Schedule:               |                                                                                                            |  |      |   
|                                            | Schedule IIValuation and Qualifying Accounts for the Fiscal Years August 31, 2002, 2001, and 2000         |  |      | 79 | 

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INTERLAND, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share amounts)

|                                                |                                        |                                             |                                                  |        |                   |         |            |         |            |          |         |        |        |        | 
|----------------------------------------------- | -------------------------------------- | ------------------------------------------- | ------------------------------------------------ | ------ | ----------------- | ------- | ---------- | ------- | ---------- | -------- | ------- | ------ | ------ | ------ | 
|                                                |                                        |                                             |                                                  |        | Fiscal Year Ended
|                                                |                                        |                                             |                                                  |        |                  
|                                                |                                        |                                             |                                                  |        | August 31,        |         | August 31, |         | August 31,
|                                                |                                        |                                             |                                                  |        | 2002              |         | 2001       |         | 2000      
|                                                |                                        |                                             |                                                  |        |                   |         |            |         |           
|Revenues                                        |                                        | $                                           | 101,628                                          |        |                   | $       | 60,752     |         |            | $        | 32,862  |       
|Cost of revenues                                |                                        |                                             | 55,231                                           |        |                   |         | 39,420     |         |            |          | 24,335  |       
|                                                |                                        |                                             |                                                  |        |                   |         |            |         |            |          |         |       
|                                                |                                        |                                             | Gross margin                                     |        |                   | 46,397  |            |         |            | 21,332   |         |        |        | 8,527  | 
|Operating expenses:                             |                                        |                                             |                                                  |        |                   |         |            |         |            |          |         |       
|                                                | Sales, marketing and technical support |                                             |                                                  | 52,055 |                   |         |            | 37,181  |            |          |         | 26,157 |       
|                                                | General and administrative             |                                             |                                                  | 46,583 |                   |         |            | 36,067  |            |          |         | 23,070 |       
|                                                | Goodwill amortization                  |                                             |                                                  |       |                   |         |            | 6,809   |            |          |         | 4,920  |       
|                                                | Bad debt expense                       |                                             |                                                  | 10,529 |                   |         |            | 2,232   |            |          |         | 570    |       
|                                                | Restructuring costs                    |                                             |                                                  | (1,324 | )                 |         |            | 110,278 |            |          |         |       |       
|                                                | Merger and integration costs           |                                             |                                                  | 8,138  |                   |         |            | 1,711   |            |          |         |       |       
|                                                | Other expense (income), net            |                                             |                                                  | 681    |                   |         |            | (1,637  | )          |          |         | 634    |       
|                                                |                                        |                                             |                                                  |        |                   |         |            |         |            |          |         |       
|                                                |                                        |                                             | Total operating expenses                         |        |                   | 116,662 |            |         |            | 192,641  |         |        |        | 55,351 | 
|                                                |                                        |                                             |                                                  |        |                   |         |            |         |            |          |         |       
|Operating loss                                  |                                        |                                             | (70,265                                          | )      |                   |         | (171,309   | )       |            |          | (46,824 | )     
|Loss on investments, net                        |                                        |                                             |                                                 |        |                   |         | (5,419     | )       |            |          | (592    | )     
|Interest income, net                            |                                        |                                             | 752                                              |        |                   |         | 8,317      |         |            |          | 11,476  |       
|                                                |                                        |                                             |                                                  |        |                   |         |            |         |            |          |         |       
|Loss from continuing operations before taxes    |                                        |                                             | (69,513                                          | )      |                   |         | (168,411   | )       |            |          | (35,940 | )     
|Income tax benefit                              |                                        |                                             | 64,241                                           |        |                   |         | 22,694     |         |            |          | 9,748   |       
|                                                |                                        |                                             |                                                  |        |                   |         |            |         |            |          |         |       
|Net loss from continuing operations             |                                        |                                             | (5,272                                           | )      |                   |         | (145,717   | )       |            |          | (26,192 | )     
|                                                |                                        |                                             |                                                  |        |                   |         |            |         |            |          |         |       
|Discontinued operations, net of tax             |                                        |                                             |                                                  |        |                   |         |            |         |            |          |         |       
|                                                |                                        | Income (loss) from discontinued operations  |                                                  |        |                  |         |            |         | (2,239     | )        |         |        | 67,735 |       
|                                                |                                        | Loss on disposal of discontinued operations |                                                  |        | (6,021            | )       |            |         | (209,238   | )        |         |        |       |       
|                                                |                                        |                                             |                                                  |        |                   |         |            |         |            |          |         |       
|                                                |                                        |                                             | Total income (loss) from discontinued operations |        |                   | (6,021  | )          |         |            | (211,477 | )       |        |        | 67,735 | 
|                                                |                                        |                                             |                                                  |        |                   |         |            |         |            |          |         |       
|Net income (loss)                               |                                        | $                                           | (11,293                                          | )      |                   | $       | (357,194   | )       |            | $        | 41,543  |       
|                                                |                                        |                                             |                                                  |        |                   |         |            |         |            |          |         |       
|Income (loss) per share, basic and diluted:     |                                        |                                             |                                                  |        |                   |         |            |         |            |          |         |       
|                                                |                                        | Continuing operations                       |                                                  | $      | (0.04             | )       |            | $       | (1.46      | )        |         | $      | (0.27  | )     
|                                                |                                        | Discontinued operations                     |                                                  |        | (0.04             | )       |            |         | (2.12      | )        |         |        | 0.70   |       
|                                                |                                        |                                             |                                                  |        |                   |         |            |         |            |          |         |       
|                                                |                                        | $                                           | (0.08                                            | )      |                   | $       | (3.58      | )       |            | $        | 0.43    |       
|                                                |                                        |                                             |                                                  |        |                   |         |            |         |            |          |         |       
|Number of shares used in per share calculation: |                                        |                                             |                                                  |        |                   |         |            |         |            |          |         |       
|                                                |                                        | Basic and diluted                           |                                                  |        | 137,389           |         |            |         | 99,596     |          |         |        | 96,447 |       

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

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INTERLAND, INC.
CONSOLIDATED BALANCE SHEETS(In thousands)

|                                                                                                                                                                       |                                            |   |         |         |            |   |            |         |  |  | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------- | ------- | ---------- | - | ---------- | ------- |  |  | 
|                                                                                                                                                                       |                                            |   |         |         | As of     
|                                                                                                                                                                       |                                            |   |         |         |           
|                                                                                                                                                                       |                                            |   |         |         | August 31, |   | August 31,
|                                                                                                                                                                       |                                            |   |         |         | 2002       |   | 2001      
|                                                                                                                                                                       |                                            |   |         |         |            |   |           
|Assets                                                                                                                                                                 |                                            |   |         |         |            |   |            |        
|Cash and cash equivalents                                                                                                                                              |                                            | $ | 62,693  |         |            | $ | 142,675    |        
|Short term investments                                                                                                                                                 |                                            |   | 43,388  |         |            |   | 31,468     |        
|Receivables, net                                                                                                                                                       |                                            |   | 9,139   |         |            |   | 11,576     |        
|Income taxes recoverable                                                                                                                                               |                                            |   | 2,019   |         |            |   | 23,847     |        
|Other current assets                                                                                                                                                   |                                            |   | 3,292   |         |            |   | 4,223      |        
|Restricted investments                                                                                                                                                 |                                            |   | 6,894   |         |            |   |           |        
|                                                                                                                                                                       |                                            |   |         |         |            |   |            |        
|                                                                                                                                                                       | Total current assets                       |   |         | 127,425 |            |   |            | 213,789 | 
|Restricted investments                                                                                                                                                 |                                            |   | 27,409  |         |            |   | 27,944     |        
|Property plant and equipment, net                                                                                                                                      |                                            |   | 59,058  |         |            |   | 59,849     |        
|Goodwill                                                                                                                                                               |                                            |   | 120,011 |         |            |   | 104,406    |        
|Intangibles, net                                                                                                                                                       |                                            |   | 53,250  |         |            |   | 17,216     |        
|Investments held to maturity                                                                                                                                           |                                            |   | 7,512   |         |            |   | 6,000      |        
|Other assets                                                                                                                                                           |                                            |   | 613     |         |            |   | 76         |        
|                                                                                                                                                                       |                                            |   |         |         |            |   |            |        
|                                                                                                                                                                       | Total assets                               |   | $       | 395,278 |            |   | $          | 429,280 | 
|                                                                                                                                                                       |                                            |   |         |         |            |   |            |        
|Liabilities and Shareholders Equity                                                                                                                                   |                                            |   |         |         |            |   |            |        
|Accounts payable                                                                                                                                                       |                                            | $ | 3,918   |         |            | $ | 5,751      |        
|Accrued expenses                                                                                                                                                       |                                            |   | 30,364  |         |            |   | 57,676     |        
|Current portion of long term debt and capital lease obligations                                                                                                        |                                            |   | 19,157  |         |            |   | 14,875     |        
|Deferred revenue                                                                                                                                                       |                                            |   | 19,629  |         |            |   | 15,859     |        
|                                                                                                                                                                       |                                            |   |         |         |            |   |            |        
|                                                                                                                                                                       | Total current liabilities                  |   |         | 73,068  |            |   |            | 94,161  | 
|Long-term debt and capital lease obligations                                                                                                                           |                                            |   | 12,009  |         |            |   | 24,231     |        
|Deferred revenue, long-term                                                                                                                                            |                                            |   | 1,195   |         |            |   | 1,563      |        
|Other liabilities                                                                                                                                                      |                                            |   | 11,276  |         |            |   | 12,895     |        
|                                                                                                                                                                       |                                            |   |         |         |            |   |            |        
|                                                                                                                                                                       | Total liabilities                          |   |         | 97,548  |            |   |            | 132,850 | 
|Commitments and contingencies                                                                                                                                          |                                            |   |         |         |            |   |            |        
|Common stock, $.01 par value, authorized 210 million and 200 million shares, respectively;
issued and outstanding 141.3 million and 137.8 million shares, respectively |                                            |   | 1,413   |         |            |   | 1,378      |        
|Additional capital                                                                                                                                                     |                                            |   | 296,949 |         |            |   | 282,738    |        
|Warrants                                                                                                                                                               |                                            |   | 1,690   |         |            |   | 1,690      |        
|Deferred compensation                                                                                                                                                  |                                            |   | (2,228  | )       |            |   | (3,310     | )      
|Note receivable from shareholder                                                                                                                                       |                                            |   | (2,735  | )       |            |   |           |        
|Retained earnings                                                                                                                                                      |                                            |   | 2,641   |         |            |   | 13,934     |        
|                                                                                                                                                                       |                                            |   |         |         |            |   |            |        
|                                                                                                                                                                       | Total shareholders equity                 |   |         | 297,730 |            |   |            | 296,430 | 
|                                                                                                                                                                       |                                            |   |         |         |            |   |            |        
|                                                                                                                                                                       | Total liabilities and shareholders equity |   | $       | 395,278 |            |   | $          | 429,280 | 
|                                                                                                                                                                       |                                            |   |         |         |            |   |            |        

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

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INTERLAND, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY(In thousands)

|                           |                          |                                                        |             |         |              |       |            |       |         |    |          |         |              |        |             |       |          |   |               |        |        |   |        |   |        |   |         |        |          |   |         |         |          |        | 
|-------------------------- | ------------------------ | ------------------------------------------------------ | ----------- | ------- | ------------ | ----- | ---------- | ----- | ------- | -- | -------- | ------- | ------------ | ------ | ----------- | ----- | -------- | - | ------------- | ------ | ------ | - | ------ | - | ------ | - | ------- | ------ | -------- | - | ------- | ------- | -------- | ------ | 
|                           |                          |                                                        |             |         |              |       |            |       |         |    |          |         |              |        |             |       |          |   |               |        |        |   |        |   | Note   |   |         |        |          |   |         |         |         
|                           |                          |                                                        |             |         | Common Stock |       |            |       |         |    |          |         |              |        |             |       |          |   | Receivable    |        |        |   |        |   | Total 
|                           |                          |                                                        |             |         |              |       | Additional |       |         |    |          |         | Deferred     |        | From        |       | Retained |   | Shareholders'
|                           |                          |                                                        |             |         | Shares       |       | Amount     |       | Capital |    | Warrants |         | Compensation |        | Shareholder |       | Earnings |   | Equity       
|                           |                          |                                                        |             |         |              |       |            |       |         |    |          |         |              |        |             |       |          |   |              
|Balance, September 1, 1999 |                          |                                                        | 96,272      |         |              | $     | 963        |       |         | $  | 127,951  |         |              | $      |            |       |          | $ |              |        |        | $ |       |   |        | $ | 329,585 |        |          | $ | 458,499 |        
|                           |                          | Stock sold                                             |             |         | 169          |       |            |       | 2       |    |          |         | 1,518        |        |             |       |         |   |               |        |       |   |        |   |       |   |         |        |         |   |         |         | 1,520    |       
|                           |                          | Stock options exercised                                |             |         | 222          |       |            |       | 2       |    |          |         | 2,680        |        |             |       |         |   |               |        |       |   |        |   |       |   |         |        |         |   |         |         | 2,682    |       
|                           |                          | Sale of property and patents to MTI                    |             |         |             |       |            |       |        |    |          |         | 2,285        |        |             |       |         |   |               |        |       |   |        |   |       |   |         |        |         |   |         |         | 2,285    |       
|                           |                          | Tax effect of stock options                            |             |         |             |       |            |       |        |    |          |         | 51           |        |             |       |         |   |               |        |       |   |        |   |       |   |         |        |         |   |         |         | 51       |       
|                           |                          | Net income                                             |             |         |             |       |            |       |        |    |          |         |             |        |             |       |         |   |               |        |       |   |        |   |       |   |         |        | 41,543   |   |         |         | 41,543   |       
|                           |                          |                                                        |             |         |              |       |            |       |         |    |          |         |              |        |             |       |          |   |               |        |        |   |        |   |        |   |         |        |          |   |         |        
|Balance, August 31, 2000   |                          |                                                        | 96,663      |         |              | $     | 967        |       |         | $  | 134,485  |         |              | $      |            |       |          | $ |              |        |        | $ |       |   |        | $ | 371,128 |        |          | $ | 506,580 |        
|                           |                          | Stock and options issued to purchase Interland-Georgia |             |         | 40,900       |       |            |       | 409     |    |          |         | 120,885      |        |             |       |         |   |               |        |       |   |        |   |       |   |         |        |         |   |         |         | 121,294  |       
|                           |                          | Stock sold                                             |             |         | 183          |       |            |       | 2       |    |          |         | 607          |        |             |       |         |   |               |        |       |   |        |   |       |   |         |        |         |   |         |         | 609      |       
|                           |                          | Stock options exercised                                |             |         | 10           |       |            |       |        |    |          |         | 8,081        |        |             |       |         |   |               |        |       |   |        |   |       |   |         |        |         |   |         |         | 8,081    |       
|                           |                          | Issuance of stock options                              |             |         |             |       |            |       |        |    |          |         |             |        |             |       |         |   |               |        | (3,657 | ) |        |   |       |   |         |        |         |   |         |         | (3,657   | )     
|                           |                          | Sale of property and patents to MTI                    |             |         |             |       |            |       |        |    |          |         | 18,680       |        |             |       |         |   |               |        |       |   |        |   |       |   |         |        |         |   |         |         | 18,680   |       
|                           |                          | Warrants issued to purchase Interland-Georgia          |             |         |             |       |            |       |        |    |          |         |             |        |             |       | 1,690    |   |               |        |       |   |        |   |       |   |         |        |         |   |         |         | 1,690    |       
|                           |                          | Amortization of deferred compensation                  |             |         |             |       |            |       |        |    |          |         |             |        |             |       |         |   |               |        | 347    |   |        |   |       |   |         |        |         |   |         |         | 347      |       
|                           |                          | Net loss                                               |             |         |             |       |            |       |        |    |          |         |             |        |             |       |         |   |               |        |       |   |        |   |       |   |         |        | (357,194 | ) |         |         | (357,194 | )     
|                           |                          |                                                        |             |         |              |       |            |       |         |    |          |         |              |        |             |       |          |   |               |        |        |   |        |   |        |   |         |        |          |   |         |        
|                           | Balance, August 31, 2001 |                                                        |             | 137,756 |              |       | $          | 1,378 |         |    | $        | 282,738 |              |        | $           | 1,690 |          |   | $             | (3,310 | )      |   | $      |  |        |   | $       | 13,934 |          |   | $       | 296,430 |         
|                           |                          | Stock issued to purchase:                              |             |         |              |       |            |       |         |    |          |         |              |        |             |       |          |   |               |        |        |   |        |   |        |   |         |        |          |   |         |         |          |       
|                           |                          |                                                        | CommuniTech |         |              | 5,375 |            |       |         | 54 |          |         |              | 10,727 |             |       |          |  |               |        |        |  |        |   |        |  |         |        |          |  |         |         |          | 10,781 | 
|                           |                          |                                                        | Innerhost   |         |              | 4,172 |            |       |         | 42 |          |         |              | 12,222 |             |       |          |  |               |        |        |  |        |   |        |  |         |        |          |  |         |         |          | 12,264 | 
|                           |                          | Stock sold                                             |             |         | 220          |       |            |       | 2       |    |          |         | 324          |        |             |       |         |   |               |        |       |   |        |   |       |   |         |        |         |   |         |         | 326      |       
|                           |                          | Stock options exercised                                |             |         | 653          |       |            |       | 5       |    |          |         | 803          |        |             |       |         |   |               |        |       |   |        |   |       |   |         |        |         |   |         |         | 808      |       
|                           |                          | Stock received in settlement of note                   |             |         | (238         | )     |            |       | (2      | )  |          |         | (404         | )      |             |       |         |   |               |        |       |   |        |   |       |   |         |        |         |   |         |         | (406     | )     
|                           |                          | Repurchase and retirement of stock                     |             |         | (6,626       | )     |            |       | (66     | )  |          |         | (9,713       | )      |             |       |         |   |               |        |       |   |        |   |       |   |         |        |         |   |         |         | (9,779   | )     
|                           |                          | Non-cash compensation                                  |             |         |             |       |            |       |        |    |          |         | 252          |        |             |       |         |   |               |        |       |   |        |   |       |   |         |        |         |   |         |         | 252      |       
|                           |                          | Amortization of deferred compensation                  |             |         |             |       |            |       |        |    |          |         |             |        |             |       |         |   |               |        | 1,082  |   |        |   |       |   |         |        |         |   |         |         | 1,082    |       
|                           |                          | Issuance of note receivable                            |             |         |             |       |            |       |        |    |          |         |             |        |             |       |         |   |               |        |       |   |        |   | (2,735 | ) |         |        |         |   |         |         | (2,735   | )     
|                           |                          | Net loss                                               |             |         |             |       |            |       |        |    |          |         |             |        |             |       |         |   |               |        |       |   |        |   |       |   |         |        | (11,293  | ) |         |         | (11,293  | )     
|                           |                          |                                                        |             |         |              |       |            |       |         |    |          |         |              |        |             |       |          |   |               |        |        |   |        |   |        |   |         |        |          |   |         |        
|Balance, August 31, 2002   |                          |                                                        | 141,312     |         |              | $     | 1,413      |       |         | $  | 296,949  |         |              | $      | 1,690       |       |          | $ | (2,228        | )      |        | $ | (2,735 | ) |        | $ | 2,641   |        |          | $ | 297,730 |        
|                           |                          |                                                        |             |         |              |       |            |       |         |    |          |         |              |        |             |       |          |   |               |        |        |   |        |   |        |   |         |        |          |   |         |        

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

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INTERLAND, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)

|                                                                                                                              |                                                     |                                                         |         |                   |         |            |          |            |         |   |         |          |        |  
|----------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ------------------------------------------------------- | ------- | ----------------- | ------- | ---------- | -------- | ---------- | ------- | - | ------- | -------- | ------ | -
|                                                                                                                              |                                                     |                                                         |         | Fiscal Year Ended
|                                                                                                                              |                                                     |                                                         |         |                  
|                                                                                                                              |                                                     |                                                         |         | August 31,        |         | August 31, |          | August 31,
|                                                                                                                              |                                                     |                                                         |         | 2002              |         | 2001       |          | 2000      
|                                                                                                                              |                                                     |                                                         |         |                   |         |            |          |           
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                                          |                                                     |                                                         |         |                   |         |            |          |            |         |   |         |         
|Net income (loss)                                                                                                             |                                                     | $                                                       | (11,293 | )                 |         | $          | (357,194 | )          |         | $ | 41,543  |         
|Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities from continuing operations: |                                                     |                                                         |         |                   |         |            |          |            |         |   |         |         
|                                                                                                                              | Loss (income) from discontinued operations          |                                                         |         | 6,021             |         |            |          | 211,477    |         |   |         | (67,735  | )     
|                                                                                                                              | Non-cash restructuring costs                        |                                                         |         |                  |         |            |          | 108,528    |         |   |         |         |       
|                                                                                                                              | Depreciation and amortization                       |                                                         |         | 36,719            |         |            |          | 24,585     |         |   |         | 12,257   |       
|                                                                                                                              | Loss on investments, net                            |                                                         |         |                  |         |            |          | 5,419      |         |   |         | 592      |       
|                                                                                                                              | Provision for doubtful accounts                     |                                                         |         | 10,529            |         |            |          | 2,232      |         |   |         | 570      |       
|                                                                                                                              | Other non-cash adjustments                          |                                                         |         | 4,271             |         |            |          | (995       | )       |   |         | (2,023   | )     
|                                                                                                                              | Changes in operating assets and liabilities:        |                                                         |         |                   |         |            |          |            |         |   |         |          |       
|                                                                                                                              |                                                     | Receivables, net                                        |         |                   | (9,407  | )          |          |            | (30,785 | ) |         |          | 2,121  |  
|                                                                                                                              |                                                     | Income tax recoverable                                  |         |                   | 19,008  |            |          |            |        |   |         |          |       |  
|                                                                                                                              |                                                     | Other current assets                                    |         |                   | 139     |            |          |            | 2,261   |   |         |          | (1,732 | )
|                                                                                                                              |                                                     | Deferred income taxes                                   |         |                   |        |            |          |            | (9,426  | ) |         |          | 142    |  
|                                                                                                                              |                                                     | Accounts payable, accrued expenses and deferred revenue |         |                   | (23,481 | )          |          |            | (3,448  | ) |         |          | 13,292 |  
|                                                                                                                              |                                                     | Other                                                   |         |                   |        |            |          |            | (121    | ) |         |          | 1,354  |  
|                                                                                                                              |                                                     |                                                         |         |                   |         |            |          |            |         |   |         |         
|Cash provided by (used in) operating activities of continuing operations                                                      |                                                     |                                                         | 32,506  |                   |         |            | (47,467  | )          |         |   | 381     |         
|                                                                                                                              |                                                     |                                                         |         |                   |         |            |          |            |         |   |         |         
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                                          |                                                     |                                                         |         |                   |         |            |          |            |         |   |         |         
|                                                                                                                              | Expenditures for property, plant, and equipment     |                                                         |         | (5,596            | )       |            |          | (20,090    | )       |   |         | (36,904  | )     
|                                                                                                                              | Purchases of held-to-maturity investment securities |                                                         |         | (83,872           | )       |            |          | (119,344   | )       |   |         | (245,949 | )     
|                                                                                                                              | Proceeds from maturities of investment securities   |                                                         |         | 70,440            |         |            |          | 211,066    |         |   |         | 260,700  |       
|                                                                                                                              | Deposits of restricted cash                         |                                                         |         | (6,213            | )       |            |          | (25,086    | )       |   |         |         |       
|                                                                                                                              | Proceeds from sale of investments                   |                                                         |         |                  |         |            |          | 5,989      |         |   |         |         |       
|                                                                                                                              | Equity investment                                   |                                                         |         |                  |         |            |          | (5,000     | )       |   |         | (7,000   | )     
|                                                                                                                              | Acquisitions, net of cash acquired                  |                                                         |         | (42,509           | )       |            |          | 14,413     |         |   |         | (58,297  | )     
|                                                                                                                              | Notes issued to related party                       |                                                         |         | (2,735            | )       |            |          |           |         |   |         |         |       
|                                                                                                                              | Other                                               |                                                         |         |                  |         |            |          | (480       | )       |   |         | (2,351   | )     
|                                                                                                                              |                                                     |                                                         |         |                   |         |            |          |            |         |   |         |         
|Cash provided by (used in) investing activities of continuing operations                                                      |                                                     |                                                         | (70,485 | )                 |         |            | 61,468   |            |         |   | (89,801 | )       
|                                                                                                                              |                                                     |                                                         |         |                   |         |            |          |            |         |   |         |         
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                                          |                                                     |                                                         |         |                   |         |            |          |            |         |   |         |         
|                                                                                                                              | Repayments of debt and capital lease obligations    |                                                         |         | (18,339           | )       |            |          | (6,456     | )       |   |         | (10,016  | )     
|                                                                                                                              | Proceeds from issuance of debt                      |                                                         |         |                  |         |            |          | 20,000     |         |   |         |         |       
|                                                                                                                              | Proceeds from issuance of common stock              |                                                         |         | 1,134             |         |            |          | 915        |         |   |         | 4,202    |       
|                                                                                                                              | Purchase and retirement of stock                    |                                                         |         | (9,779            | )       |            |          |           |         |   |         |         |       
|                                                                                                                              | Other                                               |                                                         |         |                  |         |            |          |           |         |   |         | 52       |       
|                                                                                                                              |                                                     |                                                         |         |                   |         |            |          |            |         |   |         |         
|Cash provided by (used in) financing activities of continuing operations                                                      |                                                     |                                                         | (26,984 | )                 |         |            | 14,459   |            |         |   | (5,762  | )       
|                                                                                                                              |                                                     |                                                         |         |                   |         |            |          |            |         |   |         |         
|Net cash provided by (used in) continuing operations                                                                          |                                                     |                                                         | (64,963 | )                 |         |            | 28,460   |            |         |   | (95,182 | )       
|Net cash provided by (used in) discontinued operations                                                                        |                                                     |                                                         | (15,019 | )                 |         |            | (85,787  | )          |         |   | 94,234  |         
|                                                                                                                              |                                                     |                                                         |         |                   |         |            |          |            |         |   |         |         
|Net decrease in cash and cash equivalents                                                                                     |                                                     |                                                         | (79,982 | )                 |         |            | (57,327  | )          |         |   | (948    | )       
|Cash and cash equivalents at beginning of period                                                                              |                                                     |                                                         | 142,675 |                   |         |            | 200,002  |            |         |   | 200,950 |         
|                                                                                                                              |                                                     |                                                         |         |                   |         |            |          |            |         |   |         |         
|Cash and cash equivalents at end of period                                                                                    |                                                     | $                                                       | 62,693  |                   |         | $          | 142,675  |            |         | $ | 200,002 |         
|                                                                                                                              |                                                     |                                                         |         |                   |         |            |          |            |         |   |         |         
|Supplemental Disclosures                                                                                                      |                                                     |                                                         |         |                   |         |            |          |            |         |   |         |         
|Income taxes paid, net of amounts recovered                                                                                   |                                                     | $                                                       | (87,984 | )                 |         | $          | 9,356    |            |         | $ | 652     |         
|Interest paid, net of amounts capitalized                                                                                     |                                                     |                                                         | 3,227   |                   |         |            | 91       |            |         |   | 495     |         
|Equipment acquired under capital lease                                                                                        |                                                     |                                                         | 6,383   |                   |         |            | 24,510   |            |         |   |        |         
|Common stock and warrants issued for acquisitions                                                                             |                                                     |                                                         | 23,045  |                   |         |            | 122,984  |            |         |   |        |         

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

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##### Table of Contents



INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     GENERAL

Business Interland, Inc. (formerly Micron Electronics, Inc.) and its
subsidiaries (collectively the Company) is a leading Web hosting company that
offers a broad range of business-to-business Internet products and services,
including managed dedicated hosting services, co-location and connectivity
services, electronic commerce services, applications hosting and other Web
hosting products.

Historically, the Company provided a variety of computer products and
related services through its PC Systems, SpecTek, and Web hosting business
segments. The Company has disposed of its PC Systems and SpecTek business
segments, which are reported as discontinued operations  See Footnote on
Discontinued Operations. The Companys Web hosting business remains as the
Companys sole continuing operations. Prior to its disposal, the PC Systems
business consisted of developing, marketing, manufacturing, selling and
supporting a wide range of desktop and notebook systems and network servers
under the micronpc.com brand name and selling, reselling, and supporting a
variety of additional peripherals, software and services. Prior to its
disposal, the SpecTek business consisted of processing and marketing various
grades of memory products in either component or module form for specific
applications.

History of operating losses The Web hosting business has incurred net
losses and losses from operations for each period from inception through August
31, 2002. The Companys future success is dependent upon its ability to achieve
profitability prior to the depletion of cash resources and to raise funds
thereafter, if needed. Management cannot assure that the Company will be
profitable in the future under its current Web and applications hosting model
or that adequate funding will be available to allow it to continue operations
subsequent to the one-year time period. However, the Companys current
financial forecast indicates that there are sufficient cash resources on hand
until the Company reaches positive cash flows.

2.     SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation The financial statements include the accounts of
Interland, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. Investments in
companies in which the Company has significant influence over operating and
financial policies are accounted for using the equity method. Other
investments are accounted for using the cost method. All significant
intercompany balances and transactions have been eliminated. All references to
periods including annual and quarterly are on a fiscal basis.

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 financial
statements. The amounts that the Company will ultimately incur or recover
could differ materially from its current estimates. The underlying estimates
and facts supporting these estimates could change in 2003 and thereafter.

Revenue recognition Revenues from continuing operations are primarily
generated from shared and dedicated hosting, managed services, e-commerce
services, applications hosting and domain name registrations. Revenues are
recognized as the services are provided. Hosting contracts generally are for
service periods ranging from one to 24 months and typically require up-front
fees. These fees, including set-up fees for hosting services, are deferred and
recognized ratably over the customers expected service period. Deferred
revenues represent the liability for advance billings to customers for services
not yet provided. The Company provides a 30-day money back guarantee on
hosting packages. The Company records a reserve against revenue on hosting
packages and monitors the adequacy of the reserve.

Basic and diluted income (loss) per share In accordance with SFAS No.
128, Earnings Per Share, diluted earnings per share excludes anti-dilutive
employee stock options of approximately 20.3 million, 17.9 million, and 8.2
million in 2002, 2001, and 2000, respectively. Basic earnings per share are
computed using the weighted average number of common shares outstanding.
Diluted earnings per share are computed using the weighted average number of
common shares outstanding and potential common shares outstanding when their
effect is dilutive. Potential common shares result from the assumed exercise
of outstanding stock options and warrants.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In addition to net income (loss) per share, the Company has also reported
per share amounts on the separate income statement components required by
Accounting Principles Board (APB) Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
Because the Company has reported a loss from continuing operations during
fiscal years 2002, 2001 and 2000, the effect of dilutive securities is excluded
from the calculation of per share amounts for those years.

Comprehensive income The Company reports comprehensive income in
accordance with Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income. This statement requires the disclosure of
accumulated other comprehensive income or loss (excluding net income or loss)
as a separate component of shareholders equity. For all periods presented,
comprehensive income is the same as net income.

Financial instruments and concentration of credit risk Cash equivalents
include highly liquid short-term investments with original maturities of three
months or less, readily convertible to known amounts of cash. The amounts
reported as cash equivalents, short term investments, receivables, accounts
payable and accrued expenses and debt are considered by management to be
reasonable approximations of their fair values, based on information available
as of August 31, 2002. The use of different assumptions could have a material
effect on the estimated fair value amounts. The reported fair values do not
take into consideration potential taxes or other expenses that would be
incurred in an actual settlement.

Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents,
short and long-term investments and trade and other receivables. The Company
invests its cash in credit instruments of highly rated financial institutions
and performs periodic evaluations of the credit standing of these financial
institutions. The Companys policies limit the concentration of credit
exposure by restricting investments with any single obligor, instrument or
geographic area. The Companys policies limit the concentration of accounts
receivable credit exposure by requiring customers to prepay their hosting fees
prior to initiating services.

Restricted investmentsRestricted investments consist primarily of
commercial paper and money market securities with maturities of less than one
year, and are carried at cost, which approximates fair market value. These
investments are restricted to use by certain vendors and creditors for rent,
credit card processing, lease payments and other items. These investments are
classified based upon the term of the restriction, not necessarily the
underlying security.

Goodwill and other intangibles In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, goodwill is no longer amortized, but is
tested for impairment, at least annually, using the quoted market price of the
Companys stock. Intangible assets acquired as part of a business combination
are accounted for in accordance with SFAS No. 141 Business Combinations, and
are recognized apart from goodwill if the intangible asset arises from
contractual or other legal rights or the asset is capable of being separated
from the acquired enterprise. Intangible assets are reviewed for impairment by
applying the recognition and measurement provisions, which compare the carrying
amount of an intangible asset to its fair value. If the carrying amount
exceeds fair value, an impairment loss is recognized. Intangible assets are
amortized, using the straight-line method, over our estimate of their period of
benefit of 3 to 7 years

Property, plant and equipment Property, plant and equipment, including
software, are stated at cost less accumulated depreciation and amortization. We
utilize straight-line depreciation for property and equipment over our estimate
of their useful lives. Changes in technology or changes in the intended use of
property, plant and equipment may cause the estimated period of use or the
value of these assets to change. We perform an annual analysis to confirm the
appropriateness of estimated economic useful lives for each category of current
property, plant, and equipment. Additionally, long-lived assets are reviewed
for impairment whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. Estimates and assumptions used in
both setting depreciable lives and testing for recoverability require
management judgment. The Company leases certain equipment under capital
leases. Equipment under capital leases is depreciated using the straight-line
method over the shorter of the lease term or estimated useful life of the
asset. Gains and losses related to the retirement or disposal of fixed assets
are recognized in the period in which the transaction occurred.

Advertising Advertising costs are charged to operations as incurred.
Total advertising expense was $13.0, $9.2 and $13.4 for the years ending August
31, 2002, 2001 and 2000, respectively.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income taxes The Company accounts for income taxes under the provisions
of SFAS No. 109, Accounting for Income Taxes. SFAS 109 requires recognition
of deferred tax liabilities and assets for the expected future tax consequences
of events that have been included in the financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
difference is expected to reverse.

Stock-based compensation Employee stock awards under the Companys
compensation plans are accounted for in accordance with APB No. 25, Accounting
for Stock Issued to Employees and related interpretations. The Company
provides the disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation, and related interpretations. Stock-based awards to
non-employees are accounted for under the provisions of SFAS No. 123.

Recently issued accounting standardsIn June 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement Obligations. This statement
provides accounting and reporting standards for recognizing obligations related
to asset retirement costs associated with the retirement of tangible long-lived
assets. Under this statement, legal obligations associated with the retirement
of long-lived assets are to be recognized at their fair value in the period in
which they are incurred if a reasonable estimate of fair value can be made.
The fair value of the asset retirement costs is capitalized as part of the
carrying amount of the long-lived asset and subsequently allocated to expense
using a systematic and rational method over the assets useful life. Any
subsequent changes to the fair value of the liability due to passage of time or
changes in the amount or timing of estimated cash flows is recognized as an
accretion expense. The Company will be required to adopt this statement on
September 1, 2002 and does not believe it will have a material impact on its
consolidated financial position, results of operations, or cash flows.

In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which is effective for fiscal
years beginning after December 15, 2001. This statement supercedes FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. However, it retains the fundamental
provisions of SFAS No. 121 for the recognition and measurement of the
impairment of long-lived assets to be held and used and the measurement of
long-lived assets to be disposed of by sale. Impairment of goodwill is not
included in the scope of SFAS No. 144 and will be treated in accordance with
the accounting standards established in SFAS No. 142. Under SFAS No. 144,
long-lived assets are to be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing or discontinued
operations. The statement applies to all long-lived assets, including
discontinued operations, and replaces the provisions of APB Opinion No. 30.
The Company adopted this statement beginning September 1, 2002.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections, which is effective for transactions occurring after May 15, 2002.
The Statement rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, which required all gains and losses from
extinguishments of debt to be aggregated and classified as an extraordinary
item (net of related income tax effect), if material. The criteria in APB
Opinion No. 30 will now be used to classify those gains and losses. Also SFAS
No. 64 amended SFAS No. 4 and is no longer necessary because of this
rescission. This Statement amends SFAS No. 13, Accounting for Leases, to
eliminate an inconsistency between the accounting for sale-leaseback
transactions and certain lease modifications that have economic effects that
are similar to sale-leaseback transactions. The amendment requires that a lease
modification results in recognition of a gain or loss in the financial
statements, is subject to SFAS No. 66 Accounting for Sales of Real Estate if
the leased asset is real estate (including integral equipment), and is subject
to the sale-leaseback rules of SFAS No. 98 Accounting for Leases:
Sale-Leaseback Transactions Involving Real Estate, Sales-Type Leases of Real
Estate, Definition of the Lease Term, and Initial Direct Costs of Direct
Financing Leases. The Company adopted this Statement beginning September 1,
2002.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The principal difference between this Statement and Issue 94-3
relates to its requirements for recognition of a liability for a cost
associated with an exit or disposal activity. This Statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under Issue 94-3, a liability for an exit cost
as defined in Issue 94-3 was recognized at the date of an entitys commitment
to an exit plan. This Statement eliminates the definition and requirements for
recognition of exit costs in Issue 94-3. This Statement also establishes that
fair value is the objective for initial measurement of the liability. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company adopted this Statement
beginning September 1, 2002.

Reclassifications Certain reclassifications have been made, none of
which affected net income, to present the statements on a consistent basis.

In addition to the significant accounting policies outlined above, the
Companys significant accounting policies relating specifically to discontinued
operations are listed below.

Certain concentrations Certain components, subassemblies and software
included in our systems are obtained from sole suppliers or a limited number of
suppliers. The Company relies, to a certain extent, upon its suppliers
abilities to enhance existing products in a timely and cost-effective manner,
to develop new products to meet changing customer needs and to respond to
emerging standards and other technological developments in the personal
computer industry. The Companys reliance on a limited number of suppliers
involves several risks, including the possibility of shortages and/or increases
in costs of components and subassemblies, and the risk of reduced control over
delivery schedules. A concentration of credit risk may exist with respect to
trade receivables, as many customers are affiliated with computer,
telecommunications and office automation industries, or are governmental
entities. The Company performs ongoing credit evaluations on a significant
number of its customers and collateral from its customers is generally not
required.

Revenue recognition Revenues from product sales to customers is
generally recognized upon shipment. A provision for estimated sales returns is
recorded in the period in which the sales are recognized. Revenues from
service and support contracts for which we are primarily obligated is
recognized over the term of the contract. Revenues from sales of third party
service contracts for which we are not obligated is recognized at the time of
sale.

Inventories Inventory balances are stated at the lower of cost or
market, with cost being determined on an average cost basis.

Property, plant and equipment Property, plant and equipment, including
software, are stated at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of 5 to 30 years for buildings and 2 to
10 years for equipment and software.

Product and process technology Costs related to the conceptual
formulation and design of products and processes are expensed as research and
development. Costs incurred to establish patents and acquire product and
process technology are capitalized. Capitalized costs are amortized using the
straight-line method over the shorter of the estimated useful life of the
technology, the patent term or the agreement, ranging up to 10 years.

Royalties The Company has royalty-bearing license agreements allowing
the Company to sell certain hardware and software products and to use certain
patented technology. Royalty costs are accrued and included in cost of goods
sold when the sale is recognized.

Warranty and services The Company provides for estimated costs to be
incurred under its warranty and other service programs at the time sales are
recorded.

Foreign currency The Company uses the United States (U.S.) Dollar as its
functional currency, except for its former operations in Japan and Malaysia.
The assets and liabilities of those operations are translated into U.S. Dollars
at exchange rates in effect at the balance sheet date. Income and expense
items are translated at the average exchange rates prevailing during the
period. Aggregate transaction gains and losses included in the determination
of net income are not material for any period presented.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.     DISCONTINUED OPERATIONS

The Company has discontinued the operations of its PC Systems and SpecTek
business segments. These segments are accounted for as discontinued operations
in accordance with APB No. 30. Amounts in the financial statements and related
notes for all periods shown have been reclassified to reflect the discontinued
operations.

Operating results for the discontinued operations are reported, net of
tax, under Income (loss) from discontinued operations on the accompanying
consolidated Statements of Operations. In addition, the loss for the disposal
of the discontinued operations has also been recorded, net of tax, under Loss
on disposal of discontinued operations on the accompanying consolidated
Statements of Operations.

Cash flows from the discontinued operations are also stated separately on
the accompanying consolidated Statements of Cash Flows, under Net cash
provided by (used in) discontinued operations.

PC Systems

On May 31, 2001, the Company sold its PC Systems business to GTG PC
Holdings, LLC (GTG PC), an affiliate of the Gores Technology Group. Under
the terms of the agreement, GTG PC received assets, which included $76.5
million in cash, and assumed specified liabilities of the PC Systems business.
For the year ended August 31, 2002, the loss on disposal was $6.0 million.
Included in the loss on disposal is a $3.8 million charge due to the settlement
of a dispute with GTG PC on the amount it owed to the Company. In addition, the
Company wrote down certain sales tax receivable balances to their net
realizable value, which resulted in a charge of $0.7 million. The Company also
accrued $0.7 million in contingent liabilities and
$0.6 million for legal fees related to these discontinued operations. For the
year ended August 31, 2001, the loss on disposal was $212.2 million. Included
in the loss on disposal were employee termination costs of approximately $15.4
million, of which $0.3 million is included in the accompanying consolidated
Balance Sheet under Accrued liabilities at August 31, 2001. The Company
retained all liabilities of the PC Systems business not assumed by GTG PC,
including, for example, liabilities for taxes arising prior to the closing of
the transaction, employee termination and related expenses, and any contingent
liabilities arising prior to the closing date. In addition, the Company has
agreed for a period of three years not to compete with the PC Systems business,
and for two years, not to solicit or hire prior employees of the PC Systems
business. For a transition period after the closing of the purchase, GTG PC
provided some information technology, financial, telecommunications and human
resources services to the Company at its cost plus 10% during the first four
months after the closing, and at its cost plus 25% for the following two
months.

For a period of two years following the closing of the purchase, or for
the applicable statute of limitations with respect to taxes and government
contracts, the Company is obligated to indemnify the purchaser and affiliated
entities for any breaches of the representations and warranties contained in
the agreement. In addition, the Company is obligated for an indefinite period
of time to indemnify the purchaser and affiliated entities for any breaches in
covenants. The agreement provides that the maximum aggregate liability of the
Company for indemnification under the agreement is $10.0 million.

The agreement also provides that the Company would potentially be entitled
to receive a percentage of any proceeds in the event the PC Systems business is
sold or has an initial public offering of its securities within three years of
the closing of the purchase. The Company would receive a payment only after
the repayment of transaction costs, repayment of debt and capital
contributions, payment of a specified amount of cash to GTG PC and obligations
under employee incentive programs.

Summarized below are the operating results for the PC Systems business, which
are included together with SpecTeks operating results in the accompanying
consolidated Statements of Operations, under Income (loss) from discontinued
operations.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                        |  |                   |        |            |  |            |          |   |  |   |           |  
|------------------------------------------------------- |  | ----------------- | ------ | ---------- |  | ---------- | -------- | - |  | - | --------- | -
|                                                        |  | Fiscal Year Ended
|                                                        |  |                  
|                                                        |  | August 31,        |        | August 31, |  | August 31,
|                                                        |  | 2002              |        | 2001       |  | 2000      
|                                                        |  |                   |        |            |  |           
|                                                        |  | (In thousands)   
|Net sales                                               |  | $                 |       |            |  | $          | 602,818  |   |  | $ | 1,031,852 |  
|                                                        |  |                   |        |            |  |            |          |   |  |   |           |  
|Loss before income taxes                                |  |                   |       |            |  |            | (65,075  | ) |  |   | (104,797  | )
|Income tax benefit                                      |  |                   |       |            |  |            |         |   |  |   | 29,508    |  
|                                                        |  |                   |        |            |  |            |          |   |  |   |           |  
|Loss from discontinued operations, net of tax           |  |                   |       |            |  |            | (65,075  | ) |  |   | (75,289   | )
|Loss on disposal of discontinued operations, net of tax |  |                   | (6,021 | )          |  |            | (212,164 | ) |  |   |          |  
|                                                        |  |                   |        |            |  |            |          |   |  |   |           |  
|Loss from discontinued operations, net of tax           |  | $                 | (6,021 | )          |  | $          | (277,239 | ) |  | $ | (75,289   | )
|                                                        |  |                   |        |            |  |            |          |   |  |   |           |  

SPECTEK

The Company has discontinued the operations of its SpecTek business
segment, which is accounted for as discontinued operations in accordance with
APB No. 30. Pursuant to the Amended and Restated Component Recovery Agreement
(as amended, the Component Recovery Agreement), dated effective September 2,
1999, Micron Technology, Inc. (MTI), exercised its rights to purchase the assets of the SpecTek business.
On March 22, 2001, the Company entered into a Purchase Agreement (the Purchase
Agreement) to sell all assets primarily used by SpecTek and certain land,
buildings and intellectual property to MTI. Pursuant to the terms of the
Purchase Agreement, the Company transferred the land, buildings and
intellectual property to MTI on March 22, 2001, and received $18 million of
cash in excess of the historical cost from MTI. This amount has been recorded,
net of tax, as an increase in additional paid in capital. The Company has
leased back a portion of the land and buildings from MTI and has also been
granted a license to use certain of the intellectual property. In addition,
MTI agreed to pay the Company for the March 1, 2001 net book value of the
assets used by SpecTek, less any outstanding intercompany payables. The
proceeds from this transaction, net of intercompany payables, were
approximately $39.6 million, not including certain land, buildings and
intellectual property. Pursuant to the Purchase Agreement, the assets used by
SpecTek were transferred to MTI on April 5, 2001.

Summarized below are the operating results for SpecTek, which are included
together with the PC Systems business operating results, in the accompanying
consolidated Statements of Operations under Income (loss) from discontinued
operations.

|                                                        |  |                   |   |            |  |            |         |  |  |   |         |  
|------------------------------------------------------- |  | ----------------- | - | ---------- |  | ---------- | ------- |  |  | - | ------- | -
|                                                        |  | Fiscal Year Ended
|                                                        |  |                  
|                                                        |  | August 31,        |   | August 31, |  | August 31,
|                                                        |  | 2002              |   | 2001       |  | 2000      
|                                                        |  |                   |   |            |  |           
|                                                        |  | (In thousands)   
|Net sales                                               |  | $                 |  |            |  | $          | 248,309 |  |  | $ | 491,502 |  
|                                                        |  |                   |   |            |  |            |         |  |  |   |         |  
|Income before income taxes                              |  |                   |  |            |  |            | 62,836  |  |  |   | 200,084 |  
|Income tax provision                                    |  |                   |  |            |  |            |        |  |  |   | (57,060 | )
|                                                        |  |                   |   |            |  |            |         |  |  |   |         |  
|Income from discontinued operations, net of tax         |  |                   |  |            |  |            | 62,836  |  |  |   | 143,024 |  
|Gain on disposal of discontinued operations, net of tax |  |                   |  |            |  |            | 2,926   |  |  |   |        |  
|                                                        |  |                   |   |            |  |            |         |  |  |   |         |  
|Loss from discontinued operations, net of tax           |  | $                 |  |            |  | $          | 65,762  |  |  | $ | 143,024 |  
|                                                        |  |                   |   |            |  |            |         |  |  |   |         |  

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.     RESTRUCTURING COSTS

During the fourth quarter of 2001, the Company approved and implemented a
restructuring program in connection with its acquisition of Interland-Georgia.
This finalized restructuring plan, for which all payments are expected to be
completed by August 31, 2004, provides for the consolidation of the Companys
operations and elimination of duplicative facilities. In accordance with EITF No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
and Activity, the restructuring costs, excluding asset impairments, were
recognized as liabilities at the time management committed to the plan.
Management determined that these costs provided no future economic benefit,
they were incremental to other costs incurred by the Company prior to the
restructuring, or were contractual obligations that existed prior to the date
the plan was approved and were either continued after the exit plan was
completed with no economic benefit to the Company or were non-cancelable
without a penalty; and they were incurred as a direct result of the plan to
exit the identified activities. The asset impairments were accounted for in
accordance with SFAS No. 121 Accounting for the Impairment of Long-Lived
Assets and for Long-Live Assets to be Disposed Of. Accordingly, during 2001,
the Company recorded a charge of approximately $110.3 million related to
employee termination benefits, facility closure costs, asset disposals and
other exit costs which the Company has recorded in operating expenses.

The liability related to this restructuring program was $8.8 million and
$12.5 million at August 31, 2002 and 2001, respectively. The restructuring
charges and related accruals recognized under the plan affected the Companys
consolidated financial position as follows:

|                           |                      |   |                |        |           |   |            |         |             |   |              |        |          |   |     |      |   |   |   |         |   |   |        |         |  
|-------------------------- | -------------------- | - | -------------- | ------ | --------- | - | ---------- | ------- | ----------- | - | ------------ | ------ | -------- | - | --- | ---- | - | - | - | ------- | - | - | ------ | ------- | -
|                           |                      |   |                |        |           |   | Property   |         |             |   |              |        | Employee |   |     |      |   |   |   |         |  
|                           |                      |   | Lease          |        | plant and |   | Other exit |         | termination |   | Goodwill and |        |          |   |    
|                           |                      |   | abandonments   |        | equipment |   | costs      |         | benefits    |   | intangibles  |        | Total   
|                           |                      |   |                |        |           |   |            |         |             |   |              |        |         
|                           |                      |   | (In thousands)
|Balance at August 31, 2000 |                      |   |               |        |           |   |           |         |             |   |             |        |          |   |    |      |   |   |  |         |   |   |       |        
|                           | Plan charges         |   | $              | 9,404  |           |   | $          | 26,915  |             |   | $            | 3,528  |          |   | $   | 727  |   |   | $ | 69,704  |   |   | $      | 110,278 |  
|                           | Cash paid            |   |                | (683   | )         |   |            |        |             |   |              |       |          |   |     | (498 | ) |   |   |        |   |   |        | (1,181  | )
|                           | Non-cash write-downs |   |                |       |           |   |            | (26,915 | )           |   |              |       |          |   |     |     |   |   |   | (69,704 | ) |   |        | (96,619 | )
|                           |                      |   |                |        |           |   |            |         |             |   |              |        |          |   |     |      |   |   |   |         |   |   |        |        
|Balance at August 31, 2001 |                      | $ | 8,721          |        |           | $ |           |         |             | $ | 3,528        |        |          | $ | 229 |      |   | $ |  |         |   | $ | 12,478 |        
|                           | Cash paid            |   |                | (1,625 | )         |   |            |        |             |   |              | (487   | )        |   |     | (229 | ) |   |   |        |   |   |        | (2,341  | )
|                           | Other adjustments    |   |                | 538    |           |   |            |        |             |   |              | (1,862 | )        |   |     |     |   |   |   |        |   |   |        | (1,324  | )
|                           |                      |   |                |        |           |   |            |         |             |   |              |        |          |   |     |      |   |   |   |         |   |   |        |        
|Balance at August 31, 2002 |                      | $ | 7,634          |        |           | $ |           |         |             | $ | 1,179        |        |          | $ |    |      |   | $ |  |         |   | $ | 8,813  |        
|                           |                      |   |                |        |           |   |            |         |             |   |              |        |          |   |     |      |   |   |   |         |   |   |        |        

The lease abandonment charge represents future lease payments for data
centers and office facilities being exited. The other exit costs represent
contractual payments and termination penalties for bandwidth and data connectivity contracts.

During fiscal 2001, the Company recognized asset impairment charges of
$26.9 million reflecting the write down of leasehold improvements, equipment,
and software that was no longer being used due to facility closures in
connection with the continued execution of the Companys restructuring plan.
The fair value of the impaired property, plant and equipment of the duplicative
facilities, including the related goodwill and intangibles of $69.7 million,
was based on estimated salvage values because the estimated cash flows were
negative.

During fiscal 2002, the Company paid $1.6 million, $0.5 million and $0.2
million in connection with the ongoing obligations related to facility
occupancy charges, bandwidth contracts and employee termination benefits,
respectively.

During fiscal 2002, the restructuring liability pertaining to lease
abandonments was increased by $1.3 million due to the impact of revised exit
plans pertaining to the Companys Seattle, Washington facility. During the
third quarter, the Company settled a disputed tenant improvement allowance with
the landlord of an exited facility. In connection with the settlement, the
Company is no longer responsible for paying approximately $0.7 million of the
remaining lease payments required over the remaining lease term, which was
originally accrued in the restructuring charge. The liability was also decreased by $0.1 million
to reflect the lease termination for the Companys Los Angeles, California
facility. These three adjustments net to $0.5 million as indicated in the
schedule above table.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During fiscal 2002, the restructuring liability pertaining to other exit
costs was reduced by $1.9 million in connection with the settlement of certain
data connectivity contract obligations for amounts different from original
estimates.

5.     MERGER AND INTEGRATION COSTS

During fiscal 2002 the Company recorded a charge for merger and
integration costs of $8.1 million. Included in this charge was $4.2 million for
employee termination benefits, $2.5 million for relocation costs, $0.7 million
for employee retention bonuses, $0.2 million for legal services and $0.5
million for other non-capitalizable costs related to the merger and integration
of the Companys recent acquisitions including Interland-Georgia,
CommuniTech.Net, Dialtone, Inc., and iNNERHOST, Inc.

During fiscal 2001 the Company recorded a $1.7 million charge for merger
and integration costs for financial advisory, legal, and accounting services,
and other non-capitalizable expenses directly related to the Interland-Georgia
acquisition.

6.     OTHER EXPENSE (INCOME), NET

During fiscal 2002, the Company completed the sale of its remaining
Boise-based consumer dial-up accounts and certain data center assets. The sale
resulted in a net loss of $0.6 million, which is reported in the Statement of
Operations for the year ended August 31, 2002, under Other expense (income),
net. The sale of these accounts is not expected to have a substantial impact
on operating income and cash flows.

In June 2001, the Company sold substantially all of its consumer dial-up
accounts for $3.8 million. The sale resulted in a gain of $2.5 million in
fiscal 2001.

7.     ACQUISITIONS

On August 6, 2001, the Company acquired 100 percent of the outstanding
common shares of Interland-Georgia by issuing 0.861 shares of the Companys
common stock in exchange for each share of Interland-Georgia common stock or
40,899,803 shares. In addition, the Company issued options and warrants to
purchase shares of the Companys common stock in exchange for each issued and
outstanding Interland-Georgia option and warrant using the ratio of 0.861
shares of the Company for each share of Interland-Georgia. The results of
Interland-Georgias operations have been included in the consolidated financial
statements since the date of acquisition. The primary goal of the acquisition
was to create a new company with much greater scale. The aggregate purchase
price was $127.2 million, including equity issued with a value of $122.9
million and cash of $4.3 million. The value of the 40,899,803 common shares
issued was determined based on the average market price of the Companys common
shares over the 2-day period before and after the terms of the acquisition were
agreed to and announced on March 23, 2001.

The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition:

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|                        |                     |   |                |         | 
|----------------------- | ------------------- | - | -------------- | ------- | 
|                        |                     |   | Fair Value    
|                        |                     |   |               
|                        |                     |   | (In Thousands)
|Current assets          |                     | $ | 26,781         |        
|Property and equipment  |                     |   | 29,265         |        
|Other intangible assets |                     |   | 17,500         |        
|Other assets            |                     |   | 507            |        
|Goodwill                |                     |   | 102,964        |        
|Current liabilities     |                     |   | (41,908        | )      
|Long-term liabilities   |                     |   | (7,943         | )      
|                        |                     |   |                |        
|                        | Net assets acquired |   | $              | 127,166 | 
|                        |                     |   |                |        

Of the total $17.5 million of acquired intangible assets, $12 million was
assigned to purchased software (5 year useful life), $4.9 million was assigned
to registered trademarks (7 year useful life), and $600,000 was assigned to
reseller and strategic alliances (3 year useful life). The $103.0 million of
goodwill is not expected to be deductible for tax purposes.

On February 8, 2002, the Company acquired 100 percent of the outstanding
common shares of CommuniTech.Net, Inc. (CommuniTech.Net) by issuing 5,375,000
shares of the Companys common stock in exchange for all shares of
CommuniTech.Net common stock. In connection with the acquisition, 0.8 million
shares of issued stock were placed into escrow for one year to satisfy
unidentified claims that occurred prior to the acquisition date. To date,
there has been no notice of claim of dispute under the escrow agreement. The
value of the common shares issued was determined based on the average market
price of the Companys common shares over the 2-day period before and after the
terms of the acquisition were agreed to and announced on February 8, 2002. The
results of CommuniTech.Nets operations have been included in the consolidated
financial statements since the date of acquisition. CommuniTech.Net is a
Kansas City, Missouri-based Web and applications hosting company serving small
and medium-sized businesses. The aggregate purchase price was $11.0 million,
including equity issued with a value of $10.8 million and estimated direct
acquisition costs of $0.2 million.

In connection with the acquisition of CommuniTech.Net, the Company holds
two notes receivable with balances totaling $2.7 million at August 31, 2002
from a seller of CommuniTech.Net. These notes, which bear interest at the rate
of 5% per annum, mature on February 8, 2004 with interest only payments due
quarterly. The loans are collateralized by 2.7 million shares of the Companys
common stock, owned by the note holder. The receivable is shown on the balance
sheet as a reduction in shareholders equity.

The following table summarizes the purchase price allocation based on the
estimated fair values of the assets acquired and liabilities assumed at the
date of acquisition:

|                                 |                     |   |                |        | 
|-------------------------------- | ------------------- | - | -------------- | ------ | 
|                                 |                     |   | Fair Value    
|                                 |                     |   |               
|                                 |                     |   | (In Thousands)
|Current assets                   |                     | $ | 502            |       
|Property and equipment           |                     |   | 3,487          |       
|Customer relationships           |                     |   | 2,600          |       
|Reseller and strategic alliances |                     |   | 514            |       
|Core technology                  |                     |   | 360            |       
|Trademarks                       |                     |   | 210            |       
|Goodwill                         |                     |   | 6,898          |       
|Current liabilities              |                     |   | (3,565         | )     
|                                 |                     |   |                |       
|                                 | Net assets acquired |   | $              | 11,006 | 
|                                 |                     |   |                |       

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On May 6, 2002, the Company acquired 100 percent of the outstanding common
shares of Dialtone, Inc., (Dialtone), by paying cash of $15.8 million in
exchange for all shares of Dialtones common stock. In connection with the
acquisition, $1.5 million was placed into escrow for one year to satisfy
unidentified claims that occurred prior to the acquisition date. To date,
there has been no notice of claim of dispute under the escrow agreement. The
results of Dialtones operations have been included in the consolidated
financial statements since the date of acquisition. Dialtone is a Ft.
Lauderdale, Florida-based Web and applications dedicated hosting company
serving small and medium-sized businesses. The aggregate purchase price was
$15.8 million, including direct acquisition costs of $.05 million.

The following table summarizes the purchase price allocation based on the
estimated fair values of the assets acquired and liabilities assumed at the
date of acquisition.

|                        |                     |   |                |        | 
|----------------------- | ------------------- | - | -------------- | ------ | 
|                        |                     |   | Fair Value    
|                        |                     |   |               
|                        |                     |   | (In Thousands)
|Current assets          |                     | $ | 1,049          |       
|Property and equipment  |                     |   | 3,630          |       
|Core technology         |                     |   | 120            |       
|Trademarks              |                     |   | 290            |       
|Customer relationship   |                     |   | 3,700          |       
|Other intangible assets |                     |   | 88             |       
|Other assets            |                     |   | 72             |       
|Goodwill                |                     |   | 10,149         |       
|Current liabilities     |                     |   | (2,742         | )     
|Long-term liabilities   |                     |   | (571           | )     
|                        |                     |   |                |       
|                        | Net assets acquired |   | $              | 15,785 | 
|                        |                     |   |                |       

On August 1, 2002, the Company acquired iNNERHOST, Inc. (iNNERHOST) by
issuing 4,171,538 shares of the Companys common stock and paying $5.2 million
in cash in exchange for 100 percent of the outstanding common shares of
iNNERHOST. The total number of shares issued may be increased or decreased
based on the value of the Companys stock on the effective date of a
registration statement of these shares. In connection with the acquisition,
0.5 million shares of stock and $0.3 million were placed into escrow for one
year to satisfy unidentified claims that occurred prior to the acquisition
date. To date, there has been no notice of claim of dispute under the escrow
agreement. The results of iNNERHOSTs operations have been included in the
consolidated financial statements since August 1, 2002, the effective date of
acquisition. The aggregate purchase price was $17.6 million, including direct
acquisition costs of $.09 million.

The following table summarizes the purchase price allocation based on the
estimated fair values of the assets acquired and liabilities assumed at the
date of acquisition. The purchase price allocation is still being finalized
and is subject to adjustment, specifically, the intangible assets
have not been identified.

|                       |                     |   |                |        | 
|---------------------- | ------------------- | - | -------------- | ------ | 
|                       |                     |   | Fair Value    
|                       |                     |   |               
|                       |                     |   | (In Thousands)
|Current assets         |                     | $ | 2,236          |       
|Property and equipment |                     |   | 6,995          |       
|Intangible assets      |                     |   | 12,836         |       
|Other assets           |                     |   | 512            |       
|Current liabilities    |                     |   | (4,301         | )     
|Long-term liabilities  |                     |   | (676           | )     
|                       |                     |   |                |       
|                       | Net assets acquired |   | $              | 17,602 | 
|                       |                     |   |                |       

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In October 2001, January 2002 and May 2002, the Company acquired the small
business-focused shared and dedicated Web hosting customer accounts of
Interliant, Inc., AT&T Corp., and Burlee Networks LLC, respectively, resulting
in the recognition of approximately $25.4 million of acquired intangible
assets. The final purchase price of these account acquisitions is contingent
upon certain revenue thresholds earned over a future period of time, and
accordingly, is subject to change. These intangible assets are being amortized
over a three-year useful life.

The primary goal of
these acquisitions was to continue to grow the Companys shared
and dedicated subscriber base.

On December 14, 1999 the Company acquired LightRealm, Inc. (LightRealm),
a Kirkland, Washington-based Web and applications hosting and Internet access
company serving small- and medium-sized businesses. The Company paid
approximately $48 million in cash, including expenses, in exchange for 100% of
LightRealms outstanding stock. On March 16, 2000, the Company acquired
Worldwide Internet Publishing Corporation (WIPC), a Boca-Raton, Florida-based
Web hosting company that also served small- and medium-sized businesses. The
Company paid approximately $13 million in cash, including
expenses, in exchange
for 100% of the outstanding stock of WIPC. The Company accounted for both
transactions as purchases and allocated the purchase price to the net assets
acquired, including intangible assets, based on the their fair values as
determined by an independent appraiser. The Companys results of operations
include the results of operations of LightRealm and WIPC, subsequent
to their respective acquisition dates. In connection with the Companys fourth
quarter of 2001 restructuring program, these businesses were exited and all
related assets were written off.

The following unaudited pro forma information reflects the results of the
Companys continuing operations for the years ended August 31, 2002, and August
31, 2001, as if the acquisitions of iNNERHOST, Dialtone, CommuniTech.Net and
Interland-Georgia had occurred at the beginning of fiscal 2001, after giving
effect to certain adjustments, including amortization of intangibles,
depreciation, and related income tax effects. The unaudited pro forma
information is based on estimates and assumptions. These estimates and
assumptions have been made solely for the purpose of developing this pro forma
information. Unaudited pro forma financial information is presented for
illustrative purposes only and is not necessarily indicative of the financial
position or results of operations of future periods or the results that
actually would have been realized had the entities been a single entity during
these periods.

|                                                |                   |   |                                          |         |            |   |          |         |  
|----------------------------------------------- | ----------------- | - | ---------------------------------------- | ------- | ---------- | - | -------- | ------- | -
|                                                |                   |   | Fiscal Year Ended                       
|                                                |                   |   |                                         
|                                                |                   |   | August 31,                               |         | August 31,
|                                                |                   |   | 2002                                     |         | 2001      
|                                                |                   |   |                                          |         |           
|                                                |                   |   | Unaudited                                |         | Unaudited 
|                                                |                   |   |                                          |         |           
|                                                |                   |   | (In thousands, except per share amounts)
|Revenues from continuing operations             |                   | $ | 119,139                                  |         |            | $ | 124,126  |        
|Loss from continuing operations before taxes    |                   |   | (77,525                                  | )       |            |   | (250,906 | )      
|Income tax benefit                              |                   |   | 64,059                                   |         |            |   | 182      |        
|Net loss from continuing operations             |                   |   | (13,466                                  | )       |            |   | (250,724 | )      
|Net
loss                                        |                   | $ | (19,487                                  | )       |            | $ | (462,201 | )      
|Loss per share from continuing operations:      |                   |   |                                          |         |            |   |          |        
|                                                | Basic and diluted |   | $                                        | (0.09   | )          |   | $        | (1.72   | )
|Loss per share:                                 |                   |   |                                          |         |            |   |          |        
|                                                | Basic and diluted |   | $                                        | (0.14   | )          |   | $        | (3.17   | )
|Number of shares used in per share calculation: |                   |   |                                          |         |            |   |          |        
|                                                | Basic and diluted |   |                                          | 142,762 |            |   |          | 145,952 |  

8.     INVESTMENT SECURITIES

The following table summarizes, by major security type, the cost of the
Companys investments. All investments with remaining maturities in excess of
one year are recorded as long-term investments in the accompanying Consolidated
Balance Sheets. In 2002 and 2001, the carrying value of investments
approximates fair value.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                           |                                        |  |                |        |            |  |         |        | 
|---------------------------------------------------------- | -------------------------------------- |  | -------------- | ------ | ---------- |  | ------- | ------ | 
|                                                           |                                        |  | As of         
|                                                           |                                        |  |               
|                                                           |                                        |  | August 31,     |        | August 31,
|                                                           |                                        |  | 2002           |        | 2001      
|                                                           |                                        |  |                |        |           
|                                                           |                                        |  | (In thousands)
|Held to maturity investment securities, at amortized cost: |                                        |  |                |        |            |  |         |       
|                                                           | Commercial paper                       |  | $              | 84,081 |            |  | $       | 88,553 | 
|                                                           | State and local government             |  |                | 15,850 |            |  |         | 17,900 | 
|                                                           | U. S. Government agency                |  |                |       |            |  |         | 9,968  | 
|                                                           | Certificates of deposit                |  |                | 17,485 |            |  |         | 2,839  | 
|                                                           |                                        |  |                |        |            |  |         |       
|                                                           |                                        |  | 117,416        |        |            |  | 119,260 |       
|Less: cash equivalents                                     |                                        |  | (32,213        | )      |            |  | (53,848 | )     
|Less: restricted cash                                      |                                        |  | (34,303        | )      |            |  | (27,944 | )     
|                                                           |                                        |  |                |        |            |  |         |       
|                                                           | Investments                            |  | $              | 50,900 |            |  | $       | 37,468 | 
|                                                           |                                        |  |                |        |            |  |         |       
|                                                           | Investments
maturing within one year   |  |                | 43,388 |            |  |         | 31,468 | 
|                                                           | Investments
maturing one to five years |  |                | 7,512  |            |  |         | 6,000  | 
|                                                           |                                        |  |                |        |            |  |         |       
|                                                           | Total
Contractual Maturities           |  | $              | 50,900 |            |  | $       | 37,468 | 
|                                                           |                                        |  |                |        |            |  |         |       

9.     RECEIVABLES

|                                   |             |   |                |       |            |   |        |        | 
|---------------------------------- | ----------- | - | -------------- | ----- | ---------- | - | ------ | ------ | 
|                                   |             |   | As of         
|                                   |             |   |               
|                                   |             |   | August 31,     |       | August 31,
|                                   |             |   | 2002           |       | 2001      
|                                   |             |   |                |       |           
|                                   |             |   | (In thousands)
|Trade receivables                  |             | $ | 10,495         |       |            | $ | 7,367  |       
|Notes receivable  related parties |             |   |               |       |            |   | 555    |       
|Other                              |             |   | 2,487          |       |            |   | 5,464  |       
|Allowance for doubtful accounts    |             |   | (3,843         | )     |            |   | (1,810 | )     
|                                   |             |   |                |       |            |   |        |       
|                                   | Receivables |   | $              | 9,139 |            |   | $      | 11,576 | 
|                                   |             |   |                |       |            |   |        |       

Interland-Georgia loaned two of its shareholder officers, both of whom are
no longer affiliated with the Company, $225,000 each. The notes were full
recourse, collateralized by common stock of the Company owned by the
individuals, bore interest at 10% per annum and were due on demand. During
fiscal 2002, the notes and accrued interest of $0.6 million were satisfied
through the exchange of common stock.

Other receivables primarily consist of interest receivable, sales tax
refunds receivable and third party partner and reseller receivables.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.     PROPERTY, PLANT AND EQUIPMENT

|                                                |                                    |  |              |  |                |   |            |        |  |   |        |        | 
|----------------------------------------------- | ---------------------------------- |  | ------------ |  | -------------- | - | ---------- | ------ |  | - | ------ | ------ | 
|                                                |                                    |  |              |  |                |   | As of     
|                                                |                                    |  |              |  |                |   |           
|                                                |                                    |  | Estimated    |  | August 31,     |   | August 31,
|                                                |                                    |  | useful lives |  | 2002           |   | 2001      
|                                                |                                    |  |              |  |                |   |           
|                                                |                                    |  | (In years)   |  | (In thousands)
|Computer equipment                              |                                    |  | 3            |  |                | $ | 51,528     |        |  | $ | 38,234 |       
|Software                                        |                                    |  | 2            |  |                |   | 13,138     |        |  |   | 5,565  |       
|Office equipment                                |                                    |  | 5            |  |                |   | 5,958      |        |  |   | 6,186  |       
|Leasehold improvements                          |                                    |  | 3-5          |  |                |   | 19,371     |        |  |   | 13,551 |       
|Assets in progress                              |                                    |  |              |  |                |   | 1,308      |        |  |   | 1,935  |       
|                                                |                                    |  |              |  |                |   |            |        |  |   |        |       
|                                                |                                    |  |              |  |                |   | 91,303     |        |  |   | 65,471 |       
|Less: Accumulated depreciation and amortization |                                    |  |              |  |                |   | (32,245    | )      |  |   | (5,622 | )     
|                                                |                                    |  |              |  |                |   |            |        |  |   |        |       
|                                                | Property, plant and equipment, net |  |              |  |                |   | $          | 59,058 |  |   | $      | 59,849 | 
|                                                |                                    |  |              |  |                |   |            |        |  |   |        |       

Depreciation and amortization of property, plant and equipment, including
those assets held under capital lease was $26.6 million, $11.6 million and $4.2
million, for 2002, 2001, and 2000, respectively.

Leasehold improvements are amortized over the shorter of the lease term or
the estimated useful life of the improvement.

11.     ACQUIRED INTANGIBLES AND GOODWILL

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141
Business Combinations (SFAS 141) and SFAS No. 142 Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
SFAS 141 also specifies the criteria applicable to intangible assets acquired
in a purchase method business combination to be recognized and reported apart
from goodwill. SFAS 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment, at least annually. SFAS 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and be reviewed for
impairment. Amortization of goodwill and acquired intangible assets relating to
discontinued operations was $0.0, $0.8 and $0.5 million for fiscal 2002, 2001
and 2000, respectively.

The Company adopted SFAS 142 effective September 1, 2001. Upon
adoption of SFAS 142, the Company no longer amortizes goodwill. The following
table reflects net loss adjusted to exclude amortization expense recognized in
the periods presented related to goodwill:

|                                            |                                                    |   |                   |       |            |   |            |       |   |   |        |      | 
|------------------------------------------- | -------------------------------------------------- | - | ----------------- | ----- | ---------- | - | ---------- | ----- | - | - | ------ | ---- | 
|                                            |                                                    |   | Fiscal Year Ended
|                                            |                                                    |   |                  
|                                            |                                                    |   | August 31,        |       | August 31, |   | August 31,
|                                            |                                                    |   | 2002              |       | 2001       |   | 2000      
|                                            |                                                    |   |                   |       |            |   |           
|                                            |                                                    |   | (In thousands)   
|Net
income (loss) as reported               |                                                    | $ | (11,293           | )     |            | $ | (357,194   | )     |   | $ | 41,543 |     
|Add back goodwill amortization              |                                                    |   |                  |       |            |   | 6,809      |       |   |   | 4,920  |     
|                                            |                                                    |   |                   |       |            |   |            |       |   |   |        |     
|Adjusted net income (loss)                  |                                                    | $ | (11,293           | )     |            | $ | (350,385   | )     |   | $ | 46,463 |     
|                                            |                                                    |   |                   |       |            |   |            |       |   |   |        |     
|Income
(loss) per share, basic and diluted: |                                                    |   |                   |       |            |   |            |       |   |   |        |     
|                                            | As reported                                        |   | $                 | (0.08 | )          |   | $          | (3.58 | ) |   | $      | 0.43 | 
|                                            | Goodwill amortization                              |   |                   |      |            |   |            | 0.07  |   |   |        | 0.05 | 
|                                            |                                                    |   |                   |       |            |   |            |       |   |   |        |     
|                                            | Adjusted
basic and diluted income (loss) per share |   | $                 | (0.08 | )          |   | $          | (3.51 | ) |   | $      | 0.48 | 
|                                            |                                                    |   |                   |       |            |   |            |       |   |   |        |     

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In accordance with the requirements of FAS 142, the Company has performed
its annual impairment test of goodwill as of May 31, 2002 and has determined
that goodwill is not impaired.

The changes in the carrying amount of goodwill for the year ended August
31, 2002 and 2001, are as follows:

|                             |                                |   |                   |        |            |   |         |         |  
|---------------------------- | ------------------------------ | - | ----------------- | ------ | ---------- | - | ------- | ------- | -
|                             |                                |   | Fiscal Year Ended
|                             |                                |   |                  
|                             |                                |   | August 31,        |        | August 31,
|                             |                                |   | 2002              |        | 2001      
|                             |                                |   |                   |        |           
|                             |                                |   | (In thousands)   
|Balance at beginning of year |                                | $ | 104,406           |        |            | $ | 59,207  |        
|                             | Goodwill acquired              |   |                   | 17,046 |            |   |         | 104,406 |  
|                             | Impairment
write-down (Note 4) |   |                   |       |            |   |         | (52,398 | )
|                             | Amortization expense           |   |                   |       |            |   |         | (6,809  | )
|                             | Other adjustments              |   |                   | (1,441 | )          |   |         |        |  
|                             |                                |   |                   |        |            |   |         |        
|Balance at end of year       |                                | $ | 120,011           |        |            | $ | 104,406 |        
|                             |                                |   |                   |        |            |   |         |        

In connection with the Interland-Georgia acquisition, the Company accrued
liabilities related to abandoned leases and estimated contract termination
fees. During the second quarter of 2002, the Company settled obligations with
three vendors resulting in a net increase to goodwill of $0.3 million. During
the third quarter of 2002, the Company sub-leased a portion of the abandoned
facility through the end of the lease term resulting in a reduction to the
accrued liability and goodwill in the amount of $0.4 million. Additionally,
the Company received a waiver and release from a vendor which released the
Company from its obligations under a terminated contract and as a result, the
Company reversed $1.4 million of liabilities previously accrued related to this
contract. These adjustments to goodwill are reflected in the above table in
Other adjustments.

The following table summarizes intangible assets by asset class and
related accumulated amortization as required by FAS 142:

|                                |                                    |  |                       |        |                       |  |          |        |              |  |       |        |  |  |   |     | 
|------------------------------- | ---------------------------------- |  | --------------------- | ------ | --------------------- |  | -------- | ------ | ------------ |  | ----- | ------ |  |  | - | --- | 
|                                |                                    |  | Fiscal Year Ended    
|                                |                                    |  |                      
|                                |                                    |  | As of August 31, 2002 |        | As of August 31, 2001
|                                |                                    |  |                       |        |                      
|                                |                                    |  |                       |        |                       |  |          |        |              |  | Gross |        |  |  |  
|                                |                                    |  | Gross carrying        |        | Accumulated           |  | carrying |        | Accumulated 
|                                |                                    |  | amount                |        | amortization          |  | amount   |        | amortization
|                                |                                    |  |                       |        |                       |  |          |        |             
|                                |                                    |  | (In thousands)       
|Amortizable intangible assets:  |                                    |  |                       |        |                       |  |          |        |              |  |       |        |  |  |   |    
|                                | Core technology                    |  | $                     | 12,480 |                       |  | $        | 2,683  |              |  | $     | 12,000 |  |  | $ | 200 | 
|                                | Customer account acquisitions      |  |                       | 25,424 |                       |  |          | 5,298  |              |  |       |       |  |  |   |    | 
|                                | Customer relationships             |  |                       | 6,300  |                       |  |          | 917    |              |  |       |       |  |  |   |    | 
|                                | Trademarks                         |  |                       | 5,400  |                       |  |          | 831    |              |  |       | 4,900  |  |  |   | 58  | 
|                                | Other                              |  |                       | 13,998 |                       |  |          | 623    |              |  |       | 600    |  |  |   | 26  | 
|                                |                                    |  |                       |        |                       |  |          |        |              |  |       |        |  |  |   |     | 
|                                | Total                              |  | $                     | 63,602 |                       |  | $        | 10,352 |              |  | $     | 17,500 |  |  | $ | 284 | 
|                                |                                    |  |                       |        |                       |  |          |        |              |  |       |        |  |  |   |     | 
|Aggregate amortization expense: |                                    |  |                       |        |                       |  |          |        |              |  |       |        |  |  |   |    
|                                | For the year ended August 31, 2002 |  |                       |        |                       |  | $        | 10,068 |              |  |       |        |  |  |   |     | 
|Estimated amortization expense: |                                    |  |                       |        |                       |  |          |        |              |  |       |        |  |  |   |    
|                                | For the year ended August 31, 2003 |  |                       |        |                       |  | $        | 14,800 |              |  |       |        |  |  |   |     | 
|                                | For the year ended August 31, 2004 |  |                       |        |                       |  |          | 14,543 |              |  |       |        |  |  |   |     | 
|                                | For the year ended August 31, 2005 |  |                       |        |                       |  |          | 8,051  |              |  |       |        |  |  |   |     | 
|                                | For the year ended August 31, 2006 |  |                       |        |                       |  |          | 2,910  |              |  |       |        |  |  |   |     | 
|                                | For the year ended August 31, 2007 |  |                       |        |                       |  |          | 700    |              |  |       |        |  |  |   |     | 

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Included in
other of $14.0 million is $12.8 million related to the acquisition of
iNNERHOST as well as $1.2 million related to reseller
relationships. Upon completion of the purchase price allocation for iNNERHOST,
this balance will be allocated to the appropriate intangible asset categories
including goodwill. Amortization expense for this balance has been estimated and
recorded during fiscal 2002 using a life of 3 years, however,
the five year estimated amortization expense table excludes estimated
iNNERHOST amortization expense.

All intangible assets are amortized on a straight line basis over a
weighted average of 4 years. Core technology is amortized over a weighted
average of 5 years, customer account acquisitions and customer relationships
are amortized over a weighted average of 3 years and trademarks are amortized
over a weighted average of 7 years and all other intangible assets are
amortized on a weighted average of 3 years. None of the goodwill
related to any acquisitions is
deductible for tax purposes.

12.     LOSS ON INVESTMENTS

In fiscal 2001, the
Company incurred a loss on its equity share of the losses of Bird on
a Wire, Inc. (BOAW), as well as the Companys loss
on disposal of its investment therein ($4.9 million) and
wrote-off an investment in Innuity, Inc. ($5.0 million). On
May 28, 2001, BOAW entered into a definitive agreement to sell
its assets. After settling BOAW liabilities, the Company received net
proceeds of $1.5 million.

On September 29,
2000, the Company sold its remaining 10% interest in MCMS, Inc.
(MCMS) for a net gain of $4.5 million.

13.     ACCRUED EXPENSES

|                                        |                  |   |                |        |            |   |        |        | 
|--------------------------------------- | ---------------- | - | -------------- | ------ | ---------- | - | ------ | ------ | 
|                                        |                  |   | As of         
|                                        |                  |   |               
|                                        |                  |   | August 31,     |        | August 31,
|                                        |                  |   | 2002           |        | 2001      
|                                        |                  |   |                |        |           
|                                        |                  |   | (In thousands)
|Accrued payroll and related liabilities |                  | $ | 5,496          |        |            | $ | 7,694  |       
|Taxes payable                           |                  |   | 826            |        |            |   | 559    |       
|Accrued restructuring liabilities       |                  |   | 8,813          |        |            |   | 12,478 |       
|Acquisition related liabilities         |                  |   | 9,007          |        |            |   | 8,837  |       
|Accrued lease payments                  |                  |   | 956            |        |            |   | 3,398  |       
|Accrued legal liabilities               |                  |   | 547            |        |            |   | 3,153  |       
|Accrued professional fees               |                  |   | 108            |        |            |   | 2,070  |       
|Other                                   |                  |   | 4,611          |        |            |   | 19,487 |       
|                                        |                  |   |                |        |            |   |        |       
|                                        | Accrued expenses |   | $              | 30,364 |            |   | $      | 57,676 | 
|                                        |                  |   |                |        |            |   |        |       

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In connection with the acquisition of Interland-Georgia, the Company
accrued certain liabilities representing estimated costs of exiting certain
facilities, termination of bandwidth contracts and involuntary termination of
employees of Interland-Georgia in accordance with EITF No, 95-3, Recognition
of Liabilities in Connection with a Purchase Business Combination.
The August 31, 2002 balance of $7.8 million is a component
of the $5.5 million Accrued payroll and related
liabilities and the $9.0
million Acquisition related liabilities balances in the above accrued expense
detail table. The following table shows the amounts accrued, amounts paid and
other adjustments to these accruals:

|                           |                     |   |                |        |           |   |          |        |             |   |          |        |   |   |       |        |  
|-------------------------- | ------------------- | - | -------------- | ------ | --------- | - | -------- | ------ | ----------- | - | -------- | ------ | - | - | ----- | ------ | -
|                           |                     |   |                |        |           |   |          |        |             |   | Employee |        |   |   |      
|                           |                     |   | Lease          |        |           |   |          |        | termination |   |          |        |  
|                           |                     |   | abandonments   |        | Bandwidth |   | benefits |        | Total      
|                           |                     |   |                |        |           |   |          |        |            
|                           |                     |   | (In thousands)
|Balance at August 31, 2000 |                     | $ |               |        |           | $ |         |        |             | $ |         |        |   | $ |      |       
|                           | Liabilities accrued |   |                | 7,098  |           |   |          | 1,440  |             |   |          | 1,362  |   |   |       | 9,900  |  
|                           | Cash paid           |   |                | (123   | )         |   |          |       |             |   |          | (83    | ) |   |       | (206   | )
|Balance at August 31, 2001 |                     |   | 6,975          |        |           |   | 1,440    |        |             |   | 1,279    |        |   |   | 9,694 |       
|                           | Cash paid           |   |                | (1,871 | )         |   |          |       |             |   |          | (1,027 | ) |   |       | (2,898 | )
|                           | Other adjustments   |   |                | 2,470  |           |   |          | (1,440 | )           |   |          |       |   |   |       | 1,030  |  
|                           |                     |   |                |        |           |   |          |        |             |   |          |        |   |   |       |       
|Balance at August 31, 2002 |                     | $ | 7,574          |        |           | $ |         |        |             | $ | 252      |        |   | $ | 7,826 |       
|                           |                     |   |                |        |           |   |          |        |             |   |          |        |   |   |       |       

During fiscal 2002, the Company revised its estimates of the cost of
exiting three of the Interland-Georgia facilities resulting in a net increase
to the accrual of $2.5 million. Approximately $2.9 million was recorded as
operating expense within the Companys Statement of Operations and $0.4 million
was recorded as a purchase price adjustment as a reduction of goodwill.
Additionally, the Company received a waiver and release from a vendor, which
released the Company from its obligations under a terminated bandwidth
contract, and as a result, the Company reversed $1.4 million of liabilities
previously accrued. This adjustment was recorded as an Interland-Georgia
purchase price adjustment as a reduction of goodwill and is reflected in the
above table in Other adjustments.

14.     LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

|                                                                                                                                               |                                              |   |                |        |            |   |         |        | 
|---------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | - | -------------- | ------ | ---------- | - | ------- | ------ | 
|                                                                                                                                               |                                              |   | As of         
|                                                                                                                                               |                                              |   |               
|                                                                                                                                               |                                              |   | August 31,     |        | August 31,
|                                                                                                                                               |                                              |   | 2002           |        | 2001      
|                                                                                                                                               |                                              |   |                |        |           
|                                                                                                                                               |                                              |   | (In thousands)
|Capitalized lease obligations payable in monthly installments through
2005, weighted average interest rates of 10.93% and 16.05%, respectively |                                              | $ | 24,467         |        |            | $ | 33,736  |       
|Notes payable                                                                                                                                  |                                              |   | 6,699          |        |            |   | 5,370   |       
|                                                                                                                                               |                                              |   |                |        |            |   |         |       
|                                                                                                                                               |                                              |   | 31,166         |        |            |   | 39,106  |       
|Less current portion                                                                                                                           |                                              |   | (19,157        | )      |            |   | (14,875 | )     
|                                                                                                                                               |                                              |   |                |        |            |   |         |       
|                                                                                                                                               | Long-term debt and capital lease obligations |   | $              | 12,009 |            |   | $       | 24,231 | 
|                                                                                                                                               |                                              |   |                |        |            |   |         |       

The Company has an outstanding note payable under a secured credit
agreement expiring July 31, 2003. As of August 31, 2002, the Company has
borrowed the full amount under the agreement of $5.4 million. Under the
agreement, the Company is required to maintain cash and cash equivalents of
$6.9 million in a restricted investment account. The note requires monthly
interest only payments with the principal and any accrued interest payable on
July 31, 2003. The note bears interest a rate equal to prime less 100 basis
points. At August 31, 2002, the applicable interest rate was equal to 3.25%.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

iNNERHOST has an outstanding note payable relating to data center
construction costs with monthly payments of principal and interest through
August 2004. The agreement stipulates a fixed rate of interest of 10%. The
outstanding balance of the loan at August 31, 2002, is $1.0 million.
Additionally, iNNERHOST has term loans for equipment purchases with monthly
payments of principal and interest, which have stated interest rates of 12%.
As of August 31, 2002, the outstanding balance was $0.3 million.

Interest income, on
the statement of operations, is net of approximately $3.2 million, $0.06 million and
$0.2 million of interest expenses in 2002, 2001 and 2000, respectively.

15.     OTHER LIABILITIES

|                              |                   |                |       |            |  |   |       |        | 
|----------------------------- | ----------------- | -------------- | ----- | ---------- |  | - | ----- | ------ | 
|                              |                   |               
|                              |                   | As of         
|                              |                   |               
|                              |                   | August 31,     |       | August 31,
|                              |                   | 2002           |       | 2001      
|                              |                   |                |       |           
|                              |                   | (In thousands)
|                             
|Sales tax assessments reserve |                   | $              | 8,300 |            |  | $ | 8,300 |       
|Income tax liability reserve  |                   |                | 2,895 |            |  |   | 4,591 |       
|Other                         |                   |                | 81    |            |  |   | 4     |       
|                              |                   |                |       |            |  |   |       |       
|                              | Other liabilities |                | $     | 11,276     |  |   | $     | 12,895 | 
|                              |                   |                |       |            |  |   |       |       

The Company is a party to numerous sales and use tax assessments
related to the discontinued PC and SpecTek operations and has
established a reserve of $8.3 million.

16.     WARRANTS

In connection with the purchase of Interland-Georgia on August 6, 2001,
the Company issued warrants to purchase shares of the Companys common stock in
exchange for each issued and outstanding Interland-Georgia warrant using the
exchange ratio of 0.861 shares of the Company for each share of
Interland-Georgia. All of the warrants are fully vested at August 31, 2002.
Following is a summary of the outstanding warrants issued by the Company:

|                      |  |                   |  |        |           |           |  |          |       |  |  | 
|--------------------- |  | ----------------- |  | ------ | --------- | --------- |  | -------- | ----- |  |  | 
|                      |  |                   |  |        |           | Number of |  | Exercise
|Warrant Holder        |  | Expiration Date   |  | Shares |           | Price    
|                      |  |                   |  |        |           |          
|Compaq                |  | June 30, 2003     |  |        | 78,110    |           |  | $        | 12.90 | 
|Hewlett Packard       |  | June 30, 2003     |  |        | 38,745    |           |  |          | 12.90 | 
|Verizon               |  | October 11, 2003  |  |        | 2,696,652 |           |  |          | 20.91 | 
|Compaq                |  | December 31, 2003 |  |        | 69,167    |           |  |          | 13.94 | 
|Microsoft Corporation |  | December 24, 2004 |  |        | 470,519   |           |  |          | 6.24  | 
|VeriSign              |  | March 15, 2005    |  |        | 320,648   |           |  |          | 6.24  | 
|Transamerica          |  | May 1, 2005       |  |        | 18,598    |           |  |          | 9.67  | 
|Microsoft Corporation |  | July 26, 2005     |  |        | 403,594   |           |  |          | 13.94 | 
|VeriSign              |  | July 26, 2005     |  |        | 322,875   |           |  |          | 13.94 | 
|Transamerica          |  | October 3, 2005   |  |        | 21,525    |           |  |          | 13.94 | 
|                      |  |                   |  |        |           |           |  |          |       |  |  | 
|                      |  | Total             |  |        | 4,440,433 |           |  |          |       | 
|                      |  |                   |  |        |           |           |  |          |       |  |  | 

17.     STOCK PURCHASE AND INCENTIVE PLANS

The Companys 1995 Employee Stock Purchase Plan (the Plan) allows
eligible employees to purchase shares of common stock through payroll
deductions. The shares can be purchased for 85% of the lower of the beginning
or ending fair market value of each six-month offering period and is restricted
from resale for a period of one year from the date of purchase. Purchases are
limited to 20% of an employees eligible compensation. A total of 2,500,000
shares are reserved for issuance under the plan, of which approximately
1,262,000 shares had been issued as of August 31, 2002. Shares issued under
the Plan during 2002, 2001, and 2000, were approximately 220,000, 183,000 and
169,000, respectively.

The Company has three stock option plans, the 2002 Equity Incentive Plan
(the 2002 Plan), the 2001 Equity Incentive Plan (the 2001 Plan) and the
1995 Stock Option Plan (the 1995 Plan), collectively referred to as the
Option Plans.

During fiscal 2002,
the Companys shareholders approved the 2002 Plan which
provides for the granting of incentive and non-statutory stock options. As of
August 31, 2002, there were 6.5 million shares of common stock reserved for
issuance under the 2002 Plan. Exercise prices of the incentive and
non-statutory stock options are 100% of the fair market value of the Companys
common stock on the date of grant. Stock options granted generally vest as to
25% of the shares issued under the option grant after one year from the date of
grant. Subsequent to the one-year anniversary of the grant, the options become
vested as to 2.08% of the total shares of the options granted per month. In
connection with the adoption of the 2002 Plan, the Company terminated its 1995
Plan and its 2001 Plan. All awards outstanding under those plans continue in
accordance with their terms, but no further awards will be granted under those
plans.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Companys 2001 Plan provided for the granting of non-statutory stock
options and restricted stock awards. Exercise prices of the non-statutory
stock options may be less than fair market value at the date of grant. Stock
options granted generally vest as to 25% of the shares issued under the option
grant after one year from the date of grant. Subsequent to the one-year
anniversary of the grant, the options become vested as to 2.08% of the total
shares of the options grant per month.

The Companys 1995 Plan provided for the granting of incentive and
non-statutory stock options. Exercise prices of the incentive and
non-statutory stock options are 100% of the fair market value of the Companys
common stock on the date of grant. Prior to April 28, 1999 exercise prices of
the incentive and non-statutory stock options were generally issued at 100% and
85%, respectively, of the fair market value of the Companys common stock on
the date of grant. Stock options granted to employees and executive officers
after April 28, 1999 typically have a term of ten years and vest twenty-five
percent each year for four years from the date of grant. Stock options granted
to employees and executive officers prior to April 28, 1999 typically have a
term of six years and vest twenty percent each year for five years from the
date of grant.

During 1998, Mr. Joel J. Kocher, the Companys Chief Executive Officer and
Chairman of the Board of Directors, was granted options to purchase a total of
650,000 shares of the Companys common stock. Of these 650,000 options,
500,000 were granted under the 1995 Plan and 150,000 were granted as non-plan
grants. A total of 250,000 options vest after completion by Mr. Kocher of
seven (7) years of employment with the Company, subject to immediate early
vesting if the Company achieves certain financial criteria relating to
profitability, net revenue, net margin and cash balance increases. During 2002
and 2001, Mr. Kocher was granted options to purchase a total of 1,000,000 and
1,428,700 shares of the Companys common stock.

In connection with the purchase of Interland-Georgia on August 6, 2001,
the Company issued options to purchase shares of the Companys common stock and
restricted shares in exchange for each issued and outstanding Interland-Georgia
option and restricted share using the exchange ratio of 0.861 per share of the
Company for each share of Interland-Georgia. The Company recorded deferred
compensation of $107,000 related to this conversion.

Option activity under the Option Plans is summarized as:

|                                             |           |  |                                          |       |                 |   |                 |  |          |  |           |       |          |   |       |  |  |  |          |       |  |   |       |  | 
|-------------------------------------------- | --------- |  | ---------------------------------------- | ----- | --------------- | - | --------------- |  | -------- |  | --------- | ----- | -------- | - | ----- |  |  |  | -------- | ----- |  | - | ----- |  | 
|                                             |           |  | Fiscal Year Ended                       
|                                             |           |  |                                         
|                                             |           |  | August 31, 2002                          |       | August 31, 2001 |   | August 31, 2000
|                                             |           |  |                                          |       |                 |   |                
|                                             |           |  |                                          |       |                 |   | Weighted        |  |          |  |           |       | Weighted |   |       |  |  |  | Weighted
|                                             |           |  |                                          |       |                 |   | Average         |  |          |  |           |       | Average  |   |       |  |  |  | Average 
|                                             |           |  | Number of                                |       | Exercise        |   | Number of       |  | Exercise |  | Number of |       | Exercise
|                                             |           |  | Shares                                   |       | Price           |   | Shares          |  | Price    |  | Shares    |       | Price   
|                                             |           |  |                                          |       |                 |   |                 |  |          |  |           |       |         
|                                             |           |  | (In thousands, except per share amounts)
|Outstanding at beginning of year             |           |  | 17,915                                   |       |                 | $ | 5.13            |  |          |  | 8,203     |       |          | $ | 11.90 |  |  |  | 7,448    |       |  | $ | 12.56 | 
|Granted                                      |           |  | 6,652                                    |       |                 |   | 2.24            |  |          |  | 6,179     |       |          |   | 3.79  |  |  |  | 2,719    |       |  |   | 10.94 | 
|Conversion of HostPro stock plans            |           |  |                                         |       |                 |   |                |  |          |  | 3,625     |       |          |   | 2.56  |  |  |  |         |       |  |   |      | 
|Acquisition of Interland-Georgia             |           |  |                                         |       |                 |   |                |  |          |  | 5,227     |       |          |   | 3.00  |  |  |  |         |       |  |   |      | 
|Exercised                                    |           |  | (653                                     | )     |                 |   | 1.24            |  |          |  | (10       | )     |          |   | 11.79 |  |  |  | (229     | )     |  |   | 12.17 | 
|Terminated or cancelled                      |           |  | (8,055                                   | )     |                 |   | 5.62            |  |          |  | (5,309    | )     |          |   | 10.15 |  |  |  | (1,735   | )     |  |   | 13.20 | 
|                                             |           |  |                                          |       |                 |   |                 |  |          |  |           |       |          |   |       |  |  |  |          |       |  |   |       | 
|Outstanding at end of year                   |           |  | 15,859                                   |       |                 |   | 2.95            |  |          |  | 17,915    |       |          |   | 5.13  |  |  |  | 8,203    |       |  |   | 11.90 | 
|                                             |           |  |                                          |       |                 |   |                 |  |          |  |           |       |          |   |       |  |  |  |          |       |  |   |       | 
|Exercisable at end of year                   |           |  | 7,262                                    |       |                 |   | 3.36            |  |          |  | 7,715     |       |          |   | 11.51 |  |  |  | 2,233    |       |  |   | 12.40 | 
|Shares available for future grant
under the: |           |  |                                          |       |                 |   |                 |  |          |  |           |       |          |   |       |  |  |  |          |       |  |   |       | 
|                                             | 2002 Plan |  |                                          | 4,639 |                 |   |                 |  |          |  |           |      |          |   |       |  |  |  |          |      |  |   |       |  | 
|                                             | 2001 Plan |  |                                          |      |                 |   |                 |  |          |  |           | 2,428 |          |   |       |  |  |  |          |      |  |   |       |  | 
|                                             | 1995 Plan |  |                                          |      |                 |   |                 |  |          |  |           | 6,736 |          |   |       |  |  |  |          | 6,406 |  |   |       |  | 

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information about the Companys stock
options outstanding under the Option Plans as of August 31, 2002:

|                         |  |                     |        |                     |  |          |     |           |  |          |       |  |  |          |       |  |  |   |       | 
|------------------------ |  | ------------------- | ------ | ------------------- |  | -------- | --- | --------- |  | -------- | ----- |  |  | -------- | ----- |  |  | - | ----- | 
|                         |  | Options Outstanding |        | Options Exercisable
|                         |  |                     |        |                    
|                         |  |                     |        |                     |  | Weighted |     | Weighted  |  |          |       |  |  | Weighted
|                         |  |                     |        |                     |  | Average  |     | Average   |  |          |       |  |  | Average 
|                         |  | Number of           |        | Remaining           |  | Exercise |     | Number of |  | Exercise
|Range of Exercise Prices |  | Shares              |        | Life (Years)        |  | Price    |     | Shares    |  | Price   
|                         |  |                     |        |                     |  |          |     |           |  |         
|                         |  | (In thousands)     
|Less than $2.00          |  |                     | 4,281  |                     |  |          | 8.7 |           |  | $        | 1.12  |  |  |          | 2,298 |  |  | $ | 0.84  | 
|$2.01 - $5.00            |  |                     | 10,257 |                     |  |          | 8.1 |           |  |          | 2.80  |  |  |          | 4,091 |  |  |   | 3.35  | 
|$5.01 - $10.00           |  |                     | 752    |                     |  |          | 3.0 |           |  |          | 8.84  |  |  |          | 514   |  |  |   | 8.88  | 
|$10.00 - $15.00          |  |                     | 563    |                     |  |          | 4.9 |           |  |          | 11.62 |  |  |          | 356   |  |  |   | 11.65 | 
|Greater than $15.00      |  |                     | 6      |                     |  |          | 7.5 |           |  |          | 16.67 |  |  |          | 3     |  |  |   | 16.76 | 
|                         |  |                     |        |                     |  |          |     |           |  |          |       |  |  |          |       |  |  |   |       | 
|                         |  |                     | 15,859 |                     |  |          |     |           |  |          |       |  |  |          | 7,262 |  |  |   |       | 
|                         |  |                     |        |                     |  |          |     |           |  |          |       |  |  |          |       |  |  |   |       | 

The Company adopted the disclosure-only provisions of SFAS 123, and
elected to continue to measure compensation expense for its stock-based
employee compensation using the intrinsic value method prescribed by APB No.
25. The fair value of options at date of grant is estimated using the
Black-Scholes options pricing model. The weighted average assumptions and
resulting fair values at date of grant for options granted during 2002, 2001,
and 2000, are as follows:

|                              |                                       |  |                           |      |       |  |      |      |       |  |   |      |       | 
|----------------------------- | ------------------------------------- |  | ------------------------- | ---- | ----- |  | ---- | ---- | ----- |  | - | ---- | ----- | 
|                              |                                       |  | Stock Option Plans Shares |     
|                              |                                       |  |                           |     
|                              |                                       |  | 2002                      |      | 2001  |  | 2000 |     
|                              |                                       |  |                           |      |       |  |      |     
|Assumptions                   |                                       |  |                           |      |       |  |      |      |       |  |   |      |      
|                              | Expected life                         |  |                           | 3.0  | years |  |      | 3.0  | years |  |   | 3.2  | years | 
|                              | Risk-free interest rate               |  |                           | 4.0  | %     |  |      | 4.0  | %     |  |   | 6.1  | %     | 
|                              | Expected volatility                   |  |                           | 76.5 | %     |  |      | 76.1 | %     |  |   | 72.0 | %     | 
|                              | Dividend yield                        |  |                           | 0.0  | %     |  |      | 0.0  | %     |  |   | 0.0  | %     | 
|Weighted average fair values: |                                       |  |                           |      |       |  |      |      |       |  |   |      |      
|                              | Exercise price equal to market price  |  | $                         | 2.24 |       |  | $    | 2.18 |       |  | $ | 6.31 |       | 
|                              | Exercise price less than market price |  | $                         |     |       |  | $    | 1.66 |       |  | $ | 8.83 |       | 

Stock based compensation costs would have increased net loss by $4.5
million, or $0.03 per diluted share in 2002 and increased net loss
and decreased
net income by $21 million and $17 million or $0.21 and $0.17 per diluted share
in 2001 and 2000, respectively, if the fair values of all options granted
subsequent to 1995 had been recognized as compensation expense on a
straight-line basis over the vesting period of the grants. The pro forma
effect on net income (loss) for 2002, 2001, and 2000, may not be representative
of the pro forma effect on net income in future years because it does not take
into consideration pro forma compensation expense related to grants made prior
to the adoption of SFAS No. 123.

On August 17, 2000, the Board of Directors of the Company and HostPro
adopted the 2000 Equity Incentive Plan I and 2000 Equity Incentive Plan II (the
HostPro Stock Plans), reserving a total of 10 million shares of HostPro
Common Stock for issuance under the plans. The grants awarded vested as to 25%
of the shares issued under the option grant after one year from the date of
grant. Subsequent to the one-year anniversary of the grant, the options vest
as to 2.08% of the total shares of the option grant per month. Options could
not be exercised prior to (i) issuance to the public of shares of Common Stock
pursuant to an S-1 Registration Statement under the Securities Act of 1933, as
amended or (ii) five years from the date of grant; provided that any option
granted to a resident of California who is not an officer or director of
HostPro shall become exercisable at the rate of no less than 20% per year over
five years from the date of grant. In March 2001, the Company converted all
the outstanding options under the HostPro Stock Plans using an exchange ratio
of 0.5715, to stock options of the Company and adopted the HostPro Stock Plans
as the 2001 Equity Incentive Plan. The Company recorded deferred compensation
of $3.2 million related to this conversion, of which $796,000
and $268,000 was amortized in
2002 and 2001, respectively.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Option activity under HostPros Stock Plans are as follows :

|                                                        |  |                                          |        |                 |  |           |      |          |  |  |       |          |  |   |      | 
|------------------------------------------------------- |  | ---------------------------------------- | ------ | --------------- |  | --------- | ---- | -------- |  |  | ----- | -------- |  | - | ---- | 
|                                                        |  | Fiscal Year Ended                       
|                                                        |  |                                         
|                                                        |  | August 31, 2001                          |        | August 31, 2000
|                                                        |  |                                          |        |                
|                                                        |  |                                          |        |                 |  | Weighted  |      |          |  |  |       | Weighted
|                                                        |  |                                          |        |                 |  | Average   |      |          |  |  |       | Average 
|                                                        |  | Number of                                |        | Exercise        |  | Number of |      | Exercise
|                                                        |  | Shares                                   |        | Price           |  | Shares    |      | Price   
|                                                        |  |                                          |        |                 |  |           |      |         
|                                                        |  | (In thousands, except per share amounts)
|Outstanding at beginning of year                        |  |                                          | 3,875  |                 |  | $         | 2.25 |          |  |  |      |          |  | $ |     | 
|Granted                                                 |  |                                          | 4,020  |                 |  |           | 0.92 |          |  |  | 3,876 |          |  |   | 2.25 | 
|Exercised                                               |  |                                          |       |                 |  |           |     |          |  |  |      |          |  |   |     | 
|Terminated or cancelled                                 |  |                                          | (4,270 | )               |  |           | 0.68 |          |  |  | (1    | )        |  |   | 2.25 | 
|Converted to the 2001 Plan                              |  |                                          | (3,625 | )               |  |           | 2.56 |          |  |  |      |          |  |   |     | 
|                                                        |  |                                          |        |                 |  |           |      |          |  |  |       |          |  |   |      | 
|Outstanding at end of year                              |  |                                          |       |                 |  | $         |     |          |  |  | 3,875 |          |  | $ | 2.25 | 
|                                                        |  |                                          |        |                 |  |           |      |          |  |  |       |          |  |   |      | 
|Exercisable at end of year                              |  |                                          |       |                 |  |           |      |          |  |  |      |          |  |   |     | 
|Shares available for future grant
under the Option Plan |  |                                          |       |                 |  |           |      |          |  |  | 6,124 |          |  |   |      | 

18.     RETIREMENT PLAN

The Company offered its employees a 401(k) retirement plan (the RAM
Plan) in which substantially all employees may participate. Under the RAM
Plan, employees may contribute from 2% to 16% of eligible pay to various
savings alternatives. The RAM plan provides for an annual match of eligible
employees contributions equal to 100% of the first 4% of pay or $1,500,
whichever is greater. In calendar 2000 and 2001, the Companys contributions
under the RAM Plan were made in the Companys stock, which is purchased on the
open market. The Company may also contribute additional amounts based on its
financial performance, however no additional Company contributions were made
during the three years ended August 31, 2002.

Interland-Georgia offered its employees a 401(k) retirement plan in which
substantially all employees may participate. Under the plans deferred
compensation arrangement, eligible employees who elect to participate in the
plan may contribute between 1% and 15% of eligible compensation, as defined, to
the plan. Interland, at its discretion, may elect to provide for either a
matching contribution or a discretionary profit-sharing contribution or both.
The Company did not elect to provide a discretionary match in 2001.

On January 1, 2002, the Interland-Georgia 401(k) Plan merged with the RAM
Plan, and changed its name to the Interland 401(k) Savings Plan (Savings
Plan). In July 2002, Interland amended the Savings Plan to allow employees to
contribute up to 25% of eligible pay. The Companys expense included in
continuing operations pursuant to the RAM Plan, and thereafter the Savings
Plan, was approximately $0.5 million, $0.6 million, and $0.3 million in 2002,
2001 and 2000, respectively. The Companys expense included in discontinued
operations pursuant to the RAM Plan was approximately $2.2 million and $2.7
million in 2001 and 2000, respectively.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19.     RELATED PARTY TRANSACTIONS

|                                                    |  |                   |       |            |  |            |         |   |  |   |         | 
|--------------------------------------------------- |  | ----------------- | ----- | ---------- |  | ---------- | ------- | - |  | - | ------- | 
|                                                    |  | Fiscal Year Ended
|                                                    |  |                  
|                                                    |  | August 31,        |       | August 31, |  | August 31,
|                                                    |  | 2002              |       | 2001       |  | 2000      
|                                                    |  |                   |       |            |  |           
|                                                    |  | (In thousands)   
|Net sales                                           |  | $                 |      |            |  | $          | 23,561  |   |  | $ | 7,282   | 
|Inventory purchases                                 |  |                   |      |            |  |            | 103,808 |   |  |   | 98,227  | 
|Component recovery agreement expenses               |  |                   |      |            |  |            | 99,483  |   |  |   | 204,603 | 
|Administrative services and other expenses (income) |  |                   |      |            |  |            | (206    | ) |  |   | 524     | 
|MTI lease                                           |  |                   | 2,904 |            |  |            | 1,165   |   |  |   |        | 
|Property, plant and equipment purchases             |  |                   |      |            |  |            | 14,186  |   |  |   | 7,651   | 
|Property, plant and equipment sales                 |  |                   |      |            |  |            | 32,649  |   |  |   | 37,504  | 

In fiscal years 2001 and 2000, substantially all of the transactions noted
above were between the Companys discontinued operations and Micron Technology,
Inc. (MTI). In connection with the sale of the discontinued PC business to
GTG, the Company was obligated to pay lease payments to MTI during fiscal year
2002. There were no other sale or purchase transactions between the Company
and MTI.

In connection with the acquisition of CommuniTech.Net, the Company holds two
notes receivable with balances totaling $2.7 million at August 31, 2002 from a
seller of CommuniTech.Net. These notes, which bear interest at the rate of 5%
per annum, mature on February 8, 2004 with interest only payments due
quarterly. Accrued interest on the notes as of August 31, 2002 was $.08
million. The loans are collateralized by 2.7 million shares of the Companys
common stock, owned by the note holder. The receivable is shown on the balance
sheet as a reduction in shareholders equity.

During the second quarter the Micron Technology Foundation, which beneficially
owned approximately 43% of the Companys common stock, sold all of the
approximately 58.6 million shares of the Companys common stock to
institutional investors, together with the Company and four of its directors.
The Company re-purchased and retired approximately 5.8 million shares of common
stock from the Foundation at an aggregate cost of $7.3 million.

During the fourth quarter of 2002, the Company repurchased 0.8 million shares
of the Companys common stock from the two former owners of CommuniTech.Net at
an aggregate cost of $2.5 million.

20.     INCOME TAXES

The effective income tax rate on continuing operations was approximately
92% for fiscal 2002 compared to 13% for fiscal 2001 and 27% for fiscal 2000.
The rate principally reflects the federal statutory rate, net of the effect of
state taxes, tax-exempt securities and non-deductible goodwill amortization.
The change in the effective income tax rate primarily reflects tax benefits
resulting from a change in the Internal Revenue Code regarding the carryback of
net operating losses, as well as a valuation allowance on certain tax assets.

|                               |                         |   |                   |         |            |   |            |         |   |   |        |        |  
|------------------------------ | ----------------------- | - | ----------------- | ------- | ---------- | - | ---------- | ------- | - | - | ------ | ------ | -
|                               |                         |   | Fiscal Year Ended
|                               |                         |   |                  
|                               |                         |   | August 31,        |         | August 31, |   | August 31,
|                               |                         |   | 2002              |         | 2001       |   | 2000      
|                               |                         |   |                   |         |            |   |           
|                               |                         |   | (In thousands)   
|Current:                       |                         |   |                   |         |            |   |            |         |   |   |        |       
|                               | U.S. Federal            |   | $                 | (64,241 | )          |   | $          | (22,233 | ) |   | $      | 15,753 |  
|                               | State                   |   |                   |        |            |   |            | (461    | ) |   |        | 3,416  |  
|                               |                         |   |                   |         |            |   |            |         |   |   |        |        |  
|                               |                         | $ | (64,241           | )       |            | $ | (22,694    | )       |   | $ | 19,169 |       
|                               |                         |   |                   |         |            |   |            |         |   |   |        |        |  
|Deferred:                      |                         |   |                   |         |            |   |            |         |   |   |        |       
|                               | U.S. Federal            |   | $                 |        |            |   | $          |        |   |   | $      | (1,783 | )
|                               | State                   |   |                   |        |            |   |            |        |   |   |        | 418    |  
|                               |                         |   |                   |         |            |   |            |         |   |   |        |        |  
|                               |                         | $ |                  |         |            | $ |           |         |   | $ | (1,365 | )     
|                               |                         |   |                   |         |            |   |            |         |   |   |        |        |  
|Income tax (benefit) provision |                         | $ | (64,241           | )       |            | $ | (22,694    | )       |   | $ | 17,804 |       
|                               |                         |   |                   |         |            |   |            |         |   |   |        |        |  
|Allocated to:                  |                         |   |                   |         |            |   |            |         |   |   |        |       
|                               | Continuing operations   |   | $                 | (64,241 | )          |   | $          | (22,694 | ) |   | $      | (9,748 | )
|                               |                         |   |                   |         |            |   |            |         |   |   |        |        |  
|                               | Discontinued operations |   | $                 |        |            |   | $          |        |   |   | $      | 27,552 |  
|                               |                         |   |                   |         |            |   |            |         |   |   |        |        |  

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On March 9, 2002, a tax law entitled the Job Creation and Worker
Assistance Act of 2002 was passed. The act benefited the Company directly
during 2002 by allowing the ability to carryback 2001 tax losses an additional
three years for a total of five years. During the third quarter the Company
recorded a tax benefit of approximately $64 million from cash relating to the
additional tax loss carryback claims. This tax refund has significantly added
to the Companys cash position but has also reduced the amount of tax net
operating losses that are available for carryforward to future years.

The tax benefit associated with non-statutory stock options and
disqualifying dispositions, by employees, of shares issued under the Companys
stock plans reduced taxes payable by approximately $0.0 million, $0.0 million
and $0.05 million for 2002, 2001, and 2000, respectively. These benefits were
credited to additional capital.

A reconciliation between the income tax provision and income tax computed
using the federal statutory rate follows:

|                                                          |  |                   |         |            |  |            |         |   |  |   |        |  
|--------------------------------------------------------- |  | ----------------- | ------- | ---------- |  | ---------- | ------- | - |  | - | ------ | -
|                                                          |  | Fiscal Year Ended
|                                                          |  |                  
|                                                          |  | August 31,        |         | August 31, |  | August 31,
|                                                          |  | 2002              |         | 2001       |  | 2000      
|                                                          |  |                   |         |            |  |           
|                                                          |  | (In thousands)   
|U.S. federal income tax at statutory rate                 |  | $                 | (26,437 | )          |  | $          | (58,943 | ) |  | $ | 20,771 |  
|State taxes, net of federal benefit and state tax credits |  |                   | 7,284   |            |  |            | (8,420  | ) |  |   | 723    |  
|Goodwill                                                  |  |                   |        |            |  |            | 21,276  |   |  |   |       |  
|Valuation allowance                                       |  |                   | (51,875 | )          |  |            | 20,794  |   |  |   |       |  
|Tax-exempt Foreign Trade Income                           |  |                   | 6,567   |            |  |            | 2,000   |   |  |   | (5,398 | )
|Other                                                     |  |                   | 220     |            |  |            | 599     |   |  |   | 1,708  |  
|                                                          |  |                   |         |            |  |            |         |   |  |   |        |  
|Income tax (benefit) provision                            |  | $                 | (64,241 | )          |  | $          | (22,694 | ) |  | $ | 17,804 |  
|                                                          |  |                   |         |            |  |            |         |   |  |   |        |  

The tax effects of temporary differences and carryforwards that give rise
to the deferred tax assets and liabilities are as follows:

|                               |                                  |   |                |         |            |   |          |         |  
|------------------------------ | -------------------------------- | - | -------------- | ------- | ---------- | - | -------- | ------- | -
|                               |                                  |   | As of         
|                               |                                  |   |               
|                               |                                  |   | August 31,     |         | August 31,
|                               |                                  |   | 2002           |         | 2001      
|                               |                                  |   |                |         |           
|                               |                                  |   | (In thousands)
|Deferred tax assets:           |                                  |   |                |         |            |   |          |        
|                               | Receivables and other allowances |   | $              | 1,518   |            |   | $        | 371     |  
|                               | Accrued expenses                 |   |                | 7,419   |            |   |          | 6,899   |  
|                               | Accrued compensation             |   |                | 416     |            |   |          | 6,678   |  
|                               | Accrued licenses and royalties   |   |                |        |            |   |          | 236     |  
|                               | Deferred revenue                 |   |                | 7,856   |            |   |          | 6,761   |  
|                               | Property, plant and equipment    |   |                | 2,147   |            |   |          | 8,605   |  
|                               | Net operating loss carryforwards |   |                | 72,866  |            |   |          | 112,864 |  
|                               | Other                            |   |                | 48      |            |   |          | 3,836   |  
|                               |                                  |   |                |         |            |   |          |         |  
|Total deferred tax assets      |                                  |   | 92,270         |         |            |   | 146,250  |        
|Valuation allowance            |                                  |   | (81,406        | )       |            |   | (133,251 | )      
|                               |                                  |   |                |         |            |   |          |         |  
|Net deferred tax assets        |                                  |   | 10,864         |         |            |   | 12,999   |        
|Deferred tax liabilities:      |                                  |   |                |         |            |   |          |        
|                               | Acquired intangibles             |   |                | (10,864 | )          |   |          | (12,934 | )
|                               | Deferred patent charges          |   |                |        |            |   |          | (65     | )
|                               |                                  |   |                |         |            |   |          |         |  
|Total deferred tax liabilities |                                  |   | (10,864        | )       |            |   | (12,999  | )      
|                               |                                  |   |                |         |            |   |          |         |  
|Net deferred taxes             |                                  | $ |               |         |            | $ |         |        
|                               |                                  |   |                |         |            |   |          |         |  

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred tax assets and liabilities have not been classified with net
assets of discontinued operations because income taxes will not be assumed by
the buyers of the discontinued operations and remain the responsibility of the
Company.

The Company has federal operating loss carryforwards that are limited by
the Internal Revenue Code of $182 million (including $90 million, $8 million,
and $1 million as a result of the merger with Interland-Georgia, iNNERHOST, and
DialTone, respectively) that expire beginning in 2006. The acquired companies
of Interland-Georgia, iNNERHOST, and DialTone, experienced an ownership change
as defined under Section 382 of the Internal Revenue Code in August 2001. As a
result of the ownership change, the losses will be subject to annual
limitations in their future use. The aggregate annual limitation is
approximately $4.1 million.

The Company recorded a full valuation allowance with respect to the
pre-acquisition net deferred tax assets associated with the acquired
businesses. To the extent that tax benefits are realized in the future with
respect to the pre-acquisition deferred tax assets, the benefit will be
credited to goodwill versus income tax expense. The amount of the
pre-acquisition deferred tax assets approximates $40 million.

A valuation allowance has been established against the deferred tax assets
because management does not believe such assets are more likely than not to be
realized.

21.     COMMITMENTS

The Company leases various buildings, computer and office equipment, under
capital and operating lease agreements. The Company has also entered into
various bandwidth agreements. The assets and liabilities under capital leases
are recorded at the lower of the present value of the minimum lease payments or
the fair value of the assets. These assets are depreciated over the shorter of
their related lease terms or their estimated useful lives.

In connection with the discontinuance of the Companys SpecTek business,
the Company sold assets including land and buildings to MTI. Given that MTI
was then the majority owner of Micron Electronics, Inc.
(MEI), the transfer was between a parent and its
subsidiary, accordingly the transaction was accounted for at historical cost in
the separate financial statements of both MEI and MTI. As a result the gain in
the amount paid versus the historical cost of the assets transferred was
treated as an adjustment to equity, net of tax.

The Company subsequently leased back a few hundred square feet of
administrative office space from MTI that was used for a few months while
continuing to wind down the discontinued SpecTek operations. Lease payments
were expensed as an operating lease and were immaterial.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In July 2001, the
Company entered into a Financing arrangement for a sale and leaseback
of $14.6 million for certain equipment, primarily computer hardware.
The sale-leaseback arrangement was accounted for
under the guidelines of SFAS 28. Accordingly, the gain of approximately $2.5
million that resulted from the sale-leaseback transaction was deferred and,
since the leased asset qualifies as a capital lease, is being amortized in
proportion to the amortization of the leased asset and
is included in property, plant and equipment, net.

Rental expense
related to operating leases was approximately $7.7 million,
$4.0 million and $8.0 million in 2002, 2001, and 2000, respectively. Future
minimum lease payments including facility leases and bandwidth
commitments are as follows:

|                                                   |                                    |   |                |        |                |   |        |         |  
|-------------------------------------------------- | ---------------------------------- | - | -------------- | ------ | -------------- | - | ------ | ------- | -
|                                                   |                                    |   | Operating      |        |                |   |       
|                                                   |                                    |   | Leases and     |        |                |   |       
|                                                   |                                    |   | Other Future   |        |                |   |       
|                                                   |                                    |   | Minimum        |        |                |   |       
|                                                   |                                    |   | Commitments    |        | Capital Leases
|                                                   |                                    |   |                |        |               
|                                                   |                                    |   | (In thousands)
|2003                                               |                                    | $ | 17,924         |        |                | $ | 14,959 |        
|2004                                               |                                    |   | 9,936          |        |                |   | 10,535 |        
|2005                                               |                                    |   | 8,160          |        |                |   | 1,730  |        
|2006                                               |                                    |   | 6,376          |        |                |   |       |        
|2007                                               |                                    |   | 5,737          |        |                |   |       |        
|Thereafter                                         |                                    |   | 13,510         |        |                |   |       |        
|                                                   |                                    |   |                |        |                |   |        |        
|                                                   | Total                              |   | $              | 61,643 |                |   |        | 27,224  |  
|                                                   |                                    |   |                |        |                |   |        |        
|                                                   | Less: amount representing interest |   |                |        |                |   |        | (2,757  | )
|                                                   |                                    |   |                |        |                |   |        |        
|Present value of net minimum lease payments        |                                    |   |                |        |                |   | 24,467 |        
|                                                   | Less: current portion              |   |                |        |                |   |        | (13,080 | )
|                                                   |                                    |   |                |        |                |   |        |        
|Capital lease obligation excluding current portion |                                    |   |                |        |                | $ | 11,387 |        
|                                                   |                                    |   |                |        |                |   |        |        

22.  CONTINGENCIES

Interland defended a contract dispute lawsuit filed on October 2, 2001, in
Dallas County, Texas Court seeking damages of approximately $2.1 million for
goods purchased by our PC Systems business. The Company removed the case to
federal court, and counterclaimed for legal fees owed by the plaintiff for
legal fees they had agreed to indemnify the Company for that were incurred on
an unrelated patent lawsuit. These legal fees amounted to approximately $1.3
million. This claim was settled during the fourth quarter of fiscal 2002 for
$1.1 million.

Interland is defending an employee class action lawsuit filed in the U.S.
District Court for Idaho. In this case five individual plaintiffs claim they
were employees of Micron Electronics Inc. (MEI) between 1999 and April 2001.
The plaintiffs claim that they, and other similarly situated employees, did not
receive overtime pay to which they were entitled under the Fair Labor Standards
Act. Interland disputes these claims and believes the plaintiffs are not
entitled to any material additional wages. The court conditionally certified a
class of not more than 800 former employees and notices of the litigation are
being sent to these persons to give them the opportunity to opt in to the
litigation. The parties are continuing to conduct discovery. At this early
stage of the litigation Interland is unable to estimate its total expenses,
possible loss or range of loss that may ultimately be connected with the
matter. This potential liability remains with Interland even though it sold
the PC Systems business.

Periodically, the
Company is made aware that technology it used in its discontinued
operations may have infringed on intellectual property rights held by
others. The Company has evaluated all such claims and, if necessary
and appropriate, sought to obtain licenses for the use of such
technology. If the Company or its suppliers were unable to obtain
licenses necessary to use intellectual property in its discontinued
operations products or processes, it may be forced to defend
legal actions taken against it relating to allegedly protected
technology. The Company evaluates all such claims and has accrued a
liability and charged discontinued operations for the estimated costs of
settlement or adjudication of claims for alleged infringement as of
the respective dates of the balance sheets included in this report.
In accordance with
SFAS No. 5 Accounting for Contingencies the Company
has adequately reserved for the contingencies arising from the above
legal matters where an outcome was deemed to probable and the loss
amount could be reasonably estimated. As such, the Company does not
believe that the anticipated outcome of the aforementioned
proceedings will have a materially adverse impact on its results of
operations or financial condition.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company is party to various other legal actions arising in the
normal course of business, none of which is expected to have a material
adverse effect on its business, financial position, results of operations and
cash flows.

23.  GEOGRAPHIC INFORMATION

The Companys business activities are represented by a single industry
segment, web site and applications hosting. The Companys sales are
generated from customers residing both within the United States and outside
of the United States. The following table shows sales by these geographic
locations:

|                             |  |                   |         |            |  |            |        |  |  |   |        | 
|---------------------------- |  | ----------------- | ------- | ---------- |  | ---------- | ------ |  |  | - | ------ | 
|                             |  | Fiscal Year Ended
|                             |  |                  
|                             |  | August 31,        |         | August 31, |  | August 31,
|                             |  | 2002              |         | 2001       |  | 2000      
|                             |  |                   |         |            |  |           
|                             |  | (In thousands)   
|Revenues by Geographic Area  |  |                   |         |            |  |            |        |  |  |   |        | 
|(Based on customer location) |  |                   |         |            |  |            |        |  |  |   |        | 
|United States                |  | $                 | 91,018  |            |  | $          | 50,179 |  |  | $ | 29,773 | 
|Non- U.S.                    |  |                   | 10,610  |            |  |            | 10,573 |  |  |   | 3,089  | 
|                             |  |                   |         |            |  |            |        |  |  |   |        | 
|Total                        |  | $                 | 101,628 |            |  | $          | 60,752 |  |  | $ | 32,862 | 
|                             |  |                   |         |            |  |            |        |  |  |   |        | 

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REPORT OF INDEPENDENT ACCOUNTANTS

The Shareholders and Board of Directors
Interland, Inc.

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Interland, Inc. (formerly Micron Electronics, Inc.) and its
subsidiaries at August 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period
ended August 31, 2002 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Companys management; our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United
States of America, which 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

| |  |     |  |                           
| |  | --- |  | --------------------------
| |  | /s/ |  | PRICEWATERHOUSECOOPERS LLP

Atlanta, Georgia
November 15, 2002

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INTERLAND, INC.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)(In thousands, except per share amounts)

|     |                                             |                         |       |                                          |       |                   |       |              |       |                 |       |         |       |   |       |          |       |  
|---- | ------------------------------------------- | ----------------------- | ----- | ---------------------------------------- | ----- | ----------------- | ----- | ------------ | ----- | --------------- | ----- | ------- | ----- | - | ----- | -------- | ----- | -
|     |                                             |                         |       | First                                    |       | Second            |       | Third        |       | Fourth         
|     |                                             |                         |       | Quarter                                  |       | Quarter           |       | Quarter      |       | Quarter        
|     |                                             |                         |       | Ended                                    |       | Ended             |       | Ended        |       | Ended          
|     |                                             |                         |       | November 30,
2001                        |       | February 28,
2002 |       | May 31,
2002 |       | August 31,
2002
|     |                                             |                         |       |                                          |       |                   |       |              |       |                
|     |                                             |                         |       | (In thousands, except per share amounts)
|2002 |                                             |                         |       |                                          |       |                   |       |              |       |                 |       |         |       |   |       |         
|     | Revenues                                    |                         | $     | 23,921                                   |       |                   | $     | 25,245       |       |                 | $     | 24,719  |       |   | $     | 27,743   |      
|     | Gross margin                                |                         |       | 9,786                                    |       |                   |       | 11,456       |       |                 |       | 11,634  |       |   |       | 13,521   |      
|     | Income (loss) from continuing operations    |                         |       | (19,772                                  | )     |                   |       | (19,851      | )     |                 |       | 50,691  |       |   |       | (16,340  | )    
|     | Net income (loss)                           |                         |       | (19,772                                  | )     |                   |       | (19,851      | )     |                 |       | 46,129  |       |   |       | (17,799  | )    
|     | Income (loss) per share, basic:             |                         |       |                                          |       |                   |       |              |       |                 |       |         |       |   |       |          |      
|     |                                             | Continuing operations   |       | $                                        | (0.14 | )                 |       | $            | (0.14 | )               |       | $       | 0.37  |   |       | $        | (0.12 | )
|     |                                             | Discontinued operations |       |                                          |      |                   |       |              |      |                 |       |         | (0.03 | ) |       |          | (0.01 | )
|     |                                             |                         |       |                                          |       |                   |       |              |       |                 |       |         |       |   |       |         
|     |                                             | $                       | (0.14 | )                                        |       | $                 | (0.14 | )            |       | $               | 0.34  |         |       | $ | (0.13 | )       
|     |                                             |                         |       |                                          |       |                   |       |              |       |                 |       |         |       |   |       |         
|     | Income (loss) per share, diluted:           |                         |       |                                          |       |                   |       |              |       |                 |       |         |       |   |       |          |      
|     |                                             | Continuing operations   |       | $                                        | (0.14 | )                 |       | $            | (0.14 | )               |       | $       | 0.36  |   |       | $        | (0.12 | )
|     |                                             | Discontinued operations |       |                                          |      |                   |       |              |      |                 |       |         | (0.03 | ) |       |          | (0.01 | )
|     |                                             |                         |       |                                          |       |                   |       |              |       |                 |       |         |       |   |       |         
|     |                                             | $                       | (0.14 | )                                        |       | $                 | (0.14 | )            |       | $               | 0.33  |         |       | $ | (0.13 | )       
|     |                                             |                         |       |                                          |       |                   |       |              |       |                 |       |         |       |   |       |         
|2001 |                                             |                         |       |                                          |       |                   |       |              |       |                 |       |         |       |   |       |         
|     | Revenues                                    |                         | $     | 13,526                                   |       |                   | $     | 14,466       |       |                 | $     | 15,395  |       |   | $     | 17,365   |      
|     | Gross margin                                |                         |       | 3,998                                    |       |                   |       | 5,270        |       |                 |       | 5,680   |       |   |       | 6,384    |      
|     | Loss from continuing operations             |                         |       | (8,378                                   | )     |                   |       | (9,704       | )     |                 |       | (9,112  | )     |   |       | (118,523 | )    
|     | Net income (loss)                           |                         |       | 1,576                                    |       |                   |       | (168,942     | )     |                 |       | (40,554 | )     |   |       | (149,274 | )    
|     | Income (loss) per share, basic and diluted: |                         |       |                                          |       |                   |       |              |       |                 |       |         |       |   |       |          |      
|     |                                             | Continuing operations   |       | $                                        | (0.09 | )                 |       | $            | (0.10 | )               |       | $       | (0.09 | ) |       | $        | (1.10 | )
|     |                                             | Discontinued operations |       |                                          | 0.11  |                   |       |              | (1.65 | )               |       |         | (0.33 | ) |       |          | (0.28 | )
|     |                                             |                         |       |                                          |       |                   |       |              |       |                 |       |         |       |   |       |         
|     |                                             | $                       | 0.02  |                                          |       | $                 | (1.75 | )            |       | $               | (0.42 | )       |       | $ | (1.38 | )       
|     |                                             |                         |       |                                          |       |                   |       |              |       |                 |       |         |       |   |       |         

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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

ITEM 11.  EXECUTIVE COMPENSATION

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain information concerning the Registrants executive officers and
directors is included under the caption Officers and Directors of the
Registrant included in PART I, Item 1 of this report. Other information
required by Items 10, 11, 12 and 13 will be contained in the registrants Proxy
Statement which will be filed with the Securities and Exchange Commission
within 120 days after August 31, 2002, and is incorporated herein by reference.

ITEM 14.  CONTROLS AND PROCEDURES

The Companys chief executive officer, chief financial officer, and chief
accounting officer evaluated the effectiveness of the Companys disclosure
controls and procedures (as defined in the Securities Exchange Act of 1934
Rules 13(a)  14(c), and 15(d), which became effective August 29, 2002) within
the 90 days preceding the filing of this annual report, in connection with the
preparation of its annual report on Form 10-K for the fiscal
year ended August 31, 2002. Based on this review, the chief executive officer, chief financial
officer, and chief accounting officer concluded that our disclosure controls
and procedures require substantial improvement.

In addition, the Companys chief executive officer, chief financial officer,
chief accounting officer, and Audit Committee are aware of conditions that are
considered to be material weaknesses in internal controls for the fiscal year
ending August 31, 2002 under standards established by the American Institute of
Certified Public Accountants.

The aforementioned weaknesses in both the Companys disclosure controls and
procedures and internal controls pertain to the following areas:



| |  |  | Revenue cycle process, including the calculation of deferred
revenue and monitoring of past due accounts;                                                  
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Stock option tracking and reporting;                                                                                                                       
|
| |  |  | Recognition of liabilities arising from recently acquired
operations that have not been disclosed to the Company by the seller
of the acquired entity; and,
|
| |  |  | Processes surrounding financial reporting and period closes,
including timely and accurate reconciliation of account balances.                             

The Company has implemented certain mitigating procedures and corrective
actions that address the cited weaknesses, but which do not eliminate them.
These corrective actions included:



| |  |  | The appointment of a new chief financial officer, the hiring of a new
corporate controller and the authorization of the hiring of nine
additional accounting and two additional financial personnel;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | A thorough analysis of accounts receivable in connection with year-end
reporting, and the addition of substantial additional reserves for
doubtful accounts;                                        
|
| |  |  | An assessment of likely real estate abandonment costs and a corresponding
adjustment to liability; and                                                                                              
|
| |  |  | An analysis of deferred revenue accounts, and the filing of amended
quarterly reports on Form 10-Q-A.                                                                                               

Nonetheless, a number of salutary procedures and actions deemed desirable by
management were intrinsically incapable of being accomplished immediately, and
the Company has instituted plans to continue improvement in the future. For
example, the Company has purchased, but has not yet implemented, commercial
billing software to replace the self-developed and acquired software and
systems it currently employs, all of which require substantial manual
intervention, and which have not been subject to the rigorous quality control
and de-bugging associated with commercial programs. Management has reporting
procedures and processes designed to manage its business, and believes that
these procedures and processes, together with its informal information
gathering, have been sufficient to make available material information
regarding the Company which is known to its employees. Management has not yet
instituted specific formal procedures to ensure that all facts which may
require disclosure have been brought to its attention, and the weaknesses of
systems may result in material information not being known to, i.e. not being
brought to the actual conscious knowledge of, the Companys employees.
Nonetheless, management believes that its current practices and procedures,
albeit not as mature or as formal as management intends them to be in the
future, are appropriate under the circumstances. Consequently, management has
a good faith belief that there are no material inaccuracies or omissions in
this Form 10-K and any disclosures therein.

67



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The following factors contributed to the disclosure and internal control
conditions described above:



| |  |  | Rapid growth of the Company;                                     
| | - |  | -----------------------------------------------------------------
|
| |  |  | Eleven recent company and account acquisitions;                  
|
| |  |  | Significant rate of turnover
of key personnel; and               
|
| |  |  | Legacy systems developed internally for much smaller enterprises.

The Company is taking the following additional actions to improve its
disclosure and internal controls and procedures for future reporting
procedures:



| |  |  | Implementing a new billing, accounts receivable, and
collections system;                                                                                 
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Accelerating the accounts receivable collections process and
instituting new policies regarding monitoring of past due accounts;                         
|
| |  |  | Hiring additional skilled, experienced, and qualified key
financial personnel;                                                                           
|
| |  |  | Implementing comprehensive monthly balance sheet account
reconciliation procedures;                                                                      
|
| |  |  | Establishing a formal period end close schedule including assignment of specific accountabilities; and,                                                  
|
| |  |  | Instituting formal processes designed to ensure that relevant
facts are brought to managements attention so as to adhere to all
disclosure requirements.

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##### Table of Contents






PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

|                                            |  |                                                                                                            |  |                              |                                  
|------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------------------------------
|(a)                                         |  | List of documents filed as part of this Report                                                            
|                                           
|                                            |  | 1.                                                                                                         |  | Financial Statements        
|                                           
|Consolidated Financial Statements:         
|                                           
|                                            |  | Consolidated
Statements of Operations for the Fiscal Years Ended August 31,
2002, 2001, and 2000          
|                                           
|                                            |  | Consolidated
Balance Sheets as of August 31, 2002 and 2001                                                
|                                           
|                                            |  | Consolidated
Statements of Shareholders Equity for the Fiscal Years Ended
August 31, 2002, 2001, and 2000
|                                           
|                                            |  | Consolidated Statements of Cash
Flows for the Fiscal Years Ended August 31, 2002, 2001, and 2000          
|                                           
|                                            |  | Notes to Consolidated Financial Statements                                                                
|                                           
|Quarterly Financial Information (Unaudited)
|                                           
|Report of Independent Accountants          
|                                           
|                                            |  | 2.                                                                                                         |  | Financial Statement Schedule
|                                           
|                                            |  |                                                                                                            |  | II -                         | Valuation and Qualifying Accounts

All
other Schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission
of the Schedules, or because the information required is included in
the financial statements and notes thereto.

| |  |    |  |                                                                                   | 
| |  | -- |  | --------------------------------------------------------------------------------- | 
| |  | 3. |  | The following documents are filed as
exhibits to this Annual Report on Form 10-K:

|        |      |             |  |                                                                                                                                                                                                                                               |  |          |  |         |  |        |      |             |  |      |  |      
|------- | ---- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- |  | ------- |  | ------ | ---- | ----------- |  | ---- |  | -----
|        |      |             |  |                                                                                                                                                                                                                                               |  |          |  |         |  |        |      |             |  |      |  | FILED
|EXHIBIT |      | DESCRIPTION |  | INCORPORATED BY REFERENCE                                                                                                                                                                                                                     |  | HEREWITH
|        |      |             |  |                                                                                                                                                                                                                                               |  |         
|        |      |             |  |                                                                                                                                                                                                                                               |  | Form     |  | Date    |  | Number |      | Registrant* |  |     
|        |      |             |  |                                                                                                                                                                                                                                               |  |          |  |         |  |        |      |             |  |     
|        | 2.01 |             |  | Agreement of Merger, dated as of
October 10, 1994, as amended by the first amendment thereto, dated as of
December 13, 1994, by and among ZEOS, MCI and MCMS                                                                                  |  | S-4      |  | 3/13/95 |  |        | 2.1  |             |  | INLD |  |      
|        | 2.02 |             |  | Articles of Merger, dated April 7,
1995, by and among ZEOS, MCI and MCMS                                                                                                                                                                      |  | 8-K      |  | 4/07/95 |  |        | 2.2  |             |  | INLD |  |      
|        | 2.03 |             |  | Purchase Agreement, dated March 22,
2001, by and among MEI California,
Inc., the Registrant and MICRON
Technology Inc. (MTI)                                                                                                                |  | 8-K      |  | 4/10/01 |  |        | 2.01 |             |  | INLD |  |      
|        | 2.04 |             |  | Agreement and Plan of Merger dated
March 22, 2001, by and among the
Registrant, Imagine Acquisition
Corporation and Interland, Inc., a
Georgia corporation
(Interland-Georgia)                                                              |  | 8-K      |  | 4/10/01 |  |        | 2.01 |             |  | INLD |  |      
|        | 2.05 |             |  | Membership Interest Purchase
Agreement, dated as of April 30,
2001, by and between the Registrant
and GTG PC Holdings, LLC                                                                                                                    |  | 10-Q     |  | 5/31/01 |  |        | 2.01 |             |  | INLD |  |      
|        | 2.06 |             |  | First Amendment to Membership
Interest Purchase Agreement and Form
of Contribution Agreement, dated as
of May 31, 2001, by and between the
Registrant and GTG PC Holdings, LLC                                                                |  | 10-Q     |  | 5/31/01 |  |        | 2.02 |             |  | INLD |  |      
|        | 2.07 | (1)         |  | Agreement and Plan of Merger dated as
of May 3, 2002, by and between
Dialtone Inc., Jaguarcub Acquisition
Corporation, Dialtone Stockholders
Representative                                                                                  |  | 10-Q     |  | 5/31/02 |  |        | 2.07 |             |  | INLD |  |      
|        | 2.08 | (a)(1)      |  | Agreement and Plan of Merger dated as                                                                                                                                                                                                         |  | S-3/A    |  | 9/24/02 |  |        | 2.08 |             |  | INLD |  |      
|        |      |             |  | of August 30, 2002 by and
among Interland, Inc., Panthercub Acquisition Corporation, iNNERHOST,
Inc., Spire Capital Partners, L.P., Spire Investment L.L.C.,
Waller-Sutton Media Partners, L.P. and the other stockholders of iNNERHOST, Inc. |  |          |  |         |  |        |      |             |  |      |  |      
|        | 2.08 | (b)         |  | Amendment dated as of
October 10, 2002 to Agreement
and Plan of Merger by and among Interland, Inc., iNNERHOST, Inc. and
the stockholders of iNNERHOST, Inc.                                                                                  |  |          |  |         |  |        |      |             |  |      |  | x    

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|        |           |             |  |                                                                                                                                                                            |  |          |  |         |  |        |        |             |  |      |  |      
|------- | --------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- |  | ------- |  | ------ | ------ | ----------- |  | ---- |  | -----
|        |           |             |  |                                                                                                                                                                            |  |          |  |         |  |        |        |             |  |      |  | FILED
|EXHIBIT |           | DESCRIPTION |  | INCORPORATED BY REFERENCE                                                                                                                                                  |  | HEREWITH
|        |           |             |  |                                                                                                                                                                            |  |         
|        |           |             |  |                                                                                                                                                                            |  | Form     |  | Date    |  | Number |        | Registrant* |  |     
|        |           |             |  |                                                                                                                                                                            |  |          |  |         |  |        |        |             |  |     
|        | 3.01      |             |  | Unofficial Restated Articles of
Incorporation of Registrant (as
amended through April 24, 2002)                                                                            |  | 10-Q     |  | 5/31/02 |  |        | 3.01   |             |  | INLD |  |      
|        | 3.02      |             |  | Unofficial Restated Bylaws of the
Registrant (as amended through August
6, 2001)                                                                                           |  | 10K/A    |  | 5/31/02 |  |        | 3.02   |             |  | INLD |  |      
|        | 3.03      |             |  | Amendment to Articles of
Incorporation of Registrant                                                                                                                       |  | 8-K      |  | 8/13/01 |  |        | 4.1    |             |  | INLD |  |      
|        | 3.04      |             |  | Amendment to Restated Bylaws of
Registrant                                                                                                                                 |  | 8-K      |  | 8/13/01 |  |        | 4.2    |             |  | INLD |  |      
|        | 4.01      |             |  | Form of Stock Certificate of the
Registrant                                                                                                                                |  | 10-K     |  | 8/31/01 |  |        | 3.04   |             |  | INLD |  |      
|        | 4.03      |             |  | August 30, 2002 Registration Rights
Agreement by and among Interland,
Inc., Spire Capital Partners, L.P.,
Spire Investment, L.L.C., and
Waller-Sutton Media Partners, L.P. |  | S-3      |  | 9/24/02 |  |        | 4.03   |             |  | INLD |  |      
|        | 4.04      |             |  | August 30, 2002 Stock Restriction
Agreement by and among Spire Capital
Partners, L.P., Spire Investment,
L.L.C., and Waller-Sutton Media
Partners, L.P.                    |  | S-3      |  | 9/24/02 |  |        | 4.04   |             |  | INLD |  |      
|        | 4.05      |             |  | March 28, 2002 Amendment to Stock
Rights Agreement by and among
Interland, Inc., Bryan Heitman and
Gabriel Murphy                                                          |  | 10-Q     |  | 5/31/02 |  |        | 10.112 |             |  | INLD |  |      
|        | 4.06      |             |  | July 11, 2002 Amendment to Stock
Rights Agreement by and among
Interland, Inc., Bryan Heitman and
Gabriel Murphy                                                           |  | S-3/A    |  | 9/24/02 |  |        | 4.06   |             |  | INLD |  |      
|        | 10.35(a)+ |             |  | Micron Electronics 1995 Stock Option
Plan, as amended through August 29,
2001                                                                                              |  | S-8      |  | 1/14/00 |  |        | 4.1    |             |  | INLD |  |      
|        | 10.35(b)+ |             |  | Form of Notice of Grant for Micron
Electronics 1995 Stock Option Plan                                                                                                      |  | 10-K     |  | 8/31/01 |  |        | 10.35  | (b)         |  | INLD |  |      
|        | 10.35(c)+ |             |  | Interland 1995 Stock Option Plan, as
amended August 30, 2001                                                                                                               |  | 10-K     |  | 8/31/01 |  |        | 10.35  | (c)         |  | INLD |  |      
|        | 10.35(d)+ |             |  | Form of Notice of Grant for Interland
1995 Stock Option Plan                                                                                                               |  | 10-K     |  | 8/31/01 |  |        | 10.35  | (d)         |  | INLD |  |      
|        | 10.36(a)+ |             |  | Micron Electronics 1995 Employee
Stock Purchase Plan, as amended
through August 5, 2001                                                                                    |  | 10-Q     |  | 6/1/95  |  |        | 10.36  |             |  | INLD |  |      
|        | 10.36(b)+ |             |  | Interland 1995 Employee Stock
Purchase Plan, as amended August 6,
2001                                                                                                     |  | 10-K     |  | 8/31/01 |  |        | 10.36  |             |  | INLD |  |      

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|        |        |             |  |                                                                                                                                      |  |          |  |         |  |        |       |             |  |      |  |      
|------- | ------ | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------ |  | -------- |  | ------- |  | ------ | ----- | ----------- |  | ---- |  | -----
|        |        |             |  |                                                                                                                                      |  |          |  |         |  |        |       |             |  |      |  | FILED
|EXHIBIT |        | DESCRIPTION |  | INCORPORATED BY REFERENCE                                                                                                            |  | HEREWITH
|        |        |             |  |                                                                                                                                      |  |         
|        |        |             |  |                                                                                                                                      |  | Form     |  | Date    |  | Number |       | Registrant* |  |     
|        |        |             |  |                                                                                                                                      |  |          |  |         |  |        |       |             |  |     
|        | 10.38+ |             |  | Form of Indemnification Agreement
between the Registrant and its
officers and directors                                              |  | 10-K     |  | 8/31/95 |  |        | 10.38 |             |  | INLD |  |      
|        | 10.39+ |             |  | Form of Six-Month Termination
Agreements for certain officers of
the Registrant                                                      |  | 10-K     |  | 8/31/95 |  |        | 10.39 |             |  | INLD |  |      
|        | 10.42  |             |  | Amended and Restated Component
Recovery Agreement, dated effective
September 2, 1999, between the
Registrant and MTI                 |  | 8-K      |  | 9/10/99 |  |        | 10.42 |             |  | INLD |  |      
|        | 10.44+ |             |  | Form of Twelve-Month Termination
Agreements for certain officers of
the Registrant                                                   |  | 10-K     |  | 8/28/97 |  |        | 10.44 |             |  | INLD |  |      
|        | 10.45+ |             |  | Form of Two-Year Termination
Agreements for certain officers of
the Registrant                                                       |  | 10-K     |  | 8/28/97 |  |        | 10.45 |             |  | INLD |  |      
|        | 10.47+ |             |  | Form of Employment and Non-compete
Agreement, with 12-month termination
provision, for certain officers of
the Registrant            |  | 10-Q     |  | 2/26/98 |  |        | 10.47 |             |  | INLD |  |      
|        | 10.48+ |             |  | Form of Employment and Non-compete
Agreement, with 6-month termination
provision, for certain officers of
the Registrant             |  | 10-Q     |  | 2/26/98 |  |        | 10.48 |             |  | INLD |  |      
|        | 10.52+ |             |  | Employment Offer, dated January 10,
1998, to Joel J. Kocher                                                                          |  | 10-Q     |  | 2/26/98 |  |        | 10.52 |             |  | INLD |  |      
|        | 10.56+ |             |  | Form of Employment, Severance and
Non-compete Agreement for Certain
Officers of the Registrant                                       |  | 10-K     |  | 9/3/98  |  |        | 10.56 |             |  | INLD |  |      
|        | 10.58+ |             |  | The Registrants Executive Incentive
Plan, as amended                                                                                |  | 10-Q     |  | 12/2/99 |  |        | 10.58 |             |  | INLD |  |      
|        | 10.65  |             |  | Executive Sales Representative
Agreement effective September 2,
1999, between the Registrant and
Micron Semiconductor Products, Inc. |  | 8-K      |  | 9/10/99 |  |        | 10.65 |             |  | INLD |  |      
|        | 10.68+ |             |  | Amended Non Qualified Stock Option
Agreement, dated April 6, 2000                                                                    |  | 10-Q     |  | 6/1/00  |  |        | 10.68 |             |  | INLD |  |      
|        | 10.69+ |             |  | Amended Non Qualified Stock Option
Agreement, dated April 6, 2000                                                                    |  | 10-Q     |  | 6/1/00  |  |        | 10.69 |             |  | INLD |  |      

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|        |       |             |  |                                                                                                                                  |  |          |  |          |  |        |       |             |  |      |  |      
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | -------- |  | -------- |  | ------ | ----- | ----------- |  | ---- |  | -----
|        |       |             |  |                                                                                                                                  |  |          |  |          |  |        |       |             |  |      |  | FILED
|EXHIBIT |       | DESCRIPTION |  | INCORPORATED BY REFERENCE                                                                                                        |  | HEREWITH
|        |       |             |  |                                                                                                                                  |  |         
|        |       |             |  |                                                                                                                                  |  | Form     |  | Date     |  | Number |       | Registrant* |  |     
|        |       |             |  |                                                                                                                                  |  |          |  |          |  |        |       |             |  |     
|        | 10.70 | (a)+        |  | HostPro, Inc. 2000 Equity Incentive
Plan I                                                                                       |  | 10-K     |  | 8/31/00  |  |        | 10.70 |             |  | INLD |  |      
|        | 10.70 | (b)+        |  | HostPro, Inc. 2000 Equity Incentive
Plan II                                                                                      |  | 10-K     |  | 8/31/00  |  |        | 10.71 |             |  | INLD |  |      
|        | 10.70 | (c)+        |  | Form of Notice of Grant for HostPro,
Inc. 2000 Equity Incentive Plans                                                            |  | 10-K     |  | 8/31/00  |  |        | 10.72 |             |  | INLD |  |      
|        | 10.70 | (d)+        |  | Form of Notice of Grant for HostPro,
Inc. 2000 Equity Incentive Plans                                                            |  | 10-K     |  | 8/31/00  |  |        | 10.73 |             |  | INLD |  |      
|        | 10.70 | (e)+        |  | Micron Electronics 2001 Equity
Incentive Plan, as amended as of
March 22, 2001                                                   |  | 10-Q     |  | 5/31/01  |  |        | 10.89 |             |  | INLD |  |      
|        | 10.70 | (f)+        |  | Interland 2001 Equity Incentive Plan,
as amended August 6, 2001                                                                  |  | 10-K     |  | 8/31/01  |  |        | 10.70 | (f)         |  | INLD |  |      
|        | 10.70 | (g)+        |  | Form of Notice of Grant for Interland
2001 Equity Incentive Plan                                                                 |  | 10-K     |  | 8/31/01  |  |        | 10.70 | (g)         |  | INLD |  |      
|        | 10.76 |             |  | Amendment Number 1 to Amended and
Restated Component Recovery
Agreement, dated November 16, 2000,
between the Registrant and MTI |  | 10-Q     |  | 11/30/00 |  |        | 10.76 |             |  | INLD |  |      
|        | 10.77 |             |  | Commercial Lease, dated March 22,
2001, between MTI and the Registrant                                                           |  | 8-K      |  | 4/10/01  |  |        | 99.01 |             |  | INLD |  |      
|        | 10.78 |             |  | Commercial Sublease, dated March 22,
2001, between MTI and the Registrant                                                        |  | 8-K      |  | 4/10/01  |  |        | 99.02 |             |  | INLD |  |      
|        | 10.79 | +           |  | The Registrants Severance Plan for
Employees  2001 Amendment and
Restatement                                                   |  | 10-Q     |  | 3/1/01   |  |        | 10.79 |             |  | INLD |  |      
|        | 10.80 | +           |  | The Registrants Change in Control
Severance Plan                                                                                |  | 10-Q     |  | 3/1/01   |  |        | 10.80 |             |  | INLD |  |      
|        | 10.81 | +           |  | HostPro, Inc. 2000 Incentive Plan II
 Notice of Grant to Joel Kocher                                                            |  | 10-Q     |  | 3/1/01   |  |        | 10.81 |             |  | INLD |  |      
|        | 10.82 | +           |  | Retention Agreement between the
Registrant and Mike Adkins, dated as
of December 1, 2000                                         |  | 10-Q     |  | 3/1/01   |  |        | 10.82 |             |  | INLD |  |      
|        | 10.83 | +           |  | Retention Agreement between the
Registrant and Steve Arnold, dated as
of December 1, 2000                                        |  | 10-Q     |  | 3/1/01   |  |        | 10.83 |             |  | INLD |  |      
|        | 10.84 | +           |  | Retention Agreement between the
Registrant and Sid Ferrales, dated as
of December 1, 2000                                        |  | 10-Q     |  | 3/1/01   |  |        | 10.84 |             |  | INLD |  |      

72



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|        |       |             |  |                                                                                                                          |  |          |  |         |  |        |       |             |  |      |  |      
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | -------- |  | ------- |  | ------ | ----- | ----------- |  | ---- |  | -----
|        |       |             |  |                                                                                                                          |  |          |  |         |  |        |       |             |  |      |  | FILED
|EXHIBIT |       | DESCRIPTION |  | INCORPORATED BY REFERENCE                                                                                                |  | HEREWITH
|        |       |             |  |                                                                                                                          |  |         
|        |       |             |  |                                                                                                                          |  | Form     |  | Date    |  | Number |       | Registrant* |  |     
|        |       |             |  |                                                                                                                          |  |          |  |         |  |        |       |             |  |     
|        | 10.85 | +           |  | Retention Agreement between the
Registrant and Lyle Jordan, dated as
of December 1, 2000                                 |  | 10-Q     |  | 3/1/01  |  |        | 10.85 |             |  | INLD |  |      
|        | 10.86 | +           |  | Retention Agreement between the
Registrant and Jim Stewart, dated as
of December 1, 2000                                 |  | 10-Q     |  | 3/1/01  |  |        | 10.86 |             |  | INLD |  |      
|        | 10.87 | +           |  | Amended Retention Agreement between
the Registrant and Steve Arnold,
dated as of April 7, 2001                           |  | 10-Q     |  | 5/31/01 |  |        | 10.87 |             |  | INLD |  |      
|        | 10.88 | +           |  | Retention Agreement between the
Registrant and Jeff Moeser, dated as
of February 23, 2001                                |  | 10-Q     |  | 5/31/01 |  |        | 10.88 |             |  | INLD |  |      
|        | 10.89 |             |  | MTI Shareholder Agreement dated as of
March 22, 2001 between the Registrant
and MTI                                      |  | 8-K      |  | 4/10/01 |  |        | 2.01  |             |  | INLD |  |      
|        | 10.91 |             |  | Operating lease for property located
at 3250 Wilshire Blvd., Los Angeles,
California, dated as of March 16,
1998         |  | 10-Q     |  | 5/31/01 |  |        | 10.90 |             |  | INLD |  |      
|        | 10.92 |             |  | Operating lease for property located
at 3250 Wilshire Blvd., Los Angeles,
California, dated as of March 19,
1999         |  | 10-Q     |  | 5/3/101 |  |        | 10.91 |             |  | INLD |  |      
|        | 10.93 |             |  | Operating lease for property located
at 1450 Eagle Flight Way, Boise,
Idaho, dated as of January 7, 2000                 |  | 10-Q     |  | 5/31/01 |  |        | 10.92 |             |  | INLD |  |      
|        | 10.94 |             |  | Operating lease for property located
at 3326 160th Avenue SE, Bellevue,
Washington, dated as of December 16,
1999        |  | 10-Q     |  | 5/31/01 |  |        | 10.93 |             |  | INLD |  |      
|        | 10.95 | (a)+        |  | Employment Agreement dated December
2, 1999 between the Company and Ken
Gavranovic, as amended                           |  | S-1/A    |  | 6/26/00 |  |        | 10.6  |             |  | INLD |  |      
|        | 10.95 | (b)+        |  | Employment Agreement Assumption and
Amendment dated March 22, 2001
between the Registrant and Ken
Gavranovic, as amended |  | 10-K     |  | 8/31/01 |  |        | 10.95 | (b)         |  | INLD |  |      
|        | 10.96 | (a)+        |  | Interland-Georgia Stock Incentive Plan                                                                                   |  | S-8      |  | 9/17/01 |  |        | 4.05  | (a)         |  | INLD |  |      
|        | 10.96 | (b)+        |  | First Amendment to Interland-Georgia
Stock Incentive Plan                                                                |  | S-8      |  | 9/17/01 |  |        | 4.05  | (b)         |  | INLD |  |      
|        | 10.96 | (c)+        |  | Second Amendment to Interland-Georgia
Stock Incentive Plan                                                               |  | S-8      |  | 9/17/01 |  |        | 4.05  | (c)         |  | INLD |  |      

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|        |        |             |  |                                                                                                                                                    |  |          |  |         |  |        |       |             |  |      |  |      
|------- | ------ | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- |  | ------- |  | ------ | ----- | ----------- |  | ---- |  | -----
|        |        |             |  |                                                                                                                                                    |  |          |  |         |  |        |       |             |  |      |  | FILED
|EXHIBIT |        | DESCRIPTION |  | INCORPORATED BY REFERENCE                                                                                                                          |  | HEREWITH
|        |        |             |  |                                                                                                                                                    |  |         
|        |        |             |  |                                                                                                                                                    |  | Form     |  | Date    |  | Number |       | Registrant* |  |     
|        |        |             |  |                                                                                                                                                    |  |          |  |         |  |        |       |             |  |     
|        | 10.96  | (d)+        |  | Third Amendment to Interland-Georgia
Stock Incentive Plan                                                                                          |  | S-8      |  | 9/17/01 |  |        | 4.05  | (d)         |  | INLD |  |      
|        | 10.96  | (e)+        |  | Fourth Amendment to Interland-Georgia
Stock Incentive Plan                                                                                         |  | S-8      |  | 9/17/01 |  |        | 4.05  | (e)         |  | INLD |  |      
|        | 10.97  | +           |  | Promissory Note of Ken Gavranovic in
favor of Interland-Georgia dated
December 10, 1998                                                            |  | S-1/A    |  | 5/18/00 |  |        | 10.15 |             |  | ILND |  |      
|        | 10.98  | +           |  | Promissory Note of Ken Gavranovic in
favor of Interland-Georgia dated May
14, 1999                                                                 |  | S-1/A    |  | 5/18/00 |  |        | 10.17 |             |  | ILND |  |      
|        | 10.99  | +           |  | Stock Pledge Agreement between
Interland-Georgia and Ken Gavranovic
dated May 14, 1999                                                             |  | S-1/A    |  | 5/18/00 |  |        | 10.19 |             |  | ILND |  |      
|        | 10.100 | (a)         |  | Agreement of Lease between
Interland-Georgia and 34 Peachtree
Associates, L.P. dated November 19,
1997                                             |  | S-1/A    |  | 5/18/00 |  |        | 10.21 | (a)         |  | ILND |  |      
|        | 10.100 | (b)         |  | First Amendment to Agreement of Lease
between Interland-Georgia and TCB #4,
L.L.C. (f/k/a 34 Peachtree
Associates, L.P.) dated July 6, 1998        |  | S-1/A    |  | 5/18/00 |  |        | 10.21 | (b)         |  | ILND |  |      
|        | 10.100 | (c)         |  | Second Amendment to Agreement of
Lease between Interland-Georgia and
TCB #4, L.L.C. (f/k/a 34 Peachtree
Associates, L.P.) dated September 15,
1999 |  | S-1/A    |  | 5/18/00 |  |        | 10.21 | (c)         |  | ILND |  |      
|        | 10.101 | (a)         |  | Amended and Restated Lease Agreement
between Interland-Georgia and 101
Marietta Street Associated dated
September 29, 1999                         |  | S-1/A    |  | 5/18/00 |  |        | 10.22 | (a)         |  | ILND |  |      
|        | 10.101 | (b)         |  | First Amendment to Amended and
Restated Lease Agreement between
Interland-Georgia and 101 Marietta
Street Associates dated November 23,
1999       |  | S-1/A    |  | 5/18/00 |  |        | 10.22 | (b)         |  | ILND |  |      
|        | 10.102 | +           |  | Employment Agreement dated April 1,
2000 between Interland-Georgia and
Mark K. Alexander                                                           |  | S-1/A    |  | 5/18/00 |  |        | 10.23 |             |  | ILND |  |      
|        | 10.103 | +           |  | Employment Agreement dated February
15, 2000 between Interland-Georgia
and Robert Malally                                                          |  | S-1/A    |  | 6/9/00  |  |        | 10.24 |             |  | ILND |  |      

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|        |        |             |  |                                                                                                                                                                                        |  |          |  |         |  |        |        |             |  |      |  |      
|------- | ------ | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- |  | ------- |  | ------ | ------ | ----------- |  | ---- |  | -----
|        |        |             |  |                                                                                                                                                                                        |  |          |  |         |  |        |        |             |  |      |  | FILED
|EXHIBIT |        | DESCRIPTION |  | INCORPORATED BY REFERENCE                                                                                                                                                              |  | HEREWITH
|        |        |             |  |                                                                                                                                                                                        |  |         
|        |        |             |  |                                                                                                                                                                                        |  | Form     |  | Date    |  | Number |        | Registrant* |  |     
|        |        |             |  |                                                                                                                                                                                        |  |          |  |         |  |        |        |             |  |     
|        | 10.104 | (a)         |  | SunTrust Plaza Garden Offices Lease
Agreement by and between SunTrust
Plaza Associates, LLC and
Interland-Georgia dated May 15, 2000                                                   |  | 10-K     |  | 8/31/01 |  |        | 10.104 | (a)         |  | INLD |  |      
|        | 10.104 | (b)         |  | First Amendment to Lease Agreement by
and between SunTrust Plaza
Associates, LLC and Interland-Georgia
dated September 27, 2000                                                        |  | 10-K     |  | 8/31/01 |  |        | 10.104 | (b)         |  | INLD |  |      
|        | 10.105 |             |  | Amended and Restated Registration
Rights Agreement between the
Registrant, MTI and certain
shareholders of Interland named
therein dated August 6, 2001                                |  | 10-K     |  | 8/31/01 |  |        | 10.105 |             |  | INLD |  |      
|        | 10.106 |             |  | Stock Purchase Agreement between MTI
and Micron Semiconductor Products,
Inc. dated as of August 30, 2001                                                                               |  | 10-K     |  | 8/31/01 |  |        | 10.106 |             |  | INLD |  |      
|        | 10.107 |             |  | Donation Agreement between Micron
Semiconductor Products, Inc. and the
Micron Technology Foundation, Inc.
dated as of August 30, 2001                                                  |  | 10-K     |  | 8/31/01 |  |        | 10.107 |             |  | INLD |  |      
|        | 10.108 | (a)+        |  | Employment Agreement between the Registrant and Allen Shulman dated
November 1, 2001                                                                                                   |  |          |  |         |  |        |        |             |  |      |  | x    
|        | 10.108 | (b)+        |  | Amendment to Employment Agreement
between the Registrant and Allen
Shulman dated as of September 10, 2002.                                                                             |  |          |  |         |  |        |        |             |  |      |  | x    
|        | 10.109 |             |  | February 8, 2002 Investor Rights
Agreement by and among Interland,
Inc., PAR Investment Partners, L.P.,
Hartford Capital Appreciation Fund,
and certain other stockholders             |  | 10-Q     |  | 2/28/02 |  |        | 10.109 |             |  | INLD |  |      
|        | 10.110 | (1)         |  | Agreement and Plan of Merger dated as
of February 8, 2002, by and between
CommuniTech.Net, Inc., Montana
Acquisition Company, Inc., Interland,
Inc., Gabriel Murphy, and Bryan
Heitman |  | 10-Q     |  | 2/28/02 |  |        | 10.110 |             |  | INLD |  |      
|        | 10.111 |             |  | Stock Repurchase Agreement dated as
of November 12, 2001 by and between Ken Gavanovic and Interland, Inc.                                                                              |  | 10-Q     |  | 5/31/02 |  |        | 10.111 |             |  | INLD |  |      
|        | 10.112 |             |  | Amendment to Stock Rights Agreement
dated as of March 28, 2002 by and
among                                                                                                            |  | 10-Q     |  | 5/31/02 |  |        | 10.112 |             |  | INLD |  |      

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|        |           |             |  |                                                                                                                                                      |  |          |  |      |  |        |  |             |  |  |  |      
|------- | --------- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- |  | ---- |  | ------ |  | ----------- |  |  |  | -----
|        |           |             |  |                                                                                                                                                      |  |          |  |      |  |        |  |             |  |  |  | FILED
|EXHIBIT |           | DESCRIPTION |  | INCORPORATED BY REFERENCE                                                                                                                            |  | HEREWITH
|        |           |             |  |                                                                                                                                                      |  |         
|        |           |             |  |                                                                                                                                                      |  | Form     |  | Date |  | Number |  | Registrant* |  | 
|        |           |             |  |                                                                                                                                                      |  |          |  |      |  |        |  |             |  | 
|        | 10.113    |             |  | Promissory Note in the principal
amount of $5,370,006 dated July 20,
2001 in favor of U.S. Bank National
Association                                 |  |          |  |      |  |        |  |             |  |  |  | x    
|        | 10.114    |             |  | Credit Agreement dated July 20, 2001
between Micron Electronics, Inc. and
HostPro, Inc., as Borrowers, and U.S.
Bank National Association, as Lender |  |          |  |      |  |        |  |             |  |  |  | x    
|        | 10.115(2) |             |  | Microsoft Services Provider License
Agreement dated as of January 15,
2002                                                                           |  |          |  |      |  |        |  |             |  |  |  | x    
|        | 21.01     |             |  | Subsidiaries of the Registrant                                                                                                                       |  |          |  |      |  |        |  |             |  |  |  | x    
|        | 23.01     |             |  | Consent of Independent Accountants                                                                                                                   |  |          |  |      |  |        |  |             |  |  |  | x    
|        | 24.01     |             |  | Power of Attorney                                                                                                                                    |  |          |  |      |  |        |  |             |  |  |  | x    



---

|*   |  | INLD indicates the exhibit is incorporated by reference to the Registrants prior filings with the SEC. ILND indicates the
exhibit is incorporated by reference to Interland-Georgias prior filings with the SEC,                  
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|+   |  | Management contract or compensatory arrangement or plan.                                                                                                                                                                            
|   
|(1) |  | Schedules and exhibits have been omitted from the exhibit. A list of omitted schedules and exhibits is set forth immediately
following the table of contents of the exhibit. Copies will be provided to the Commission upon request.
|   
|(2) |  | The Company has requested confidential treatment for portions of this exhibit pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.                                                                                        
|   
|(b) |  | Reports on Form 8-K                                                                                                                                                                                                                 
|   
|    |  | No Reports on Form 8-K were filed during the fourth quarter.                                                                                                                                                                        

76



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

|                         |  |                                                                                         
|------------------------ |  | ----------------------------------------------------------------------------------------
|                         |  | INTERLAND, INC                                                                          
|                         |  |                                                                                         
|Date:  November 27, 2002 |  | /s/  Allen L. Shulman                                                                   
|                         |  | By: Allen L. Shulman
Senior Vice President, Chief
Financial Officer, and
General Counsel

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

|                                      |  |                                                                                                   |  |                   |  | 
|------------------------------------- |  | ------------------------------------------------------------------------------------------------- |  | ----------------- |  | 
|Signature                             |  | Title                                                                                             |  | Date             
|                                      |  |                                                                                                   |  |                  
|                                      |  |                                                                                                   |  |                  
|                                     
|/s/  Joel J. KocherJoel J. Kocher     |  | Chairman of the
Board, President and Chief Executive
Officer
(principal
executive officer)        |  | November 26, 2002
|                                     
|/s/  Allen L. ShulmanAllen L. Shulman |  | Senior Vice
President, Chief
Financial Officer, and
General Counsel
(principal financial officer) |  | November 29, 2002
|                                     
|/s/  Robert F. KerrisRobert F. Kerris |  | Assistant Vice
President and
Corporate
Controller
(principal
accounting officer)                  |  | November 26, 2002
|                                     
|/s/  John B. BalousekJohn B. Balousek |  | Director                                                                                          |  | November 29, 2002
|                                     
|Robert Lee                            |  | Director                                                                                          |  | November , 2002  
|                                     
|/s/  Edward ShapiroEdward Shapiro     |  | Director                                                                                          |  | November 27, 2002
|                                     
|Robert T. Slezak                      |  | Director                                                                                          |  | November , 2002  

77



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##### Table of Contents



Interland, Inc. Certification for Annual Report on Form 10-K

I, Joel J. Kocher, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Interland, Inc.;                                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: November 27, 2002

| |  |  |  |                                                                            
| |  |  |  | ---------------------------------------------------------------------------
| |  |  |  | /s/ Joel J. Kocher                                                         
| |  |  |  |                                                                            
| |  |  |  | Joel J. Kocher
Chairman of the Board, President
and Chief Executive Officer

79



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##### Table of Contents



Interland, Inc. Certification for Annual Report on Form 10-K

I, Allen L. Shulman, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Interland, Inc.;                                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: November 27, 2002

| |  |  |  |                                                                                     
| |  |  |  | ------------------------------------------------------------------------------------
| |  |  |  |                                                                                     
| |  |  |  | /s/ Allen L. Shulman                                                                
| |  |  |  |                                                                                     
| |  |  |  | Allen L. Shulman
Senior Vice President,
Chief Financial Officer,
and General Counsel

80



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##### Table of Contents



SCHEDULE II
INTERLAND, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)

|                                       |                         |   |                   |        |                 |   |                 |        |  |   |        |       | 
|-------------------------------------- | ----------------------- | - | ----------------- | ------ | --------------- | - | --------------- | ------ |  | - | ------ | ----- | 
|                                       |                         |   | Fiscal Year Ended
|                                       |                         |   |                  
|                                       |                         |   | August 31, 2002   |        | August 31, 2001 |   | August 31, 2000
|                                       |                         |   |                   |        |                 |   |                
|                                       |                         |   | (In thousands)   
|Allowance
For Doubtful Accounts        |                         |   |                   |        |                 |   |                 |        |  |   |        |      
|Balance at beginning of year           |                         | $ | 1,810             |        |                 | $ | 6,178           |        |  | $ | 3,846  |      
|Additions charged to bad debt expense  |                         |   | 10,529            |        |                 |   | 2,233           |        |  |   | 5,750  |      
|Other                                  |                         |   | 1,135             |        |                 |   | 158             |        |  |   | 400    |      
|Reductions and write-offs              |                         |   | (9,631            | )      |                 |   | (6,759          | )      |  |   | (3,818 | )    
|                                       |                         |   |                   |        |                 |   |                 |        |  |   |        |      
|Balance at end of year                 |                         | $ | 3,843             |        |                 | $ | 1,810           |        |  | $ | 6,178  |      
|                                       |                         |   |                   |        |                 |   |                 |        |  |   |        |      
|Included in:                           |                         |   |                   |        |                 |   |                 |        |  |   |        |      
|                                       | Continuing operations   |   | $                 | 3,843  |                 |   | $               | 1,810  |  |   | $      | 305   | 
|                                       |                         |   |                   |        |                 |   |                 |        |  |   |        |      
|                                       | Discontinued operations |   | $                 |       |                 |   | $               |       |  |   | $      | 5,873 | 
|                                       |                         |   |                   |        |                 |   |                 |        |  |   |        |      
|Deferred
Tax Asset Valuation Allowance |                         |   |                   |        |                 |   |                 |        |  |   |        |      
|Balance at beginning of year           |                         | $ | 133,251           |        |                 | $ | 4,652           |        |  | $ | 4,652  |      
|Additions charged to expense           |                         |   |                  |        |                 |   | 21,030          |        |  |   |       |      
|Discontinued operations                |                         |   |                  |        |                 |   | 67,600          |        |  |   |       |      
|Change in loss carryforward            |                         |   | (51,845           | )      |                 |   |                |        |  |   |       |      
|Additions from acquisitions            |                         |   |                  |        |                 |   | 39,969          |        |  |   |       |      
|                                       |                         |   |                   |        |                 |   |                 |        |  |   |        |      
|Balance at end of year                 |                         | $ | 81,406            |        |                 | $ | 133,251         |        |  | $ | 4,652  |      
|                                       |                         |   |                   |        |                 |   |                 |        |  |   |        |      
|Included in:                           |                         |   |                   |        |                 |   |                 |        |  |   |        |      
|                                       | Continuing operations   |   | $                 | 81,406 |                 |   | $               | 65,651 |  |   | $      | 4,652 | 
|                                       |                         |   |                   |        |                 |   |                 |        |  |   |        |      
|                                       | Discontinued operations |   | $                 |       |                 |   | $               | 67,600 |  |   | $      |      | 
|                                       |                         |   |                   |        |                 |   |                 |        |  |   |        |      

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