##### Table of Contents



UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



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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, 2003

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) 720-8301(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.   Yes þ   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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).   Yes þ   No o

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 2003 was approximately $113 million.

The number of outstanding shares of the registrants Common Stock on October
31, 2003 was 16,315,754.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the registrants 2004 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                                                              
|                                            | 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                                          
|                                            | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|                                            | ITEM 9A. CONTROLS AND PROCEDURES                                                             
|PART III                                   
|                                            | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                                            | ITEM 10A. DISCLOSURE OF AUDIT COMMITTEE FINANCIAL EXPERT                                     
|                                            | ITEM 11. EXECUTIVE COMPENSATION                                                              
|                                            | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                                            | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|                                            | ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES                                              
|                                            | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                    
|EX-3.01(B)                                 
|EX-14 CODE OF CONDUCT                      
|EX-21.1 SUBSIDIARIES OF THE REGISTRANT     
|EX-23.01 CONSENT OF INDEPENDENT ACCOUNTANTS
|EX-24.01 POWER OF ATTORNEY                 
|EX-31.1 302 CERTIFICATION OF CEO           
|EX-31.2 302 CERTIFICATION OF CFO           
|EX-32.1 906 CERTIFICATION OF CEO           
|EX-32.2 906 CERTIFICATION OF CFO           



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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.
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 its future operating results including its
planned increase in its revenue 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
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 risks associated with our target markets
and risks pertaining to competition, other trend information and the Companys
ability to successfully enhance its operations. 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Risk 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. All
annual references are on a fiscal August 31st year-end basis, unless otherwise
indicated. All tabular amounts are stated in thousands.

General

Interland is a leader in delivering standardized business-class Web hosting and
online solutions to small-and-medium-sized businesses (SMB), and helping them
to achieve success by providing the knowledge, services and tools to build,
manage and promote businesses online. Interland offers a broad range of
products and services, including shared and dedicated hosting services,
e-commerce, application hosting, Web site development, marketing and
optimization tools. Prior to 2001, the Company also provided a variety of
computer products and related services through PC Systems, a computer
manufacturing business, and SpecTek, a memory products business. During fiscal
2001, the Company discontinued its PC Systems and SpecTek businesses and the
Companys ongoing operations became exclusively those of an online solutions
provider to small businesses.

The current Web hosting business was formed through the merger of the Companys
HostPro division and Interland, Inc., a Georgia Corporation
(Interland-Georgia), followed by eight company or account acquisitions from
October 2001 through August 31, 2003. On August 6, 2001, the Company acquired
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.

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 Fort
Lauderdale, Florida based leading dedicated Web hosting company.

On August 1, 2002, the Company acquired iNNERHOST, Inc., (iNNERHOST), a
Miami, Florida based Web hosting company serving small-and-medium-sized
businesses.

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On January 3, 2003, the Company acquired Trellix Corporation (Trellix), a
privately held developer of software-based Web site solutions. Founded in
1995, Trellix is a provider of private-label Web site publishing solutions,
integrated business services, and low-cost hosting technology. Trellix offers
a suite of site building tools and services that enable Interland and its users
to create professional Web sites highly efficiently.

On June 13, 2003, the Company acquired Hostcentric, Inc., (Hostcentric) a
privately held provider of a broad range of Web hosting services to small
business and enterprise customers.

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 annual hosting revenue growth has been the
result of its acquisitions. In order to reduce expenses, the Company exited
redundant facilities, reduced the associated work force and terminated
contracts related to unused Internet connectivity or bandwidth. As a result,
the Company does not believe its historical financial results are indicative of
expected future results. Going forward, the Company does not anticipate further
acquisitions as a means of growing revenue, but rather plans to pursue organic
growth strategies, including execution of plans to offer combined web site
design, web site hosting, and marketing consultation to small-and-medium-sized
businesses, sometimes referred to as a mass market or mainstream market
strategy. Furthermore, the Company realized substantial cost efficiencies
starting in the fourth quarter of fiscal 2003 as a result of the integration of
previously acquired companies. As a result of these integration activities, the
Company generated quarterly operating cost savings of $11.6 million, as
evidenced by the reduction of operating expenses from the $44.5 million
incurred in the fourth quarter of fiscal 2002 to the $32.9 million incurred in
the fourth quarter of fiscal 2003. Most of these reductions are expected to
continue to benefit the Company in the future.

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 common stock is listed
on the Nasdaq National Market under 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) 720-8301
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.

The company makes available free of charge on its website its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports as soon as reasonably practicable after this
material is electronically filed with or furnished to the SEC.

Corporate Strategy

Interlands continuing strategic objective is to be the leading provider of
standardized Web hosting and online solutions to small-and-medium-sized
businesses. The Company intends to serve profitably its target market by
maintaining scale and efficiency in its operations, while employing technology
to deliver an attractive value proposition to its customers.

Interland believes the most profitable segment of the Web solutions and hosting
market is serving small-and medium-sized businesses. 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 Web site design 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 solutions for SMBs in a scalable 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 
Risk Factors Interlands ability to significantly organically grow revenue is
dependent on successful penetration of the mainstream market of small- and
medium-sized businesses lacking an effective Web presence).

At the beginning of fiscal year 2002 the Company implemented a strategic plan
designed to build the market leader in online solutions for SMBs, aimed at
targeting this high growth market opportunity. A fundamental element of the
plan was to develop a business model based on economies of scale resulting in
attractive profit margins. This three

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year strategic plan resulted in an intense acquisition phase followed by an
equally intense integration phase in the first two years. In fiscal 2002, the
Companys objective was to achieve the scale required for profit rapidly
through acquisitions, and begin the integration process. In fiscal 2003, the
companys objective was to complete the integration process to reach attractive
levels of positive EBITDA and begin preparing the organic growth engine. Having
successfully achieved the first two phases of the plan with the achievement of
positive EBITDA results in the fourth quarter of fiscal 2003, the Company is
now focused on the final phase of its original plan: organic growth. Beginning
in fiscal year 2004, the Companys focus is on organic growth by maintaining
leadership in the early adopter market and by developing, testing and growing
distribution channels for the offering and delivery of professionally designed
Web sites to the mainstream market.

Products and Services

Interland offers an integrated suite of Web hosting, Web site design,
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;
| | - |  | ---------------------------------------



| |  |  | Web site design services;
| | - |  | -------------------------



| |  |  | Web site promotion 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 and
other related product and services. The Company generally sells its services
under agreements having terms of one to twenty-four months; nonetheless, the
customer may often be permitted to cancel during an initial thirty-day period.
Customers pay for the services either in a lump sum in advance, or monthly.
During fiscal 2003, the Company derived 96.9% of its revenues from hosting and
other hosting-related services compared to 98.2% in fiscal 2002. The balance
of the revenues had been generated primarily by other network related services.

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 control easily 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 some
of the Companys business relationships, its customers can also obtain merchant
account and online payment processing services.

On September 16, 2002, the Company introduced its blueHALO shared hosting
architecture, which was 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. Key technical features of the blueHALO
architecture 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

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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 managed dedicated 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.

Web site design services

Following its acquisition of Trellix, Interland recently introduced
professional Web site development services. This expansion of our services
beyond our core hosting products is a recognition of the markets evolving
dynamics. Industry analysts estimate that nearly 80% of all SMBs in the United
States do not have a Web presence. The Company believes that the primary
barriers to adoption of online solutions by SMBs have been their lack of
technical expertise and the cost barrier to trial; that is, the initial cost of
developing a Web site. Today, before being able to evaluate the benefits of a
solid online presence, an SMB would have to expend thousands of dollars or
devote numerous hours to deploy complex technology. As a result, penetration
has remained low. The Company believes that the key to penetrating the
estimated 18 million SMBs who have no online presence and those among the 4
million whose online presence is not regarded as effective is to deliver an
affordable and easy-to-use total solution. The Company refers to this business
opportunity as the mainstream market. Although our core hosting business is
limited to providing hosting services only to customers that already have a Web
site, with the new software tools available since the acquisition of Trellix,
the Company is able to target SMBs without a Web site. Interlands in-house
designers use the suite of Trellix development tools to build full-featured,
professional SMB Web sites. Interland-designed Web site functionality includes
features such as e-commerce, scheduling, auctions, online chat and coupons.
Because the design tool was developed with non-technical end users in mind,
customers are able to make simple changes to their Web sites and manage their
online presence.

Web site promotion services

In order to benefit fully from a professional Web presence, SMBs need
assistance in promoting their Web site. Interland offers a broad range of
online marketing and promotions services, including online search, directory
registration, email and coupon marketing.

Interland is targeting the mainstream SMB market with a unique value
proposition offering a bundle of services, site hosting as well as professional
design, all for an attractive fixed monthly cost.

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 that the company hosts consist of Web site building tools, Online
storefront and e-commerce solutions and a suite of managed services all of
which help businesses succeed online.

Other Web hosting-related products and services

Interland also makes available other complementary products and services
including domain name registration and technical consulting. The Company
believes these value-added products and services enable it to provide its

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customers 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 SMBs.

Sales and Marketing

Interland utilizes multiple sales and distribution channels in an effort to
maximize its market share. There are separate channels for the Companys line
of traditional hosting services and for the Companys newer line of mainstream
market services.

Traditional hosting services channels include direct sales through both sales
professionals and online sales as well as indirect sales through reseller and
private-label arrangements, and other channels.

Direct sales



| |  |  | In-bound and out-bound telephone sales professionals, who are predominantly
located in Atlanta, Georgia for shared hosting and predominantly located in
Miami, Florida for 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 the Web, direct mail, advertising and
business referrals. The Companys sales force is trained in a relationship
selling approach that allows representatives 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 is intended to ensure that all sales personnel are
knowledgeable about technological advances and the Companys 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 8,900 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 partner marketing, customer referrals and industry
referrals.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Internet partner 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.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | 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.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Mainstream market services channels
| |  |  | -----------------------------------



| |  |  | Since its acquisition of Trellix, the
Company has been developing sales channels aimed at distributing its new
integrated online solutions services. These channels include a direct sales
force, online and telephone sales. The Company also intends to test a
variety of other distribution channels.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Direct sales force
| |  |  | ------------------



| |  |  | Based on in-depth market research, the Company concluded that the best way
to develop an effective portfolio of distribution channels to the mainstream
market was to first establish a direct sales effort. This way, the Company
would be able to control all aspects of this channels development as well
as be as close as possible to its target customers. As a result, starting in
the spring of 2003, the company began building a direct sales force
dedicated to the mainstream market. The Company is planning on continuing
the rollout of this sales force through fiscal year 2004.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Online and telephone sales
| |  |  | --------------------------



| |  |  | In parallel with the development of its direct mainstream sales force, the
Company is leveraging its experience in online and telephone sales by making
this new suite of products available through these established channels.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other mainstream sales channels
| |  |  | -------------------------------



| |  |  | During the course of fiscal 2004, the Company intends on testing a number of
other potential distribution channels for its mainstream solutions.
Potential channel candidates include retail partners, sales seminars,
strategic partners, agents and franchisees. The Company also intends to
leverage its network of thousands of hosting resellers. The Companys
objective for 2004 is to identify and begin implementing complementary
distribution channels enabling it to cost-effectively distribute its suite
of integrated online solutions to the mainstream SMB market.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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
several initiatives with Microsoft, including developing Windows Server 2003
product offerings and promotions for both Dedicated and Shared hosting
customers. The Company has worked with Microsoft throughout the year on Rapid
Economic Justification studies and has beta tested new software well in advance
of general release. In return, Microsoft provides the Company with technical
expertise, PR programs and case studies, and training initiatives for Microsoft
products. Microsoft has also featured the Company on its ASP.Net developer
sites and promotes the Companys offerings to

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its developer base. The Company continues to work with Microsoft to develop new
hosted applications for its Windows products and is discussing the potential
use of Exchange and Office product lines.

Verizon

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

Customers

Interland provides hosting services both directly to end-user business
customers as well as through 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, 2003, the
Company had approximately 200,000 paid shared hosting customer accounts and
managed nearly 8,500 dedicated servers compared to 220,000 paid shared hosting
customer accounts and 7,500 dedicated servers as of August 31, 2002.
Additionally, the Company hosts Web sites under plans formerly marketed by
Trellix.

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.

Data centers

The Company has a total of almost
34,000 square feet of data center floor space.
These data centers, located in Atlanta, Georgia (13,140 sq.ft.); Miami, Florida
(13,189 sq.ft.) and Fremont, California (7,636 sq.ft.), 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 the blueHALO architecture, 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 materially 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 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

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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 procedures for rapidly resolving technical problems that arise.

International Revenues

Interlands international revenues from continuing operations totaled $10.4
million, $10.6 million and $10.6 million in 2003, 2002 and 2001, 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. as the Company has no network operations outside of the United States.

Competition

Interland believes that the primary competitive factors in the technical
segment of its business are reliability, technical support and price. Although
the market is intensely competitive, the Company believes that it compares
favorably with its competition on these dimensions. In the SMB mainstream
market segment, the Company believes that critical success factors are the
bundling of a complete Web site design and hosting solution combined with a
personalized approach to sales and customer support. The Company believes it is
unique in the marketplace in its offering of such a service at a price
attractive to the majority of SMBs.

The SMB hosting market is highly fragmented with a large number of competitors,
most of which have market share of less than 1%. Interland believes it has a
market share of approximately 10%, placing the Company in the industrys
leading position, and that its next closest competitor is NTT/Verio. A number
of other companies offer Web hosting in addition to their core products and
services. 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, computer hardware suppliers and
Internet-centric companies.

The Company does not consider itself to be in direct competition with companies
such as IBM, Digex, Globix or Navisite. Those companies provide high-end
services that are highly customized, require the user to have technical
expertise and generally charge several thousand dollars per month. Interlands
solutions are standardized, do not require the user to have technical
expertise, and generally sell for less than $100 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,
2003, the Company owned eight issued U.S. patents and had several additional
patent applications on file but not yet issued. 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. Interland 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 cannot ensure 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

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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  Risk Factors 
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.

Government Regulation

Interland is not currently subject to direct federal, state or local government
regulation, other than regulations that generally apply to publicly registered businesses. This could change in the future  see Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Risk Factors  Interlands business operates in an uncertain legal environment
where future government regulation and lawsuits could restrict Interlands
business or cause unexpected losses.

Employees

The Company employed approximately 761 individuals, including 88 contractors as
of August 31, 2003 compared to approximately 820 individuals, including 75
contractors 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 employment by the Company. As of August 31, 2003, 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 which includes 143,215 square feet (of
which 27,839 sq.ft. are subleased) in Atlanta, Georgia; 25,628 square feet (all
of which are subleased) in Boise, Idaho; 43,851 square feet (of which 20,457
sq.ft. are subleased) in Bellevue, Washington; 45,000 square feet (of which
26,763 sq.ft. are subleased) in Tukwila, Washington; 64,174 square feet in
Miami, Florida; 17,230 square feet (of which 2,180 sq.ft. are subleased) in
Concord, Massachusetts; 12,500 square feet in Orlando, Florida; 15,229 square
feet in Fremont, California; 9,400 square feet in Houston, Texas; 8,969 square
feet in Farmingdale, New York; 200 square feet in New York, New York and 336
square feet in Weehawken, New Jersey.




ITEM 3.LEGAL PROCEEDINGS

Interland is defending an employee class action lawsuit filed in the U.S.
District Court for Idaho. In this case, five individual plaintiffs claim that
when they were employees of Micron Electronics Inc. (MEI) between 1999 and
April 2001, 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 opt in period for potential class members
has closed and discovery continues on the merits of the case. Interland
believes that expenses or losses associated with the case will not have a
material adverse effect on Interland. This potential liability remains with
Interland even though it sold the PC Systems business.

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In February of 2003, the Company filed a lawsuit in Cobb County, Georgia
against Mr. Gabriel Murphy, one of the former principals of Interlands
subsidiary, CommuniTech.Net, Inc. (Communitech), which was acquired by
Interland in February 2002. The Companys lawsuit claims, among other things,
that Mr. Murphy breached certain covenants under his employee agreement and
also demands payment from Mr. Murphy under his delinquent $2.7 million
promissory notes. 273,526 shares of the Companys common stock collateralize
these notes and the receivable balance is shown on the balance sheet as a
reduction in equity.

Messrs. Heitman and Murphy filed a lawsuit against Interland, its CEO, Mr. Joel
Kocher, and Communitech, in Jackson County, Missouri claiming, among other
things, that Interland acted unreasonably in failing to have the S-3
registration statement declared effective by the SEC on a timely basis and
claiming that Interland and/or Mr. Kocher made inaccurate disclosures in
connection with Interlands acquisition of Communitech. The complaint asks for
compensatory and punitive damages in an unspecified amount. Interland believes
that these claims are without merit and will not have a material adverse effect
on Interland and intends to vigorously defend the claims.

On March 14, 2003, Halo Management, LLC, filed a suit against Interland in the
U.S. District Court for the Northern District of California. The suit alleges
that Interlands use of blueHALO (U.S. Patent and Trademark Office Serial No.
78/135,621) to describe its proprietary Web hosting architecture infringes on
the plaintiffs registered trademark Halo (U.S. Patent and Trademark Office
Serial No. 75/870,390; Registration No. 2,586,017). The suit seeks a
permanent injunction against Interlands use of its blueHALO mark and money
damages. In a motion after the suit was filed, the plaintiff also requested
a preliminary injunction against Interlands use of its blueHALO mark. On
November 17, 2003 the court denied plaintiffs motion. In rendering its
opinion, the court specifically held that the plaintiff had engaged in
so-called naked licensing and, as a consequence, had forfeited its rights
in the HALO trademark. Consequently, Interland continues to believe it has
meritorious defenses, plans to continue to defend the matter vigorously and
believes that no material adverse effect on Interland will occur as a result of
this litigation.

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. As of August
31, 2003, the Company had an aggregate amount of $1.1 million accrued for such
matters.

The Company is also a defendant in a number of other lawsuits which the Company
regards as minor and unlikely to result in any material payment; nonetheless,
the outcome of litigation may not be assured, and the Companys cash balances
could be materially affected by an adverse judgment.

In accordance with SFAS No. 5 Accounting for Contingencies, the Company
believes it has adequately reserved for the contingencies arising from the
above legal matters where an outcome was deemed to be 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, its financial condition
or its cash flows.

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ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On July 1, 2003 the Company held its annual meeting of shareholders. The
following matter was voted upon:

The election of five directors to serve until the next Annual Meeting of
Shareholders and until their successors are elected and have qualified. The
following table provides the number of votes cast for and withheld as to the
election of directors.

Name of Nominee
    
    Votes For
    
    Votes WithheldJoel J. Kocher
    
    
    85,148,704
    
    
    
    20,119,407John B. Balousek
    
    
    84,750,111
    
    
    
    20,518,000Robert C. Lee
    
    
    84,761,603
    
    
    
    20,506,508Edward L. Shapiro
    
    
    103,841,364
    
    
    
    1,426,747Robert T. Slezak
    
    
    84,746,571
    
    
    
    20,521,540


On November 11, 2003 the Board elected Patrick Crecine to fill a vacant seat.




ITEM 4A.EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT

The executive officers and directors of the Company and their ages as of
November 11, 2003, were as follows:

Name
    
    Age
    
    PositionJoel J. Kocher
    
    
    47
    
    
    Chairman of the Board of Directors, President and Chief Executive OfficerAllen L. Shulman
    
    
    55
    
    
    Senior Vice President, Chief Financial Officer, and General CounselSavino R. Sid Ferrales
    
    
    53
    
    
    Senior Vice President and Chief Human Resources OfficerDonald Bulens
    
    
    47
    
    
    Senior Vice President of Mainstream MarketingWilliam Jones
    
    
    43
    
    
    Chief Information Officer, Vice President of OperationsTiffani Bova
    
    
    37
    
    
    Vice President, Sales & Channel ProgramsRobert T. Slezak
    
    
    46
    
    
    DirectorJohn P. Crecine
    
    
    64
    
    
    DirectorRobert Lee
    
    
    54
    
    
    DirectorJohn B. Balousek
    
    
    57
    
    
    DirectorEdward Shapiro
    
    
    38
    
    
    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, Mr. Kocher served as President and Chief
Operating Officer at Power Computing Corporation, a personal computer company,
from December 1996 until August 1997. He served as Executive Vice President and
then Chief Executive Officer of Artistsoft, Inc., a computer networking and
telephony company, from August 1994 to January 1996. From 1987 to 1994, he
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

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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.

Donald Bulensis Senior Vice President of Mainstream Marketing and joined the
Company in conjunction with the January 2003 acquisition of Trellix Corporation
(Trellix). Mr. Bulens was formerly the President and CEO of Trellix from
January 1999 through January 2003. Prior to Trellix, Mr. Bulens was an
independent consultant advising software and Internet companies from November
1997 through January 1999. From August 1996 through November 1997, Mr. Bulens
was the President and CEO of Radnet, Inc. From January 1988 through August
1996, Mr. Bulens held a number of management positions at Lotus Development
Corporation, including Vice President of Worldwide Business Partner Programs.
Mr. Bulens began his career at New England Telephone Company and then AT&T,
where he held several sales and sales management positions from June 1978
through January 1988.

William Jonesbecame Chief Information Officer, Vice President of Operations in
July 2003. A 20-year veteran in information technology, Mr. Jones brings a
wealth of experience to his job overseeing the Companys information technology
and data center operations. Prior to joining Interland, Mr. Jones was CIO of
Tivoli Systems from May 2000 to January 2003, and as director of Americas
infrastructure services for the IBM Software Group from November 1998 to May
2000. From October 1996 to October 1998, he served as director of operations in
the IT group for ENTEX Information Services, a privately held computer systems
reseller and services company. During his 14-year tenure at Electronic Data
Systems (EDS) from June 1982 to October 1996, he held various technical and
management positions with emphasis on information technology operations.

Tiffani Bovabecame the Vice President, Sales & Channel Programs at Interland
in July 2003. Miss Bova joined Interland from Affinity Internet where she was
the Vice President of Sales and Channel Programs, building Affinitys channel
presence and revenue growth. In 2002, Miss Bova was named one of twenty-five
leading channel advocates heading up innovative channel program campaigns by
CRN Magazine. Widely regarded as an expert in the technology reseller channel,
this 13-year technical sales veteran has also held management positions with
leading companies including Sprint, Inacom and Winstar.

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.

Dr. John Patrick Crecinebecame a director of Interland in November 2003. Dr.
Crecine is Chief Executive Officer of B.P.T., Inc., a private investor, and
consultant. He was President of the Georgia Institute of Technology from 1987
to mid-1994. Previously he served as a Professor at the University of Michigan
and founding Director of the Institute of Public Policy Studies from 1965 to
1975. He became Dean of the College of Humanities and Social Sciences at
Carnegie Mellon University in 1976, a position he held until 1983 when he
became the Universitys Provost and Senior Vice President for Academic Affairs.
He held that position until his Georgia Tech appointment. He is a member of the
Board of the Georgia Department of Industry, Trade and Tourism. He also has
been a Director of INTERMET Corporation, a company listed on the NASDAQ
National Market, since 1993.

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.

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Edward 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.




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 close prices for the Companys common stock,
as reported by the NASDAQ National Market:

| |      |  |  |                                        |  |      |       |     |  |   |       | 
| | ---- |  |  | -------------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
| |      |  |  |                                        |  | High |       | Low
| |      |  |  |                                        |  |      |       |    
| | 2003 |  |  | Fourth Quarter ended August 31, 2003   |  | $    | 12.20 |     |  | $ | 7.25  | 
| |      |  |  | Third Quarter ended May 31, 2003       |  |      | 12.50 |     |  |   | 6.50  | 
| |      |  |  | Second Quarter ended February 28, 2003 |  |      | 18.90 |     |  |   | 7.10  | 
| |      |  |  | First Quarter ended November 30, 2002  |  |      | 28.30 |     |  |   | 13.60 | 
|
| | 2002 |  |  | Fourth Quarter ended August 31, 2002   |  | $    | 32.80 |     |  | $ | 24.90 | 
| |      |  |  | Third Quarter ended May 31, 2002       |  |      | 32.00 |     |  |   | 17.80 | 
| |      |  |  | Second Quarter ended February 28, 2002 |  |      | 30.00 |     |  |   | 17.90 | 
| |      |  |  | First Quarter ended November 30, 2001  |  |      | 23.00 |     |  |   | 10.40 | 

The above prices have been adjusted to reflect the Companys 1-for-10 reverse
stock split, which became effective on August 1, 2003.

Holders Of Record

On November 24, 2003, the closing price of Interlands common stock as reported
on the Nasdaq National Market was $6.83 per share and there were approximately
1,900 shareholders of record.

Dividends

Interland has not declared or paid any cash dividends 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, 2003, 2002 and 2001, and the historical consolidated
balance sheet data as of August 31, 2003 and 2002 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 only the results of the Companys continuing
operations, the Web hosting business.

In fiscal 2003, the Company acquired one Web and applications hosting company
and a developer of software-based Web site solutions. 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

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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.

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) |                                                  | 2003              |   | 2002                          |        | 2001 |   | 2000    |       | 1999
|                                         |                                                  |                   |   |                               |        |      |   |         |       |     
|Statements of income data:               |                                                  |                   |   |                               |        |      |   |         |       |      |   |          |        |   |   |         |       |   |   |        
|                                         | Revenues from continuing operations              |                   | $ | 106,638                       |        |      | $ | 101,628 |       |      | $ | 60,752   |        |   | $ | 32,862  |       |   | $ | 464     |     
|                                         | Income (loss) from continuing operations         |                   |   | (178,791                      | )      |      |   | (5,272  | )     |      |   | (145,717 | )      |   |   | (26,192 | )     |   |   | 5,187   |     
|                                         | Net Income (loss)                                |                   |   | (173,879                      | )      |      |   | (11,293 | )     |      |   | (357,194 | )      |   |   | 41,543  |       |   |   | 36,524  |     
|                                         | Earnings (loss) per share, continuing operations |                   |   |                               |        |      |   |         |       |      |   |          |        |   |   |         |       |   |   |         |     
|                                         |                                                  | Basic and Diluted |   | $                             | (12.19 | )    |   | $       | (0.38 | )    |   | $        | (14.63 | ) |   | $       | (2.70 | ) |   | $       | 0.50 | 
|                                         | Net Income (loss) per share                      |                   |   |                               |        |      |   |         |       |      |   |          |        |   |   |         |       |   |   |         |     
|                                         |                                                  | Basic and Diluted |   | $                             | (11.85 | )    |   | $       | (0.82 | )    |   | $        | (35.86 | ) |   | $       | 4.30  |   |   | $       | 3.80 | 
|Balance sheet data:                      |                                                  |                   |   |                               |        |      |   |         |       |      |   |          |        |   |   |         |       |   |   |        
|                                         | Total assets                                     |                   | $ | 207,042                       |        |      | $ | 395,278 |       |      | $ | 429,280  |        |   | $ | 563,920 |       |   | $ | 502,826 |     
|                                         | Total debt                                       |                   |   | 12,499                        |        |      |   | 31,166  |       |      |   | 39,106   |        |   |   | 1,971   |       |   |   | 9,993   |     
|                                         | Shareholders equity                             |                   |   | 152,658                       |        |      |   | 297,730 |       |      |   | 296,430  |        |   |   | 506,580 |       |   |   | 458,499 |     

The above per share amounts have been adjusted to reflect the Companys
1-for-10 reverse stock split, which became effective on August 1, 2003.




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 its future operating results including its
planned increase in its revenue 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 due to the risks and uncertainties associated with
forward-looking statements including risks associated with our target markets,
product offerings, and risks pertaining to our ability to successfully enhance
the Companys operations. These and other identified risks are disclosed in
the Risk Factors section of Item 7  Managements Discussion and Analysis
included in this Form 10-K for the year ended August 31, 2003. All yearly
references are to the Companys fiscal years ended August 31, 2003, August 31,
2002, or August 31, 2001 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 leader in delivering standardized business-class Web hosting and
online solutions to small-and-medium-sized businesses, and helping them to
achieve success by providing the knowledge, services and tools to build, manage
and promote businesses online. Interland offers a broad range of products and
services, including shared and dedicated hosting services, e-commerce,
application hosting, Web site development, marketing and optimization tools.
Prior to 2001, the Company also provided a variety of computer products and
related services through PC Systems, a computer manufacturing business, and
SpecTek, a memory products business. During fiscal

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2001, the Company discontinued its PC Systems and SpecTek businesses and the Companys ongoing
operations became exclusively those of an online solutions provider to small
businesses.

The current Web hosting business was formed through the merger of the Companys
HostPro division and Interland, Inc., a Georgia Corporation
(Interland-Georgia), followed by eight company or account acquisitions from
October 2001 through August 31, 2003. On August 6, 2001, the Company acquired
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 from
MUEI to INLD.

On October 2001, January 2002, and May 2002 respectively, the Company acquired
the small-sized business focused shared and dedicated Web hosting customer
accounts of Interliant, Inc., (Interliant), AT&T Corp., (AT&T), and Burlee
Networks LLC, (Burlee).

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 Fort
Lauderdale, Florida based dedicated Web hosting company.

On August 1, 2002, the Company acquired iNNERHOST, Inc., (iNNERHOST), a
Miami, Florida based Web hosting company serving small-and medium-sized
businesses.

On January 3, 2003, the Company acquired Trellix Corporation (Trellix), a
privately held company founded in 1995 is a provider of Web site development
and publishing solutions, integrated business services, and low-cost hosting
technology. Trellix offers a suite of site building tools and services that
enable users to create professional Web sites.

On June 13, 2003, the Company acquired Hostcentric, Inc., a privately held
company that provides a broad range of Web hosting services to small business
and enterprise customers.

During fiscal 2003 the Company focused primarily on integrating the
acquisitions described above. As a result of these integration activities, the
Company generated quarterly operating cost savings of $11.6 million, as
evidenced by the reduction of operating expenses from the $44.5 million
incurred in the fourth quarter of fiscal 2002 to the $32.9 million incurred in
the fourth quarter of fiscal 2003. In order to reduce expenses, the Company
exited redundant data center facilities, reduced the associated work force, and
terminated redundant and/or uneconomic bandwidth and connectivity contracts.
The Company has a limited operating history as a provider of standardized
business-class online solutions to SMBs. The Companys revenue growth is
attributable to its acquisitions. As a result, the Company does not believe
its historical financial results are indicative of expected future results. The
Company does not anticipate making further acquisitions as a means of growing
revenue, but rather it intends to pursue organic growth strategies, including
execution of its plans to offer combined Web site design, development, and
management tools to small-and-medium-sized businesses, also referred to as its
mainstream market initiative.

Critical Accounting Policies And Estimates

Management based this discussion and analysis of financial condition and
results of operations upon the Companys 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 management 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 ongoing basis, management
evaluates its 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.
Estimates are based on historical experience and on various other assumptions
believed 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.

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The following critical accounting policies reflect the more significant
judgments and estimates used in the preparation of the 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 generated from shared and dedicated Internet Web
hosting, managed services, e-commerce services, applications
hosting, domain name registrations, and Web site development
services. Revenues are recognized as the services are provided.
Hosting contracts generally are for service periods ranging from one
to twenty four months and sometimes require up-front set-up fees,
which are deferred and recognized ratably over the customers first
year of service. Deferred revenues represent the liability for
advance billings to customers for services not yet provided. The
Company may permit an early termination of a term contract subject
to penalties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Valuation of Accounts Receivable Judgment is required when
the Company assesses the likelihood of ultimate realization of
recorded accounts receivable, including assessing the likelihood of
collection and the credit-worthiness of 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, an increase in
the allowance for doubtful accounts would be required. Similarly, a
change in the payment behavior of customers generally may require an
adjustment in the calculation of an appropriate allowance. The
majority of customer payments are made by credit card. Each month
management reviews customer payment patterns, historical credit card
charge-backs, customer cancellation trends, and comparative aged
receivables balances in order to determine the appropriate amount of
allowance for doubtful accounts receivable to record. As a result
of these analyses, the Company believes that the current allowance
for doubtful accounts receivable is adequate to cover a reasonably
expected level of un-collectible accounts receivable as of the
balance sheet date.
|
| |  |  | Property, Plant, Equipment and Long Lived Assets  The
Company utilizes significant amounts of property, plant and
equipment in providing service to its 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 three to
seven 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. The Company performs 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.                                                                                                                                                                                                                                                                                                                      
|
| |  |  | Goodwill and Intangible Assets In accordance with SFAS No.
142 Goodwill and Other Intangible Assets, 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 of carrying value based
on the calculated fair value exists, the Company measures the
impairment through the use of discounted cash flows. 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
acquired businesses are impaired. Goodwill is no longer amortized,
but instead is subject to impairment tests at least annually. The
Company generally performs the annual test on May 31st. Other
intangible assets are amortized over an estimate of their period of
benefit.                         
|
| |  |  | 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. The Company is required to assess the likelihood of
any adverse judgments or outcomes of these matters as well as
potential ranges of probable losses. A determination of the amount
of the loss accrual required, if any, for these contingencies, is
made after careful analysis of each individual issue. The Company
consults with legal counsel and other experts where necessary to
assess any                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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| |   |  | 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. The amounts
recorded as of the subsequent reported balance sheet dates represent
the estimated remaining liabilities. These amounts are subject to
final settlement, which could result in a revision to the estimated
loss on the final disposal of these discontinued operations.
Related amounts in the financial statements and corresponding notes
for all periods presented have been classified as part of
discontinued operations.
|
| |  |  | 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-GA. The Company also
incurred liabilities related to the integration of acquired business
during fiscal 2002 and 2003. These remaining liabilities represent
our estimate of future lease payments for data centers and office
facilities being exited that cannot be recovered through subleases,
employee termination, and termination penalties for bandwidth and
data connectivity contracts we are no longer utilizing.                                                                                

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 reclassified to
consistently separate and present the results of discontinued operations, and
the discussion and analysis that follow 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,
|                                             |                               |                                    |        | 2003              |       | 2002       |       | 2001      
|                                             |                               |                                    |        |                   |       |            |       |           
|Revenues                                     |                               |                                    | 100.0  | %                 |       |            | 100.0 | %          |       |   | 100.0  | %    
|Operating costs and expenses:                |                               |                                    |        |                   |       |            |       |            |       |   |        |      
|                                             | Network operating costs       |                                    |        | 30.8              | %     |            |       | 34.0       | %     |   |        | 46.2  | %    
|                                             | Sales and marketing           |                                    |        | 19.0              | %     |            |       | 26.4       | %     |   |        | 38.7  | %    
|                                             | Technical support             |                                    |        | 14.7              | %     |            |       | 16.6       | %     |   |        | 19.5  | %    
|                                             | General and administrative    |                                    |        | 38.4              | %     |            |       | 38.3       | %     |   |        | 51.7  | %    
|                                             | Bad debt expense              |                                    |        | 6.9               | %     |            |       | 10.4       | %     |   |        | 3.7   | %    
|                                             | Depreciation and amortization |                                    |        | 53.2              | %     |            |       | 36.1       | %     |   |        | 40.5  | %    
|                                             | Restructuring costs           |                                    |        | 4.8               | %     |            |       | -1.3       | %     |   |        | 181.5 | %    
|                                             | Merger and integration costs  |                                    |        | 0.5               | %     |            |       | 8.0        | %     |   |        | 2.8   | %    
|                                             | Goodwill impairment           |                                    |        | 84.3              | %     |            |       | 0.0        | %     |   |        | 0.0   | %    
|                                             | Intangible asset impairment   |                                    |        | 13.0              | %     |            |       | 0.0        | %     |   |        | 0.0   | %    
|                                             | Other expense (income), net   |                                    |        | 1.2               | %     |            |       | 0.7        | %     |   |        | -2.7  | %    
|                                             |                               |                                    |        |                   |       |            |       |            |       |   |        |       |       |  
|                                             |                               | Total operating costs and expenses |        |                   | 266.8 | %          |       |            | 169.1 | % |        |       | 382.0 | %
|                                             |                               |                                    |        |                   |       |            |       |            |       |   |        |       |       |  
|Operating (loss)                             |                               |                                    | -166.8 | %                 |       |            | -69.1 | %          |       |   | -282.0 | %    
|Loss on investments, net                     |                               |                                    | 0.0    | %                 |       |            | 0.0   | %          |       |   | -8.9   | %    
|Interest income (expense), net               |                               |                                    | -0.3   | %                 |       |            | 0.7   | %          |       |   | 13.7   | %    
|                                             |                               |                                    |        |                   |       |            |       |            |       |   |        |       |       |  
|Loss from continuing operations before taxes |                               |                                    | -167.1 | %                 |       |            | -68.4 | %          |       |   | -277.2 | %    
|Income tax benefit (expense)                 |                               |                                    | -0.6   | %                 |       |            | 63.2  | %          |       |   | 37.3   | %    
|                                             |                               |                                    |        |                   |       |            |       |            |       |   |        |       |       |  
|Net income (loss) from continuing operations |                               |                                    | -167.7 | %                 |       |            | -5.2  | %          |       |   | -239.9 | %    
|                                             |                               |                                    |        |                   |       |            |       |            |       |   |        |       |       |  

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The loss from continuing operations for the fiscal year 2003 was $(178.8)
million, or $(12.19) per share basic and diluted, on revenues of $106.6
million, compared to a loss from continuing operations in 2002 of $(5.3)
million, or $(0.38) per share basic and diluted, on revenues of $101.6 million,
and a loss from continuing operations in 2001 of $(145.7) million, or $(14.63)
per share basic and diluted on revenues of $60.8 million. The results of
continuing operations in fiscal 2001 include 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 seven months;   
|
| |  |  | Dialtone for four months; and,      
|
| |  |  | INNERHOST for one month.            

The results of continuing operations for fiscal 2003 include the operating activities of:



| |  |  | Interland-Georgia for twelve months;    
| | - |  | ----------------------------------------
|
| |  |  | CommuniTech.Net for twelve months;      
|
| |  |  | Dialtone for twelve months;             
|
| |  |  | INNERHOST for twelve months;            
|
| |  |  | Trellix for eight months; and,          
|
| |  |  | Hostcentric for two and one-half months.

Discontinued Operations

PC Systems

In fiscal 2001 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 August 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 regards 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 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 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.

In fiscal 2003, the Company recognized a gain of $4.9 million on the disposal
of discontinued operations. This gain consisted of a $5.5 million reduction in
the Companys liability for Micron Electronics sales taxes payable with

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various jurisdictions including a settlement reached with the state of Idaho,
and a $0.4 million reduction in the Companys liability for Micron Electronics
payroll taxes. These gains were partially offset by a $0.7 million increase in
required legal reserves and $0.3 million in other various charges related to
discontinued operations.

SpecTek

In fiscal 2001, the Company 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 related Amended and Restated Component
Recovery Agreement, 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 incurred by MTI. This amount was recorded, net of tax, as an increase in
additional paid in capital. Net proceeds from the sale of the SpecTek assets
under the Purchase Agreement were $39.6 million.

Comparison of the Years Ended August 31, 2003, 2002, and 2001

Revenues

Total revenues increased 4.9% to $106.6 million during fiscal 2003 from $101.6
million in fiscal 2002 and $60.8 million in fiscal 2001.

|                |  |                   |         |            |  |            |         |  |  |   |        | 
|--------------- |  | ----------------- | ------- | ---------- |  | ---------- | ------- |  |  | - | ------ | 
|                |  | Fiscal Year Ended
|                |  |                  
|                |  | August 31,        |         | August 31, |  | August 31,
|Revenues        |  | 2003              |         | 2002       |  | 2001      
|                |  |                   |         |            |  |           
|Hosting revenue |  | $                 | 103,313 |            |  | $          | 99,755  |  |  | $ | 52,476 | 
|Other revenue   |  |                   | 3,325   |            |  |            | 1,873   |  |  |   | 8,276  | 
|                |  |                   |         |            |  |            |         |  |  |   |        | 
|Total revenue   |  | $                 | 106,638 |            |  | $          | 101,628 |  |  | $ | 60,752 | 
|                |  |                   |         |            |  |            |         |  |  |   |        | 

Hosting revenues increased 3.6% to $103.3 million during fiscal 2003 from $99.8
million in fiscal 2002 and $52.5 million in fiscal 2001. Hosting revenues are
comprised of shared, dedicated, and application hosting services and domain
name registrations. The growth in hosting revenues, which is attributable to
acquisitions, continues to be partially offset by account cancellations, net of
new customers obtained through sales and marketing activities. These
cancellations occur as a result of: a) customer action; b) termination by the
Company for non-payment; or c) termination by the Company as a result of a
decision to no longer provide a particular service. The Company has not,
during its current acquisition and integration phases, focused on organic
growth, and has as a result of increased efficiency, reduced its spending on
marketing and advertising from the amounts spent in fiscal 2002. Consequently,
the Company has, aside from acquisitions, yet to achieve sustained overall
growth in revenue. The Company does not expect to make further acquisitions,
although the recent acquisition of Hostcentric is expected to provide
additional revenue. The Company does expect to achieve modest organic revenue
growth sometime during fiscal 2004 in both its core hosting business and its
mainstream market initiative by which it will offer Web site design,
development, and management tools to small-and-medium-sized businesses. The
increase from 2001 to 2002 was primarily related to the additional subscribers
obtained from various acquisitions made by the Company.

Other revenues increased 77.5% to $3.3 million during fiscal 2003 from $1.9
million in fiscal 2002, which had decreased from $8.3 million in fiscal 2001.
Other revenues are primarily comprised of consulting, Internet connectivity
fees, co-location services, and Web-based business solution services. The
increase in other revenues during fiscal 2003 is due to an increase in
consulting services and the inclusion of Trellix revenues, partially offset by
a decrease in co-location services revenue. The decrease from 2001 to 2002 was
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.

As of August 31, 2003, the Company had approximately 200,000 paid shared
hosting customer accounts and managed nearly 8,500 dedicated servers (many of
which host multiple Web sites) compared to 220,000 paid shared hosting customer
accounts and 7,500 dedicated servers at August 31, 2002. The decrease in
shared hosting customer accounts is primarily due to customer churn caused by
breakage experienced as accounts were migrated to
other data centers during the integration process, as well as the Companys
more stringent termination policies

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applied to delinquent accounts. The
increase in dedicated servers is primarily attributable to the Hostcentric
acquisition and improved sales performance.

Operating Costs and Expenses

Network Operating Costs

Network operating costs decreased 5.0% to $32.9 million in fiscal 2003 from
$34.6 million in fiscal 2002, which had increased 23.2% from $28.1 million in
fiscal 2001. The decrease in networking operating costs is most directly
related to the data center consolidation, which was a critical part of the
Companys restructuring and integration initiative. That initiative also
accounted for a $1.5 million reduction in bandwidth connectivity costs, a $1.3
million reduction in service fees, and a $0.8 million reduction in employee
related costs. In addition the Company reduced operating lease costs by $1.6
million as a result of purchasing the underlying leased equipment. These cost
savings were partially offset by a $1.6 million increase in software costs
necessary to support customer product offerings, a $0.9 million increase in
repair and maintenance costs to maintain network reliability, a $0.6 million
increase in professional fees to upgrade network security, and a $0.4 million
increase in domain registration costs. The increase from 2001 to 2002 was
primarily related to expenses such as rent, telecommunications and Internet
access costs from acquired companies and their associated data center
facilities.

Sales and Marketing

Sales and marketing expenses decreased 24.4% to $20.3 million during fiscal
2003 from $26.8 million in fiscal 2002, which had increased 14.0% from $23.5
million in fiscal 2001. The Companys sales and marketing expenses as a
percentage of revenues decreased to 19.0% during fiscal 2003 from 26.4% in
fiscal 2002 and 38.7% in fiscal 2001. The decrease in sales and marketing
expenses is directly attributable to functional centralization and much greater
use of on-line advertising and customer initiated on-line sales, and a
reduction in reliance on more expensive print advertising and direct mail. The
increase from 2001 to 2002 reflects the addition of the sales and marketing
cost structure of the companies acquired during 2002.

Technical Support

Technical support expenses decreased 6.7% to $15.7 million during fiscal 2003
from $16.8 million in fiscal 2002, which had increased 41.9% from $11.9 million
in fiscal 2001. The Companys technical support expenses as a percentage of
revenues decreased to 14.7% during fiscal 2003 from 16.6% in fiscal 2002 and
19.5% in fiscal 2001. The decrease in technical support costs is caused by a
$1.3 million reduction in service fees paid to third-party providers for
support of acquired accounts, a $0.4 million reduction in professional fee
expenses associated with process reengineering initiatives, a $0.3 million
reduction in employee-related expenses, and $0.3 million savings in repairs and
maintenance costs. Partially offsetting these reductions were increases in
contracted labor expenses of $0.6 million and occupancy expenses of $0.6
million. The increase from 2001 to 2002 reflected the additional resources
needed to support the increased size of the customer account base generated by
2002 company acquisitions.

General and Administrative

General and administrative expenses increased 5.3% to $40.9 million during
fiscal 2003 from $38.9 million in fiscal 2002, which had increased 23.8% from
$31.4 million in fiscal 2001. The Companys general and administrative
expenses as a percentage of revenues increased to 38.4% during fiscal 2003 from
38.3% in fiscal 2002 and down from 51.7% in fiscal 2001. General and
administrative expenses increased primarily due to a $2.3 million increase in
professional fees primarily related to process improvements, the initial design
requirements of a new billing system and the development of the mainstream
market initiative, a $1.4 million increase in legal fees associated with
litigation arising from the integration of recent acquisitions and related
security registrations costs, an additional $1.3 million in salary and benefit
costs associated with the acquired workforces of iNNERHOST, Trellix, and
Hostcentric, a $0.6 million increase in staffing relocation costs necessary to
complete consolidation initiatives, and a $0.5 million increase in premiums for
director and officer liability insurance. Partially offsetting these increases
was a $2.4 million decrease in occupancy costs associated with office
consolidation, a $1.2 million decrease in allocated service fees, and a $0.6
million decrease in communication costs as a result of renegotiated contracts
with telecom providers. The increase from 2001 to 2002 was primarily related
to increased administrative costs attributable to the acquisitions made by the
Company and an adjustment to reserves required for disposal of abandoned
facilities.

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Bad Debt Expense

Bad debt expense decreased 30.3% to $7.3 million during fiscal 2003 from $10.5
million in fiscal 2002, which had increased 377.2% from $2.2 million in fiscal
2001. The Companys bad debt expense as a percentage of revenues decreased to
6.9% during fiscal 2003 from 10.4% in fiscal 2002 compared to 3.7% in fiscal
2001. The decrease in bad debt expense is directly attributable to the
implementation of more aggressive collection strategies and more stringent
non-paying account deactivation termination policies. Generally services are
suspended when an account becomes thirty days past due and services are
terminated if an account ages beyond sixty days. The increase in bad debt
expense during fiscal 2002 was primarily related to the acquisitions of
customer accounts of Interland-GA, 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-GA and the restructuring plan,
which included the consolidation of data centers and internal business systems,
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 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.

Depreciation And Amortization

Depreciation and amortization expenses increased 54.4% to $56.7 million during
fiscal 2003 from $36.7 million in fiscal 2002, which had increased 49.4% from
$24.6 million in fiscal 2001. The Companys depreciation and amortization
expenses as a percentage of revenues increased to 53.2% during fiscal 2003 from
36.1% in fiscal 2002 and 40.5% in fiscal 2001. The increase in annual
depreciation and amortization expense is due to (a) $9.8 million of accelerated
depreciation on the assets associated with closed data centers in Seattle, Los
Angeles and Kansas City; (b) $2.3 million of accelerated amortization of
software products acquired through business combinations; and, (c) $9.6 million
additional depreciation and amortization charges associated with acquired
entities and purchased assets. The increase from 2001 to 2002 was primarily
related to depreciation of acquired data centers and equipment, increased
amortization expense 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.

Restructuring Costs

Restructuring costs increased 483.1% to $5.1 million during fiscal 2003 from a
$(1.3) million gain in fiscal 2002, which had decreased 101.2% from $110.3
million in fiscal 2001. During fiscal 2003 the Company adopted a consolidation
and restructuring plan, which led to the closure of redundant data centers and
the consequent establishment and recording of appropriate reserves. The
restructuring costs in fiscal year 2003 were composed of $0.7 million for the
termination of bandwidth connectivity contracts, $1.8 million for facility
lease termination charges, $1.4 million for equipment related charges and $1.2
million for employee related severance expenses. During fiscal 2002 the
Company recognized a write down of $1.3 million against the restructuring
reserve established in August 2001 coincident with the acquisition of
Interland-Georgia. This write down pertained to the settlement of a previously
disputed tenant improvement allowance, settlement of bandwidth connectivity
contracts for less than previously estimated, and the assignment of certain
other data connectivity contracts to a third party.

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 December 31st, 2003, provides for the consolidation of the
Companys operations and elimination of duplicative facilities obtained as a
result of previous business acquisitions. 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-Lived 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.

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During the second quarter of 2003, the Company approved and initiated a program
to exit certain facilities and consolidate those operations into other existing
facilities. This restructuring plan is part of managements continued
plan to streamline the Companys operations and to reduce the long-term
operating costs. In accordance with SFAS No. 146 Accounting for Costs
Associated with Exit or Disposal Activities, costs associated with these
activities have been recognized and measured at their fair value in the period
in which the liabilities are incurred. One-time termination benefits for
employees required to render services until they are terminated in order to
receive termination benefits were recognized ratably over the future service
period. The plan provided for the closure of three data center facilities, a
reduction of those related workforces of approximately 171 employees, and the
termination of bandwidth and data connectivity contracts in place at these and
other facilities. The Company exited all three data centers by June 2003.

The following table shows a reconciliation of the beginning and ending
liability balances from August 31, 2000 through August 31, 2003, related to all
restructuring activities recorded by the Company under both of the
restructuring programs described in the above two paragraphs. These accrued
restructuring charges are reflected in the consolidated balance sheet in
Accrued expenses:

Property,
    
    
    
    
    
    EmployeeLease
    
    plant, and
    
    Other exit
    
    termination
    
    Goodwill andabandonments
    
    equipment
    
    costs
    
    benefits
    
    Intangibles
    
    Total(In thousands)Balance
at August 31, 2000
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Plan charges
    
    
    9,404
    
    
    
    26,915
    
    
    
    3,528
    
    
    
    727
    
    
    
    69,704
    
    
    
    110,278Cash 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
    
    
    $
    
    
    
    $
    12,478Cash paid
    
    
    (1,625
    )
    
    
    
    
    
    
    (487
    )
    
    
    (229
    )
    
    
    
    
    
    
    (2,341
    )Other adjustments
    
    
    538
    
    
    
    
    
    
    
    (1,862
    )
    
    
    
    
    
    
    
    
    
    
    (1,324
    )Balance at August 31, 2002
    
    $
    7,634
    
    
    $
    
    
    
    $
    1,179
    
    
    $
    
    
    
    $
    
    
    
    $
    8,813Plan charges
    
    
    2,061
    
    
    
    1,317
    
    
    
    1,886
    
    
    
    1,317
    
    
    
    
    
    
    
    6,581Cash paid
    
    
    (3,831
    )
    
    
    (227
    )
    
    
    (625
    )
    
    
    (1,165
    )
    
    
    
    
    
    
    (5,848
    )Other adjustments
    
    
    (218
    )
    
    
    46
    
    
    
    (1,216
    )
    
    
    (121
    )
    
    
    
    
    
    
    (1,509
    )Non-cash write down
    
    
    
    
    
    
    (871
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (871
    )Balance at August 31, 2003
    
    $
    5,646
    
    
    $
    265
    
    
    $
    1,224
    
    
    $
    31
    
    
    $
    
    
    
    $
    7,166


Through the twelve months ended August 31, 2003, the Company has incurred $5.1
million in restructuring charges. The fiscal 2003 plan charges consist of $2.1
million in lease termination costs, $1.9 million in bandwidth termination
costs, $1.3 million in employee termination benefits, and $1.3 million in fixed asset
related charges. The Company settled certain data connectivity contract
obligations for amounts less than the original estimates. In connection with
the settlements, the bandwidth termination costs accrual was reduced by $1.2
million and is reflected in the above table in Other adjustments. In
addition, one of the Companys lease abandonment liabilities was reduced by
$0.2 million in connection with the reduction of the Companys obligation due
to a sublease arrangement for the facility. The lease abandonment charge
represents future lease payments for data centers and office facilities being
exited. The other exit costs represent termination penalties for bandwidth and
data connectivity contracts.

Merger And Integration
Costs

Merger and integration costs decreased 93.9% to $0.5 million during fiscal 2003
from $8.1 million in fiscal 2002, which had increased 375.6% from $1.7 million
in fiscal 2001. The Companys merger and integration costs as a percentage of
revenues decreased to 0.5% during fiscal 2003 from 8.0% in fiscal 2002 and 2.8%
in fiscal 2001. The costs incurred in fiscal 2003 related primarily to
employee relocation costs. The costs incurred in fiscal 2002 were comprised of
$7.4 million for employee retention bonuses, relocation costs, and termination
benefits, $0.2 million for legal services, and $0.5 million for other
non-capitalizable costs. The increase from 2001 to 2002 was primarily related
to the Interland-GA and other acquisitions completed in those years. Included
in the $8.1 million of merger and integration expenses for fiscal year 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.

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Goodwill Impairment

As of May 31, 2003 in accordance
with the requirements of SFAS 142 Goodwill and Other
Intangible Assets, the Company
completed its annual goodwill impairment test which entailed comparing the
aggregate market value of the companys outstanding securities plus its
liabilities to the aggregate carrying value of the Companys assets, including
goodwill and other indefinite life intangible assets. The Companys market price of its stock has experienced
significant volatility over the last fiscal year and closed as of August 31,
2003, with a market value significantly less that the value at the beginning of
the fiscal year. Management retained valuation specialists to assist in the
valuation of its tangible and identifiable intangible assets for purposes of
determining the implied fair value of goodwill at May 31, 2003. Upon
completion of the annual assessment, Interland recorded a non-cash impairment
charge of $89.9 million to reduce the carrying value of goodwill to its
estimated fair value of $47.6 million.

Intangible Asset Impairment

The Companys aggressive acquisition strategy over the last two years resulted
in significant accumulated customer and product related intangible asset
balances. The Company continued to monitor the performance of these acquired
identifiable intangible assets, and during the third quarter the Company
determined that the related discounted present value of future cash flows from
its Interliant, AT&T and Burlee customer account acquisitions, as well as
the value of the customer relationship intangible assets from its CommuniTech.Net, iNNERHOST and
Dialtone acquisitions were materially less than previously estimated, due
primarily to customer cancellations and company-initiated account terminations.
As a result of this assessment, the Company determined that these identifiable
intangible assets were worth less than their carrying value, and the Company
consequently recorded a non-cash impairment charge of $13.9 million to reduce
the asset value to its newly-assessed value.

Other Expense (Income),
Net

Other expense (income), net increased 88.8% to $1.3 million during fiscal 2003
from $0.7 million in fiscal 2002, which had decreased 141.6% from $(1.6)
million in fiscal 2001. During fiscal 2003 the Company recognized a net $1.3
million loss related to the disposal of long-lived assets in accordance with
requirements of SFAS No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets. During fiscal 2002 the Company completed the sale of its
remaining Boise Idaho based consumer dial-up accounts and certain data center
assets which resulted in a net loss of $0.7 million. 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.

Loss On Investments, Net

The Company incurred no gains or losses from investment activity during fiscal
2003 or 2002. Loss on investments, net for the fiscal year ended 2001 amounted
to $5.4 million. The loss in 2001 consisted of a loss on an investment 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 the 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 (Expense),
Net

Interest income (expense), net decreased 137.5% to $(0.3) million during fiscal
2003 from $0.8 million in fiscal 2002, which had decreased 91.0% from $8.3
million in fiscal 2001. The Companys interest income (expense), net as a
percentage of revenues, decreased to (0.3)% during fiscal 2003 from 0.7% in
fiscal 2002 and 13.7% in fiscal 2001. Interest income (expense), net consists
of interest income earned on the Companys invested cash and liquid
investments, less interest expense on debt (primarily capital leases). The
cause for the increase in net interest expense is primarily due to the lower
levels of funds available for investment and lower interest rates experienced
during fiscal 2003 and 2002.

Income Tax Provision

The effective income tax expense rate on continuing operations was
approximately 0.4% for fiscal 2003, compared to an effective income tax benefit
rate of 92.4% for fiscal 2002 and benefit of 13.5% for fiscal 2001. Giving
rise to the income tax expense in fiscal 2003 is an adjustment to a previously
recorded tax benefit receivable. The effective rates principally reflect 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 carry back 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

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the ability to carry back tax losses to the previous five years. During the third
quarter of 2002, the Company received approximately $66 million in cash
relating to the carry back 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 carry
forward to future years.

Earnings Before Interest, Taxes,
Depreciation And Amortization (EBITDA)

EBITDA is defined as net income from continuing operations less (i) interest
income or expense, (ii) income taxes, and (iii) depreciation and amortization.
EBITDA is not an indicator of financial performance under generally accepted
accounting principles and may not be comparable to similarly captioned
information reported by other companies. In addition, it does not replace net
income (loss), operating income (loss), or cash flows from operating activities
as indicators of operating performance or liquidity. The effect of taxes and
interest on Interlands net loss is not significant, but depreciation and
amortization, primarily as a result of acquisitions, is significant. The
Company believes that measuring the performance of the business without regard
to non-cash depreciation and amortization can make trends in operating results
more readily apparent, and when considered with other information, assist
investors and other users of the Companys financial statements who wish to
evaluate the Companys ability to generate future cash flows.

The Companys EBITDA loss increased 261.1% to a loss of $121.1 million during
fiscal 2003 from losses of $33.5 million in fiscal 2002, which had decreased
78.0% from losses of $152.1 million in fiscal 2001. The primary cause for the increased
EBITDA loss during fiscal 2003 was the $89.9 million and $13.9 million asset
impairment charges recorded against goodwill and identifiable intangible
assets, respectively.

The decrease in the EBITDA loss from 2001 to 2002 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-GA, CommuniTech.Net and Dialtone.

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The following table reflects the calculation of EBITDA from continuing
operations and a reconciliation to net cash provided by (used in) operating
activities:

Fiscal Year EndedAugust 31,
    
    August 31,
    
    August 31,2003
    
    2002
    
    2001(In thousands)Net loss
    
    $
    (173,879
    )
    
    $
    (11,293
    )
    
    $
    (357,194
    )Depreciation and amortization
    
    
    56,708
    
    
    
    36,719
    
    
    
    24,585Interest expense (income)
    
    
    327
    
    
    
    (752
    )
    
    
    (8,317
    )Income tax expense (benefit)
    
    
    629
    
    
    
    (64,241
    )
    
    
    (22,694
    )Discontinued operations
    
    
    (4,912
    )
    
    
    6,021
    
    
    
    211,477EBITDA from continuing operations
    
    $
    (121,127
    )
    
    $
    (33,546
    )
    
    $
    (152,143
    )Interest (expense) income
    
    
    (327
    )
    
    
    752
    
    
    
    8,317Provision for bad debts
    
    
    7,335
    
    
    
    10,529
    
    
    
    2,232Non-cash restructuring costs
    
    
    
    
    
    
    
    
    
    
    108,528Loss on the sale of assets
    
    
    1,641
    
    
    
    
    
    
    
    Loss on investments, net
    
    
    
    
    
    
    
    
    
    
    5,419Goodwill and intangible impairment
    
    
    103,796
    
    
    
    
    
    
    
    Other non-cash adjustments
    
    
    2,189
    
    
    
    4,271
    
    
    
    (995
    )Income tax (expense) benefit
    
    
    (629
    )
    
    
    64,241
    
    
    
    22,694Changes in assets and liabilities:Income tax recoverable
    
    
    778
    
    
    
    19,008
    
    
    
    Receivables, net
    
    
    (2,323
    )
    
    
    (9,407
    )
    
    
    (30,785
    )Other current assets
    
    
    742
    
    
    
    139
    
    
    
    2,261Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    (9,426
    )Accounts payable, accrued expenses and deferred revenue
    
    
    (24,951
    )
    
    
    (23,481
    )
    
    
    (3,448
    )Other
    
    
    
    
    
    
    
    
    
    
    (121
    )Net cash provided by (used) in operating activities
    
    $
    (32,876
    )
    
    $
    32,506
    
    
    $
    (47,467
    )


Liquidity And Capital Resources

As of August 31, 2003, the Company had $35.3 million in cash and cash
equivalents, $16.3 million in short-and long-term unrestricted investments, and
$18.6 million in short-and long-term, restricted investments representing a
total cash and investment position of $70.2 million. This represents a $77.7
million or 52.5% decrease from the total cash and investment position of $147.9
million at August 31, 2002, which was comprised of $62.7 million in cash and
cash equivalents, $50.9 million in short-and long-term unrestricted investments
and $34.3 million in short-and long-term restricted investments.

The following table discloses aggregate information about the Companys
contractual obligations as of August 31, 2003 and the periods in which payments
are due:

AfterContractual Obligations (in thousands)
    
    Total
    
    1 year
    
    2-3 years
    
    4-5 years
    
    5 yearsOperating leases
    
    $
    1,180
    
    
    $
    892
    
    
    $
    252
    
    
    $
    36
    
    
    $
    Real Property Leases
    
    
    32,548
    
    
    
    5,813
    
    
    
    10,821
    
    
    
    8,766
    
    
    
    7,148Bandwidth Commitments
    
    
    7,174
    
    
    
    4,583
    
    
    
    2,591
    
    
    
    
    
    
    
    Capital leases
    
    
    12,652
    
    
    
    11,263
    
    
    
    1,389
    
    
    
    
    
    
    
    Total Commitments
    
    $
    53,554
    
    
    $
    22,551
    
    
    $
    15,053
    
    
    $
    8,802
    
    
    $
    7,148


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The components of the change in the Companys total cash and investment
position during fiscal 2003 consist of $32.9 million used to fund continuing
operations, $21.5 million used to repay capital lease and long-term debt
obligations, $13.2 million to purchase equipment and related capital
expenditures, $8.6 million for business acquisitions (principally Hostcentric
and Trellix), $1.0 million to re-purchase the Companys common stock, and $3.3
million to fund discontinued operations. Partially offsetting these uses of
cash was $0.4 million of proceeds received from the issuance of the Companys
common stock.

Cash used in operating activities of continuing operations decreased $22.6
million or 40.0% to $32.9 million during fiscal 2003 from $55.5 million during
fiscal 2002 (net of $88.0 million of tax refunds received during that fiscal
year). The reduction in cash used in continuing operations is reflective of
the Companys integration initiatives that reduced facility, bandwidth
connectivity, and employee-related costs. Cash provided by investing
activities increased $101.2 million or 143.6% to $30.7 million during fiscal
2003 from cash used in investing activities of $(70.5) million during fiscal
2002. The increase in cash provided by investing activities is primarily
related to changes in the Companys acquisition philosophy in that recent
acquisitions (specifically Hostcentric and Trellix) have been financed
principally by the issuance of the Companys common stock. Cash used in
financing activities decreased $4.9 million or 18.3% to ($22.1) million during
fiscal 2003 from $(27.0) million during fiscal 2002. The decrease in cash used
in financing activities is due to a significant reduction in the volume of
repurchases of the Companys common stock. Net cash used in discontinued
operations decreased $11.8 million or 78.4% to $3.3 million during fiscal 2003
from cash used in discontinued operations of $(15.0) million during fiscal
2002. The reduction in cash used related to discontinued operations reflects
the continued winding down of the computer products and services businesses.
The Company expects to continue to experience a net use of cash in operating
activities in fiscal year 2004 due to the costs of implementing its mainstream
market initiative.

As of August 31, 2002, the Company had $147.9 million in cash and cash
equivalents, investments and restricted investments. This represented a
decrease of $60.2 million compared to August 31, 2001. Cash used during the
fiscal year 2002 included $55.5 million for operations (net of an $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
operation 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 US Bank
under which the Company executed a $5.4 million credit agreement. This
agreement had a stated interest rate of prime less 100 basis points or 3.25%.
During the quarter ended February 28, 2003, $5.4 million was paid and the loan
was closed. The payoff of this loan released $6.7 million of collateralized
cash that was pledged under this agreement.

In July 2001, the Company entered into a financing arrangement with U.S.
Bancorp Oliver-Allen Technology Leasing for a sale and leaseback of up to $14.6
million for certain equipment, primarily computer hardware. The stated interest
rate on the facility is 5.75%. In January 2002, the Company repurchased
certain of the leased assets from U.S. Bancorp Oliver-Allen Technology Leasing
at a total cost of $2.9 million. In connection with the repurchase,
approximately $3.3 million of cash and equivalents became unrestricted. As of
August 31, 2003, the principal balance on the facility was $3.8 million. As of
August 31, 2003, the Company has pledged $7.2 million as collateral for this
agreement. The restrictions prevent the Company from utilizing the related cash
and cash equivalents until all of its obligations under the lease are
satisfied. As the company exited various facilities during the year ended
August 31, 2003, certain assets that were leased under this facility were
transferred to different locations. The Company has been unable to determine
the precise location of some of the assets. Under the

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requirements of the agreement, the Company has informed the bank of this
situation and the Company has received a waiver-letter from U.S. Bancorp
Oliver-Allen waiving any default of the lease agreement that may have occurred
due to the inability to locate some of the assets.

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 10.0%. In connection with the acquisition of iNNERHOST, the Company
assumed this obligation, which had an outstanding balance of $0.5 million at
August 31, 2003. 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 12.0% and an outstanding balance of $0.1 million
at August 31, 2003.

The Company made capital expenditures of $13.2 million during fiscal 2003,
generally for server equipment and related software, integration and
restructuring activities, and other expenditures related to new customer
growth.

On January 3, 2003, the Company acquired Trellix Corporation, a privately held
developer of software-based Web site solutions. Founded in 1995, Trellix is a
provider of private-label Web site publishing solutions, integrated business
services, and low-cost hosting technology. The primary reason for the
acquisition is that Trellix offers a suite of site-building tools and services
that enable users to create professional Web sites. Trellixs product line
offers an expansion of the existing Interland product line. Trellixs
financial results are included in Interlands financial results beginning in
January 2003. The aggregate purchase price was approximately $12.2 million
consisting of $4.75 million in cash, 300,000 shares of Interland stock, and
600,000 warrants to purchase shares of Interland stock at a price of $50.00 per
warrant. The value of the common shares issued was determined based on the
closing price of Interland common stock on NASDAQ on January 3, 2003. The
warrants at the date of acquisition were valued at $5.50 each using the
Black-Scholes pricing model. The Company spent $0.8 million
during FY 2003 for
the integration of Trellix and the related mainstream-market deployment. In
connection with the acquisition, the Company also assumed $0.2 million in
capital lease obligations as well as a $2.5 million working capital deficit.

On June 13, 2003, the Company acquired Hostcentric, Inc., a privately held
provider of a broad range of Web hosting services to small business and
enterprise customers. The aggregate purchase price was $25.5 million in cash
and stock. The Company paid $4.7 million in cash and issued approximately 1.36
million shares of Interland stock valued at $20.4 million, net of $0.4 million
direct issue costs.

The Company implemented an integration and transition program designed to
reduce future operating expenses. These expenditures, totaling $23.4 million
during fiscal 2003 ($7.1 million for capital expenditures and $16.3 million
for operating expenses), were for the purpose of streamlining the Companys
infrastructure, completing the integration of acquisitions, upgrading internal
systems, divesting acquired data centers, and consolidating operations

The Companys continued future success is dependent upon its ability to achieve
and sustain positive cash flow prior to the depletion of cash resources and to
raise funds, thereafter, if needed. Nonetheless, the Company believes it has
adequate cash and liquid resources to fund operations and planned capital
expenditures through at least the next 18 to 24 months.

Reverse Stock Split

The Company implemented a 1-for-10 reverse stock split that went into effect as
of the close of the market on August 1, 2003. Wells Fargo Bank Minnesota, N.
A. was retained to act as administrator for the reverse stock split.
Management believes that the pre-split share count of approximately 162.6
million shares was too high for a company of Interlands size, and that a
reduced share count will permit meaningful changes in net income in the future
to be reflected in meaningful changes in Earning Per Share. A higher price per
share is expected to permit certain institution investors, prohibited by their
governing rules from purchasing stocks at prices below a stated threshold, to
invest in the Companys stock and will also reduce transaction costs for those
wishing to purchase significant dollar amounts of the Companys stock.

No fractional shares of common stock were issued in connection with the reverse
stock split. In instances where the reverse stock split would result in a
shareholder of record becoming a holder of a fractional interest in a share of
common stock, the number of shares held by such record shareholder was rounded
down to the product of (i) the closing sales price of the common stock on the
effective date of the reverse stock split, multiplied by (ii) the fractional
interest.

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Stock Repurchase Program

In March 2003, the board of directors authorized a stock repurchase program to
acquire outstanding common stock. Under the program, up to $10.0 million of
common stock could be reacquired over the next year. Since its announcement of
the authorization of a share purchase program by its board of directors, the
Company utilized approximately $1.0 million to buy back approximately 85,000
shares of its outstanding stock.

Recently Issued Accounting Standards

In November 2002, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board (FASB) reached a consensus on EITF No. 00-21,
Accounting for Revenue Arrangements with Multiple Element Deliverables. The
Issue addresses how to account for arrangements that may involve the delivery
or performance of multiple products, services and/or rights to use assets.
Revenue arrangements with multiple deliverables should be divided into separate
units of accounting if the deliverables in the arrangement meet certain
criteria. Arrangement consideration should be allocated among the separate
units of accounting based on their relative fair values. The Issue also
supersedes certain guidance set forth in Staff Accounting Bulletin No. 101
(SAB 101), Revenue Recognition in Financial Statements. The final consensus
is applicable to agreements entered into in quarters beginning after June 15,
2003, with early adoption permitted. Additionally, companies are permitted to
apply the consensus guidance to all existing arrangements as a cumulative
effect of a change in accounting principle. The Company adopted this new
pronouncement effective September 1, 2003, on a prospective basis. The impact
of this adoption did not have a material impact on Interlands consolidated
financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 clarified the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated support from
other parties. FIN 46 requires existing unconsolidated variable interest
entities to be consolidated by their primary beneficiaries if the entities do
not effectively disperse risks among parties involved. All companies with
variable interests in variable interest entities created after January 31,
2003, must apply the provisions of this Interpretation to those entities
immediately. A public company with a variable interest in a variable interest
entity created before February 1, 2003, must apply the provisions of this
Interpretation to that entity no later than the beginning of the first interim
or annual reporting period after December 15, 2003. For variable interest
entities for which an enterprise holds a variable interest that it acquired
before February 1, 2003, FIN 46 may be applied by restating previously issued
financial statements or prospectively from the date of adoption. The Company
has evaluated its investments and concluded that none of the Companys
investments meets the requirements for consideration under FIN 46.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective for the first quarter
of fiscal year 2004. The adoption of this standard on September 1, 2003 did
not have a material impact on Interlands consolidated financial statements.

Risk Factors

You should carefully consider the following factors and all other information
contained in thisForm 10-Kfor the fiscal year ending August 31, 2003 before
you make any investment decisions with respect to the Companys securities.
The risks and uncertainties described below may not be the only risks the
Company faces.

Interland has incurred losses since inception and could incur losses in the future.

Interland has incurred net losses and losses from operations for all but one of
each quarterly period from its inception through the fourth quarter of fiscal
2003. A number of factors could increase its operating expenses, such as:



| |  |  | Adapting network infrastructure and administrative resources
to accommodate additional customers and future growth;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | Developing products, distribution, marketing, and management for the mainstream market;
| | - |  | ---------------------------------------------------------------------------------------

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| |  |  | Broadening customer technical support capabilities; and
| | - |  | -------------------------------------------------------



| |  |  | Improving network security features.
| | - |  | ------------------------------------

To the extent that increases in expenses are not offset by increases in
revenues, operating losses will increase.

Ours is a recurring-revenue subscriber business and as such the effects of a net loss of monthly recurring revenue are magnified.

A large majority of our revenue is derived from the monthly recurring charges
(MRC) incurred by owners of hosted websites. Accordingly, the termination of
a single account paying $30.00 per month will affect revenue every month in the
future. The loss of such a customer at the beginning of a fiscal year will
result in a twelve-fold reduction in revenue for that fiscal year, and the loss
of even one such customer each month of the fiscal year will result in a
diminution of 78 times the monthly recurring revenue, or $2,340 over the entire
fiscal year. Absent the addition of customers through acquisitions, Interland
has consistently incurred a net loss in MRC, and this situation may continue
with material negative effects on reported revenue and net income. Although
reductions in MRC may be offset for a time by increases in revenue derived from
one-time or non-recurring charges, the compounding effect of MRC losses will
almost certainly eventually result in a meaningful reduction of reported
revenue. Moreover, because of Interlands relatively low percentage of
variable costs, a concomitantly high percentage of the amount of revenue loss
results in a loss of EBITDA and of net income. There can be no assurance
that Interlands efforts to reduce the loss of MRC will be successful.

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.

Because the Company has grown through acquisition and its past operating
results reflect the costs of integrating these acquisitions, historical results
are not representative of future expected operating results. Furthermore, the
Companys historical annual financial results reflect only the partial impacts
of recent acquisitions. In addition, because the Company will be seeking to
drive revenue growth primarily through its mainstream market initiative,
which is a new market for the Company, it will be challenging to predict future
revenues. As a result, investors and their advisors will find it challenging
to predict future operating income.

Interland has a limited operating history and its business model is still evolving, which makes it difficult to evaluate its prospects.

Interlands limited operating history makes evaluating its business operations
and prospects difficult. Its range of service offerings has changed since
inception and its business model is still developing. Interland has changed
from being primarily a seller of personal computers and related accessories to
being primarily a Web hosting and Web based value added business solutions
provider to small- and medium-sized businesses company. Because some of its
services are new, the market for them is uncertain. As a result, the revenues
and income potential of its business, as well as the potential benefits of its
acquisitions, may be difficult to evaluate.

Quarterly and annual operating results may fluctuate, which could cause Interlands stock price to be volatile.

Past operating results have fluctuated significantly on a quarterly and an
annual basis. Quarterly and annual operating results may continue to
significantly fluctuate due to a wide variety of factors. Because of these
fluctuations, comparing operating results from period to period is not
necessarily meaningful, and it would not be meaningful to rely upon such
comparisons as an indicator of future performance. Factors that may cause its
operating results to fluctuate include, but are not limited to:



| |  |  | Demand for and market acceptance of the Companys services and products;
| | - |  | ------------------------------------------------------------------------



| |  |  | Introduction of new services or enhancements by Interland or its competitors;
| | - |  | -----------------------------------------------------------------------------



| |  |  | Costs of implementing new network security features, CRM systems, and billing modules;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | Technical difficulties or system downtime affecting the
Internet generally or its hosting operations specifically;
| | - |  | ------------------------------------------------------------------------------------------------------------------

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| |  |  | Customer retention;
| | - |  | -------------------



| |  |  | Increased competition and consolidation within the Web hosting and applications hosting markets;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | Changes in its pricing policies and the pricing policies of its competitors; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | Gains or losses of key strategic partner relationships.
| | - |  | -------------------------------------------------------

Interland cannot provide any assurances that it will succeed in its plans to
increase the size of its customer base, the amount of services it offers, or
its revenues during the next fiscal year and beyond. In addition, relatively
large portions of its expenses are fixed in the short term, and therefore its
results of operations are particularly sensitive to fluctuations in revenues.
Also, if it cannot continue using third-party products in its service
offerings, its service development costs could increase significantly.

Interlands stock price may be volatile which could cause an investment in its common stock to decrease significantly.

The market price of its common stock has experienced a significant decline. The
price has been and is likely to continue to be highly volatile. The following
are examples of factors or developments that would likely cause the Companys
stock price to continue to be volatile:



| |  |  | Variations in operating results and analyst earnings estimates;
| | - |  | ---------------------------------------------------------------



| |  |  | The volatility of stock within the sectors within which it conducts business;
| | - |  | -----------------------------------------------------------------------------



| |  |  | Announcements by Interland or its competitors regarding introduction of new services;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | General decline in economic conditions;
| | - |  | ---------------------------------------



| |  |  | Reductions in the volume of trading in its common stock and;
| | - |  | ------------------------------------------------------------



| |  |  | The Companys inability to reduce the rate of account
cancellations, or to increase the rate of account additions, or
both.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------

During the 52 weeks ended August 31, 2003, the high and low closing price for
Interland common stock on NASDAQ was $28.30 and $6.50, respectively.

Interland operates in a new and evolving market with uncertain prospects for growth and may not be able to generate and sustain growth in its customer base.

The market for Web hosting and applications hosting services for small-and-medium-sized businesses, and especially for the mainstream solutions, has only
recently begun to develop and is evolving rapidly. Interlands future growth,
if any, will depend upon the willingness of small-and-medium-sized businesses
to purchase Web and applications services, Interlands ability to increase or
at least maintain its average monthly revenue per user (ARPU), and its
ability to retain its core customer base. For the 2003 fiscal year,
Interlands average monthly revenue per customer account was $27.76 for shared
hosting services and $411.54 for dedicated hosting services. These figures,
when compared to those of prior periods, reflect the stability of the shared
hosting ARPU and the decline in dedicated hosting ARPUs made possible by sharp
declines in the past few years of hardware and bandwidth prices, enabling the
company to lower dedicated service prices while maintaining attractive margins.
For the 2003 fiscal year, Interlands average monthly customer turnover was
4.4% for shared hosting services and 5.3% for dedicated hosting services. In
the first quarter of fiscal year 2003, the companys average monthly churn was
less than 3.5% for shared hosting and less than 4.0% for dedicated hosting. The
higher levels of customer churn experienced in the subsequent quarters are
believed to be the direct result of the companys integration activities in the
second and third quarters of fiscal 2003 when the company shut down seven of
its data center facilities, moved over 5,000 servers to its current facilities
and migrated more than 30% of the shared customer base. The market for
Interlands services may not develop further and consumers may not widely adopt
its services. If this market fails to develop further or develops more slowly
than expected, or if Interlands services do not achieve broader market

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acceptance, Interland will not be able to grow its customer base. In addition,
Interland must be able to differentiate itself from its competition through its
service offerings and brand recognition. These activities may be more
expensive than Interland anticipates, and Interland may not succeed in
differentiating itself from its competitors, achieving market acceptance of its
services, or selling additional services to its existing customer base.

Interlands ability to significantly organically grow revenue is
dependent on successful penetration of the mainstream market of small-and-medium-sized
businesses lacking an effective Web presence.

The mainstream market of small-and-medium-sized businesses lacking an
effective Web presence has only been evaluated with limited market research and
trials. In addition, the Company is dependent upon the successful broader
market introduction of the Companys software-based Web site development
product offerings. Delays in seizing this market initiative and/or in the
related product introduction will limit the Companys future revenue growth.

Interlands mainstream market initiative could cause losses for Interland, particularly within the next fiscal year.

The Company has initiated a product line and marketing program directed at the
mainstream market of SMBs without an effective Web presence. This initiative
is described in detail at Item 1 - Business. The Company is committing
substantial resources to this initiative, and if it is unsuccessful in
obtaining a significant number of new customers in this market, the Company
could suffer substantial net losses. In addition, this is a new product line,
and the products and services in this line may prove unprofitable to the
Company unless it is successful in implementing them and achieving economies of
scale. Even if the Company is successful in these efforts, the Company
anticipates that the introduction of the new line will contribute net losses
and negative cash flow from continuing operations through at least fiscal
year 2004 while the Company completes the implementation of the new services
and achieves a sufficient volume of business to cover the additional fixed
costs.

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 continue to concentrate on serving the small- and
medium-sized business market. This market contains many businesses that may
not be successful, and consequently 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 competitor with a lower pricing structure. 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:



| |  |  | Increased expenditures on sales and marketing programs to replace
failing customers;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Capitalizing on infrastructure 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;
and,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 could decrease
revenues and profitability.

Interland could incur liabilities in the future relating to its PC Systems business, which could cause additional operating losses.

Interland could incur liabilities from the sale of the PC Systems business to
GTG PC. According to the terms of its agreement with GTG PC, it retained
liabilities relating to the operation of the PC systems business prior to the

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closing of the transaction including liabilities for taxes, contingent
liabilities and liabilities for accounts payable accrued prior to the closing.
It also agreed to indemnify GTG PC and its affiliates for any breach of its
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. Its 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 its representations, warranties and covenants contained in
the agreement with GTG PC. Accordingly, it could be required in the future to
make payments to GTG PC and its affiliates in accordance with the agreement,
which could adversely affect its future results of operations and cash flows.
To date it has not had to satisfy any such claims.

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, which
could hinder Interlands ability to successfully market its 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, the Company expects that it will face
additional competition from existing competitors and new market entrants in the
future. Many of Interlands current and potential 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; and,
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | Devote greater resources to the marketing and sale of their services
and adopt more aggressive pricing policies than the Company can.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------

Current and potential competitors in the market include Web hosting service
providers, applications hosting providers, Internet service providers,
telecommunications companies, large information technology firms and computer
hardware suppliers. These competitors may operate in one or more of these areas
and include companies such as NTT/Verio, Affinity Internet, and Earthlink.

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 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 its products and services are offered.
Interland currently is, and in the future may be, involved in legal disputes
relating to the validity or alleged infringement of its intellectual property
rights or those of a third party. 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, any adverse decisions could subject it to significant liabilities,
require it to seek licenses from others, prevent it from using, licensing or
selling certain of its products and services, or cause severe disruptions to
operations or the markets in which it competes which could decrease
profitability.

Periodically, it is made aware of claims, or potential claims, that technology
it used in its discontinued operations may have infringed 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
several 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.

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Unfavorable results of existing litigation may cause Interland to have additional expenses or operating losses.

Interland is defending an employee class action lawsuit filed in the U.S.
District Court for Idaho. In this case, five individual plaintiffs claim that
when they were employees of Micron Electronics Inc. (MEI) between 1999 and
April 2001, 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 opt in period for potential class members
has closed and discovery continues on the merits of the case. Interland
believes that expenses or losses associated with the case will not have a
material adverse effect on Interland. This potential liability remains with
Interland even though it sold the PC Systems business.

In February of 2003, the Company filed a lawsuit in Cobb County, Georgia
against Mr. Gabriel Murphy, one of the former principals of Interlands
subsidiary, CommuniTech.Net, Inc. (Communitech), which was acquired by
Interland in February 2002. The Companys lawsuit claims, among other things,
that Mr. Murphy breached certain covenants under his employee agreement and
also demands payment from Mr. Murphy under his delinquent $2.7 million
promissory notes. 273,526 shares of the Companys common stock collateralize
these notes and the receivable balance is shown on the balance sheet as a
reduction in equity.

Messrs. Heitman and Murphy filed a lawsuit against Interland, its CEO, Mr. Joel
Kocher, and Communitech, in Jackson County, Missouri claiming, among other
things, that Interland acted unreasonably in failing to have the S-3
registration statement declared effective by the SEC on a timely basis and
claiming that Interland and/or Mr. Kocher made inaccurate disclosures in
connection with Interlands acquisition of Communitech. The complaint asks for
compensatory and punitive damages in an unspecified amount. Interland believes
that these claims are without merit and will not have a material adverse effect
on Interland and intends to vigorously defend the claims.

On March 14, 2003, Halo Management, LLC, filed a suit against Interland in the
U.S. District Court for the Northern District of California. The suit alleges
that Interlands use of blueHALO (U.S. Patent and Trademark Office Serial No.
78/135,621) to describe its proprietary Web hosting architecture infringes on
the plaintiffs registered trademark Halo (U.S. Patent and Trademark Office
Serial No. 75/870,390; Registration No. 2,586,017). The suit seeks a
permanent injunction against Interlands use of its blueHALO mark and money
damages. In a motion after the suit was filed, the plaintiff also requested
a preliminary injunction against Interlands use of its blueHALO mark. On
November 17, 2003 the court denied plaintiffs motion. In rendering its
opinion, the court specifically held that the plaintiff had engaged in
so-called naked licensing and, as a consequence, had forfeited its rights
in the HALO trademark. Consequently, Interland continues to believe it has
meritorious defenses, plans to continue to defend the matter vigorously and
believes that no material adverse effect on Interland will occur as a result of
this litigation.

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. As of August
31, 2003, the Company had an aggregate amount of $1.1 million accrued for such
matters.

The Company is also a defendant in a number of other lawsuits which the Company
regards as minor and unlikely to result in any material payment; nonetheless,
the outcome of litigation may not be assured, and the Companys cash balances
could be materially affected by an adverse judgment.

In accordance with SFAS No. 5 Accounting for Contingencies, the Company
believes it has adequately reserved for the contingencies arising from the
above legal matters where an outcome was deemed to be 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, its financial condition
or its 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

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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, information
technology, engineering, and technical support resources could adversely affect
its ability to remain competitive in its markets. The Company has and may
continue to face the loss of key personnel, which could limit the ability of
the Company to develop and market its products and services.

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
and continues to significantly benefit 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 the
Company.

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. The Company has also
experienced, and in the future it may continue to experience, delays or
interruptions in service as a result of the accidental or intentional actions
of Internet users, current and former employees, or others. 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 network vulnerability to security breaches could cause disruptions in its service, liability to third parties, or loss of customers.

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 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.

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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 or hardware defects could harm its business and reputation.

The Companys service offerings depend on complex software and hardware,
including proprietary software tools and software licensed from third parties.
Complex software and hardware may contain defects, particularly when first
introduced or when new versions are released. The Company may not discover
software or hardware defects that affect its new or current services or
enhancements until after they are deployed. Although Interland has not
experienced any material software or hardware defects to date, it is possible
that defects may exist or occur in the future. 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 rate of growth of Internet use.

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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 such legislation. 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. 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. 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.

Resolving remaining weaknesses in disclosure and internal controls could require more time than anticipated, distract managements attention from Interlands ongoing operations, or prove to be more costly than expected.

Interland disclosed in its Form 10-K for the fiscal year ending August 31, 2002
that it had material weaknesses in its internal and disclosure controls and
procedures. In Part III  Item 14 of this Form 10-K, the Company reports
significant progress in most areas. In addition, management believes that its
use of alternative mitigating disclosure and reporting processes have been
sufficient to provide it with a good faith belief that there are no material
inaccuracies or omissions from its most recent SEC filings. However,
management recognizes that further improvements in its disclosure and internal
controls and procedures are appropriate. The implementation of these remaining
improvements will be time consuming and expensive. In this regard management
is unable to estimate the financial impact of:



| |  | A delay in the implementation of remaining necessary internal and disclosure control improvements;
|- |  | --------------------------------------------------------------------------------------------------



| |  | The effects of managements distraction caused by the implementation of the procedural improvements; and,
|- |  | ---------------------------------------------------------------------------------------------------------



| |  | The ongoing cost inefficiencies caused by employment of mitigating controls and procedures necessary to address the
remaining existing weaknesses in disclosure and internal controls pending completion of the requisite improvements.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Furthermore, uncertainty over these factors and the delay in implementation may
cause additional volatility in Interlands stock price.

Substantial future sales of shares by shareholders could negatively affect Interlands stock price.

If the Companys shareholders sell substantial amounts of its common stock in
the public market, the market price of its common stock could
decline. Only a small portion of the Companys issued and
outstanding shares is subject to any restriction on resale.







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,
2003, approximately 95% of the Companys liquid investments mature within three
months and 5% mature within one year. The majority of the Companys long-term
debt is comprised of fixed-rate capital leases used to finance equipment
purchases. In this regard the underlying debt instruments are not marketable
and, therefore, there is no

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associated market risk. As of August 31, 2003, 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, 2003, the
Companys investment portfolio included fixed rate securities with an estimated
fair value of $46 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 (exclusive of capital leases) 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 estimated fair value of the Companys long-term debt at August 31,
2003 was $1.7 million.

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ITEM 8. Financial Statements And supplementary Data

Index To consolidated Financial Statements

PageConsolidated Financial Statements:Consolidated Statements of Operations for the Fiscal Years Ended August 31, 2003, 2002, and 2001
    
    
    40Consolidated Balance Sheets as of August 31, 2003 and 2002
    
    
    41Consolidated Statements of Shareholders Equity for the Fiscal Years Ended
August 31, 2003, 2002, and 2001
    
    
    42Consolidated Statements of Cash Flows for the Fiscal Years Ended August 31, 2003, 2002, and 2001
    
    
    43Notes to Consolidated Financial Statements
    
    
    44Report of Independent Auditors
    
    
    73Quarterly Financial Information (Unaudited)
    
    
    74Financial Statement Schedule:Schedule II-Valuation and Qualifying Accounts for the Fiscal Years August 31, 2003, 2002, and 2001
    
    
    90


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Interland, Inc.
Consolidated Statements of Operations(In thousands except per share amounts)

Fiscal Year EndedAugust 31,
    
    August 31,
    
    August 31,2003
    
    2002
    
    2001Revenues
    
    $
    106,638
    
    
    $
    101,628
    
    
    $
    60,752Operating costs and expenses:Network operating costs, exclusive of depreciation shown below
    
    
    32,856
    
    
    
    34,586
    
    
    
    28,067Sales and marketing, exclusive of depreciation shown below
    
    
    20,269
    
    
    
    26,826
    
    
    
    23,528Technical support, exclusive of depreciation shown below
    
    
    15,709
    
    
    
    16,845
    
    
    
    11,870General and administrative, exclusive of depreciation shown below
    
    
    40,948
    
    
    
    38,893
    
    
    
    31,427Bad debt expense
    
    
    7,335
    
    
    
    10,529
    
    
    
    2,232Depreciation and amortization
    
    
    56,708
    
    
    
    36,719
    
    
    
    24,585Restructuring costs
    
    
    5,072
    
    
    
    (1,324
    )
    
    
    110,278Merger and integration costs
    
    
    494
    
    
    
    8,138
    
    
    
    1,711Goodwill impairment
    
    
    89,928
    
    
    
    
    
    
    
    Intangible asset impairment
    
    
    13,868
    
    
    
    
    
    
    
    Other expense (income), net
    
    
    1,286
    
    
    
    681
    
    
    
    (1,637
    )Total operating costs and expenses
    
    
    284,473
    
    
    
    171,893
    
    
    
    232,061Operating loss
    
    
    (177,835
    )
    
    
    (70,265
    )
    
    
    (171,309
    )Loss on investments, net
    
    
    
    
    
    
    
    
    
    
    (5,419
    )Interest income (expense), net
    
    
    (327
    )
    
    
    752
    
    
    
    8,317Loss from continuing operations before taxes
    
    
    (178,162
    )
    
    
    (69,513
    )
    
    
    (168,411
    )Income tax benefit (expense)
    
    
    (629
    )
    
    
    64,241
    
    
    
    22,694Net loss from continuing operations
    
    
    (178,791
    )
    
    
    (5,272
    )
    
    
    (145,717
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (2,239
    )Gain (loss) on disposal of discontinued operations, net of tax
    
    
    4,912
    
    
    
    (6,021
    )
    
    
    (209,238
    )Total income (loss) from discontinued operations
    
    
    4,912
    
    
    
    (6,021
    )
    
    
    (211,477
    )Net loss
    
    $
    (173,879
    )
    
    $
    (11,293
    )
    
    $
    (357,194
    )Basic and diluted net income (loss) per share:Continuing operations
    
    $
    (12.19
    )
    
    $
    (0.38
    )
    
    $
    (14.63
    )Discontinued operations
    
    
    0.34
    
    
    
    (0.44
    )
    
    
    (21.23
    )$
    (11.85
    )
    
    $
    (0.82
    )
    
    $
    (35.86
    )Number of shares used in per share calculation:Basic and Diluted
    
    
    14,668
    
    
    
    13,739
    
    
    
    9,960


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

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Interland, Inc.
Consolidated Balance Sheets(In thousands, except shares and per share amounts)

As ofAugust 31,
    
    August 31,2003
    
    2002AssetsCash and cash equivalents
    
    $
    35,255
    
    
    $
    62,693Short-term investments
    
    
    16,300
    
    
    
    43,388Receivables, net of the allowance of $373 and $3,843, respectively
    
    
    5,160
    
    
    
    9,139Income taxes recoverable
    
    
    612
    
    
    
    2,019Other current assets
    
    
    3,210
    
    
    
    3,292Restricted investments
    
    
    362
    
    
    
    6,894Total current assets
    
    
    60,899
    
    
    
    127,425Restricted investments
    
    
    18,264
    
    
    
    27,409Property plant and equipment, net
    
    
    35,935
    
    
    
    59,058Goodwill
    
    
    66,646
    
    
    
    120,011Intangibles, net
    
    
    24,791
    
    
    
    53,250Investments held to maturity
    
    
    
    
    
    
    7,512Other assets
    
    
    507
    
    
    
    613Total assets
    
    $
    207,042
    
    
    $
    395,278Liabilities and shareholders equityAccounts payable
    
    $
    1,488
    
    
    $
    3,918Accrued expenses
    
    
    23,655
    
    
    
    30,364Current portion of long-term debt and capital lease obligations
    
    
    10,845
    
    
    
    19,157Deferred revenue
    
    
    10,991
    
    
    
    19,629Total current liabilities
    
    
    46,979
    
    
    
    73,068Long-term debt and capital lease obligations
    
    
    1,654
    
    
    
    12,009Deferred revenue, long-term
    
    
    354
    
    
    
    1,195Other liabilities
    
    
    5,397
    
    
    
    11,276Total liabilities
    
    
    54,384
    
    
    
    97,548Commitments and contingencies (Note 21 & 22)Shareholders equityCommon stock, $.01 par value, authorized 21 million shares,
issued and outstanding 16.3 million and 14.1 million shares, respectively
    
    
    164
    
    
    
    1,413Additional capital
    
    
    322,523
    
    
    
    296,949Warrants
    
    
    4,990
    
    
    
    1,690Deferred compensation
    
    
    (1,046
    )
    
    
    (2,228
    )Note receivable from shareholder
    
    
    (2,735
    )
    
    
    (2,735
    )Retained earnings / (accumulated deficit)
    
    
    (171,238
    )
    
    
    2,641Total shareholders equity
    
    
    152,658
    
    
    
    297,730Total liabilities and shareholders equity
    
    $
    207,042
    
    
    $
    395,278


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)

Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalAdditional
    
    
    
    
    
    Deferred
    
    Note Receivable
    
    Retained
    
    Shareholders'Shares
    
    Amount
    
    Capital
    
    Warrants
    
    Compensation
    
    From Shareholder
    
    Earnings
    
    EquityBalance, August 31, 2000
    
    
    9,666
    
    
    $
    967
    
    
    $
    134,485
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    371,128
    
    
    $
    506,580Stock and options issued to purchase Interland-Georgia
    
    
    4,090
    
    
    
    409
    
    
    
    120,885
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121,294Stock sold
    
    
    19
    
    
    
    2
    
    
    
    607
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    609Stock options exercised
    
    
    1
    
    
    
    
    
    
    
    8,081
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,081Issuance of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,657
    )
    
    
    
    
    
    
    
    
    
    
    (3,657
    )Sale of property and patents to MTI
    
    
    
    
    
    
    
    
    
    
    18,680
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,680Warrants issued to purchase Interland-Georgia
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,690
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,690Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    347
    
    
    
    
    
    
    
    
    
    
    
    347Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (357,194
    )
    
    
    (357,194
    )Balance, August 31, 2001
    
    
    13,776
    
    
    $
    1,378
    
    
    $
    282,738
    
    
    $
    1,690
    
    
    $
    (3,310
    )
    
    $
    
    
    
    $
    13,934
    
    
    $
    296,430Stock issued to purchase:CommuniTech
    
    
    538
    
    
    
    54
    
    
    
    10,727
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,781iNNERHOST
    
    
    417
    
    
    
    42
    
    
    
    12,222
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,264Stock sold
    
    
    22
    
    
    
    2
    
    
    
    324
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    326Stock options exercised
    
    
    65
    
    
    
    5
    
    
    
    803
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    808Stock received in settlement of note
    
    
    (24
    )
    
    
    (2
    )
    
    
    (404
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (406
    )Repurchase and retirement of stock
    
    
    (663
    )
    
    
    (66
    )
    
    
    (9,713
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,779
    )Non-cash compensation
    
    
    
    
    
    
    
    
    
    
    252
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    252Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,082
    
    
    
    
    
    
    
    
    
    
    
    1,082Issuance of note receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,735
    )
    
    
    
    
    
    
    (2,735
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,293
    )
    
    
    (11,293
    )Balance, August 31, 2002
    
    
    14,131
    
    
    $
    1,413
    
    
    $
    296,949
    
    
    $
    1,690
    
    
    $
    (2,228
    )
    
    $
    (2,735
    )
    
    $
    2,641
    
    
    $
    297,730Stock issued to purchase:iNNERHOST
    
    
    553
    
    
    
    55
    
    
    
    (72
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17
    )Trellix
    
    
    300
    
    
    
    30
    
    
    
    4,866
    
    
    
    3,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,196Hostcentric
    
    
    1,357
    
    
    
    136
    
    
    
    20,302
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,438Stock sold
    
    
    34
    
    
    
    4
    
    
    
    290
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    294Stock options exercised
    
    
    23
    
    
    
    2
    
    
    
    190
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192Repurchase and retirement of stock
    
    
    (85
    )
    
    
    (8
    )
    
    
    (976
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (984
    )Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    (607
    )
    
    
    
    
    
    
    1,182
    
    
    
    
    
    
    
    
    
    
    
    575Non-cash compensation
    
    
    9
    
    
    
    1
    
    
    
    112
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113Adjustment 1-for-10 reverse stock split
    
    
    
    
    
    
    (1,469
    )
    
    
    1,469
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (173,879
    )
    
    
    (173,879
    )Balance, August 31, 2003
    
    
    16,322
    
    
    $
    164
    
    
    $
    322,523
    
    
    $
    4,990
    
    
    $
    (1,046
    )
    
    $
    (2,735
    )
    
    $
    (171,238
    )
    
    $
    152,658


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

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Interland, Inc.
Consolidated Cash Flow Statements(In thousands)

Fiscal Year EndedAugust 31,
    
    August 31,
    
    August 31,2003
    
    2002
    
    2001CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (173,879
    )
    
    $
    (11,293
    )
    
    $
    (357,194
    )Adjustments to reconcile net loss to net cash provided by (used in)
operating activities from continuing operations:(Income)/Loss from discontinued operations
    
    
    (4,912
    )
    
    
    6,021
    
    
    
    211,477Non-cash restructuring costs
    
    
    
    
    
    
    
    
    
    
    108,528Loss on sale of assets
    
    
    1,641
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    56,708
    
    
    
    36,719
    
    
    
    24,585Loss on investments, net
    
    
    
    
    
    
    
    
    
    
    5,419Provision for bad debts
    
    
    7,335
    
    
    
    10,529
    
    
    
    2,232Goodwill and intangible asset impairment
    
    
    103,796
    
    
    
    
    
    
    
    Other non-cash adjustments
    
    
    2,189
    
    
    
    4,271
    
    
    
    (995
    )Changes in operating assets and liabilities
net of effect of acquisitions:Receivables, net
    
    
    (2,323
    )
    
    
    (9,407
    )
    
    
    (30,785
    )Income tax recoverable
    
    
    778
    
    
    
    19,008
    
    
    
    Other current assets
    
    
    742
    
    
    
    139
    
    
    
    2,261Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    (9,426
    )Accounts payable, accrued expenses and deferred revenue
    
    
    (24,951
    )
    
    
    (23,481
    )
    
    
    (3,448
    )Other
    
    
    
    
    
    
    
    
    
    
    (121
    )Cash provided by (used in) operating activities of continuing operations
    
    
    (32,876
    )
    
    
    32,506
    
    
    
    (47,467
    )CASH FLOWS FROM INVESTING ACTIVITIESExpenditures for property, plant, and equipment
    
    
    (13,152
    )
    
    
    (5,596
    )
    
    
    (20,090
    )Purchases of held-to-maturity investment securities
    
    
    (32,300
    )
    
    
    (83,872
    )
    
    
    (119,344
    )Proceeds from maturities of investment securities
    
    
    68,700
    
    
    
    70,440
    
    
    
    211,066Proceeds from restricted investments
    
    
    15,828
    
    
    
    
    
    
    
    Deposits of restricted cash
    
    
    
    
    
    
    (6,213
    )
    
    
    (25,086
    )Proceeds from the sale of investments
    
    
    
    
    
    
    
    
    
    
    5,989Equity investment
    
    
    
    
    
    
    
    
    
    
    (5,000
    )Acquisitions, net of cash acquired
    
    
    (8,630
    )
    
    
    (42,509
    )
    
    
    14,413Notes issued to related party
    
    
    
    
    
    
    (2,735
    )
    
    
    Other
    
    
    300
    
    
    
    
    
    
    
    (480
    )Cash provided by (used in) investing activities of continuing operations
    
    
    30,746
    
    
    
    (70,485
    )
    
    
    61,468CASH FLOWS FROM FINANCING ACTIVITIESRepayments of debt and capital lease obligations
    
    
    (21,543
    )
    
    
    (18,339
    )
    
    
    (6,456
    )Proceeds from the issuance of debt
    
    
    
    
    
    
    
    
    
    
    20,000Proceeds from issuance of common stock
    
    
    433
    
    
    
    1,134
    
    
    
    915Purchase and retirement of stock
    
    
    (985
    )
    
    
    (9,779
    )
    
    
    Other
    
    
    38
    
    
    
    
    
    
    
    Cash provided by (used in) financing activities of continuing operations
    
    
    (22,057
    )
    
    
    (26,984
    )
    
    
    14,459Net cash provided by (used in) continuing operations
    
    
    (24,187
    )
    
    
    (64,963
    )
    
    
    28,460Net cash used in discontinued operations
    
    
    (3,251
    )
    
    
    (15,019
    )
    
    
    (85,787
    )Net decrease in cash and cash equivalents
    
    
    (27,438
    )
    
    
    (79,982
    )
    
    
    (57,327
    )Cash and cash equivalents at beginning of period
    
    
    62,693
    
    
    
    142,675
    
    
    
    200,002Cash and cash equivalents at end of period
    
    $
    35,255
    
    
    $
    62,693
    
    
    $
    142,675Supplemental DisclosuresIncome taxes paid, net of amounts recovered
    
    $
    
    
    
    $
    (87,984
    )
    
    $
    9,356Interest paid, net of amounts capitalized
    
    
    2,574
    
    
    
    3,227
    
    
    
    91Equipment acquired under capital lease
    
    
    
    
    
    
    6,383
    
    
    
    24,510Common stock and warrants issued for acquisitions
    
    
    28,617
    
    
    
    23,045
    
    
    
    122,984Related party receivable settled in stock
    
    
    
    
    
    
    600
    
    
    
    


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

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INTERLAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. General

Business Interland, Inc. (known as Micron Electronics, Inc. prior to August
6, 2001), together with its subsidiaries (collectively the Company), is a
leading Web hosting and online services Company dedicated to helping small- and
medium-sized businesses (SMB) achieve success by providing the knowledge,
services and tools to build, manage and promote businesses online. Interland
offers a wide selection of online services, including standardized Web hosting,
e-commerce, application hosting, and Web site development, marketing and
optimization tools. Historically, the Company provided a variety of computer
products and related services through its PC Systems, SpecTek, and Web hosting
business segments. The Company disposed of its PC Systems and SpecTek business
segments during the third quarter of fiscal 2001. The Companys Web hosting
business remains as the Companys sole continuing operation. 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 Companys Web hosting business has incurred
net losses and losses from operations for all but one quarter from inception
through all of fiscal 2003. The Companys future success is dependent upon its
ability to achieve positive cash flow prior to the depletion of cash resources
and its ability to raise funds, if needed. Nonetheless, the Companys current
financial forecast supports managements expectation that the Company will have
adequate cash resources to fund operations for at least the next 18 to 24
months.

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 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 2004 and thereafter.

Revenue recognition Revenues 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 twenty-four 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.

Reverse stock split In June 2003, the Company announced that its board of
directors had approved a 1-for10 reverse stock split. The reverse stock split
was made effective as of the close of the market on August 1, 2003, and the
Companys common stock began trading on a reverse split basis on August 4, 2003
and effectively reduced the number of shares of common stock issued and
outstanding from approximately 162.6 million to approximately 16.3 million. All
per share and number of shares outstanding in this report have been revised for
the stock split.

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 and warrants of approximately 2.5 million, 2.0 million
and 1.8 million in 2003, 2002, and 2001, respectively. Basic income (loss) per
share is computed using the weighted average number of common shares
outstanding. Diluted income (loss) per share is 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. Because the
Company has reported a loss from continuing operations during fiscal years
2003, 2002, and 2001, the effect of dilutive securities are excluded from the
calculation of per share amounts for these years.

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INTERLAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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,  as
the disposal activities of the Companys discontinued operations were initiated
prior to the Companys adoption of SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets on September 1, 2002. Because the Company has
reported a loss from continuing operations during fiscal years 2003, 2002, and
2001, 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, restricted investments, short-term investments,
receivables, accounts payable, accrued expenses and debt are considered by
management to be reasonable approximations of their fair values, based on
information available as of August 31, 2003. 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 the majority of 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 as an indicator of fair value. If impairment of carrying value based on
the calculated fair value exists, the Company measures the impairment through
the use of discounted cash flows. 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 the 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 the
estimate of their period of benefit of three to seven years.

Property, plant and equipment Property, plant and equipment, including
software, are stated at cost less accumulated depreciation and amortization.
The straight-line depreciation method is used for property, plant and equipment
over the 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. An annual analysis is
performed 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. Leasehold improvements are

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INTERLAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

amortized over the shorter of the lease term or the estimated useful life of
the improvement. 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 $10.5 million, $13.0 million, and $9.2 million for the
years ending August 31, 2003, 2002, and 2001, respectively.

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 Employee
Compensation  The Company accounts for stock-based
compensation issued to employees using the intrinsic value method as prescribed
by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees and has adopted the disclosure requirements of SFAS No.
123 Accounting for Stock-Based Compensation as amended by SFAS No. 148
Accounting for Stock Based Compensation  Transition and Disclosure  an
amendment of SFAS No. 123.

If the Company had elected to adopt the optional recognition provisions of SFAS
No. 123, which uses the fair value based method for stock-based compensation,
and amortized the fair value of the options to compensation expense on a
straight-line basis over the vesting period of the options, the following table
illustrates the effect on net loss and loss per share:

Fiscal Year EndedAugust 31,
    
    August 31,
    
    August 31,2003
    
    2002
    
    2001(In thousands except per share amounts)Net loss as reported
    
    $
    (173,879
    )
    
    $
    (11,293
    )
    
    $
    (357,194
    )Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects
    
    
    573
    
    
    
    1,083
    
    
    
    266Deduct: Total stock-based employee compensation
expense determined under fair value method-
based methods for all awards, net of tax effects
    
    
    (891
    )
    
    
    4,510
    
    
    
    21,000Proforma net loss
    
    $
    (174,197
    )
    
    $
    (5,700
    )
    
    $
    (335,928
    )Loss per share:Basic and Diluted  as reported
    
    $
    (11.85
    )
    
    $
    (0.82
    )
    
    $
    (35.86
    )Basic and Diluted  pro forma
    
    $
    (11.88
    )
    
    $
    (0.41
    )
    
    $
    (33.73
    )Weighted average shares outstandingBasic and Diluted
    
    
    14,668
    
    
    
    13,739
    
    
    
    9,960


Recently issued accounting standards In November 2002, the Emerging Issues
Task Force (EITF) of the Financial Accounting Standards Board (FASB)
reached a consensus on EITF No. 00-21, Accounting for Revenue Arrangements
with Multiple Element Deliverables. The Issue addresses how to account for
arrangements that may involve the delivery or performance of multiple products,
services and/or rights to use assets. Revenue arrangements with multiple
deliverables should be divided into separate units of accounting if the
deliverables in the arrangement meet certain criteria. Arrangement
consideration should be allocated among the separate units of accounting based
on their relative fair values. The Issue also supersedes certain guidance set
forth in Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements. The final consensus is

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INTERLAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

applicable to agreements entered into in quarters beginning after June 15,
2003, with early adoption permitted. Additionally, companies are permitted to
apply the consensus guidance to all existing arrangements as a cumulative
effect of a change in accounting principle. The Company adopted this new
pronouncement effective September 1, 2003, on a prospective basis. The impact
of this adoption did not have a material impact on Interlands consolidated
financial statements.

In January 2003, the FASB issued
FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 clarified the application of
Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated support from
other parties. FIN 46 requires existing unconsolidated variable interest
entities to be consolidated by their primary beneficiaries if the entities do
not effectively disperse risks among parties involved. All companies with
variable interests in variable interest entities created after January 31,
2003, must apply the provisions of this Interpretation to those entities
immediately. A public company with a variable interest in a variable interest
entity created before February 1, 2003, must apply the provisions of this
Interpretation to that entity no later than the beginning of the first interim
or annual reporting period after December 15, 2003. For variable interest
entities for which an enterprise holds a variable interest that it acquired
before February 1, 2003, FIN 46 may be applied by restating previously issued
financial statements or prospectively from the date of adoption. The Company
has evaluated its investments and concluded that none of the Companys
investments meets the requirements for consideration under FIN 46.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective for the first quarter
of fiscal year 2004. The adoption of this standard on September 1, 2003 did
not have a material impact on Interlands consolidated financial statements.

Reclassifications The Company has revised the presentation of its
consolidated statements of operations for all periods presented to conform to
presentations used by others in the Web hosting industry. As the Company has
migrated from a manufacturing entity to a Web hosting company, it believes its
revised presentation reflects more appropriately its results of operations and
allows for more comparability to its peers. The revised presentation removes
the gross margin sub-total and instead classifies all operating expenses and
costs in their respective line item. Additionally, depreciation and
amortization expense, previously presented as components of network operating
costs, general and administrative costs, sales and marketing costs and
technical support costs is now presented separately. These reclassifications,
none of which affect net loss, have been made to all periods presented to
present the financial statements on a consistent basis.

3. Discontinued Operations

Accounting policies related to discontinued operations

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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 the majority of customers to prepay their hosting fees
prior to initiating services.

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INTERLAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 a component of general and
administrative expense. 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 network
operating costs when the sale is recognized.

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 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 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. In fiscal 2003,
the Company recognized a gain of $4.9 million on the disposal of discontinued
operations. This gain consisted of a $5.5 million reduction in the Companys
liability for Micron Electronics sales taxes payable with various
jurisdictions including a settlement reached with the state of Idaho, and a
$0.4 million reduction in the Companys liability for Micron Electronics
payroll taxes. These gains were partially offset by a $0.7 million increase in
required legal reserves and $0.3 million in other various charges related to
discontinued operations. 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 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.

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INTERLAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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, repayments 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.

Fiscal Year EndedAugust 31,
    
    August 31,
    
    August 31,2003
    
    2002
    
    2001(In thousands)Net sales
    
    $
    
    
    
    $
    
    
    
    $
    602,818Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    (65,075
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    Loss from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    (65,075
    )Income (Loss) on disposal of discontinued operations, net of tax
    
    
    4,912
    
    
    
    (6,021
    )
    
    
    (212,164
    )Loss from discontinued operations, net of tax
    
    $
    4,912
    
    
    $
    (6,021
    )
    
    $
    (277,239
    )


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 operating results, in the accompanying
consolidated statements of operations under Loss from discontinued
operations.

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INTERLAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Fiscal Year EndedAugust 31,
    
    August 31,
    
    August 31,2003
    
    2002
    
    2001(In thousands)Net sales
    
    $
    
    
    
    $
    
    
    
    $
    248,309Income before income taxes
    
    
    
    
    
    
    
    
    
    
    62,836Income tax provision
    
    
    
    
    
    
    
    
    
    
    Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    62,836Gain on disposal of discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    2,926Loss from discontinued operations, net of tax
    
    $
    
    
    
    $
    
    
    
    $
    65,762


4. Restructuring And Facility Exit 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 December 31, 2003, provides for the consolidation of the Companys
operations and elimination of duplicative facilities obtained as a result of
previous business acquisitions. In accordance with EITF No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an 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 could not be cancelled
without 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-Lived 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.

During the second quarter of 2003, the Company approved and initiated a program
to exit certain facilities and consolidate those operations into other existing
facilities. This restructuring plan is part of managements continued plan to
streamline the Companys operations and to reduce the long-term operating
costs. In accordance with SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, costs associated with these activities have been
recognized and measured at their fair value in the period in which the
liabilities are incurred. One-time termination benefits for employees required
to render services until they are terminated in order to receive termination
benefits were recognized ratably over the future service period. The plan
provided for the closure of three data center facilities, a reduction of those
related workforces of approximately 171 employees, and the termination of
bandwidth and data connectivity contracts in place at these and other
facilities. The Company exited all three data centers by June 2003.

The following table shows a reconciliation of the beginning and ending
liability balances from August 31, 2000 through August 31, 2003 related to all
restructuring activities recorded by the Company under both of the
restructuring programs described in the above two paragraphs. The balance at
August 31, 2003 represents remaining liabilities to be paid in cash. These
accrued restructuring charges are reflected in the consolidated balance sheet
in Accrued expenses:

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INTERLAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Property,
    
    
    
    
    
    EmployeeLease
    
    plant, and
    
    Other exit
    
    termination
    
    Goodwill andabandonments
    
    equipment
    
    costs
    
    benefits
    
    Intangibles
    
    Total(In thousands)Balance at August 31, 2000
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Plan charges
    
    
    9,404
    
    
    
    26,915
    
    
    
    3,528
    
    
    
    727
    
    
    
    69,704
    
    
    
    110,278Cash 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
    
    
    $
    
    
    
    $
    12,478Cash paid
    
    
    (1,625
    )
    
    
    
    
    
    
    (487
    )
    
    
    (229
    )
    
    
    
    
    
    
    (2,341
    )Other adjustments
    
    
    538
    
    
    
    
    
    
    
    (1,862
    )
    
    
    
    
    
    
    
    
    
    
    (1,324
    )Balance at August 31, 2002
    
    $
    7,634
    
    
    $
    
    
    
    $
    1,179
    
    
    $
    
    
    
    $
    
    
    
    $
    8,813Plan charges
    
    
    2,061
    
    
    
    1,317
    
    
    
    1,886
    
    
    
    1,317
    
    
    
    
    
    
    
    6,581Cash paid
    
    
    (3,831
    )
    
    
    (227
    )
    
    
    (625
    )
    
    
    (1,165
    )
    
    
    
    
    
    
    (5,848
    )Other adjustments
    
    
    (218
    )
    
    
    46
    
    
    
    (1,216
    )
    
    
    (121
    )
    
    
    
    
    
    
    (1,509
    )Non-cash write down
    
    
    
    
    
    
    (871
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (871
    )Balance at August 31, 2003
    
    $
    5,646
    
    
    $
    265
    
    
    $
    1,224
    
    
    $
    31
    
    
    $
    
    
    
    $
    7,166


Through the twelve months ended August 31, 2003, the Company has incurred $5.1
million in restructuring charges. The fiscal 2003 plan charges consist of $2.1
million in lease termination costs, $1.9 million in bandwidth termination
costs, $1.3 million in employee termination benefits, and
$1.3 million in fixed asset
related charges. The Company settled certain data connectivity contract
obligations for amounts less than the original estimates. In connection with
the settlements, the bandwidth termination costs accrual was reduced
by $1.2
million and is reflected in the above table in Other adjustments. In
addition, one of the Companys lease abandonment liabilities was reduced by
$0.2 million in connection with the reduction of the Companys obligation due
to a sublease arrangement for the facility. The lease abandonment charge
represents future lease payments for data centers and office facilities being
exited. The other exit costs represent termination penalties for bandwidth and
data connectivity contracts.

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. Accordingly, the lease
abandonment accrual was reduced by $0.7 million and is reflected in the above
table in Other adjustments. 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.

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.

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.

5. MERGER AND INTEGRATION COSTS

The Company recorded $0.5 million to merger and integration costs for severance
and relocation expenses in fiscal 2003. These costs were primarily related to
employee relocation.

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

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INTERLAND, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

to the merger and integration of the Companys recent acquisitions including
Interland-GA, 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

The Company recorded $1.3 million to other expense in fiscal 2003. During the
third quarter of fiscal 2003, the Company recorded a write-off of $1.6 million
as the result of a fixed asset physical inventory; the Company also recorded a
gain of $0.3 million on the sale of some of its fixed assets.

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

Hostcentric

On June 13, 2003, the Company completed the acquisition of Hostcentric, Inc.
for $25.5 million in cash and stock. The Company paid $4.7 million in cash and
issued approximately 1.36 million shares of Interland stock valued at $20.4
million, net of $0.4 million direct issue costs. The value of the common
shares issued was determined based on a ten-day weighted average closing price
of Interland common stock on NASDAQ for the period ending two days before the
merger agreement date of December 19, 2002. The results of Hostcentrics
operations are included in the consolidated financial statements as of the
acquisition date. Formed in 2000, Hostcentric was a privately held provider of
a broad range of Web hosting services to small business and enterprise
customers.

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

Fair Value(In Thousands)Current assets
    
    $
    4,885Property and equipment
    
    
    4,559Trade names and trademarks
    
    
    360Customer relationships
    
    
    3,900Goodwill
    
    
    19,051Current liabilities
    
    
    (5,970
    )Other liabilities
    
    
    (1,311
    )Net assets acquired
    
    $
    25,474


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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Trellix

On January 3, 2003, the Company acquired Trellix Corporation, a privately held
developer of software-based Web site solutions. Founded in 1995, Trellix is a
provider of private-label Web site publishing solutions, integrated business
services, and low-cost hosting technology. The primary reason for the
acquisition is that Trellix offers a suite of site-building tools and services
that enable users to create professional Web sites. Trellixs product line
offers an expansion of the existing Interland product line. Trellixs financial
results are included in Interlands financial results beginning in January 2003.
The aggregate purchase price was approximately $12.2 million consisting of $4.75
million in cash, 300,000 shares of Interland stock, and 600,000 warrants to
purchase shares of Interland stock at a price of $50.00 per warrant. The value
of the common shares issued was determined based on the closing price of
Interland common stock on NASDAQ on January 3, 2003. The warrants at the date of
acquisition were valued at $5.50 each using the Black-Scholes pricing model.

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

|                                     |                               |   |                    |        | 
|------------------------------------ | ----------------------------- | - | ------------------ | ------ | 
|                                     |                               |   | **Fair Value**    
|                                     |                               |   |                   
|                                     |                               |   | **(In Thousands)**
|Current
          assets             |                               | $ | 700                |       
|Property
          and equipment     |                               |   | 603                |       
|Trade
          names and trademarks |                               |   | 140                |       
|Technology                           |                               |   | 5,900              |       
|Goodwill                             |                               |   | 8,096              |       
|Current
          liabilities        |                               |   | (3,763             | )     
|                                     |                               |   |                    |       
|                                     | Net
          assets acquired |   | $                  | 11,676 | 
|                                     |                               |   |                    |       

The following unaudited pro forma information reflects the results of the
Companys continuing operations for the years ended August 31, 2003, and August
31, 2002, as if the acquisition of Hostcentric and Trellix had occurred at the
beginning of fiscal 2002, after giving effect to certain adjustments, including
amortization of intangibles 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.

|                                                     |                   |            |          |            |  |   |          |        | 
|---------------------------------------------------- | ----------------- | ---------- | -------- | ---------- |  | - | -------- | ------ | 
|                                                     |                   |            | As of   
|                                                     |                   |            |         
|**(In thousands,
        except per share amounts)** |                   | August 31, |          | August 31,
|                                                     |                   | 2003       |          | 2002      
|                                                     |                   |            |          |            | 
|Revenues from continuing operations                  |                   | $          | 120,558  |            |  | $ | 127,579  |       
|Loss from continuing operations before taxes         |                   | $          | (187,228 | )          |  | $ | (110,754 | )     
|Income tax benefit (expense)                         |                   |            | (621     | )          |  |   | 64,242   |       
|                                                     |                   |            |          |            |  |   |          |       
|Net income (loss) from continuing operations         |                   |            | (187,849 | )          |  |   | (46,512  | )     
|Net loss                                             |                   |            | (181,973 | )          |  |   | (50,629  | )     
|Loss per share from continuing operations:           |                   |            |          |            |  |   |          |       
|Basic and diluted                                    |                   | $          | (11.87   | )          |  | $ | (2.92    | )     
|Loss per share:                                      |                   |            |          |            |  |   |          |       
|Basic and diluted                                    |                   |            | ($11.50  | )          |  |   | ($3.18   | )     
|Number of shares used in per share calculation:      |                   |            |          |            |  |   |          |       
|                                                     | Basic and diluted |            |          | 15,822     |  |   |          | 15,904 | 

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

iNNERHOST

Effective August 1, 2002, the Company acquired iNNERHOST, Inc. for an aggregate
purchase price of $17.7 million, consisting of approximately $5.2 million in
cash and up to 970,182 shares of Interland common stock. In addition, the
purchase agreement stipulated that the purchase consideration was subject to
adjustment based on the following provisions:



| |  | An earn-out provision that specified that the realization of the full
purchase price by the shareholders of iNNERHOST would be contingent
upon the iNNERHOST revenues for the three-month period following the
date of acquisition being at least 95% of the historical monthly
revenues. INNERHOST revenues for the subject three-month period were
in fact in compliance with this requirement and thus no modification
to the purchase price and related consideration was necessary.                                                                                                                                                                                                                                                                               
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | A price protection provision that specified that a pro-rata payback of
shares to Interland if the average closing price for the five business
days preceding the effective date of the registration statement
covering shares issued in this acquisition is greater than $37.00 but
less than $50.00 per share by the amount of the closing price over
$25.00 per share. The agreement also provided additional payment of
shares to the iNNERHOST shareholders on a pro-rata basis if the
average closing price of five business days preceding the effective
date of the registration statement covering shares issued in this
acquisition is less than $25.00 per share but greater than $10.00 per
share by the amount of the closing price below $25.00 per share.

During April 2003, the Company completed the registration process and issued an
additional 553,029 shares of Interland common stock in accordance with the price
protection provision bringing the total number of shares issued to 970,182
(including contingent shares described above). The acquisition of iNNERHOST was
accounted for in accordance with SFAS No. 141,Business Combinations. The
contingently issued shares of the Companys stock did not affect the aggregate
recorded cost of the acquisition.

In connection with the acquisition, 50,000 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. Management believes that the value of the escrow
account is sufficient to cover all known claims that have a likely probability
of an unfavorable outcome. 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 $17.7 million,
including direct acquisition costs of $0.2 million.

During the second quarter ended February 28, 2003, the iNNERHOST purchase price
allocation was completed and amounts were allocated to identifiable intangible
assets and goodwill. The following table summarizes the purchase price
allocation based on the 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 (continued)

|                                     |                               |   |                    |        | 
|------------------------------------ | ----------------------------- | - | ------------------ | ------ | 
|                                     |                               |   | **Fair Value**    
|                                     |                               |   |                   
|                                     |                               |   | **(In Thousands)**
|Current
          assets             |                               | $ | 2,235              |       
|Property
          and equipment     |                               |   | 6,995              |       
|Trade
          names and trademarks |                               |   | 200                |       
|Customer
          relationships     |                               |   | 3,400              |       
|Other
          assets               |                               |   | 512                |       
|Goodwill                             |                               |   | 9,384              |       
|Current
          liabilities        |                               |   | (4,301             | )     
|Long-term
          liabilities      |                               |   | (676               | )     
|                                     |                               |   |                    |       
|                                     | Net
          assets acquired |   | $                  | 17,749 | 
|                                     |                               |   |                    |        | 

Dialtone

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. 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 | 
|                                  |                               |   |                    |       

Communitech

On February 8, 2002, the Company acquired 100 percent of the outstanding common
shares of CommuniTech.Net, Inc. (CommuniTech.Net) by issuing 537,500 shares of
the Companys common stock in exchange for all shares of CommuniTech.Net common
stock. 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.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

In connection with the acquisition of CommuniTech.Net, the Company holds two
notes receivable with balances totaling $2.7 million at August 31, 2003 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 270,000 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 | 
|                                           |                               |   |                    |       

Interland  GA

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
4,089,980 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 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.

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.

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 (continued)

|                                  |                               |   |                    |         | 
|--------------------------------- | ----------------------------- | - | ------------------ | ------- | 
|                                  |                               |   | **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 | 
|                                  |                               |   |                    |        

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 |   | $                                                    | (0.94  | )              |   | $        | (17.18 | )
|Loss
          per share:                                 |                             |   |                                                      |        |                |   |          |       
|Basic
          and diluted                               |                             | $ | (1.36                                                | )      |                | $ | (31.67   | )     
|Number
          of shares used in per share calculation: |                             |   |                                                      |        |                |   |          |       
|                                                          | Basic
          and diluted |   |                                                      | 14,276 |                |   |          | 14,595 |  

Other

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,

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

resulting in the recognition of approximately $25.4 million of acquired intangible assets.
These intangible assets are being amortized over a three-year useful life.

In connection with the acquisition of Interland-GA, Trellix and INNERHOST the
Company accrued certain liabilities representing estimated costs of exiting
certain facilities, termination of bandwidth contracts and involuntary
termination of employees in accordance with EITF 95-3, Recognition of
Liabilities in Connection with a Purchase Business Combination. These amounts
are included in Accrued expenses on the balance sheet and are not included in
the restructuring reserves discussed in Note 4. The following table shows the
changes in the accrual from August 31, 2000:

|                                         |                                               |       |                  |        |               |      |                |        |                 |       |              |        |      |       |           |        |  
|---------------------------------------- | --------------------------------------------- | ----- | ---------------- | ------ | ------------- | ---- | -------------- | ------ | --------------- | ----- | ------------ | ------ | ---- | ----- | --------- | ------ | -
|                                         |                                               |       | ****             | ****   | ****          | **** | ****           | ****   | ****            | ****  | **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** | ****  
|                                         | Other
          adjustments                   |       |                  | 2,470  |               |      |                | (1,440 | )               |       |              |       |      |       |           | 1,030  |  
|                                         | Cash
          paid                           |       |                  | (1,871 | )             |      |                |       |                 |       |              | (1,027 | )    |       |           | (2,898 | )
|                                         |                                               |       |                  |        |               |      |                |        |                 |       |              |        |      |       |           |       
|**Balance
          at August 31, 2002** | ****                                          | ****  | **7,574**        | ****   | ****          | **** | ****          | ****   | ****            | ****  | **252**      | ****   | **** | ****  | **7,826** | ****  
|                                         | Liabilities
          accrued and adjustments |       |                  |       |               |      |                |       |                 |       |              | 675    |      |       |           | 675    |  
|                                         | Cash
          paid                           |       |                  | (6,653 | )             |      |                |       |                 |       |              | (710   | )    |       |           | (7,363 | )
|                                         |                                               |       |                  |        |               |      |                |        |                 |       |              |        |      |       |           |       
|**Balance
          at August 31, 2003** | ****                                          | **$** | **921**          | ****   | ****          | **** | ****          | ****   | ****            | **$** | **217**      | ****   | **** | **$** | **1,138** | ****  
|                                         |                                               |       |                  |        |               |      |                |        |                 |       |              |        |      |       |           |       

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 $2.8 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.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 2003 and 2002, the carrying value of investments approximates
fair value.

|                                                                     |                                      |   |                    |        |                |   |         |        | 
|-------------------------------------------------------------------- | ------------------------------------ | - | ------------------ | ------ | -------------- | - | ------- | ------ | 
|                                                                     |                                      |   | **As of**         
|                                                                     |                                      |   |                   
|                                                                     |                                      |   | **August 31,**     | ****   | **August 31,**
|                                                                     |                                      |   | **2003**           | ****   | **2002**      
|                                                                     |                                      |   |                    | ****   |               
|                                                                     |                                      |   | **(In thousands)**
|Held
          to maturity investment securities, at amortized cost: |                                      |   |                    |        |                |   |         |       
|                                                                     | Commercial
          paper           |   | $                  | 35,514 |                |   | $       | 84,081 | 
|                                                                     | State
          and local government |   |                    | 6,990  |                |   |         | 15,850 | 
|                                                                     | Certificates
          of deposit    |   |                    | 3,259  |                |   |         | 17,485 | 
|                                                                     |                                      |   |                    |        |                |   |         |       
|                                                                     |                                      |   | 45,763             |        |                |   | 117,416 |       
|Less:
          cash equivalents                                     |                                      |   | (19,463            | )      |                |   | (32,213 | )     
|Less:
          restricted investments                               |                                      |   | (10,000            | )      |                |   | (34,303 | )     
|                                                                     |                                      |   |                    |        |                |   |         |       
|                                                                     | Investments                          |   | $                  | 16,300 |                |   | $       | 50,900 | 
|                                                                     |                                      |   |                    |        |                |   |         |       
|Investments
          maturing within one year                       |                                      |   | 16,300             |        |                |   | 43,388  |       
|Investments
          maturing one to five years                     |                                      |   |                   |        |                |   | 7,512   |       
|                                                                     |                                      |   |                    |        |                |   |         |       
|Total
          Contractual Maturities                               |                                      | $ | 16,300             |        |                | $ | 50,900  |       
|                                                                     |                                      |   |                    |        |                |   |         |       

9. RECEIVABLES

|                                          |             |   |                    |       |                |   |        |       | 
|----------------------------------------- | ----------- | - | ------------------ | ----- | -------------- | - | ------ | ----- | 
|                                          |             |   | **As of**         
|                                          |             |   |                   
|                                          |             |   | **August 31,**     | ****  | **August 31,**
|                                          |             |   | **2003**           | ****  | **2002**      
|                                          |             |   |                    | ****  |               
|                                          |             |   | **(In thousands)**
|Trade
          receivables               |             | $ | 3,884              |       |                | $ | 10,495 |      
|Other                                     |             |   | 1,649              |       |                |   | 2,487  |      
|Allowance
          for doubtful accounts |             |   | (373               | )     |                |   | (3,843 | )    
|                                          |             |   |                    |       |                |   |        |      
|                                          | Receivables |   | $                  | 5,160 |                |   | $      | 9,139 | 
|                                          |             |   |                    |       |                |   |        |      

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 STATEMENTS (continued)

10. PROPERTY, PLANT AND EQUIPMENT

|                                                          |                                              |      |                  |      |                    |      |                |        |  |   |         |        | 
|--------------------------------------------------------- | -------------------------------------------- | ---- | ---------------- | ---- | ------------------ | ---- | -------------- | ------ |  | - | ------- | ------ | 
|                                                          |                                              | **** | ****             | **** | ****               | **** | **As of**     
|                                                          |                                              | **** | ****             | **** | ****               | **** |               
|                                                          |                                              | **** | **Estimated**    | **** | **August 31,**     | **** | **August 31,**
|                                                          |                                              | **** | **useful lives** | **** | **2003**           | **** | **2002**      
|                                                          |                                              | **** |                  | **** |                    | **** |               
|                                                          |                                              | **** | **(In years)**   | **** | **(In thousands)**
|Computer
          equipment                              |                                              |      | 3                |      |                    | $    | 58,865         |        |  | $ | 51,528  |       
|Software                                                  |                                              |      | 2                |      |                    |      | 14,856         |        |  |   | 13,138  |       
|Office
          equipment                                |                                              |      | 5                |      |                    |      | 5,672          |        |  |   | 5,958   |       
|Leasehold
          improvements                          |                                              |      | 3-5              |      |                    |      | 20,390         |        |  |   | 19,371  |       
|Assets
          in progress                              |                                              |      |                  |      |                    |      | 2,784          |        |  |   | 1,308   |       
|                                                          |                                              |      |                  |      |                    |      |                |        |  |   |         |       
|                                                          |                                              |      |                  |      |                    |      | 102,567        |        |  |   | 91,303  |       
|Less:
          Accumulated depreciation and amortization |                                              |      |                  |      |                    |      | (66,632        | )      |  |   | (32,245 | )     
|                                                          |                                              |      |                  |      |                    |      |                |        |  |   |         |       
|                                                          | Property,
          plant and equipment, net |      |                  |      |                    |      | $              | 35,935 |  |   | $       | 59,058 | 
|                                                          |                                              |      |                  |      |                    |      |                |        |  |   |         |       

Depreciation and amortization of property, plant and equipment, including those
assets held under capital lease was $39.8 million, $26.6 million and $11.6
million for 2003, 2002, and 2001, respectively.

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.

The Company adopted SFAS 141 and 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,**               
|                                                      |                                                              |   | **2003**       | ****   | **2002**       | **** | **2001**                     
|                                                      |                                                              |   |                | ****   |                | **** |                              
|                                                      |                                                              |   |                |        |                |      | (In thousands)                |       |      |      |         
|Net
          loss as reported                        |                                                              | $ | (173,879       | )      |                | $    | (11,293                       | )     |      | $    | (357,194 | )     
|Add
          back goodwill amortization              |                                                              |   |               |        |                |      |                              |       |      |      | 6,809    |       
|                                                      |                                                              |   |                |        |                |      |                               |       |      |      |          |       
|Adjusted
          net loss                           |                                                              |   | (173,879       | )      |                |      | (11,293                       | )     |      |      | (350,385 | )     
|                                                      |                                                              |   |                |        |                |      |                               |       |      |      |          |       
|Income
          (loss) per share, basic and diluted: |                                                              |   |                |        |                |      |                               |       |      |      |          |       
|                                                      | As reported                                                  |   | $              | (11.85 | )              |      | $                             | (0.82 | )    |      | $        | (35.86 | )
|                                                      | Goodwill
          amortization                              |   |                |       |                |      |                               |      |      |      |          | 0.68   |  
|                                                      |                                                              |   |                |        |                |      |                               |       |      |      |          |       
|                                                      | Adjusted
          basic and diluted income (loss) per share |   | $              | (11.85 | )              |      | $                             | (0.82 | )    |      | $        | (35.18 | )
|                                                      |                                                              |   |                |        |                |      |                               |       |      |      |          |       

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INTERLAND, INC.
NOTES TO CONSOLIDATED STATEMENTS (continued)

In accordance with the requirements of SFAS 142, the Company tests for
impairment on an annual basis and between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of
goodwill below its carrying amount. Interland performed an initial impairment
assessment upon adoption at September 1, 2001 and determined that a transition
charge was not required. During the third quarter of 2003, the Company completed
the annual impairment test which entailed comparing the aggregate market value
of the Companys outstanding securities plus its liabilities to the aggregate
carrying value of the Companys assets, including goodwill and other indefinite
life intangible assets. The market price of the Companys stock had experienced
significant volatility over the last fiscal year and closed as of May 31, 2003
with a market value significantly less than the value at the beginning of the
fiscal year. Management retained valuation specialists to assist in the
valuation of its tangible and identifiable intangible assets for purposes of
determining the implied fair value of goodwill at May 31, 2003. Upon completion
of the annual assessment, Interland recorded a non-cash impairment charge of
$89.9 million to reduce the carrying value of goodwill to its estimated fair
value of $47.6 million.

The following table discloses changes in the carrying amount of goodwill from
August 31, 2001 through August 31, 2003:

|                                       |                                 |   |                               |         |                |   |         |        |  
|-------------------------------------- | ------------------------------- | - | ----------------------------- | ------- | -------------- | - | ------- | ------ | -
|                                       |                                 |   | **Fiscal Year
        Ended**
|                                       |                                 |   |                              
|                                       |                                 |   | **August 31,**                | ****    | **August 31,**
|                                       |                                 |   | **2003**                      | ****    | **2002**      
|                                       |                                 |   |                               | ****    |               
|                                       |                                 |   | **(In thousands)**           
|Balance
          at beginning of year |                                 | $ | 120,011                       |         |                | $ | 104,406 |       
|                                       | Goodwill
          acquired     |   |                               | 36,563  |                |   |         | 17,046 |  
|                                       | Impairment
          write-down |   |                               | (89,928 | )              |   |         |       |  
|                                       | Other
          adjustments     |   |                               |        |                |   |         | (1,441 | )
|                                       |                                 |   |                               |         |                |   |         |       
|Balance
          at end of year       |                                 | $ | 66,646                        |         |                | $ | 120,011 |       
|                                       |                                 |   |                               |         |                |   |         |       

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.

Given the Companys aggressive acquisition strategy over the last two years,
significant customer related intangible asset balances have accumulated through
August 31, 2003. The Company has continued to monitor the performance of these
acquired customer related intangible assets and during the third quarter of
fiscal 2003, the Company determined that revenues, operating profits and cash
flows from its Interliant, AT&T and Burlee customer account acquisitions, as
well as customer relationship intangible assets from its CommuniTech, iNNERHOST
and Dialtone acquisitions were materially less than previously estimated,
primarily related to customer and Company initiated terminations. As such, the
Company determined that these identifiable intangible assets needed to be tested
for recoverability. Management used the expected present value of future cash
flows to determine the fair value of these identifiable intangible assets and
determined that the carrying amount of these assets was higher than their fair
values. Upon completion of the assessment, Interland recorded a non-cash
impairment charge of $13.9 million to reduce the carrying value of identifiable
intangible assets to estimated fair values.

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INTERLAND, INC.
NOTES TO CONSOLIDATED STATEMENTS (continued)

The following table summarizes intangible assets by asset class and related
accumulated amortization:

|                                |                                    |  |                       |        |                       |  |                   |        |              |  |   |        |  |  |   |        | 
|------------------------------- | ---------------------------------- |  | --------------------- | ------ | --------------------- |  | ----------------- | ------ | ------------ |  | - | ------ |  |  | - | ------ | 
|                                |                                    |  |                       |        |                       |  | Fiscal Year Ended |        |              |  |  
|                                |                                    |  |                       |        |                       |  |                   |        |              |  |  
|                                |                                    |  | As of August 31, 2003 |        | As of August 31, 2002
|                                |                                    |  |                       |        |                      
|                                |                                    |  | Gross                 |        |                       |  |                   |        | Gross        |  |   |        | 
|                                |                                    |  | carrying              |        | Accumulated           |  | carrying          |        | Accumulated 
|                                |                                    |  | amount                |        | amortization          |  | amount            |        | amortization
|                                |                                    |  |                       |        |                       |  |                   |        |             
|                                |                                    |  |                       |        |                       |  | (In thousands)    |        |              |  |  
|Amortizable intangible assets:  |                                    |  |                       |        |                       |  |                   |        |              |  |   |        |  |  |   |       
|                                | Core technology                    |  | $                     | 17,900 |                       |  | $                 | 7,784  |              |  | $ | 12,480 |  |  | $ | 2,683  | 
|                                | Customer account acquisitions      |  |                       | 16,323 |                       |  |                   | 12,602 |              |  |   | 25,424 |  |  |   | 5,298  | 
|                                | Customer relationships             |  |                       | 10,129 |                       |  |                   | 3,776  |              |  |   | 6,300  |  |  |   | 917    | 
|                                | Trademarks                         |  |                       | 6,100  |                       |  |                   | 1,798  |              |  |   | 5,400  |  |  |   | 831    | 
|                                | Other                              |  |                       | 1,162  |                       |  |                   | 863    |              |  |   | 13,998 |  |  |   | 623    | 
|                                |                                    |  |                       |        |                       |  |                   |        |              |  |   |        |  |  |   |       
|                                | Total                              |  | $                     | 51,614 |                       |  | $                 | 26,823 |              |  | $ | 63,602 |  |  | $ | 10,352 | 
|                                |                                    |  |                       |        |                       |  |                   |        |              |  |   |        |  |  |   |       
|Aggregate amortization expense: |                                    |  |                       |        |                       |  |                   |        |              |  |   |        |  |  |   |       
|                                | For the year ended August 31, 2003 |  | $                     | 16,950 |                       |  |                   |        |              |  |   |        |  |  |   |        | 
|Estimated amortization expense: |                                    |  |                       |        |                       |  |                   |        |              |  |   |        |  |  |   |       
|                                | For the year ended August 31, 2004 |  | $                     | 8,244  |                       |  |                   |        |              |  |   |        |  |  |   |        | 
|                                | For the year ended August 31, 2005 |  |                       | 8,120  |                       |  |                   |        |              |  |   |        |  |  |   |        | 
|                                | For the year ended August 31, 2006 |  |                       | 3,529  |                       |  |                   |        |              |  |   |        |  |  |   |        | 
|                                | For the year ended August 31, 2007 |  |                       | 2,544  |                       |  |                   |        |              |  |   |        |  |  |   |        | 
|                                | For the year ended August 31, 2008 |  |                       | 1,766  |                       |  |                   |        |              |  |   |        |  |  |   |        | 

At August 31, 2002, included in Other was $12.8 million related to the
acquisition of iNNERHOST. Upon completion of the purchase price allocation for
iNNERHOST, this balance was allocated to the appropriate intangible asset
categories and goodwill.

Core technology is amortized over a weighted average of four years, customer
account acquisitions and customer relationships are amortized over a weighted
average of three years, trademarks are amortized over a weighted average of
seven years, and all other intangible assets are amortized over a weighted
average of three years. The weighted average amortization period for all
intangible assets as a group is four years. None of the goodwill balance 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.

13. ACCRUED EXPENSES

|                                            |                        |   |                |        |            |   |       |        | 
|------------------------------------------- | ---------------------- | - | -------------- | ------ | ---------- | - | ----- | ------ | 
|                                            |                        |   | As of         
|                                            |                        |   |               
|                                            |                        |   | August 31,     |        | August 31,
|                                            |                        |   | 2003           |        | 2002      
|                                            |                        |   |                |        |           
|                                            |                        |   | (In thousands)
|Accrued payroll and related liabilities     |                        | $ | 5,495          |        |            | $ | 5,496 |       
|Accrued restructuring liabilities           |                        |   | 7,166          |        |            |   | 8,813 |       
|Acquisition related liabilities             |                        |   | 1,138          |        |            |   | 9,007 |       
|Taxes payable                               |                        |   | 1,285          |        |            |   | 826   |       
|Accrued advertising                         |                        |   | 1,241          |        |            |   | 49    |       
|Accrued discontinued operations liabilities |                        |   | 1,100          |        |            |   | 2,409 |       
|Accrued software liabilities                |                        |   | 934            |        |            |   | 182   |       
|Accrued professional fees                   |                        |   | 401            |        |            |   | 108   |       
|Accrued legal liabilities                   |                        |   | 247            |        |            |   | 547   |       
|Accrued lease payments                      |                        |   | 64             |        |            |   | 956   |       
|Other                                       |                        |   | 4,584          |        |            |   | 1,971 |       
|                                            |                        |   |                |        |            |   |       |        | 
|                                            | Total accrued expenses |   | $              | 23,655 |            |   | $     | 30,364 | 
|                                            |                        |   |                |        |            |   |       |        | 

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Accrued payroll and related liabilities include mainly accrued bonuses, accrued
vacation, and other accrued payroll costs. Accrued restructuring liabilities and
acquisition related liabilities are discussed in footnote 4 Restructuring and
Facility Exit Costs and footnote 7 Acquisitions, respectively.

14. OTHER LIABILITIES

|                                |                         |   |                |       |            |   |       |        | 
|------------------------------- | ----------------------- | - | -------------- | ----- | ---------- | - | ----- | ------ | 
|                                |                         |   | As of         
|                                |                         |   |                |       |            |   |      
|                                |                         |   | August 31,     |       | August 31,
|                                |                         |   | 2003           |       | 2002      
|                                |                         |   |                |       |           
|                                |                         |   | (In thousands)
|Sales tax assessments liability |                         | $ | 2,366          |       |            | $ | 8,300 |       
|Income tax liability            |                         |   | 1,417          |       |            |   | 2,895 |       
|Other                           |                         |   | 1,614          |       |            |   | 81    |       
|                                |                         |   |                |       |            |   |       |       
|                                | Total other liabilities |   | $              | 5,397 |            |   | $     | 11,276 | 
|                                |                         |   |                |       |            |   |       |       

The Company is a party to numerous sales and use tax and income tax assessments
related to the discontinued PC Systems and Spectek operations and has established a
reserve of $2.4 million. The difference of sales tax assessments liability from
August 31, 2002 is primarily attributable to a favorable sales tax resolution of
$5.0 million.

15. LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS

|                                                                                                                                             |  |                |         |            |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | ---------- |  | - | ------- | -
|                                                                                                                                             |  | As of         
|                                                                                                                                             |  |                |         |            |  |  
|                                                                                                                                             |  | August 31,     |         | August 31,
|                                                                                                                                             |  | 2003           |         | 2002      
|                                                                                                                                             |  |                |         |           
|                                                                                                                                             |  | (In thousands)
|Capitalized lease obligations payable in monthly
installments through 2005, weighted average interest
rates of 11.0% and 10.9%, respectively |  | $              | 11,880  |            |  | $ | 24,467  |  
|Notes payable                                                                                                                                |  |                | 619     |            |  |   | 6,699   |  
|                                                                                                                                             |  |                |         |            |  |   |         |  
|                                                                                                                                             |  |                | 12,499  |            |  |   | 31,166  |  
|Less current portion                                                                                                                         |  |                | (10,845 | )          |  |   | (19,157 | )
|                                                                                                                                             |  |                |         |            |  |   |         |  
|Long-term debt and capital lease obligations                                                                                                 |  | $              | 1,654   |            |  | $ | 12,009  |  
|                                                                                                                                             |  |                |         |            |  |   |         |  

The Company has an outstanding note payable relating to iNNERHOSTs 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, 2003 was $0.5 million compared to
a balance of $1.0 million at August 31, 2002. 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, 2003, the outstanding
balance was $0.1 million compared to an outstanding balance of $0.3 million as
of August 31, 2002.

On July 20, 2001, the Company entered into a financing arrangement with US Bank
under which the Company executed a $5.4 million credit agreement. This agreement
had a stated interest rate of prime less 100 basis points or 3.25%. During the
quarter ended February 28, 2003, $5.4 million was paid and the loan was closed.
The payoff of this loan released $6.7 million of restricted investments that
were pledged as collateral under this agreement.

In July 2001, the Company entered into a financing arrangement with U.S. Bancorp
Oliver-Allen Technology Leasing for a sale and leaseback of up to $14.6 million
for certain equipment, primarily computer hardware. The stated interest rate on
the facility is 5.75%. In January 2002, the Company repurchased certain of the
leased assets from U.S. Bancorp Oliver-Allen Technology Leasing at a total cost
of $2.9 million. In connection with the repurchase, approximately $3.3 million
of cash and equivalents became unrestricted. As of August 31, 2003, the
principal balance on the facility was $3.8 million. As of August 31, 2003, the
Company has pledged $7.2 million as collateral for this agreement. The
restrictions prevent the Company from utilizing the related cash and cash

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

equivalents until all of its obligations under the lease are satisfied. As the
company exited various facilities during the year ended August 31, 2003, certain
assets that were leased under this facility were transferred to different
locations. The Company has been unable to locate some
of the assets. Under the requirements of the agreement, the Company has informed
the bank of this situation and the company has received a waiver letter from
U.S. Bancorp Oliver-Allen waiving any default of the lease agreement that may
have occurred due to the inability to locate the precise location of some of the
assets. At the end of the initial lease term, in July 2004, the Company has the
option to purchase the equipment at its in-place value or extend the term of
the lease for an additional 12 months at its current monthly rental amount. The
Company continues to make all payments as required under the lease agreement.
These assets have no remaining book value and the Company believes it has
adequately reserved for any potential end of lease liability.

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 rate of 0.861 shares of the Company for each share of
Interland-Georgia. All of the warrants are fully vested at August 31, 2003. On
January 3, 2003, the Company acquired Trellix Corporation. As part of the
purchase price, the Company issued warrants to Trellix shareholders to purchase
600,000 shares of Interlands common stock at an exercise price of $50.00 per
share.

The following table summarizes the Companys warrant holders as of August 31,
2003:

|                      |  |                   |  |        |           |           |  |          |        |  |  | 
|--------------------- |  | ----------------- |  | ------ | --------- | --------- |  | -------- | ------ |  |  | 
|                      |  |                   |  |        |           | Number of |  | Exercise
|Warrant Holder        |  | Expiration Date   |  | Shares |           | Price    
|                      |  |                   |  |        |           |          
|Verizon               |  | October 11, 2003  |  |        | 269,665   |           |  | $        | 209.10 | 
|Compaq                |  | December 31, 2003 |  |        | 6,917     |           |  |          | 139.40 | 
|Microsoft Corporation |  | December 24, 2004 |  |        | 47,052    |           |  |          | 62.40  | 
|Verisign              |  | March 15, 2005    |  |        | 32,065    |           |  |          | 62.40  | 
|Transamerica          |  | May 1, 2005       |  |        | 1,860     |           |  |          | 96.70  | 
|Microsoft Corporation |  | July 26, 2005     |  |        | 40,359    |           |  |          | 139.40 | 
|Verisign              |  | July 26, 2005     |  |        | 32,288    |           |  |          | 139.40 | 
|Transamerica          |  | October 3, 2005   |  |        | 2,153     |           |  |          | 139.40 | 
|Trellix               |  | January 3, 2008   |  |        | 600,000   |           |  |          | 50.00  | 
|                      |  |                   |  |        |           |           |  |          |        |  |  | 
|                      |  | Total             |  |        | 1,032,359 |           |  |          |        | 
|                      |  |                   |  |        |           |           |  |          |        |  |  | 

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 250,000 shares are reserved for
issuance under the plan, of which approximately 160,300 shares had been issued
as of August 31, 2003 compared to 126,200 shares issued as of August 31, 2002.
Shares issued under the Plan during 2003, 2002, and 2001, were approximately
34,100, 22,000 and 18,300, 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. All of these option plans have an option term of 10 years. Vesting
periods range from 3 to 5 years.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

During fiscal 2002, the Company shareholders approved the 2002 Plan which
provides for the granting of incentive and non-statutory stock options. As of
August 31, 2003, there were 115,873 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.

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
granted 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
65,000 shares of the Companys common stock. Of these 65,000 options, 50,000
were granted under the 1995 Plan and 15,000 were granted as non-plan grants. A
total of 25,000 options vest after completion by Mr. Kocher of seven 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 2003, 2002 and 2001, Mr. Kocher was
granted options to purchase a total of 35,000, 100,000 and 142,870 shares of the
Companys common stock, respectively.

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 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, 2003   |     | August 31, 2002 |   | August 31, 2001                         
|                                             |           |  |                   |     |                 |   |                                         
|                                             |           |  |                   |     |                 |   | 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             |           |  | 1,586             |     |                 | $ | 29.50                                    |  |          |  | 1,792     |     |          | $ | 51.30 |  |  |  | 820      |     |  | $ | 119.00 | 
|Granted                                      |           |  | 518               |     |                 |   | 12.80                                    |  |          |  | 665       |     |          |   | 22.40 |  |  |  | 618      |     |  |   | 37.90  | 
|Conversion of HostPro stock plans            |           |  |                  |     |                 |   |                                         |  |          |  |          |     |          |   |      |  |  |  | 363      |     |  |   | 25.60  | 
|Acquisition of Interland-Georgia             |           |  |                  |     |                 |   |                                         |  |          |  |          |     |          |   |      |  |  |  | 523      |     |  |   | 30.00  | 
|Exercised                                    |           |  | (24               | )   |                 |   | 8.28                                     |  |          |  | (65       | )   |          |   | 12.40 |  |  |  | (1       | )   |  |   | 117.90 | 
|Terminated or cancelled                      |           |  | (659              | )   |                 |   | 28.11                                    |  |          |  | (806      | )   |          |   | 56.20 |  |  |  | (531     | )   |  |   | 101.50 | 
|                                             |           |  |                   |     |                 |   |                                          |  |          |  |           |     |          |   |       |  |  |  |          |     |  |   |        | 
|Outstanding at end of year                   |           |  | 1,421             |     |                 |   | 24.66                                    |  |          |  | 1,586     |     |          |   | 29.50 |  |  |  | 1,792    |     |  |   | 51.30  | 
|                                             |           |  |                   |     |                 |   |                                          |  |          |  |           |     |          |   |       |  |  |  |          |     |  |   |        | 
|Exercisable at end of year                   |           |  | 686               |     |                 |   | 33.08                                    |  |          |  | 726       |     |          |   | 33.60 |  |  |  | 772      |     |  |   | 115.10 | 
|Shares available for future
grant under the: |           |  |                   |     |                 |   |                                          |  |          |  |           |     |          |   |       |  |  |  |          |     |  |   |        | 
|                                             | 2002 Plan |  |                   | 116 |                 |   |                                          |  |          |  |           | 464 |          |   |       |  |  |  |          |    |  |   |        |  | 
|                                             | 2001 Plan |  |                   |    |                 |   |                                          |  |          |  |           |    |          |   |       |  |  |  |          | 243 |  |   |        |  | 
|                                             | 1995 Plan |  |                   |    |                 |   |                                          |  |          |  |           |    |          |   |       |  |  |  |          | 674 |  |   |        |  | 

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes information about the Companys stock options
outstanding under the Option Plans as of August 31, 2003:

|                         |  |                                          |       |                     |  |          |     |           |  |          |        |  |  |          |     |  |  |   |        | 
|------------------------ |  | ---------------------------------------- | ----- | ------------------- |  | -------- | --- | --------- |  | -------- | ------ |  |  | -------- | --- |  |  | - | ------ | 
|                         |  | 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, except per share amounts) |       |                     |  |         
|Less than $10.00         |  |                                          | 159   |                     |  |          | 7.8 |           |  | $        | 9.01   |  |  |          | 132 |  |  | $ | 9.34   | 
|$10.00 - $13.00          |  |                                          | 485   |                     |  |          | 9.1 |           |  |          | 11.52  |  |  |          | 52  |  |  |   | 11.84  | 
|$13.01 - $22.00          |  |                                          | 342   |                     |  |          | 8.2 |           |  |          | 20.16  |  |  |          | 150 |  |  |   | 20.10  | 
|$22.01 - $32.00          |  |                                          | 247   |                     |  |          | 6.2 |           |  |          | 30.14  |  |  |          | 181 |  |  |   | 31.14  | 
|$32.01 - $90.00          |  |                                          | 154   |                     |  |          | 4.5 |           |  |          | 62.15  |  |  |          | 140 |  |  |   | 60.37  | 
|Greater than $90.00      |  |                                          | 34    |                     |  |          | 3.0 |           |  |          | 119.76 |  |  |          | 31  |  |  |   | 119.52 | 
|                         |  |                                          |       |                     |  |          |     |           |  |          |        |  |  |          |     |  |  |   |        | 
|                         |  |                                          | 1,421 |                     |  |          |     |           |  |          |        |  |  |          | 686 |  |  |   |        | 

The Company adopted the disclosure-only provisions of SFAS 123 Accounting for
Stock-Based Compensation, and elected to continue to measure compensation
expense for its stock-based employee compensation using the intrinsic value
method prescribed by APB No. 25 Accounting for Stock Issued to Employees. 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 2003, 2002, and 2001, are as
follows:

|                              |                                       |  |           |       |           |  |                           |       |   |  |   |       |  
|----------------------------- | ------------------------------------- |  | --------- | ----- | --------- |  | ------------------------- | ----- | - |  | - | ----- | -
|                              |                                       |  |           |       |           |  | Stock Option Plans Shares
|                              |                                       |  |           |       |           |  |                          
|                              |                                       |  | 2003      |       | 2002      |  | 2001                     
|                              |                                       |  |           |       |           |  |                          
|Assumptions                   |                                       |  |           |       |           |  |                           |       |   |  |   |      
|                              | Expected life                         |  | 3.0 years |       | 3.0 years |  | 3.0 years                
|                              | Risk-free interest rate               |  |           | 2.8   | %         |  |                           | 4.0   | % |  |   | 4.0   | %
|                              | Expected volatility                   |  |           | 80.0  | %         |  |                           | 76.5  | % |  |   | 76.1  | %
|                              | Dividend yield                        |  |           | 0.0   | %         |  |                           | 0.0   | % |  |   | 0.0   | %
|Weighted average fair values: |                                       |  |           |       |           |  |                           |       |   |  |   |      
|                              | Exercise price equal to market price  |  | $         | 24.66 |           |  | $                         | 22.40 |   |  | $ | 21.80 |  
|                              | Exercise price less than market price |  | $         |      |           |  | $                         |      |   |  | $ | 16.60 |  

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 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, 2003.

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.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 $0.2 million in 2003, $0.5 million in 2002 and $0.6 million in
2001, respectively. The Companys expense included in discontinued operations
pursuant to the RAM plan was approximately $2.2 million in 2001.

19. RELATED PARTY TRANSACTIONS

|                                                    |  |            |                   |            |  |                |       |  |  |   |         |  
|--------------------------------------------------- |  | ---------- | ----------------- | ---------- |  | -------------- | ----- |  |  | - | ------- | -
|                                                    |  |            | Fiscal Year Ended
|                                                    |  |           
|                                                    |  | August 31, |                   | August 31, |  | August 31,    
|                                                    |  | 2003       |                   | 2002       |  | 2001          
|                                                    |  |            |                   |            |  |               
|                                                    |  |            |                   |            |  | (In thousands) |       |  |  |  
|Net sales                                           |  | $          |                  |            |  | $              |      |  |  | $ | 23,561  |  
|Inventory purchases                                 |  |            |                  |            |  |                |      |  |  |   | 103,808 |  
|Component recovery agreement expenses               |  |            |                  |            |  |                |      |  |  |   | 99,483  |  
|Administrative services and other expenses (income) |  |            |                  |            |  |                |      |  |  |   | (206    | )
|MTI lease                                           |  |            | 728               |            |  |                | 2,904 |  |  |   | 1,165   |  
|Property, plant and equipment purchases             |  |            |                  |            |  |                |      |  |  |   | 14,186  |  
|Property, plant and equipment sales                 |  |            |                  |            |  |                |      |  |  |   | 32,649  |  

In fiscal year 2001, 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 Micron Technology, Inc. (MTI)
during fiscal year 2002 and 2003. 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, 2003 from the
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 273,526 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 of fiscal 2002, the Micron Technology Foundation,
which beneficially owned approximately 43% of the Companys common stock, sold
all of the approximately 5.9 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 580,000 shares of common
stock from the Foundation at an aggregate cost of $7.3 million.

During the fourth quarter of 2002, the Company repurchased 80,000 shares of the
Companys common stock from the two former owners of CommuniTech.Net at an
aggregate cost of $2.5 million.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

20. INCOME TAXES

The effective income tax rate on continuing operations was approximately 0% for
fiscal 2003 compared to 92% for fiscal 2002 and 13% for fiscal 2001. 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,
|                               |                         |   | 2003              |     | 2002       |   | 2001      
|                               |                         |   |                   |     |            |   |           
|                               |                         |   | (In thousands)   
|Current:                       |                         |   |                   |     |            |   |            |         |   |   |         |        
|                               | U.S. Federal            |   | $                 | 629 |            |   | $          | (64,241 | ) |   | $       | (22,233 | )
|                               | State                   |   |                   |    |            |   |            |        |   |   |         | (461    | )
|                               |                         |   |                   |     |            |   |            |         |   |   |         |         |  
|                               |                         | $ | 629               |     |            | $ | (64,241    | )       |   | $ | (22,694 | )      
|                               |                         |   |                   |     |            |   |            |         |   |   |         |         |  
|Deferred:                      |                         |   |                   |     |            |   |            |         |   |   |         |        
|                               | U.S. Federal            |   | $                 |    |            |   | $          |        |   |   | $       |        |  
|                               | State                   |   |                   |    |            |   |            |        |   |   |         |        |  
|                               |                         |   |                   |     |            |   |            |         |   |   |         |         |  
|                               |                         | $ |                  |     |            | $ |           |         |   | $ |        |        
|                               |                         |   |                   |     |            |   |            |         |   |   |         |         |  
|Income tax (benefit) provision |                         | $ | 629               |     |            | $ | (64,241    | )       |   | $ | (22,694 | )      
|                               |                         |   |                   |     |            |   |            |         |   |   |         |         |  
|Allocated to:                  |                         |   |                   |     |            |   |            |         |   |   |         |        
|                               | Continuing operations   |   | $                 | 629 |            |   | $          | (64,241 | ) |   | $       | (22,694 | )
|                               |                         |   |                   |     |            |   |            |         |   |   |         |         |  
|                               | Discontinued operations |   | $                 |    |            |   | $          |        |   |   | $       |        |  
|                               |                         |   |                   |     |            |   |            |         |   |   |         |         |  

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 of fiscal 2002 the Company
recorded a tax benefit of approximately $64.2 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.

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,
|                                                          |  | 2003              |         | 2002       |  | 2001      
|                                                          |  |                   |         |            |  |           
|                                                          |  | (In thousands)   
|U.S. federal income tax at statutory rate                 |  | $                 | (62,357 | )          |  | $          | (26,437 | ) |  | $ | (58,943 | )
|State taxes, net of federal benefit and state tax credits |  |                   | (3,983  | )          |  |            | 7,284   |   |  |   | (8,420  | )
|Goodwill                                                  |  |                   | 31,475  |            |  |            |        |   |  |   | 21,276  |  
|Valuation allowance                                       |  |                   | 33,844  |            |  |            | (51,875 | ) |  |   | 20,794  |  
|Tax-exempt Foreign Trade Income                           |  |                   |        |            |  |            | 6,567   |   |  |   | 2,000   |  
|Other                                                     |  |                   | 1,650   |            |  |            | 220     |   |  |   | 599     |  
|                                                          |  |                   |         |            |  |            |         |   |  |   |         |  
|Income tax (benefit) provision                            |  | $                 | 629     |            |  | $          | (64,241 | ) |  | $ | (22,694 | )
|                                                          |  |                   |         |            |  |            |         |   |  |   |         |  

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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,
|                               |                           |                                  |          | 2003           |         | 2002      
|                               |                           |                                  |          |                |         |           
|                               |                           |                                  |          | (In thousands)
|Deferred tax assets:           |                           |                                  |          |                |         |            |         |  
|                               |                           | Receivables and other allowances |          | $              | 112     |            |         | $ | 1,518   |  
|                               |                           | Accrued expenses                 |          |                | 934     |            |         |   | 7,419   |  
|                               |                           | Accrued compensation             |          |                | 57      |            |         |   | 416     |  
|                               |                           | Deferred revenue                 |          |                | 4,536   |            |         |   | 7,856   |  
|                               |                           | Property, plant and equipment    |          |                | 5,162   |            |         |   | 2,147   |  
|                               |                           | Net operating loss carryforwards |          |                | 106,978 |            |         |   | 72,866  |  
|                               |                           | Other                            |          |                |        |            |         |   | 48      |  
|                               |                           |                                  |          |                |         |            |         |  
|Total deferred tax assets      |                           |                                  | 117,779  |                |         |            | 92,270  |  
|Valuation allowance            |                           |                                  | (116,792 | )              |         |            | (81,406 | )
|                               |                           |                                  |          |                |         |            |         |  
|Net deferred tax assets        |                           |                                  | 987      |                |         |            | 10,864  |  
|                               | Deferred tax liabilities: |                                  |          |                |         |            |         |   |        
|                               |                           | Acquired intangibles             |          |                | (987    | )          |         |   | (10,864 | )
|                               |                           |                                  |          |                |         |            |         |  
|Total deferred tax liabilities |                           |                                  | (987     | )              |         |            | (10,864 | )
|                               |                           |                                  |          |                |         |            |         |  
|Net deferred taxes             |                           | $                                |         |                |         | $          |        |  
|                               |                           |                                  |          |                |         |            |         |  

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, some of which are limited
by the Section 382 of the Internal Revenue Code. The consolidated limited
amount of net operating losses available to the Company as of August 31, 2003
are $267.4 million. These losses begin to expire in fiscal year 2006.

The Company recorded a full valuation allowance with respect to the
pre-acquisition deferred tax assets. The benefit was credited to goodwill
versus income tax expense. The amount of the pre-acquisition deferred tax
asset approximates $40.0 million.

A valuation allowance has been established against the deferred tax asset
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 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
No. 28 Accounting for Sales with Leasebacks an amendment of FASB Statement No.
13. Accordingly, a 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.

In fiscal 2001, 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.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(MEI), the transfer was between a parent and its subsidiary, accordingly the
transaction was accounted for at historical cost of the assets transferred was
treated as an adjustment to equity, net of tax.

In fiscal 2002, 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.

Rental expense related to operating leases was approximately $5.5 million,
$7.7 million, and $4.0 million in 2003, 2002, and 2001, 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)
|2004                                               |                                    | $ | 11,288         |        |                | $ | 11,263 |        
|2005                                               |                                    |   | 8,108          |        |                |   | 1,380  |        
|2006                                               |                                    |   | 5,555          |        |                |   | 9      |        
|2007                                               |                                    |   | 4,660          |        |                |   |        |        
|2008                                               |                                    |   | 4,142          |        |                |   |        |        
|Thereafter                                         |                                    |   | 7,148          |        |                |   |        |        
|                                                   |                                    |   |                |        |                |   |        |        
|                                                   | Total                              |   | $              | 40,901 |                |   | $      | 12,652  |  
|                                                   |                                    |   |                |        |                |   |        |        
|                                                   | Less: amount representing interest |   |                |        |                |   |        | 772     |  
|                                                   |                                    |   |                |        |                |   |        |        
|Present value of net minimum lease payments        |                                    |   |                |        |                | $ | 11,880 |        
|                                                   | Less: current portion              |   |                |        |                |   |        | (10,264 | )
|                                                   |                                    |   |                |        |                |   |        |        
|Capital lease obligation excluding current portion |                                    |   |                |        |                | $ | 1,616  |        
|                                                   |                                    |   |                |        |                |   |        |        

22.     CONTINGENCIES

Interland is defending an employee class action lawsuit filed in the U.S.
District Court for Idaho. In this case, five individual plaintiffs claim that
when they were employees of Micron Electronics Inc. (MEI) between 1999 and
April 2001, 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 opt in period for potential class members
has closed and discovery continues on the merits of the case. Interland
believes that expenses or losses associated with the case will not have a
material adverse effect on Interland. This potential liability remains with
Interland even though it sold the PC Systems business.

In February of 2003, the Company filed a lawsuit in Cobb County, Georgia
against Mr. Gabriel Murphy, one of the former principals of Interlands
subsidiary, CommuniTech.Net, Inc. (Communitech), which was acquired by
Interland in February 2002. The Companys lawsuit claims, among other things,
that Mr. Murphy breached certain covenants under his employee agreement and
also demands payment from Mr. Murphy under his delinquent $2.7 million
promissory notes. 273,526 shares of the Companys common stock collateralize
these notes and the receivable balance is shown on the balance sheet as a
reduction in equity.

Messrs. Heitman and Murphy filed a lawsuit against Interland, its CEO, Mr. Joel
Kocher, and Communitech, in Jackson County, Missouri claiming, among other
things, that Interland acted unreasonably in failing to have the S-3
registration statement declared effective by the SEC on a timely basis and
claiming that Interland and/or Mr. Kocher made inaccurate disclosures in
connection with Interlands acquisition of Communitech. The complaint asks for
compensatory and punitive damages in an unspecified amount. Interland believes
that these claims are without merit and will not have a material adverse effect
on Interland and intends to vigorously defend the claims.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

On March 14, 2003, Halo Management, LLC, filed a suit against Interland in the
U.S. District Court for the Northern District of California. The suit alleges
that Interlands use of blueHALO (U.S. Patent and Trademark Office Serial No.
78/135,621) to describe its proprietary Web hosting architecture infringes on
the plaintiffs registered trademark Halo (U.S. Patent and Trademark Office
Serial No. 75/870,390; Registration No. 2,586,017).
The suit seeks a permanent injunction against Interlands use of its blueHALO
mark and money damages. In a motion after the suit was filed, the plaintiff
also requested a preliminary injunction against Interlands use of its
blueHALO mark. On November 17, 2003 the court denied plaintiffs motion. In
rendering its opinion, the court specifically held that the plaintiff had
engaged in so-called naked licensing and, as a consequence, had forfeited
its rights in the HALO trademark. Consequently, Interland continues to
believe it has meritorious defenses, plans to continue to defend the matter
vigorously and believes that no material adverse effect on Interland will occur
as a result of this litigation.

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. As of August
31, 2003, the Company had an aggregate amount of $1.1 million accrued for such
matters.

The Company is also a defendant in a number of other lawsuits which the Company
regards as minor and unlikely to result in any material payment; nonetheless,
the outcome of litigation may not be assured, and the Companys cash balances
could be materially affected by an adverse judgment.

In accordance with SFAS No. 5 Accounting for Contingencies, the Company
believes it has adequately reserved for the contingencies arising from the
above legal matters where an outcome was deemed to be 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, its financial condition
or its cash flows.

23.     COMMON STOCK AND RELATED MATTERS

In March 2003, the board of directors authorized a stock repurchase program
to acquire outstanding common stock. Under the program, up to $10.0 million
of common stock could be reacquired over the next year. During fiscal 2003,
the Company purchased approximately 85,000 shares of common stock at an
aggregate cost of approximately $1.0 million.

In June 2003, the Company announced that its board of directors had approved a
1-for-10 reverse stock split. The reverse stock split was made effective as
of the close of the market on August 1, 2003, and the Companys common stock
began trading on a reverse split basis on August 4, 2003.

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INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

24.     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,
|                             |       |   | 2003              |         | 2002       |   | 2001      
|                             |       |   |                   |         |            |   |           
|                             |       |   | (In thousands)   
|Revenues by Geographic Area  |       |   |                   |         |            |   |            |         |  |   |        |       
|(Based on customer location) |       |   |                   |         |            |   |            |         |  |   |        |       
|United States                |       | $ | 96,276            |         |            | $ | 91,018     |         |  | $ | 50,179 |       
|Non- U.S.                    |       |   | 10,362            |         |            |   | 10,610     |         |  |   | 10,573 |       
|                             |       |   |                   |         |            |   |            |         |  |   |        |       
|                             | Total |   | $                 | 106,638 |            |   | $          | 101,628 |  |   | $      | 60,752 | 
|                             |       |   |                   |         |            |   |            |         |  |   |        |       

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Report of Independent Auditors

The Shareholders and Board of Directors
Interland, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders equity and cash flows present
fairly, in all material respects, the financial position of Interland, Inc.
(formerly Micron Electronics, Inc.) and its subsidiaries at August 31, 2003 and
2002, and the results of their operations and their cash flows for each of the
three years in the period ended August 31, 2003 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.

As discussed in Note 11, effective September 1, 2001, the Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, resulting in cessation of the
amortization of goodwill in 2002.

/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia

November 21, 2003

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Quarterly Financial Information (Unaudited)

|                                                      |                                   |   |                                                  |       |         |   |         |       |         |   |          |       |   |   |        |       |  
|----------------------------------------------------- | --------------------------------- | - | ------------------------------------------------ | ----- | ------- | - | ------- | ----- | ------- | - | -------- | ----- | - | - | ------ | ----- | -
|                                                      |                                   |   | First                                            |       | Second  |   | Third   |       | Fourth 
|                                                      |                                   |   | Quarter                                          |       | Quarter |   | Quarter |       | Quarter
|                                                      |                                   |   |                                                  |       |         |   |         |       |        
|                                                      |                                   |   | (In thousands,
        except per share amounts)
|2003                                                  |                                   |   |                                                  |       |         |   |         |       |         |   |          |       |   |   |        |      
|Revenues                                              |                                   | $ | 27,283                                           |       |         | $ | 26,114  |       |         | $ | 25,898   |       |   | $ | 27,343 |      
|Income
          (loss) from continuing operations    |                                   |   | (14,380                                          | )     |         |   | (22,142 | )     |         |   | (136,326 | )     |   |   | (5,943 | )    
|Net
          income (loss)                           |                                   |   | (14,414                                          | )     |         |   | (22,423 | )     |         |   | (136,493 | )     |   |   | (550   | )    
|Income
          (loss) per share, basic and diluted: |                                   |   |                                                  |       |         |   |         |       |         |   |          |       |   |   |        |      
|                                                      | Continuing
          operations   |   | $                                                | (1.03 | )       |   | $       | (1.56 | )       |   | $        | (9.41 | ) |   | $      | (0.40 | )
|                                                      | Discontinued
          operations |   |                                                  |      |         |   |         | (0.02 | )       |   |          | (0.01 | ) |   |        | 0.36  |  
|                                                      |                                   |   |                                                  |       |         |   |         |       |         |   |          |       |   |   |        |      
|                                                      |                                   | $ | (1.03                                            | )     |         | $ | (1.58   | )     |         | $ | (9.42    | )     |   | $ | (0.04  | )    
|                                                      |                                   |   |                                                  |       |         |   |         |       |         |   |          |       |   |   |        |      

|                                            |                         |   |                                          |       |         |   |         |       |         |   |        |       |   |   |         |       |  
|------------------------------------------- | ----------------------- | - | ---------------------------------------- | ----- | ------- | - | ------- | ----- | ------- | - | ------ | ----- | - | - | ------- | ----- | -
|                                            |                         |   | First                                    |       | Second  |   | Third   |       | Fourth 
|                                            |                         |   | Quarter                                  |       | Quarter |   | Quarter |       | Quarter
|                                            |                         |   |                                          |       |         |   |         |       |        
|                                            |                         |   | (In thousands, except per share amounts)
|2002                                        |                         |   |                                          |       |         |   |         |       |         |   |        |       |   |   |         |      
|Revenues                                    |                         | $ | 23,921                                   |       |         | $ | 25,245  |       |         | $ | 24,719 |       |   | $ | 27,743  |      
|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 and diluted: |                         |   |                                          |       |         |   |         |       |         |   |        |       |   |   |         |      
|                                            | Continuing operations   |   | $                                        | (1.44 | )       |   | $       | (1.45 | )       |   | $      | 3.72  |   |   | $       | (1.18 | )
|                                            | Discontinued operations |   |                                          |      |         |   |         |      |         |   |        | (0.33 | ) |   |         | (0.11 | )
|                                            |                         |   |                                          |       |         |   |         |       |         |   |        |       |   |   |         |      
|                                            |                         | $ | (1.44                                    | )     |         | $ | (1.45   | )     |         | $ | 3.38   |       |   | $ | (1.29   | )    
|                                            |                         |   |                                          |       |         |   |         |       |         |   |        |       |   |   |         |      

Included in net income (loss) for the third
quarter of 2003 is loss on impairment of goodwill
and other intangible assets totaling $103.8 million.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.







ITEM 9A. 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) as of
the date of this annual report, in connection with the preparation of its
annual report on Form 10-K for the twelve months ending August 31, 2003. Based
on this review, the chief executive officer, chief financial officer, and chief
accounting officer concluded that Interlands disclosure controls and
procedures concerning the Companys revenue cycle continue to require further
improvement.

Internal and Disclosure Controls

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) as of
August 31, 2003, in connection with the preparation of its annual report on
Form 10-K.

The Companys internal and disclosure controls and procedures are necessarily
interdependent. During the course of the fiscal 2002 year-end close and
subsequent audit, the Companys management and its auditors identified several
matters related to internal controls that needed to be addressed. Several of
these matters were classified by the auditors as material weaknesses or
reportable conditions in accordance with the standards of the American
Institute of Certified Public Accountants then in effect. During fiscal 2003
management addressed the identified issues with emphasis on the Companys
revenue cycle, including associated revenue recognition policies and
receivables valuation. As a result of these efforts the Company has eliminated
the material weaknesses previously identified, and the current state of
internal and disclosure controls are sufficient to give reasonable assurance
that the financial statements are correct in all material respects.
Nonetheless, the Company recognizes that its current processes continue to rely
upon manual reviews and processes to ensure that neither human error nor system
weakness has resulted in erroneous reporting of financial data.

Discussed below are the remaining specific disclosures and internal control
weaknesses existing in the revenue cycle as identified by management, and the
Companys corresponding mitigating procedures and corrective actions as
implemented through November 24, 2003.

As customer account data from acquired company databases were migrated onto the
Companys centralized billing system, details regarding deferred revenue,
pre-paid amounts, and open accounts receivable balances were not initially
correctly reflected. During fiscal 2003 customer data from the Companys
CommuniTech.Net, Dialtone, and iNNERHOST acquisitions were migrated to the
Interland-GA system. Mitigating procedures implemented to correct this
situation included detailed individual customer account analyses and
reconciliations, scrutiny of data integrity and population controls, and
correcting top-side accounting adjustment entries. All these processes were
completed, and correcting entries posted, prior to the release of consolidated
financial statements.

The Company does not have an efficient system for monitoring accounts
receivable and related credit memo and write-off activity. The Companys
internally developed billing system (MAARS/OASIS) is not integrated into the
Companys general ledger system. Accordingly, discrepancies can arise between
the accounts receivable sub-ledger (per the billing system) and the general
ledger. In order to promptly identify and reconcile these discrepancies, the
Company has designed and programmed a number of database exception reports.
Each entry on an exception report must be manually investigated to identify,
understand, and correct as necessary specific anomalies. Designated personnel
from both the Accounting and Information Technology departments review the
reconciliations in order to design and implement changes to processes with a
view to correcting the root cause of the discrepancies.

Further procedural actions that have been employed to properly report
receivable balances and corresponding revenue recognition include:



| |  |  | All unresolved balances that were older than 90 days were written off
(except in a few specific instances where the balance was deemed
collectible);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | Virtually all shared hosting accounts that age past 60 days and
dedicated accounts that age past 75 days have service de-provisioned and
are put into a write-off queue; (the Company pursues collection of all
past-due accounts, even after the balance is written off.)                                                 
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Generally the Company ceases future revenue recognition for customers
from whom there exists unpaid invoices more than 30 days past due.
Hosting services are also suspended until the invoices are paid at which
point revenue recognition is resumed.                                                                    
|
| |  |  | The Company also maintains a balance in the allowance for doubtful
accounts to cover the following specific percentages of the accounts
receivable aging categories: 7.4% of the 0-60 day balance (which is
periodically adjusted to reflect actual historical experience), and 100%
of all balances more than 60 days old.

The Company has continued to modify the programming of the billing system to
provide additional functionality and reporting capabilities. Central to the
correction of previously identified material weaknesses was the creation and
use of a detailed transaction log which may be queried on an ad-hoc basis as a
check on system output.

Management has moved expeditiously, committing considerable resources to
address the internal control deficiencies it has identified to date.
Nonetheless, the Company continues to make improvements in the efficiency and
automation of accounting processes, and it will take some additional time
before management is satisfied that all processes are optimized such that
commercial billing software can be fully implemented. The final resolution to
all of the aforementioned disclosure and internal control weaknesses will be
the implementation of a new billing and accounts receivable system. In this
regard the Company invested significant time and funds to research and select
an appropriate and proven commercially available system. The result of this
effort was the selection of the ADC SingleView system. The Company expects to
have adequately established and documented its system of internal control over
financial reporting to permit formal evaluation by June 30, 2004.

Interland is committed to ongoing periodic reviews of its controls and their
effectiveness. Controls are improving and management has no reason to believe
that the financial statements included in this report are not fairly stated in
all material respects. However, new problems could be identified in the
future. Management expects to continue to improve controls with each passing
quarter.

Management believes that its practices and procedures, albeit not as mature or
as formal as management intends them to be in the future, are adequate under
the circumstances, and that there are no material inaccuracies or omissions in
this Form 10-K.

In addition to the responses outlined above, the following actions have been
taken to strengthen disclosure and internal controls:

| |  |  | Maintenance of specific documentation files to support
      financial statement and footnote disclosures; | 
| | - |  | ---------------------------------------------------------------------------------------------------------- | 

| |  |  | Quarterly reviews as to the effectiveness of our internal
      and disclosure controls; | 
| | - |  | ---------------------------------------------------------------------------------------- | 

| |  |  | Circulating for review the Companys public filings
      to key members of the senior management team representing each functional
      area in an effort to further ensure that the filings include all required
      disclosures; | 
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

In connection with the evaluation pursuant to Exchange Act Rule 13a-15(d) of
the companys internal controls over financial reporting (as defined in
Exchange Act Rule 13a-15(f)) by the companys management, including its chief
executive officer and chief financial officer, no changes during the quarter
ended August 31, 2003 were identified that have materially affected, or are
reasonably likely to materially affect, the companys internal controls over
financial reporting.







PART III







ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT







ITEM 10A. DISCLOSURE OF AUDIT COMMITTEE FINANCIAL EXPERT

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ITEM 11. EXECUTIVE COMPENSATION







ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT







ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS







ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

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, 10A, 11, 12, 13 and 14 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, 2003, and is
incorporated herein by reference.

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PART IV







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

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, 2003, 2002, and 2001          
|
| |    |  | Consolidated Balance Sheets as of August 31, 2003 and 2002                                                
|
| |    |  | Consolidated Statements of Shareholders Equity for the Fiscal Years
Ended August 31, 2003, 2002, and 2001
|
| |    |  | Consolidated Statements of Cash Flows for the Fiscal Years Ended
August 31, 2003, 2002, and 2001          
|
| |    |  | Notes to Consolidated Financial Statements                                                                
|
| |    |  | Report of Independent Auditors                                                                            
|
| |    |  | Quarterly Financial Information (Unaudited)                                                               



| | 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      |  |      
|        |  |                                                                                                                                                              |  |                           |  |         |  |          |      |             |  |      |  | PREVIOUSLY |  |      
|        |  |                                                                                                                                                              |  |                           |  |         |  |          |      |             |  |      |  | ON FORM    |  | FILED
|        |  |                                                                                                                                                              |  | INCORPORATED BY REFERENCE |  | 10-K    |  | HEREWITH
|        |  |                                                                                                                                                              |  |                           |  |         |  |         
|Exhibit |  | Description                                                                                                                                                  |  | 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 |  |            |  |      

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|           |  |                                                                                                                                                                                                                                                                                     |  |                           |  |          |  |          |      |             |  |      |  |            |  |      
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | -------- |  | -------- | ---- | ----------- |  | ---- |  | ---------- |  | -----
|           |  |                                                                                                                                                                                                                                                                                     |  |                           |  |          |  |          |      |             |  |      |  | FILED      |  |      
|           |  |                                                                                                                                                                                                                                                                                     |  |                           |  |          |  |          |      |             |  |      |  | PREVIOUSLY |  |      
|           |  |                                                                                                                                                                                                                                                                                     |  |                           |  |          |  |          |      |             |  |      |  | ON FORM    |  | FILED
|           |  |                                                                                                                                                                                                                                                                                     |  | INCORPORATED BY REFERENCE |  | 10-K     |  | HEREWITH
|           |  |                                                                                                                                                                                                                                                                                     |  |                           |  |          |  |         
|Exhibit    |  | Description                                                                                                                                                                                                                                                                         |  | Form                      |  | Date     |  | Number   |      | Registrant* |  |      |  |           
|           |  |                                                                                                                                                                                                                                                                                     |  |                           |  |          |  |          |      |             |  |      |  |           
|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 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. |  | S-3/A                     |  | 9/24/02  |  |          | 2.08 |             |  | INLD |  |            |  |      
|           |  |                                                                                                                                                                                                                                                                                     |  |                           |  |          |  |          |      |             |  |      |  |            |  |      
|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.                                                                                                                        |  | 10-K                      |  | 8/31/02  |  |          | 2.08 | (b)         |  | INLD |  |            |  |      
|           |  |                                                                                                                                                                                                                                                                                     |  |                           |  |          |  |          |      |             |  |      |  |            |  |      
|2.09(1)    |  | Agreement and Plan of Merger
dated as of December 19, 2002 by
and among Interland, Inc., Bobcat
Acquisition Corporation,
Hostcentric, Inc. and William
Bunting, Steve Harter, and
Dominique Bellanger as
Stockholders Representatives                                               |  | 8-K                       |  | 12/20/02 |  |          | 2.1  |             |  | INLD |  |            |  |      

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|        |  |                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ------- |  | -------- | ------ | ----------- |  | ---- |  | ---------- |  | -----
|        |  |                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  | FILED      |  |      
|        |  |                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  | PREVIOUSLY |  |      
|        |  |                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  | ON FORM    |  | FILED
|        |  |                                                                                                                                                                            |  | INCORPORATED BY REFERENCE |  | 10-K    |  | HEREWITH
|        |  |                                                                                                                                                                            |  |                           |  |         |  |         
|Exhibit |  | Description                                                                                                                                                                |  | Form                      |  | Date    |  | Number   |        | Registrant* |  |      |  |           
|        |  |                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |           
|2.10(1) |  | Merger Agreement and Plan of
Reorganization among Trellix
Corporation, Interland, Inc. and
Cheetah Acquisition Corporation                                                 |  | S-3                       |  | 1/22/03 |  |          | 2.10   |             |  | INLD |  |            |  |      
|        |  |                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|3.01    |  | Unofficial Restated Articles of
Incorporation of Registrant (as
amended through April 24, 2002)                                                                            |  | 10-Q                      |  | 5/31/02 |  |          | 3.01   |             |  | INLD |  |            |  |      
|        |  |                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|3.01(b) |  | Articles of Amendment to Articles
of Incorporation of Registrant                                                                                                           |  |                           |  |         |  |          |        |             |  |      |  |            |  | X    
|        |  |                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|3.02    |  | Unofficial Restated Bylaws of the
Registrant (as amended through
April 24, 2002)                                                                                           |  | 10-Q                      |  | 5/31/02 |  |          | 3.02   |             |  | 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.                    |  | 2-3                       |  | 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 |  |            |  |      
|        |  |                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|4.07    |  | December 31, 2002 Amendment to
Stock Rights Agreement by and
among Interland, Inc., Bryan                                                                                  |  | S-3/A                     |  | 3/17/03 |  |          | 4.07   |             |  | INLD |  |            |  |      
|        |  |                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|4.08    |  | Heitman and Gabriel Murphy
Form of Warrant                                                                                                                                 |  | S-3                       |  | 1/22/03 |  |          | 4.07   |             |  | INLD |  |            |  |      

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|          |  |                                                                                                                           |  |                           |  |         |  |          |       |             |  |      |  |            |  |      
|--------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ------- |  | -------- | ----- | ----------- |  | ---- |  | ---------- |  | -----
|          |  |                                                                                                                           |  |                           |  |         |  |          |       |             |  |      |  | FILED      |  |      
|          |  |                                                                                                                           |  |                           |  |         |  |          |       |             |  |      |  | PREVIOUSLY |  |      
|          |  |                                                                                                                           |  |                           |  |         |  |          |       |             |  |      |  | ON FORM    |  | FILED
|          |  |                                                                                                                           |  | INCORPORATED BY REFERENCE |  | 10-K    |  | HEREWITH
|          |  |                                                                                                                           |  |                           |  |         |  |         
|Exhibit   |  | Description                                                                                                               |  | Form                      |  | Date    |  | Number   |       | Registrant* |  |      |  |           
|          |  |                                                                                                                           |  |                           |  |         |  |          |       |             |  |      |  |           
|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 |  |            |  |      
|          |  |                                                                                                                           |  |                           |  |         |  |          |       |             |  |      |  |            |  |      
|10.36(c)+ |  | Interland, Inc. 2002 Equity
Incentive Plan                                                                                |  | S-8                       |  | 10/3/03 |  |          | 4.1   |             |  | INLD |  |            |  |      
|          |  |                                                                                                                           |  |                           |  |         |  |          |       |             |  |      |  |            |  |      
|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 |  |            |  |      

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|          |  |                                                                                                                                      |  |                           |  |         |  |          |       |             |  |      |  |            |  |      
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- |  | ------- |  | -------- | ----- | ----------- |  | ---- |  | ---------- |  | -----
|          |  |                                                                                                                                      |  |                           |  |         |  |          |       |             |  |      |  | FILED      |  |      
|          |  |                                                                                                                                      |  |                           |  |         |  |          |       |             |  |      |  | PREVIOUSLY |  |      
|          |  |                                                                                                                                      |  |                           |  |         |  |          |       |             |  |      |  | ON FORM    |  | FILED
|          |  |                                                                                                                                      |  | INCORPORATED BY REFERENCE |  | 10-K    |  | HEREWITH
|          |  |                                                                                                                                      |  |                           |  |         |  |         
|Exhibit   |  | Description                                                                                                                          |  | Form                      |  | Date    |  | Number   |       | Registrant* |  |      |  |           
|          |  |                                                                                                                                      |  |                           |  |         |  |          |       |             |  |      |  |           
|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 |  |            |  |      
|          |  |                                                                                                                                      |  |                           |  |         |  |          |       |             |  |      |  |            |  |      
|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 |  |            |  |      

82



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|        |  |                                                                                                                                  |  |                           |  |          |  |          |       |             |  |      |  |            |  |      
|------- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | -------- |  | -------- | ----- | ----------- |  | ---- |  | ---------- |  | -----
|        |  |                                                                                                                                  |  |                           |  |          |  |          |       |             |  |      |  | FILED      |  |      
|        |  |                                                                                                                                  |  |                           |  |          |  |          |       |             |  |      |  | PREVIOUSLY |  |      
|        |  |                                                                                                                                  |  |                           |  |          |  |          |       |             |  |      |  | ON FORM    |  | FILED
|        |  |                                                                                                                                  |  | INCORPORATED BY REFERENCE |  | 10-K     |  | HEREWITH
|        |  |                                                                                                                                  |  |                           |  |          |  |         
|Exhibit |  | Description                                                                                                                      |  | Form                      |  | Date     |  | Number   |       | Registrant* |  |      |  |           
|        |  |                                                                                                                                  |  |                           |  |          |  |          |       |             |  |      |  |           
|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 |  |            |  |      
|        |  |                                                                                                                                  |  |                           |  |          |  |          |       |             |  |      |  |            |  |      
|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 |  |            |  |      

83



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##### Table of Contents



|          |  |                                                                                                                          |  |                           |  |         |  |          |       |             |  |      |  |            |  |      
|--------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- |  | ------- |  | -------- | ----- | ----------- |  | ---- |  | ---------- |  | -----
|          |  |                                                                                                                          |  |                           |  |         |  |          |       |             |  |      |  | FILED      |  |      
|          |  |                                                                                                                          |  |                           |  |         |  |          |       |             |  |      |  | PREVIOUSLY |  |      
|          |  |                                                                                                                          |  |                           |  |         |  |          |       |             |  |      |  | ON FORM    |  | FILED
|          |  |                                                                                                                          |  | INCORPORATED BY REFERENCE |  | 10-K    |  | HEREWITH
|          |  |                                                                                                                          |  |                           |  |         |  |         
|Exhibit   |  | Description                                                                                                              |  | Form                      |  | Date    |  | Number   |       | Registrant* |  |      |  |           
|          |  |                                                                                                                          |  |                           |  |         |  |          |       |             |  |      |  |           
|10.88+    |  | Retention Agreement between the
Registrant and Jeff Moeser, dated
as of February 23, 2001                                |  | 8-K                       |  | 5/31/01 |  |          | 10.88 |             |  | INLD |  |            |  |      
|          |  |                                                                                                                          |  |                           |  |         |  |          |       |             |  |      |  |            |  |      
|10.89     |  | MTI Shareholder Agreement dated
as of March 22, 2001 between the
Registrant and MTI                                      |  | 10-Q                      |  | 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                      |  | 5/3/01  |  |          | 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 |  |            |  |      
|          |  |                                                                                                                          |  |                           |  |         |  |          |       |             |  |      |  |            |  |      
|10.96(d)+ |  | Third Amendment to
Interland-Georgia Stock Incentive
Plan                                                                |  | S-8                       |  | 9/17/01 |  |          | 4.05  | (d)         |  | INLD |  |            |  |      

84



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##### Table of Contents



|          |  |                                                                                                                                                    |  |                           |  |         |  |          |       |             |  |      |  |            |  |      
|--------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ------- |  | -------- | ----- | ----------- |  | ---- |  | ---------- |  | -----
|          |  |                                                                                                                                                    |  |                           |  |         |  |          |       |             |  |      |  | FILED      |  |      
|          |  |                                                                                                                                                    |  |                           |  |         |  |          |       |             |  |      |  | PREVIOUSLY |  |      
|          |  |                                                                                                                                                    |  |                           |  |         |  |          |       |             |  |      |  | ON FORM    |  | FILED
|          |  |                                                                                                                                                    |  | INCORPORATED BY REFERENCE |  | 10-K    |  | HEREWITH
|          |  |                                                                                                                                                    |  |                           |  |         |  |         
|Exhibit   |  | Description                                                                                                                                        |  | Form                      |  | Date    |  | Number   |       | Registrant* |  |      |  |           
|          |  |                                                                                                                                                    |  |                           |  |         |  |          |       |             |  |      |  |           
|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 |  |            |  |      

85



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##### Table of Contents



|           |  |                                                                                                                                                                                        |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ------- |  | -------- | ------ | ----------- |  | ---- |  | ---------- |  | -----
|           |  |                                                                                                                                                                                        |  |                           |  |         |  |          |        |             |  |      |  | FILED      |  |      
|           |  |                                                                                                                                                                                        |  |                           |  |         |  |          |        |             |  |      |  | PREVIOUSLY |  |      
|           |  |                                                                                                                                                                                        |  |                           |  |         |  |          |        |             |  |      |  | ON FORM    |  | FILED
|           |  |                                                                                                                                                                                        |  | INCORPORATED BY REFERENCE |  | 10-K    |  | HEREWITH
|           |  |                                                                                                                                                                                        |  |                           |  |         |  |         
|Exhibit    |  | Description                                                                                                                                                                            |  | 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                      |  | 8/3/101 |  |          | 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                                                                                                   |  | 10-K                      |  | 8/31/02 |  |          | 10.108 | (a)         |  | INLD |  |            |  |      
|           |  |                                                                                                                                                                                        |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|10.108(b)+ |  | Amendment to Employment Agreement
between the Registrant and Allen
Shulman dated as of September 10,
2002.                                                                             |  | 10-K                      |  | 8/31/02 |  |          | 10.108 | (b)         |  | INLD |  |            |  |      
|           |  |                                                                                                                                                                                        |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|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 |  |            |  |      

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##### Table of Contents



|          |  |                                                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|--------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ------- |  | -------- | ------ | ----------- |  | ---- |  | ---------- |  | -----
|          |  |                                                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  | FILED      |  |      
|          |  |                                                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  | PREVIOUSLY |  |      
|          |  |                                                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  | ON FORM    |  | FILED
|          |  |                                                                                                                                                                                                            |  | INCORPORATED BY REFERENCE |  | 10-K    |  | HEREWITH
|          |  |                                                                                                                                                                                                            |  |                           |  |         |  |         
|Exhibit   |  | Description                                                                                                                                                                                                |  | Form                      |  | Date    |  | Number   |        | Registrant* |  |      |  |           
|          |  |                                                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |           
|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 |  |            |  |      
|          |  |                                                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|10.113    |  | Promissory Note in the principal
amount of $5,370,006 dated July
20, 2001 in favor of U.S. Bank
National Association                                                                                       |  | 10-K                      |  | 8/31/02 |  |          | 10.113 |             |  | INLD |  |            |  |      
|          |  |                                                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|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                                                       |  | 10-K                      |  | 8/31/02 |  |          | 10.114 |             |  | INLD |  |            |  |      
|          |  |                                                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|10.115(2) |  | Microsoft Services Provider
License Agreement dated as of
January 15, 2002                                                                                                                                 |  | 10-K                      |  | 8/31/02 |  |          | 10.115 |             |  | INLD |  |            |  |      
|          |  |                                                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|10.116    |  | Escrow Agreement dated as of June
13, 2003, by and among Interland,
Inc., William B. Bunting, Steve
Harter, and Dominique Bellanger,
and SunTrust Bank, a Georgia
banking corporation (the Escrow
Agent) |  | 10-Q                      |  | 5/31/03 |  |          | 10.1   |             |  | INLD |  |            |  |      
|          |  |                                                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|14.00     |  | Code of Conduct                                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |            |  | X    
|          |  |                                                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|21.01     |  | Subsidiaries of the Registrant                                                                                                                                                                             |  |                           |  |         |  |          |        |             |  |      |  |            |  | X    
|          |  |                                                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|23.01     |  | Consent of Independent Accountants                                                                                                                                                                         |  |                           |  |         |  |          |        |             |  |      |  |            |  | X    
|          |  |                                                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|24.01     |  | Power of Attorney                                                                                                                                                                                          |  |                           |  |         |  |          |        |             |  |      |  |            |  | X    
|          |  |                                                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|31.1      |  | Certification of Chief Executive
Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002                                                                                                         |  |                           |  |         |  |          |        |             |  |      |  |            |  | X    
|          |  |                                                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|31.2      |  | Certification of Chief Financial
Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002                                                                                                         |  |                           |  |         |  |          |        |             |  |      |  |            |  | X    
|          |  |                                                                                                                                                                                                            |  |                           |  |         |  |          |        |             |  |      |  |            |  |      
|32.1      |  | Certification of Chief Executive
Officer under Section 906 of the
Sarbanes-Oxley Act of 2002                                                                                                               |  |                           |  |         |  |          |        |             |  |      |  |            |  | X    

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##### Table of Contents



|        |  |                                                                                              |  |                           |  |      |  |          |  |             |  |  |  |            |  |      
|------- |  | -------------------------------------------------------------------------------------------- |  | ------------------------- |  | ---- |  | -------- |  | ----------- |  |  |  | ---------- |  | -----
|        |  |                                                                                              |  |                           |  |      |  |          |  |             |  |  |  | FILED      |  |      
|        |  |                                                                                              |  |                           |  |      |  |          |  |             |  |  |  | PREVIOUSLY |  |      
|        |  |                                                                                              |  |                           |  |      |  |          |  |             |  |  |  | ON FORM    |  | FILED
|        |  |                                                                                              |  | INCORPORATED BY REFERENCE |  | 10-K |  | HEREWITH
|        |  |                                                                                              |  |                           |  |      |  |         
|Exhibit |  | Description                                                                                  |  | Form                      |  | Date |  | Number   |  | Registrant* |  |  |  |           
|        |  |                                                                                              |  |                           |  |      |  |          |  |             |  |  |  |           
|        |  |                                                                                              |  |                           |  |      |  |          |  |             |  |  |  |            |  |      
|32.1    |  | Certification of Chief Financial
Officer under Section 906 of the
Sarbanes-Oxley Act of 2002 |  |                           |  |      |  |          |  |             |  |  |  |            |  | 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                                                                                                                                                                                                                 
|   
|    |  | On June 13, 2003, the Company filed a Form 8-K regarding the closing of its acquisition of HostCentric, Inc.                                                                                                                        
|   
|    |  | On June 27, 2003, the Company filed a Form 8-K with a press release
regarding its financial results for the third quarter.                                                                                                          
|   
|    |  | On July 1, 2003, the Company filed a Form 8-K with a press release
regarding its financial results for the third quarter.                                                                                                           
|   
|    |  | On July 28, 2003, the Company filed a Form 8-K with a press release
regarding its 1-for-10 reverse stock split.                                                                                                                     

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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 26, 2003
    
    /s/  ALLEN L. SHULMANBy: Allen L. ShulmanSenior Vice President, General Counsel andChief Financial Officer


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. KOCHER
    
    Chairman of the
    
    November 26, 2003Board, President andJoel J. Kocher
    
    Chief ExecutiveOfficer (principalexecutive officer)/s/  ALLEN L. SHULMAN
    
    Senior Vice
    
    November 26, 2003President, ChiefAllen L. Shulman
    
    Financial Officer andGeneral Counsel(principal financialofficer)/s/  GONZALO TRONCOSO
    
    Area Vice President
    
    November 26, 2003and ControllerGonzalo Troncoso
    
    (principal accountingofficer)/s/  JOHN B. BALOUSEK
    
    Director
    
    November 26, 2003John B. Balousek/s/  DR. JOHN PATRICK CRECINE
    
    Director
    
    November 26, 2003Dr. John Patrick Crecine/s/  ROBERT LEE
    
    Director
    
    November 26, 2003Robert Lee/s/  EDWARD L. SHAPIRO
    
    Director
    
    November 26, 2003Edward L. Shapiro/s/  ROBERT T. SLEZAK
    
    Director
    
    November 26, 2003Robert T. Slezak


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##### Table of Contents



SCHEDULE II
INTERLAND, INC.
VALUATION AND QUALIFYING ACCOUNTS

Fiscal Year EndedAugust 31, 2003
    
    August 31, 2002
    
    August 31, 2001(In thousands)Allowance For Doubtful AccountsBalance at beginning of year
    
    $
    3,843
    
    
    $
    1,810
    
    
    $
    6,178Additions charged to bad debt expense
    
    
    6,621
    
    
    
    10,529
    
    
    
    2,233Acquisitions
    
    
    
    
    
    
    1,135
    
    
    
    158Reductions and write-offs
    
    
    (10,091
    )
    
    
    (9,631
    )
    
    
    (6,759
    )Balance at end of year
    
    $
    373
    
    
    $
    3,843
    
    
    $
    1,810Included in:Continuing operations
    
    $
    373
    
    
    $
    3,843
    
    
    $
    1,810Discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    Deferred Tax Asset Valuation AllowanceBalance at beginning of year
    
    $
    81,406
    
    
    $
    133,251
    
    
    $
    4,652Additions charged to expense
    
    
    
    
    
    
    
    
    
    
    21,030Discontinued operations
    
    
    
    
    
    
    
    
    
    
    67,600Change in loss carryforward
    
    
    24,870
    
    
    
    (54,873
    )
    
    
    Additions from acquisitions
    
    
    10,516
    
    
    
    3,028
    
    
    
    39,969Balance at end of year
    
    $
    116,792
    
    
    $
    81,406
    
    
    $
    133,251Included in:Continuing operations
    
    $
    116,792
    
    
    $
    81,406
    
    
    $
    65,651Discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    67,600


90