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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-K





xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002





or





 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934





For the transition period
from                    to



Commission File Number 0-26115





INTERLIANT, INC.

(Exact name of registrant as specified in its
charter)





|Delaware                                                       |  | 13-3978980                         
|-------------------------------------------------------------- |  | -----------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. EmployerIdentification No.)





TWO MANHATTANVILLE ROAD

PURCHASE, NEW YORK
10577

(Address of principal executive offices, zip code)





(914) 640-9000

(Registrants telephone number, Including Area Code)





Securities registered pursuant to Section 12(b) of the Act: None





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





Common Stock, $.01 Par Value Per Share





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



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



Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)

Yes ̈No    x



The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of Common Stock on
June 30, 2002 of $0.10 as reported on the NASDAQ, was approximately $2.4 million. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.



As of March 31, 2003, approximately 57,500,000 shares of Common Stock, $.01 par value per share, were outstanding.





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|         |  | TABLE OF CONTENTS                                                                              |  |   
|-------- |  | ---------------------------------------------------------------------------------------------- |  | --
|        
|         |  | PART I                                                                                         |  |   
|Item 1.  |  | Business                                                                                       |  | 4 
|Item 2.  |  | Properties                                                                                     |  | 9 
|Item 3.  |  | Legal Proceedings                                                                              |  | 9 
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                            |  | 9 
|        
|         |  | PART II                                                                                        |  |   
|Item 5.  |  | Market for the Companys Common Equity and Related Stockholder Matters                         |  | 9 
|Item 6.  |  | Selected Financial Data                                                                        |  | 10
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 12
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                     |  | 21
|Item 8.  |  | Financial Statements and Supplementary Data                                                    |  | 21
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 53
|        
|         |  | PART III                                                                                       |  |   
|Item 10. |  | Directors and Executive Officers                                                               |  | 53
|Item 11. |  | Executive Compensation                                                                         |  | 53
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 53
|Item 13. |  | Related Party Transactions                                                                     |  | 53
|Item 14. |  | Controls and Procedures                                                                        |  | 53
|        
|         |  | PART IV                                                                                        |  |   
|        
|Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  | 54
|         |  | Signatures                                                                                     |  | 56
|         |  | Certifications                                                                                 |  | 59





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Interliant is a registered
trademark of Interliant, Inc. This Report on Form 10-K contains trademarks of other companies. These trademarks are the property of their respective holders. All references to we, us, our, or Interliant in this Report on Form 10-K means Interliant,
Inc.





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PART I



THE STATEMENTS IN THIS REPORT ON FORM 10-K THAT ARE NOT
DESCRIPTIONS OF HISTORICAL FACTS MAY BE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT MANAGEMENTS CURRENT VIEWS, ARE BASED ON CERTAIN ASSUMPTIONS AND ARE SUBJECT TO RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, RISKS DETAILED
HEREIN AND IN OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, TO WHICH YOU ARE REFERRED.



|ITEM 1. |  | BUSINESS
|------- |  | --------



BANKRUPTCY PROCEEDING; LIQUIDATION OF COMPANY



In August 2002, we and our domestic subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the Southern District
of New York (Bankruptcy Court) for reorganization under Chapter 11 of the Bankruptcy Code (Chapter 11 Proceeding). Our United Kingdom subsidiaries are not debtors in the Chapter 11 Proceeding.



We are actively pursuing the sale of substantially all of our
assets and operations and the assets of our domestic subsidiaries, including the capital stock of our non-debtor subsidiaries. Upon the consummation of such a sale, all of our remaining assets (including proceeds received from the sale of our
assets) would be distributed to our creditors, without any distribution being made to holders of our Common Stock. We would then have no assets or operations. If we are unable to consummate a sale of our assets, we anticipate that we will have to
cease operations in the second quarter of 2003 due to insufficient cash flows resulting from continuing operating losses and we would then liquidate our assets in the Chapter 11 Proceeding. Holders of Common Stock would not receive any proceeds of
such a liquidation.



Accordingly, we do not
expect to emerge from the Chapter 11 Proceeding with any assets or operations.



On April 11, 2003, we entered into an asset purchase agreement (APA) with an affiliate of Pequot Capital Management, Inc. (Pequot) to sell substantially all of our operations
and assets, less certain liabilities. The closing of the transactions contemplated by the APA is subject to Bankruptcy Court approval and other conditions.



The following is a description of the business we currently conduct, which is to be sold in the above described transaction:



General



We provide managed infrastructure solutions, encompassing messaging and collaboration, managed hosting,
bundled-in managed security, and an integrated set of professional services offerings that differentiate and add customer value to the core infrastructure solutions. We sell to the large/enterprise and medium markets through our direct sales force
and through channel partners.



We offer secure
infrastructure and a focused suite of e-business solutions. Our customers face significant challenges in doing business on the Internet due to its technical complexity, the shortage of technical resources and/or specialized skills, the time
necessary to implement applications and the cost of implementation and ongoing support. Our offerings enable our customers to maintain critical business functions without maintaining an IT infrastructure and staff that are not central to their core
competencies.



Services and Solutions



The Interliant Solutions Suite is comprised of the following
offerings: Interliant Messaging and Collaboration, Interliant Managed Hosting, and Interliant Managed Security, plus related professional services (Interliant Services).



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Interliant Messaging and
Collaboration



We offer email, collaboration
and knowledge management solutions that allow a customers widely distributed work force to collaborate through shared software applications, intranets, extranets, and messaging services for internal and external communication. Interliant
Messaging and Collaboration solutions help customers identify and implement the messaging and application strategy that best meets the needs of their businesses.



To support our end-to-end approach to messaging and collaboration, we offer a variety of products and
services. We provide our customers with migration services from legacy mail systems, handling co-existence and integration issues. For customers who choose to outsource their messaging and collaboration infrastructures, we can manage their system in
our data centers or remotely manage it in our own facility. Regardless of the location, we assume responsibility for the management, monitoring, and support of the resulting mission-critical messaging environment, ensuring a highly reliable solution
with service level guarantees. Beyond messaging, we also create collaborative, Web-based applications as well as manage existing applications so that organizations can focus on their core business.



Messaging and Collaboration solutions include:



| | · |  | Managed Lotus Domino, a service for hosting a customers Domino messaging and/or application platform;
| | - |  | ------------------------------------------------------------------------------------------------------

| | · |  | Managed Microsoft Exchange, a hosted solution for Exchange messaging;
| | - |  | ---------------------------------------------------------------------

| | · |  | Remote Managed Messaging,a solution for managing a customers Domino or Exchange infrastructure that is located at their facility;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------

| | · |  | IBM Lotus Team ( QuickPlace), IBM Lotus Web Conferencing and IBM Lotus Instant Messaging ( Sametime) Hosting,turnkey solutions that provide customers with
Lotus technology for virtual teams, secure chat, and online collaboration;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · |  | AppCare, a professional services offering that provides the customer with remote management of its Domino applications;
| | - |  | -----------------------------------------------------------------------------------------------------------------------

| | · |  | Mail Migration, a professional services offering that assists customers in migrations and implementations of messaging platforms and infrastructures; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | · |  | Strategic Servicesprovided by Interliant Services consultants, including a messaging total cost of ownership review, messaging scorecard, and collaboration
strategy analysis.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Interliant Managed
Hosting



Interliant Managed Hosting provides
hosting infrastructure for network-based applications, which allows customers to store their databases, applications or Web sites on equipment owned and maintained by us or on their equipment located in our data centers, or on equipment at
customers premises by means of remote access.



Interliants Managed Hosting solutions encompass:



| | · |  | Industry-leading Operating Systems: Windows 2000/2003, Red Hat Linux, and Sun Solaris;
| | - |  | --------------------------------------------------------------------------------------

| | · |  | Hardware Platforms: Dell PowerEdge servers and PowerVault storage products, HP Proliant servers and Sun Enterprise servers and StorEdge storage products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | · |  | Software Hosting: Database hosting (Oracle 8i/9i, Microsoft SQL Server 2000, IBM DB2 and Informix) and Web servers (such as Microsoft IIS, Apache and Zeus);
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · |  | Managed Care Services: including system activity, disk space utilization, Web server, initial configuration, and anti-virus reviews, detailed security scans,
mail server review, system administration support, advanced Apache and IIS Web server support, DNS services;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · |  | Database Administrator (DBA) Services: 24x7 DBA support plus value-added services such as database replication and implementation consulting; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

| | · |  | Web-Based Reporting: detailed reports that help customers maximize their hosting investment.
| | - |  | --------------------------------------------------------------------------------------------



Interliant Managed Security



Interliant Managed Security is bundled with the our core
Messaging and Collaboration or Managed Hosting solutions. Our managed security solutions are based on third-parties firewall and virtual private network (VPN) technologies, bundled with security engineering as well as monitoring
and management services. Interliant Managed



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Security leverages security products from providers such as Check Point Software, Nokia, Enterasys, Avaya,
and other vendors.



We offer security planning
for both existing networks and those under design. Our consultants and engineers help design, build, and deploy secure networks for both internal and external requirements. Our Managed Security solutions and services include security policy
development; planning for existing and future network and Web initiatives; firewall design and implementation; VPN/remote access design; authentication and encryption services; managed firewall services: hosted, remote managed and remote monitored
services; and managed VPN services.



Interliant Branded
Solutions



The Interliant Branded Solutions
program provides organizations with the ability to leverage our managed infrastructure solutions as a privately labeled or co-branded offering to our existing customers. We can tailor a portfolio of managed services for our partners or deliver a
specific core offering that the partners then integrate with their existing service suite.



Interliant Professional Services



Interliant Professional Services include capabilities to create intranet, extranet, and numerous application hosting solutions for customers, as well as network design and implementation, security
implementation and back-end Web development projects. In addition, we provide support for our customers enterprise networking needs. Our services include network architecture and design, strategic technology planning and application
development and implementation.



The portfolio of
Interliant Professional Services includes:



Infrastructure Consulting: Our services include email migration strategy, planning, and execution, as well as stability and performance tuning and security audits of existing infrastructure. We help our customers utilize the
features of their chosen messaging and collaboration platforms, such as Lotus Domino, Domino.doc®, IBM Lotus Web Conferencing and Instant Messaging (Sametime®), QuickPlace, IBM WebSphere®, Microsoft®Active Directory, Outlook, and Microsoft Exchange. Our consultants can help troubleshoot problems and devise automated systems to improve customers staff efficiency.



Application Development and Consulting: Our consultants analyze customers business problems,
legacy systems and data, and technology requirements, and develop applications using tools such as Lotus Domino, WebSphere, XML, Sun®Java, IBM Lotus Web Conferencing and Instant Messaging and other Web technologies.
We build systems that can integrate with relational databases and legacy systems.



Application Management: We can also assist customers by supporting existing applications.



Customers



We have a diversified customer base across our service offerings. Our customer contracts generally range in duration from month-to-month
to three years. Our customers include end users representing a variety of business types, from mid-sized businesses to large enterprises. Our customers are principally in the United States and the United Kingdom.



Strategic Relationships



Our strategic relationships and partnerships with technology
companies allow us to provide a wide range of services to meet customers needs. The companies that we maintain strategic relationships with include IBM, Lotus Development, Microsoft, Cisco Systems, Check Point Software and Sun.



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Technology Facilities and
Network Operations.



Hosting Solutions



Although industry-standard Web servers are
adequate for basic Web hosting, we believe that efficiently managing complex, Internet-based applications requires significant technological innovations. We have developed a proprietary managed hosting platform. Our hosting architecture provides
customers with industry technologies, including EMC Symmetrix storage, Dell PowerEdge servers and Sun Enterprise servers.



Facilities and Operations



Our executive offices, leased by us, are located in Purchase, New York. We also lease the facilities that house our data centers in
Houston, Texas and Vienna, Virginia, as well as a data center in London, England. The lease terms for our Houston, Vienna, and Purchase facilities have been recently restructured in conjunction with our Chapter 11 Proceeding. Additionally, we have
entered into a new lease for substantially reduced space in the Boston, Massachusetts vicinity, where the professional services division is primarily located. We have network and server monitoring infrastructures in all three of our data centers.
Our customer service representatives and systems administrators are located in our Houston and Vienna data centers.



Our Network Operations Centers (NOCs) are responsible for monitoring our entire network, server farm, security infrastructure
and hosted applications. The NOCs also monitor our Internet and telecommunications connections to ensure that they are functional and that traffic is properly loaded. Our NOCs are located in each US data center for distributed management of each of
the US and UK data centers.



Connectivity



Customers
can access our data centers:



| | · |  | via the Internet over Sprints, Broadwings and NTT/Verios worldwide networks;
| | - |  | -------------------------------------------------------------------------------



| | · |  | through X.25 connections provided by Worldcom;
| | - |  | ----------------------------------------------



| | · |  | through X.400 connections provided by Cable and Wireless;
| | - |  | ---------------------------------------------------------



| | · |  | over dedicated circuits between data centers through Sprint; or
| | - |  | ---------------------------------------------------------------



| | · |  | domestically via a toll-free number for either remote or Internet protocol virtual private network (IPVPN) access.
| | - |  | --------------------------------------------------------------------------------------------------------------------



Customer Service



Through our customer service systems, customer service
representatives can generally resolve issues via e-mail or a toll-free number. We also offer many of our customers a self-service customer support alternative, which provides site statistics such as disk storage capacity and bandwidth utilization.
Certain customer accounts also have access to dedicated support engineers who are familiar with each unique configuration or requirement a larger customer may have.



Competition



The market we serve is highly competitive and is characterized by relative ease of entry. Our current and potential competitors include:



| | · |  | ASPs such as Corio, United Messaging, and USinternetworking;
| | - |  | ------------------------------------------------------------



| | · |  | Web hosting and Internet services companies such as Digex, Divine, Cable & Wireless, Interland, NaviSite, NTT Verio, Rackspace, and local and regional hosting
providers;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Internet professional services companies such as EDS, IBM Global Services, Verisign and regional professional services organizations; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| | · |  | regional and local telecommunications companies, including the regional Bell operating companies such as Qwest Communications, MCI/Worldcom and Verizon.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



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Most of our
competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we do. As a result, certain of
these competitors may be able to develop and expand their network infrastructures and service offerings more rapidly, adapt to new or emerging technologies and changes in customer requirements more quickly, take advantage of acquisition and other
opportunities more readily, devote greater resources to the marketing and sale of their services and adopt more aggressive pricing policies than we can. In addition, these competitors have entered and will likely continue to enter into joint
ventures or consortia to provide additional services competitive with those provided by us.



Intellectual Property Rights



We rely on a combination of copyright, trademark, service mark, trade secret laws and contractual restrictions to establish and protect certain proprietary rights in our services. We have no patented
technology that would preclude or inhibit competitors from entering our market. The steps taken by us to protect our intellectual property may not prove sufficient to prevent misappropriation of our technology or to deter independent third-party
development of similar technologies. The laws of certain foreign countries may not protect our services or intellectual property rights to the same extent as do the laws of the United States. We also rely on certain technologies that we license from
third parties. These third-party technology licenses may not continue to be available to us on commercially reasonable terms. The loss of the ability to use such technology could require us to obtain the rights to use substitute technology, which
could be more expensive or offer lower quality or performance and therefore have an adverse effect on our business.



To date, we have not been notified that our services infringe on the proprietary rights of third parties, but third parties could claim
infringement by us with respect to current or future services. From time to time, we are notified that the content of one of our customers sites infringes on a third partys trademark or copyright. In response, we take steps pursuant to
the Digital Millennium Copyright Act to inform the customer of such claim and, where appropriate, terminate a customers service. We expect that participants in our markets will be increasingly subject to infringement claims as the number of
services and competitors in our industry segment grows. Any such claim, whether meritorious or not, could be time consuming, result in costly litigation, cause service installation delays or require us to enter into royalty or licensing agreements.
Such royalty or licensing agreements might not be available on terms acceptable to us or at all. As a result, any such claim could have an adverse effect upon our business.



Government Regulation



We currently are not subject to direct federal, state or local government regulation, other than regulations that apply to businesses
generally. Only a relatively small body of laws and regulations currently applies specifically to hosting and e-commerce activities, or access to the Internet. Due to the increasing popularity and use of the Internet, however, it is possible that
laws and regulations with respect to the Internet may be adopted at international, 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. Although sections of the Communication Decency Act of 1996 that, among other things,
proposed to impose criminal penalties on anyone distributing indecent material to minors over the Internet were held to be unconstitutional by the U.S. Supreme Court, similar laws may be proposed, adopted and upheld. The nature of future
legislation and the manner in which it may be interpreted and enforced cannot be fully determined and, therefore, legislation similar to the Communications Decency Act could subject us and/or our customers to potential liability, which in turn could
have a material adverse effect on our business, results of operations and financial condition. The adoption of any such laws or regulations might decrease the growth of the Internet, which in turn could decrease the demand for our services, increase
the cost of doing business or in some other manner have an adverse effect on our business.



We collect sales and other taxes in the states in which we have offices and are required by law to do so. We currently do not collect sales or other taxes with respect to the sale of services or
products in all states and countries in which we do not have offices and are not required by law to do so. One or more jurisdictions have sought to impose sales or other tax obligations on companies that engage in online commerce within their
jurisdictions. A successful assertion by one or more jurisdictions that we should collect sales or other taxes on our products and services, or remit payment of sales or other taxes for prior periods, could have an adverse effect on our 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. The vast majority of such laws



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were adopted prior to the advent of the Internet and related technologies and, as a result, do not
contemplate or address the unique issues of the Internet and related technologies. Changes to such laws intended to address these issues could create uncertainty in the marketplace that could reduce demand for our services, increase the cost of
doing business as a result of costs of litigation or increased service delivery costs or could in some other manner have an adverse effect on our business.



Any new legislation or regulation, or the application of laws or regulations from jurisdictions whose laws do not currently apply to our
business, could have an adverse effect on our business.



Employees



As of December
31, 2002, we had 176 employees, of which 24 were in sales, distribution and marketing, 96 were IT professionals, including engineering, technical and professional services, 18 were in customer care and 38 were in finance and administration. None of
our employees are represented by a labor union and we believe that our employee relations are good.



|ITEM 2. |  | PROPERTIES
|------- |  | ----------



Our executive offices, which we lease, are located in Purchase, New York. We also lease the facilities that house our data centers in
Houston, Texas and Vienna, Virginia, as well as a data center in London, England. We lease an additional facility in the Boston, Massachusetts vicinity where the professional services division is primarily located. We believe these facilities are
adequate for our current and near term needs.



|ITEM 3. |  | LEGAL PROCEEDINGS
|------- |  | -----------------



In August 2002, we and our domestic subsidiaries filed voluntary petitions in the Bankruptcy Court for reorganization under Chapter 11 of
the Bankruptcy Code. In the Chapter 11 Proceeding, and subject to the approval of the Bankruptcy Court, we are attempting to sell substantially all of our assets and operations. The cash proceeds generated by such a sale would be paid to our
creditors, with no distribution being made to any holders of our Common Stock. If we are not able to consummate the sale of our assets, we anticipate ceasing operations during the second quarter of 2003 due to insufficient cash flows to support our
operations. We do not expect to emerge from the Chapter 11 Proceeding with any assets or operations.



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



Not applicable



PART II



|ITEM 5. |  | MARKET FOR THE COMPANYS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- |  | ----------------------------------------------------------------------



Market for Common Stock and Holders of Record



Our Common Stock commenced trading on the Nasdaq National
Market under the symbol INIT on July 8, 1999. In July 2002, our Common Stock was delisted from Nasdaq and began trading on the Over The Counter Bulletin Board (OTC). The following table sets forth, for the periods indicated, the
intra-day high and low sales prices per share of Common Stock on the Nasdaq National Market until July 2002 and on the OTC thereafter. Such prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.



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|                            |  | High |       | Low
|--------------------------- |  | ---- | ----- | ---
|2001                       
|                           
|First Quarter               |  | $    | 6.625 |    
|Second Quarter              |  | $    | 3.200 |    
|Third Quarter               |  | $    | 0.780 |    
|Fourth Quarter              |  | $    | 0.860 |    
|                           
|2002                       
|                           
|First Quarter               |  | $    | 0.550 |    
|Second Quarter              |  | $    | 0.280 |    
|Third Quarter until July 16 |  | $    | 0.180 |    
|Third Quarter from July 17  |  | $    | 0.100 |    
|Fourth Quarter              |  | $    | 0.050 |    



As of
March 31, 2003, there were approximately 210 stockholders of record of our Common Stock. We believe that as of March 31, 2003 we had approximately 12,500 beneficial owners of our Common Stock.



Dividends



We have never paid or declared cash dividends on our Common Stock.



Equity Compensation Plan Information



The following table sets forth information with respect to our
equity compensation plans (including individual compensation arrangements) as of December 31, 2002.





|Plan category                                              |  | Number of securities to be issued upon exercise of outstanding options, warrants and rights |  | Weighted average exercise price of outstanding options warrants and rights |  | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|                                                          
|Equity compensation plans approved by security holders     |  | 5,600,294                                                                                   |  | $1.98                                                                      |  | 11,999,706                                                                                                                                 
|Equity compensation plans not approved by security holders |  |                                                                                             |  |                                                                            |  |                                                                                                                                            
|                                                           |  |                                                                                             |  |                                                                            |  |                                                                                                                                            
|Total                                                      |  | 5,600,294                                                                                   |  | $1.98                                                                      |  | 11,999,706                                                                                                                                 
|                                                           |  |                                                                                             |  |                                                                            |  |                                                                                                                                            





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|ITEM 6. |  | SELECTED CONSOLIDATED FINANCIAL DATA (In thousands, except per share data)
|------- |  | --------------------------------------------------------------------------



The following selected consolidated financial data should be
read in conjunction with Interliants Consolidated Financial Statements and Notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K. The
statement of operations for the years ended December 31, 1998, 1999, 2000 and 2001 reclassified to give effect to discontinued operations and the balance sheet data as of December 31, 1998, 1999, 2000 and 2001, are derived from the consolidated
financial statements of Interliant that have been audited by Ernst & Young LLP, independent auditors, whose report with respect thereto is included elsewhere in this Form 10-K. The statement of operations for the year ended December 31, 2002 and
the balance sheet data as of December 31, 2002 are derived from the consolidated financial statements of Interliant, Inc. that have been audited by Urbach Kahn & Werlin LLP whose report with respect thereto is included elsewhere in this Form
10K.





|                                                                                                                       |  | Years ended December 31,              |         
|---------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | --------
|                                                                                                                       |  | 2002                                  |         
|                                                                                                                       |  |                                       |         
|                                                                                                                       |  | (In thousands, except per share data) |         
|                                                                                                                      
|Statement of Operations Data:                                                                                          |  |                                       |         
|Revenue                                                                                                                |  | $                                     | 44,616  
|                                                                                                                       |  |                                       |         
|Costs and expenses:                                                                                                    |  |                                       |         
|Cost of revenue                                                                                                        |  |                                       | 26,598  
|Sales and marketing                                                                                                    |  |                                       | 10,402  
|General and administrative                                                                                             |  |                                       | 21,443  
|Non-cash compensation                                                                                                  |  |                                       | 777     
|Depreciation                                                                                                           |  |                                       | 5,824   
|Amortization of intangibles                                                                                            |  |                                       | 709     
|Restructuring charges                                                                                                  |  |                                       | 248     
|Impairment loss                                                                                                        |  |                                       | 22,556  
|                                                                                                                       |  |                                       |         
|                                                                                                                       |  |                                       | 88,557  
|                                                                                                                       |  |                                       |         
|Loss, before items listed below                                                                                        |  |                                       | (43,941 
|Gain on sale of businesses                                                                                             |  |                                       | 8,521   
|Other income (expense), net                                                                                            |  |                                       | 607     
|Interest income (expense), net                                                                                         |  |                                       | (7,229  
|Reorganization items, net                                                                                              |  |                                       | (3,881  
|                                                                                                                       |  |                                       |         
|Loss before minority interest, discontinued operations extra- ordinary gain and
cumulative effect of accounting change |  |                                       | (45,923 
|Minority interest                                                                                                      |  |                                       |         
|                                                                                                                       |  |                                       |         
|Loss before discontinued operations, extraordinary gain and cumulative effect of
accounting change                     |  |                                       | (45,923 
|Loss from discontinued operations                                                                                      |  |                                       | (2,990  
|                                                                                                                       |  |                                       |         
|Loss before extraordinary gain and cumulative effect of accounting
change                                              |  |                                       | (48,913 
|Extraordinary gain on debt refinancing                                                                                 |  |                                       |         
|                                                                                                                       |  |                                       |         
|Loss before cumulative effect of accounting change                                                                     |  |                                       | (48,913 
|Cumulative effect of accounting change                                                                                 |  |                                       |         
|                                                                                                                       |  |                                       |         
|Net loss                                                                                                               |  | $                                     | (48,913 
|                                                                                                                       |  |                                       |         
|Basic and diluted loss per share:                                                                                      |  |                                       |         
|Loss before discontinued operations, extraordinary gain and cumulative effect of
accounting change                     |  | $                                     | (0.82   
|Discontinued operations                                                                                                |  |                                       | (0.06   
|Extraordinary gain on debt refinancing                                                                                 |  |                                       |         
|Cumulative effect of accounting change                                                                                 |  |                                       |         
|                                                                                                                       |  |                                       |         
|Net loss                                                                                                               |  | $                                     | (0.88   
|                                                                                                                       |  |                                       |         
|Weighted average shares outstandingbasic and diluted                                                                  |  |                                       | 55,866  
|                                                                                                                       |  |                                       |         
|                                                                                                                      
|Statement of Cash Flows Data                                                                                           |  |                                       |         
|Net cash used for operating activities                                                                                 |  | $                                     | (10,521 
|Net cash provided by (used for) investing activities                                                                   |  |                                       | 6,340   
|Net cash used for reorganization activities                                                                            |  |                                       | (2,541  
|Net cash provided by financing activities                                                                              |  |                                       | 3,172   
|Net capital activities                                                                                                 |  |                                       | 2,447   
|                                                                                                                      
|Balance Sheet Data:                                                                                                    |  |                                       |         
|Cash, cash equivalents and short term investments                                                                      |  | $                                     | 1,845   
|Working capital (deficiency)                                                                                           |  |                                       | 2,989   
|Total assets                                                                                                           |  |                                       | 13,609  
|Liabilities subject to compromise                                                                                      |  |                                       | 123,072 
|Debt and capital lease obligations, less current portion                                                               |  |                                       | 410     
|Total stockholders (deficit) equity                                                                                   |  |                                       | (116,311



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|ITEM 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------



You should read the following description of our financial
condition and results of operations in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this annual report on Form 10-K.



Forward Looking Statements And Associated Risks



This Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Certain forward-looking statements relate to, among other things, future results of operations, profitability, growth plans, sales, expense trends, capital
requirements and general industry and business conditions applicable to our business. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Our actual results and the timing of
certain events may differ significantly from the results discussed in the forward-looking statements. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. The words
anticipate, believe, estimate and similar expressions used herein are generally intended to identify forward-looking statements. In addition to the other risks described elsewhere in this report and in other
filings by the Company with the Securities and Exchange Commission, to which you are referred, important factors to consider in evaluating such forward-looking statements include but are not limited to: the uncertainty that demand for our services
will increase and other competitive market factors; changes in our business strategy; an inability to execute our strategy due to unanticipated changes in our business, our industry or the economy in general; difficulties in the timely expansion of
our network and data centers or in the acquisition and integration of businesses; difficulties in retaining and attracting new employees or customers; difficulties in developing or deploying new services; risks associated with rapidly changing
technology; and various other factors that may prevent us from competing successfully or profitably in existing or future markets. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained
herein will in fact be realized and we assume no obligation to update this information.



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BANKRUPTCY PROCEEDING;
LIQUIDATION OF COMPANY



In August 2002, we
and our domestic subsidiaries commenced the Chapter 11 Proceeding in the Bankruptcy Court. We are actively pursuing the sale of substantially all of our assets. We anticipate that upon completion of such a sale, all of our remaining assets
(including proceeds received from the sale) will be distributed to our creditors, without any distribution being made to holders of our Common Stock. We would then have no assets or operations. If we are unable to consummate a sale of our assets, we
anticipate that we will have to cease operations in the second quarter of 2003 due to insufficient cash flows available to support our operations. We would then liquidate our assets, with the proceeds thereof being paid to our creditors. Holders of
Common Stock would not receive any proceeds of such a liquidation. Accordingly, we do not expect to emerge from the Chapter 11 Proceeding with any assets or operations.



On April 11, 2003, we entered into the APA with Pequot to sell substantially all of our operation assets,
less certain liabilities. The closing of the transactions contemplated by the APA is subject to Bankruptcy Court approval and other conditions.



Critical Accounting Policies



The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.



Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are primarily related to revenue recognition,
as described below in Results of Operations. For a detailed discussion on the application of these and other accounting policies, see Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year
ended December 31, 2002.



RESULTS OF OPERATIONS



Our reportable segments include managed
infrastructure solutions and professional services. Our current major lines of business included in each of these segments are as follows:





|Managed Infrastructure Solutions     |  | Web Hosting         |  | Professional Services               
|------------------------------------ |  | ------------------- |  | ------------------------------------
|                                    
|Managed Messaging and Collaboration  |  | Retail Web Hostinga |  | Messaging and Collaboration Services
|Managed Hosting                      |  |                     |  | Security and Networking Solutionsc  
|Managed Security                     |  |                     |  | Enterprise Resource Planning (ERP)d 
|Branded Web Hosting (Private Label)b |  |                     |  |                                     





Notes:

| | a |  | Retail Web Hosting business was sold October 2001.
| | - |  | --------------------------------------------------

| | b |  | US Shared Branded Web Hosting business was sold October 2002.
| | - |  | -------------------------------------------------------------

| | c |  | Security and Networking Solutions product related business was sold August 2002.
| | - |  | --------------------------------------------------------------------------------

| | d |  | Enterprise Resource Planning Oracle consulting business was sold December 2002.
| | - |  | -------------------------------------------------------------------------------



Our revenue streams consist of
recurring service fees, and non-recurring professional services and product sales. We sell managed infrastructure solutions and Web hosting services for contractual periods generally ranging from one month to three years. Web hosting arrangements
generally are cancelable by either party without penalty. Hosting revenues are recognized ratably over the contractual period as services are performed. Incremental fees for excess bandwidth usage and data storage are billed and recognized as
revenue in the period that customers utilize such services. Payments received and billings made in advance of providing hosting services are deferred until the services are provided.



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Professional
services revenues generally are recognized as the services are rendered, provided that no significant obligations remain and collection of the receivable is considered probable. Substantially all of our professional services contracts call for
billings on a time and materials basis. Some of our contracts contain milestones and/or customer acceptance provisions. For these contracts, revenue is recognized as milestones are performed and accepted by the customer or when customer acceptance
is attained.



Certain customer contracts contain
multiple elements under which we sell a combination of any of the following: managed infrastructure solutions and professional services, computer equipment, software licenses and maintenance services to customers. We have determined that objective
evidence of fair value exists for all elements and have recorded revenue for each of the elements as follows: (1) revenue from the sale of computer equipment and software products is recorded at the time of delivery; (2) revenue from service
contracts is recognized as the services are performed; and (3) maintenance revenue and related costs are recognized ratably over the term of the maintenance agreement.



Under certain arrangements, we resell computer equipment and/or software and maintenance purchased from
various computer equipment and software vendors. We are recording the revenue from these products and services on a gross basis pursuant to EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. Under these arrangements, we
determined that we are the primary obligor. We present the end-user with a total solution from a selection of various vendor products, set final prices and perform certain services. Additionally, we have credit and back-end inventory risk. In August
2002, we sold the hardware component of this business.



In some circumstances we resell software and in connection with such sales, we apply the provisions of Statement of Position 97-2, (SOP 97-2), Software Revenue Recognition, as amended by Statement of Position 98-4. Under
SOP 97-2, we recognize license revenue upon shipment of a product to the end-user if a signed contract exists, the fee is fixed and determinable and collection of the resulting receivable is probable. For contracts with multiple elements (e.g.,
software products, maintenance and other services), we allocate revenue to each element of the contract based on vendor specific objective evidence of the elements fair value.



Cost of revenues primarily consists of salaries and related expenses associated with professional services
and data center operations, data center facilities costs, costs of hardware and software products sold to customers, and data communications expenses, including one-time fees for circuit installation and variable recurring circuit payments to
network providers. Monthly circuit charges vary based upon circuit type, distance and usage, as well as the term of the contract with the carrier.



Sales and marketing expense consists of personnel costs associated with the direct sales force, internal telesales, product development
and product marketing employees, as well as costs associated with marketing programs, advertising, product literature, external telemarketing costs and corporate marketing activities, including public relations.



General and administrative expense includes the cost of
customer service functions, finance and accounting, human resources, legal and executive salaries, corporate overhead, acquisition integration costs and fees paid for professional services.



Restructuring and impairment charges:



During the latter half of the first quarter of 2001, we
experienced a substantial decline in revenues and new sales orders. There were negative economic developments and trends that occurred during this period in our industry sector, including reduced corporate information technology spending, the
failure of many Internet-related companies, and sharply reduced sales forecasts. All of these factors caused us to re-evaluate our business focus and operating plans for the remainder of 2001 and beyond. Such decisions gave rise to the following
actions:



Based on a decision reached by our
management and the Board of Directors in late March 2001, on April 2, 2001 we announced a restructuring plan (the April Plan or restructuring) to further streamline the business by narrowing our services focus to a core set
of offerings. The April Plan comprised workforce reductions and the exit of certain non-core businesses. In conjunction with the restructuring, we undertook a review of our long-lived assets pursuant to Statement of Financial Accounting Standards
(SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS 121), and SEC Staff Accounting Bulletin No. 100, Restructuring and Impairment Charges (SAB 100) to ascertain if these decisions and
changed conditions caused an impairment charge.



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The April Plan
was executed in two phases. Phase 1, which began on April 3, 2001, consisted of a workforce reduction of approximately 200 positions, and resulted in a charge for the payment of severance and related costs of approximately $1.7 million. This charge
was recognized in the second quarter of 2001.



Phase 2 of the April Plan included exiting, via sale, certain businesses that we determined to be outside of the redefined scope of our service offerings and additional workforce reductions. In July 2001, we exited the Managed
Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM) product lines of our managed infrastructure solutions segment, formerly known as reSOURCE PARTNER (RSP), which had been a key component
of our scope of services prior to the April Plan. In August 2001, we exited the remaining operations of RSP. The 2001 losses from discontinued operations of $10.4 million include losses incurred prior to the measurement date of approximately $6.5
million, and the estimated losses on disposal of $3.9 million.



In July 2001, we announced a further business restructuring that included additional workforce reductions of approximately 70 positions and a plan to exit certain leased office facilities. We recognized a restructuring charge of $3.0
million during the third quarter of 2001 for the qualifying costs.



In October 2001, we sold another of our non-core businesses, our shared and unmanaged dedicated retail Web hosting business (see Note 5 of Notes to Consolidated Financial Statements).



As part of the restructuring activities an impairment
assessment was made at the end of the first quarter of 2001 with respect to the long-lived assets associated with the businesses planned to be sold or shut down. The assessment indicated that, on a held for use basis, there was impairment evident in
such assets. Further, based on our assessment of internal and external facts and circumstances to which the impairment was attributable, we concluded that the impairment indicators arose in the latter half of the first quarter of 2001. In connection
therewith we recorded impairment charges aggregating $36.5 million. Long-lived assets that are impaired consist of property and equipment, identifiable intangible assets and related goodwill. For purposes of measuring the impairment charge, fair
value was determined based on a calculation of discounted cash flows or net realizable value if known.



In connection with the disposition of our investment in Interliant Europe, we conducted an impairment assessment with respect to the
long-lived assets associated with Interliant Europe, and the assessment indicated that there was impairment evident in such assets. The fair value of the long-lived assets was determined based on the terms of the definitive agreement that we
executed in August 2001. Consequently, we recorded an impairment charge of $4.7 million, to write-off the entire net book value of property and equipment ($4.4 million), identifiable intangible assets ($0.2 million) and other long-term assets ($0.1
million) related to Interliant Europe.



We
determined that there were potential impairment indicators present in our core hosting and professional services businesses that arose during the third quarter of 2001 as a result of the continued economic uncertainties in general, certain
weaknesses in our market and lack of revenue growth for the Company in particular. Accordingly, we conducted an impairment assessment with respect to long-lived assets associated with such businesses. Further, for businesses previously identified
for sale or disposition, we updated the fair value determination based on more current pricing terms from recent negotiations with prospective buyers. Based on these assessments, we determined that there was impairment evident in the assets
associated with our core hosting businesses and the PeopleSoft ERP professional services business. Consequently, we recorded impairment charges of $85.5 million including $0.2 million in discontinued operations to write-off the net book value of
certain of the fixed assets, including software, used in those businesses ($51.8 million), other long term assets ($1.0 million) and identifiable intangible assets and goodwill ($32.7 million) related to those businesses.



In the year ended December 31, 2002, business conditions
continued to deteriorate and we determined that additional parts of our business had to be sold in order to provide cash flow to continue the remaining part of the business. Accordingly, in connection with this decision, and in accordance with the
provisions of SFAS No.144 Accounting for Impairment of Long Lived Assets (SFAS144), we did a further assessment of the potential impairment in our long-lived



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assets and determined that substantially all of such assets were impaired and we recorded impairment charges of $22.6 million in 2002.



The following is a discussion of our results
from continuing operations. Upon consummation of the proposed APA, there will no longer be any revenues and most expenses will be eliminated.



Years Ended December 31, 2002 and 2001



The following table sets forth in comparative format the historical results of operations for 2002 and 2001 reclassified to give effect to
discontinued operations:





|                            |  | Years Ended December 31, |      
|--------------------------- |  | ------------------------ | -----
|(dollars in millions)       |  | 2002 Historical          |      
|                           
|Service revenues            |  | $                        | 35.6 
|Product revenues            |  |                          | 9.0  
|                            |  |                          |      
|Total revenues              |  |                          | 44.6 
|                            |  |                          |      
|                           
|Costs and expenses:         |  |                          |      
|Cost of service revenues    |  |                          | 18.8 
|Cost of product revenues    |  |                          | 7.8  
|Sales and marketing         |  |                          | 10.4 
|General and administrative  |  |                          | 22.2 
|Depreciation                |  |                          | 5.8  
|Amortization of intangibles |  |                          | 0.7  
|Restructuring charge        |  |                          | 0.2  
|Impairment losses           |  |                          | 22.6 
|                            |  |                          |      
|                            |  |                          | 88.5 
|                            |  |                          |      
|Operating loss              |  | $                        | (43.9
|                            |  |                          |      





Revenues decreased $33.8 million, from $78.4 million in 2001 to $44.6 million in 2002. The decrease in revenues was due primarily to the
lower revenues from the professional services and Web hosting segments.



Professional services revenues decreased $15.8 million, from $31.4 million in 2001 to $15.6 million in 2002. This decrease was due primarily to lower sales of products ($8.8 million) and consulting ($6.9 million) revenues
resulting from reduced customer demand stemming from overall weaknesses in the economy and in the Information Technology sector in particular. The product business was sold in the third quarter of 2002. Other service revenues declined from
$17.0 million in 2001 to $0.0 million in 2002 due to the Web hosting segment (included in other revenue) which was sold in the latter part of 2001, and had revenues of $12.5 million in 2001 as well as the sale of Interliant Europe in August
2001. Managed infrastructure solutions revenues decreased $1.0 million, from $30.0 million in 2001 to $29.0 million in 2002. This decrease was due primarily to overall weakness in the marketplace and customer resistance caused by our bankruptcy
status.



Cost of Revenues



Cost of revenues decreased by $23.6 million, from $50.2
million in 2001 to $26.6 million in 2002. This decrease was due primarily to the lower cost of product sales as a result of lower revenue, reduced salaries and related costs as a result of the restructuring activities in 2001. In the future, cost of
revenues may fluctuate due to capacity utilization, the timing of investments in data centers, changes in the mix of services and fluctuations in bandwidth costs.



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Gross margin
was 40.4% for 2002 as compared to 36.0% for 2001. The higher gross margins are the result of an increase in the proportion of revenue from managed infrastructure solutions as compared with professional services and products, which typically generate
lower gross margins as compared with our managed infrastructure solutions.



Sales and Marketing



Sales
and marketing expense decreased by $15.7 million, from $26.1 million in 2001 to $10.4 million in 2002. This decrease was attributable to lower marketing expenditures, namely reductions in brand recognition programs and lesser emphasis on direct
marketing campaigns for the Web hosting segment, and lower salaries and benefits associated with reductions in our headcount stemming from our restructuring efforts.



General and Administrative



General and administrative expense (excluding non-cash compensation) decreased by $35.4 million, from $56.8 million in 2001 to $21.4
million in 2002. This decrease resulted from workforce reductions, improved cost controls and elimination of certain facility leases as a result of the bankruptcy filing.



Non-cash compensation



Non-cash compensation expense increased by $5.4 million, from a credit of $4.6 million in 2001 to $0.8 million in 2002.



During the year ended December 31, 2001, we recorded non-cash
compensation charges aggregating $1.3 million stemming from stock issuances to our co-chairmen, and stock and warrant issuances and option grants to The Feld Group, which is rendering executive-level service to us. During the year ended December 31,
2002 we recorded non-cash compensation charges aggregating $0.8 million for restricted stock issued to our chairman and certain officers in lieu of cash compensation and stock issued to the Feld Group as compensation for executive level services to
us.



Restructuring Charges



As described in the Results of Operations-Restructuring
and Impairment Charges herein, we recorded gross restructuring charges of $5.2 million during the year ended December 31, 2001 and added an additional $0.2 million to the reserve in 2002. As of December 31, 2001, $3.1 million of the
restructuring reserve was utilized and 256 employees were terminated under the plan. During 2002, $1.2 million was utilized and $1.2 million was transferred to reorganization charges.



Depreciation



Depreciation expense decreased by $18.3 million, from $24.1 million in 2001 to $5.8 million in 2002. The decrease in depreciation expense
was attributable to reductions in depreciation for assets which were either sold or written down in connection with impairment charges.



Amortization of Intangible Assets



Amortization expense decreased by $34.3 million, from $35.0 million in 2001 to $0.7 million in 2002. This decrease in amortization expense
was attributable primarily to the reduction in the carrying amounts of intangible assets as a result of the impairment charges recorded in 2002 and 2001.



Impairment Loss on Long-lived Assets



Impairment losses on long-lived assets were $22.6 million and $126.5 million for the years ended December 31, 2002 and 2001, respectively.
In conjunction with the events and circumstances surrounding our April 2001 restructuring plan (see Notes 4 and 14 of Notes to Consolidated Financial Statements), the plans to exit our European and ERP People Soft



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consulting businesses, and continued deterioration in the core consulting and hosting business we
performed a series of reviews of our long-lived assets to ascertain if such decisions and economic factors resulted in an impairment in our long-lived assets pursuant to SFAS 121 in 2001 and SFAS 144 in 2002 and SAB 100. See Results of
OperationsRestructuring and Impairment Charges herein.



Interest Income (Expense), Net



Net interest expense decreased by $10.9 million, from $18.1 million of net interest expense in 2001 to $7.2 million of net interest expense in 2002. In December 2001, we restructured our 7% convertible subordinated notes, issuing new
10% senior convertible notes. There was a gain on the transaction which was reduced by the interest to maturity on the 10% notes in accordance with FASB No. 15 Troubled Debt Restructuring. Accordingly, there was no interest expense
related to such notes in 2002. In addition, as a result of the Bankruptcy filing, all interest was stayed, and consequently, no interest expense was recorded since the filing date (August 5, 2002). In 2002 and 2001 interest expense included $2.7
million and 3.3 million, respectively, related to the beneficial conversion feature of the 10% and 8% subordinated convertible notes sold in 2002 and 2001, respectively. Interest income was $1.8 million in 2001 and $0.1 million in 2002 as there was
limited cash to invest in 2002.



Years Ended December 31, 2001
and 2000



The following table sets forth in
comparative format the historical results of operations for 2001 and 2000 reclassified to give effect to discontinued operations.





|                            |  | Years Ended December 31, |       
|--------------------------- |  | ------------------------ | ------
|(dollars in millions)       |  | 2001 Reclassified        |       
|                           
|Service revenues            |  | $                        | 60.6  
|Product revenues            |  |                          | 17.8  
|                            |  |                          |       
|Total revenues              |  |                          | 78.4  
|                            |  |                          |       
|                           
|Costs and expenses:         |  |                          |       
|Cost of service revenues    |  |                          | 35.4  
|Cost of product revenues    |  |                          | 14.8  
|Sales and marketing         |  |                          | 26.1  
|General and administrative  |  |                          | 52.2  
|Depreciation                |  |                          | 24.1  
|Amortization of intangibles |  |                          | 35.0  
|Restructuring charge        |  |                          | 4.9   
|Impairment losses           |  |                          | 126.5 
|                            |  |                          |       
|                            |  |                          | 319.0 
|                            |  |                          |       
|Operating loss              |  | $                        | (240.6
|                            |  |                          |       



Revenues



Revenues decreased $19.5 million, from $97.9
million in 2000 to $78.4 million in 2001. The decrease in revenues was due primarily to the lower revenues from the professional services and Web hosting segments offset by increased managed infrastructure solutions revenue as discussed below.



Managed infrastructure solutions revenues
increased $5.0 million, from $25.0 million in 2000 to $30.0 million in 2001. This increase was due primarily to the successful expansion of our OEM or private label hosting activities under our branded solutions programs. Web hosting revenues
decreased $7.1 million, from $19.6 million in 2000 to $12.5 million in 2001, resulting primarily from the sale of the retail Web hosting business in October, 2001 as well as the overall reduction in



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revenues as a result of the declining economy in 2001 and reduced direct marketing expenditures in 2001. Professional services revenues
decreased $18.2 million, from $49.5 million in 2000 to $31.4 million in 2001. This decrease was due primarily to lower sales of products ($13.4 million) and consulting ($4.8 million) revenues resulting from reduced customer demand stemming from
overall weaknesses in the economy and in the Information Technology sector in particular.



Cost of Revenues



Cost of revenues decreased by $18.7 million, from $68.9 million in 2000 to $50.2 million in 2001. This decrease was due primarily to the lower cost of product sales as a result of lower revenue, reduced salaries and related costs as
a result of the restructuring activities in 2001, offset by the increased costs related to the acquisitions consummated during 2000. In the future, cost of revenues may fluctuate due to capacity utilization, the timing of investments in data
centers, changes in the mix of services, fluctuations in bandwidth costs.



Gross margin was 36.0% for 2001 as compared to 29.6% for 2000. The higher gross margins are the result of an increase in the proportion of revenue from hosting services as compared with ASP professional services and
products, which typically generate lower gross margins as compared with our hosting services.



Sales and Marketing



Sales and marketing expense decreased by $9.2 million, from $35.3 million in 2000 to $26.1 million in 2001. This decrease was attributable to lower marketing expenditures, namely reductions in brand
recognition programs and lesser emphasis on direct marketing campaigns for the Web hosting segment, and lower salaries and benefits associated with reductions in our headcount stemming from our restructuring efforts, offset by increases from the
sales and marketing expenses of businesses acquired during 2000.



General and Administrative



General and administrative expense (excluding non-cash compensation) increased by $4.1 million, from $52.7 million in 2000 to $56.8 million in 2001. This increase in general and administrative expense was attributable primarily to
the general and administrative expenses of businesses acquired during 2000 and increases in bad debt provisions stemming from overall weaknesses in the economy and in the Information Technology sector in particular, offset by expense decreases
resulting from workforce reductions and improved cost controls.



Non-cash compensation



Non-cash compensation expense decreased by $19.7 million, from $15.1 million in 2000 to a credit of $4.6 million in 2001.



In January 2000, we issued options to purchase 1.5 million shares of Common Stock at an average exercise price of $18.00 per share to our
then-current CEO. The average exercise price of the options was below the fair value of the Common Stock as of the measurement date, which required the recognition of approximately $30.0 million as compensation expense over the four-year vesting
period of the options on a graded vesting basis. In April 2001, said CEO terminated his employment with us. In connection therewith, we recorded an adjustment in the 2001 period to reverse compensation charges aggregating approximately $8.4 million,
which were recorded during 2000 and the quarter ended March 31, 2001, to reflect the excess of the charge recognized on a graded vesting basis over the value of the options that had ratably vested as of the date of his termination.



During the year ended December 31, 2001, we recorded non-cash
compensation charges aggregating $1.3 million stemming from restricted stock issuances to our co-chairmen, and stock and warrant issuances and option grants to The Feld Group, which was rendering executive-level service to us.



Restructuring Charges



As described in the Results of Operations-Restructuring
and Impairment Charges herein, we recorded gross restructuring charges of $5.2 million during the year ended December 31, 2001. As of December 31, 2001, $3.1 million of the restructuring reserve was utilized and 256 employees were terminated
under the plan.



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Depreciation



Depreciation expense increased by $8.6
million, from $15.5 million in 2000 to $24.1 million in 2001. The increase in depreciation expense was attributable to the acquisitions consummated during 2000, and investments in network software and equipment, furniture and office equipment, and
leasehold improvements during 2001 and the second half of 2000, offset by reductions in depreciation for assets which were written down in connection with impairment charges. The fixed asset additions were driven by the expansion of our data centers
and customer care facilities and customer-driven computer equipment and software purchases.



Amortization of Intangible Assets



Amortization expense decreased by $4.4 million, from $39.4 million in 2000 to $35.0 million in 2001. This decrease in amortization expense was attributable primarily to the reduction in the carrying
amounts of intangible assets as a result of the impairment charges recorded in 2001, offset by increases in amortization due to the acquisitions consummated during 2000.



Impairment Loss on Long-lived Assets



Impairment losses on long-lived assets were $126.5 million and $0.0 million for the years ended December 31,
2001 and 2000, respectively. In conjunction with the events and circumstances surrounding our April 2001 restructuring plan (see Notes 4 and 14 of Notes to Consolidated Financial Statements), the plan to exit our European and ERP People Soft
consulting businesses, continued deterioration in the core consulting and hosting business, we performed a series of reviews of our long-lived assets to ascertain if such decisions and economic factors resulted in an impairment in our long-lived
assets pursuant to SFAS 121, and SAB100. See Results of Operations-Restructuring and Impairment Charges herein.



Interest income (expense), net



Net interest expense increased by $12.9 million, from $5.2 million of net interest expense in 2000 to $18.1 million of net interest
expense in 2001. Interest expense increased $6.7 million, from $13.2 million in 2000 to $19.9 million in 2001 as a result of the issuance of the 7% Convertible Subordinated Notes in February 2001, the sale of $19.0 million of 8% Convertible
Subordinated Notes in August 2001 (including a charge of $3.3 million related to the beneficial conversion feature of such notes) and capital lease obligations to finance equipment and furniture purchases during 2001. Interest income decreased $6.2
million, from $8.0 million in 2000 to $1.8 million in 2001. This decrease was due to the significant reduction in the amount of cash available for short term investing in 2001.



Liquidity and Capital Resources



On April 11, 2003, we entered the APA with Pequot to sell substantially all of our operations and assets,
less certain liabilities. The closing of the transactions contemplated by the APA is subject to Bankruptcy Court approval and other conditions.



We believe that our existing cash, and cash equivalents, together with funding available under our Debtor-in-Possession financing line
will not provide sufficient funds to enable us to operate beyond the second quarter of 2003. Accordingly, we are attempting to sell all or substantially all of our assets in the Chapter 11 Proceeding. If we consummate the APA sale, the proceeds
thereof (together with our other remaining assets) will be distributed to our creditors, with no distribution being made to holders of our Common Stock. If we are unable to consummate a sale of our assets, we anticipate that we will have to cease
operations around the end of the second quarter of 2003 due to insufficient cash flows resulting from continuing operating losses, and we would then liquidate our assets in the Chapter 11 Proceeding. Holders of Common Stock would not receive
any proceeds of such a liquidation.



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##### Table of Contents



During the
year ended December 31, 2002, cash used in operating activities was $10.9 million. The net loss of $48.9 million included non-cash charges for depreciation, amortization and other non-cash charges totaling $46.6 million and non-cash income from
gains on sale of businesses of $8.5 million. Cash was provided by decreases in accounts receivable and prepaid and other current assets totaling $7.7 million offset by a net decrease in operating liabilities of $4.9 million.



|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|-------- |  | ---------------------------------------------------------



We have limited exposure to financial market risks, including changes in interest rates. Substantially all of
our indebtedness bears interest at a fixed rate to maturity, which therefore minimizes our exposure to interest rate fluctuations.



|ITEM 8. |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- |  | -------------------------------------------





INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS





|Reports of Independent Auditors                                                                                |  | 22
|-------------------------------------------------------------------------------------------------------------- |  | --
|Consolidated Balance Sheets as of December 31, 2002 and 2001                                                   |  | 24
|Consolidated Statements of Operations for the Years ended December 31, 2002, 2001 and
2000                     |  | 25
|Consolidated Statements of Stockholders (Deficit) Equity for the Years Ended
December 31, 2002, 2001 and 2000 |  | 26
|Consolidated Statements of Cash Flows for the Years ended December 31, 2002, 2001 and
2000                     |  | 27
|Notes to Consolidated Financial Statements                                                                     |  | 28





21



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Independent Auditors Report





To the Board of Directors

and Shareholders of

Interliant Inc.:



We have audited the accompanying consolidated balance sheet of Interliant, Inc and subsidiaries (the
Company) as of December 31, 2002, and the related consolidated statements of operations, stockholders equity (deficit), and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.



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



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Interliant, Inc. and subsidiaries at December
31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects the information set forth therein.



The accompanying 2002 financial statements have been prepared assuming that Interliant Inc. and its subsidiaries will continue as a going
concern, which contemplates the realization of assets and the liquidation of its liabilities in the ordinary course of business. As discussed in Note 1, on August 5, 2002, the Company and its domestic subsidiaries (including indirectly owned
subsidiaries) (collectively Debtor-in-Possession) filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. Interliant Inc. is currently operating its business as a Debtor-in-Possession under the
jurisdiction of the Bankruptcy Court, and continuation of Interliant Inc. as a going concern is dependent upon, among other things, the confirmation of a Plan of Reorganization, Interliant Inc.s ability to comply with all debt covenants under
the existing debtor-in-possession financing agreement, and Interliant Inc.s ability to generate sufficient cash from operations and to obtain financing sources to meet its future obligations. As further indicated in Note 18 to the consolidated
financial statements, the Company has entered into an Asset Purchase Agreement to sell substantially all of its operations and assets. The uncertainties inherent in the bankruptcy process, Interliant Inc.s recurring losses from operations and
the completion of the proposed sale of assets raise substantial doubt about Interliant Inc.s ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on
the recoverability and classification of assets or the amount and classification of liabilities that might result from the outcome of these uncertainties.





/S/  URBACH KAHN & WERLIN LLP



New York, New York

April 12, 2003

.





22



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Independent Auditors Report



Board of Directors and Stockholders

Interliant, Inc.



We have audited the accompanying consolidated balance sheets
of Interliant, Inc. (the Company) as of December 31, 2001, and the related consolidated statements of operations, stockholders (deficit) equity, and cash flows for each of the two years in the period ended December 31, 2001. Our
audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.



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



In our opinion, the financial statements referred to above present fairly, in all material respects the consolidated financial position of
Interliant, Inc. at December 31, 2001, and the consolidated results of its operations and its cash flows for each of the two years in period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.



As discussed in Note 2 to the financial statements, in 2000
the Company changed its method of accounting for set-up fees to conform with Staff Accounting Bulletin 101, Revenue Recognition.





/S/  ERNST & YOUNG LLP





Stamford, Connecticut

February 14, 2002



23



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##### Table of Contents



INTERLIANT,
INC.



CONSOLIDATED BALANCE SHEETS





|                                                                                                                                                                 |  | December 31, 2002 |              |   | December 31, 2001 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------------ | - | ----------------- | -
|                                                                                                                                                                
|Assets                                                                                                                                                           |  |                   |              |   |                   |  
|Current assets:                                                                                                                                                  |  |                   |              |   |                   |  
|Cash and cash equivalents                                                                                                                                        |  | $                 | 1,845,461    |   |                   | $
|Restricted cash                                                                                                                                                  |  |                   | 738,873      |   |                   |  
|Accounts receivable, net of allowances of $0.2 million and $1.5 million at December 31,
2002 and 2001, respectively                                              |  |                   | 4,101,236    |   |                   |  
|Deferred costs                                                                                                                                                   |  |                   |              |   |                   |  
|Prepaid assets                                                                                                                                                   |  |                   | 999,616      |   |                   |  
|Other current assets                                                                                                                                             |  |                   | 1,741,575    |   |                   |  
|                                                                                                                                                                 |  |                   |              |   |                   |  
|Total current assets                                                                                                                                             |  |                   | 9,426,761    |   |                   |  
|                                                                                                                                                                 |  |                   |              |   |                   |  
|Property and equipment, net                                                                                                                                      |  |                   | 3,383,800    |   |                   |  
|Goodwill, net                                                                                                                                                    |  |                   |              |   |                   |  
|Intangibles, net                                                                                                                                                 |  |                   |              |   |                   |  
|Net assets of discontinued operations                                                                                                                            |  |                   |              |   |                   |  
|Other assets                                                                                                                                                     |  |                   | 798,789      |   |                   |  
|                                                                                                                                                                 |  |                   |              |   |                   |  
|Total assets                                                                                                                                                     |  | $                 | 13,609,350   |   |                   | $
|                                                                                                                                                                 |  |                   |              |   |                   |  
|                                                                                                                                                                
|Liabilities and stockholders (deficit) equity                                                                                                                   |  |                   |              |   |                   |  
|Current liabilities:                                                                                                                                             |  |                   |              |   |                   |  
|Notes payable and current portion of long-term debt                                                                                                              |  |                   |              |   |                   |  
|and capital lease obligations                                                                                                                                    |  | $                 | 2,159,202    |   |                   | $
|Accounts payable                                                                                                                                                 |  |                   | 1,395,541    |   |                   |  
|Accrued expenses                                                                                                                                                 |  |                   | 2,224,998    |   |                   |  
|Deferred revenue                                                                                                                                                 |  |                   | 658,052      |   |                   |  
|Net liabilities of discontinued operations                                                                                                                       |  |                   |              |   |                   |  
|Restructuring reserve                                                                                                                                            |  |                   |              |   |                   |  
|                                                                                                                                                                 |  |                   |              |   |                   |  
|Total current liabilities                                                                                                                                        |  |                   | 6,437,793    |   |                   |  
|                                                                                                                                                                
|Long-term debt and capital lease obligations, less current portion                                                                                               |  |                   | 410,299      |   |                   |  
|Other long-term liabilities                                                                                                                                      |  |                   |              |   |                   |  
|                                                                                                                                                                
|Liabilities subject to compromise                                                                                                                                |  |                   | 123,072,269  |   |                   |  
|                                                                                                                                                                 |  |                   |              |   |                   |  
|Total liabilities                                                                                                                                                |  |                   | 129,920,361  |   |                   |  
|                                                                                                                                                                 |  |                   |              |   |                   |  
|Stockholders (deficit) equity:                                                                                                                                  |  |                   |              |   |                   |  
|Preferred stock, $.01 par value; 1,000,000 shares authorized; 0 shares issued and
outstanding                                                                    |  |                   |              |   |                   |  
|Common stock, $.01 par value;500,000,000 shares authorized; 57,496,121, and 51,891,036
shares issued and outstanding at December 31, 2002 and 2001, respectively |  |                   | 574,962      |   |                   |  
|Additional paid-in capital                                                                                                                                       |  |                   | 321,219,226  |   |                   |  
|Accumulated deficit                                                                                                                                              |  |                   | (437,843,641 | ) |                   |  
|Accumulated other comprehensive loss                                                                                                                             |  |                   | (261,558     | ) |                   |  
|                                                                                                                                                                 |  |                   |              |   |                   |  
|Total stockholders (deficit) equity                                                                                                                             |  |                   | (116,311,011 | ) |                   |  
|                                                                                                                                                                 |  |                   |              |   |                   |  
|Total liabilities and stockholders (deficit) equity                                                                                                             |  | $                 | 13,609,350   |   |                   | $
|                                                                                                                                                                 |  |                   |              |   |                   |  

See accompanying notes to consolidated financial statements.



24



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INTERLIANT,
INC.



CONSOLIDATED STATEMENTS OF
OPERATIONS





|                                                                                                                                   |  | Years Ended December 31, |            
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | -----------
|                                                                                                                                   |  | 2002                     |            
|                                                                                                                                  
|Revenues:                                                                                                                          |  |                          |            
|Service revenues                                                                                                                   |  | $                        | 35,555,561 
|Product revenues                                                                                                                   |  |                          | 9,060,367  
|                                                                                                                                   |  |                          |            
|Total Revenues                                                                                                                     |  |                          | 44,615,928 
|                                                                                                                                   |  |                          |            
|                                                                                                                                  
|Costs and expenses:                                                                                                                |  |                          |            
|Cost of service revenues                                                                                                           |  |                          | 18,773,588 
|Cost of product revenues                                                                                                           |  |                          | 7,824,789  
|Sales and marketing                                                                                                                |  |                          | 10,401,956 
|General and administrative (exclusive of non-cash                                                                                  |  |                          |            
|compensation shown below)                                                                                                          |  |                          | 21,442,232 
|Non-cash compensation                                                                                                              |  |                          | 777,402    
|Depreciation                                                                                                                       |  |                          | 5,823,988  
|Amortization of intangibles                                                                                                        |  |                          | 709,055    
|Restructuring charges, net                                                                                                         |  |                          | 247,720    
|Impairment losses                                                                                                                  |  |                          | 22,556,342 
|                                                                                                                                   |  |                          |            
|                                                                                                                                   |  |                          | 88,557,072 
|                                                                                                                                   |  |                          |            
|Loss before interest, reorganizations items, and other income                                                                      |  |                          | (43,941,144
|Gain on sale of businesses, net                                                                                                    |  |                          | 8,521,185  
|Other income                                                                                                                       |  |                          | 607,530    
|Interest income (expense), net of $0.1 million, $1.8 million and $8.0 million interest
income in 2002, 2001 and 2000, respectively |  |                          | (7,229,512 
|Reorganization items, net                                                                                                          |  |                          | (3,880,992 
|                                                                                                                                   |  |                          |            
|Loss before minority interest, discontinued operations, extraordinary gain, and
cumulative effect of accounting change             |  |                          | (45,922,933
|                                                                                                                                  
|Minority interest                                                                                                                  |  |                          |            
|                                                                                                                                   |  |                          |            
|Loss before discontinued operations, extraordinary gain, and cumulative effect of
accounting change                                |  |                          | (45,922,933
|                                                                                                                                  
|Discontinued operations                                                                                                            |  |                          | (2,990,333 
|                                                                                                                                   |  |                          |            
|Loss before extraordinary gain and cumulative effect of accounting
change                                                          |  |                          | (48,913,266
|Gain on debt refinancing                                                                                                           |  |                          |            
|                                                                                                                                   |  |                          |            
|                                                                                                                                  
|Loss before cumulative effect of accounting change                                                                                 |  |                          | (48,913,266
|                                                                                                                                  
|Cumulative effect of accounting change                                                                                             |  |                          |            
|                                                                                                                                   |  |                          |            
|Net loss                                                                                                                           |  | $                        | (48,913,266
|                                                                                                                                   |  |                          |            
|                                                                                                                                  
|Basic and diluted loss per share:                                                                                                  |  |                          |            
|Loss before cumulative effect of accounting change                                                                                 |  | $                        | (0.82      
|Discontinued operations                                                                                                            |  |                          | (0.06      
|Gain on debt restructuring                                                                                                         |  |                          |            
|Cumulative effect of accounting change                                                                                             |  |                          |            
|                                                                                                                                   |  |                          |            
|Net loss                                                                                                                           |  | $                        | (0.88      
|                                                                                                                                   |  |                          |            
|                                                                                                                                  
|Weighted average shares outstandingbasic and diluted                                                                              |  |                          | 55,865,760 
|                                                                                                                                   |  |                          |            





See accompanying notes to consolidated financial statements.



25



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INTERLIANT,
INC.



CONSOLIDATED STATEMENTS OF
STOCKHOLDERS (DEFICIT) EQUITY





|                                                                              |  | Comprehensive Income (Loss) |              |   | Common Stock |            | Additional Paid-in Capital |   |         | Deferred Compensation |   |             | Accumulated Deficit |  |   | Accumulated Other Comprehensive(Loss) Income |   |  | Total Stockholders(Deficit) Equity |             
|----------------------------------------------------------------------------- |  | --------------------------- | ------------ | - | ------------ | ---------- | -------------------------- | - | ------- | --------------------- | - | ----------- | ------------------- |  | - | -------------------------------------------- | - |  | ----------------------------------- | ------------
|                                                                              |  |                             | Shares       |   | Par Value    |            |                            |   |         |                      
|                                                                             
|Balance as of December 31, 1999                                               |  |                             |              |   |              | 44,601,141 |                            | $ | 446,011 |                       | $ | 201,922,128 |                     |  |   |                                              |   |  | $                                   | (64,822,097 
|Sales of common stock in private placements                                   |  |                             |              |   |              | 787,881    |                            |   | 7,879   |                       |   | 25,977,497  |                     |  |   |                                              |   |  |                                     |             
|Exercise of stock options and warrants                                        |  |                             |              |   |              | 1,428,674  |                            |   | 14,287  |                       |   | 2,491,013   |                     |  |   |                                              |   |  |                                     |             
|Common stock issued and stock options granted in connection with
acquisitions |  |                             |              |   |              | 1,978,522  |                            |   | 19,785  |                       |   | 57,988,853  |                     |  |   |                                              |   |  |                                     |             
|Deferred compensatory stock options                                           |  |                             |              |   |              |            |                            |   |         |                       |   | 31,442,131  |                     |  |   | (31,442,131                                  | ) |  |                                     |             
|Amortization of deferred compensation                                         |  |                             |              |   |              |            |                            |   |         |                       |   |             |                     |  |   | 15,105,643                                   |   |  |                                     |             
|Foreign currency translation adjustment                                       |  | $                           | (673,081     | ) |              |            |                            |   |         |                       |   |             |                     |  |   |                                              |   |  |                                     |             
|Net loss                                                                      |  |                             | (151,229,285 | ) |              |            |                            |   |         |                       |   |             |                     |  |   |                                              |   |  |                                     | (151,229,285
|                                                                              |  |                             |              |   |              |            |                            |   |         |                       |   |             |                     |  |   |                                              |   |  |                                     |             
|Total comprehensive loss                                                      |  | $                           | (151,902,366 | ) |              |            |                            |   |         |                       |   |             |                     |  |   |                                              |   |  |                                     |             
|                                                                              |  |                             |              |   |              |            |                            |   |         |                       |   |             |                     |  |   |                                              |   |  |                                     |             
|Balance as of December 31, 2000                                               |  |                             |              |   |              | 48,796,218 |                            |   | 487,962 |                       |   | 319,821,622 |                     |  |   | (16,336,488                                  | ) |  |                                     | (216,051,382
|Exercise of stock options and warrants                                        |  |                             |              |   |              | 408,370    |                            |   | 4,085   |                       |   | 165,646     |                     |  |   |                                              |   |  |                                     |             
|Common stock issued and stock options granted in connection with
acquisitions |  |                             |              |   |              | 1,576,448  |                            |   | 15,764  |                       |   | 3,389,777   |                     |  |   |                                              |   |  |                                     |             
|Common stock issued                                                           |  |                             |              |   |              | 1,110,000  |                            |   | 11,100  |                       |   | 1,327,200   |                     |  |   |                                              |   |  |                                     |             
|Amortization of deferred compensation                                         |  |                             |              |   |              |            |                            |   |         |                       |   | (22,335,374 | )                   |  |   | 16,336,488                                   |   |  |                                     |             
|Beneficial conversion feature on 8% Subordinated Convertible Notes issued     |  |                             |              |   |              |            |                            |   |         |                       |   | 3,251,485   |                     |  |   |                                              |   |  |                                     |             
|Warrant value on 8% Subordinated Convertible Notes                            |  |                             |              |   |              |            |                            |   |         |                       |   | 3,942,394   |                     |  |   |                                              |   |  |                                     |             
|Warrant value on 10% Senior notes                                             |  |                             |              |   |              |            |                            |   |         |                       |   | 4,211,072   |                     |  |   |                                              |   |  |                                     |             
|Foreign currency translation adjustment                                       |  | $                           | 366,219      |   |              |            |                            |   |         |                       |   |             |                     |  |   |                                              |   |  |                                     |             
|Net loss                                                                      |  |                             | (172,878,993 | ) |              |            |                            |   |         |                       |   |             |                     |  |   |                                              |   |  |                                     | (172,878,993
|                                                                              |  |                             |              |   |              |            |                            |   |         |                       |   |             |                     |  |   |                                              |   |  |                                     |             
|Total comprehensive loss                                                      |  | $                           | (172,512,774 | ) |              |            |                            |   |         |                       |   |             |                     |  |   |                                              |   |  |                                     |             
|                                                                              |  |                             |              |   |              |            |                            |   |         |                       |   |             |                     |  |   |                                              |   |  |                                     |             
|Balance as of December 31, 2001                                               |  |                             |              |   |              | 51,891,036 |                            | $ | 518,911 |                       | $ | 313,773,822 |                     |  |   |                                              |   |  | $                                   | (388,930,375
|Common stock issued in lieu of compensation                                   |  |                             |              |   |              | 3,953,335  |                            |   | 39,533  |                       |   | 417,667     |                     |  |   |                                              |   |  |                                     |             
|Common stock issued in connection with Note conversions                       |  |                             |              |   |              | 1,558,000  |                            |   | 15,580  |                       |   | 1,542,420   |                     |  |   |                                              |   |  |                                     |             
|Common stock issued                                                           |  |                             |              |   |              | 93,750     |                            |   | 938     |                       |   | 7,031       |                     |  |   |                                              |   |  |                                     |             
|Amortization of deferred compensation                                         |  |                             |              |   |              |            |                            |   |         |                       |   | 566,670     |                     |  |   |                                              |   |  |                                     |             
|Beneficial conversion feature on 10% Subordinated Convertible Notes
issued    |  |                             |              |   |              |            |                            |   |         |                       |   | 5,066,158   |                     |  |   |                                              |   |  |                                     |             
|Warrant value on 10% Senior notes                                             |  |                             |              |   |              |            |                            |   |         |                       |   | (154,542    | )                   |  |   |                                              |   |  |                                     |             
|Foreign currency translation adjustment                                       |  | $                           | 16,464       |   |              |            |                            |   |         |                       |   |             |                     |  |   |                                              |   |  |                                     |             
|Net loss                                                                      |  |                             | (48,913,266  | ) |              |            |                            |   |         |                       |   |             |                     |  |   |                                              |   |  |                                     | (48,913,266 
|                                                                              |  |                             |              |   |              |            |                            |   |         |                       |   |             |                     |  |   |                                              |   |  |                                     |             
|Total comprehensive loss                                                      |  | $                           | (48,896,802  | ) |              |            |                            |   |         |                       |   |             |                     |  |   |                                              |   |  |                                     |             
|                                                                              |  |                             |              |   |              |            |                            |   |         |                       |   |             |                     |  |   |                                              |   |  |                                     |             
|Balance as of December 31, 2002                                               |  |                             |              |   |              | 57,496,121 |                            | $ | 574,962 |                       | $ | 321,219,226 |                     |  | $ |                                              |   |  | $                                   | (437,843,641
|                                                                              |  |                             |              |   |              |            |                            |   |         |                       |   |             |                     |  |   |                                              |   |  |                                     |             





See accompanying notes to consolidated financial statements.



26



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##### Table of Contents

INTERLIANT, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS





|                                                                               |  | Years Ended December 31, |            
|------------------------------------------------------------------------------ |  | ------------------------ | -----------
|                                                                               |  | 2002                     |            
|                                                                              
|Operating Activities                                                           |  |                          |            
|Net loss                                                                       |  | $                        | (48,913,266
|Adjustments to reconcile net loss to net cash used in operating
activities:    |  |                          |            
|Provision for (reduction in) uncollectible accounts                            |  |                          | (241,416   
|Depreciation and amortization                                                  |  |                          | 6,921,157  
|Impairment losses                                                              |  |                          | 22,556,342 
|Beneficial conversion                                                          |  |                          | 2,699,746  
|Debt forgiveness                                                               |  |                          |            
|Discontinued operations                                                        |  |                          | 5,437,514  
|Gain on 7% Convertible Subordinated Notes refinancing                          |  |                          |            
|Gain on sale of businesses                                                     |  |                          | (8,521,185 
|Reorganization items, net                                                      |  |                          | 3,880,992  
|Non-cash compensation, including amortization of deferred compensation         |  |                          | 777,403    
|Non-cash charges recorded in connection with debt discounts and PIK
interest   |  |                          | 2,942,469  
|Non-cash charges recorded in connection with restructuring                     |  |                          |            
|Minority interest in earnings of subsidiary                                    |  |                          |            
|Other non-cash items                                                           |  |                          | (65,458    
|Change in operating assets and liabilities:                                    |  |                          |            
|Restricted cash                                                                |  |                          | 1,562,000  
|Accounts receivable                                                            |  |                          | 1,742,696  
|Prepaid and other current assets                                               |  |                          | 1,114,543  
|Other assets                                                                   |  |                          | 169,458    
|Accounts payable                                                               |  |                          | (595,564   
|Accrued expenses                                                               |  |                          | (1,072,545 
|Deferred revenue                                                               |  |                          | (8,687     
|Restructuring reserve                                                          |  |                          | (907,153   
|                                                                               |  |                          |            
|Net cash used in operating activities                                          |  |                          | (10,520,954
|                                                                               |  |                          |            
|                                                                              
|Investing activities                                                           |  |                          |            
|Purchases of property and equipment                                            |  |                          | (2,447,493 
|Investment in long-term assets                                                 |  |                          |            
|Purchases of short-term investments                                            |  |                          |            
|Sale of short-term investments                                                 |  |                          |            
|Proceeds from sales of businesses, net of costs                                |  |                          | 9,987,704  
|Acquisitions of businesses, net of cash acquired                               |  |                          | (1,199,999 
|                                                                               |  |                          |            
|Net cash provided by (used in) investing activities                            |  |                          | 6,340,212  
|                                                                               |  |                          |            
|                                                                              
|Reorganization activities                                                      |  |                          |            
|Net cash used in reorganization activities                                     |  |                          | (2,540,552 
|                                                                               |  |                          |            
|                                                                              
|Financing activities                                                           |  |                          |            
|Proceeds from sale of common stock (includes Employee Stock Purchase
Plan)     |  |                          | 7,969      
|Proceeds from issuance of 7% Convertible Subordinated Notes                    |  |                          |            
|Proceeds from exercise of options and warrants                                 |  |                          |            
|Proceeds from issuance of debt and capital lease financing                     |  |                          | 25,680,149 
|Payment in connection with debt restructuring                                  |  |                          | (1,945,629 
|Repayment of debt and capital leases                                           |  |                          | (20,570,800
|Minority investment in subsidiary                                              |  |                          |            
|Offering costs                                                                 |  |                          |            
|                                                                               |  |                          |            
|Net cash provided by financing activities                                      |  |                          | 3,171,689  
|                                                                               |  |                          |            
|Effect of exchange rate changes on cash                                        |  |                          | 23,964     
|Net decrease in cash and cash equivalents                                      |  |                          | (3,525,641 
|Cash and cash equivalents at beginning of year                                 |  |                          | 5,371,102  
|                                                                               |  |                          |            
|Cash and cash equivalents at end of year                                       |  | $                        | 1,845,461  
|                                                                               |  |                          |            
|SUPPLEMENTAL DISCLOSURES, INCLUDING NONCASH INVESTING AND FINANCING
ACTIVITIES |  |                          |            
|Cash paid for interest                                                         |  | $                        | 799,081    
|Stock issued and options granted for acquisitions                              |  |                          |            
|Stock issued in lieu of compensation                                           |  | $                        | 457,200    
|Stock issued for Note conversions                                              |  | $                        | 1,558,000  
|Debt assumed or issued in acquisitions                                         |  | $                        | 2,037,125  
|Property, equipment and furniture acquired under capital lease
obligations     |  | $                        | 310,736    
|Warrants issued in connection with 10% Convertible Senior Notes                |  |                          |            
|Warrants issued in connection with 10% Convertible Subordinated Notes          |  | $                        | 2,212,170  
|Warrants issued in connection with 8% Convertible Subordinated Notes           |  |                          |            





See accompanying notes to consolidated financial statements.



27



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##### Table of Contents







INTERLIANT, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|1. |  | Business
|-- |  | --------



On August 5, 2002 (the Filing Date) the Company and its domestic subsidiaries (including indirectly owned subsidiaries)
(collectively Debtors) filed voluntary petitions in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court) for reorganization under Chapter 11 of the United States Bankruptcy Code (the
Bankruptcy Code) under the following case numbers (the Chapter 11 Proceedings): Interliant, Inc. (02-23150), Interliant Acquisition Corp. (02-23151), Interliant Association Solutions, Inc. (02-23153), Interliant Consulting
and Professional Services, Inc. (02-23155), Interliant International, Inc. (02-23159), Interliant Services, Inc. (02-23162), Interliant Texas, Inc. (02-23166), The Jacobson Consulting Group, Inc. (02-23168), rSP Insurance Agency, Inc. (02-23158), SL
Successor Corp. (02-23160), Soft Link Holding Corp. (02-23161), and TP Successor Corp. (02-23163). The Companys United Kingdom subsidiaries are not debtors in the Chapter 11 filing.





The Company is actively pursuing
the sale of substantially all of its operations and the assets of its domestic subsidiaries, including the capital stock of the non-debtor subsidiaries. Upon the consummation of such a sale, all of the remaining assets (including proceeds received
from the sale of our assets) would be distributed to the creditors, without any distribution being made to holders of the Common Stock. The Company would then have no assets or operations. If the Company is unable to consummate a sale of its assets,
the Company anticipates that it will have to cease operations in the second quarter of 2003 due to insufficient cash flows resulting from continuing operating losses, and it would then liquidate its assets in the Chapter 11 Proceedings. Holders of
Common Stock would not receive any proceeds of such a liquidation. (See Note 18)



Accordingly, the Company does not expect to emerge from the Chapter 11 Proceedings with any assets or operations.



Interliant, Inc. (OTC-BB-INIT.OB), (the Company), is a provider of managed infrastructure
solutions, encompassing messaging, security, and hosting, plus an integrated set of professional services that differentiate and add customer value to these core solutions. The Company provides companies of all sizes with cost-effective, secure
infrastructure and a focused suite of e-business solutions.



In July 2002, the Companys Common Stock was delisted from the Nasdaq National Market and began trading on the Over The Counter Bulletin Board.



The Company was organized under the laws of the State of Delaware on December 8, 1997. Web Hosting
Organization LLC (WEB), a Delaware Limited Liability Company, is the largest single shareholder, owning 47% of the Companys issued and outstanding shares of common stock (Common Stock) as of December 31, 2002.
WEBs investors comprise Charterhouse Equity Partners III, L.P. and Chef Nominees Limited (collectively, CEP Members), and WHO Management, LLC (WHO).



For the period from inception to December 31, 2002, the Company has incurred net losses and negative cash
flows from operations, and has also expended significant funds for capital expenditures (property and equipment) and the acquisitions of businesses. As of December 31, 2002, the Company had working capital of $3.0 million, including cash and cash
equivalents of $1.8 million.



The necessity for
filing under the Bankruptcy Code, in addition to the continued negative cash flow from operations, was attributable primarily to the Companys inability to collect funds due in connection with the prior sales of business units, a delay in the
anticipated sale of one of its business units and continued weakening of market conditions.



The outstanding principal of, and accrued interest on substantially all long-term debt of the Debtors became immediately due and payable as a result of the commencement of the Chapter 11 Proceedings.
However, the vast majority of the claims in existence at the Filing Date (including claims for principal and accrued interest and substantially all legal proceedings) are stayed (deferred) while the Company continues to manage its businesses. The
Bankruptcy Court has, upon motion by the Debtors, permitted the Debtors to pay or otherwise honor certain unsecured pre-Filing Date claims, including employee wages and benefits and customer claims in the ordinary course of business, subject to
certain limitations. The Debtors also have the right to assume or reject executory contracts, subject to Bankruptcy Court approval and certain other limitations. In this context, assumption means that the Debtors agree to perform their
obligations and cure certain existing defaults under an executory contract and rejection means that the Debtors are relieved from its obligations to perform further under an executory contract and are subject only to a claim for damages
for the breach thereof. Any claim for damages resulting from the rejection of an executory contract is treated as a general unsecured claim in the Chapter 11 Proceedings.



28



---

##### Table of Contents



Generally,
pre-Filing Date claims against the Debtors fall into two categories: secured and unsecured, including certain contingent, unliquidated and/or disputed claims. Under the Bankruptcy Code, a creditors claim is treated as secured only to the
extent of the value of the collateral securing such claim, with the balance of such claim being treated as unsecured. Unsecured and partially secured claims do not accrue interest after the Filing Date. A fully secured claim, however, does accrue
interest after the Filing Date until the amount due and owing to the secured creditor, including interest accrued after the Filing Date, is equal to the value of the collateral securing such claim. The final amount and validity of pre-Filing Date
contingent, unliquidated and/or disputed claims ultimately may be established by the Bankruptcy Court or by agreement of the parties.



The Debtors anticipate that substantially all liabilities of the Debtors as of the Filing Date will be resolved under one or more plans of
liquidation to be proposed and voted on in the Chapter 11 Proceedings in accordance with the provisions of the Bankruptcy Code. Although the Debtors intend to file and seek confirmation of such a plan or plans, there can be no assurance that the
Debtors will file such a plan or plans, and that if the Debtors do file such a plan or plans then as to when such plan or plans will be confirmed by the Bankruptcy Court and consummated.



Pursuant to an order entered by the Bankruptcy Court, the Company obtained from a financial institution
Debtor-In-Possession (DIP) financing, under which the Company can borrow up to $5.0 million based on the amount of its eligible accounts receivable, and the Company has pledged substantially all its assets as security against
this financing.



The accompanying consolidated
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. However, as a result of the Chapter 11 Proceedings, such
realization of assets and liquidation of liabilities are subject to a significant number of uncertainties. As a result of the Chapter 11 Proceedings, certain liabilities which previously had been classified as non-current liabilities on the
Companys balance sheet have become immediately due and payable pursuant to the terms of the underlying agreements. Therefore, the Company has classified such liabilities on the balance sheet as Liabilities Subject To Compromise. Under the
Bankruptcy Code, substantially all of such liabilities are stayed (deferred) while the Company continues to manage the business.



In accordance with AICPA Statement of Position 90-7 (SOP 90-7), Financial Reporting by Entities in Reorganization under
the Bankruptcy Code, condensed combined debtor-in-possession financial statements of the Debtors, excluding the UK subsidiaries, are presented below. Such financial statements have been prepared on the same basis as the condensed consolidated
financial statements and include intercompany receivables and investments in non-Debtor subsidiaries at cost and are presented as follows:



INTERLIANT, INC.



COMBINED DEBTOR-IN-POSSESSION BALANCE SHEETS



|                                                                                                                                                                  |  | December 31, |              |   | December 31, |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------------ | - | ------------ | -
|                                                                                                                                                                  |  | 2002         |              |   | 2001         |  
|Assets                                                                                                                                                            |  |              |              |   |              |  
|Current assets:                                                                                                                                                   |  |              |              |   |              |  
|Cash and cash equivalents                                                                                                                                         |  | $            | 1,630,700    |   |              | $
|Restricted cash                                                                                                                                                   |  |              | 738,873      |   |              |  
|Accounts receivable, net of allowances of $0.2 million and $1.4 million at December 31,
2002 and 2001, respectively                                               |  |              | 3,122,425    |   |              |  
|Deferred costs                                                                                                                                                    |  |              |              |   |              |  
|Prepaid assets                                                                                                                                                    |  |              | 792,276      |   |              |  
|Other current assets                                                                                                                                              |  |              | 1,740,448    |   |              |  
|                                                                                                                                                                  |  |              |              |   |              |  
|Total current assets                                                                                                                                              |  |              | 8,024,722    |   |              |  
|                                                                                                                                                                  |  |              |              |   |              |  
|                                                                                                                                                                 
|Property and equipment, net                                                                                                                                       |  |              | 2,554,513    |   |              |  
|Goodwill, net                                                                                                                                                     |  |              |              |   |              |  
|Intangibles, net                                                                                                                                                  |  |              |              |   |              |  
|Net assets of discontinued operations                                                                                                                             |  |              |              |   |              |  
|Other assets                                                                                                                                                      |  |              | 719,998      |   |              |  
|Investment in unconsolidated subsidiary                                                                                                                           |  |              | 1,446,055    |   |              |  
|                                                                                                                                                                  |  |              |              |   |              |  
|Total assets                                                                                                                                                      |  | $            | 12,745,288   |   |              | $
|                                                                                                                                                                  |  |              |              |   |              |  
|Liabilities and stockholders (deficit) equity                                                                                                                    |  |              |              |   |              |  
|Current liabilities:                                                                                                                                              |  |              |              |   |              |  
|Notes payable and current portion of long-term debt and capital lease
obligations                                                                                 |  | $            | 2,159,202    |   |              | $
|Accounts payable                                                                                                                                                  |  |              | 1,120,667    |   |              |  
|Accrued expenses                                                                                                                                                  |  |              | 1,737,406    |   |              |  
|Deferred revenue                                                                                                                                                  |  |              | 294,898      |   |              |  
|Net liabilities of discontinued operations                                                                                                                        |  |              |              |   |              |  
|Restructuring reserve                                                                                                                                             |  |              |              |   |              |  
|                                                                                                                                                                  |  |              |              |   |              |  
|Total current liabilities                                                                                                                                         |  |              | 5,312,173    |   |              |  
|                                                                                                                                                                 
|Long-term debt and capital lease obligations, less current portion                                                                                                |  |              | 410,299      |   |              |  
|Other long-term liabilities                                                                                                                                       |  |              |              |   |              |  
|                                                                                                                                                                 
|Liabilities subject to compromise                                                                                                                                 |  |              | 123,072,269  |   |              |  
|                                                                                                                                                                  |  |              |              |   |              |  
|Total liabilities                                                                                                                                                 |  |              | 128,794,741  |   |              |  
|                                                                                                                                                                  |  |              |              |   |              |  
|                                                                                                                                                                 
|Stockholders (deficit) equity:                                                                                                                                   |  |              |              |   |              |  
|Preferred stock, $.01 par value; 1,000,000 shares authorized; 0 shares issued and
outstanding                                                                     |  |              |              |   |              |  
|Common stock, $.01 par value; 500,000,000 shares authorized; 57,496,121, and 51,891,036
shares issued and outstanding at December 31, 2002 and 2001, respectively |  |              | 574,962      |   |              |  
|Additional paid-in capital                                                                                                                                        |  |              | 321,219,226  |   |              |  
|Accumulated deficit                                                                                                                                               |  |              | (437,843,641 | ) |              |  
|                                                                                                                                                                  |  |              |              |   |              |  
|Total stockholders (deficit) equity                                                                                                                              |  |              | (116,049,453 | ) |              |  
|                                                                                                                                                                  |  |              |              |   |              |  
|Total liabilities and stockholders (deficit) equity                                                                                                              |  | $            | 12,745,288   |   |              | $
|                                                                                                                                                                  |  |              |              |   |              |  



INTERLIANT, INC.



COMBINED DEBTOR-IN-POSESSION STATEMENTS OF OPERATIONS



|                                                                                                                      |  | Years Ended December 31, |            
|--------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | -----------
|                                                                                                                      |  | 2002                     |            
|Revenues:                                                                                                             |  |                          |            
|Service revenues                                                                                                      |  | $                        | 30,292,241 
|Product revenues                                                                                                      |  |                          | 8,779,646  
|                                                                                                                      |  |                          |            
|Total Revenues                                                                                                        |  |                          | 39,071,887 
|                                                                                                                     
|Costs and expenses:                                                                                                   |  |                          |            
|Cost of service revenues                                                                                              |  |                          | 16,705,842 
|Cost of product revenues                                                                                              |  |                          | 7,626,892  
|Sales and marketing                                                                                                   |  |                          | 9,239,196  
|General and administrative (exclusive of non-cash compensation shown
below)                                           |  |                          | 20,286,512 
|Non-cash compensation                                                                                                 |  |                          | 777,402    
|Depreciation                                                                                                          |  |                          | 4,960,545  
|Amortization of intangibles                                                                                           |  |                          | 709,055    
|Restructuring charge                                                                                                  |  |                          | 247,720    
|Impairment losses                                                                                                     |  |                          | 22,556,342 
|                                                                                                                      |  |                          |            
|                                                                                                                      |  |                          | 83,109,506 
|                                                                                                                      |  |                          |            
|                                                                                                                     
|Operating loss before interest, reorganizations items, and other income                                               |  |                          | (44,037,619
|Gain on sale of businesses                                                                                            |  |                          | 8,521,185  
|Other income                                                                                                          |  |                          | 763,982    
|Interest income (expense), net of $0.1, $1.8 and $8.0 million of interest income in
2002, 2001 and 2000               |  |                          | (7,116,240 
|Reorganization items, net                                                                                             |  |                          | (3,880,992 
|Equity income (loss) in unconsolidated subsidiary                                                                     |  |                          | (173,250   
|                                                                                                                      |  |                          |            
|Loss before minority interest, discontinued operations extraordinary gain, and
cumulative effect of accounting change |  |                          | (45,922,934
|                                                                                                                     
|Minority interest                                                                                                     |  |                          |            
|                                                                                                                      |  |                          |            
|                                                                                                                     
|Loss before discontinued operations, extraordinary gain, and cumulative effect of
accounting change                   |  |                          | (45,922,934
|Discontinued operations                                                                                               |  |                          | (2,990,332 
|                                                                                                                      |  |                          |            
|                                                                                                                      |  |                          |            
|Loss before extraordinary gain and cumulative effect of accounting
change                                             |  |                          | (48,913,266
|                                                                                                                     
|Gain on debt refinancing                                                                                              |  |                          |            
|                                                                                                                      |  |                          |            
|                                                                                                                     
|Loss before cumulative effect of accounting change                                                                    |  |                          | (48,913,266
|Cumulative effect of accounting change                                                                                |  |                          |            
|                                                                                                                      |  |                          |            
|                                                                                                                     
|Net loss                                                                                                              |  | $                        | (48,913,266
|                                                                                                                      |  |                          |            
|Basic and diluted loss per share:                                                                                     |  |                          |            
|Loss before cumulative effect of accounting change                                                                    |  | $                        | (0.82      
|Discontinued operations                                                                                               |  |                          | (0.06      
|Gain on debt restructuring                                                                                            |  |                          |            
|Cumulative effect of accounting change                                                                                |  |                          |            
|                                                                                                                      |  |                          |            
|Net loss                                                                                                              |  | $                        | (0.88      
|                                                                                                                      |  |                          |            
|                                                                                                                     
|Weighted average shares outstandingbasic and diluted                                                                 |  |                          | 55,865,760 
|                                                                                                                      |  |                          |            



INTERLIANT, INC.



COMBINED DEBTOR-IN-POSSESSION STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY



|                                                                              |  | Common Stock |  | Additional Paid-in Capital |         |  | Deferred Compensation |             |   | Accumulated Deficit |   |             | Total Stockholders' Equity | 
|----------------------------------------------------------------------------- |  | ------------ |  | -------------------------- | ------- |  | --------------------- | ----------- | - | ------------------- | - | ----------- | -------------------------- | 
|                                                                              |  |              |  |                            |        
|                                                                              |  | Shares       |  | Par Value                  |         |  |                       |            
|Balance as of December 31, 1999                                               |  | 44,601,141   |  | $                          | 446,011 |  | $                     | 201,922,128 |   |                     | $ |             |                            | 
|                                                                             
|Sales of common stock in private placements                                   |  | 787,881      |  |                            | 7,879   |  |                       | 25,977,497  |   |                     |   |             |                            | 
|Exercise of stock options and warrants                                        |  | 1,428,674    |  |                            | 14,287  |  |                       | 2,491,013   |   |                     |   |             |                            | 
|Common stock issued and stock options granted in connection with
acquisitions |  | 1,978,522    |  |                            | 19,785  |  |                       | 57,988,853  |   |                     |   |             |                            | 
|Deferred compensatory stock options                                           |  |              |  |                            |         |  |                       | 31,442,131  |   |                     |   | (31,442,131 | )                          | 
|Amortization of deferred compensation                                         |  |              |  |                            |         |  |                       |             |   |                     |   | 15,105,643  |                            | 
|Net loss                                                                      |  |              |  |                            |         |  |                       |             |   |                     |   |             |                            | 
|                                                                              |  |              |  |                            |         |  |                       |             |   |                     |   |             |                            | 
|Balance as of December 31, 2000                                               |  | 48,796,218   |  |                            | 487,962 |  |                       | 319,821,622 |   |                     |   | (16,336,488 | )                          | 
|                                                                             
|Exercise of stock options and warrants                                        |  | 408,370      |  |                            | 4,085   |  |                       | 165,646     |   |                     |   |             |                            | 
|Common stock issued and stock options granted in connection with
acquisitions |  | 1,576,448    |  |                            | 15,764  |  |                       | 3,389,777   |   |                     |   |             |                            | 
|Common stock issued                                                           |  | 1,110,000    |  |                            | 11,100  |  |                       | 1,327,200   |   |                     |   |             |                            | 
|Amortization of deferred compensation                                         |  |              |  |                            |         |  |                       | (22,335,374 | ) |                     |   | 16,336,488  |                            | 
|Beneficial conversion feature on 8% Subordinated Convertible Notes
issued     |  |              |  |                            |         |  |                       | 3,251,485   |   |                     |   |             |                            | 
|Warrant value on 8% Subordinated Convertible Notes                            |  |              |  |                            |         |  |                       | 3,942,394   |   |                     |   |             |                            | 
|Warrant value on 10% Senior notes                                             |  |              |  |                            |         |  |                       | 4,211,072   |   |                     |   |             |                            | 
|Net loss                                                                      |  |              |  |                            |         |  |                       |             |   |                     |   |             |                            | 
|                                                                              |  |              |  |                            |         |  |                       |             |   |                     |   |             |                            | 
|Balance as of December 31, 2001                                               |  | 51,891,036   |  |                            | 518,911 |  |                       | 313,773,822 |   |                     |   |            |                            | 
|                                                                             
|Common stock issued in lieu of compensation                                   |  | 3,953,335    |  |                            | 39,533  |  |                       | 417,667     |   |                     |   |             |                            | 
|Common stock issued in connection with Note conversions                       |  | 1,558,000    |  |                            | 15,580  |  |                       | 1,542,420   |   |                     |   |             |                            | 
|Common stock issued                                                           |  | 93,750       |  |                            | 938     |  |                       | 7,031       |   |                     |   |             |                            | 
|Amortization of deferred compensation                                         |  |              |  |                            |         |  |                       | 566,670     |   |                     |   |             |                            | 
|Beneficial conversion feature on 10% Subordinated Convertible Notes
issued    |  |              |  |                            |         |  |                       | 5,066,158   |   |                     |   |             |                            | 
|Warrant value on 10% Senior notes                                             |  |              |  |                            |         |  |                       | (154,542    | ) |                     |   |             |                            | 
|Net loss                                                                      |  |              |  |                            |         |  |                       |             |   |                     |   |             |                            | 
|                                                                              |  |              |  |                            |         |  |                       |             |   |                     |   |             |                            | 
|Balance as of December 31, 2002                                               |  | 57,496,121   |  | $                          | 574,962 |  | $                     | 321,219,226 |   |                     | $ |            |                            | 
|                                                                              |  |              |  |                            |         |  |                       |             |   |                     |   |             |                            | 



29



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##### Table of Contents



INTERLIANT,
INC.



COMBINED DEBTOR-IN-POSSESSION
STATEMENTS OF CASH FLOWS



|                                                                             |  | Years Ended December 31, |            
|---------------------------------------------------------------------------- |  | ------------------------ | -----------
|                                                                             |  | 2002                     |            
|                                                                            
|OPERATING ACTIVITIES                                                         |  |                          |            
|Net loss                                                                     |  | $                        | (48,913,266
|Adjustments to reconcile net loss to net cash used in operating
activities:  |  |                          |            
|Provision for uncollectible accounts                                         |  |                          | (228,626   
|Depreciation and amortization                                                |  |                          | 6,057,891  
|Impairment                                                                   |  |                          | 22,556,342 
|Beneficial conversion                                                        |  |                          | 2,699,746  
|Debt forgiveness                                                             |  |                          |            
|Discontinued operations                                                      |  |                          | 5,437,514  
|Gain on 7% Convertible Subordinated Notes refinancing                        |  |                          |            
|Gain on sale of businesses                                                   |  |                          | (8,521,185 
|Reorganization items, net                                                    |  |                          | 3,880,992  
|Non-cash compensation, including amortization of deferred compensation       |  |                          | 777,403    
|Non-cash charges recorded in connection with debt discounts and PIK
interest |  |                          | 2,942,469  
|Non-cash charges recorded in connection with restructuring                   |  |                          |            
|Minority interest in earnings of subsidiary                                  |  |                          |            
|Net loss of unconsolidated subsidiary                                        |  |                          | 173,250    
|Other non-cash items                                                         |  |                          | (84,400    
|Change in operating assets and liabilities:                                  |  |                          |            
|Restricted cash                                                              |  |                          | 1,562,000  
|Accounts receivable                                                          |  |                          | 2,081,868  
|Prepaid and other current assets                                             |  |                          | 1,069,763  
|Other assets                                                                 |  |                          | 169,459    
|Accounts payable                                                             |  |                          | (571,524   
|Accrued expenses                                                             |  |                          | (1,114,141 
|Deferred revenue                                                             |  |                          | 28,245     
|Restructuring reserve                                                        |  |                          | (907,153   
|                                                                             |  |                          |            
|Net cash used in operating activities                                        |  |                          | (10,903,353
|                                                                             |  |                          |            
|                                                                            
|Investing activities                                                         |  |                          |            
|Purchases of fixed assets                                                    |  |                          | (2,143,021 
|Investment in long-term assets                                               |  |                          |            
|Purchases of short-term investments                                          |  |                          |            
|Sale of short-tem investments                                                |  |                          |            
|Proceeds from sales of businesses, net of costs                              |  |                          | 9,987,704  
|Acquisitions of businesses, net of cash acquired                             |  |                          | (1,199,999 
|                                                                             |  |                          |            
|Net cash provided by (used in) investing activities                          |  |                          | 6,644,684  
|                                                                             |  |                          |            
|                                                                            
|Reorganization activities                                                    |  |                          |            
|Net cash used in reorganization activities                                   |  |                          | (2,540,552 
|                                                                             |  |                          |            
|                                                                            
|Financing activities                                                         |  |                          |            
|Proceeds from sale of common stock (includes Employee Stock Purchase
Plan)   |  |                          | 7,969      
|Proceeds from issuance of 7% Convertible Subordinated Notes                  |  |                          |            
|Proceeds from exercise of options and warrants                               |  |                          |            
|Proceeds from issuance of debt and capital lease financing                   |  |                          | 25,680,149 
|Payment in connection with debt restructuring                                |  |                          | (1,945,629 
|Repayment of debt and capital leases                                         |  |                          | (20,570,800
|Investment in subsidiary                                                     |  |                          | 577,836    
|Minority investment in subsidiary                                            |  |                          |            
|Offering costs                                                               |  |                          |            
|                                                                             |  |                          |            
|Net cash provided by financing activities                                    |  |                          | 3,749,525  
|                                                                             |  |                          |            
|                                                                            
|Effect of exchange rate changes on cash                                      |  |                          |            
|Net decrease in cash and cash equivalents                                    |  |                          | (3,049,696 
|Cash and cash equivalents at beginning of year                               |  |                          | 4,680,396  
|                                                                             |  |                          |            
|Cash and cash equivalents at end of year                                     |  | $                        | 1,630,700  
|                                                                             |  |                          |            



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|2. |  | Summary of Significant Accounting Policies
|-- |  | ------------------------------------------



Basis of Presentation



The consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated. Liabilities subject to compromise have been reported in accordance with SOP 90-7, and on a going concern basis, which contemplates continuity of operations, realization of
assets and liabilities in the ordinary course of business.



Cash Equivalents



The
Company considers all highly liquid investments purchased with an original maturity (at date of purchase) of three months or less to be cash equivalents. Cash equivalents, which consist primarily of money market accounts and commercial paper, are
carried at cost, which approximates market value.



Fair Value
of Financial Instruments



Carrying amounts
of financial instruments held by the Company, which include cash, cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses, approximate fair value due to their short duration. The fair value of other
long-term obligations approximates carrying amounts based on borrowing rates for similar instruments.



Concentrations of Credit Risk



Financial instruments that potentially subject the Company to concentrations of credit risk principally comprise cash, cash equivalents, short-term investments, accounts receivable, accounts payable
and debt obligations. As of December 31, 2002, the Companys cash, and cash equivalents are deposited with various domestic and foreign financial institutions. With respect to accounts receivable, the Companys customer base is primarily
dispersed throughout North America and the United Kingdom. The Company monitors customer payment history, generally does not require collateral and establishes reserves for uncollectible accounts as warranted. In addition to individual customers,
the Company also provides services to resellers, who, in turn, provide services to their own customers.



Use of Estimates



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



Property and Equipment



Property and equipment are stated at cost. Major additions
and improvements are capitalized, while replacements, maintenance and repairs that do not improve or extend the life of the assets are charged to expense. Depreciation and amortization has been provided using the straight-line method over the
estimated useful lives of the assets as follows:





|Network software and equipment |  | 2 to 3 years                                             
|------------------------------ |  | ---------------------------------------------------------
|                              
|Furniture and office equipment |  | 3 to 7 years                                             
|                              
|Leasehold improvements         |  | Remaining lease term or useful life, whichever is shorter







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Goodwill, Other Intangible
Assets and Asset Impairment



In June 2001,
the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives.



The Company applied the new rules on accounting for goodwill
and other intangible assets beginning in the first quarter of 2002. During 2002, the Company performed the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002, and as a result of impairment
charges taken in 2002, the effect of these tests on the earnings and financial position of the Company were not significant.



On August 1, 2001, the FASB issued SFAS No. 144, Accounting For Impairment of Long-Lived Assets (SFAS 144). The Company adopted this
pronouncement beginning January 1, 2002. SFAS No. 144 prescribes the accounting for the impairment of long-lived assets (excluding goodwill), and long-lived assets to be disposed of by sale. SFAS 144 retains the requirement of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS 121), to measure long-lived assets classified as held for sale at the lower of its carrying value or fair market value less the cost to sell.
Therefore, discontinued operations are no longer measured on a net realizable basis, and future operating results are no longer recognized before they occur.



In response to certain events and circumstances that transpired in the first quarter of 2001 and in the second and third quarters of 2002
(see Note 4), pursuant to SFAS 121 and SEC Staff Accounting Bulletin No. 100 (SAB 100), Restructuring and Impairment Charges, the Company performed a review of its long-lived assets because indicators of impairment to its long-lived assets existed.
An impairment assessment was made with respect to the long-lived assets associated with businesses to be sold or shut down (see Note 4).



Intangible Assets



Intangible assets primarily consist of customer lists, covenants not to compete, assembled workforce, trade names, and goodwill, all of
which arose from the acquisitions of hosting and related Internet professional services companies. Such assets, excluding indefinite lived assets in 2002, are being amortized on a straight-line basis over periods ranging from one to five years (see
Note 4).



Pre-petition liabilities



The accompanying consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. However, as a result of the Chapter 11 Proceedings, such realization of assets and liquidation of
liabilities are subject to a significant number of uncertainties. Although, as a result of the filing under the Bankruptcy Code, certain liabilities which previously had been classified as non-current liabilities on the balance sheet have become
immediately due and payable pursuant to the terms of the underlying agreements. Therefore, we have classified such liabilities on the balance sheet as Liabilities Subject To Compromise. Under the Bankruptcy Code substantially all of such liabilities
are stayed (deferred) while the Company continues to manage the business.



Revenue Recognition



The
Companys revenues are primarily derived from managed infrastructure solutions and professional services.



The Company sells its managed infrastructure solutions for contractual periods generally ranging



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from one month to three years. Hosting revenues are recognized ratably over the contractual period as
services are performed. Incremental fees for excess bandwidth usage and data storage are billed and recognized as revenue in the period that customers utilize such services. Payments received and billings made in advance of providing services are
deferred until the services are provided.



In
December 1999, the SEC issued Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements (SAB 101), which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC.



The Company recorded a cumulative effect of
change in accounting principle, effective January 1, 2000, for revenue recognized in 1999 for set up fees primarily associated with its Web hosting services. Prior to the adoption of SAB 101, the Company recognized revenue from non-refundable set up
fees charged to customers upon completion of the set up services. Effective January 1, 2000, such fees are being amortized over the longer of the contractual period or expected life of the customer relationship (one year). For the year ended
December 31, 2000, the Company recorded a cumulative effect charge of $1.2 million to reflect the change in accounting principle.



Professional services revenues are recognized as the services are rendered, provided that no significant obligations remain and collection
of the receivable is considered probable. Substantially all of the Companys professional services contracts call for billings on a time and materials basis. Some of the Companys contracts contain milestones and/or customer acceptance
provisions. For these contracts, revenue is recognized as milestones are performed and/or accepted by the customer.



Certain of the Companys contracts contain multiple-elements under which the Company sells a combination of any of the following:
managed infrastructure solutions and professional services, computer equipment, software licenses and maintenance services to customers. The Company has determined that objective evidence of fair value exists for all elements and has recorded
revenue for each of the elements as follows: (1) revenue from the sale of computer equipment and software products is recorded at the time of delivery; (2) revenue from service contracts is recognized as the services are performed; (3) maintenance
revenue and related costs are recognized ratably over the term of the maintenance agreement. The Company is deferring and recognizing the cost of the reseller hardware and software maintenance over the same term as the maintenance revenue pursuant
to SAB 101.



Under certain arrangements, the
Company resells computer equipment and/or software and maintenance purchased from various computer equipment and software vendors. The Company is recording the revenue from these products and services on a gross basis pursuant to EITF 99-19,
Reporting RevenueGross as a Principal versus Net as an Agent. Under these arrangements, the Company has determined that it is the primary obligor. The Company presents the end-user with a total solution, provides the end-user with a
choice from various vendor products, sets final prices and performs certain services. Additionally, the Company has credit and back-end inventory risk.



In some circumstances, the Company resells software and in connection with such sales applies the provisions of Statement of Position
97-2, (SOP 97-2), Software Revenue Recognition, as amended.Under SOP 97-2, the Company recognizes license revenue upon shipment of a product to the end-user if a signed contract exists, the fee is fixed and determinable and
collection of the resulting receivable is probable. For contracts with multiple elements (e.g., software products, maintenance and other services), the Company allocates revenue to each element of the contract based on vendor specific objective
evidence of the elements fair value.



Advertising
Expenses



Advertising costs are expensed as
incurred. Advertising expenses for the year ended December 31, 2002, 2001 and 2000 were $0.1 million, $0.5 million and $8.7 million, respectively.





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Income Taxes



The Company accounts for income taxes using
the liability method under which deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.



Net Loss Per
Share



Basic net loss per share is computed
based on the weighted average number of shares of Common Stock outstanding. Diluted loss per share does not differ from basic loss per share since potential Common Stock to be issued upon exercise of stock options, warrants and conversion of
convertible notes are anti-dilutive for the periods presented. As of December 31, 2002, 2001 and 2000, the number of potentially dilutive shares of Common Stock were 0.0, 2.6 and 0.1 million shares, respectively, based on the number of outstanding
stock options, warrants and convertible securities as of that date.



Stock-Based Compensation



The Company accounts for its stock-based compensation plan using the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees(APB 25). The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting For Stock-Based Compensation (SFAS 123).



In March 2000, the Financial Accounting Standards Board (FASB) issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB No. 25, which became effective beginning July 1, 2000. The adoption of this new accounting standard did not have a significant effect on the Companys financial position or
results of operations.



Foreign Currency Translation



The financial statements of foreign
subsidiaries have been translated into U.S. dollars in accordance with SFAS No. 52, Foreign Currency Translation. The functional currency of the Companys foreign operating units is the local currency in the country that the entity
operates. All balance sheet accounts have been translated using the exchange rate in effect at the balance sheet date. Statement of operations amounts have been translated using the average exchange rate for the period. Adjustments resulting from
such translation have been reported separately as a component of other comprehensive income in stockholders equity. Gains and losses on foreign currency transactions are recorded in the Statement of Operations.



Derivatives and Hedging Activities



In 2000, the Company adopted FASB No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. To date, the Company has not made use of the financial instruments covered by this Statement and therefore there is no impact on its financial position or results of operations.



Discontinued Operations



In 2002, the Company adopted the provisions of SFAS
No.144 for operations discontinued in the year ended December 31, 2002.



Prior to 2002, the Company accounted for discontinued operations under the provisions of Accounting Principles Board 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 (APB 30), to reflect the operations of a segment discontinued in 2001.



The Companys financial statements have been reclassified to reflect the discontinued operations



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and net assets of businesses which were sold in 2002, 2001 and 2000 (see Note 13).



Recent Accounting Developments



In May 2002, the FASB issued SFAS No. 145, Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS No. 145). The statement rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment
of that statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. As a result, gains and losses from extinguishment of debt will be classified as extraordinary items only if they are determined to be
unusual and infrequently occurring items. SFAS No. 145 also requires that gains and losses from debt extinguishments, which were classified as extraordinary items in prior periods, be reclassified to continuing operations if they do not meet the
criteria for extraordinary items. The provisions of SFAS No. 145 are effective for our fiscal year beginning January 1, 2003.



In June 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal Activities (SFAS No. 146). SFAS No.
146 addresses significant issues regarding the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the
Emerging Issues Task Force (EITF) set forth in EITF Issue No. 94-3. The scope of SFAS No. 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement, or an individual deferred compensation contract. SFAS No. 146 was effective for exit or disposal activities that were initiated after
December 31, 2002. The Company will apply the provisions of this statement to restructuring activities following the effective date.



In December 2002, FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure (SFAS
No. 148) which provides transition guidance for a voluntary change to the fair value method of accounting (from the intrinsic value method) for stock option awards. The Statement also amends the disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123). The disclosure requirements apply to annual as well as interim disclosures, and are applicable whether APB No. 25 or SFAS No. 123 is used to account for stock-based
awards. The Company will continue to apply the provisions of APB No. 25 (intrinsic value) in accounting for stock-based awards, therefore the transition provisions will have no impact to us.



|3. |  | Property and Equipment
|-- |  | ----------------------



Property and equipment, net consist of the following:



|                                        |  | December 31,
|--------------------------------------- |  | ------------
|                                        |  | 2002        
|                                       
|Network Software & Equipment            |  | $           
|Furniture Fixtures and Office Equipment |  |             
|Leasehold Improvements                  |  |             
|                                        |  |             
|                                        |  |             
|Less Accumulated Depreciation           |  |             
|Less Impairment, NBV                    |  |             
|                                        |  |             
|                                        |  | $           
|                                        |  |             



Assets
financed under capital leases were $0.3 million and $15.2 million in 2002 and 2001, respectively. Depreciation expense, including depreciation of assets under capital leases and amortization of software and leasehold improvements, amounted to $5.8
million, $24.1 million and $15.5 million for the years ended 2002, 2001 and 2000, respectively.



As discussed in Note 4, in connection with impairment analyses of the Companys long-lived





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assets, impairment loss of $2.9 million and $51.4 million was recorded to write down the net book value of
certain property used in the hosting and consulting businesses in the years ended December 31, 2002 and 2001, respectively.



|4. |  | Intangible Assets
|-- |  | -----------------



The Company allocated the purchase price of acquired companies to identifiable tangible assets and liabilities and intangible assets based
on the nature and the terms of the various purchase agreements and evaluation of the acquired businesses. Covenants not to compete are amortized over periods not to exceed the term of the respective agreement. Values are assigned to identifiable
intangible assets in accordance with Accounting Principles Board Opinion No. 16 (APB 16), using the Companys estimate of the fair value of the asset. Amounts not allocated to tangible assets and liabilities and identifiable intangible assets
have been recorded as goodwill.



Intangible
assets consist of the following:



|                              |  | December 31,
|----------------------------- |  | ------------
|Intangible Assets             |  | 2002        
|Covenants not to compete      |  | $           
|Customer lists                |  |             
|Assembled workforce           |  |             
|Trade names                   |  |             
|Goodwill                      |  |             
|                              |  |             
|                              |  |             
|Less accumulated amortization |  |             
|Less impairment nbv           |  |             
|                              |  |             
|                              |  | $           
|                              |  |             





Amortization expense amounted to $0.7 million, $35.0 million and $39.5 million in 2002, 2001 and 2000, respectively.



Impairment of Long-Lived Assets



During the second quarter of 2002, the Company re-evaluated
the future prospects of the security and Oracle consulting businesses and concluded that these businesses no longer fit with the ongoing businesses which the Company continues to operate. Accordingly, these businesses were offered for sale and the
sales were completed in the second half of 2002. The Company also assessed the ongoing value of the long-lived assets associated with the messaging consulting business which is being retained. Pursuant to SFAS 121, SFAS 142 and SFAS 144 and SAB 100,
the Company performed a review of its long-lived assets because those decisions represented indicators of impairment to its long-lived assets.



In the year-ended December 31, 2002, an impairment assessment was made with respect to the long-lived assets associated with businesses to
be sold or shut down. The assessment indicated that based on the expected selling prices of the businesses to be sold, there was significant impairment in the value of the long-lived assets associated with those businesses. Consequently the Company
recorded impairment charges totaling $20.6 million, including $6.8 million included in discontinued operations ($17.8 million of identifiable intangible assets and goodwill, and $2.8 million of property and equipment). The assessment with respect to
the retained consulting business indicated that, on a held for use basis, there was impairment evident in such assets. Accordingly, the Company recorded an impairment charge of $7.9 million ($7.8 million of identifiable intangible assets and
goodwill and $0.1 million of property and equipment).



In connection with the pending sale of a portion of its professional services business, the Company determined that the carrying value of the intangible assets associated with that business was impaired



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based on the sales price of the business. Accordingly, an impairment loss of $1.0 million was recorded in
the three months ended March 31, 2002.



In the
year-ended December 31, 2001, in response to certain events and circumstances that transpired in the first quarter of 2001 (see Note 14April 2001 Restructuring Charge), pursuant to SFAS No. 121, and SAB 100, the Company performed a review of
its long-lived assets because indicators of impairment to its long-lived assets existed.



An impairment assessment was made with respect to the long-lived assets associated with businesses to be sold or shut down. The assessment indicated that, on a held for use basis, there was impairment
evident in such assets. Further, based on the Companys assessment of both internal and external facts and circumstances to which the impairment was attributable, management concluded that the impairment indicators arose in the latter half of
the first quarter of 2001. Consequently, the Company recorded impairment charges of $36.2 million and $0.3 million in the first and second quarters of 2001, respectively. Long-lived assets that were impaired consist of property and equipment ($8.6
million), identifiable intangible assets and related goodwill ($27.6 million), and other assets ($0.4 million). For purposes of measuring the impairment charges, fair value was determined based on a calculation of discounted cash flows.



During the second quarter of 2001, the Company
approved a plan to exit Interliant Europe B.V., a 51%-majority owned subsidiary with operations in continental Europe. An impairment assessment was made with respect to the long-lived assets associated with Interliant Europe, and the assessment
indicated that there was impairment evident in such assets. The fair value of the long-lived assets was determined based on a definitive agreement that was executed in August 2001, whereby the Company sold its entire interest in Interliant Europe
for a nominal amount of proceeds (see Note 5). Consequently, the Company recorded an impairment charge in the second quarter of 2001 of $4.7 million, to write-off the entire net book value of property and equipment ($4.4 million), identifiable
intangible assets ($0.2 million) and other long-term assets ($0.1 million) related to Interliant Europe.



During the third quarter of 2001, the Company determined that potential impairment indicators were present in the core hosting and
professional services businesses. Such impairment indicators arose as a result of the continued economic uncertainties in general, certain weaknesses in the Companys market, and lack of revenue growth for the Company in particular.
Accordingly, an additional impairment assessment was conducted with respect to long-lived assets associated with such businesses. Further, for businesses previously identified for sale or disposition, the fair value determination was updated based
on more current pricing terms from recent negotiations with prospective buyers. Based on these assessments, it was determined that there was impairment evident in the assets associated with the Companys core hosting businesses and the
PeopleSoft ERP professional services business. Consequently, impairment charges were recorded in the third and fourth quarters of 2001 of $84.5 million to write down the net book value of certain of the property and equipment including software used
in those businesses ($51.4 million) and identifiable intangible assets and goodwill ($32.7 million) related to those businesses. In addition, during the third quarter of 2001, the Company recorded a charge of approximately $1.0 million, included as
part of impairment losses, to reflect the permanent decline of the fair market value of restricted investments in certain non-public companies.



In connection with the above events and circumstances, management also has re-evaluated the assigned lives used for depreciating and
amortizing its remaining long-lived assets and has concluded that the existing lives continue to be appropriate.



|5. |  | Acquisitions and Dispositions
|-- |  | -----------------------------



Since inception, the Company acquired 27 businesses at an aggregate cost (including contingent consideration earned pursuant to the
respective purchase agreements) of $218.2 million, excluding assumed liabilities. In 2002 and 2001, the Company sold six and three businesses, respectively. Each of the acquisitions has been accounted for using the purchase method of accounting. The
operations of



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each of the acquired companies are included in the operating results of the Company from their respective
date of acquisition.



The following is a summary
of acquisitions and dispositions:



2002 Dispositions



In January 2002, the Company sold the
assets of its subsidiary Telephonetics, Inc. to a company formed by Stephen Maggs, a founder and former member of the Board of Directors of the Company. The total sales price was $1.6 million of which $0.6 million was in cash and the balance was in
the form of promissory notes and the assumption of debt. Notes in the aggregate amount of $0.4 million were due and paid in 2002. The remaining note is due in annual installments of $0.2 million in December 2003, 2004, and 2005.



In February 2002, the Company sold the assets of its
subsidiary Softlink, Inc. to a subsidiary of Springbow Solutions, Inc. The final sales price was $3.8 million of which $3.3 million was paid in cash to the Company and $0.5 million was paid to a former owner of Softlink as part of the contingent
consideration provision of the original purchase agreement.



In May 2002, the Company sold the assets of one of the business units included in the consulting business for nominal consideration, an impairment loss of $1.0 million was recorded in the three months ended March 31, 2002 in
recognition of the expected loss on the sale.



In
September 2002, the Company sold its security products business for cash proceeds of $0.2 million.



In October 2002, the Company sold the assets and operations it had used to provide private-label shared and high-volume dedicated Web
hosting to Sprint Communications Company, L.P. for approximately $5.0 million and the assumption of certain liabilities of the Company associated with the purchased assets.



In December 2002, the Company sold the assets of its Oracle professional services business to
SchlumbergerSema, Inc. for approximately $0.2 million and the assumption of certain liabilities related to the sold business.



The combined gain on the sale of these businesses, including the receipt of contingent consideration payments for businesses sold in the
prior year, was $8.5 million, which is included in gain on sale of businesses.



2001 Dispositions



In
July 2001, the Company, through a subsidiary, sold all of the outstanding capital stock of Interliant Managed Applications Solutions, Inc. (formerly known as reSOURCE PARTNER, Inc. and herein referred to as rSP) to a subsidiary of Interpath
Communications, Inc. (Interpath) pursuant to the terms of a purchase agreement (Purchase Agreement). The Purchase Agreement provides for contingent consideration to be paid to the Company if Interpath renews or retains
certain customer contracts within specified periods after the closing and if under those contracts, specified revenue targets are met during the twelve-month period following July 20, 2001. The Purchase Agreement further provides that additional
contingent consideration will be paid to the Company if new contracts are entered into by Interpath with certain prospective customers within 180 days of July 20, 2001. The aggregate contingent consideration payable under the Purchase Agreement may
range as high as $3.5 million, and in 2002, the Company recorded contingent consideration of $0.6 million, the minimum amount the Company has earned. There is no assurance that any additional contingent consideration will be paid, and any contingent
consideration payable shall be paid in cash and may be subject, in part, to an offset against any liability of the Company arising under its indemnity obligations set forth in the Purchase Agreement. The Company recorded the disposition as a
discontinued operation during the second quarter of 2001. The receipt of contingent consideration proceeds in excess of amounts recorded, if any, will reduce the loss on disposal of discontinued operations (see Note 13).



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In August
2001, the Company, through its subsidiary Interliant International, Inc. (Interliant International), entered into definitive agreements (Definitive Agreements) with @viso Limited (@viso) under which it sold to @viso all of
its 51% equity interest in Interliant Europe, B.V. (Interliant Europe) for a nominal amount.



In October 2001, the Company completed the sale of another of its non-core businesses, its shared and unmanaged dedicated retail Website
hosting business (Retail Web hosting), to Interland, Inc. The Company received cash proceeds of $6.6 million, consisting of an initial payment of $5.0 million for the transferred customer accounts and $1.6 million for the sale of network
equipment and software used in connection with such customer accounts. Future contingent payments related to the customer accounts will be dependent upon the achievement of specified cash collection targets with respect to the transferred customers,
after transition of such accounts. In 2002, $1.5 million of contingent payments were earned and included in gain on sale of business. Additional contingent payments are not reasonably determinable at this time.



2000 Acquisitions



In the year ended December 31, 2000, the Company acquired the
assets of a provider of hosting services for outsourced human resources and financial solutions, entered into a partnership and acquired the assets of a company providing hosting services in France, and acquired the stock of four entities in the
professional services business. Total consideration for these acquisitions consisted of $26.5 million in cash, 2.4 million shares of Common Stock, valued at $53.0 million and issuances of $13.0 million of notes. The stock and notes issued includes
amounts earned under contingent consideration provisions of the related purchase agreements.



|6. |  | Other Current Assets
|-- |  | --------------------



Other current assets consist of the following:



|                                     |  | December 31,
|------------------------------------ |  | ------------
|                                     |  | 2002        
|                                    
|Amounts due from sales of businesses |  | $           
|Vendor receivables                   |  |             
|Inventory, net of reserves           |  |             
|Deposits                             |  |             
|Other                                |  |             
|                                     |  |             
|Total                                |  | $           
|                                     |  |             





|7. |  | Short Term Debt
|-- |  | ---------------



In September 2002, the Company completed a DIP financing agreement under which it can borrow up to $5.0 million pledging its accounts
receivable and substantially all of its other assets as collateral. The definitive agreement provides for a loan term of one year with interest at prime plus 1% on amounts borrowed subject to increases in the rate upon the occurrence of certain
events. Borrowings under the Accounts Receivable Financing are based on a percentage of eligible receivables as defined in the definitive agreements. At December 31, 2002, no amounts were outstanding under this agreement.



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|8. |  | Accrued Expenses
|-- |  | ----------------



Accrued expenses consist of the following:



|                                  |  | December 31,
|--------------------------------- |  | ------------
|                                  |  | 2002        
|Compensation and related costs    |  | $           
|Communications costs              |  |             
|Amounts due to business partners  |  |             
|Hardware and software liabilities |  |             
|Professional Fees                 |  |             
|Rent                              |  |             
|Other                             |  |             
|                                  |  |             
|Total                             |  | $           
|                                  |  |             



|9. |  | Long-Term Debt, Capital Lease Obligations and Liabilities Subject to Compromise
|-- |  | -------------------------------------------------------------------------------



Long-term debt and capital lease obligations consists of the following:



|                                                                                                                                                     |  | December 31,
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------
|                                                                                                                                                     |  | 2002        
|10% Convertible Senior Notes, due 2006                                                                                                               |  |             
|Future interest to maturity on 10% Notes                                                                                                             |  |             
|8% Convertible Subordinated Notes, due 2003                                                                                                          |  |             
|7% Convertible Subordinated Notes, due 2005                                                                                                          |  |             
|Capital lease obligations                                                                                                                            |  | $           
|8% Note payable to @viso, due 2005                                                                                                                   |  |             
|Obligations related to the sale/leaseback of data center equipment, approximate interest
rate of 15%, payable in monthly installments over 36 months |  |             
|Notes payable to former owners of acquired businesses                                                                                                |  |             
|Notes payable for purchase of assets formerly under capital lease                                                                                    |  |             
|Other debt                                                                                                                                           |  |             
|                                                                                                                                                     |  |             
|Sub-total                                                                                                                                            |  |             
|Less amounts classified as current                                                                                                                   |  |             
|                                                                                                                                                     |  |             
|Total                                                                                                                                                |  | $           
|                                                                                                                                                     |  |             



Maturities of long-term debt and capital lease obligations are $2.2 million and $0.4 million in 2003 and 2004, respectively.



During the years ended December 31, 2002 and 2001, the Company financed approximately $0.3 million and $15.2 million, respectively, of
computer equipment and furniture with various lenders under



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capital lease arrangements, of which $4.7 million was financed under sale/leaseback arrangements in 2001.
The leases are payable in monthly installments over 24 to 36 months, with interest rates ranging from 7% to 17% per annum. During the fourth quarter of 2001 and January 2002, the Company was successful in negotiating restructured terms for most of
the leases. As a result, the Company was able to reduce the monthly payments, extend the payment period and in some cases reduce the effective interest rate on the leases.



In March 2002, Charterhouse Equity Partners III L.P., and Mobius Technology Ventures VI, LP (formerly
Softbank) and its related funds (collectively the Investors) purchased an aggregate of $10.0 million of the Companys 10% Convertible Subordinated Notes due March 2005 (10% Subordinated Notes) and 10.0 million warrants
to purchase the Companys Common Stock at $0.30 per share. The 10% Subordinated Notes are convertible into the Companys Common Stock at $0.30 per share, and the warrants are exercisable for five years. Interest on the 10% Subordinated
Notes may be paid in cash or the issuance of additional 10% Subordinated Notes at the Companys option. In addition, the Investors, or other persons acceptable to the Company, may purchase up to an additional $10.0 million of the 10%
Subordinated Notes and related warrants. The fair value of the warrants which were allocated to the total proceeds received was $2.3 million and will be charged to interest expense over the term of the 10% Subordinated Notes. These notes also
contain a beneficial conversion feature amounting to approximately $2.7 million, which was charged to interest expense upon the receipt of the proceeds.



In December 2001, the Company exchanged $164.2 million (99.6%) of the previously issued $164.8 million 7% Convertible Subordinated Notes
(7% Notes) for new 10% Convertible Senior Notes (10% Senior Notes), cash and warrants to purchase the Companys Common Stock, ($270, $70 and 67.5 notes, cash, and warrants, respectively for each $1,000 of 7% Notes
exchanged). At the option of the Company, interest payments can be made in the form of additional 10% Senior Notes. The 10% Senior Notes are convertible into Common Stock at a conversion price of $1.00 per share. The warrants have an exercise price
of $0.60 per share and expire five years after issuance. The exchange transaction has been accounted for pursuant to SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings (SFAS 15). Accordingly, upon closing, the
difference between the consideration issued and the present carrying value of the 7% Notes exchanged, reduced by the gross interest costs from the issuance date to maturity ($27.9 million) and transaction costs on the 10% Senior Notes issued, has
been treated as an extraordinary gain. SFAS 15 requires the accrual of the entire amount of interest to be paid to maturity on the 10% Senior Notes issued in the exchange. The unamortized value assigned to the warrants ($4.4 million) has been
deducted from the face amount of the 10% Notes and the amortization is being charged to interest expense prior to the Filing Date and to reorganization expense subsequent thereto.



As of December 31, 2002, there were $0.6 million of the 7% Notes outstanding which had not been converted
into 10% Senior Notes. The 7% Notes are convertible at the option of the holder, at any time on or prior to maturity into Common Stock at a conversion price of $53.10 per share, which is equal to a conversion rate of 18.8324 shares per $1,000
principal amount of the 7% Notes. The 7% Notes mature on February 16, 2005.



In August 2001, pursuant to a definitive agreement entered into in April, 2001 the Company sold to affiliates of Charterhouse Group International, Inc. (Charterhouse) and SOFTBANK
Technology Ventures VI, L.P. and its related funds (Softbank) an aggregate of 190 units (Units), each Unit consisting of $100,000 principal amount of 8% Convertible Subordinated Notes (8% Notes) and 27,273
warrants for the purchase of shares of Common Stock for a total sales price of $19.0 million. The 8% Notes are convertible at the option of the holder, at any time prior to maturity, into Common Stock at a conversion price of $1.10 per share,
subject to adjustment, which is equal to 90,909.09 shares of Common Stock, per $100,000 principal amount of the 8% Notes. Interest payments are payable on the last day of each calendar quarter by the issuance of additional 8% Notes ($0.6 million as
of December 31, 2001) The 8% Notes mature on June 30, 2003. The warrants have an exercise price of $1.25 per share and expire five years after issuance. The fair value of the warrants, which were allocated to the total proceeds received was $3.9
million. Such amounts are being charged over the term of the 8% Notes commencing August 2001 to interest expense prior to the Filing Date and to reorganization expense subsequent thereto. In addition, the 8% Notes contain a beneficial conversion
feature amounting to approximately $3.3 million, which was charged to interest expense upon receipt of



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the proceeds. The unamortized value assigned to the warrants ($3.2 million) has been deducted from the
face amount of the 8% Notes.



In connection with
7% Note exchange transaction described previously, the Company has revised certain of the terms of the 8% Notes and related warrants. The conversion price of the 8% Notes was reduced from $1.10 per share to $1.00 per share and the exercise price of
the related warrants was reduced from $1.25 per share to $0.60 per share.



In connection with the Companys purchase of its equity interest in Interliant Europe, @viso loaned the Company the amount required to purchase said interest in May 2000 (approximately $7.6 million) evidenced by a note
bearing interest at 8% per annum which is payable in full at the earlier of a sale of Interliant Europes stock in an initial public offering or February 2005. The interest payable on the note may be added to the principal amount of the note on
each payment date at the option of the Company and the Company has exercised such option at each interest payment date.



Liabilities Subject To Compromise



Under bankruptcy law, actions by creditors to collect indebtedness owed prior to the Filing Date are stayed and certain other pre-petition
contractual obligations may not be enforced. The Bankruptcy Court has approved the payment of certain pre-petition liabilities including employee salaries and wages, benefits, and other employee obligations.



Pursuant to an order of the Bankruptcy Court, the Company
mailed notices to all known creditors that the deadline for filing proof of claims with the Bankruptcy Court was November 27, 2002. Amounts that have been recorded may be different than amounts filed by the creditors. The number and amount of
allowed claims cannot be presently ascertained.



The following table summarizes the components of liabilities subject to compromise as of December 31, 2002:



|10% Convertible Senior Notes                          |  | $ | 41,526,000 
|----------------------------------------------------- |  | - | -----------
|Future interest to maturity on 10% Notes              |  |   | 24,743,000 
|10% Subordinated Convertible Notes                    |  |   | 8,274,000  
|8% convertible Subordinated Notes                     |  |   | 19,322,000 
|7% Convertible Subordinated Notes                     |  |   | 583,000    
|Capital lease obligations                             |  |   | 584,000    
|8% Note payable to @viso                              |  |   | 8,978,000  
|Notes payable to former owners of acquired businesses |  |   | 2,137,000  
|Pre-petition accounts payable                         |  |   | 6,621,000  
|Pre-petition accrued expenses                         |  |   | 10,304,000 
|                                                      |  |   |            
|                                                      |  | $ | 123,072,000
|                                                      |  |   |            



|10. |  | Stockholders Equity
|--- |  | --------------------



Preferred Stock



In May 1999, the Companys stockholders approved an amendment to the Companys Charter to authorize the issuance of 1.0 million
shares of undesignated preferred stock with a par value of $0.01 per share.



Common Stock



In January
and February 2000, the Company sold 0.8 million shares of Common Stock in private



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placements for total gross proceeds of $27.5 million. In connection with the sales, the Company issued
warrants to purchase 0.2 million shares of Common Stock at an average exercise price of $34.90 per share, which approximated the market price at the date of issuance. The warrants expired December 31, 2000.



During 2001 and 2000, approximately 1.6 million and 2.0
million shares of Common Stock, respectively, were issued in connection with acquisitions (see Note 5).



As of December 31, 2002, 143.1 million shares of Common Stock were reserved for issuance upon exercise of stock options, warrants and
conversion of all of the convertible notes.



In July 2002, the Companys stockholders approved an amendment to the Companys Charter to increase the number of authorized shares of Common Stock to 500.0 million.



Stock Option Plan



In February 1998, the Company adopted its 1998 Stock Option
Plan (the Plan), that is administered by the Compensation Committee of the Board of Directors (the Committee). Under the terms of the Plan, as amended, the Committee may grant stock options to directors, officers, employees and
consultants of the Company. The Plan permits the grant of incentive stock options (ISOs) and nonqualified stock options (NSOs). In the year ended December 31, 2001, the Companys stockholders approved amendments to the
Plan which included (i) an increase in the number shares available for grants of options under the plan to 17.6 million shares of Common Stock, (ii) permission to grant options below fair market value, and (iii) an increase of the maximum number of
shares of Common Stock that may be subject to options granted to any optionee during any one calendar year. The Plan provides that stock options granted may not expire more than ten years from the date of the grant. Options granted under the Plan
generally will become exercisable over a four-year period in equal annual installments unless the Committee specifies a different vesting schedule. In the event of a change in control of the Company, each option becomes immediately vested and
exercisable, provided that no written provision has been made, in connection with any such event, for (1) the continuation of the Plan and/or the assumption of all outstanding options by a successor corporation or (2) the substitution for such
options with new options covering the stock of a successor corporation. The Plan has a term of ten years, subject to earlier termination or amendment by the Committee, and all options under the Plan prior to its termination remain outstanding until
they have been exercised or terminated.



During
the year ended December 31, 2002, an immaterial amount of options were issued under the Plan at less than fair market value.



The following table sets forth the Plan activity for the years ended December 31, 2002, 2001 and 2000:



|                                       |  | 2002             |   | 2001 |             | 2000        
|-------------------------------------- |  | ---------------- | - | ---- | ----------- | ------------
|                                       |  | Number of Shares |   |      | Price Range |             
|Options outstanding, beginning of year |  | 12,171,615       |   |      | $           | 0.13-$42.88 
|Options granted                        |  | 1,390,619        |   |      | $           | 0.20-$  1.00
|Options exercised                      |  |                 |   |      |             |             
|Options terminated                     |  | (7,961,940       | ) |      | $           | 0.13-$42.88 
|                                       |  |                  |   |      |             |             
|Options outstanding, end of year       |  | 5,600,294        |   |      | $           | 0.13-$42.88 
|                                       |  |                  |   |      |             |             



The
weighted average exercise price of options granted under the Plan was $2.33, $3.28, and $19.90 in 2002, 2001 and 2000, respectively. At December 31, 2002 and 2001, 3.2 million and 1.7 million options granted under the Plan, respectively were vested
and exercisable.



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The following
table summarizes information about stock options granted under the Plan which were outstanding as of December 31, 2002:



|                         |  | Options Outstanding |  |  | Options Exercisable                         
|------------------------ |  | ------------------- |  |  | --------------------------------------------
|Range of Exercise Prices |  | Number of Options   |  |  | Weighted- Average Remaining Contractual Life
|$0.13-$0.57              |  | 2,277,344           |  |  | 6.7 years                                   
|$1.00-$3.33              |  | 2,770,687           |  |  | 8.2                                         
|$4.00-$17.00             |  | 412,713             |  |  | 7.0                                         
|$19.25-$42.88            |  | 139,550             |  |  | 6.8                                         
|                         |  |                     |  |  |                                             
|                         |  | 5,600,294           |  |  | 7.2 years                                   
|                         |  |                     |  |  |                                             



Stock-Based
Compensation



As discussed in Note 2, the
Company applies APB 25 and related interpretations in accounting for its stock option plan. During 2000, the vesting of options to purchase 31,750 shares of Common Stock was accelerated in connection with termination arrangements, and as a result,
the Company charged approximately $0.7 million, to compensation expense.



As required under SFAS 123, the following pro forma net loss and net loss per share presentations reflect the amortization of the option grant fair value as expense. For purposes of this disclosure, the estimated fair value
of the options is amortized to expense over the options vesting periods.



SFAS 123 pro forma information is as follows:



|                                               |  | 2002 |             |   | 2001 |   |              | 2000 | 
|---------------------------------------------- |  | ---- | ----------- | - | ---- | - | ------------ | ---- | 
|Pro forma net loss                             |  | $    | (59,145,000 | ) |      | $ | (188,373,000 | )    | 
|Pro forma net loss per sharebasic and diluted |  | $    | (1.06       | ) |      | $ | (3.72        | )    | 



The
weighted average grant date fair value was $0.31, $3.28 and $17.96 for stock options issued in 2002, 2001 and 2000, respectively, and the weighted-average remaining contractual life for options outstanding as of December 31, 2002 and 2001 was 7.2
and 9.2 years, respectively. Significant assumptions used in determining this value include a risk free interest rate and volatility of 4.25% and 3.58%, 4.29% and 2.72% and 6.5% and 1.26%, in 2002, 2001 and 2000, respectively, an expected option
life of five years, and a dividend rate of zero.



The effects on pro forma disclosures of applying SFAS 123 are not likely to be representative of the effects on pro forma disclosures in future years as the period presented includes only four years of option grants under the Plan,
while 2002 includes five years, 2001 includes four years and 2000 includes three years.



In April 2002, the Company amended its agreement with The Feld Group for executive services rendered and to be rendered from January 2002 through December 31, 2002. In lieu of any cash compensation for
this period, The Feld Group received 2,333,335 shares of Common Stock through July 31, 2002, along with cash reimbursement for out-of-pocket expenses, pursuant to this agreement. As of July 31, 2002, this agreement was terminated and no further
issuances of stock will be made. Also pursuant to the April 2002 amended agreement, a nominee of The Feld Group received warrants to purchase 1,200,000 shares of Common Stock at a price of $0.30 per share. Upon termination of the agreement, warrants
for 500,000 shares were cancelled. The fair value of the vested warrants ($0.1 million) was charged to expense over seven months through July 31, 2002



In March 2002, certain of the Companys executive officers agreed to take an aggregate of 1.1



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million restricted shares of Common Stock in lieu of a portion of their cash compensation for the year
ending December 31, 2002. In addition, the Company amended the employment agreement of one of the Companys Co-chairmen, extending the term from May 31, 2002 to May 31, 2003 and issued him 500,000 restricted shares of Common Stock in lieu of
cash compensation for the extended term.



In May
2001, the Company amended its agreement with The Feld Group, Inc., a Dallas, Texas based technology and management services firm, under which The Feld Group renders executive-level services to the Company. Under the amended agreement (the Feld
Group Agreement), Mr. Bruce Graham, a member of The Feld Group rendered services as the Chief Executive Officer and President of the Company. In connection therewith, as a non-refundable and non-forfeitable sign-on bonus, the Company issued
The Feld Group 0.8 million shares of Common Stock, valued at $0.9 million, which was recorded as a charge to non-cash compensation during the second quarter of 2001.



The Company also granted The Feld Group options to purchase 2.0 million shares of Common Stock at an exercise
price of $1.00 per share. Such options were issued outside the Plan. The option shares will vest and become exercisable, so long as The Feld Group Agreement remains in effect, in forty-eight equal monthly installments based on the passage of time.
In March 2002, The Feld Group options were amended to provide that the balance of the 2,000,000 options granted thereunder which are not vested as of March 7, 2002 (i.e., 1,625,000 option shares) shall become vested and exercisable in ten (10) equal
monthly installments based on the passage of time, on the last day of each month commencing March 31, 2002 and continuing through and including December 31, 2002. Pursuant to EITF 96-18, as the option shares vest, the Company will record non-cash
compensation charges based on the fair value of the shares vesting during the period. Such non-cash compensation charges totaled $0.1 million for the year ended December 31, 2001. Upon a change in control of the Company, the option with respect to
such number of shares equal to the difference between 1,000,000 minus the then vested portion of the first 1,000,000 of the total option share grant, shall become fully and immediately vested and exercisable. In addition, the balance of the option
shall become fully and immediately vested and exercisable upon the occurrence of both of the following events: (1) a change in control of the Company, and (2) after such change in control, The Feld Groups engagement by the Company, or the
successor entity resulting therefrom, is terminated by the Company or such successor or The Feld Group terminates the engagement due to a significant adverse change in its or Mr. Grahams level of responsibility, compensation or staffing
requirements, as directed by the Board of Directors of the Company or such successor, which is not remedied within 30 days of written notice from The Feld Group to such Board advising them of The Feld Groups intention to terminate the
engagement. This agreement was terminated as of July 31, 2002.



In January 2000, the Company issued options to purchase 1.5 million shares of Common Stock at an average exercise price of $18.00 per share to its then-current CEO. Such options were issued outside of the Plan. The average exercise
price of the options was below the fair value of the Common Stock as of the measurement date, which would result in the recognition of approximately $30.0 million as compensation expense over the four-year vesting period of the options on a graded
vesting basis. Due to the fact that the CEO terminated his employment with the Company in April 2001, an adjustment was recorded during the second quarter of 2001 to reverse compensation charges aggregating approximately $8.4 million, which were
expensed during 2000 and the quarter ended March 31, 2001. The expense reversal reflects the excess of the charge recognized on a graded vesting basis over the value of the options that had ratably vested as of the date of his termination. The
entire 1.5 million share grant was canceled as of July 2001 because the vested shares were not exercised within the requisite three months of the employment termination.



Employee Stock Purchase Plan



Effective July 2000, the stockholders of the Company approved the adoption of the 2000 Employee Stock
Purchase Plan (ESPP), that provides for the sale of up to 1.5 million shares of Common Stock to eligible participating employees of the Company through periodic payroll deductions. The purchase price of the shares is the lesser of 85
percent of the Common Stocks fair market value on the first day of the purchase period or the last day of the purchase period for each six-month purchase period. The ESPP qualifies as an employee stock purchase plan under section
423 of the Internal



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Revenue Code of 1986, as amended. During the year ended December 31, 2002, 0.09 million shares were
purchased by employees pursuant to the plan for total consideration of $0.008 million. The ESPP was terminated in the fourth quarter of 2002.



Other Comprehensive Loss



The Other Comprehensive loss was $0.0 million, $0.4 million, and $0.7 million for the years ended December 31, 2002, 2001, and 2000,
respectively. During the year ended December 31, 2001, in connection with the sale of Interliant Europe, a foreign currency loss of $1.0 million was realized, offset by unrealized translation losses of $0.6 million, for a Comprehensive loss balance
of $0.4 million.



|11. |  | Income Taxes
|--- |  | ------------



As of December 31, 2002, the Company has federal and state net loss carryforwards of approximately $354 million and foreign net operating
loss carryforwards of $15.5 million. The net loss carryforwards will expire at various dates beginning in the years 2004 through 2022 if not utilized.



Significant components of the Companys deferred tax assets and liabilities for federal and state income taxes consist of the
following at December 31, 2002 and 2001:



|                                         |  | 2002 |              |   | 2001 |  
|---------------------------------------- |  | ---- | ------------ | - | ---- | -
|Deferred tax assets and liabilities:     |  |      |              |   |      |  
|Net loss carryforwards                   |  | $    | 147,373,000  |   |      | $
|SFAS No.142: Impairment                  |  |      | 21,613,000   |   |      |  
|Amortization of intangible assets        |  |      | 13,858,000   |   |      |  
|SFAS No. 15 Interest Accrual             |  |      |              |   |      |  
|Other, net                               |  |      | (3,480,000   | ) |      |  
|                                         |  |      |              |   |      |  
|Total deferred tax assets                |  |      | 179,364,000  |   |      |  
|Basis difference in acquired intangibles |  |      | (2,107,000   | ) |      |  
|                                         |  |      |              |   |      |  
|Total deferred tax assets, net           |  |      | 177,257,000  |   |      |  
|Valuation allowance                      |  |      | (177,257,000 | ) |      |  
|                                         |  |      |              |   |      |  
|Net                                      |  | $    |              |   |      | $
|                                         |  |      |              |   |      |  



The Company believes
that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realization of the deferred tax assets such that a full valuation allowance has been recorded. The Company will continue to assess the
realization of the deferred tax assets based on actual and forecasted operating results. The valuation allowance increased by $35.0 million from 2001 to 2002.



|12. |  | Operating Leases
|--- |  | ----------------



The Company leases its data centers and certain office space under noncancelable operating leases, which expire at various dates through
May 2010. Some of the leases contain renewal options. Total rent expense for all operating leases was approximately $6.2, $11.0 and $8.1 million for the years ended December 31, 2002, 2001 and 2000, respectively. In connection with certain of the
leases, the Company has given the landlords standby letters of credit in the amount of approximately $0.7 million in lieu of security deposits. Such letters of credit are backed by certificates of deposit, which are



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restricted as to use, and are accordingly classified in the Companys balance sheet as restricted
cash as of December 31, 2002.



Future minimum
lease commitments for noncancelable operating leases, net of subleases, are as follows at December 31, 2002:



|2003       |  | $ | 2,193,000
|---------- |  | - | ---------
|2004       |  |   | 1,917,000
|2005       |  |   | 1,370,000
|2006       |  |   | 952,000  
|2007       |  |   | 827,000  
|Thereafter |  |   | 1,184,000
|           |  |   |          
|           |  | $ | 8,443,000
|           |  |   |          



|13. |  | Discontinued Operations
|--- |  | -----------------------



Pursuant to SFAS 144 and for sales prior to 2002, Accounting Principles Board 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 (APB 30), the Company has classified the results of certain of the businesses sold in 2002
and 2001 as discontinued operations. Accordingly, the results of operations and the assets and liabilities of those businesses have been reclassified as discontinued operations for all periods presented. During 2002, Telephonetics, Inc., Softlink,
Inc. (Peoplesoft professional services) and Interliant Texas, Inc. (Oracle professional services) were discontinued, and in the third quarter of 2001, the Company discontinued its Managed Enterprise Resource Planning (ERP) and Customer
Relationship Management (CRM) hosting, outsourcing and related hosting services business, operated through rSP.



The summary unaudited results of the discontinued operations for the years ended December 31, 2002, 2001 and 2000 are shown below:



|                        |  | 2002 |            |   | 2001 |   | 2000      
|----------------------- |  | ---- | ---------- | - | ---- | - | ----------
|Revenues                |  | $    | 7,413,000  |   |      | $ | 38,906,000
|Operating profit (loss) |  | $    | (6,687,000 | ) |      | $ | 2,276,000 



Summary
balance sheet information with respect to the discontinued operations as of December 31, 2002 and 2001 are shown below:



|                            |  | December 31, | 
|--------------------------- |  | ------------ | 
|                            |  | 2002         | 
|Current assets              |  | $            | 
|Property and equipment, net |  |              | 
|Intangibles, net            |  |              | 
|Current liabilities         |  |              | 
|                            |  |              | 
|Net assets                  |  | $            | 
|                            |  |              | 



|14. |  | Restructuring Charges
|--- |  | ---------------------



In September 2000, the Company announced a plan to accelerate its acquisition integration program by consolidating certain geographically
dispersed functions. The plan included the elimination of approximately 300 jobs, the exit of certain leased facilities and other related contractual arrangements, and the termination of a software development project. The plan included a workforce
reduction in



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operations and information systems, customer care, sales, marketing and business development, and finance
and administration. The Company recorded a restructuring charge of $2.5 million during the three months ended September 30, 2000. As of December 31, 2001, the reserve was fully utilized and 112 positions were eliminated in 2000 and 26 in 2001.



April 2001 Restructuring Charge



Based on a decision reached by management
and the Board of Directors in late March 2001, the Company announced a restructuring plan on April 2, 2001 (April Plan or restructuring) to further streamline the business by narrowing its services focus to a core set of
offerings. The April Plan comprises workforce reductions and the exit of certain non-core businesses.



The April Plan, which began on April 3, 2001, consisted of a workforce reduction of 186 positions. This action resulted in a charge for
payment of severance and related costs of approximately $1.7 million. The charge was recognized during the second quarter of 2001 and was completed by the end of 2001 (see Note 5).



July 2001 Restructuring Charge



Based on a decision reached by management and the Board of Directors in July 2001, the Company announced a
restructuring plan on July 31, 2001 (July Plan or restructuring) designed to further reduce the ongoing operating expenses of the Company in light of the continued uncertainties in the economy in general, certain weaknesses
in the market for IT outsourcing services, and lack of recent revenue growth for the Company in particular.



The July Plan comprised workforce reductions of approximately 70 positions and the exit of certain leased facilities. All 70 positions
were eliminated as of the end of 2001. The Company retained licensed real estate brokers to actively market each of the identified leased facilities to be exited. To date, no agreements have been made to exit or sublease any of the identified
facilities.



In the first quarter of 2002, $0.2
million was added to the reserve to cover additional costs related to the delay in exiting leased facilities.



The following table summarizes the status of the July 2001 restructuring reserve:



|(In thousands)                                                    |  | Total July 2001 Restructuring |        |   | Severance and related costs |   |      | Exit leased facilities | 
|----------------------------------------------------------------- |  | ----------------------------- | ------ | - | --------------------------- | - | ---- | ---------------------- | 
|Total reserve charged to expense for year ended December 31, 2001 |  | $                             | 3,578  |   |                             | $ | 646  |                        | 
|2001 Cash Charges Against Reserve:                                |  |                               | (1,359 | ) |                             |   | (646 | )                      | 
|2001 Non-cash Charges Against Reserve:                            |  |                               | (44    | ) |                             |   |      |                        | 
|                                                                  |  |                               |        |   |                             |   |      |                        | 
|Balance as of December 31, 2001                                   |  | $                             | 2,175  |   |                             |   |      |                        | 
|Total reserve charged to expense for year ended December 31, 2002 |  |                               | 248    |   |                             |   |      |                        | 
|2002 Cash Charges Against Reserve:                                |  |                               | (1,185 | ) |                             |   |      |                        | 
|2002 Unused reserve credited to reorganization items:             |  |                               | (1,238 | ) |                             |   |      |                        | 
|                                                                  |  |                               |        |   |                             |   |      |                        | 
|Balance as of December 31, 2002                                   |  | $                             |        |   |                             | $ |      |                        | 
|                                                                  |  |                               |        |   |                             |   |      |                        | 



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|15. |  | Related Party Transactions
|--- |  | --------------------------



WEB is the largest single shareholder of the Company. WEBs investors comprise CEP Members, and WHO. The Company received consulting
services from Sage Equities, Inc. and Intensity Ventures, Inc., whose principals are chairman and former co-chairman of the Company, respectively, and members of WHO, for the purpose of providing strategic management oversight. For the principal of
Sage Equities, Inc., the Company incurred costs of $30,000 associated with a restricted stock grant in lieu of salary for services provided in 2002, and the principal of Sage Equities, Inc. was compensated as an employee of the Company in 2001 and
2000. For Intensity Ventures in the years ended December 31, 2001 and 2000, the Company incurred costs of $293,000 (of which $60,000 were consulting services, $2,000 were expenses and $231,000 were non-cash compensation costs incurred in the
issuance of shares of Common Stock) and $228,000 (of which $180,000 were consulting services and $48,000 expenses), respectively.



In August 2001, Charterhouse and Mobius and their related funds purchased 8% Convertible Subordinated Notes (8% Notes) and
warrants for the purchase of Common Stock for $19.0 million. Interliant incurred interest expense in conjunction with the 8% Notes related to Charterhouse for $522,000 and $322,000 and to Mobius for $423,000 and $261,000 in 2002 and 2001,
respectively. In lieu of cash interest payments in conjunction with the 8% Notes, the Company issued additional notes related to Charterhouse for $437,000 and $322,000 and to Mobius for $354,000 and $261,000 in 2002 and 2001, respectively. In March
2002, Charterhouse and Mobius and its related funds purchased 10% Subordinated Notes and warrants for the purchase of Common Stock for $10.0 million. Interliant incurred interest expense in 2002 in conjunction with the 10% Subordinated Notes of
$307,000 and $103,000 for Charterhouse and Mobius, respectively. For the years ended December 31, 2002, 2001 and 2000, Interliant generated $220,000, $750,000, and $1,051,000 of revenue, respectively, from Mobius for security and Lotus Notes
development and hosting services.



The Feld
Group, Inc., a Dallas, Texas based technology and management services firm, rendered executive-level services to the Company. Under the agreement Mr. Bruce Graham, a member of The Feld Group, acted as a Director, Chief Executive Officer and
President of the Company along with at least one additional executive. For the Feld Group in 2002, 2001 and 2000, the Company incurred expenses of $758,000 (of which $113,000 were expenses and $645,000 non-cash compensation for the issuances of
Common Stock, warrants and options), $2,778,000 (of which $1,320,000 were professional service fees, $328,000 expenses and $1,130,000 non-cash compensation for the issuance of Common Stock, warrants and options) and $703,000 (of which $627,000 were
professional service fees and $76,000 expenses), respectively. This agreement was terminated as of July 31, 2002.



Mr. Bruce Graham is a member of the board of directors of Contrado, Inc., an enterprise software company that developed and installed
software to automate Interliants equipment provisioning process. In 2001, Interliant capitalized $229,000 of software development and installation fees it paid to Contrado, Inc. and incurred $53,000 of software maintenance expenses with
Contrado, Inc.



In the fourth quarter of 2001,
Mr. Stephen Maggs, at the time a member of the Board of Directors, was retained to provide operational and strategic management at Telephonetics, Inc., a wholly owned subsidiary of the Company. The Company incurred expenses on behalf of Mr. Maggs of
$9,000 (of which $7,000 were professional service fees and $2,000 expenses) and $43,000 (of which $37,000 were professional service fees and $6,000 expenses) in 2002 and 2001, respectively. Mr. Maggs resigned from the Board of Directors effective
January 31, 2002 and subsequently purchased the assets of Telephonetics, Inc. (See Note 5).



The chairman of The Company, Mr. Leonard Fassler, is co-chairman of Vytek Wireless, Inc. (Vytek), a global integration company that provides wireless data solutions. Vytek purchased
co-location hosting services from the Company, generating $37,000 of revenues in 2001.



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|16. |  | Employee Benefit Plan
|--- |  | ---------------------



In 1998, the Company instituted a 401(k) Plan for all employees who are age 19 or older and have been employed by the Company or by an
acquired business for at least one month. Participating employees may make contributions to the 401(k) Plan up to 15% of their eligible compensation. The 401(k) Plan provides that the Company may make discretionary contributions to the 401(k) Plan
on behalf of participating employees. In 1999, the Company initiated a matching contribution policy wherein it agreed to match the employees contributions 100% up to 5% of the participating employees eligible compensation. The total
amount contributed by the Company and charged to expense during 2001 and 2000 was $2.1 million and $2.4 million respectively. The Company discontinued matching contributions in the second half of 2001.



|17. |  | Segment Reporting
|--- |  | -----------------



Pursuant to FAS 131, the Company determined that it had two reportable segments in 2002, Managed infrastructure solutions and Professional
Services. The Web Hosting segment was discontinued following the October 26, 2001 sale of retail Web hosting assets to Interland, Inc. and Web hosting operations are classified under the Other caption.



The Companys management generally reviews the results of
operations of each segment exclusive of depreciation and amortization related to each segment. Accordingly, such expenses are excluded from the segment operating income or loss and are shown in the Other caption. In addition, all intangible assets,
discontinued operations and corporate assets and expenses are also included in the Other caption.



Segment information as of and for the years ended December 31, 2002, 2001, and 2000 for each of the segments is as follows:



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|                                 |  | Years ended December 31, |            
|-------------------------------- |  | ------------------------ | -----------
|                                 |  | 2002                     |            
|Revenues:                        |  |                          |            
|Managed Infrastructure Solutions |  | $                        | 28,954,000 
|Professional Services            |  |                          | 15,604,000 
|Other                            |  |                          | 58,000     
|                                 |  |                          |            
|Total                            |  | $                        | 44,616,000 
|                                 |  |                          |            
|                                
|Operating Income (Loss):         |  |                          |            
|Managed Infrastructure Solutions |  | $                        | (6,801,000 
|Professional Services            |  |                          | 438,000    
|Other                            |  |                          | (37,578,000
|                                 |  |                          |            
|Total                            |  | $                        | (43,941,000
|                                 |  |                          |            
|                                
|                                 |  | Balance at December 31,  |            
|                                 |  | 2002                     |            
|Segment Assets:                  |  |                          |            
|Managed Infrastructure Solutions |  | $                        | 7,363,000  
|Professional Services            |  |                          | 1,158,000  
|Other                            |  |                          | 5,088,000  
|                                 |  |                          |            
|Total                            |  | $                        | 13,609,000 
|                                 |  |                          |            



For the
years ended December 31, 2002, 2001 and 2000, approximately 14%, 7% and 10%, respectively, of revenues were from sources outside the United States, primarily from Europe, Latin America and Asia.



|18. |  | Subsequent Events
|--- |  | -----------------



On April 11, 2003, the Company entered into an asset purchase agreement (APA) with an affiliate of Pequot Capital Management,
Inc. (Pequot) to sell substantially all of its operations and assets, less certain liabilities. The closing of the transactions contemplated by the APA is subject to Bankruptcy Court approval and other conditions. The APA provides for a
cash payment of up to $4.7 million and assumption of not more than $5.8 million of liabilities, with final amounts determined at the closing date.



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|19. |  | Quarterly Information (unaudited)
|--- |  | ---------------------------------



The following tables set forth certain unaudited quarterly results of operations of the Company for 2002 and 2001. The quarterly operating
results are not necessarily indicative of future results of operations.



|                                                                              |  | Three Months Ended |            
|----------------------------------------------------------------------------- |  | ------------------ | -----------
|                                                                              |  | 31-Mar 2002        |            
|Revenues                                                                      |  | $                  | 15,579,000 
|Gross Profit                                                                  |  |                    | 6,122,000  
|Operating loss before items listed below                                      |  |                    | (9,312,000 
|Loss before discontinued operations                                           |  |                    | (8,831,000 
|Net Income (loss)                                                             |  | $                  | (11,641,000
|                                                                              |  |                    |            
|Basic and diluted loss per share:                                             |  |                    |            
|Loss before discontinued operations                                           |  |                    | ($0.17     
|Discontinued operations                                                       |  |                    | (0.05      
|                                                                              |  |                    |            
|Net income (loss)                                                             |  |                    | ($0.22     
|                                                                              |  |                    |            
|                                                                             
|                                                                              |  | Three Months Ended |            
|                                                                              |  | 31-Mar 2001        |            
|Revenues                                                                      |  | $                  | 23,252,000 
|Gross Profit                                                                  |  |                    | 8,437,000  
|Operating loss before items listed below                                      |  |                    | (76,040,000
|Loss before minority interest, discontinued operations and extraordinary
gain |  |                    | (78,616,000
|Loss before discontinued operations and extraordinary gain                    |  |                    | (76,993,000
|Loss before extraordinary gain                                                |  |                    | (81,221,000
|Net income (loss)                                                             |  | $                  | (81,221,000
|                                                                              |  |                    |            
|Basic and diluted income (loss) per share:                                    |  |                    |            
|Loss before discontinued operations and extraordinary gain                    |  |                    | ($1.55     
|Discontinued operations                                                       |  |                    | (0.10      
|Gain on debt refinancing                                                      |  |                    |            
|                                                                              |  |                    |            
|Net income (loss)                                                             |  |                    | ($1.65     
|                                                                              |  |                    |            





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



Not applicable



PART III



|ITEM 10. |  | DIRECTORS AND EXECUTIVE OFFICERS
|-------- |  | --------------------------------



Information with respect to directors and executive officers is included in Interliants Proxy Statement to be filed pursuant to
Regulation 14A (the Proxy Statement) under the caption Election of Directors and Executive Officers and such information is incorporated herein by reference, if filed by April 30, 2003 or, if the Proxy Statement is not filed by such
date, such information will be disclosed by amendment to this Form 10-K prior to April 30, 2003.



|ITEM 11. |  | EXECUTIVE COMPENSATION
|-------- |  | ----------------------



The section entitled Executive Compensation and the information set forth under the caption Election of Directors-Director Compensation
included in the Proxy Statement are incorporated herein by reference if filed by April 30, 2003 or, if the Proxy Statement is not filed by such date, such information will be disclosed by amendment to this Form 10-K prior to April 30, 2003.



|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT and RELATED STOCKHOLDER MATTERS
|-------- |  | ----------------------------------------------------------------------------------------------



The Common Stock information in the section entitled
Principal Shareholders of the Proxy Statement is incorporated herein by reference or, if the Proxy Statement is not filed by such date, such information will be disclosed by amendment to this Form 10-K prior to April 30, 2003.



|ITEM 13. |  | RELATED PARTY TRANSACTIONS
|-------- |  | --------------------------



The section entitled Related Party Transactions of the Proxy Statement is incorporated herein by reference or, if the Proxy Statement is
not filed by such date, such information will be disclosed by amendment to this Form 10-K prior to April 30, 2003.



|ITEM 14. |  | CONTROLS AND PROCEDURES
|-------- |  | -----------------------



The Companys chief executive officer and principal financial officer, after evaluating the effectiveness of the Companys
disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended) as of a date (the Evaluation Date) within 90 days before the filing date of this annual report, have
concluded that the Companys disclosure controls and procedures are effective in ensuring that material information required to be disclosed is included in the reports that it files with the Securities and Exchange Commission.



Changes in Internal Controls



There were no significant changes in the Companys
internal controls or, to the knowledge of the management of the Company, in other factors that could significantly affect these controls subsequent to the Evaluation Date.





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PART IV



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



Item 15(a) 1. The information required by this item is
included in Item 8 of Part II of this 10K.



The
following documents or the portions thereof indicated are filed as a part of this Report in Item 8:



2. Financial Statement Schedules:



Schedule II Valuation and qualifying accounts for each of the three years in the period ended December 31, 2002



All other schedules are omitted as the
required information is inapplicable or the information is presented in the Consolidated Financial Statements and Notes thereto.





INTERLIANT, INC. AND CONSOLIDATED SUBSIDIARIES



SCHEDULE II VALUATION AND QUALIFYING
ACCOUNTS



|                                                                  |  |                                |           | Additions              |    |                |   |  |                         
|----------------------------------------------------------------- |  | ------------------------------ | --------- | ---------------------- | -- | -------------- | - |  | ------------------------
|                                                                  |  | Balance at Beginning of Period |           | Charged (credited) to: |    |                |   |  | Balance at End of Period
|Classification                                                    |  |                                | Expense   |                        |    | Other Accounts |   |  | Deductions              
|Year ended December 31, 2002 Allowance for uncollectible accounts |  | $                              | 1,505,761 |                        | ($ | 241,416        | ) |  |                         
|Year ended December 31, 2001 Allowance for uncollectible accounts |  | $                              | 1,578,236 |                        | $  | 4,381,159      |   |  | $                       
|Year ended December 31, 2000 Allowance for uncollectible accounts |  | $                              | 1,378,000 |                        | $  | 3,291,938      |   |  | $                       



|(1) |  | includes allowances of acquired companies and discontinued operations
|--- |  | ---------------------------------------------------------------------

|(2) |  | includes amounts reclassified to net assets of discontinued operations
|--- |  | ----------------------------------------------------------------------



| |  | Item 15(b) Reports on Form 8-K
| |  | ------------------------------



| | 1. |  | Form 8-K, dated January 7, 2003, whereby Interliant announced the sale of its Oracle Professional services Group to SchlumbergerSema, a subsidiary of Schlumberger
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 
| | 

| | 2. |  | Form 8-K, Dated January 21, 2003, whereby Interliant announced a change in its independent auditors to Urbach Kahn & Werlin LLP from Ernst & Young LLP.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Item 15(c) EXHIBITS
| |  | -------------------



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The following
is a list of exhibits filed as part of this Annual Report on Form 10-K.



| | 3.1 |  | Form of Amended and Restated Certificate of Incorporation of Interliant.*
| | --- |  | -------------------------------------------------------------------------

| | 3.2 |  | Form of Amended and Restated By Laws of Interliant.*
| | --- |  | ----------------------------------------------------

| | 10.69 |  | Asset purchase agreement dated April 11, 2003 between Interliant et al and I Acquisition, Inc., an affiliate of Pequot Capital Management, Inc.+
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

| | 21.1 |  | List of Subsidiaries.+
| | ---- |  | ----------------------

| | 99.1 |  | Certification of the Chief Executive Officer.+
| | ---- |  | ----------------------------------------------

| | 99.2 |  | Certification of Principal Financial Officer.+
| | ---- |  | ----------------------------------------------



---

|* |  | Previously filed as an exhibit to the Companys Registration Statement on Form S-1 Commission File No. 333-74403 incorporated by reference herein.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------



|+ |  | Filed herewith.
|- |  | ---------------





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|ITEM 15. |  | 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.



Interliant, Inc.By:

/S/    FRANCIS J. ALFANOFrancis J. Alfano President and Chief Executive Officer




Dated: April
14, 2003





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





|Signature                                   |  | Title                                                                      |  | Date          
|------------------------------------------- |  | -------------------------------------------------------------------------- |  | --------------
|                                           
|/S/    LEONARD J. FASSLERLeonard J. Fassler |  | Chairman of the Board                                                      |  | April 14, 2003
|                                           
|/S/    FRANCIS J. ALFANOFrancis J. Alfano   |  | President, Chief Executive Officer, Director (Principal Executive Officer) |  | April 14, 2003
|                                           
|/S/    DAVID M. WALKEDavid M. Walke         |  | Director                                                                   |  | April 14, 2003







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