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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-K

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

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
   ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                      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)

<TABLE>
<S>                                            <C>
                  Delaware                                      13-3978980
        (State or other jurisdiction                         (I.R.S. Employer
      of incorporation or organization)                     Identification No.)
</TABLE>

                            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. [_]

   The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing price of Common Stock on March 30, 2001
of $1 5/16 as reported on the Nasdaq National Market, was approximately $23.2
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 30, 2001, 49,450,092 shares of Common Stock, $.01 par value per
share, were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

<TABLE>
<CAPTION>
                                                                        Part of
Document                                                               Form 10-K
--------                                                               ---------
<S>                                                                    <C>
Portions of the Definitive Proxy Statement with respect to the Annual
 Meeting of Shareholders,
 to be filed not later than 120 days after the close of the
 Registrant's fiscal year............................................  Part III
</TABLE>

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<PAGE>

                               TABLE OF CONTENTS

<TABLE>
 <C>         <S>                                                            <C>
                                        PART I


    Item 1.  Business....................................................     1
    Item 2.  Properties..................................................    24
    Item 3.  Legal Proceedings...........................................    24
    Item 4.  Submission of Matters to a Vote of Security Holders.........    24


                                        PART II


    Item 5.  Market for the Company's Common Equity and Related
              Stockholder Matters........................................    25
    Item 6.  Selected Financial Data.....................................    27
    Item 7.  Management's Discussion and Analysis of Financial Condition
              and Results of Operations..................................    29
    Item 7A. Quantitative and Qualitative Disclosures about Market Risk..    38
    Item 8.  Financial Statements and Supplementary Data.................    39
    Item 9.  Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure...................................    62


                                       PART III


    Item 10. Directors and Executive Officers............................    62
    Item 11. Executive Compensation......................................    62
    Item 12. Security Ownership of Certain Beneficial Owners and
              Management.................................................    62
    Item 13. Related Party Transactions..................................    62


                                        PART IV


    Item 14. Exhibits, Financial Statement Schedules and Reports on Form
              8-K........................................................    63
    Item 15. Signatures..................................................    67
</TABLE>

   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.

                                       i
<PAGE>

                                    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, THE INFORMATION SET
FORTH UNDER THE CAPTION "RISK FACTORS", AS WELL AS OTHER RISKS DETAILED HEREIN
AND IN OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, TO WHICH
YOU ARE REFERRED. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE CURRENTLY
ANTICIPATED AS A RESULT OF THE FOREGOING OR OTHER FACTORS.

   We currently file reports, proxy statements and other information with the
SEC. Such reports, proxy statements and other information can be inspected and
copied at the public reference facilities maintained by the SEC at:

<TABLE>
   <S>                      <C>                       <C>
   Room 1024                Suite 1400
   450 Fifth Street, N.W.   Northwest Atrium Center   13th Floor
   Judiciary Plaza          500 West Madison Street   Seven Word Trade Center
   Washington, D.C. 20549   Chicago, Illinois 60661   New York, New York 10048
</TABLE>

   Copies of material can be obtained at prescribed rates from the Public
Reference Section of the SEC at:

     450 Fifth Street, N.W.
     Judiciary Plaza
     Washington, D.C. 20549

   The SEC maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC. The address of the site is http://www.sec.gov.

ITEM 1. BUSINESS

   We are a leading global application service provider, or ASP, providing our
customers with a focused suite of outsourced e-business solutions. As an ASP,
we provide managed services for complex hosted applications to multiple end
users from our data centers across a wide area network. Our customers face
significant challenges in doing business on the Internet due to its technical
complexity, their lack of technical skills, the time necessary to implement
solutions and the cost of implementation and ongoing support. By providing
outsourced solutions that combine our hosting infrastructure with professional
services expertise, we can rapidly design, implement, deploy and effectively
manage cost-effective solutions for our customers.

   We offer our customers a suite of services focused on their non-core but
critical business functions enabling them to focus on their own core
competencies. The following are the principal services and products we provide
to our customers:

  .  hosting infrastructure for network-based applications, which allows our
     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 at their premises by means of remote access;

  .  a focused suite of business solutions that include Collaboration,
     Managed Hosting and Security;

  .  professional services for designing, implementing and deploying these
     and other Internet-based applications; and

  .  operations support, systems and applications management, and customer
     service and support.

                                       1
<PAGE>

Services Portfolio

   Our services portfolio, which we have branded "INIT Solutions Suite",
consists of the following principal solutions:

   INIT COLLABORATION (Hosted Messaging/Knowledge Management solutions). We
offer a range of products, services and hosting solutions designed to enhance
an organization's collaboration and knowledge management. These solutions
include:

     INIT Managed Messaging, a flexible management service to host or
  remotely manage customer's mission-critical Lotus Domino or Microsoft
  Exchange messaging infrastructures;

     INIT Application Hosting, which provides state of the art hosting
  capabilities for Domino-based applications, extranets and more; and

     INIT Team, a hosted collaboration solution that delivers and enhances
  the Lotus QuickPlace product.

   INIT HOST (Web and Managed Hosting).  We provide shared, dedicated and co-
located Web hosting services. We also provide managed hosting services for
Web-based applications demanding complex, multi-server environments, which are
also referred to as Application Infrastructure Provider (AIP) services.
Managed services include load balancing, clustering, mirroring and
geographically dispersed clustered solutions. Supported platforms include
Microsoft NT, SQL and Windows 2000, Solaris, AIX and Oracle Database. These
services are also available on an Original Equipment Manufacturer (OEM) basis.

   INIT SECURE (Infrastructure/Security Solutions). Our
infrastructure/security solutions allow our customers to implement and deploy
technologies that enhance the performance of their hosted e-business
solutions. These technologies include managed firewall services, managed
virtual private networks (VPN), managed intrusion detection services (IDS),
load balancing, and caching solutions based on technologies from vendors such
as Cisco Systems, Check Point Software, Nokia and Alteon WebSystems.

   INIT SERVICES (Professional Services). We implement, enhance and support
our ASP solutions with professional services either provided by our own
consultants or by our business partners. Our professional services include
capabilities to create intranet, extranet and application hosting solutions
for our customers, enterprise resource planning (ERP) implementation and
support, as well as provide network and security implementations and support.
In addition, we have established strategic relationships that enable us to
provide a wide range of scalable and reliable ASP services to our customers
and business partners.

   We have four primary data centers in the United States located in Houston,
Texas; Atlanta, Georgia; Vienna, Virginia; and Columbus, Ohio, all of which
are monitored on a 24x7 basis and have 24x7 customer support. Our data centers
in Houston, Atlanta and Vienna include sophisticated monitoring and
diagnostics, multiple high-speed network connections to the Internet and
uninterruptible power supplies, fire suppression and external fuel generators.
Our Columbus data center is a secured, raised-floor data center that provides
continuous support, plus a standby generator, hot and cold disaster recovery
sites, and off-site data storage. We also operate data centers in Paris,
France and in London, England.

Recent Business Developments; Business Restructuring

   During the latter half of the first quarter of 2001, we recognized a
substantial decline in revenues and new sales orders compared to our 2001
forecast. During this period we saw reduced corporate information technology
spending, and the economy had also slowed to a far greater extent and more
rapidly than we had anticipated earlier in that quarter. In addition, and at
the same time, we began experiencing a lower rate of adoption for the ASP
model. As a result of these changes, at the beginning of the second quarter of
2001 we announced a restructuring plan (April Restructuring Plan) of our
business to focus on solution offerings in

                                       2
<PAGE>

which we believe we have an established core competency and a competitive
advantage. These are also our highest demand offerings where we have made
significant investments in infrastructure and personnel. These areas are:

  .  Managed messaging on Lotus Notes and Microsoft Exchange platforms (INIT
     Collaboration);

  .  Complex hosting and managed services, and shared hosting for direct
     customers and on Original Equipment Manufacturer (OEM) basis (INIT
     Host);

  .  Managed Security (INIT Secure); and

  .  Professional Services (INIT Services).

   As part of the April Restructuring Plan, we decided not to make any further
investments in our solution areas which fall outside of our new narrowed focus.
Early in the second quarter of 2001 we commenced efforts to dispose of certain
of our business units and assets which relate to these solutions areas. We will
however, continue to service our existing customers in these areas until the
time of such disposition. The areas we will no longer invest in or seek to
dispose of are:

  .  Hosting Enterprise Resource Planning (ERP) solutions;

  .  Hosting Customer Relationship Management (CRM) solutions; and

  .  Hosting E-commerce solutions.

   On April 16, 2001, we entered into a definitive agreement with affiliates of
Charterhouse Group International, Inc. (Charterhouse) and Softbank Technology
Ventures VI, L.P. and its related funds (Softbank) under which they agreed to
purchase, in the aggregate, 190 units (Units), each Unit consisting of $100,000
principal amount of 8% Convertible Subordinated Notes (Notes) and 27,273
warrants (Warrants) for the purchase of shares of our Common Stock for a total
sales price of $19.0 million. Under the definitive agreement we have the right
to require Charterhouse and Softbank to purchase their respective share of the
Units, or a portion thereof, through April 17, 2002. The 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
Notes. Interest payments will be payable on the last day of each calendar
quarter by the issuance of additional Notes. The Notes mature on June 30, 2003.
The Warrants have an exercise price of $1.25 per share and expire five years
after issuance. At the same time, we entered into a definitive agreement with
EYT, Inc. (EYT), an entity controlled by Charterhouse and Softbank, under which
EYT committed to repurchase from us our investment in EYT for a purchase price
of $1 million, which approximates our cost of such investment. This asset is
classified as other assets on our balance sheet as of December 31, 2000. The
closing of the EYT transaction shall take place contemporaneously with the
closing of the first sale of Units to Charterhouse and Softbank. The above
transactions are collectively referred to herein as the "$20 Million Funding."

Our Opportunity

   We believe that our ASP services can provide our customers the following
advantages:

  .  Improved time of implementation. With rapid implementation methodologies
     and applications management expertise, we enable customers to take
     advantage of the functionality of new or upgraded applications without
     the difficulties associated with long implementation cycles and
     attracting and retaining qualified IT talent. In addition, we attempt to
     minimize customization, therefore reducing the time and total expense
     associated with any specific application implementation;

  .  Improved performance and reliability. As the complexity of applications
     and networks increase, customers are finding it difficult to manage and
     maintain the performance of their IT systems. By offering Service Level
     Agreements (SLAs) and utilizing the latest technology, we are able to
     offer guaranteed levels of service that are not easily attainable by
     customers' internal IT departments;

                                       3
<PAGE>

  .  Focus on core competencies. By outsourcing the delivery and management
     of certain applications, customers better utilize scarce internal IT
     resources;

  .  Access to best-in-class applications and technology. We utilize the
     latest data center technologies, network management tools and leading
     applications to provide our focused suite of solutions. Our customers,
     therefore, have the flexibility to select best-in-class solutions from
     multiple technology vendors;

  .  Reduced total cost of ownership. Until recently, the implementation of
     applications required either the development of in-house software
     applications or the customization of existing packages, making each
     implementation unique and costly. It also made implementation time
     frames and costs unpredictable. By outsourcing to us, companies are able
     to better forecast and plan for monthly IT expenditures; and

  .  Reduced technology risk. By selecting an outsourced service, our
     customers do not have to invest in hardware and software if they choose
     not to. Instead we generally use our equipment and software and take on
     the risk of technology becoming obsolete.

   The ASP market is fragmented and is currently being served by a wide range
of companies, most of which offer only a portion of the services provided by
broad service ASPs. Those other companies include the following:

  .  telecommunications companies and Internet service providers which
     typically provide only data center facilities and network connectivity;

  .  hosting companies, which typically provide only data center facilities,
     network connectivity and computer and storage hardware;

  .  software companies, which typically provide only application and
     database software; and

  .  IT services companies, which typically provide highly customized
     implementation services and post implementation support.

   Our suite of ASP solutions provide a focused range of building blocks
required to support our customers, including data center facilities, network
connectivity, computer and storage hardware, systems and applications
management, application development tools, application and database software,
implementation services and post-implementation support. We believe that a
market opportunity exists for an internationally recognized ASP with the scale
and expertise to offer outsourced e-business solutions to businesses of all
sizes.

Our Solution

   We design, implement and deploy ASP solutions that enable our customers to
effectively manage e-business solutions in a rapid and cost-effective manner.
We believe that we offer the technological expertise, partnering ability and
understanding of the business and licensing models which are essential to
succeed in the ASP marketplace. We provide solutions to customers ranging from
small businesses to large enterprises in a variety of vertical markets across a
wide range of industries. We believe we have developed the infrastructure,
resources, systems and application management expertise and industry
relationships to capitalize on this emerging market opportunity.

   We provide the following advantages to our customers:

   Rapid Implementation. Designing, implementing, and deploying e-business
solutions is a complex problem requiring appropriate staff with the correct
skill sets. Our hosting solutions provide our customers with our preconfigured
infrastructure and our experienced team of consultants to rapidly implement
their e-business solutions.

                                       4
<PAGE>

   Comprehensive Hosting Solutions. Our hosting solutions provide our
customers with continuously available remote access to mission-critical
applications and data. These solutions help to ensure that our customers'
applications and Web sites are continuously online and deliver data rapidly to
users. Our data centers in Atlanta, Houston, Vienna, and Columbus provide
high-quality performance and reliability through features such as a redundant,
high-speed access ranging from T-1 to OC-12 circuits, secure network
architecture, continuous monitoring, alternate power sources, environmental
controls, regular data backups and a fault-tolerant hosting platform. Our
Network Operations Centers monitor our network on a 24x7 basis and allow our
staff to minimize service interruptions.

   Customer Service. We are committed to providing value-added customer
service. Our customer services group can address technical problems on a 24x7
basis. We are upgrading our internal CRM System, including advanced customer
service software and call routing technology, to streamline the customer
service process. We also offer a self-service customer support alternative,
which provides online access to account and billing data and site statistics,
such as disk storage capacity.

   Cost-Effective Solutions. Our customers benefit from the capital and labor
investments that we have made to support hosting and other Internet services.
For customers to replicate our performance and reliability, they would be
required to make significant expenditures for hardware, data center
facilities, connectivity and personnel. We believe that our hosting solutions
are significantly more cost-effective and reliable than in-house solutions,
both for businesses with low-end application requirements as well as for those
businesses whose Internet operations are mission-critical and require
sophisticated application support.

Services

   As a result of the April Restructuring Plan, we are focusing on select
solution offerings in which we believe we have a competitive advantage. For
the foreseeable future, we will not make further investments in the hosting of
enterprise resource planning (ERP), customer relationship management (CRM) and
e-commerce solutions. We believe these solutions lie outside of our narrowed
solutions focus, and we intend to dispose of certain of our business units
that relate to these solutions areas. We will, however continue to service
existing customers in these areas until the time of such disposition. Our
present services portfolio consists of the following principal solutions:

INIT COLLABORATION (Messaging/Application Hosting/Knowledge Management
solutions)

   We offer our customers a broad spectrum of collaboration and knowledge
management solutions that allow a customer's widely distributed work force to
collaborate more effectively through shared software applications, specialized
teaming software and/or managed messaging services for internal and external
communication. We provide hosting and consulting services based on Lotus and
Microsoft applications and platforms.

   These solutions include:

     INIT Managed Messaging, a flexible management service to host or
  remotely manage a customer's mission-critical Lotus Domino or Microsoft
  Exchange messaging infrastructures;

     INIT Application Hosting which provides state of the art hosting
  capabilities for Domino-based applications, extranets and more; and

     INIT Team, a hosted collaboration solution that delivers and enhances
  the Lotus QuickPlace product.

                                       5
<PAGE>

INIT HOST (Web and managed Hosting Services)

   We offer a comprehensive suite of solutions to meet the current and future
Web hosting needs of our customers. We provide managed, shared and dedicated,
as well as co-located hosting services. The following table sets forth certain
information with respect to our Web hosting services. All of these services are
available on an OEM basis.

<TABLE>
<CAPTION>
   Hosting
   Services      Web Site Profile      Key Features           Customer Benefits
   --------      ----------------      ------------           -----------------

   <S>           <C>                   <C>                    <C>
   Shared        Static Web pages,     Hosted on shared       Economical
                 limited content,      server maintained
                 moderately            in a managed
                 accessed sites        Interliant data
                                       center

   Dedicated     Dynamic Web           Dedicated              Greater server
                 content, heavily      Interliant-owned       resources
                 accessed sites,       server in shared       requiring minimal
                 more scalable and     rack                   customer
                 sophisticated                                maintenance
                 applications
                 offered

   Co-Located    Dynamic Web           Secure, accessible     Greater
                 content, customer     cabinet hosted         control/access to
                 provided              within Interliant      customer-owned
                 applications          managed data           hardware; obtain
                                       center                 benefits of
                                                              Interliant hosting
                                                              infrastructure
</TABLE>

   Customers generally pay monthly, quarterly or annual fees for the services
used, including bandwidth and storage fees, as well as one-time fees for
installation and any equipment purchased by the customer.

   Shared Hosting. Our shared hosting solution provides customers with all the
elements needed to establish a basic presence on the Web at a reasonable cost,
making it an economical solution for relatively simple or moderately accessed
Web sites. This entry-level service is known as shared hosting because the
customer's home page has its own domain name and appears to exist as a stand-
alone server. It operates with the speed and efficiency of our high- speed
connections and its location at our facility remains invisible to Web site
visitors. Customers are able to have their own Web site with a domain name at a
fraction of the cost of maintaining it themselves. Because customers do not
need to invest in costly hardware or personnel to accommodate future growth, we
believe this solution also maximizes the customers' flexibility.

   Dedicated Hosting. As companies increase the complexity, level of traffic or
reliance on their Web sites, they may prefer to host their Web site on a
dedicated server, which is typically owned and maintained by us. A dedicated
server provides greater server and network resources to our customers than
shared hosting, more robust e-commerce solutions, and allows them to configure
their hardware to optimize site performance. Customers receive a high level of
site security, maintenance and technical support without the prohibitive costs
of setting up and maintaining their own server and Internet connection. We
support most leading Internet hardware and software system vendor platforms,
including Microsoft NT, SQL and Windows 2000, Solaris, AIX and Oracle
Databases.

   Co-located Hosting. We provide co-located hosting services in each of our
primary data centers for customers with sophisticated, mission-critical
applications. This solution allows the customer to own and access their servers
on a 24x7 basis while having the option to delegate the day-to-day management
of their applications to our IT specialists or to continue to manage it
themselves. In addition, co-located servers are housed in separate, limited-
access rooms in our data centers.

                                       6
<PAGE>

INIT SECURE (Managed Security Solutions)

   Our infrastructure/security solutions allow our customers to implement and
deploy technologies that enhance the performance of their hosted e-business
solutions. These technologies include managed firewall services, load balancing
and caching solutions from vendors such as Check Point Software, Nokia and
Alteon WebSystems. Our INIT Secure-Managed Firewall Offerings are divided into
three levels of offerings --standard, advanced and enterprise -- giving
customers options based on configurations, price/performance and scale. Also,
INIT Secure Managed VPN, INIT Secure Managed IDS (Intrusion Detection Services)
and INIT Managed Authentication Services are new Interliant products recently
introduced to the marketplace.

INIT SERVICES (Professional Services)

   We implement, enhance and support our ASP services with professional
services, either provided by our own consultants or by our business partners.
These services are a key part of our ASP service portfolio, enabling us to
provide our customers with end-to-end outsourced solutions.

   Our professional services include capabilities to create intranet, extranet
and application hosting solutions for our customers, as well as provide network
implementation, security implementation and back-end Web development projects.
In addition, we provide support for our customers' enterprise networking needs.
We address the complete spectrum of services, including desktop and network
server support, network architecture and design, strategic technology planning
and application development and implementation. We scale our professional
services to meet each client's individual needs.

Other Services

   In addition to our principal solution offerings described above, our
services portfolio includes the following hosting solutions:

   E-Commerce. We provide hosted e-commerce solutions based on the IBM
WebSphere Suite of products including WebSphere Application Server and
WebSphere Commerce Suite 5.01, Microsoft Site Server Commerce, and MIVA. Our
hosted e-commerce offerings allow our customers to create and manage electronic
storefronts and to provide end-to-end online solutions.

   Customer Relationship Management. Our hosted Customer Relationship
Management (CRM) solutions, which are based on Onyx software, provide
geographically distributed sales, marketing, and service organizations with all
the elements needed to deploy sales force automation, marketing automation,
partner relationship management and other CRM components quickly and at a
reasonable cost.

   Enterprise Resource Planning. Our hosted Enterprise Resource Planning (ERP)
solutions include the hosting and application management of outsourced human
resources and finance solutions based on PeopleSoft and Oracle software.

   As part of our April Restructuring Plan, we decided not to make any further
investments in the solution areas described above as they fall outside of our
new narrowed focus. We have commenced efforts to dispose of certain of our
business units and assets which relate to these solution areas. We will,
however, continue to service our existing customers in these areas until the
time of such disposition.

Customers

   We have established 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, ranging from small businesses to large enterprises. We also
sell our services to Web consulting firms, Internet service providers, network
integration companies, system integrators and other Internet-related companies
who resell them to their customers. We do not believe that the loss of any one
customer would materially adversely affect us.

                                       7
<PAGE>

Strategic Relationships

   Our strategic relationships and partnerships with leading technology
companies allow us to provide a wide range of services to meet our customers'
needs. The following is a description of selected companies with whom we have a
strategic relationship:

   Microsoft. We are a member of Microsoft's MCP Program as a Microsoft
Certified Solution Provider. Under a Strategic Alliance Agreement entered into
with Microsoft in early 2000, we developed an Exchange 2000 managed messaging
product which we released in the second half of 2000. We are also designated as
a development and deployment partner for various Microsoft products including
the Whistler release of Windows 2000 and the next release of Microsoft
Exchange. As such, we are responsible for providing feedback on Microsoft
products in the advanced hosting and managed application markets prior to
release of those products and by doing so we have been able to provide services
and gain expertise on these products before the general market. In addition,
Interliant and Microsoft are jointly engaged in developing efforts to increase
the availability, reliability and scalability of Windows 2000 based shared Web
hosting services. We also entered into a co-marketing and promotion agreement
whereby Microsoft will include our advertisements in a catalog that is inserted
into every FrontPage 2000 product box that is packaged for retail sale, as well
as a catalog that is inserted into every full package product version of Office
Developer, Office Standard, Office Small Business, Office Professional and
Office Premium. In return, we feature Front Page 2000 on our Web site with
greater frequency and visibility than any competing product.

   Network Solutions/Verisign. We have entered into a strategic alliance with
Network Solutions, Inc., a Verisign company, to deliver enhanced Internet
identity and hosting services for small and medium-sized businesses. Under the
terms of this agreement, Interliant and Network Solutions offer and promote our
respective products and services to each other's existing and potential
customers.

   Dell Computer Corporation. We have alliance agreements with Dell under which
we provide e-business services to Dell in the United States and the United
Kingdom. Under the terms of the agreements, we have commitments to purchase
certain Dell servers and storage products for use in our hosting service.

   IBM. We are a Premier Partner in the IBM Partnerworld Business Partner
program for Service Providers, an IBM Service Provider for e-Business, and the
first certified IBM Hosting Advantage partner.

   Lotus Development. We believe we are a leading partner of IBM's Lotus
software division. We are a Lotus Net Service Provider/Alliance Partner and a
member of the Lotus Partnership For Growth under which Lotus assists us in the
growth and development of our Lotus related business. We provide a variety of
messaging and hosting services for Internet, intranet and extranet applications
operating on Lotus Notes/Domino.

   Cisco Systems. We are part of the Cisco Powered Network Program, a
certification awarded by Cisco in recognition of our world-class network
infrastructure design based on Cisco products. We have a strategic relationship
with Cisco Systems to provide comprehensive solutions to our customers
utilizing Cisco Systems access and switching products. We are authorized to
distribute Cisco Systems products as part of our offering, both domestically
and on a multinational scale, at substantial discounts to the retail prices
available generally. This relationship also grants us substantial discounts on
Cisco Systems products allocated for our internal uses.

   Sun Microsystems. In November, 2000, we joined Sun's service provider
program as an Elite Plus member. Additionally, we became a member of Sun's
iForce Initiatives, which includes Sun's Startup Accelerator Program, through
which Sun has provided us with hardware and software, including a development
environment, to support and service emerging e-businesses.

   Oracle. We are an Oracle Authorized Application Provider (OAAP) partner and
an Oracle iHost partner. As a member of these partner programs, we provide
solutions for customers based on the Oracle e-business suite of applications.

                                       8
<PAGE>

Interliant Europe

   In February 2000, we and @viso Limited, a company incorporated under the
laws of England and Wales and owned 50% by Softbank Holdings, Inc. and 50% by
Vivendi, S.A., formed Interliant Europe B.V., owned 51% by us and 49% by @viso
Limited. Through Interliant Europe, in May 2000 we launched Web hosting,
application hosting and related services in continental Europe. @viso loaned us
the amount required to purchase our equity interest in Interliant Europe (see
Notes 5 and 7 of Notes to the Consolidated Financial Statements).

Sales and Distribution

   Our sales and marketing group sells our ASP solutions to our customers
through the following sales channels:

  .  Direct Sales, which sells ASP solutions to large enterprises and other
     businesses whose Internet operations are mission-critical;

  .  Telesales, which acquires new customers through inbound calls generated
     through traditional media and outbound telesales to pre-qualified
     potential customers; and

  .  Internet Marketing programs that drive potential customers to our Web
     site or our telesales group. Customers can purchase Web hosting services
     on a 24x7 basis from our Web site at www.interliant.com.

   Indirect Sales marketed under our INIT PARTNERS offering consist of reseller
and referral partners, such as Web consulting firms, Internet service
providers, independent software vendors, network integration companies and
system integrators. These distribution partners have established relationships
with our prospective customer base as well as sales forces capable of selling
our ASP solutions. These indirect sales channels extend our market reach and
assist in the delivery of complete solutions to meet customer needs. We offer
our partners a discount from our retail price on both products and services.

   The INIT PARTNER program includes:

  .  INIT ASP Host which are solutions that empower independent software
     vendors (ISVs) to transition their business to ASP models;

  .  INIT Referral which enables partners to generate revenue by referring
     business to Interliant;

  .  INIT Vantage which enables partners to generate revenue by reselling
     Interliant solutions; and

  .  INIT Alliances, our premier partnership program, through which we form
     alliances with partners to develop new product offerings for Interliant
     and to bring our products to new sales channels.

Marketing

   We market our INIT Solutions Suite ASP solutions through programs that
generate lead sources while also increasing awareness for our corporate and
product brands. The marketing techniques that provide the greatest success for
Interliant include aggressive public relations, corporate and product
collateral, trade shows, direct response programs, and Web site marketing
(www.interliant.com). All of these programs are enhanced through our channel
marketing initiatives with alliance partners.

   We are also engaged in the following lead-generating activities:

  .  Targeted cross-selling efforts that leverage the knowledge we have about
     our current customers to offer them additional Interliant services;

  .  Database-driven direct marketing programs that use prospect profiles and
     specially-crafted offers to generate leads which allow us to market our
     services more cost-effectively by reaching the right contacts with the
     right messages;

  .  Online advertising with direct response offers; and

  .  Trade shows that target our most important product areas.

                                       9
<PAGE>

   We have created marketing and sales support systems which include an online
sales and marketing database to help our sales organization manage prospect
information. We continue to add to our sales collateral, focusing on customer
profile pieces. We also continue to update and improve our Web site for use as
a marketing and lead-generation tool.

Technology and Network Operations

   We have developed a secure, reliable, high-performance and scalable hosting
solution which we believe provides a significant competitive advantage in the
market. This solution is comprised of multiple hosting platforms that
incorporate automated functionality and a network infrastructure that includes
multiple Internet data centers and is monitored on a 24x7 basis. Our strategy
in developing our ASP solutions focuses on utilizing internally-created
technological innovations that we integrate with leading software and hardware
providers.

   ASP Hosting Platform. Although industry-standard Web servers are adequate
for basic Web hosting, we believe that efficiently managing large numbers of
Web sites and users on a single server or managing complex, Internet-based
applications require significant technological innovations. We have developed
proprietary hosting platforms that permit us to integrate existing hardware and
software products, such as those from Microsoft, Cisco Systems, Compaq, Dell,
Network Appliance and EMC/2/, to create our hosting platform. We have also
developed Web server applications designed to improve performance in a virtual
server environment and we have implemented resource monitoring tools designed
to report and alert on computer/application resource components. We continue to
look at ways to improve our platform via formal programs such as the Microsoft
Windows Reliability Program. Our solutions allow for servers to be added while
being monitored centrally, independent of where they are located.

   Facilities and Operations. We have four primary data centers located in
Houston, Texas; Atlanta, Georgia; Vienna, Virginia and Columbus, Ohio. In
addition, we operate data centers in Paris, France and in London, England. We
have network and server monitoring infrastructures in all four of our primary
data centers. In order to provide our customers with high-quality service, we
have invested substantial resources in building our network infrastructure. Our
customer service representatives and systems are located in or near our
Atlanta, Houston and Columbus data centers.

   We have designed our network to minimize the effect of any interruptions.
Our high-speed network is designed to continue operating in the case of
software or hardware failures. Our primary data centers feature separate fiber
and power connections, back-up diesel generators, environmental control systems
and uninterruptible power supplies designed to provide on-site power for up to
four weeks. Our data centers in Atlanta and Houston also have separate
redundant fiber. Systems receive full and incremental backups except to
dedicated servers in our Vienna and Atlanta facilities which receive full and
incremental backups only if the customers subscribe to this service. We also
provide remote access management and reporting tools. Quality and security are
paramount concerns for our customer base. Consequently, we employ several
security measures, including firewalls, intrusion monitoring and site security
monitoring, limited access electronic card key measures and the physical
separation of servers from administrative workstations. We have also
implemented monitoring systems to identify potential sources of failure, limit
downtime and notify our staff of any problems. Although we have attempted to
build redundancy into our network and hosting facilities, our data centers are
subject to various single points of failure and a problem with one of our
routers or switches could cause an interruption in the services we provide to
some of our customers.

   Our Vienna, Virginia facility is a world-class data center located within a
mile of MAE-East, the major East Coast data hub to the Internet, facilitating
scalable Internet connectivity and reliable network services available. This
facility features the latest in equipment and design, including MGE
Uninterruptible Power Systems, multi-carrier connectivity, environmental
monitoring and conditioning and end-to-end physical security systems. We
believe these features ensure stable, reliable operation of applications.

                                       10
<PAGE>

   Historically, our Houston data center housed our application hosting
operations and our Atlanta center housed our Web hosting operations. Each of
these centers, as well as our data center in Vienna, Virginia, are capable of
providing a full range of ASP hosting. We anticipate that, over time, the
functional distinctions between our Houston, Atlanta and Vienna data centers
will diminish.

   Our Network Operations Centers (NOCs), with the exception of our NOC in our
Columbus data center which is focused solely on our enterprise resource
planning, or ERP, hosted applications, are responsible for monitoring our
entire network, server farm and hosted applications on a 24x7 basis. We monitor
each piece of equipment, including routers, switches and servers. The NOCs also
monitor all Internet and telecommunications connections and ensure that they
are functional and properly loaded. The design of the NOCs enables systems
administrators and support staff to be promptly alerted to problems and we have
established procedures for rapidly resolving any technical problems that arise.
The NOCs are fully integrated into our customer service facilities. In
connection with our integration efforts, we recently completed building and
equipping a centralized Enterprise Control Center (ECC) in our Atlanta data
center to monitor and control our entire network operations.

   Connectivity. We offer connectivity to our systems from virtually anywhere
in the world, enabling customers to deploy global solutions. Customers can
access us:

  .  via the Internet;

  .  through X.28 connections provided by Compuserve;

  .  through dedicated lines at a bandwidth they specify;

  .  over Frame Relay through AT&T, Sprint and MCI Worldcom; or

  .  domestically via a toll-free number.

   We utilize multiple DS-3 connections to the Internet provisioned directly
off a SONET ring from our Atlanta, Houston and Vienna data centers. In
addition, we currently utilize multiple OC-12 sized circuits from our Atlanta
facility and multiple OC-3 connections from our Vienna facility. Internally
developed and commercially available management and monitoring systems provide
insight into the performance of our entire network as well as consistency of
security measures across all of our current hosting platforms. Bandwidth
utilization and management is done through a hardware-based collection system
which interfaces with reporting and billing systems to provide our customers
with summaries of their monthly utilization.

   By utilizing top-tier connectivity providers and developing private peering
arrangements with bandwidth providers, we are able to offer highly resilient,
redundant and high-speed connectivity between the Internet and each of our data
center facilities.

   Agreements with certain of our connectivity providers, including UUNET
Technologies and Level (3) Communications, provide us with connectivity ranging
in capacity from T-1 to DS-3 to OC-12, which are the technical names of the
physical telecommunications connections or pipelines that will be used to
transport data. A larger pipeline can carry a greater volume of data at a
greater speed. For example, a T-1 can carry 1.544 megabits per second; a DS-3
can carry 44.736 megabits per second and an OC-12 can carry 622 megabits per
second.

Customer Service

   We view customer service as a critical part of our business strategy. As of
March 1, 2001, our customer service group had 219 employees. This group is
responsible for providing customer service to our customers as well as our
resellers and referral partners, including helping customers to use our ASP
solutions.

   We have invested in advanced customer service software and call routing
technology to streamline the customer service process. Through our customer
service systems, customer service representatives can generally resolve any
issue in a timely manner via e-mail or our toll-free number. We also offer many
of our

                                       11
<PAGE>

customers a self-service customer support alternative which provides online
access to account and billing data, and 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.

   A focused support team handles all the application hosting support
requirements via several mechanisms including a facilitated discussion database
environment available over the Internet where customers, application developers
and support technicians can discuss pertinent issues and build a relevant
knowledge base. Our Web hosting customer service operations are supported by
the Vantive Support system, a customer/asset management tracking application
that enables a customer service representative to view a customer's entire
account, including past and recent interactions with such customer. This
database categorizes all reported problems so that if a particular problem
reoccurs, customer service representatives can view its prior resolution and
provide timely and accurate customer service.

Competition

   The market served by us is highly competitive. Although barriers to entry
and continued growth are increasing, there are still few substantial barriers
to entry. We expect that we will face additional competition from existing
competitors and new market entrants in the future. The principal competitive
factors in this market include:

  .  quality of service, including network capability, scalability,
     reliability and functionality;

  .  customer service and support;

  .  variety of services and products offered;

  .  price;

  .  brand name;

  .  Internet system engineering and technical expertise;

  .  timing of introductions of additional value-added services and products;

  .  network security;

  .  financial resources; and

  .  conformity with industry standards.

   We may not have the resources, expertise or other competitive factors to
compete successfully in the future.

   Our current and potential competitors include:

  .  other ASPs, such as USinternetworking, FutureLink and Corio;

  .  other Web hosting and Internet services companies such as Interland,
     Exodus Communications, Digital Island, GlobalCenter, Globix, NaviSite,
     Digex, Data Return and local and regional hosting providers;

  .  national and regional Internet service providers such as Earthlink,
     UUNET Technologies, PSINet and Juno Online Services, Inc.;

  .  global telecommunications companies including AT&T, British
     Telecommunications, Telecom Italia and Nippon Telegraph and Telephone;

  .  other Internet professional services companies such as iXL Enterprises,
     marchFIRST, Proxicom, Inc. and Breakaway Solutions; and

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

                                       12
<PAGE>

   Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we do.
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 are not currently 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.


                                       13
<PAGE>

   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 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 March 1, 2001 we had 1,399 employees, of which 324 were in sales,
distribution and marketing, 334 were in engineering and service development,
319 were in professional services, 219 were in customer service and technical
support, 196 were in finance and administration and 4 were in acquisition
integration. As a result of our April Restructuring Plan, we eliminated
approximately 190 positions company-wide on April 3, 2001. None of our
employees are represented by a labor union and we believe that our employee
relations are good.

Risk Factors

   In addition to the other information included in this Report on Form 10-K,
you should consider the following risk factors. This Report on Form 10-K
contains forward-looking statements covered by the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve risks and uncertainties that may affect our business and
prospects. Our results may differ significantly from the results discussed in
the forward-looking statements as a result of certain factors including those
listed below or discussed elsewhere in this Report and our other filings with
the Securities and Exchange Commission, to which you are referred.

   We are a young and developing company with an evolving business model.

   We have a limited operating history and may not successfully implement our
business plan.

   We have a limited operating history. We were incorporated in December 1997
and began offering Web hosting services in February 1998. To date, we have
completed 27 acquisitions. As a result of our limited operating history and
numerous acquisitions, our business model is still developing. In April 2001,
we announced our April Restructuring Plan pursuant to which we intend to narrow
the focus of our service offerings. Our business and prospects must be
considered in light of the risks frequently encountered by companies in their
early stages of development, particularly companies in the new and rapidly
evolving Internet services market. Some of these risks relate to our ability
to:

  .  implement our restructuring plan and obtain the benefits which it is
     designed to produce;

  .  implement our sales and marketing strategy to support our business and
     build the Interliant brand;

  .  integrate acquisitions and then cross-sell our services to the customer
     bases of the acquired companies;

                                       14
<PAGE>

  .  provide reliable and cost-effective services to our customers;

  .  continue to build our operations and accounting infrastructure to
     accommodate additional customers;

  .  respond to technological developments and new products and services
     offered by our competitors;

  .  develop and offer new products and services or differentiate such
     products and services from those offered by our competitors;

  .  enter into strategic relationships with application software vendors and
     other strategic partners that further advance our objective to become a
     full service ASP;

  .  build, maintain and expand distribution channels; and

  .  attract and retain qualified personnel.

   We may not be successful in accomplishing these objectives. If we are not
successful, our business could be adversely affected.

   We have a history of significant losses and cash flow deficits, which may
increase in the future.

   Since our inception in December 1997, we have experienced operating losses
and negative cash flow from operations for each quarterly and annual period. We
experienced net losses of approximately $151.2 million and $53.9 million in the
years ended December 31, 2000 and 1999, respectively. As of December 31, 2000,
we had an accumulated deficit of approximately $216.1 million. The revenue,
cash flow and income potential of our business model is unproven and our
limited operating history makes it difficult to evaluate our prospects. While
our April Restructuring Plan is designed to reduce expenses as we focus on
offering the solutions which we believe are most attractive to us, we cannot
guarantee that we will be successful. We anticipate that we may incur increased
expenses, losses and cash flow deficits as we implement our restructuring plan.

   We have experienced significant growth in revenues, primarily attributable
to acquisitions. This growth rate is not necessarily indicative of future
operating results. Our future results will depend primarily on internal growth
and to a lesser extent on our acquisition strategy. We expect that any future
acquisitions will increase our operating expenses and operating losses. As a
result, we expect to incur significant additional operating losses. We cannot
give any assurance that we will ever achieve profitability on a quarterly or
annual basis, or, if we achieve profitability, that it will be sustainable.

   Our rapid growth and expansion has and may continue to significantly strain
our resources.

   From February 1998 through July 2000 we experienced rapid growth, primarily
due to acquisitions. This rapid growth has placed, and is likely to continue to
place, a significant strain on our operating and financial resources. Our
future performance will partly depend on our ability to manage our growth
effectively, which will require that we further develop our operating and
financial system capabilities and controls. We have invested and intend to
continue to invest significant amounts in billing, accounts receivable,
customer service and financial systems. Because in the past we employed a
strategy that included a high level of acquisition activity, we have operating
businesses that have not been integrated into our core systems and continue to
produce financial and other information from their existing systems. As a
result, our ability to record, process, summarize and report financial data
could be adversely affected.

   We will need additional funds which, if available, could result in an
increase in our interest expense or stockholder dilution. If these funds are
not available, our business could be hurt.

   To date, our cash flows from operations have been insufficient to fund our
operations and our acquisition and internal growth programs. We have funded our
operations principally from the proceeds of stock sales, sales of convertible
notes and from other external sources. We cannot predict with certainty when we
will be able to fund our operations entirely from internally generated cash
flow. We may never be able to do so. At December 31, 2000, we had cash, cash
equivalents and short-term investments of $79.9 million, and during

                                       15
<PAGE>

2000 our net cash used in operating activities was $80.2 million. On April 16,
2001, we entered into definitive agreements for the $20 Million Funding (see
Recent Business Developments; Business Restructuring and Note 15 of Notes to
Consolidated Financial Statements). It is highly likely that we will need to
raise additional funds to conduct our operations beyond 2001. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".

   We may raise funds through public or private debt or equity financing. If
funds are raised through the issuance of equity securities, the percentage
ownership of our then-current stockholders may be reduced and such equity
securities may have rights, preferences or privileges senior to those of the
holders of our Common Stock. Also, the capital markets recently have been
unreceptive to new issues of Internet-related securities, so our ability to
raise funds in this manner is highly uncertain. If additional funds are raised
through the issuance of debt securities, such securities may have certain
rights, preferences and privileges senior to those of the holders of our
outstanding debt and equity securities and the terms of such newly issued debt
could impose restrictions on our operations.

   We currently have no committed sources of capital other than the $20 Million
Funding described above. Additional financing may not be available on terms
favorable to us, or at all. If adequate funds are not available on acceptable
terms, we may not be able to continue to fund our operations and growth or to
continue our acquisition program. Our inability to raise capital could
adversely affect our business.

   Our operating results may fluctuate in the future. As a result, period-to-
period comparisons of our results of operations are not necessarily meaningful
and should not be relied upon as indications of future performance.

   Our operating results may fluctuate in the future as a result of a variety
of factors, some of which are outside of our control. These factors include:

  .  the demand for our services, pricing pressures in our market and changes
     in the mix of products and services sold by us and our competitors;

  .  technological issues, including technical difficulties affecting the
     Internet generally or our hosting operations in particular and increased
     technological demands of our customers;

  .  the amount and timing of any significant restructuring, impairment, or
     other charges resulting from or relating to our April Restructuring
     Plan;

  .  the amount and timing of our costs related to our marketing efforts and
     service introductions by us or our strategic partners;

  .  the quality and timing of acquisitions we complete and our ability to
     successfully integrate these acquisitions into our business; and

  .  economic conditions generally and specific to the hosting and consulting
     industries.

   Historically, fluctuations in our operating results have resulted
principally from completed acquisitions. Due to the factors described above,
our operating results may not be indicative of future operating results. In
addition, our future operating results for any particular period may differ
materially from our expectations or those of investors or security analysts. In
this event, the market price of our common stock would likely fall
dramatically.

   We only recently began to offer many of our products and services, and we
may offer new products and services in the future. If our products are not
accepted by the market or have reliability or quality problems, our business
may suffer.

   We have recently introduced new hosting solutions as well as enhanced
Internet services. If these and other hosting solutions and enhanced Internet
services that we may introduce in the future fail to gain market acceptance,
our business could be adversely affected. In addition, if these newly
introduced hosting solutions and enhanced Internet services have reliability,
quality or compatibility problems, market acceptance of these products could be
greatly hindered and our ability to attract new customers could be adversely
affected. We cannot offer any assurance that these new solutions and services
are free from any reliability, quality or compatibility problems.

                                       16
<PAGE>

   The growth of the market for our products and services may not materialize.

   Our market is new and rapidly evolving. Whether the market for our products
and services will grow is uncertain. Our business would be adversely affected
if the market for our services does not grow or if businesses reduce or
discontinue outsourcing these services.

   Our success depends in part on continued growth in the use of the Internet.
Our business would be adversely affected if Internet usage does not continue to
grow. Internet usage may be inhibited for a number of reasons, such as:

  .  security and privacy concerns;

  .  uncertainty of legal and regulatory issues concerning the use of the
     Internet,

  .  inconsistent quality of service; and

  .  lack of availability of cost-effective, high-speed connectivity.

   Through the third quarter of fiscal 2000 we grew rapidly, principally by way
of acquisitions. The success of our business plan depends on the successful
integration of these acquisitions.

   From February 1998 through July 2000, we have acquired 27 businesses. Our
future performance will depend in part on our ability to continually integrate
these businesses with our existing operations successfully and profitably. We
may not be able to successfully integrate the acquired businesses with existing
operations without substantial costs, delays or other problems, if at all. As
we integrate acquired businesses:

  .  we may lose customers of acquired companies due to difficulties during
     the integration process;

  .  we may not be able to bill customers of the acquired companies
     accurately due to potential deficiencies in the internal controls of the
     acquired companies, such as inadequate back-office systems of the
     acquired companies and potential difficulties in migrating records onto
     our own systems;

  .  we may experience difficulty in collecting bills rendered by acquired
     companies due to inaccurate record keeping of the acquired companies;

  .  key employees of the acquired companies whom we wish to retain may
     resign;

  .  management's attention and resources could be diverted from our ongoing
     business concerns;

  .  we may not be able to integrate newly acquired technologies with our
     existing technologies; and

  .  we may not be able to train, retain and motivate executives and
     employees of the acquired company.

   A significant portion of our assets consists of intangible assets, the
recoverability of which is not certain and the amortization of which will
increase losses or reduce earnings in the future.

   In connection with our acquisitions completed through December 31, 2000,
$197.2 million of the aggregate purchase price has been allocated to intangible
assets such as covenants not to compete, customer lists, trade names, assembled
work force and goodwill. Intangible amortization charges for 2001 with respect
to acquisitions completed to date will be approximately $51.9 million.
Amortization expense will increase as we acquire additional businesses. Our
business could suffer if changes in our industry or our inability to operate
the business successfully and produce positive cash flows from operations
result in an impairment in the value of our intangible assets and therefore
necessitate a write-off of all or part of these assets. In connection with our
April Restructuring Plan, we conducted a review for evidence of impairment of
our intangible assets. Based on that review, we determined that certain of our
intangible assets related to businesses we intend to sell or shut down became
impaired in the first quarter of 2001. Accordingly, we anticipate recording a
significant impairment charge ranging from $30 million to $45 million in the
quarter ending March 31, 2001, although it is reasonably possible that the
ultimate charge will vary considerably outside this range. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

   We have substantially increased our indebtedness due to our sale of debt
securities and we may not be able to pay our debt and other obligations.

                                       17
<PAGE>

   In the first quarter of 2000, as a result of our sale of our 7% convertible
subordinated notes, we incurred approximately $164.8 million of additional
indebtedness increasing our ratio of debt to equity (expressed as a percentage)
from approximately 2.7% to approximately 217.1% as of December 31, 2000. Our
other indebtedness is principally comprised of notes payable and capital lease
obligations. We may incur substantial additional indebtedness in the future
including indebtedness resulting from the $20 Million Funding. The level of our
indebtedness, among other things, could

  .  make it difficult for us to make payments on the notes;

  .  impair our ability to obtain additional financing in the future;

  .  reduce funds available to us for working capital, capital expenditures,
     strategic acquisitions, research and development or other purposes;

  .  restrict our ability to introduce new products or exploit business
     opportunities;

  .  limit our flexibility in planning for, or reacting to, changes in our
     business; and

  .  make us more vulnerable in the event of a downturn in our business, and
     to competitive pressures in the industry in which we operate.

   Our cash flow generated during the year ended December 31, 2000 would have
been insufficient to pay the amount of interest payable on the notes, and we
cannot assure you that we will be able to pay interest and other amounts due on
the notes as and when they become due and payable. If our cash flow is
inadequate to meet our obligations, we could face substantial liquidity
problems. If we are unable to generate sufficient cash flow or otherwise obtain
funds necessary to make required payments on the notes or our other
obligations, we would be in default under the terms thereof, which would permit
the holders of the notes to accelerate the maturity of the notes and could also
cause defaults under future indebtedness we may incur. Any such default could
have a material adverse effect on our business, prospects, financial condition
and operating results.

   We operate in the rapidly evolving Internet services industry, which
presents the following risks.

   We depend on the growth and stability of the Internet infrastructure.

   If the use of the Internet continues to grow rapidly, its infrastructure may
not be able to support the demands placed on it by such growth and its
performance or reliability may decline. In addition, Web sites have experienced
interruptions in their service as a result of outages and other delays
occurring throughout the Internet network infrastructure. If these outages or
delays occur frequently, use of the Internet as a commercial or business medium
could, in the future, grow more slowly or decline, which would adversely affect
our business.

   If we do not respond effectively and on a timely basis to rapid
technological change, our business could suffer.

   The Internet industry is characterized by rapidly changing technology,
industry standards, customer needs and competition, as well as by frequent new
product and service introductions. Our future success will depend, in part, on
our ability to accomplish all of the following in a timely and cost-effective
manner, all while continuing to develop our business model and roll-out our
services:

  .  effectively use and integrate leading technologies;

  .  continue to develop our technical expertise;

  .  enhance our products and current networking services;

  .  develop new products and services that meet changing customer needs;

  .  advertise and market our products and services; and

  .  influence and respond to emerging industry standards and other changes.

   We cannot assure you that we will successfully use or develop new
technologies, introduce new services or enhance our existing services on a
timely basis, or that new technologies or enhancements used or developed by us
will achieve market acceptance. Our pursuit of necessary technological advances
may require substantial time and expense.

                                       18
<PAGE>

   Disruption of our services due to accidental or intentional security
breaches may adversely impact our business.

   A significant barrier to the growth of e-commerce and communications over
the Internet has been the need for secure transmission of confidential
information. Despite our design and implementation of a variety of network
security measures, unauthorized access, computer viruses, accidental or
intentional actions and other disruptions could occur. We may incur significant
costs to protect against the threat of security breaches or to alleviate
problems caused by such breaches. If someone were able to misappropriate our
users' personal or proprietary information or credit card information, we could
be subject to claims, litigation or other potential liabilities.

   We operate in an uncertain regulatory and legal environment which may make
it more difficult to defend ourselves against any claims brought against us.

   We are not currently subject to direct regulation by the Federal
Communications Commission or any other governmental agency, other than
regulations applicable to business in general. While there are currently few
laws or regulations which specifically regulate Internet communications, laws
and regulations directly applicable to online commerce or Internet
communications are becoming more prevalent. There is much uncertainty regarding
the marketplace impact of these laws. In addition, various jurisdictions
already have enacted laws covering intellectual property, privacy, libel and
taxation that could affect our business by virtue of their impact on online
commerce. In the future, we may become subject to regulation by the FCC or
another regulatory agency. Further, the growth of the Internet, coupled with
publicity regarding Internet fraud, may lead to the enactment of more stringent
consumer protection laws. If we become subject to claims that we have violated
any laws, even if we successfully defend against these claims, our business
could suffer. Moreover, new laws that impose restrictions on our ability to
follow current business practices or increase our costs of doing business could
hurt our business.

   If states and countries in which we do not currently collect sales or other
taxes mandate that we do so, our business could suffer.

   We collect sales or other taxes with respect to the sale of products or
services in states and countries where we believe we are required to do so. We
currently do not collect sales and other taxes with respect to the sale of
services or products in all states and countries in which we do not have
offices and believe we 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.

   We could face liability for information disseminated through our network.

   It is possible that claims could be made against us in connection with the
nature and content of the materials disseminated through our networks. Several
private lawsuits are pending against other entities which seek to impose
liability upon online services companies and Internet service providers as a
result of the nature and content of materials disseminated over the Internet.
If any of these actions succeed, we might be required to respond by investing
substantial resources or discontinuing some of our product or service
offerings. The increased attention focused upon liability issues as a result of
these lawsuits and legislative proposals could impact the growth of Internet
use. Although we carry professional liability insurance, it may not be adequate
to compensate or may not cover us in the event we become liable for information
carried on or disseminated through our networks. Any costs not covered by
insurance incurred as a result of such liability or asserted liability could
adversely affect our business.

                                       19
<PAGE>

   Our business operations present the following additional risks.

   We intend to continue to commit substantial funds to sales and marketing
initiatives. Our failure to develop brand recognition for the Interliant brand
could hurt our business.

   Our sales and marketing expenses were $42.9 million and $17.2 million in the
years ended December 31, 2000 and 1999, respectively. A component of our
strategy is to continue our sales and marketing activities. This may include
the expansion of our sales force, development of reseller and referral partner
channels and increased marketing efforts. As a result, sales and marketing
expenses are likely to increase substantially in future periods. Our business
could be adversely affected if the Interliant brand is not well received by our
customers, our marketing efforts are not productive or we are otherwise
unsuccessful in increasing our brand awareness. We are currently marketing and
expect to continue to market some of our products and services under the brand
names of acquired companies. In most circumstances, we have changed or intend
to change the brand under which we offer these products and services to the
Interliant "INIT" brand. If we are unsuccessful in these efforts, we may not
achieve our revenues objectives and the acquired operations could lose
substantial value.

   We operate in an extremely competitive market and may not be able to compete
effectively.

   Our current and prospective competitors are numerous. Many of our
competitors have substantially greater financial, technical and marketing
resources, larger customer bases, longer operating histories, greater name
recognition and more established relationships in the industry than we do. We
may not be able to compete effectively. See "Business--Competition."

   We depend on the skills of key personnel.

   We depend on the continued service of our key personnel. Our key personnel
are critical to our success, and many of them would be difficult to replace.
Most of them are not bound by employment agreements, and competitors in our
industry may attempt to recruit them. We currently have agreements to retain
the services of certain members of our management team. These agreements do
not, however, as a practical matter, guarantee our retention of these persons.
The loss of the services of one or more of our key personnel could adversely
affect our business.

   We operate in an industry where it is difficult to attract and retain
qualified personnel.

   We expect that we will need to hire additional personnel in all areas of our
business. The competition for personnel throughout our industry is intense. At
times, we have experienced difficulty in attracting and retaining qualified new
personnel. If we do not succeed in attracting new, qualified personnel or
retaining and motivating our current personnel, our business could suffer.

   We cannot assure you that the ASP market will become viable or grow at a
rate that will allow us to achieve profitability.

   Growth in demand for and acceptance of ASPs and their hosted business
software applications is highly uncertain, and the rate of adoption of the ASP
model has been slower than we had expected. We cannot assure you that this
market will become viable or, if it becomes viable, that it will grow at a rate
that will allow us to achieve profitability. The market for Internet services,
private network management solutions and widely distributed Internet-enabled
application software has only recently begun to develop and is now evolving
rapidly. It is possible that these solutions will never achieve market
acceptance. It is also possible that potential customers will decide that the
risks associated with hiring ASPs to implement and manage their critical
systems and business functions outweigh the efficiencies associated with the
products and services we provide. Concerns over transaction security and user
privacy, inadequate network infrastructure for the entire Internet and
inconsistent performance of the Internet could also limit the growth of
Internet-based business software solutions.


                                       20
<PAGE>

   Our application hosting solutions depend on software applications we obtain
from third parties.

   We obtain software products pursuant to agreements with vendors such as
Lotus and Microsoft and package them as part of our application hosting
solutions. The agreements are typically for terms ranging from one to three
years. We also license additional technologies that we use in our business from
other third parties. If these agreements were terminated or not renewed, we
might have to discontinue products or services that are central to our business
strategy or delay their introduction unless we could find, license and package
equivalent technology. Our business strategy also depends on obtaining
additional application software. We cannot be sure, however, that we will be
able to obtain the new and enhanced applications we may need to keep our
solutions competitive. If we cannot obtain these applications and as a result
must discontinue, delay or reduce the availability of our solutions or other
products and services, our business may be adversely affected. In addition, we
may become subject to infringement actions based upon the technologies licensed
from third parties. Any of these claims, with or without merit, could subject
us to costly litigation and divert the attention of our technical and
management personnel.

   Our agreements with application software vendors are not exclusive and may
not provide us with any competitive advantage.

   None of our agreements for application software and other technology are
exclusive. Our competitors may also license and utilize the same technology in
competition with us. We cannot be sure that the vendors of technology used in
our products will continue to support this technology in its current form. Nor
can we be sure that we will be able to adapt our own products to changes in
this technology. In addition, we cannot be sure that potential financial or
other difficulties of third party vendors will not have an adverse affect on
the technologies incorporated in our products, or that, if these technologies
become unavailable, we will be able to find suitable alternatives.

   We depend on our network infrastructure. If we do not have continued access
to a reliable network, our business will suffer.

   Our success partly depends upon the capacity, scalability, reliability and
security of our network infrastructure, including the capacity leased from our
telecommunications network suppliers. We depend on these companies to provide
uninterrupted and "bug free" service. We would be adversely affected if such
services were not provided. In addition, we would be adversely affected if:

  .  these companies greatly increased the prices of their services; or

  .  the telecommunications capacity available to us was insufficient for our
     business purposes and we were unable to use alternative networks or pass
     along any increased costs to our customers.

   Our business and expansion models assume that we will be able to scale our
network infrastructure to support increasing numbers of customers and increased
traffic. However, the scalability of our network is unproven.

  We must continue to develop and expand our network infrastructure to
     accommodate:

  .  increases in the number of users we service;

  .  increases in and the amount of information they wish to transport;

  .  increases in the number of products and services we offer; and

  .  changing customer requirements.

   Our expansion, maintenance and adaptation of our telecommunications and
hosting facility infrastructure will require substantial financial, operational
and management resources. If we are required to expand our network
significantly and rapidly due to increased usage, additional stress will be
placed upon our network hardware, traffic management systems and hosting
facilities. The ability of our network to connect and manage a substantially
larger number of customers at high transmission speeds while achieving expected
performance is unknown.

                                       21
<PAGE>

   As our customers' bandwidth usage increases, we will need to make additional
investments in our infrastructure to maintain adequate data transmission
speeds, the availability of which may be limited and the cost of which may be
significant. Additional network capacity may not be available from third-party
suppliers as it is needed by us. As a result, our network may not be able to
achieve or maintain a sufficiently high capacity of data transmission,
especially if customers' usage increases. Any failure on our part to achieve or
maintain high-capacity data transmission could significantly reduce consumer
demand for our services and adversely affect our business.

   We could experience system failures and capacity constraints, which could
affect our ability to compete.

   To succeed, we must be able to operate our network infrastructure on a 24x7
basis without interruption. Our operations depend upon our ability to protect
our network infrastructure, equipment and customer files against damage from:

  .  human error;

  .  natural disasters;

  .  power loss or telecommunications failures; and

  .  sabotage or other intentional acts of vandalism.

   However, even if we take precautions, the occurrence of a natural disaster
or other unanticipated problems at our data centers could result in
interruptions in the services we provide to our customers.

   At this time, we do not have a formal disaster recovery plan. In addition,
our data centers are subject to various single points of failure. As a result,
a problem with one of our routers, switches or fiber paths or with another
aspect of our network could cause an interruption in the services we provide to
some of our customers. We have experienced interruptions in service in the
past. Any future interruptions could:

  .  require us to spend substantial amounts of money replacing existing
     equipment or adding redundant facilities;

  .  damage our reputation for reliable service;

  .  cause existing end users, resellers and referral partners to cancel
     their contracts;

  .  cause end users to seek damages for losses incurred; or

  .  make it more difficult for us to attract new end users, resellers and
     referral partners.

   Any of these occurrences could adversely affect our business.

   We have entered into service level agreements with some of our customers and
we will continue to offer service level agreements to a larger group of
customers in the future. In that case, we could incur significant liability to
our customers in connection with any system downtime and those obligations may
adversely affect our business.

   Currency fluctuations and different standards, regulations and laws relating
to our international operations may adversely affect our business.

   Approximately 10% of our revenue for the year ended December 31, 2000 and
16% of our revenue for the year ended December 31, 1999 were to customers
located outside the United States, primarily in Europe, Asia and South America.
Because our sales overseas are denominated in U.S. dollars, currency
fluctuations may inhibit us from marketing our services to potential foreign
customers or collecting for services rendered to current foreign customers. Our
international operations expose us to additional risks including those such as
managing operations across disparate geographic areas and differences in
privacy, censorship and liability standards and regulations.

                                       22
<PAGE>

   We cannot be sure that our service offerings will be accepted in the
European and Asian markets, or even if accepted, whether these businesses will
be viable or grow at rates that will allow us to achieve profitability. If
these businesses do not achieve significant market acceptance or are not
profitable, we may incur significant losses.

   We may be liable for defects or errors in the solutions we develop.

   Many of the solutions we develop are critical to the operations of our
clients' businesses. Any defects or errors in these solutions could result in:

  .  delayed or lost client revenues;

  .  adverse customer reaction toward Interliant;

  .  negative publicity;

  .  additional expenditures to correct the problem; and

  .  claims against us.

   Claims against us may not be adequately covered by insurance, may result in
significant losses and, even if defended successfully, may raise our insurance
costs.

   Our public status presents the following risks:

   You may encounter volatility in the market price of our Common Stock.

   The trading price of our Common Stock has been, and is likely to continue to
be, highly volatile. Our stock price could be subject to wide fluctuations in
response to factors such as the following:

  .  actual or anticipated variations in quarterly results of operations;

  .  the addition or loss of customers, vendors or strategic partners;

  .  our ability to hire and retain key personnel and other employees;

  .  announcements of technological innovations, new products or services by
     us or our competitors;

  .  changes in financial estimates or recommendations by securities
     analysts;

  .  conditions or trends in the Internet and online commerce industries;

  .  changes in the market valuations of other Internet or online service
     companies; and

  .  our announcements of significant acquisitions, strategic partnerships,
     joint ventures or capital commitments.

   In addition, the stock market in general, and the Nasdaq National Market and
the market for Internet and technology companies in particular, have
experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of these companies.
These broad market and industry factors may materially and adversely affect our
stock price, regardless of our operating performance. Consequently, you may not
be able to sell our Common Stock at a price that is attractive to you.

   Our existing principal stockholders, executive officers and directors
control Interliant. This could delay or prevent a change in corporate control
that stockholders may believe will improve management. This could also depress
our stock price because purchasers cannot acquire a controlling interest.

   As of March 30, 2001, our directors, executive officers and their affiliates
beneficially own, in the aggregate, shares representing approximately 59.0% of
our Common Stock. As a result, these persons, acting together, will be able to
control all matters submitted to our stockholders for approval and to control
our

                                       23
<PAGE>

management and affairs. This control could have the effect of delaying or
preventing a change of control that stockholders may believe would be
beneficial to their interests. In addition, this control could depress our
stock price because purchasers will not be able to acquire a controlling
interest in Interliant.

   Our stock price may be affected by the availability of shares for sale. The
future sale of large amounts of our stock, or the perception that such sales
could occur, could negatively affect our stock price.

   The market price of our Common Stock could drop as a result of a large
number of shares of our common stock becoming available in the market. As of
March 30, 2001, there were approximately 49.4 million shares of Common Stock
outstanding, substantially all of which are eligible for sale in the public
market. Holders of approximately 31.5 million restricted shares have
registration rights with respect to shares of Common Stock, which, if
exercised, would permit the holders to sell their shares freely in the public
markets. An aggregate of approximately 3.1 million shares are issuable upon
conversion of the notes. Such shares may be sold freely under a shelf
registration maintained by the Company. In addition, shares issuable upon
exercise of our outstanding options may be sold freely under our registration
statements on Form S-8.

ITEM 2. PROPERTIES

   Our executive offices, which we lease, are located in Purchase, New York. We
also lease the facilities that house our primary data centers in Atlanta,
Georgia, Columbus, Ohio, Houston, Texas and Vienna, Virginia, as well as data
centers in Paris, France and London, England and other facilities in the
Washington, D.C. and Boston metropolitan areas. We believe these facilities are
adequate for our current needs, although we may, in the future, need to expand
our facilities if we outgrow them due to customer and market demand.

ITEM 3. LEGAL PROCEEDINGS

   In the ordinary course of business, we may be involved in legal proceedings
from time to time. As of the date hereof, there are no material legal
proceedings pending against us.

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

   Not applicable.

                                       24
<PAGE>

                                    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. 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. Such prices reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.

<TABLE>
<CAPTION>
                                                             High        Low
                                                             ----        ----
   <S>                                                       <C>         <C>
   1999
   Third Quarter (from July 8, 1999)........................ $23 23/64   $10 1/2
   Fourth Quarter........................................... $35 3/8     $ 9 1/4
   2000
   First Quarter............................................ $54 15/16   $26
   Second Quarter........................................... $28 13/16   $13
   Third Quarter............................................ $24         $ 7 3/4
   Fourth Quarter........................................... $10 13/16   $ 2 1/2
   2001
   First Quarter............................................ $ 6 5/8     $ 1 3/16
</TABLE>

   The last reported sale price of our common stock on March 30, 2001 was $1
5/16. As of March 30, 2001, there were approximately 200 stockholders of record
of our Common Stock. We believe that as of March 30, 2001 we had approximately
14,000 beneficial owners of our Common Stock.

Dividends

   We have never paid or declared cash dividends on our common stock. We
currently intend to retain all future earnings for our business and do not
anticipate paying cash dividends in the foreseeable future. Future dividends,
if any, will depend on, among other things: (1) our operating results, (2)
capital requirements and (3) restrictions in loan agreements.

Changes in Securities

   In the year ended December 31, 2000, options to purchase 1,161,650 shares of
Common Stock were exercised at a weighted average exercise price of $1.46 per
share.

   In the year ended December 31, 2000, 267,004 shares of Common Stock were
sold to our employees pursuant to the Employee Stock Purchase Plan at $2.71 per
share.

   In January and February 2000, we sold an aggregate of 787,881 shares of
Common Stock to six strategic partners for a total purchase price of $27.5
million. In connection with these sales, we issued warrants to purchase an
aggregate of 157,575 shares of common stock with a weighted average exercise
price of $34.90 per share.

   In February 2000, we sold an aggregate principal amount of $154.8 million of
7% Convertible Subordinated Notes. The initial purchasers of the notes were
Merrill Lynch, Pierce Fenner & Smith Incorporated, CIBC World Markets Corp.,
Donaldson Lufkin & Jenrette Securities Corporation and C.E. Unterberg Tobin. In
March 2000, we sold an aggregate principal amount of $10.0 million of the same
7% Convertible Subordinated Notes to Microsoft Corporation.

   In February 2000, in connection with the acquisition of Soft Link, Inc, we
issued, as partial consideration, 254,879 shares of Common Stock to certain
stockholders of Soft Link, Inc.

                                       25
<PAGE>

   In February 2000, in connection with the purchase of substantially all of
the assets and assumption of certain liabilities of reSOURCE PARTNER, Inc., we
issued, as partial consideration, 1,041,179 shares of Common Stock to certain
stockholders of reSOURCE PARTNER, Inc.

   In June 2000, in connection with the acquisition of Knowledge Systems, Inc.,
we issued, as partial consideration, 46,407 shares of Common Stock to certain
stockholders of Knowledge Systems, Inc.

   In July 2000, in connection with the acquisition of Interactive Software,
Inc., we issued, as partial consideration, 193,612 shares of Common Stock to
certain stockholders of Interactive Software, Inc.

   In July 2000, in connection with the acquisition of Milestone Services,
Inc., we issued, as partial consideration, 129,073 shares of Common Stock to
certain stockholders of Milestone Services, Inc.

   In August 2000, we issued warrants to purchase a maximum of 180,000 shares
of Common Stock at an exercise price of $13.06 to The Feld Group, Inc.

   During the year ended December 31, 2000, in connection with the attainment
of certain earnout targets, we issued, as partial consideration, 37,482 shares
of Common Stock to stockholders of Net Daemons Associates, Inc, which were
previously held in escrow, 37,238 shares of Common Stock to stockholders of The
Daily-e Corporation, 118,108 shares of Common Stock to stockholders of Sales
Technology Ltd., 144,847 shares of Common Stock to stockholders of Triumph
Technologies, Inc., and 13,179 shares of Common Stock to stockholders of
Digiweb, Inc.

   We believe that the transactions described above were exempt from
registration under the Securities Act pursuant to Section 4(2) of the
Securities Act, Regulation D or Rule 144A promulgated thereunder, as
transactions by an issuer not involving public offering, or pursuant to Rule
701 promulgated under Section 3(b) of the Securities Act, as transactions
pursuant to written compensatory benefit plans and contracts relating to
compensation. The recipients of securities in each of these transactions
represented that they were acquiring the securities for investment only and not
with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the securities certificates issued in such
transactions. All recipients had adequate access, through their relationships
with us, to information about us, or were given an adequate opportunity to
review information about us.

                                       26
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL 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 period ended December 31, 1997, and the years ended December
31, 1998, 1999 and 2000, and the balance sheet data as of December 31, 1997,
1998, 1999 and 2000, 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.
Results of operations for the period from inception to December 31, 1997 and
for the years ended December 31, 1998, 1999 and 2000 are not necessarily
indicative of the results of operations for future periods. Interliant's
development and expansion activities, including acquisitions, during the
periods shown below may significantly affect the comparability of this data
from one period to another.

<TABLE>
<CAPTION>
                                                                 Period from
                                                                 December 8,
                                                                     1997
                          Year Ended   Year Ended   Year Ended  (Inception) to
                         December 31, December 31, December 31,  December 31,
                             2000         1999         1998          1997
                         ------------ ------------ ------------ --------------
                                 (In thousands, except per share data)
<S>                      <C>          <C>          <C>          <C>
Statement of Operations
 Data:
  Revenues..............  $ 158,070     $ 47,114     $  4,905       $  --
  Costs and Expenses:
    Cost of revenues....    113,709       27,514        3,236          --
    Sales and
     marketing..........     42,869       17,236        2,555          --
    General and
     administrative.....     65,847       27,076        6,016          156
    Non-cash
     compensation.......     15,106        1,986          833
    Depreciation........     18,357        6,051          696            2
    Amortization of
     intangibles........     46,556       22,069        2,439          --
    Restructuring
     charge.............      2,500
                          ---------     --------     --------       ------
                            304,944      101,932       15,775          158
                          ---------     --------     --------       ------
Operating loss..........   (146,874)     (54,818)     (10,870)        (158)
Interest income
 (expense), net.........     (5,247)         886          138          --
Other income (expense),
 net....................        128          --           --           --
Minority interest.......      1,984
                          ---------     --------     --------       ------
Loss before cumulative
 effect of accounting
 change.................   (150,009)     (53,932)     (10,732)        (158)
Cumulative effect of
 accounting change......     (1,220)
                          ---------     --------     --------       ------
Net loss................  $(151,229)    $(53,932)    $(10,732)      $ (158)
                          =========     ========     ========       ======
Basic and diluted loss
 per share:
Loss before cumulative
 effect accounting
 change.................  $   (3.15)    $  (1.50)    $  (1.22)      $(0.05)
Cumulative effect of
 accounting change......      (0.03)
                          ---------     --------     --------       ------
Net loss per share--
 basic and diluted......  $   (3.18)    $  (1.50)    $  (1.22)      $(0.05)
                          =========     ========     ========       ======
Weighted average shares
 outstanding -- basic
 and diluted............     47,548       35,838        8,799        3,000
                          =========     ========     ========       ======
Other Data:
  EBITDA (1)............  $ (64,355)    $(24,712)    $ (6,902)      $ (156)
Statement of Cash Flows
 Data:
  Net cash used for
   operating
   activities...........  $ (80,159)    $(24,152)    $ (6,001)      $  (59)
  Net cash used for
   investing
   activities...........   (115,703)     (46,459)     (17,919)         (29)
  Net cash provided by
   financing
   activities...........    195,495       91,406       29,821        1,000
  Net capital
   expenditures.........     39,406       12,084        4,322           29
</TABLE>

                                       27
<PAGE>

<TABLE>
<CAPTION>
                                                                 Period from
                                                                 December 8,
                                                                     1997
                          Year Ended   Year Ended   Year Ended  (Inception) to
                         December 31, December 31, December 31,  December 31,
                             2000         1999         1998          1997
                         ------------ ------------ ------------ --------------
                                 (In thousands, except per share data)
<S>                      <C>          <C>          <C>          <C>
Balance Sheet Data:
  Cash, cash equivalents
   and short-term
   investments..........   $ 79,911     $ 31,220     $ 6,813        $ 912
  Working capital.......     58,852       26,886       3,755        4,815
Total assets............    342,352      162,875      26,197        4,953
Debt and capital lease
 obligations, less
 current portion........    177,665        2,503         --           --
Total stockholders'
 equity.................     87,277      137,575      21,693        4,842
</TABLE>
--------
(1) EBITDA represents earnings before net interest expense, income taxes,
    depreciation and amortization, non-cash compensation expense, restructuring
    charges and other income (expense). EBITDA is presented because it is a
    widely accepted financial indicator used by certain investors and analysts
    to analyze and compare companies on the basis of operating performance and
    because management believes that EBITDA is an additional meaningful measure
    of performance and liquidity. EBITDA is not intended to present cash flows
    for the period, nor has it been presented as an alternative to operating
    income (loss) as an indicator of operating performance and should not be
    considered in isolation or as a substitute for measures of performance
    prepared in accordance with generally accepted accounting principles. The
    items excluded from the calculation of EBITDA are significant components in
    understanding and assessing our financial performance. Our computation of
    EBITDA may not be comparable to the computation of similarly titled
    measures of other companies. EBITDA does not represent funds available for
    discretionary uses.

                                       28
<PAGE>

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. This discussion
contains forward-looking statements based upon current expectations that
involve risks and uncertainties.

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, 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 changes in the hosting and Internet
services industries 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.

Overview

   We are a leading global application service provider, or ASP, providing our
customers with a focused suite of outsourced e-business solutions. As an ASP,
we provide managed services for complex hosted applications to multiple end
users from our data centers across a wide area network. Our customers face
significant challenges in doing business on the Internet due to its technical
complexity, their lack of technical skills, the time necessary to implement
solutions and the cost of implementation and ongoing support. By providing
outsourced solutions that combine our hosting infrastructure with professional
services expertise, we can rapidly design, implement, deploy and effectively
manage cost-effective solutions for our customers.

   We offer our customers a suite of services focused on their non-core but
critical business functions enabling them to focus on their own core
competencies. The following are the principal services and products we provide
to our customers:

  .  hosting infrastructure for network-based applications, which allows our
     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 at their premises by means of remote access;

  .  a focused suite of business solutions that include Collaboration,
     Managed Hosting and Security;

  .  professional services for designing, implementing and deploying these
     and other Internet-based applications; and

  .  operations support, systems and applications management, and customer
     services.


                                       29
<PAGE>

   Since our inception we have acquired 27 operating companies providing
application hosting, Web hosting and ASP professional services solutions, for
total consideration of approximately $210.2 million. We have built or acquired
our data centers and have integrated all or part of the acquired hosting
operations into those data centers. The acquisitions have been accounted for
using the purchase method of accounting, which has resulted in the recognition,
as of December 31, 2000, of approximately $197.2 million of intangible assets.
Recoverability of our investment in intangible assets is dependent on our
ability to successfully operate our businesses and generate positive cash flows
from operations. Intangible amortization charges will result in increased
losses or reduced net income. The purchase consideration for the acquisitions
was in the form of cash, stock or a combination of cash, stock and issuance of
debt.

   For the period from inception to December 31, 2000, we have incurred net
losses and negative cash flows from operations, and have expended significant
funds for capital expenditures (property and equipment) and the acquisition of
businesses. Our principal sources of cash to fund the aforementioned activities
were from the sale of $152.3 million in Common and Preferred Stock in public
and private sales and the sale of $164.8 million of Convertible Subordinated
Notes. As of December 31, 2000, we had $79.9 million in cash, cash equivalents
and short-term investments, of which $74.6 million is available for use in our
wholly-owned operations, and $5.3 million is available for use in our 51% owned
subsidiary, Interliant Europe B.V.

   Our financial forecast indicates that such funds on hand at December 31,
2000 will not alone be sufficient to fund our operations, including expected
restructuring costs in 2001, debt service and capital requirements, through
2001. We have, however, entered into definitive agreements for the $20 Million
Funding (see Note 15 of Notes to Consolidated Financial Statements).

   We believe that the funds on hand as of December 31, 2000, combined with the
$20 Million Funding, will be sufficient to fund our operations and meet our
obligations through December 31, 2001. We believe it is likely that we will
require additional funding to conduct operations beyond 2001.

   We are seeking additional sources of cash to fund our business plan.
Accordingly, we intend to sell certain of our businesses and assets which are
no longer core to our ongoing business plans (see Note 15 of Notes to
Consolidated Financial Statements). Any proceeds from these planned sales will
be used to further fund our ongoing operations. However, there can be no
assurances that we will successfully consummate a sale of any or all of the
businesses and assets or whether any such sale, if completed, will result in
additional material cash funding to further support our ongoing operations.

   As of December 31, 2000, we had an accumulated deficit of $216.1 million.
The revenue and income potential of our business is unproven and our limited
operating history makes an evaluation of us and our prospects difficult. We
anticipate increased operating expenses as we:

  .  expand our sales and marketing initiative to continue to drive increased
     sales leads;

  .  continue to fund product development;

  .  continue to complete and equip our data centers; and

  .  implement billing, accounting, operations and customer service systems.

   Although we have experienced revenue growth, which to date has been
primarily attributable to acquisitions, we do not believe that this growth is
necessarily indicative of future operating results. We expect to continue to
incur operating losses, including depreciation and amortization expense, as
well as negative operating cash flows for the foreseeable future. We cannot be
assured that we will ever achieve profitability on a quarterly or annual basis,
or, if achieved, that we will sustain profitability.

Recent Business Developments; Business Restructuring

   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

                                       30
<PAGE>

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 comprises a workforce
reduction 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,
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.

   The April Plan is being executed in two phases. Phase 1, which began on
April 3, 2001, consists of a workforce reduction of approximately 190 positions
and will result in a charge for the payment of severance and related costs of
approximately $2.1 million. This charge will be recognized in the quarter
ending June 30, 2001. We anticipate that the annualized cost savings from the
workforce reduction will range from $10.0 million to $15.0 million. The amount
of these savings could change if we need to further adjust our personnel
infrastructure to support ongoing operations.

   Phase 2 of the April Plan includes exiting, via sale, certain businesses
that we determined to be outside of the redefined scope of our service
offerings. Currently, no purchase and sales agreements have been entered into
for any business that we plan to sell. The businesses to be exited include the
Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM)
product lines of the application hosting and ASP professional services
segments. If the divestiture efforts are not successful in the near-term, we
expect to close some of these businesses by the end of 2001. Businesses not
closed will continue to be operated with reduced cost structures resulting, in
part, from the Phase 1 workforce reductions.

   In the event that we close some of the businesses, the costs associated with
such activities will likely include the termination of additional employees and
settlement of certain contractual obligations. The costs of exiting the
businesses will vary depending on the manner of disposition. While those costs
are not fully determinable at this time, we estimate that in the event of a
shut down of certain of these businesses, the exit costs could range as
follows: workforce reductions ($1.0 million to $2.0 million) and termination of
facility leases and other contractual obligations ($1.0 million to $8.0
million).

   We will not record a restructuring liability for the qualifying costs
associated with the Phase 2 events until the criteria required under EITF 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring), and
SAB 100 are met, which will likely be the second or third quarter of 2001.

   Unanticipated changes in our assumptions may cause the estimates stated
above to vary materially. Also, due to the uncertainty of the outcome and
timing of the Phase 2 activities, the impact on our ongoing results of
operations and cash flows is not currently determinable.

   As part of the restructuring activities, pursuant to SFAS 121 and SAB 100,
an impairment assessment was made 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.
Consequently, we preliminarily expect to record an impairment charge in the
first quarter of 2001 of $30 million to $45 million. It is reasonably possible
that the ultimate charge will vary considerably outside of this range depending
on a number of factors, such as the timing and manner of planned disposition
(e.g., sale or shut down) of the exited businesses and the amount of the
proceeds realized, if any, from their sale, and the costs associated with the
shut downs, as the case may be. 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.

                                       31
<PAGE>

   We are actively seeking buyers for the businesses to be exited and related
assets. However, no assurance can be given that we will be able to sell these
assets and we have no certainty as to the amount of proceeds we will realize
from any such sale.

   In connection with the above events and circumstances, we also have re-
evaluated the assigned lives used for depreciating and amortizing, as the case
may be, our long-lived assets and have concluded that our existing lives
continue to be appropriate under present accounting rules.

   If we are successful in implementing our restructuring plans and disposing
of these businesses, our future results of operations and operating cash flows
will be significantly impacted. The ERP and CRM hosting and professional
services businesses which we plan to exit had revenues and EBITDA losses in
2000 of approximately $54.0 million and $8.0 million, respectively.
Accordingly, as a result of exiting these businesses we expect our revenues and
related operating expenses to decline. Overall, these restructuring initiatives
are designed to improve EBITDA results and cash flows for the business.
However, due to the uncertainties of the timing and outcome of these
activities, we cannot currently predict with any certainty their impact on
revenues and EBITDA in 2001 and beyond.

Results of Operations

   Our revenues are primarily derived from application hosting, Web hosting and
ASP professional services. We sell application hosting 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 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. SAB 101 allows companies to report any changes in revenue recognition
related to adopting its provisions as an accounting change at the time of
implementation in accordance with APB Opinion No. 20, "Accounting Changes."

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

   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 received.

   Certain customer contracts contain multiple elements under which we sell a
combination of any of the following: application hosting and professional
services, computer equipment, software licenses and maintenance services to
customers. We have determined that objective evidence of fair value exists for
all

                                       32
<PAGE>

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, provides the end-user with a
choice from various vendor products, sets final prices and performs certain
services. Additionally, we have credit and back-end inventory risk. As of
December 31, 2000, we had approximately $2.7 million of computer hardware and
software inventory on hand.

   As a software reseller 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 ASP 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.

                                       33
<PAGE>

Years Ended December 31, 2000 and 1999

   The following table sets forth in comparative format the historical results
of operations for 2000 and 1999.

<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                         ---------------------------------------
                                            2000      % of      1999      % of
                                         Historical Revenues Historical Revenues
                                         ---------- -------- ---------- --------
                                                  (dollars in millions)
<S>                                      <C>        <C>      <C>        <C>
Service revenues........................  $ 120.5      76%     $ 43.7       93%
Product revenues........................     37.6      24%        3.4        7%
                                          -------     ---      ------     ----
    Total revenues......................    158.1     100%       47.1      100%

Costs and expenses:
  Cost of service revenues..............     83.6      53%       24.8       53%
  Cost of product revenues..............     30.1      19%        2.7        6%
  Sales and marketing...................     42.9      27%       17.2       37%
  General and administrative............     80.9      51%       29.1       62%
  Depreciation..........................     18.4      12%        6.0       13%
  Amortization of intangibles...........     46.6      29%       22.1       47%
  Restructuring charge..................      2.5       2%
                                          -------     ---      ------     ----
                                            305.0     193%      101.9      216%
                                          -------     ---      ------     ----
Operating loss..........................   (146.9)    -93%      (54.8)    -116%
Other income and expenses...............     (4.3)     -3%        0.9        2%
                                          -------     ---      ------     ----
Net loss................................  $(151.2)    -96%     $(53.9)    -114%
                                          =======     ===      ======     ====
</TABLE>

Revenues

   Revenues increased $111.0 million, from $47.1 million in 1999 to $158.1
million in 2000. The increase in revenues was due primarily to the 15
acquisitions consummated during 2000 and 1999, and organic growth of
approximately 22%, which is calculated based on the increase in pro forma
revenues (giving effect to all acquisitions as if they occurred on January 1,
1999) from $143.8 million in 1999 to $175.1 million in 2000.

   Application hosting revenues increased $32.6 million, from $15.6 million in
1999 to $48.2 million in 2000. This increase was due primarily to acquisitions
completed during 2000 and 1999. Web hosting revenues increased $2.7 million,
from $16.9 million in 1999 to $19.6 million in 2000, resulting from customer
growth generated from increased marketing efforts. ASP professional services
revenues increased $71.5 million, from $11.5 million in 1999 to $83.0 million
in 2000. This increase was due primarily to acquisitions completed during 2000
and the second half of 1999.

Cost of Revenues

   Cost of revenues increased by $86.2 million, from $27.5 million in 1999 to
$113.7 million in 2000. This increase was due primarily to the 15 acquisitions
consummated during 1999 and 2000, and increased costs, including but not
limited to additional data center facilities and personnel, to support growth.
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 and increased levels of staffing to support
anticipated growth.

   Gross margin was 28% for 2000 as compared to 42% for 1999. The lower gross
margins are the result of an increase in the proportion of revenue from ASP
professional services and products, which typically generate lower gross
margins as compared with our hosting services. The increase in ASP
professional services and product revenue was primarily the result of the
completion of six acquisitions of such businesses since the second half of
1999.

                                      34
<PAGE>

Sales and Marketing

   Sales and marketing expense increased by $25.7 million, from $17.2 million
in 1999 to $42.9 million in 2000. This increase was attributable in part to the
15 acquisitions consummated during 1999 and 2000. Additionally, we continued
the expansion of our direct sales force, increased marketing efforts focusing
on sales lead generation and brand promotion, and developed reseller and
referral partner channels. We expect sales and marketing expenses to continue
to be a substantial component of our cost structure in future periods to
support anticipated revenue growth.

General and Administrative

   General and administrative expense increased by $51.8 million, from $29.1
million in 1999 to $80.9 million in 2000. This increase in general and
administrative expense was attributable to the 15 acquisitions consummated
during 1999 and 2000, non-cash compensation charges of $15.1 million primarily
related to the CEO Option Grant described below, and increased investments in
internal systems and facilities, and staffing levels with respect to the
customer service, billing, accounting and human resources functions to support
revenue growth.

   In February 2000, we issued options to purchase 1,500,000 shares of Common
Stock to our Chief Executive Officer at exercise prices that were below the
market price of our Common Stock at the date of grant (CEO Option Grant). Such
options were not issued pursuant to our Stock Option Plan. In total, the
intrinsic value of these options approximated $30.0 million, and for the year
ended December 31, 2000, we charged $13.8 million to non-cash compensation
expense in connection with this arrangement.

Restructuring Charge

   In September 2000, we announced a plan to accelerate our acquisition
integration program by consolidating geographically dispersed functions. The
plan includes 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 workforce reduction plan
includes job eliminations in operations and information systems, customer care,
sales, marketing and business development, and finance and administration.

   In connection therewith, we recorded a restructuring charge of $2.5 million
during the three months ended September 30, 2000. As of December 31, 2000, $1.5
million of the restructuring reserve was utilized and 112 employees were
terminated under the plan. The plan is expected to be completed by June 30,
2001. After the completion of this restructuring effort we expect to realize
annualized cost savings ranging from $8.0 million to $12.0 million. The
foregoing is a forward-looking statement and is based on our current business
plan and the assumptions on which it is based.

Depreciation

   Depreciation expense increased by $12.3 million, from $6.1 million in 1999
to $18.4 million in 2000. The increase in depreciation expense was attributable
to the 15 acquisitions consummated during 1999 and 2000, and investments in
network software and equipment, furniture and office equipment, and leasehold
improvements during 2000 and the second half of 1999. 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 to support
revenue growth.

Amortization of Intangible Assets

   Amortization expense increased by $24.5 million, from $22.1 million in 1999
to $46.6 million in 2000. This increase in amortization expense was
attributable to the 15 acquisitions consummated during 1999 and 2000.

                                       35
<PAGE>

Interest income (expense), net

   Net interest income (expense) decreased by $6.1 million, from $0.9 million
of net interest income in 1999 to $5.2 million of net interest expense in
2000. Interest expense increased $12.7 million, from $0.5 million in 1999 to
$13.2 million in 2000 as a result of the issuance of the 7% Subordinated
Convertible Notes in February 2000 and capital lease obligations to finance
equipment and furniture purchases during 2000. Interest income increased $6.6
million, from $1.4 million in 1999 to $8.0 million in 2000. This increase
primarily was the result of income associated with investments of cash
proceeds from the issuance of debt and equity financings completed in 2000.

Years Ended December 31, 1999 and 1998

   The following table sets forth in comparative format the historical results
of operations for 1999 and 1998.

<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                        ---------------------------------------
                                           1999      % of      1998      % of
                                        Historical Revenues Historical Revenues
                                        ---------- -------- ---------- --------
                                                 (dollars in millions)
<S>                                     <C>        <C>      <C>        <C>
Revenues...............................   $ 47.1      100%    $  4.9      100%
Costs and expenses:
  Cost of revenues.....................     27.5       58%       3.2       65%
  Sales and marketing..................     17.2       37%       2.6       53%
  General and administrative...........     29.1       62%       6.8      139%
  Depreciation.........................      6.0       13%       0.7       14%
  Amortization of intangibles..........     22.1       47%       2.4       49%
                                          ------     ----     ------     ----
                                           101.9      216%      15.7      320%
Interest and other income, net.........      0.9        2%       0.1        2%
                                          ------     ----     ------     ----
Net loss...............................   $(53.9)    -114%    $(10.7)    -218%
                                          ======     ====     ======     ====
</TABLE>

Revenues

   Revenues increased $42.2 million, from $4.9 million in 1998 to $47.1
million in 1999. The increase in revenues was due primarily to the 21
acquisitions consummated during 1998 and 1999.

Cost of Revenues

   Cost of revenues increased by $24.3 million, from $3.2 million in 1998 to
$27.5 million in 1999. This increase was due primarily to the 21 acquisitions
consummated during 1998 and 1999, and increased costs to support growth.

Sales and Marketing

   Sales and marketing expense increased by $14.6 million, from $2.6 million
in 1998 to $17.2 million in 1999. This increase was attributable in part to
the 21 acquisitions consummated during 1998 and 1999. A key component of our
revenue growth strategy in 1999 was to significantly increase our sales and
marketing activities which will included the expansion of our sales force,
increased marketing efforts focused on sales lead generation, and the
development of reseller and referral partner channels. As a result, sales and
marketing expenses was a substantial component of our cost structure.

General and Administrative

   General and administrative expense increased by $22.3 million, from $6.8
million in 1998 to $29.1 million in 1999. This increase in general and
administrative expense was attributable to the 21 acquisitions consummated
during 1998 and 1999, an increase of $1.2 million in non-cash compensation
expense, and increased investments in infrastructure and levels of staffing
with respect to the billing, accounting, human resources and customer service
functions to support revenue growth.

                                      36
<PAGE>

Depreciation

   Depreciation expense increased by $5.3 million, from $0.7 million in 1998 to
$6.0 million in 1999. The increase in depreciation expense was attributable to
the 21 acquisitions consummated during 1998 and 1999 and our investment in
equipment, furniture and construction to complete and equip our data centers in
Atlanta, Georgia and Vienna, Virginia.

Amortization

   Amortization expense increased by $19.7 million, from $2.4 million in 1998
to $22.1 million in 1999. This increase in amortization expense was
attributable to the 21 acquisitions consummated during 1998 and 1999.

Liquidity and Capital Resources

   We have financed our operations and acquisitions primarily from private
placements of debt and equity, and our initial public offering of common stock.
We had $79.9 million in cash, cash equivalents and short-term investments at
December 31, 2000, including $5.3 million held by Interliant Europe, a
consolidated subsidiary that is 51% owned by us.

   On April 16, 2001, we entered into a definitive agreement with affiliates of
Charterhouse Group International, Inc. (Charterhouse) and Softbank Technology
Ventures VI, L.P. and its related funds (Softbank) under which they agreed to
purchase, in the aggregate, 190 units (Units), each Unit consisting of $100,000
principal amount of 8% Convertible Subordinated Notes (Notes) and 27,273
warrants (Warrants) for the purchase of shares of our Common Stock for a total
sales price of $19.0 million. Under the definitive agreement we have the right
to require Charterhouse and Softbank to purchase their respective share of the
Units, or a portion thereof, through April 17, 2002. The 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
Notes. Interest payments will be payable on the last day of each calendar
quarter by the issuance of additional Notes. The Notes mature on June 30, 2003.
The Warrants have an exercise price of $1.25 per share and expire five years
after issuance. At the same time, we entered into a definitive agreement with
EYT, Inc. (EYT), an entity controlled by Charterhouse and Softbank, under which
EYT committed to repurchase from us our investment in EYT for a purchase price
of $1 million, which approximates our cost of such investment. This asset is
classified as other assets on our balance sheet as of December 31, 2000. The
closing of the EYT transaction shall take place contemporaneously with the
closing of the first sale of Units to Charterhouse and Softbank. The above
transactions are collectively referred to herein as the "$20 Million Funding."

   During the year ended December 31, 2000, we used $80.2 million in operating
cash activities. The net loss of $151.2 million included non-cash charges for
depreciation, amortization and other non-cash charges totaling
$83.3 million. Cash was used to fund increases in accounts receivable and
prepaid and other current assets totaling $18.5 million, offset by a net
increase in operating liabilities of $8.5 million.

   In January and February 2000, we raised $27.5 million in strategic funding
from equity investments by Dell Computer, Network Solutions and BMC Software.

   In February and March 2000, we sold $164.8 million of 7% Convertible
Subordinated Notes in a private placement. Semi-annual interest payments of
$5.4 million commenced in August 2000. The notes mature on February 16, 2005.
Upon the occurrence of certain events, we may redeem the notes prior to
maturity.

   During the year ended December 31, 2000, we added $69.0 million of network
software and equipment, furniture and office equipment and leasehold
improvements. Such fixed asset additions were primarily driven by our data
center and customer care facilities' expansion and customer-driven computer
equipment and software purchases to support revenue growth. We currently have
available lease facilities totaling

                                       37
<PAGE>

approximately $37.1 million, of which $19.4 million was utilized as of December
31, 2000. The total lease capacity includes a $16.5 million lease facility with
Dell Financial Services (DFS), under which we are financing all Dell equipment
purchases. Of the $69.0 million of fixed asset additions, approximately $17.0
million of computer equipment was financed, including $11.6 million under the
DFS facility. We expect to continue such financing activities and obtain
additional equipment financing, although no assurances can be given that
additional financing will be available when needed.

   In addition to funding ongoing operations and capital expenditures, our
principal commitments consist of non-cancelable operating leases, semi-annual
interest payments due to holders of 7% Convertible Subordinated Notes and
contingent earnout payments to certain sellers of operating companies acquired
by us.

   We completed six acquisitions in 2000 (see Note 5 of Notes to Consolidated
Financial Statements for the year ended December 31, 2000, included in this
Form 10-K). The total cash consideration for these acquisitions, and contingent
earnout payments in connection with acquisitions completed prior to 2000, was
$25.7 million, net of acquired cash. If all targets for earnouts entered into
through December 31, 2000 are achieved in full, the maximum remaining cash
consideration due pursuant to these earnouts will be $4.7 million and $1.7
million in 2001 and 2002, respectively. In addition, certain of these
agreements provide for issuance of common stock in lieu of cash, at our option.

   We believe that our existing cash, cash equivalents and short-term
investments, together with the $20 Million Funding, will provide sufficient
funds to enable us to fund our operating needs and meet our obligations through
December 31, 2001. The foregoing is a forward-looking statement and is based on
our current business plan and the assumptions on which it is based, including
our ability to successfully implement our restructuring plans and achieve the
cost savings and cash generation benefits they are designed to produce, as well
as to successfully integrate acquisitions and achieve the expected benefits,
such as operational efficiencies and revenue improvements from cross-selling
opportunities. If our plans change or our assumptions prove to be inaccurate,
we may be required to seek additional capital sooner than we currently
anticipate. As previously discussed herein, we plan to sell certain businesses
and assets and use any net proceeds from such sales to fund continuing
operations. We may also seek to raise additional capital to take advantage of
favorable conditions in the capital markets. It is highly likely that after
2001 we will need additional funds to conduct our operations, continue our
internal growth programs and fund debt service obligations. In order to fund
the repayment of our existing debt service obligations, we will either have to
increase revenues without a commensurate increase in costs to generate
sufficient cash from operations, refinance existing debt obligations, raise
additional cash through debt or equity financings, or execute a combination
thereof. We cannot be assured, however, that if we need or seek additional
capital that we will be successful in obtaining it.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   We have limited exposure to financial market risks, including changes in
interest rates. At December 31, 2000, we had short-term investments of
approximately $53.2 million. These short-term investments consist of highly
liquid investments in debt obligations of highly rated entities with maturities
of between 90 days and one year. These investments are subject to interest rate
risk and will fall in value if market interest rates
increase. We expect to hold these investments until maturity, and therefore
expect to realize the full value of these investments, even though changes in
interest rates may affect their value prior to maturity. If interest rates
decline over time, this will result in a reduction of our interest income by
approximately $0.5 million annually for each percentage decrease, based on the
amount of short-term investments on hand as of December 31, 2000.

   Substantially all of our indebtedness bears interest at a fixed rate to
maturity which therefore minimizes our exposure to interest rate fluctuations.

                                       38
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                                        <C>
Report of Independent Auditors............................................  40

Consolidated Balance Sheets as of December 31, 2000 and 1999..............  41

Consolidated Statements of Operations for the Years ended December 31,
 2000, 1999 and 1998......................................................  42

Consolidated Statements of Stockholders' Equity for the Years Ended
 December 31, 2000, 1999 and 1998.........................................  43

Consolidated Statements of Cash Flows for the Years ended December 31,
 2000, 1999 and 1998......................................................  44

Notes to Consolidated Financial Statements................................  45
</TABLE>

                                       39
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Interliant, Inc.

   We have audited the accompanying consolidated balance sheets of Interliant,
Inc. (the "Company") as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

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

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Interliant,
Inc. at December 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, 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

Boston, Massachusetts
February 16, 2001, except for Note 15
and the third, fourth and fifth paragraphs
of Note 1, as to which the date is April 16, 2001.

                                       40
<PAGE>

                                INTERLIANT, INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                          December 31,
                                                    --------------------------
                                                        2000          1999
                                                    ------------  ------------
<S>                                                 <C>           <C>
                      Assets
Current assets:
  Cash and cash equivalents........................ $ 26,678,329  $ 27,608,039
  Restricted cash..................................    1,557,529     1,011,772
  Short-term investments...........................   53,233,387     3,612,229
  Accounts receivable, net of allowances of $2.5
   million and
   $1.4 million at December 31, 2000 and 1999,
   respectively....................................   35,032,640    13,981,358
  Prepaid and other current assets.................   10,473,251     3,469,763
  Payroll and benefit funds held for customers.....    3,862,856
                                                    ------------  ------------
    Total current assets...........................  130,837,992    49,683,161
                                                    ------------  ------------
  Property and equipment, net......................   77,023,282    18,199,010
  Intangibles, net.................................  126,389,311    93,636,201
  Other assets.....................................    8,101,395     1,356,696
                                                    ------------  ------------
    Total assets................................... $342,351,980  $162,875,068
                                                    ============  ============

       Liabilities and stockholders' equity
Current liabilities:
  Notes payable and current portion of long-term
   debt and
   capital lease obligations....................... $ 11,789,385  $  1,211,835
  Accounts payable.................................   10,691,074     8,359,040
  Accrued expenses.................................   36,610,486     7,342,551
  Deferred revenue.................................    7,989,950     5,883,549
  Payroll and benefit funds held for customers.....    3,862,856
  Restructuring reserve............................    1,042,555
                                                    ------------  ------------
    Total current liabilities......................   71,986,306    22,796,975
                                                    ------------  ------------
Long-term debt and capital lease obligations, less
 current portion...................................  177,664,647     2,460,433
Other long-term liabilities........................      195,961        42,778
Minority interest in subsidiary....................    5,227,593
Stockholders' equity:..............................
  Preferred stock, $.01 par value; 1,000,000 shares
   authorized; 0 shares issued and outstanding.....
  Common stock, $.01 par value; 200,000,000 shares
   authorized; 48,796,218, and 44,601,141 shares
   issued and outstanding at
   December 31, 2000 and 1999, respectively........      487,962       446,011
  Additional paid-in capital.......................  319,821,622   201,922,128
  Deferred compensation............................  (16,336,488)
  Accumulated deficit.............................. (216,051,382)  (64,822,097)
  Accumulated other comprehensive (loss) income....     (644,241)       28,840
                                                    ------------  ------------
    Total stockholders' equity.....................   87,277,473   137,574,882
                                                    ------------  ------------
    Total liabilities and stockholders' equity..... $342,351,980  $162,875,068
                                                    ============  ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       41
<PAGE>

                                INTERLIANT, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                            Year Ended December 31,
                                   -------------------------------------------
                                       2000           1999           1998
                                   -------------  -------------  -------------
<S>                                <C>            <C>            <C>
Revenues:
  Service revenues................ $ 120,517,732  $  43,691,221  $   4,905,027
  Product revenues................    37,552,743      3,422,874
                                   -------------  -------------  -------------
    Total Revenues................   158,070,475     47,114,095      4,905,027
Costs and expenses:
  Cost of service revenues
   (exclusive of depreciation)....    83,598,375     24,767,708      3,236,385
  Cost of product revenues........    30,110,645      2,746,002
  Sales and marketing.............    42,869,983     17,236,121      2,555,035
  General and administrative
   (exclusive of non-cash
   compensation shown below)......    65,847,011     27,075,902      6,015,744
  Non-cash compensation...........    15,105,643      1,986,694        832,821
  Depreciation....................    18,356,532      6,051,296        696,039
  Amortization of intangibles.....    46,556,339     22,068,815      2,439,426
  Restructuring charge............     2,500,000
                                   -------------  -------------  -------------
                                     304,944,528    101,932,538     15,775,450
                                   -------------  -------------  -------------
Operating loss....................  (146,874,053)   (54,818,443)   (10,870,423)
Other income......................       128,330
Interest income (expense), net of
 $7,955,253 of interest income in
 2000.............................    (5,247,488)       886,444        138,073
                                   -------------  -------------  -------------
Loss before minority interest and
 cumulative effect of accounting
 change...........................  (151,993,211)   (53,931,999)   (10,732,350)
Minority interest.................     1,983,638
                                   -------------  -------------  -------------
Loss before cumulative effect of
 accounting change................  (150,009,573)   (53,931,999)   (10,732,350)
Cumulative effect of accounting
 change...........................    (1,219,712)
                                   -------------  -------------  -------------
Net loss.......................... $(151,229,285) $ (53,931,999) $ (10,732,350)
                                   =============  =============  =============
Basic and diluted loss per share:
  Loss before cumulative effect of
   accounting change.............. $       (3.15) $       (1.50) $       (1.22)
  Cumulative effect of accounting
   change.........................         (0.03)
                                   -------------  -------------  -------------
  Net loss........................ $       (3.18) $       (1.50) $       (1.22)
                                   =============  =============  =============
Weighted average shares
 outstanding--basic and diluted...    47,547,721     35,837,523      8,799,432
                                   =============  =============  =============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       42
<PAGE>

                               INTERLIANT, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                    Common Stock                                                Accumulated
                                 -------------------  Additional                                   Other         Total
                  Comprehensive               Par      Paid-in      Deferred     Accumulated   Comprehensive Stockholders'
                  Income (Loss)    Shares    Value     Capital    Compensation     Deficit     (Loss) Income    Equity
                  -------------  ---------- -------- ------------ ------------  -------------  ------------- -------------
<S>               <C>            <C>        <C>      <C>          <C>           <C>            <C>           <C>
Balance as of
December 31,
1997............  $    (157,748)  3,000,000 $ 30,000 $  4,970,000               $    (157,748)               $   4,842,252
Sales of common
stock in private
placements......                 15,600,000  156,000   25,884,000                                               26,040,000
Deferred
compensation....                    475,000    4,750    2,600,750   (2,602,250)                                      3,250
Amortization of
deferred
compensation....                                                       832,821                                     832,821
Issuance of
common stock in
connection with
acquisitions....                    142,197    1,422      705,584                                                  707,006
Net loss........    (10,732,350)
                  -------------  ---------- -------- ------------ ------------  -------------    ---------   -------------
Total
comprehensive
income (loss)...    (10,732,350)
Balance as of
December 31,
1998............                 19,217,197  192,172   34,160,334   (1,769,429)   (10,890,098)                  21,692,979
Sales of common
stock in private
placements......                  6,600,000   66,000   10,934,000                                               11,000,000
Exercise of
stock options
and warrants....                  1,524,491   15,244    5,671,875                                                5,687,119
Common stock
issued and stock
options
granted in
connection with
acquisitions....                  6,561,795   65,618   65,735,891                                               65,801,509
Conversion of
preferred
stock...........                  2,647,658   26,477   12,973,524                                               13,000,001
Initial public
offering of
common stock,
net
of offering
costs...........                  8,050,000   80,500   72,446,504                                               72,527,004
Amortization of
deferred
compensation....                                                     1,769,429                                   1,769,429
Foreign currency
translation
adjustment......         28,840                                                                     28,840          28,840
Net loss........    (53,931,999)                                                  (53,931,999)                 (53,931,999)
                  -------------  ---------- -------- ------------ ------------  -------------    ---------   -------------
Total
comprehensive
income (loss)...    (53,903,159)
Balance as of
December 31,
1999............                 44,601,141  446,011  201,922,128                 (64,822,097)      28,840     137,574,882
Sales of common
stock in private
placements......                    787,881    7,879   25,977,497                                               25,985,376
Exercise of
stock options
and warrants....                  1,428,674   14,287    2,491,013                                                2,505,300
Common stock
issued and stock
options granted
in connection
with
acquisitions....                  1,978,522   19,785   57,988,853                                               58,008,638
Deferred
compensatory
stock options...                                       31,442,131  (31,442,131)
Amortization of
deferred
compensation....                                                    15,105,643                                  15,105,643
Foreign currency
translation
adjustment......       (673,081)                                                                  (673,081)       (673,081)
Net loss........   (151,229,285)                                                 (151,229,285)                (151,229,285)
                  -------------  ---------- -------- ------------ ------------  -------------    ---------   -------------
Total
comprehensive
income (loss)...  $(151,902,366)
                  =============
Balance as of
December 31,
2000............                 48,796,218 $487,962 $319,821,622 $(16,336,488) $(216,051,382)   $(644,241)  $  87,277,473
                                 ========== ======== ============ ============  =============    =========   =============
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       43
<PAGE>

                                INTERLIANT, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                             Year Ended December 31,
                                     -----------------------------------------
                                         2000           1999          1998
                                     -------------  ------------  ------------
<S>                                  <C>            <C>           <C>
OPERATING ACTIVITIES
 Net loss........................... $(151,229,285) $(53,931,999) $(10,732,350)
 Adjustments to reconcile net loss
  to net cash used in operating
  activities:
 Provision for uncollectible
  accounts..........................     2,867,608     1,585,254       320,000
 Depreciation and amortization......    64,912,871    28,120,111     3,135,465
 Non-cash compensation, including
  amortization of deferred
  compensation......................    15,105,643     1,986,694       832,821
 Non-cash charges recorded in
  connection with restructuring.....       392,567
 Minority interest in earnings of
  subsidiary........................    (1,983,638)
 Other non-cash items...............      (135,403)      129,957
 Changes in operating assets and
  liabilities:
  Restricted cash...................      (545,757)   (1,011,772)
  Accounts receivable...............   (13,076,518)   (4,947,423)     (980,391)
  Prepaid and other current
   assets...........................    (5,435,745)   (1,873,117)     (602,457)
  Other assets......................       503,334       (90,527)
  Accounts payable..................    (3,535,857)    3,478,876       639,607
  Accrued expenses..................     9,415,584     1,111,999     1,140,135
  Deferred revenue..................     1,542,867     1,289,453       246,502
  Restructuring reserve.............     1,042,555
                                     -------------  ------------  ------------
   Net cash used in operating
    activities......................   (80,159,174)  (24,152,494)   (6,000,668)
                                     -------------  ------------  ------------
INVESTING ACTIVITIES
 Purchases of property and
  equipment.........................   (39,406,404)  (12,084,072)   (4,321,577)
 Payments issued in connection with
  non-compete agreements............            --    (2,000,000)
 Investments in long-term assets....    (1,000,000)     (952,969)
 Purchases of short-term
  investments.......................  (213,348,090)   (3,612,229)
 Sales of short-term investments....   163,726,932
 Acquisitions of businesses, net of
  cash acquired.....................   (25,675,249)  (27,809,253)  (13,597,558)
                                     -------------  ------------  ------------
   Net cash used in investing
    activities......................  (115,702,811)  (46,458,523)  (17,919,135)
                                     -------------  ------------  ------------
FINANCING ACTIVITIES
 Proceeds from sales of common
  stock, net of offering costs of
  $1.5 million, $7.9 million and
  $0.2 million in 2000, 1999 and
  1998, respectively................    25,985,376    83,527,004    29,821,078
 Proceeds from issuance of Series A
  redeemable convertible preferred
  stock.............................                  13,000,001
 Proceeds from issuance of 7%
  Subordinated Convertible Notes,
  net of offering costs of $6.1
  million...........................   158,689,050
 Proceeds from exercise of options
  and warrants......................     2,505,300     5,469,854
 Proceeds from issuance of debt and
  capital lease financing...........     7,581,072     2,550,303
 Repayment of debt and capital
  leases............................    (6,476,530)  (13,141,466)
 Minority investment in subsidiary..     7,211,231
                                     -------------  ------------  ------------
   Net cash provided by financing
    activities......................   195,495,499    91,405,696    29,821,078
                                     -------------  ------------  ------------
Effect of exchange rate changes on
 cash...............................      (563,224)
Net (decrease) increase in cash and
 cash equivalents...................      (929,710)   20,794,679     5,901,275
Cash and cash equivalents at
 beginning of period................    27,608,039     6,813,360       912,085
                                     -------------  ------------  ------------
Cash and cash equivalents at end of
 period............................. $  26,678,329  $ 27,608,039  $  6,813,360
                                     =============  ============  ============
SUPPLEMENTAL DISCLOSURES, INCLUDING
 NONCASH INVESTING AND FINANCING
 ACTIVITIES
 Cash paid for interest............. $   7,229,120  $    468,408
 Stock issued and options granted
  for acquisitions.................. $  58,008,638  $ 65,801,509  $    707,006
 Stock issued for compensation
  agreements........................                              $  2,602,250
 Conversion of Series A redeemable
  convertible preferred stock into
  common stock......................                $ 13,000,001
 Debt assumed or issued in
  acquisitions...................... $   1,262,341  $ 22,250,186
 Equipment and furniture acquired
  under capital lease obligations... $  16,998,652
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       44
<PAGE>

                                INTERLIANT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Business

   Interliant, Inc. (the Company) is a leading global application service
provider (ASP), providing customers with a focused suite of outsourced e-
business solutions. The Company's service offerings combine hosting
infrastructure with professional service expertise, which enable the rapid
design, implementation, deployment and management of cost-effective e-business
solutions for its customers.

   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 majority and controlling shareholder of the Company.
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, 2000, the Company has incurred
net losses and negative cash flows from operations, and also has expended
significant funds for capital expenditures (property and equipment) and the
acquisition of businesses. The Company's principal sources of cash to fund the
aforementioned activities were from the sale of $152.3 million in Common and
Preferred Stock in public and private sales and the sale of $164.8 million of
Convertible Subordinated Notes. As of December 31, 2000, the Company had $79.9
million in cash, cash equivalents and short-term investments, of which $74.6
million is available for use by the Company's wholly-owned businesses; $5.3
million is available for use by the Company's 51% owned subsidiary, Interliant
Europe B.V. The Company's financial forecast indicates that such funds on hand
at December 31, 2000 will not alone be sufficient to fund operations, including
expected restructuring costs (see Note 15), through 2001. The Company has,
however, entered into definitive agreements for the $20 Million Funding (see
Note 15).

   The Company believes that the funds on hand as of December 31, 2000,
combined with the committed Charterhouse and Softbank investments will be
sufficient to fund its operations and meet its obligations through December 31,
2001.

   Further, in March 2001, the Company made a decision to put up for sale
certain businesses and assets which are no longer core to its ongoing business
plans. The proceeds, if any, from such sales will be used to fund the Company's
ongoing operations (see Note 15).

2. Summary of Significant Accounting Policies

 Basis of Presentation

   The consolidated financial statements include the accounts of the Company
and its wholly and majority owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.

 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 the
equivalent of cash. Cash equivalents, which consist primarily of money market
accounts and commercial paper, are carried at cost, which approximates market
value.

 Short-term Investments

   Short-term investments, consisting of commercial paper with maturities
ranging from three months to one year, are classified as available for sale and
are carried at cost, which approximates fair market value.

                                       45
<PAGE>

 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.

 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, 2000, the Company's cash, cash equivalents and short-term
investments are deposited with various domestic and foreign financial
institutions. With respect to accounts receivable, the Company's customer base
is dispersed across many geographic areas. 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 disclosure of 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 betterments
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:

<TABLE>
   <S>                       <C>
   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
</TABLE>

 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 27 hosting and related Internet professional services
companies. Such assets are being amortized on a straight-line basis over
periods ranging from one to five years (see Note 4).

 Impairment of Long-Lived Assets

   The Company continually reviews amortization periods and the carrying value
of long-lived assets, including property and equipment, and intangible assets
to determine whether or not there are any indications of reduction in useful
lives or impairments. With respect to intangible assets, including goodwill,
certain events that would cause the Company to conduct an impairment assessment
include significant losses of customers or acquired workforce, or if operating
results of acquired businesses continually failed to meet management's
performance expectations. If after conducting such an assessment, indications
of impairment are present in long-lived assets, the estimated future
undiscounted cash flows associated with the corresponding assets would be
compared to their carrying amounts to determine if a change in useful life or a
write-down to fair value is necessary.

                                       46
<PAGE>

 Revenue Recognition

   The Company's revenues are primarily derived from application hosting, Web
hosting and ASP professional services.

   The Company sells its application hosting 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 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. SAB 101 allows companies to report any changes in revenue recognition
related to adopting its provisions as an accounting change at the time of
implementation in accordance with APB Opinion No. 20, "Accounting Changes."

   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. The pro forma effect of
this charge on 1999 and 1998 operations is not presented as the amounts are not
material.

   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 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 accepted by the customer or when customer acceptance is
received.

   Certain of the Company's contracts contain multiple-elements under which the
Company sells a combination of any of the following: application hosting 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
maintenance over the same term as the maintenance revenue pursuant to SAB 101
as these costs are direct and incremental.

   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 Revenue Gross 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. As of December 31, 2000, the Company had
approximately $2.7 million of computer hardware and software inventory on hand.

   The Company, as a software reseller, applies 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, the Company

                                       47
<PAGE>

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, 2000, 1999 and 1998 were $8.7 million, $6.0 million and
$0.7 million, respectively.

 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 bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.

 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 shares 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, 2000, 1999 and 1998, the
number of potentially dilutive shares of common stock were 0.1 million, 2.5
million and 0.4 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 utilizing 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 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 FASB Statement 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.

 Derivatives and Hedging Activities

   In 2000, the Company adopted FASB Statement 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.


                                       48
<PAGE>

 Reclassifications

   Certain 1999 and 1998 amounts have been reclassified to conform to the 2000
presentation.

3. Property and Equipment

   Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                             December 31,
                                                       ------------------------
                                                           2000        1999
                                                       ------------ -----------
   <S>                                                 <C>          <C>
   Network software and equipment..................... $ 76,648,238 $18,693,426
   Furniture, fixtures and office equipment...........    6,920,551   2,081,599
   Leasehold improvements.............................   18,129,798   3,800,282
                                                       ------------ -----------
                                                        101,698,587  24,575,307
   Less accumulated depreciation and amortization.....   24,675,305   6,376,297
                                                       ------------ -----------
                                                       $ 77,023,282 $18,199,010
                                                       ============ ===========
</TABLE>


   Assets financed under capital leases were $17.0 million and $3.9 million in
2000 and 1999, respectively. Depreciation expense, including depreciation of
assets under capital leases and amortization of software and leasehold
improvements, amounted to $18.4 million, $6.1 million, $0.7 million for the
years ended 2000, 1999 and 1998, respectively.

4. Intangible Assets

   The Company has 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:

<TABLE>
<CAPTION>
                                                December 31,
                                          ------------------------- Amortization
                                              2000         1999        Period
                                          ------------ ------------ ------------
   <S>                                    <C>          <C>          <C>
   Covenants not to compete.............. $ 25,075,302 $ 19,275,302  1-5 Years
   Customer lists........................   38,155,369   22,605,369    3 Years
   Assembled work force..................   15,677,031    6,877,031    3 Years
   Trade names...........................    6,789,247    6,773,983    3 Years
   Goodwill..............................  111,491,548   62,610,535    5 Years
                                          ------------ ------------
                                           197,188,497  118,142,220
   Less accumulated amortization.........   70,799,186   24,506,019
                                          ------------ ------------
                                          $126,389,311 $ 93,636,201
                                          ============ ============
</TABLE>

   Amortization expense amounted to $46.6 million, $22.1 million and $2.4
million in 2000, 1999 and 1998, respectively.

5. Acquisitions

   Since inception, the Company acquired 27 businesses at an aggregate cost of
$210.2 million, excluding assumed liabilities. Each of the acquisitions has
been accounted for using the purchase method of accounting. The operations of
each of the acquired companies are included in the operating results of the
Company from their respective date of acquisition.

                                       49
<PAGE>

   The following is a summary of acquisitions:

 2000 Acquisitions

   In February 2000, the Company purchased all of the outstanding stock of Soft
Link, Inc., a provider of Enterprise Resource Planning (ERP) solutions based on
PeopleSoft software. The purchase price consisted of $18.1 million in cash and
0.3 million shares of the Company's common stock (Common Stock) valued at
$37.00 per share. The agreement, as amended, provides for contingent
consideration, in the amount of 0.25 million shares of Common Stock based on
performance for 2000 and $0.5 million in Common Stock if certain performance
criteria are achieved in the year ended December 31, 2001. The payment of any
contingent consideration will be recorded as additional purchase price.

   In February 2000, the Company purchased substantially all of the assets and
assumed certain liabilities of reSOURCE PARTNER, Inc., a provider of hosting
services for outsourced human resources and finance solutions primarily using
PeopleSoft software. The purchase price consisted of $2.5 million in cash and
the issuance of 1.0 million shares of Common Stock valued at $37.00 per share.

   In May 2000, the Company, through its subsidiary Interliant International,
Inc. (International), formed Interliant Europe BV (BV). The shareholders of BV
are International and @viso Limited (@viso) owning 51% and 49%, respectively,
of the outstanding stock of BV. International's investment in BV of
approximately $7.6 million was made with the proceeds of a loan from @viso (See
Note 7). The Company has consolidated the balance sheet and results of
operations of BV as of December 31, 2000 and for the period then ended.

   In May 2000, a subsidiary of BV purchased certain data center assets located
in Paris, France from Cegetel Enterprises, SA. The purchase price was
approximately $1.9 million, of which $0.3 million was paid in cash at closing
and the balance in the form of a non interest-bearing note payable in equal
quarterly installments through February 2002. The entire purchase price has
been allocated to the acquired data center assets.

   In June 2000, the Company purchased all of the outstanding stock of
Knowledge Systems, Inc., an ASP specializing in professional services and
hosting for associations. The purchase price consisted of $0.9 million in cash,
$0.3 million in assumed seller debt and 46,407 shares of Common Stock valued at
$20.80 per share. The agreement also provides for contingent purchase
consideration of up to $5.0 million if certain specified hosting revenues and
gross margin targets are achieved for the twelve-month period ending September
2001. The payment of contingent consideration, if any, will be recorded as
additional purchase price.

   In July 2000, the Company purchased all of the outstanding stock of
Interactive Software, Inc. (ISI) and Milestone Services, Inc. (MSI), providers
of ERP software consulting and related solutions based on Oracle software. The
purchase price for ISI consisted of $1.6 million in cash and 0.2 million shares
of Common Stock valued at $15.96 per share. The purchase price for MSI
consisted of $1.8 million in cash and the issuance of 0.1 million shares of
Common Stock valued at $15.96 per share. The agreements also provide for
contingent purchase consideration of up to $6.5 million, in the aggregate if
certain operating performance and product development targets are achieved
during the twelve-month period ending July 2001 and eighteen-month period
ending January 2002. The contingent consideration is payable in a combination
of cash (not less than 40%) and Common Stock. The payment of contingent
consideration, if any, will be recorded as additional purchase price.

 1999 Acquisitions

   In February 1999, the Company purchased the assets of Digiweb, Inc., a Web
hosting company. The purchase price consisted of cash of $5.0 million and 0.5
million shares of Common Stock valued at $6.67. The agreement provided for
contingent consideration of $1.0 million based on the attainment of specified
revenue and earnings targets. Based on the attainment of the targets, $1.0
million was accrued and recorded as additional purchase price (goodwill) as of
December 31, 1999, and paid in the form of cash ($0.5 million) and Common Stock
(13,179 shares) in 2000.

                                       50
<PAGE>

   In February 1999, the Company purchased certain assets of Telephonetics
International, Inc., a provider of customized music and messages on-hold
recording services to businesses utilizing on-hold telephone equipment. The
purchase price consisted of cash of $3.0 million and 0.1 million shares of
Common Stock valued at $6.67 per share.

   In February 1999, the Company purchased all of the outstanding stock of Net
Daemons Associates, Inc. (NDA), a provider of Web development and
Internetworking services. The purchase price consisted of cash of $0.5 million
and 0.4 million shares of Common Stock valued at $6.67 per share. In addition,
the Company paid certain officers of NDA $2.4 million to induce them to enter
into non-compete agreements and paid approximately $0.4 million to cancel
certain NDA stock options. The agreement also provided for contingent
consideration of $0.5 million in cash and 0.1 million shares of Common Stock if
specified gross revenue and gross margin targets were achieved in the twelve-
month period following the acquisition. During the years ended December 31,
2000 and 1999, such amounts were paid based upon the attainment of specified
targets and were recorded as additional purchase price.

   In March 1999, the Company purchased substantially all of the assets and
assumed specified liabilities of Interliant, Inc., a Texas corporation,
(Interliant Texas), a provider of groupware hosting and application outsourcing
services. The purchase price consisted of $0.1 million in cash and 4.1 million
shares of Common Stock valued at $6.67 per share, and options to purchase up to
1.5 million shares of Common Stock at $0.13 per share. The difference between
the fair value of the vested options at the date of grant ($6.67 per share) and
the exercise price has been included in the purchase price allocation. In
addition, at closing the Company paid $7.9 million on an outstanding note
payable of Interliant Texas, and assumed a note payable in the amount of $8.0
million, which was paid in full in July 1999 from a portion of the proceeds
from the Company's initial public offering of Common Stock (IPO) (See Note 8).

   In May 1999, the Company purchased certain assets and assumed specified
liabilities of Advanced Web Creations, Inc., a Web hosting company. The
purchase price consisted of cash of approximately $0.3 million, 0.2 million
shares of Common Stock valued at $8.50 per share, and a promissory note in the
amount of $2.4 million, which was paid in full in July 1999 from a portion of
the proceeds from the Company's IPO (See Note 8). The agreement also provided
for contingent purchase consideration of $0.4 million, which was accrued and
recorded as additional purchase price as of December 31, 1999, due to the
attainment of specified revenue targets.

   In August 1999, the Company purchased substantially all of the assets of The
Daily-e Corporation, a provider of business process re-engineering and Web
development services. The purchase price consisted of 70,000 shares of the
Common Stock, valued at $11.13 per share. The agreement also provided for
contingent consideration of up to $3.9 million, payable in cash, Common Stock,
or any combination thereof at the Company's option, if specified net revenue
and earnings targets were achieved for the twelve-month period ending July 31,
2000. Through December 31, 2000, the Company paid $0.3 million in cash and
issued 76,190 shares of Common Stock, valued at $1.1 million, in connection
with the attainment of specified targets, which amounts have been recorded as
additional purchase price.

   In September 1999, the Company, through its wholly-owned subsidiary,
International, acquired all of the outstanding stock of Sales Technology
Limited, a United Kingdom-based professional services firm that provides
Customer Relationship Management (CRM) implementation solutions and groupware
application services. The total consideration consisted of cash of $0.4
million, 0.2 million shares of Common Stock valued at $11.23 per share, and
assumed debt of $0.3 million. In addition, contingent consideration of up to
$3.6 million was payable to certain sellers if specified revenue and earnings
targets are achieved during specified periods. In 2000, the Company issued 0.1
million shares of Common Stock valued at $0.6 million in connection with the
attainment of specified targets and has been recorded as additional purchase
price.

   In November 1999, the Company purchased all of the outstanding stock of
Triumph Technologies, Inc. and Triumph Development, Inc., an affiliated company
(collectively, "Triumph"), a provider of comprehensive

                                       51
<PAGE>

Internet professional services and e-business security solutions. The purchase
price consisted of cash of $3.2 million, 0.7 million shares of Common Stock
valued at $15.94 per share, $2.0 million in assumed bank debt that was paid
shortly after closing, and options to purchase 0.1 million shares of Common
Stock at $1.63 per share. The difference between the fair value of the options
at the date of grant ($15.94 per share) and the exercise price has been
included in the purchase price allocation. The agreement also provided for
contingent consideration of up to $3.0 million in cash or shares of Common
Stock, or any combination thereof, if certain revenues and earnings targets are
met for the twelve-month period from December 1, 1999 to November 30, 2000.
During 2000 the Company paid $0.8 million, issued 0.1 million shares of Common
Stock valued at $1.7 million and accrued $0.7 million in connection with
attaining specified targets. The amount accrued at December 31, 2000 was
satisfied with the issuance of 0.1 million shares of Common Stock. The payment
of contingent consideration has been recorded as additional purchase price.

   In December 1999, the Company purchased all of the outstanding stock of The
Jacobson Group, Inc., an Internet professional services firm specializing in
custom application development primarily using the Lotus Notes/Domino platform.
The purchase price consisted of cash of $4.1 million and 0.2 million shares of
Common Stock valued at $24.50 per share. The agreement also provides for
contingent consideration up to $4.8 million if certain revenue and earnings
targets are met during the years ending December 31, 2000 and 2001. At December
31, 2000, based on the attainment of certain targets, the Company accrued $3.1
million, which was paid in a combination of cash ($1.1 million) and Common
Stock (0.5 million shares) in 2001. Such amount has been recorded as additional
purchase price. The payment of additional contingent consideration, if any,
will be recorded as additional purchase price.

 1998 Acquisitions

   During the year ended 1998 the Company acquired the assets of 11 Web hosting
businesses. Total consideration for these acquisitions was $14.9 million and
0.2 million shares of Common Stock valued at $0.7 million.

   In connection with certain of the 1998 acquisitions the Company issued
certain sellers an aggregate of 0.5 million shares of Common Stock that vested
over periods ranging from one to three years. The total value of such stock
($2.6 million) was recorded as deferred compensation and amortized over the
vesting period.

   The allocation of purchase price for the acquisitions completed in 2000 as
reflected in the December 31, 2000 consolidated balance sheet is based on the
Company's initial assessment of the fair value of assets acquired and therefore
preliminary. The allocations may be modified between components of intangible
assets as the Company finalizes the purchase accounting for such acquisitions.

   The following condensed pro forma information presents the unaudited results
of operations of the Company as if the acquisitions completed through December
31, 2000 had occurred on January 1, 1999:

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                  ---------------------------
                                                      2000           1999
                                                  -------------  ------------
   <S>                                            <C>            <C>
   Revenues...................................... $ 175,088,000  $143,833,000
   Net loss before cumulative effect of
    accounting change............................  (157,110,000)  (90,213,000)
   Net loss...................................... $(158,330,000) $(90,213,000)
   Basic and diluted loss per share:
     Loss before cumulative effect of accounting
      change.....................................         (3.27)        (2.29)
     Cumulative effect of accounting change......         (0.03)
                                                  -------------  ------------
     Net loss.................................... $       (3.30) $      (2.29)
                                                  =============  ============
</TABLE>

                                       52
<PAGE>

6. Accrued Expenses

   Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                             December 31,
                                                        ----------------------
                                                           2000        1999
                                                        ----------- ----------
   <S>                                                  <C>         <C>
   Computer hardware and software purchases............ $11,367,961
   Compensation and related costs......................   6,038,014 $2,109,398
   Interest payable....................................   4,856,888
   Amounts due to former owners under contingent
    consideration arrangements (see Note 5)............   3,952,633  1,400,000
   Communications costs................................   2,082,950    376,343
   Professional fees...................................   2,201,306    579,432
   Facilities and related costs........................   1,448,348    262,640
   Marketing and advertising...........................     908,508    758,101
   Other...............................................   3,753,878  1,856,637
                                                        ----------- ----------
                                                        $36,610,486 $7,342,551
                                                        =========== ==========
</TABLE>

7. Long-Term Debt and Capital Lease Obligations

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

<TABLE>
<CAPTION>
                                                              December 31,
                                                         -----------------------
                                                             2000        1999
                                                         ------------ ----------
   <S>                                                   <C>          <C>
   7% Convertible Subordinated Notes, due 2005.........  $164,825,000
   Capital lease obligations...........................    13,479,849 $  221,058
   8% Note payable to @viso, due 2005..................     7,434,231
   Obligations related to the sale/leaseback of data
    center equipment, approximate interest rate of 15%,
    payable in monthly installments over 36 months.....     1,644,360  2,350,102
   Notes payable to former owners of acquired
    businesses.........................................       643,025  1,031,684
   Other debt..........................................     1,427,567    112,202
                                                         ------------ ----------
                                                          189,454,032  3,715,046
   Less amounts classified as current..................    11,789,385  1,211,835
                                                         ------------ ----------
                                                         $177,664,647 $2,503,211
                                                         ============ ==========
</TABLE>

  Maturities of long-term debt and capital lease obligations are as follows:

<TABLE>
      <S>                                                           <C>
      2001......................................................... $ 11,789,385
      2002.........................................................    5,112,177
      2003.........................................................      222,147
      2004.........................................................       71,323
      2005.........................................................  172,259,000
                                                                    ------------
                                                                    $189,454,032
                                                                    ============
</TABLE>


   In February and March 2000, the Company sold $164.8 million of 7%
Convertible Subordinated Notes, including $4.8 million sold upon exercise of
the underwriters' over-allotment option. The 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 notes. Interest payments began in
August 2000, and are payable semi-annually. The notes mature on February 16,
2005. Upon the occurrence of certain events the Company may redeem the notes
prior to maturity.

                                       53
<PAGE>

   @viso loaned the Company the amount required to purchase its equity interest
in Interliant Europe (approximately $7.6 million) evidenced by a note bearing
interest at 8% per annum, and which is repayable in full at the earlier of a
sale of BV's common 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.

   During 2000, the Company financed the purchases of $17.0 million of computer
equipment, software and furniture under capital lease arrangements. Such
arrangements have terms ranging from 24 to 36 months and bear interest at rates
ranging from 11% to 17%.

8. 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 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 2000 and 1999, approximately 2.0 million and 6.6 million shares of
Common Stock, respectively, were issued in connection with acquisitions (See
Note 5).

   As of December 31, 2000, 6.3 million shares of Common Stock were reserved
for issuance upon exercise of stock options, warrants and conversion of the 7%
convertible subordinated notes.

   In July 1999, the Company sold 8.0 million shares of Common Stock, including
shares sold through the exercise of the underwriters' over-allotment option, in
an underwritten IPO for net proceeds of approximately $72.5 million, after
deducting underwriters' discounts and commissions and offering costs paid
directly by the Company.

   In May 1999, the Company's stockholders approved an amendment to the
Company's Charter to increase the number of authorized shares of Common Stock
to 200.0 million.

   In January 1999, pursuant to a Securities Purchase Agreement (the Purchase
Agreement), the Company sold to SOFTBANK Technology Ventures IV L.P. and one of
its affiliates, 2.6 million shares of its Series A Redeemable Convertible
Preferred (Series A Preferred) at a price of $4.91 per Series A Preferred share
and issued warrants to purchase 0.7 million shares of Common Stock at $6.67 per
share, for cash of $13.0 million. The warrants were exercised in April 1999 for
total proceeds of $5.0 million and the Series A Preferred was converted into an
equal number of shares of Common Stock in July 1999 upon the consummation of
the IPO.

   Pursuant to a Stock Subscription Agreement dated December 8, 1997 between
the Company and WEB, WEB purchased 6.6 million shares of Common Stock during
1999, and 18.6 million shares during the period December 8, 1997 (inception) to
December 31, 1998, all at $1.67 per share.

 Stock Option Plan

   In February 1998, the Company adopted its 1998 Stock Option Plan (the Plan),
which is administered by the Board of Directors (the Committee). Under the
terms of the Plan, the Committee may grant stock options to officers, employees
and consultants of the Company. The Plan permits the grant of incentive stock
options (ISOs) and nonqualified stock options (NSOs). In December 1999, the
Board of Directors amended the Plan to

                                       54
<PAGE>

include directors of the Company among the class of persons eligible to
receive grants. In June 2000, 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 8.5 million shares of Common Stock, (ii)
permit the granting of options below fair market value, (iii) establish a
grant subcommittee of the Compensation Committee to award option grants and
(iv) provide that a maximum of 500,000 shares subject to grants may be granted
to any optionee during any year. The Plan provides that stock options may not
be granted at less than fair market value of the Common Stock on the date of
the grant and 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 stock option plan and/or the assumption of all
outstanding options by a successor corporation or (2) the substitution for
such options of 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, 2000, no 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, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                    2000                     1999                     1998
                          ------------------------- ------------------------ ----------------------
                          Number of       Price     Number of      Price     Number of    Price
                            Shares        Range      Shares        Range      Shares      Range
                          ----------  ------------- ---------  ------------- --------- ------------
<S>                       <C>         <C>           <C>        <C>           <C>       <C>
Options outstanding,
 beginning of year......   2,534,598  $0.13--$29.50   440,500  $1.67--$ 6.67
Options granted.........   2,580,575  $5.28--$42.88 2,998,815  $0.13--$29.50  440,500  $1.67--$6.67
Options exercised.......  (1,161,650) $0.13--$14.00  (768,867) $0.13--$ 6.67
Options terminated......    (929,453) $0.13--$42.88  (135,850) $1.67--$14.00
                          ----------                ---------                 -------
Options outstanding, end
 of year................   3,024,070  $0.13--$42.88 2,534,598  $0.13--$29.50  440,500  $1.67--$6.67
                          ==========                =========                 =======
</TABLE>

   The weighted average exercise price of options granted was $19.90, $5.61
and $4.11 in 2000, 1999 and 1998, respectively. In connection with certain
acquisitions during 1999, the Company granted options to purchase 1,523,461
shares of Common Stock at $0.13 per share in substitution for Interliant Texas
vested options, and options to purchase 90,824 shares of Common Stock at
prices ranging from $1.63 to $3.79 per share in substitution for Triumph
vested options. At December 31, 2000 and 1999, 0.3 million and 1.0 million
options, respectively were vested and exercisable.

   The following table summarizes information about stock options outstanding
as of December 31, 2000:

<TABLE>
<CAPTION>
               Options Outstanding                    Options Exercisable
--------------------------------------------------- ------------------------
Range of            Weighted-Average   Weighted-                Weighted-
Exercise  Number of    Remaining        Average     Number of    Average
 Prices    Options  Contractual Life Exercise Price  Options  Exercise Price
--------  --------- ---------------- -------------- --------- --------------
<S>       <C>       <C>              <C>            <C>       <C>
$ 0.13--
 $ 3.33      76,197    7.7 years         $ 2.02       25,197      $ 0.74
$ 5.00--
 $10.00     710,660    8.3               $ 7.27      139,190      $ 7.02
$ 13.06--
 $ 17.00  1,429,838    9.3               $15.71       57,189      $14.81
$ 19.25--
 $ 29.50    522,075    8.8               $23.63       38,275      $22.42
$ 37.88--
 $ 42.88    285,300    9.2               $40.87
          ---------                                  -------
          3,024,070    8.9 years         $17.12      259,851      $10.39
          =========                                  =======
</TABLE>

   In January 2000, the Company entered into a four-year employment agreement
with a new Chief Executive Officer. In connection with this agreement, the
Company issued this employee options to purchase

                                      55
<PAGE>

1,500,000 shares of Common Stock, at an average exercise price of $18.00 per
share. Such options were not issued pursuant to the Plan. The exercise price of
the options were below the fair value of the Common Stock as of the measurement
date, and as a result, the Company is recognizing approximately $30.0 million
as compensation expense over the four-year vesting period of the options on a
graded vesting basis. For the year ended December 31, 2000 the Company expensed
$13.8 million under this arrangement.

 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 and 1999,
the vesting of options to purchase 31,750 and 40,250 shares of Common Stock was
accelerated in connection with termination arrangements, and as a result, the
Company charged approximately $0.7 million and $0.3 million, respectively, 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:

<TABLE>
<CAPTION>
                                            Year Ended December 31,
                                     ----------------------------------------
                                         2000           1999         1998
                                     -------------  ------------  -----------
<S>                                  <C>            <C>           <C>
Pro forma net loss.................. $(160,539,000) $(55,093,000) $(9,756,000)
Pro forma net loss per share--basic
 and diluted........................ $       (3.38) $      (1.54) $     (1.11)
</TABLE>

   The weighted average grant date fair value was $17.96, $10.85 and $0.83 for
stock options issued in 2000, 1999 and 1998, respectively, and the weighted-
average remaining contractual life for options outstanding as of December 31,
2000 and 1999 is 8.6 and 9.2 years, respectively. Significant assumptions used
in determining this value include a risk free interest rate and volatility of
6.5% and 1.26, 6.0% and 1.39, and 6.0% and zero, in 2000, 1999 and 1998,
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 three years of option grants under the Plan,
while 1999 includes two years and 1998 includes one year.

 Employee Stock Purchase Plan

   In June 2000, the stockholders of the Company approved the adoption of the
2000 Employee Stock Purchase Plan (ESPP), effective July 2000, which 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 Revenue
Code of 1986, as amended. During the year ended December 31, 2000, 0.3 million
shares were purchased by employees pursuant to the plan for total consideration
of $0.7 million.

9. Income Taxes

   As of December 31, 2000, the Company has federal and state net operating
loss carryforwards of approximately $147.2 million as well as foreign operating
loss carryforwards of approximately $4.7 million. The net operating loss
carryforwards will expire at various dates beginning in the years 2003 through
2020 if not utilized.

                                       56
<PAGE>

   Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes consist of the following at December 31,
2000 and 1999:

<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                                     --------------------------
                                                         2000          1999
                                                     ------------  ------------
<S>                                                  <C>           <C>
Deferred tax assets and liabilities:
  Net operating loss carryforwards.................. $ 60,792,000  $ 16,270,000
  Amortization of intangible assets.................   15,703,000     8,000,000
  Non-cash compensation.............................    5,483,000
  Other, net........................................    3,675,000        49,000
                                                     ------------  ------------
Total deferred tax assets...........................   85,653,000    24,319,000
Basis difference in acquired intangibles............   (6,156,000)   (7,629,000)
                                                     ------------  ------------
Total deferred tax assets, net......................   79,497,000    16,690,000
Valuation allowance.................................  (79,497,000)  (16,690,000)
                                                     ------------  ------------
Net................................................. $        --   $        --
                                                     ============  ============
</TABLE>

   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 $62.8 million from 1999 to 2000.

   The utilization, with respect to timing and amount, of the Company's net
operating losses may be limited pursuant to provisions of the Internal Revenue
Code.

10. Operating Leases

   The Company leases its data centers and certain office space under
noncancelable operating leases, which expire at various dates through April
2010. Some of the leases contain renewal options. Total rent expense for all
operating leases was approximately $8.1 million, $3.4 million and $0.4 million
for the years ended December 31, 2000, 1999 and 1998, respectively. In
connection with certain of the leases, the Company has given the landlords
standby letters of credit in the amount of approximately $1.1 million in lieu
of security deposits. Such letters of credit are backed by certificates of
deposit, which are restricted as to use, and are accordingly classified in the
Company's balance sheet as restricted cash as of December 31, 2000.

   Future minimum lease commitments for noncancelable operating leases are as
follows at December 31, 2000:

<TABLE>
   <S>                                                              <C>
   2001............................................................ $ 10,453,000
   2002............................................................   10,298,000
   2003............................................................   10,108,000
   2004............................................................   10,102,000
   2005............................................................    9,017,000
   Thereafter......................................................    8,939,000
                                                                    ------------
                                                                    $ 58,917,000
                                                                    ============
</TABLE>

11. Restructuring Charge

   In September 2000, the Company announced a plan to accelerate its
acquisition integration program by consolidating certain geographically
dispersed functions. The plan includes 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
includes a workforce reduction in operations and information systems, customer
care, sales, marketing and business development, and finance and
administration.


                                       57
<PAGE>

   The Company recorded a restructuring charge of $2.5 million during the three
months ended September 30, 2000. Through December 31, 2000, $1.5 million of the
restructuring reserve was utilized and 112 employees were terminated under the
plan. The plan calls for the remaining employees to be terminated during the
first half of 2001.

   The following table summarizes the status of the restructuring reserve by
major component as of December 31, 2000:

<TABLE>
<CAPTION>
                                           Reserve Utilization      Reserve
                                          ----------------------   Balance at
                                 Total       Cash        Asset    December 31,
                                Reserve    Payments    Writeoffs      2000
                               ---------- -----------  ---------  ------------
<S>                            <C>        <C>          <C>        <C>
Employee termination costs.... $1,802,000 $  (986,445)             $  815,555
Facilities' exit and related
 costs........................    309,000     (82,000)                227,000
Capitalized software
 writedown....................    389,000              $(389,000)         --
                               ---------- -----------  ---------   ----------
  Total....................... $2,500,000 $(1,068,445) $(389,000)  $1,042,555
                               ========== ===========  =========   ==========
</TABLE>

12. Related-Party Transactions

   In connection with the acquisitions of certain Web hosting assets of various
entities (see Note 5), the Company paid transaction fees of approximately
$361,000 and $337,000 for the years ended December 31, 1999 and 1998,
respectively, to Charterhouse Group International, Inc., a related party of WEB
and the Company. These fees are included in the respective purchase price
allocations as capitalized transaction costs.

   The Company purchased consulting services from Sage Equities, Inc. and
Intensity Ventures, Inc., whose principals are the co-chairmen of the Company
and members of WHO, for the purpose of identifying and executing potential
acquisitions as well as providing strategic management oversight. In 2000 and
1999, a principal of Sage Equities, Inc. was compensated as an employee of the
Company. For the year ended December 31, 1998, the Company incurred expenses of
$120,000 for services provided by Sage Equities, Inc. For the years ended
December 31, 2000, 1999 and 1998, the Company incurred costs of $228,000 (of
which $48,000 were expenses), $338,000 (of which $141,000 were expenses), and
$232,000 (of which $112,000 were expenses), respectively, for Intensity
Ventures.

13. Employee Benefit Plan

   In 1998, the Company instituted a 401(k) Plan (the "Plan") for all employees
who have attained age 19 and have been employed by the Company or by an
acquired business for one month. Participating employees may make contributions
to the plan up to 15% of their eligible compensation. The Plan provides that
the Company may make discretionary contributions to the 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 amounts
contributed by the Company and charged to expense during 2000 and 1999 was $2.4
million and $0.6 million, respectively.

14. Segment Reporting

   Pursuant to FAS 131, the Company has determined that it currently has three
reportable segments: application hosting, Web hosting, and ASP professional
services. For the year ended December 31, 1998, the Company operated only in
the Web hosting segment.

   The Company's management generally reviews the results of operations of each
segment exclusive of depreciation, amortization and interest 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 and corporate expenses of the Company are included in the Other caption.

                                       58
<PAGE>

   Segment information as of and for the years ended December 31, 2000 and 1999
for each of the segments is shown below. Pursuant to certain business
developments in 2001, management plans to re-evaluate its reportable segments
in 2001 (see Note 15).

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                  ----------------------------
                                                      2000           1999
                                                  -------------  -------------
   <S>                                            <C>            <C>
   Revenues:
     Application hosting......................... $  48,227,000  $  15,639,000
     Web hosting.................................    19,550,000     16,892,000
     ASP professional services...................    82,992,000     11,493,000
     Other.......................................     7,301,475      3,090,095
                                                  -------------  -------------
                                                  $ 158,070,475  $  47,114,095
                                                  =============  =============
   Operating Income (Loss):
     Application hosting......................... $ (21,170,000) $  (6,173,000)
     Web hosting.................................   (20,185,000)   (17,302,000)
     ASP professional services...................     5,883,000        755,000
     Other.......................................  (111,402,053)   (32,098,443)
                                                  -------------  -------------
                                                  $(146,874,053) $ (54,818,443)
                                                  =============  =============
<CAPTION>
                                                    Balance at December 31,
                                                  ----------------------------
                                                      2000           1999
                                                  -------------  -------------
   <S>                                            <C>            <C>
   Segment Assets:
     Application hosting......................... $  54,187,000  $  11,223,000
     Web hosting.................................    17,281,000      7,716,000
     ASP professional services...................    32,376,000     11,704,000
     Other.......................................   238,507,980    132,232,068
                                                  -------------  -------------
                                                  $ 342,351,980  $ 162,875,068
                                                  =============  =============
</TABLE>

   For the years ended December 31, 2000, 1999 and 1998, approximately 10%, 16%
and 19%, respectively, of revenues were from sources outside the United States,
primarily from Europe, Latin America and Asia.

15. Subsequent Events

Funding Commitments

   On April 16, 2001, the Company entered into a definitive agreement with
affiliates of Charterhouse Group International, Inc. (Charterhouse) and
Softbank Technology Ventures VI, L.P. and its related funds (Softbank) under
which they agreed to purchase, in the aggregate, 190 units (Units), each Unit
consisting of $100,000 principal amount of 8% Convertible Subordinated Notes
(Notes) and 27,273 warrants (Warrants) for the purchase of shares of Common
Stock for a total sales price of $19.0 million. Under the definitive agreement
the Company has the right to require Charterhouse and Softbank to purchase
their respective share of the Units, or a portion thereof, through April 17,
2002. The 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 Notes. Interest payments will be payable on
the last day of each calendar quarter by the issuance of additional Notes. The
Notes mature on June 30, 2003. The Warrants have an exercise price of $1.25 per
share and expire five years after issuance. At the same time, the Company
entered into a definitive agreement with EYT, Inc. (EYT), an entity controlled
by Charterhouse and Softbank, under which EYT committed to repurchase from the
Company its investment in EYT for a purchase price of $1 million, which
approximates the Company's cost of such investment. This asset is classified as
other assets on the Company's balance sheet as of December 31, 2000. The
closing of the EYT

                                       59
<PAGE>

transaction shall take place contemporaneously with the closing of the first
sale of Units to Charterhouse and Softbank. The above transactions are
collectively referred to herein as the "$20 Million Funding."

Recent Business Developments; Business Restructuring

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

   The April Plan is being executed in two phases. Phase 1, which began on
April 3, 2001, consists of a workforce reduction of approximately 190
positions, and will result in a charge for payment of severance and related
costs of approximately $2.1 million. This charge will be recognized in the
quarter ending June 30, 2001.

   Phase 2 of the April Plan includes exiting, via sale, certain businesses
that the Company determined to be outside of its redefined scope of service
offerings. Currently, no purchase and sale agreements have been entered into
for any business that the Company plans to sell. The businesses to be exited
include the Enterprise Resource Planning (ERP) and Customer Relationship
Management (CRM) product lines of the application hosting and ASP professional
services segments of the Company. If the divestiture efforts are not successful
in the near-term, the Company expects to close some of the businesses by the
end of the third quarter of 2001. Businesses not closed will continue to be
operated with reduced cost structures resulting, in part, from the Phase 1
workforce reductions.

   The costs associated with exiting these businesses will likely include the
termination of additional employees and the settlement of certain contractual
obligations. While the costs of exiting the business will vary depending on the
manner of disposition, the Company believes that, in the event of a shut down
of certain businesses, the exit costs could range as follows: workforce
reductions ($1.0 million to $2.0 million) and termination of facility leases
and other contractual obligations ($1.0 million to $8.0 million). The Company
will not recognize a restructuring charge for the qualifying costs associated
with the Phase 2 actions until the criteria required under EITF 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring), and SAB 100
are met, which is likely to be in the second or third quarter of 2001.

   As part of the restructuring activities, pursuant to SFAS 121 and SAB 100,
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 preliminarily expects to record an
impairment charge in the first quarter of 2001 of $30 million to $45 million.
It is reasonably possible that the ultimate charge will vary considerably
outside of this range depending on a number of factors, such as the timing and
manner of planned disposition (e.g., sale or shut down) of the exited
businesses and the amount of proceeds realized, if any, from their sale, and
the costs associated with the shut downs, as the case may be. Long-lived assets
that are impaired consist of property and equipment, identifiable intangible
assets and related goodwill. For purposes of measuring the potential impairment
charge, fair value was determined based on a calculation of discounted cash
flows.

   In connection with the above events and circumstances, management also has
re-evaluated the assigned lives used for depreciating and amortizing, as the
case may be, its long-lived assets of its ongoing businesses and has concluded
that the existing lives continue to be appropriate under present accounting
rules.

                                       60
<PAGE>

16. Quarterly Information (unaudited)

   The following tables set forth certain unaudited quarterly results of
operations of the Company for 2000 and 1999. The quarterly operating results
are not necessarily indicative of future results of operations.

<TABLE>
<CAPTION>
                                         Three Months Ended
                         ------------------------------------------------------
                          March 31,      June 30,     September    December 31,
                             2000          2000        30, 2000        2000
                         ------------  ------------  ------------  ------------
<S>                      <C>           <C>           <C>           <C>
Revenues................ $ 26,858,000  $ 38,608,000  $ 44,291,000  $ 48,313,000
Gross profit............    8,324,000    10,368,000    12,595,000    13,074,000
Operating loss..........  (27,249,000)  (38,117,000)  (42,526,000)  (38,982,000)
Loss before cumulative
 effect of accounting
 change.................  (27,361,000)  (38,926,000)  (42,335,000)  (41,387,000)
Net loss................ $(28,581,000) $(38,926,000) $(42,335,000) $(41,387,000)
Basic and diluted loss
 per share:
  Loss before cumulative
   effect of accounting
   change............... $      (0.59) $      (0.82) $      (0.88) $      (0.85)
  Cumulative effect of
   accounting change....        (0.03)
                         ------------  ------------  ------------  ------------
  Net loss.............. $      (0.62) $      (0.82) $      (0.88) $      (0.85)
                         ============  ============  ============  ============
<CAPTION>
                                         Three Months Ended
                         ------------------------------------------------------
                          March 31,      June 30,     September    December 31,
                             1999          1999        30, 1999        1999
                         ------------  ------------  ------------  ------------
<S>                      <C>           <C>           <C>           <C>
Revenues................ $  5,434,000  $ 10,648,000  $ 12,030,000  $ 19,004,000
Gross profit............    2,183,000     4,560,000     5,497,000     7,362,000
Operating loss..........   (7,812,000)  (13,914,000)  (16,294,000)  (16,890,000)
Loss before cumulative
 effect of accounting
 change.................   (7,758,000)  (14,083,000)  (15,662,000)  (16,427,000)
Net loss................ $ (7,758,000) $(14,083,000) $(15,662,000) $(16,427,000)
Basic and diluted loss
 per share:
  Loss before cumulative
   effect of accounting
   change............... $      (0.31) $      (0.44) $      (0.37) $      (0.36)
  Cumulative effect of
   accounting change ...
                         ------------  ------------  ------------  ------------
  Net loss.............. $      (0.31) $      (0.44) $      (0.37) $      (0.36)
                         ============  ============  ============  ============
</TABLE>

                                       61
<PAGE>

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 captions "Election of Directors" and "Executive Officers"
and such information is incorporated herein by reference.

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.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The Common Stock information in the section entitled "Principal
Shareholders" of the Proxy Statement is incorporated herein by reference.

ITEM 13. RELATED PARTY TRANSACTIONS

   The section entitled "Related Party Transactions" of the Proxy Statement is
incorporated herein by reference.

                                       62
<PAGE>

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

   Item 14(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, 2000

   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

<TABLE>
<CAPTION>
                                              Additions
                          Balance at  -------------------------            Balance at
                         Beginning of Charged to   Charged to                End of
    Classification          Period     Expense   Other accounts Deductions   Period
    --------------       ------------ ---------- -------------- ---------- ----------
<S>                      <C>          <C>        <C>            <C>        <C>
Year ended December 31,
 2000 Allowance for
 uncollectible
 accounts..............   $1,378,000  $3,291,938  $280,049 (1)  $2,467,351 $2,482,636
Year ended December 31,
 1999 Allowance for
 uncollectible
 accounts..............   $  320,000  $1,585,254  $507,078 (1)  $1,034,332 $1,378,000
Year ended December 31,
 1998 Allowance for
 uncollectible
 accounts..............               $  320,000                           $  320,000
</TABLE>
--------
(1) includes allowances of acquired companies

   Item 14(b)Reports on Form 8-K

            None.

   Item 14(c)EXHIBITS

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

<TABLE>
 <C>  <C> <S>
  2.1  -- Asset Purchase Agreement among Sage Networks Acquisition Corp., Sage
          Networks, Inc., Interliant, Inc. and the shareholders of Interliant,
          Inc., dated March 8, 1999.*


  2.2  -- Agreement and Plan of Merger by and among Net Daemons, Inc., the
          Shareholders Party hereto and Sage Networks, Inc. and Sage NDA
          Acquisition Corp., dated as of February 17, 1999.*

  2.3  -- Asset Purchase Agreement between DigiWeb, Inc., a Delaware
          corporation, Yi Wen Chung, Diane X. Chen and DigiWeb, Inc., a
          Maryland corporation, dated February 4, 1999.*

  2.4  -- Asset Purchase Agreement between Telephonetics International, Inc.,
          Alan Kvares and Telephonetics, Inc., dated February 4, 1999.*

  2.5  -- Asset Purchase Agreement between Sage Networks Acquisition Corp.,
          Thomas Heimann and GEN International Inc., dated September 16, 1998.*

  2.6  -- Asset Purchase Agreement between Global Entrepreneurs Network, Inc.
          and Sage Networks Acquisition Corp., dated as of September 16, 1998.*

  2.7  -- Stock Purchase Agreement among B.N. Technology, Inc., Bernd Neumann,
          Annedore Sommer and Sage Networks, Inc., dated August 31, 1998.*
</TABLE>


                                       63
<PAGE>

<TABLE>
 <C>   <C> <S>
   2.8  -- Asset Purchase Agreement between Sage Networks, Inc. and HomeCom
           Communications, Inc. dated June 10, 1998.*


   2.9  -- Asset Purchase Agreement between Sage Networks Acquisition Corp.,
           Bonnie Shimel, William Nicholson and James Kucharski, Alan Shimel
           and Tri-Star Web Creations, Inc., dated May 1, 1998.*

  2.10  -- Asset Purchase Agreement between Sage Networks Acquisition Corp.,
           Steven C. Dabbs and Clever Computers, Inc., dated April 7, 1998.*

  2.11  -- Share Purchase Agreement and certain related documents pertaining to
           the acquisition of the entire issued share capital of Sales
           Technology Limited, between Brett Raynes and others, and Interliant,
           Inc., and Interliant International, Inc., dated September 14,
           1999.**

  2.12  -- Stock Purchase Agreement pertaining to the acquisition of all of the
           outstanding shares of Soft Link Inc., between Gretchen Artig-Swomley
           and Dale Swomley, and Interliant, Inc., and its wholly owned
           subsidiary Soft Link Holding Corp., dated February 29, 2000.***

  2.13  -- Asset Purchase Agreement dated February 29, 2000 pertaining to the
           purchase of assets and assumption of certain liabilities of reSOURCE
           PARTNER, Inc. by reSOURCE PARTNER Acquisition Corp., a wholly owned
           subsidiary of Interliant, Inc.***

   3.1  -- Form of Amended and Restated Certificate of Incorporation of the
           Registrant.*


   3.2  -- Form of Amended and Restated By-Laws of the Registrant.*


   4.1  -- Specimen Certificate for common stock of the Registrant.*


   4.2  -- Investors Agreement, dated as of January 28, 1999, by and among Sage
           Networks, Inc., SOFTBANK Technology Ventures IV, L.P. and SOFTBANK
           Technology Advisors Funds, L.P.*

   4.3  -- Securities Purchase Agreement between Sage Networks, Inc. and
           SOFTBANK Technology Ventures IV, L.P. and SOFTBANK Technology
           Advisors Funds, L.P. dated January 28, 1999.*

   4.4  -- Registration Rights Agreement, dated as of December 8, 1997, by and
           between Sage Networks, Inc. and Web Hosting Organization L.L.C.*

  10.1  -- Master Discounted Internet Services Agreement by and between UUNET
           Technologies, Inc. and Sage Networks, Inc., dated February 17,
           1999.*

  10.2  -- Amendment No. 1 dated January 24, 2001 to the Master Discounted
           Internet Services Agreement between UUNET Technologies, Inc. and
           Interliant, Inc.++++

  10.3  -- Interliant, Inc. Amended and Restated 1998 Stock Option Plan++


  10.4  -- Form of ISO Award Agreement.*

  10.5  -- Form of Nonqualified Stock Option Award Agreement between Sage
           Networks, Inc.*


  10.6  -- Employment Agreement by and between Sage Networks, Inc. and Leonard
           J. Fassler, dated January 1, 1999.*


  10.7  -- Consulting Agreement by and between Sage Networks, Inc. Intensity
           Ventures, Inc., dated January 1, 1999.*


  10.8  -- Deed of Lease by and between Westwood Center, LLC and Sage Networks,
           Inc., dated February 11, 1999.*


  10.9  -- Sublease Agreement by and between Southern Company Services, Inc.
           and Sage Networks, Inc., dated May 29, 1998.*


 10.10  -- First Amendment to Sublease Agreement by and between Southern
           Company Services, Inc. and Sage Networks, Inc., dated December 15,
           1998.*

 10.11  -- Standard Lease Agreement, dated June 11, 1995, between LaSalle
           Partners Management Limited (as agent for Fannin Street Limited
           Partnership) and Wolf Communications Company.*
</TABLE>


                                       64
<PAGE>

<TABLE>
 <C>   <C> <S>
 10.12  -- First Amendment to Standard Lease, dated January 18, 1996, between
           LaSalle Partners Management Limited (as agent for Fannin Street
           Limited Partnership) and Wolf Communications Company.*


 10.13  -- Second Amendment to Standard Lease, dated August 8, 1996, between
           LaSalle Partners Management Limited (as agent for Fannin Street
           Limited Partnership) and Wolf Communications Company.*

 10.14  -- First Amendment to Lease Agreement, between Westwood Center, L.L.C.
           and Interliant, Inc., dated June 28, 1999.*


 10.15  -- Master Lease Agreement between Leasing Technologies International,
           Inc. and Interliant, Inc., dated June 9, 1999.*


 10.16  -- Agreement of Lease between Purchase Corporate Park Associates and
           Courtaulds United States Inc., dated August 23, 1991.*

 10.17  -- Sublease, by and between Akzo Nobel Courtalds United States, Inc.
           and Interliant, Inc., dated as of May 11, 1999.*


 10.18  -- Agreement of Lease, between Purchase Corporate Park Associates, L.P.
           and Interliant, Inc., dated as of June 16, 1999 (Interliant I).*

 10.19  -- Agreement of Lease, between Purchase Corporate Park Associates, L.P.
           and Interliant, Inc., dated as of June 16, 1999 (Interliant II).*

 10.20  -- Agreement of Lease, between Purchase Corporate Park Associates, L.P.
           and Interliant, Inc., dated as of June 16, 1999 (Interliant III).*

 10.21  -- Employment Agreement by and between Sage Networks, Inc. and William
           A. Wilson, dated November 5, 1999.+


 10.22  -- Employment Agreement by and between Interliant, Inc. and Herbert R.
           Hribar, dated January 14, 2000.+


 10.23  -- Second Amendment to Lease Agreement, dated as of February 3, 2000,
           between Westwood Center L.L.C. and Interliant, Inc.+

 10.24  -- Third Amendment to Sublease Agreement, dated as of February 10,
           2000, by and between EOP-Perimeter Center, L.L.C. and Interliant,
           Inc.+

 10.25  -- Assignment and Consent of Sublease, dated as of February 29, 2000,
           by and among reSOURCE Partner, Inc., reSOURCE Partner Acquisition
           Corp. and Borden, Inc. ++

 10.26  -- Interliant, Inc. Employee Stock Purchase Plan. ++


 10.27  -- Commercial Lease Agreement, dated as of September 12, 2000, between
           Cummings Properties, LLC and Interliant Consulting and Professional
           Services, Inc.+++

 10.28  -- Lease Agreement, dated as of July 25, 2000, between University Town
           Center Associates, L.P. (d/b/a TrizecHahn Borden Building
           Management) and reSOURCE PARTNER, INC.+++

 10.29  -- Third Amendment to Standard Lease Agreement, dated as of May 15,
           2000, between AGBRI Fannin Limited Partnership and Interliant,
           Inc.+++

 10.30  -- Fourth Amendment to Standard Lease Agreement, dated as of September
           29, 2000, between AGBRI Fannin Limited Partnership and Interliant,
           Inc.+++

 10.31  -- First Amendment to Agreement of Lease, dated as of May 31, 2000,
           between Purchase Corporate Park Associates, L.P. and Interliant,
           Inc. (Interliant I).+++

 10.32  -- First Amendment to Agreement of Lease, dated as of May 31, 2000,
           between Purchase Corporate Park Associates, L.P. and Interliant,
           Inc. (Interliant II).+++

 10.33  -- First Amendment to Agreement of Lease, dated as of May 31, 2000,
           between Purchase Corporate Park Associates, L.P. and Interliant,
           Inc. (Interliant III).+++
</TABLE>

                                       65
<PAGE>


<TABLE>
 <C>   <C> <S>
 10.34  -- Agreement of Lease, dated as of May 31, 2000, between Purchase
           Corporate Park Associates, L.P. and Interliant, Inc. (Interliant
           IV).+++


 10.35  -- Sixth Amendment to Sublease Agreement, dated as of January 11, 2001,
           by and between EOP-Perimeter Center, L.L.C. and Interliant, Inc.+++

 10.36  -- Office Lease Agreement, dated as of February 11, 2000, by and
           between EOP-Perimeter Center, L.L.C. and Interliant, Inc.+++

 10.37  -- Agreement of Sub-Sub-Sublease, dated as of May 1, 2000, between
           Philips Electronics North America Corporation and Interliant,
           Inc.+++

 10.38  -- Engagement Letter, dated August 10, 2000, between Interliant, Inc.
           and The Feld Group, Inc.+++


 10.39  -- Common Stock Purchase Warrant, dated as of August 10, 2000, between
           Interliant, Inc. and Feld Co-Investment Partnership L.P.+++

  21.1  -- List of Subsidiaries.++++


  23.1  -- Consent of Ernst & Young LLP with respect to the financial
           statements of Interliant, Inc.++++
</TABLE>
--------
*   Previously filed as an exhibit to the Company's Registration Statement on
    Form S-1, Commission File No. 333-74403, and incorporated by reference
    herein.
**  Previously filed as an exhibit to the Company's Current Report on Form 8-K
    dated September 14, 1999, and incorporated by reference herein.
*** Previously filed as an exhibit to the Company's Current Report on Form 8-K
    dated February 16, 2000, and incorporated by reference herein.
+   Previously filed as an exhibit to the Company's Current Report on Form 10-K
    for the fiscal year ended December 31, 1999, and incorporated by reference
    herein.
++  Previously filed as an Exhibit to the Company's Registration Statement on
    Form S-1, Commission File No. 333-37156 and incorporated by reference
    herein.
+++  Previously filed as an exhibit to the Company's Quarterly Report on Form
     10-Q for the Quarterly Ended September 30, 2000, and incorporated by
     reference herein.
++++  Filed herewith.

                                       66
<PAGE>

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/ Herbert R. Hribar
                                             ----------------------------------
                                                 Herbert R. Hribar
                                                Chief Executive Officer

Dated: April 17 , 2001

   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:

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----
<S>                                    <C>                        <C>
        /s/ Leonard J. Fassler         Co-Chairman of the Board     April 17, 2001
______________________________________
          Leonard J. Fassler


         /s/ Bradley A. Feld           Co-Chairman of the Board     April 17, 2001
 ______________________________________
           Bradley A. Feld

        /s/ Herbert R. Hribar          President, Chief Executive   April 17, 2001
 ______________________________________  Officer, Director
          Herbert R. Hribar             (Principal Executive
                                        Officer)

        /s/ William A. Wilson          Chief Financial Officer      April 17, 2001
 ______________________________________  (Principal Financial
          William A. Wilson             Officer)

           /s/ Frank Lincks            Senior Vice President,       April 17, 2001
 ______________________________________  Finance and Accounting
             Frank Lincks               (Principal Accounting
                                        Officer)

         /s/ Thomas C. Dircks          Director                     April 17, 2001
 ______________________________________
           Thomas C. Dircks

           /s/ Jay M. Gates            Director                     April 17, 2001
 ______________________________________
             Jay M. Gates

        /s/ Merril M. Halpern          Director                     April 17, 2001
 ______________________________________
          Merril M. Halpern

          /s/ Charles R. Lax           Director                     April 17, 2001
 ______________________________________
            Charles R. Lax

         /s/ Stephen W. Maggs          Director                     April 17, 2001
 ______________________________________
           Stephen W. Maggs

       /s/ Patricia A.M. Riley         Director                     April 17, 2001
______________________________________
         Patricia A.M. Riley
</TABLE>

                                       67