<PAGE>

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

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

                                    FORM 10-Q

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

For The Quarterly Period Ended September 30, 2001

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

For The Transition Period From _____ To _____

                         Commission File Number 0-26115

                                INTERLIANT, INC.
                                ----------------
             (Exact Name Of Registrant As Specified In Its Charter)


        Delaware                                           13-3978980
------------------------                       ---------------------------------
(State of Incorporation)                       (IRS Employer Identification No.)

Two Manhattanville Road, Purchase, New York                              10577
-------------------------------------------                           ----------
  (Address of Principal Executive Offices)                            (Zip Code)

                                 (914) 640-9000
                                 --------------
              (Registrant's Telephone Number, Including Area Code)

                                      -----
      (Former Name, Former Address and Former Fiscal Year, if Changed Since
                                  Last Report)

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) Yes [X] No [ ], and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].

The number of shares outstanding of the Registrant's Common Stock as of October
31, 2001 was approximately 51,729,000.


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

<PAGE>


                                INTERLIANT, INC.

                                      INDEX

                                                                        PAGE NO.
                                                                        --------

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of
  September 30, 2001 and December 31, 2000                                  1

Condensed Consolidated Statements of Operations
  for the Three and Nine Months Ended September 30, 2001 and 2000           2

Condensed Consolidated Statements of Cash Flows
  for the Nine Months Ended September 30, 2001 and 2000                     3

Notes to Condensed Consolidated Financial Statements                        4

Item 2.  Management's Discussion and Analysis of Financial
  Condition and Results of Operations                                      15

Item 3.  Quantitative and Qualitative Disclosure of Market Risk            31


PART II. OTHER INFORMATION                                                 32

Item 1.  Legal Proceedings

Item 2.  Changes in Securities and Use of Proceeds

Item 5.  Other Information

Item 6.  Exhibits and Reports on Form 8-K

<PAGE>




<TABLE>
<CAPTION>
                                INTERLIANT, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (unaudited)


                                                           September 30,     December 31,
                                                                2001             2000
                                                           -------------    -------------

<S>                                                        <C>              <C>
Assets
Current assets:
  Cash and cash equivalents                                $  19,000,000    $  26,678,000
  Restricted cash                                              2,435,000        1,558,000
  Short-term investments                                              --       53,233,000
  Accounts receivable, net                                    17,691,000       27,355,000
  Prepaid and other current assets                             6,609,000        8,397,000
                                                           -------------    -------------
    Total current assets                                      45,735,000      117,221,000
                                                           -------------    -------------

  Fixed assets, net                                           15,266,000       65,293,000
  Intangibles, net                                            39,202,000       97,106,000
  Net assets of discontinued segment                                  --       37,568,000
  Other assets                                                 5,050,000        8,101,000
                                                           -------------    -------------
    Total assets                                           $ 105,253,000    $ 325,289,000
                                                           =============    =============

Liabilities and stockholders' (deficit) equity
Current liabilities:
  Notes payable and current portion of long-term debt      $  30,993,000    $  11,789,000
  7% Convertible Subordinated Notes                          164,825,000
  Accounts payable and accrued expenses                       34,160,000       34,536,000
  Deferred revenue                                             8,541,000        7,556,000
  Restructuring reserve                                        2,200,000        1,042,000
                                                           -------------    -------------
    Total current liabilities                                240,719,000       54,923,000
                                                           -------------    -------------

Long-term debt, less current portion                          11,538,000       12,840,000
7% Convertible Subordinated Notes                                             164,825,000
Other long-term liabilities                                      357,000          196,000
Minority interest in subsidiary                                       --        5,227,000

Stockholders' (deficit) equity:
  Common stock                                                   517,000          488,000
  Additional paid-in capital                                 309,434,000      319,821,000
  Deferred Compensation                                               --      (16,336,000)
  Accumulated deficit                                       (455,973,000)    (216,051,000)
  Accumulated other comprehensive loss                        (1,339,000)        (644,000)
                                                           -------------    -------------
    Total stockholders' (deficit) equity                    (147,361,000)      87,278,000
                                                           -------------    -------------
    Total liabilities and stockholders' (deficit) equity   $ 105,253,000    $ 325,289,000
                                                           =============    =============
</TABLE>


            See Notes to Condensed Consolidated Financial Statements

                                       1

<PAGE>

<TABLE>
<CAPTION>
                                INTERLIANT, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)


                                                                Three Months Ended                 Nine Months Ended
                                                                   September 30,                     September 30,
                                                          ------------------------------    ------------------------------
                                                               2001             2000             2001             2000
                                                          -------------    -------------    -------------    -------------

<S>                                                       <C>              <C>              <C>              <C>
Revenues
  Service revenues                                        $  23,154,000    $  28,833,000    $  79,478,000    $  74,382,000
  Product revenues                                            5,109,000       10,466,000       15,150,000       22,942,000
                                                          -------------    -------------    -------------    -------------
Total revenues                                               28,263,000       39,299,000       94,628,000       97,324,000

Costs and expenses:
  Cost of service revenues                                   15,182,000       19,738,000       51,535,000       49,792,000
  Cost of product revenues                                    4,275,000        7,827,000       12,186,000       18,715,000
  Sales and marketing                                         4,732,000        9,982,000       25,245,000       28,304,000
  General and administrative (exclusive of non-cash
    compensation shown below)                                14,701,000       15,867,000       49,796,000       40,703,000
  Non-cash compensation                                          61,000        3,750,000       (4,715,000)      11,293,000
  Depreciation                                                7,750,000        4,940,000       22,702,000       10,415,000
  Amortization of intangibles                                 9,835,000       10,500,000       32,420,000       28,970,000
  Restructuring charges                                       3,000,000        2,500,000        4,308,000        2,500,000
  Impairment losses                                          82,937,000               --      124,174,000               --
                                                          -------------    -------------    -------------    -------------
                                                            142,473,000       75,104,000      317,651,000      190,692,000
                                                          -------------    -------------    -------------    -------------

Operating loss                                             (114,210,000)     (35,805,000)    (223,023,000)     (93,368,000)
Other income (expense), net                                    (627,000)         331,000         (664,000)        (142,000)
Interest expense, net                                        (7,276,000)      (1,267,000)     (14,026,000)      (2,065,000)
                                                          -------------    -------------    -------------    -------------
Loss before minority interest, discontinued operations
  and cumulative effect of accounting change               (122,113,000)     (36,741,000)    (237,713,000)     (95,575,000)

Minority interest                                             1,846,000        1,080,000        7,012,000        1,400,000
                                                          -------------    -------------    -------------    -------------

Loss before discontinued operations and
  cumulative effect of accounting change                   (120,267,000)     (35,661,000)    (230,701,000)     (94,175,000)

Loss from discontinued operations                                    --       (6,674,000)      (9,221,000)     (14,447,000)

Cumulative effect of accounting change                               --               --               --       (1,220,000)
                                                          -------------    -------------    -------------    -------------
Net loss                                                  $(120,267,000)   $ (42,335,000)   $(239,922,000)   $(109,842,000)
                                                          =============    =============    =============    =============

Basic and diluted loss per share:
  Loss before discontinued operations and
    cumulative effect of accounting change                $       (2.34)   $       (0.74)   $       (4.59)   $       (1.99)
  Discontinued operations                                            --            (0.14)           (0.18)           (0.30)
  Cumulative effect of accounting change                             --               --               --            (0.03)
                                                          -------------    -------------    -------------    -------------
  Net loss                                                $       (2.34)   $       (0.88)   $       (4.77)   $       (2.32)
                                                          =============    =============    =============    =============


Weighted average shares outstanding - basic and diluted      51,379,000       48,170,000       50,283,000       47,261,000
                                                          =============    =============    =============    =============
</TABLE>


            See Notes to Condensed Consolidated Financial Statements

                                       2

<PAGE>

<TABLE>
<CAPTION>
                                INTERLIANT, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)

                                                                       Nine Months Ended
                                                                         September 30,
                                                                ------------------------------
                                                                     2001             2000
                                                                -------------    -------------
<S>                                                             <C>              <C>
Operating activities

  Net cash used in operating activities                         $ (42,448,000)   $ (58,658,000)
                                                                -------------    -------------

Investing activities
  Purchases of fixed assets                                       (29,447,000)     (29,195,000)
  Investment in restricted securities                                      --       (1,000,000)
  Sales and purchases of short-term investments, net               53,165,000      (76,104,000)
  Acquisitions of businesses, net of cash acquired                 (1,378,000)     (26,051,000)
                                                                -------------    -------------
  Net cash provided by (used in) investing activities              22,340,000     (132,350,000)
                                                                -------------    -------------

Financing activities
  Proceeds from sale of common stock                                  111,000       27,500,000
  Proceeds from issuance of 7% Convertible Subordinated Notes              --      164,825,000
  Proceeds from exercise of options and warrants                       11,000        1,714,000
  Proceeds from issuance of debt and capital lease financing       24,056,000        7,581,000
  Repayment of debt and capital leases                            (11,593,000)      (3,289,000)
  Minority investment in subsidiary                                        --        7,211,000
  Offering costs                                                           --       (6,983,000)
                                                                -------------    -------------
  Net cash provided by financing activities                        12,585,000      198,559,000
                                                                -------------    -------------

Effect of exchange rate changes on cash                              (155,000)      (1,058,000)

Net (decrease) increase in cash and cash equivalents               (7,678,000)       6,493,000
Cash and cash equivalents at beginning of period                   26,678,000       27,608,000
                                                                -------------    -------------
Cash and cash equivalents at end of period                      $  19,000,000    $  34,101,000
                                                                =============    =============
</TABLE>


            See Notes to Condensed Consolidated Financial Statements

                                       3

<PAGE>

                                Interliant, Inc.

              Notes to Condensed Consolidated Financial Statements
                         September 30, 2001 (unaudited)


1.   BUSINESS

     Interliant, Inc. (the Company) is a 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 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 largest single shareholder, owning 49% of the
Company's issued and outstanding shares of Common Stock as of September 30,
2001. WEB's investors comprise Charterhouse Equity Partners III, L.P. and Chef
Nominees Limited (collectively, CEP Members), and WHO Management, LLC (WHO).

     The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. For the period from inception to
September 30, 2001, 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 acquisitions of businesses. The
Company is currently in default on its 7% Convertible Subordinated Notes (7%
Notes) due to the failure to pay the interest due August 16, 2001 (See Note 3).
Further, as of September 30, 2001, the Company had negative working capital of
$195.0 million, including the amounts outstanding under the 7% Notes and 8%
Notes, which aggregate $183.8 million, and cash and cash equivalents of $19.0
million. Consequently, the Company's ability to continue as a going concern for
the next twelve months is in question. In April 2001, the Company made a
decision to offer for sale certain businesses and assets, which it no longer
considers core to its ongoing business plans. The proceeds from such sales have
been and will continue to be used to fund the Company's ongoing operations and
restructuring efforts (see Notes 9 and 10). As discussed in Note 3, the Company
has entered into a definitive agreement to exchange approximately 77% of the 7%
Notes for new notes and other consideration, and has made an offer to the
remaining holders of the 7% Notes to exchange their notes on the same terms. If
successful, such exchanges will eliminate the current default, significantly
reduce the amount of debt, and allow for payment of the debt on a long-term
basis.

     The Company believes that its existing cash, cash equivalents and
short-term investments will provide sufficient funds to enable it to fund its
operating needs and meet its obligations through February 28, 2002. This assumes
that the principal amount of the 7% Notes does not become due and payable. The
Company may not be able to continue operations beyond February 28, 2002 unless
it is able to obtain additional funding through the sale of business divisions
and/or assets, or obtain equity financing or incur additional debt. The Company
is in active discussions for the sale of two non-core business units for
expected aggregate cash proceeds of no more than $10.0 million, which, upon
closing, should provide sufficient cash to continue operations through July
2002. However, there can be no assurances that either or both of those sales
will close, and even if those sales close, that the cash proceeds will be
sufficient to continue operations beyond July 2002. See the "Liquidity and
Capital Resources" section of Management's Discussion and Analysis of Financial
Condition and Results of Operations included in this Form 10-Q.

                                       4

<PAGE>

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

     The condensed 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.

Interim Financial Information

     The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the regulations of the Securities and
Exchange Commission (SEC), but omit certain information and footnote disclosure
necessary to present the statements in accordance with accounting principles
generally accepted in the United States. The interim financial information as of
September 30, 2001 and for the three- and nine-month periods ended September 30,
2001 and 2000 is unaudited and has been prepared on the same basis as the
audited consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000. In the opinion of
management, such unaudited information includes all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
interim information.

     The balance sheet at December 31, 2000 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.

     For further information, refer to the Financial Statements and Notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2000. Operating results for the three and nine month
periods ended September 30, 2001 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2001.

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.

Net Loss Per Share

     Net loss per share is presented in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, Earnings Per Share. Basic
net loss per share is computed based on the weighted average number of shares of
common stock outstanding during the period. Diluted loss per share does not
differ from basic loss per share since potential common shares to be issued upon
the exercise of stock options, warrants and conversion of notes are
anti-dilutive for the periods presented.

New Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new

                                       5

<PAGE>

rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in accordance
with the Statements. Other intangible assets will continue to be amortized over
their useful lives.

     The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the Statement is expected to significantly reduce
the Company's net loss. During 2002, the Company will perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets as
of January 1, 2002 and has not yet determined what the effect of these tests
will be on the earnings and financial position of the Company.

     On August 1, 2001, the Financial Accounting Standards Board, (FASB) issued
SFAS No. 144, Accounting For Impairment of Long Lived Assets. The Company is
required to adopt this pronouncement beginning January 1, 2002. SFAS No. 144
prescribes the accounting for the impairment of long-lived assets (excluding
goodwill), and long-lived assets to be disposed of by sale. SFAS No. 144 retains
the requirement of SFAS No. 121 to measure long-lived asset classified as held
for sale at the lower of its carrying value or fair market value less the cost
to sell. Therefore, discontinued operations are no longer measured on a net
realizable basis, and future operating results are no longer recognized before
they occur. The impact of adopting SFAS No. 144 is not expected to be
significant.

3.   DEBT

     The Company is currently in default on its 7% Notes and the related
indentures due to its failure to make the interest payment due under the 7%
Notes within the grace period that ended September 15, 2001. Under the terms of
the related indentures, a declaration of acceleration of the entire principal
amount under the 7% Notes, plus accrued interest thereon, can only be made by
the trustee of the indentures, or holders of not less than 25% in principal
amount of the 7% Notes, neither of whom have elected to take such action to
date. Rather, holders of 77% in principal amount of the 7% Notes have agreed
under the Recapitalization and Exchange Agreement, which was entered into in
October 2001 (see Note 10), not to accelerate or demand payment of any principal
or interest due under those notes, nor take any action against the Company due
to the aforementioned defaults, until the earlier of the termination of the
exchange offer without any 7% Notes having been purchased or December 31, 2001.
Based on discussions to date, the Company believes the trustee will similarly
take no action regarding the present default. The Company cannot guarantee,
however, that the trustee will not take any action regarding such default, or
whether the holders of not less than 25% in principal amount under the 7% Notes
will not take any action in the future. Since the Company does not have the
ability under the indentures to unilaterally cure the default if and when a
notice declaring acceleration of the entire principal amount due under the 7%
Notes were to be delivered to the Company by the trustee or the requisite number
of holders, the 7% Notes have been reclassified to current liabilities on the
balance sheet as of September 30, 2001. The Company expects that upon completion
of both the private and public exchange offers (see Note 10), the remaining 7%
Notes, if any, and the new senior notes issued in connection with such closing,
will be classified as long-term liabilities based on the terms of the respective
debt issuances.

     On April 16, 2001, the Company entered into a definitive agreement
(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 (8% Notes) and 27,273 warrants (Warrants) for the purchase of
shares of Common Stock for a total sales price of $19.0 million. The Company
sold all of the Units and received the entire $19.0 million of proceeds in
August 2001.

     The 8% Notes are convertible at the option of the holder, at any time prior
to maturity, into Common Stock at a conversion price of $1.10 per share, subject
to adjustment, which is equal to

                                       6

<PAGE>

90,909.09 shares of Common Stock, per $100,000 principal amount of the Notes.
Interest payments are payable on the last day of each calendar quarter by the
issuance of additional Notes. The 8% Notes mature on June 30, 2003. The Warrants
have an exercise price of $1.25 per share and expire five years after issuance.
The fair value of the Warrants, which were allocated to the total proceeds
received was $3.9 million. Such amounts are being charged to interest expense
over the term of the 8% Notes commencing August 2001. In addition, the 8% Notes
contain a beneficial conversion feature amounting to approximately $3.3 million,
which was charged to interest expense upon receipt of the proceeds. Although the
8% Notes are not due until June 2003, the Company has classified such debt as
current since the current default under the 7% Notes triggers a cross-default
under the 8% Notes. Upon completion of both the private and public exchange
offers (see Note 10) for the 7% Notes, the Company expects to reclassify the 8%
Notes to the long-term liabilities section of the balance sheet.

     The Company has agreed to revise certain of the terms of the 8% Notes and
related Warrants upon the consummation of the pending restructuring of the 7%
Notes (See Note 10). The conversion price of the $19.0 million aggregate
principal amount of the 8% Notes will be reduced from $1.10 per share to $1.00
per share and the exercise price of the related Warrants will be reduced from
$1.25 per share to $0.60 per share.

     During the nine months ended September 30, 2001, the Company financed
approximately $15.0 million of computer equipment and furniture with various
lenders under capital lease arrangements, of which $5.1 million was financed
under sale/leaseback arrangements. The leases are payable in monthly
installments over 24 to 36 months, with interest rates ranging from 7% to 17%
per annum. During the three months ended September 30, 2001, the Company decided
to withhold monthly payments due under certain of the leases as part of its
efforts to negotiate a restructuring of the terms of those leases. As of
September 30, 2001, the Company was in arrears in the aggregate amount of $3.2
million of its amounts due under these leases. During the fourth quarter of
2001, the Company was successful in negotiating restructured terms for certain
of the leases. The Company is continuing negotiations with such lessors with
which it has not been successful to date in its restructuring efforts and is
continuing to withhold payments due under some of those leases. Due to these
circumstances, the Company has classified certain of the amounts outstanding
under the capital lease obligations as current.

4.   STOCKHOLDERS' (DEFICIT) EQUITY

     During the nine months ended September 30, 2001, the Company issued
approximately 1.6 million shares of Common Stock, valued at the fair values at
the respective dates of issuance, in connection with the attainment of
performance-based earnout targets related to certain business acquisitions. Such
contingent consideration was recorded as additional purchase price (goodwill) in
the periods that the targets were met.

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

     The Company also granted The Feld Group options to purchase 2.0 million
shares of Common Stock at an exercise price of $1.00 per share. The option
shares will vest and become exercisable, so long as The Feld Group Agreement
remains in effect, in forty-eight equal monthly installments based on the
passage of time. Pursuant to EITF 96-18, as the option shares vest, the Company
will record non-cash compensation charges based on the fair value of the shares

                                       7

<PAGE>

vesting during the period. Such non-cash compensation charges totaled $65,000
for the nine months ended September 30, 2001. Upon a change in control of the
Company, the option with respect to such number of shares equal to the
difference between 1,000,000 minus the then vested portion of the first
1,000,000 of the total option share grant, shall become fully and immediately
vested and exercisable. In addition, the balance of the option shall become
fully and immediately vested and exercisable upon the occurrence of both of the
following events: (1) a change in control of the Company, and (2) after such
change in control, The Feld Group's engagement by the Company, or the successor
entity resulting therefrom, is terminated by the Company or such successor or
The Feld Group terminates the engagement due to a significant adverse change in
its or Mr. Graham's level of responsibility, compensation or staffing
requirements, as directed by the Board of Directors of the Company or such
successor, which is not remedied within 30 days of written notice from the The
Feld Group to such Board advising them of The Feld Group's intention to
terminate the engagement.

     During the nine months ended September 30, 2001, the Company granted
options to purchase 10.4 million shares of Common Stock at exercise prices
ranging from $0.29 to $4.09 per share under the Company's 1998 Stock Option
Plan, Amended and Restated as of June 2001 (Plan). The weighted-average exercise
price of the options granted was $1.45 per share. In July 2001, the Company's
shareholders approved an increase in the number of shares available for option
grants to 13.5 million shares. As of September 30, 2001, options to purchase
11.2 million shares of Common Stock under the Plan were outstanding, of which
options to purchase 2.1 million shares were vested.

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

5.   SEGMENT INFORMATION

     The Company currently has three reportable segments: application hosting,
Web hosting, and ASP professional services. The summary unaudited results of
operations for the three and nine months ended September 30, 2001 and 2000 for
each of the segments is shown below.

                                       8

<PAGE>

<TABLE>
<CAPTION>
                                      Three Months Ended         Nine Months Ended
                                         September 30,             September 30,
                                    ----------------------    ----------------------
                                       2001         2000         2001         2000
                                    ---------    ---------    ---------    ---------
                                                     (in thousands)
Revenues from external customers:
<S>                                 <C>          <C>          <C>          <C>
  Application hosting               $   8,000    $   7,374    $  23,061    $  17,156
  Web hosting                           3,064        5,817       10,664       15,841
  ASP professional services            16,072       23,853       55,326       58,820
  Other                                 1,127        2,255        5,577        5,507
                                    ---------    ---------    ---------    ---------
    Total                           $  28,263    $  39,299    $  94,628    $  97,324
                                    =========    =========    =========    =========

Operating income (loss):
  Application hosting               $    (759)   $  (3,411)   $  (6,748)   $ (10,062)
  Web hosting                          (2,083)      (4,505)     (11,109)     (13,829)
  ASP professional services               (43)       1,916          546        3,993
  Other                              (111,325)     (29,805)    (205,712)     (73,470)
                                    ---------    ---------    ---------    ---------
    Total                           $(114,210)   $ (35,805)   $(223,023)   $ (93,368)
                                    =========    =========    =========    =========
</TABLE>


                                  September 30,   December 31,
                                       2001           2000
                                    ---------      ---------
                                         (in thousands)
Segment assets:
  Application hosting               $   3,655      $  37,124
  Web hosting                           6,461         17,281
  ASP professional services            24,339         32,376
  Other                                70,798        238,508
                                    ---------      ---------
    Total                           $ 105,253      $ 325,289
                                    =========      =========

     The Company's management generally reviews the results of operations of
each segment exclusive of depreciation and amortization (aggregating $17.6
million and $39.4 million, respectively, for the nine months ended September 30,
2001 and 2000), corporate expenses, non-cash compensation, restructuring
expenses and asset impairment losses related to each segment. Accordingly, such
expenses are excluded from the segment operating income (loss) and are shown
under the Other caption. In addition, all intangible assets and corporate assets
of the Company are included in the Other caption in segment assets. The Other
caption for the 2001 period includes $124.1 million of charges associated with
the long-lived asset impairment loss (see Note 7), and $4.3 million of net
restructuring charges. The segment results exclude the results of discontinued
operations.

     The Company believes that the reportable segments may change in future
periods as management continues developing and enhancing its service offerings.

6.   RESTRUCTURING CHARGES

April 2001 Restructuring Charge

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

     The April Plan is being executed in two phases. Phase 1, which began on
April 3, 2001, consisted of a workforce reduction of 186 positions, of which 184
positions were eliminated as of September 30, 2001. This action resulted in a
charge for payment of severance and related costs of

                                       9

<PAGE>

approximately $1.7 million. The charge was recognized during the second quarter
of 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 (see Notes 9 and 10).

The following table summarizes the status of the April 2001 Phase 1
restructuring reserve:

                                           Severance and
                                           Related Costs
                                       ----------------------
                                       (amounts in thousands)
Total reserve charged to expense        $              1,670

2001 Cash Charges Against Reserve:
  Quarter ended June 30, 2001                         (1,510)
  Quarter ended September 30, 2001                      (160)

                                        --------------------
Balance as of September 30, 2001        $                 --
                                        ====================


July 2001 Restructuring Charge

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

     The July Plan comprised workforce reductions of approximately 70 positions
and the exit of certain leased facilities. All 70 positions were eliminated as
of October 31, 2001. The Company retained licensed real estate brokers to
actively market each of the identified lease facilities to be exited. To date,
no agreements have been made to exit or sublease any of the identified
facilities.

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

<TABLE>
<CAPTION>
                                          Total July 2001      Severance and       Exit of Leased
                                           Restructuring       Related Costs         Facilities
                                          ---------------     ---------------     ---------------
                                                          (amounts in thousands)
<S>                                       <C>                 <C>                 <C>
Total reserve charged to expense          $         2,994     $           581     $         2,413

2001 Cash Charges Against Reserve:
  Quarter ended September 30, 2001                   (750)               (449)               (301)

2001 Non-cash Charges Against Reserve:
  Quarter ended September 30, 2001                    (44)                 --                 (44)

                                          ---------------     ---------------     ---------------
Balance as of September 30, 2001          $         2,200     $           132     $         2,068
                                          ===============     ===============     ===============
</TABLE>

7.   ASSET IMPAIRMENT LOSSES

     In response to certain events and circumstances that transpired in the
first quarter of 2001 (see Note 6 - April 2001 Restructuring Charge), pursuant
to Statement of Financial Accounting Standards No. (SFAS) 121, Accounting for
the Impairment of Long-Lived Assets and

                                       10

<PAGE>

for Long-Lived Assets to Be Disposed Of, and SEC Staff Accounting Bulletin No.
100 (SAB 100), Restructuring and Impairment Charges, the Company performed a
review of its long-lived assets because those decisions represented indicators
of impairment to its long-lived assets.

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

     During the second quarter of 2001, the Company approved a plan to exit
Interliant Europe B.V., a 51%-majority owned subsidiary with operations in
continental Europe. An impairment assessment was made with respect to the
long-lived assets associated with Interliant Europe, and the assessment
indicated that there was impairment evident in such assets. The fair value of
the long-lived assets was determined based on a definitive agreement that was
executed in August 2001, whereby the Company sold its entire interest in
Interliant Europe for a nominal amount of proceeds (see Note 9). Consequently,
the Company recorded an impairment charge in the second quarter of 2001 of $4.7
million, to write-off the entire net book value of property and equipment ($4.4
million), identifiable intangible assets ($0.1 million) and other long-term
assets ($0.1 million) related to Interliant Europe.

     During the third quarter of 2001, the Company determined that potential
impairment indicators were present in the core hosting and professional services
businesses. Such impairment indicators arose as a result of the continued
economic uncertainties in general, certain weaknesses in the Company's market,
and lack of revenue growth for the Company in particular. Accordingly, an
additional impairment assessment was conducted with respect to long-lived assets
associated with such businesses. Further, for businesses previously identified
for sale or disposition, the fair value determination was updated based on more
current pricing terms from recent negotiations with prospective buyers. Based on
these assessments, it was determined that there was impairment evident in the
assets associated with the Company's core hosting businesses and the PeopleSoft
ERP professional services business. Consequently, an impairment charge was
recorded in the third quarter of 2001 of $81.9 million to write-off the net book
value of certain of the fixed assets used in those businesses ($49.2 million)
and identifiable intangible assets and goodwill ($32.7 million) related to those
businesses. In addition, during the third quarter of 2001, the Company recorded
a charge of approximately $1.0 million, included as part of impairment losses,
to reflect the permanent decline of the fair market value of restricted
investments in certain non-public companies.

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

8.   DISCONTINUED OPERATIONS

     Pursuant to Accounting Principles Board Opinion No. 30, Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, ("APB 30"), the Company's financial statements have been
reclassified to reflect management's disposal of a major line of business of the
Company's application hosting segment, its Managed Enterprise Resource

                                       11

<PAGE>

Planning (ERP) and Customer Relationship Management (CRM) hosting, outsourcing
and related hosting services business, operated through its subsidiary
Interliant Managed Application Solutions, Inc. (formerly known as reSOURCE
PARTNER, Inc. and herein referred to as RSP). Since its acquisition in early
2000, RSP's business activities had been separately operated (physically,
operationally and for financial reporting purposes) as one of the four separate
major lines of business comprising the Company's application hosting segment.
The Company's ERP and CRM professional services business line, which provides
software consulting services, has been and continues to be separately operated
as a major line of business in the ASP professional services segment,
independent of RSP. In addition, RSP's customer base represented a separate
group of customers that is no longer serviced by the Company. The Company did
not retain the RSP employee base, as its skill set (e.g., operations and sales
personnel), in general, was not sufficiently compatible with continuing business
lines. Accordingly, the revenues, costs and expenses, and assets and liabilities
of RSP have been segregated and reported in the accompanying condensed
consolidated financial statements as "Discontinued Operations."

     Based on sales negotiations and other considerations, the measurement date
for such discontinued operations was determined to be May 31, 2001, the date at
which management was able to determine the method of disposal and, consequently,
was able to determine, with reasonable accuracy, the loss on such disposal. In
July 2001, the Company completed the sale of the ERP and CRM hosting business of
RSP (See Note 9). The Company disposed of the remaining outsourcing operations
of RSP during the third quarter of 2001, and retained $1.3 million of assets,
primarily consisting of computer equipment and software. As of September 30,
2001, the net liabilities of RSP totaled $0.4 million, which includes estimated
remaining liabilities associated with the disposition. The 2001 losses from
discontinued operations of $9.2 million include an operating loss incurred prior
to the measurement date of approximately $6.5 million, and the estimated loss on
disposal of $2.7 million.

     The summary unaudited results of the discontinued operations for the three
and nine months ended September 30, 2001 and 2000 are shown below.


                               Three Months Ended           Nine Months Ended
                                  September 30,               September 30,
                             ----------------------      ----------------------
                               2001          2000          2001          2000
                             --------      --------      --------      --------
                                               (in thousands)
Revenues                     $    989      $  4,991      $  9,253      $ 12,434

Operating loss               $ (1,262)     $ (6,722)     $ (8,238)     $(14,524)


     Summary balance sheet information with respect to the discontinued
operations as of September 30, 2001 and December 31, 2000 are shown below.

                                   September 30,     December 31,
                                        2001             2000
                                   -------------     ------------
                                           (in thousands)
Current assets                                       $     13,616
Property and equipment, net                                11,730
Intangibles, net                                           29,284
Current liabilities                $        (378)         (17,062)
                                   -------------     ------------
 Net assets (liabilities)          $        (378)    $     37,568
                                   =============     ============

                                       12

<PAGE>

9.   BUSINESS DISPOSITIONS

     In July 2001, the Company, through a subsidiary, sold all of the
outstanding capital stock of RSP to a subsidiary of Interpath Communications,
Inc. (Interpath) pursuant to a purchase agreement entered into by the parties
(Purchase Agreement). The Purchase Agreement provides for contingent
consideration to be paid to the Company if Interpath renews or retains certain
customer contracts within specified periods after the closing and if under those
contracts, specified revenue targets are met during the twelve-month period
following July 20, 2001. The Purchase Agreement further provides that additional
contingent consideration will be paid to the Company if new contracts are
entered into by Interpath with certain prospective customers within 180 days of
July 20, 2001. The aggregate contingent consideration payable under the Purchase
Agreement may range as high as $3.5 million, however, there is no assurance that
any contingent consideration will be paid. Any contingent consideration payable
shall be paid in cash and shall be subject, in part, to an offset against any
liability of the Company arising under its indemnity obligations set forth in
the Purchase Agreement. The receipt of contingent consideration proceeds, if
any, will reduce the loss on disposal of discontinued operations, which was
recorded during the second quarter of 2001 (see Note 8).

     In August 2001, the Company, through its subsidiary Interliant
International, Inc. (Interliant International), entered into definitive
agreements (Definitive Agreements) with @viso Limited (@viso) under which it
sold to @viso all of its 51% equity interest in Interliant Europe, B.V.
(Interliant Europe) for a nominal amount, plus an agreement which limits the
Company's liability at 1.8 million Euros (approximately US $1.5 million at
current exchange rates) for any additional funding which may be required by the
shareholders of Interliant Europe resulting from the dissolution and liquidation
of that company. The Definitive Agreements further provide that in the event any
funding from Interliant International is required in connection with the
liquidation of Interliant Europe, such funds would be loaned to Interliant
International under a lending facility from @viso, which facility provides for
interest on the borrowed amount at 12% per annum accruing until maturity and
repayment of all principal and interest at the second anniversary of the
completion of the funding. As of October 2001, the Company has been advised that
it is unlikely that any additional funding will be required in connection with
the dissolution and liquidation of Interliant Europe.

10.  SUBSEQUENT EVENTS

Sale of Retail Web Hosting Business

     In October 2001, the Company completed the sale of another of its non-core
businesses, its shared and unmanaged dedicated retail website hosting business
(Retail Web hosting), to Interland, Inc. Upon closing, the Company received cash
proceeds of $5.8 million, consisting of an initial payment of $5.0 million for
the transferred customer accounts and $0.8 million for the sale of network
equipment used in connection with such customer accounts. Future contingent
payments related to the customer accounts will be dependent upon the achievement
of specified cash collection targets with respect to the transferred customers,
after transition of such accounts. Such contingent payments are not reasonably
determinable at this time. Additionally, the Company agreed to sell to
Interland, Inc., contingent upon receiving certain third-party consents,
additional equipment and software related to the Retail Web hosting business for
approximately $0.7 million.

Convertible Subordinated Debt Restructuring - 7% Notes

     In October 2001, the Company signed a privately negotiated Recapitalization
and Exchange Agreement (Private Exchange Agreement) with eight holders of the 7%
Notes, which in the aggregate hold approximately $126.8 million principal
amount, or approximately 77%, of the outstanding 7% Notes. Under this agreement,
the eight holders agreed to exchange their subordinated notes for a combination
of $70.00 in cash, warrants to purchase 67.50 shares of the

                                       13

<PAGE>

Company's Common Stock and $270.00 principal amount of 10% senior convertible
notes, due December 2006, for each $1,000 principal amount of outstanding 7%
Notes. The closing of the Recapitalization and Exchange Agreement is conditioned
upon the consummation of an exchange offer with holders of at least 35% percent
of the remaining principal value of the 7% Notes, which is not subject to the
Recapitalization and Exchange Agreement, although the parties may mutually waive
that condition. In November 2001, the Company made a formal exchange offer to
the remaining holders of the 7% Notes. The exchange offering circular
constitutes an offer to exchange the 7% Notes for the same consideration
provided under the Private Exchange Agreement, subject to the terms and
conditions described in the offering circular.

     The closings of the Private Exchange Agreement and the exchange offer under
the offering circular, if completed, will have a material effect on the
Company's financial position and results of operations for the year ending
December 31, 2001. The transaction will be accounted for pursuant to Statement
of Financial Accounting Standards (SFAS) No. 15, Accounting by Debtors and
Creditors for Troubled Debt Restructurings. Accordingly, upon closing, the
difference between the consideration issued and the present carrying value of
the notes exchanged, reduced by the gross interest costs from the issuance date
to maturity and transaction costs on the 10% senior convertible notes to be
issued, will be treated as an extraordinary gain. The Company anticipates that
the extraordinary gain will be approximately $65.0 million, assuming holders of
85% of the 7% Notes exchange their notes pursuant to both of these transactions.

                                       14

<PAGE>

ITEM 2.  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 Unaudited Condensed Consolidated Financial
Statements and the Notes thereto. This discussion contains forward-looking
statements based upon current expectations that involve risks and uncertainties.

Forward Looking Statements and Associated Risks

     This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. Certain forward-looking statements
relate to, among other things, future results of operations, profitability,
growth plans, sales, expense trends, restructuring efforts, 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,
including, without limitation, the Company's Annual Report on Form 10-K for the
year ended December 31, 2000, important factors to consider in evaluating such
forward-looking statements include but are not limited to: uncertainty that the
exchange offer and related private restructuring transaction described herein
can be completed on the terms described or at all; 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 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:

o    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;

                                       15

<PAGE>

o    a focused suite of business solutions that include Managed Messaging,
     Managed Hosting, Web hosting and Security;

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

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

     The accompanying financial statements have been prepared assuming we will
continue as a going concern. For the period from inception to September 30,
2001, we have incurred net losses and negative cash flows from operations, and
have also expended significant funds for capital expenditures (property and
equipment) and the acquisitions of businesses. We are currently in default on
our 7% Convertible Subordinated Notes (7% Notes) due to our failure to pay the
interest due August 15, 2001. We had negative working capital of $195.0 million,
including the amounts outstanding under our 7% Notes and 8% Notes, which
aggregate $183.8 million, and cash and cash equivalents of $19.0 million as of
September 30, 2001. Consequently, our ability to continue as a going concern for
the next twelve months is in question. In April 2001, we made a decision to
offer for sale certain businesses and assets, which we no longer consider core
to our ongoing business plans. The proceeds, if any, from such sales will be
used to fund our ongoing operations (see Note 9 of Notes to Condensed
Consolidated Financial Statements). As discussed in Note 3 of Notes to Condensed
Consolidated Financial Statements, we have proposed to exchange the 7% Notes for
a combination new notes, cash and warrants to purchase shares of our common
stock, which, if successful, will eliminate the default. Since we do not have
the ability under the indentures related to the 7% Notes to unilaterally cure
the default if and when a notice declaring acceleration of the entire principal
amount due under the 7% Notes were to be delivered to the Company by the
indenture trustee or the requisite number of holders on the 7% Notes, and such
default triggers a cross-default under the 8% Notes, we have classified the 7%
Notes and 8% Convertible Subordinated Notes (8% Notes) as part of current
liabilities (See Note 3 of Notes to Condensed Consolidated Financial
Statements). We expect that upon completion of both the private and public
exchange offers (See Note 10 of Condensed Consolidated Financial Statements),
the remaining 7% Notes and the new senior notes issued in connection with such
closing, will result in the classification of such obligations as long-term
liabilities based on the terms of the respective debt issuances.

     Since our inception we have acquired 27 operating companies providing
application hosting, Web hosting and ASP professional services solutions, for
total consideration of approximately $215.6 million. The purchase consideration
for the acquisitions was in the form of cash, stock or a combination of cash,
stock and issuance of debt. The acquisitions have been accounted for using the
purchase method of accounting, which has resulted in the recognition, as of
September 30, 2001, of approximately $193.3 million of intangible assets. During
2001, we recorded impairment charges for goodwill and other intangibles of $60.0
million of net book value of such assets. As of September 30, 2001, the net
book value of goodwill and intangibles was $39.2 million. Recoverability of the
remaining net book value of intangible assets is dependent on our ability to
successfully operate our businesses and generate positive cash flows from
operations. Future intangible amortization charges will result in increased
losses or reduced net income. In June 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, effective for fiscal years beginning after December 15,
2001. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statement. Other intangible assets will
continue to be amortized over their useful lives. We will apply the new rules on
accounting for goodwill and other intangible assets beginning in the first
quarter of 2002. Implementation of the nonamortization provisions of the
Statement may result in a significant reduction in the Company's net losses,
however, the required impairment tests may require periodic charges if evidence
of impairment is determined.

                                       16

<PAGE>

     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 7% Notes and units (Units)
comprising $19.0 million of 8% Convertible Subordinated Notes and warrants to
purchase shares of our common stock. As of September 30, 2001, we had $19.0
million in cash and cash equivalents.

     We received the entire proceeds of the Units during August 2001. In
addition, we sold certain of our non-core business during the third and fourth
quarters of 2001. To date, such business dispositions have resulted in
approximately $6.0 million of cash proceeds (of which $5.8 million was received
subsequent to September 30, 2001), plus potential additional future proceeds up
to $10.0 million based on the attainment of performance targets for such
businesses. While we anticipate that the disposed businesses will attain some or
all of such performance targets, there can be no assurances that we will be
successful in realizing additional cash proceeds. We are attempting to sell the
remaining non-core businesses and assets to provide additional cash proceeds.
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 any additional sales, or if completed, whether such transactions will
result in sufficient cash funding to further support our ongoing operations.

     As of September 30, 2001, we had an accumulated deficit of $456.0 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. While
we have taken restructuring actions that we expect will result in reductions of
our overall cost structure, we anticipate the need to make continued investments
in connection with the following:

     o    expansion of our direct and channel sales initiatives;
     o    funding of product development;
     o    completing and equipping our data centers; and
     o    implementation of billing, accounting, operations and customer service
          systems.

     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.

2001 Business Restructurings and Asset Divestitures

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

     Based on a decision reached by our management and the Board of Directors in
late March 2001, on April 2, 2001 we announced a restructuring plan (the "April
Plan" or "restructuring") to further streamline the business by narrowing our
services focus to a core set of offerings. The April Plan comprises workforce
reductions and the exit of certain non-core businesses. In conjunction with the
restructuring, we undertook a review of our long-lived assets pursuant to
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and
SEC Staff

                                       17

<PAGE>

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 has been executed in two phases. Phase 1, which began on
April 3, 2001, consisted of a workforce reduction of approximately 200
positions, and resulted in a charge for the payment of severance and related
costs of approximately $1.7 million. This charge was recognized in the second
quarter of 2001. We anticipate that the annualized cost savings from the Phase 1
workforce reductions will range from $13.0 million to $15.0 million and we began
realizing savings during the latter part of the second quarter of 2001. 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
and additional workforce reductions. In July 2001, we exited the Managed
Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM)
product lines of our application hosting segment, formerly known as reSOURCE
PARTNER (RSP), which had been a key component of our scope of services prior to
the April Plan. In August 2001, we exited the remaining operations of RSP. The
2001 losses from discontinued operations of $9.2 million include losses incurred
prior to the measurement date of approximately $6.5 million, and the estimated
losses on disposal of $2.7 million. We have retained approximately $1.3 million
of RSP assets, consisting primarily of computer equipment and software. As of
September 30, 2001, the net liabilities of RSP totaled $0.4 million.

     During the second quarter of 2001, our management approved a plan to exit
Interliant Europe B.V., a 51%-owned subsidiary with operations in continental
Europe. In August 2001, we entered into definitive agreements with @viso Limited
under which we sold to @viso all of our 51% equity interest in Interliant Europe
for a nominal amount, plus an agreement which limits our liability at 1.8
million Euros (approximately US $1.5 million at current exchange rates) for any
additional funding which may be required by the shareholders of Interliant
Europe resulting from the dissolution and liquidation of that company. The
definitive agreements further provide that in the event any funding from our
subsidiary, Interliant International, is required in connection with the
liquidation of Interliant Europe, such funds would be loaned to Interliant
International under a lending facility from @viso, which facility provides for
interest on the borrowed amount at 12% per annum accruing until maturity and
repayment of all principal and interest at the second anniversary of the
completion of the funding. We have guaranteed the repayment of funds due under
the facility. While there are no assurances that we will not have any funding
obligations under the agreement described above, as of October 2001, we are
advised that it is unlikely that any additional funding will be required from
Interliant International or @viso in connection with the dissolution and
liquidation of Interliant Europe.

     In July 2001, we announced a further business restructuring that included
additional workforce reductions of approximately 70 positions and a plan to exit
certain leased office facilities. We recognized a restructuring charge of $3.0
million during the third quarter of 2001 for the qualifying costs. We expect the
annualized savings from this restructuring to be approximately $5.0 million.

     In October 2001, we sold another of our non-core businesses, our shared and
unmanaged dedicated retail web hosting business (see Note 10 of Notes to
Condensed Consolidated Financial Statements). We will continue to focus our
strategy on OEM, private label and referral partner web hosting services through
our branded solutions offerings.

     As part of the restructuring activities an impairment assessment was made
at the end of the first quarter of 2001 with respect to the long-lived assets
associated with the businesses planned to be sold or shut down. The assessment
indicated that, on a held for use basis, there was impairment evident in such
assets. Further, based on our assessment of internal and external facts and
circumstances to which the impairment was attributable, we concluded that the

                                       18

<PAGE>

impairment indicators arose in the latter half of the first quarter of 2001. In
connection therewith we recorded impairment charges during the first and second
quarters of 2001 aggregating $36.5 million. Long-lived assets that are impaired
consist of property and equipment, identifiable intangible assets and related
goodwill. For purposes of measuring the impairment charge, fair value was
determined based on a calculation of discounted cash flows or net realizable
value if known.

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

     We determined that there were potential impairment indicators present in
our core hosting and professional services businesses that arose during the
third quarter of 2001 as a result of the continued economic uncertainties in
general, certain weaknesses in our market and lack of revenue growth for the
Company in particular. Accordingly, we conducted an impairment assessment with
respect to long-lived assets associated with such businesses. Further, for
businesses previously identified for sale or disposition, we updated the fair
value determination based on more current pricing terms from recent negotiations
with prospective buyers. Based on these assessments, we determined that there
was impairment evident in the assets associated with our core hosting businesses
and the PeopleSoft ERP professional services business. Consequently, we recorded
an impairment charge in the third quarter of 2001 of $82.9 million to write-off
the net book value of certain of the fixed assets used in those businesses
($49.2 million), other long term assets ($1.0 million) and identifiable
intangible assets and goodwill ($32.7 million) related to those businesses.

     As discussed elsewhere herein, we continue to aggressively pursue the
divestiture of certain other lines of business that were determined to be
outside of our core focus. If the divestiture efforts are not successful in the
near-term, we expect to operate such businesses with reduced cost structures
resulting, in part, from the workforce reductions taken to date. While we are
actively seeking buyers for the remaining businesses to be exited and related
assets, no assurances can be given that we will be able to sell these assets,
and we cannot predict with any certainty the amount of proceeds we will realize
from and the timing of 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. 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 certainty their impact on revenues and EBITDA in 2001 and
beyond.

Results of Operations

     Our reportable segments include application hosting, Web hosting and ASP
professional services. Our current major lines of business included in each of
these segments are as follows:

                                       19

<PAGE>

<TABLE>
<CAPTION>
      Application Hosting                     Web Hosting                    ASP Professional Services
-------------------------------   -----------------------------------   ------------------------------------
<S>                               <C>                                   <C>
Managed Messaging                 Retail Web Hosting (a)                Messaging and Collaboration Services
Managed Hosting                   Branded Web Hosting (Private Label)   Security and Networking Solutions
Managed Security                                                        Enterprise Resource Planning (ERP)
</TABLE>

(a)  Business was sold in October 2001

     Our revenue streams consist of recurring service fees, and non-recurring
professional services and product sales. 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.

     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 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, provide the end-user with a
choice from various vendor products, set final prices and perform certain
services. Additionally, we have credit and back-end inventory risk.

     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.

                                       20

<PAGE>

     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.


     The following is a discussion of our results from continuing operations for
the three months and nine months ended September 30, 2001 and 2000.

THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

Revenues

     Revenues decreased $11.0 million, from $39.3 million for the three months
ended September 30, 2000 to $28.3 million for the corresponding 2001 period.
During the third quarter of 2001, we continued to experience weakness in demand
for our hosting and professional services offerings, as compared to 2000, which
we attribute to negative economic developments and trends that exist in our
industry sector, including reduced corporate information technology spending,
the failure of many Internet-related companies, and reductions in demand for
certain of our services.

     The decrease in revenues was due primarily to declines in the ASP
professional services segment. Within the ASP professional services segment,
revenues from security and networking hardware products declined by $2.5
million, or 35%, from the 2000 period, and our ERP and CRM professional services
revenues declined by $4.1 million (or approximately $4.8 million on a pro forma
basis, after giving effect to acquisitions completed in the second half of
2000). The decline in our ERP and CRM professional services resulted from sharp
reductions in corporate information technology spending in these areas and the
announcement of our intention to divest the ERP and CRM hosting product lines in
connection with our April 2001 restructuring plan.

     Our core recurring hosting product lines realized growth of approximately
$1.0 million, or 16%, as compared with the 2000 period. This growth was led by
increases in managed hosting and branded web hosting (private label) solutions
as a result of an increase in the number of customers for such services. Other
non-core businesses and core ASP professional services contributed to the
remaining revenue decline of $3.3 million. Such negative variances were the
result of continued weakness in the demand for those services during the 2001
period.

Cost of Revenues

     Cost of revenues decreased by $8.1 million, from $27.6 million for the
three months ended September 30, 2000 to $19.5 million for the corresponding
2001 period. This decrease was due primarily to lower costs of products sold
stemming from lower product revenue volume during the 2001 period, and cost
reductions, namely lower salaries and related costs, realized connection with
the execution of workforce reductions as part of our restructuring efforts in
2000 and 2001.

     In the future, cost of revenues may fluctuate due to capacity utilization,
changes in our mix of services, and fluctuations in bandwidth costs and in
levels of staffing to support demand for our services.

     Gross margin for the three months ended September 30, 2001 and 2000 was
31.2% and 29.9%, respectively. The overall gross margin improvement is primarily
the result of a decline in

                                       21

<PAGE>

ASP professional services and product revenues, which resulted in a higher
proportion of our total revenues being derived from hosting services. Revenues
from application hosting and web hosting services typically generate higher
gross margins as compared with our ASP professional services and product sales.
In addition, hosting revenues increased for 2001 as compared with the 2000
period, which resulted in higher utilization of our fixed-cost data center and
service infrastructure. Gross margin from the sale of products was 18.3% and
25.2% for the three months ended September 30, 2001 and 2000, respectively. The
decrease in gross margin from the sale of products was the result of several
non-recurring higher-margin sales of computer equipment during the 2000 period
in connection with customer terminations.

Sales and Marketing

     Sales and marketing expense decreased by $5.3 million, from $10.0 million
for the three months ended September 30, 2000 to $4.7 million for the
corresponding 2001 period. This decrease was attributable to lower marketing
expenditures, namely reductions in brand recognition programs and lesser
emphasis on direct marketing campaigns for the Web hosting segment, and lower
salaries and benefits associated with reductions in our sales headcount stemming
from our restructuring efforts.

     Sales and marketing expenses represented 25.4% and 16.7% of total revenues
for the 2000 and 2001 periods, respectively. We expect sales and marketing
expenses to continue to be a substantial component of our cost structure in
future periods.

General and Administrative

     General and administrative expense (excluding non-cash compensation)
decreased by $1.2 million, from $15.9 million for the three months ended
September 30, 2000 to $14.7 million for the corresponding 2001 period. This
decrease in general and administrative expense was attributable to reduced
salaries and benefits and other costs associated with our 2000 and 2001
restructuring efforts, and strict expense control policies instituted by our
management during 2001, offset by $1.7 million of increased general and
administrative expenses associated with the disposition in July 2001 of our
interest in Interliant Europe.

Non-cash compensation

     Non-cash compensation expense decreased by $3.7 million, from $3.7 million
for the three months ended September 30, 2000 to $61,000 for the corresponding
2001 period. In February 2000, we issued options to purchase 1,500,000 shares of
Common Stock to our then-current Chief Executive Officer (CEO) at exercise
prices that were below the market price of our Common Stock at the date of
grant. In total, such options were valued at approximately $30.0 million, and
for the three months ended September 30, 2000, we charged $3.7 million to
non-cash compensation expense in connection with this arrangement. Such options
were canceled after said CEO terminated his employment with us in April 2001.

Depreciation

     Depreciation expense increased by $2.9 million, from $4.9 million for the
three months ended September 30, 2000 to $7.8 million for the corresponding 2001
period. The increase in depreciation expense was attributable to our investments
in network software and equipment, furniture and office equipment, and leasehold
improvements during 2000 and 2001. 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 made in connection with an increase in
the number of managed hosting and private label web hosting customers.

                                       22

<PAGE>

Amortization of Intangible Assets

     Amortization expense decreased by $0.7 million, from $10.5 million for the
three months ended September 30, 2000 to $9.8 million for the corresponding 2001
period. The decrease in amortization expense was primarily attributable to the
substantial reduction in intangible assets resulting from the asset impairment
charges recorded for goodwill and other intangible assets during the first half
of 2001 (see Note 7 of Notes to Condensed Consolidated Financial Statements).


Impairment Loss on Long-lived Assets

     Impairment losses on long-lived assets were $82.9 million for the three
months ended September 30, 2001. These charges were attributable to losses
realized for our core hosting businesses and our PeopleSoft ERP professional
services business. Based on assessments made during the three months ended
September 30, 2001, we determined that there was impairment evident in the
assets associated with our core hosting businesses and the PeopleSoft ERP
professional services business. Consequently, we recorded an impairment charges
in the third quarter of 2001 to write-off the net book value of certain of the
fixed assets used in those businesses ($49.2 million) and identifiable
intangible assets and goodwill ($32.7 million) related to those businesses. In
addition, we recorded an impairment charge of approximately $1.0 million during
the three months ended September 30, 2001 to reflect the permanent decline of
the fair market value of our restricted investments in certain non-public
companies.

Interest income (expense)

     Net interest expense increased $6.0 million from $1.3 million to $7.3
million in the three months ended September 30, 2001 and 2000, respectively.
Increases in interest expense were driven by $3.3 million of interest expense
related to the beneficial conversion feature on our 8% Subordinated Convertible
Notes, and increases in capital lease obligations during the latter part of 2000
and early 2001. Interest income declined as a result of the significantly
reduced amount of cash available for short-term investing during the 2001
period.

     In the future, annual interest expense associated with the $20 Million
Funding will be approximately $4.0 million. Such amount includes the interest at
the stated rate of 8% per annum and charges associated with value assigned to
the warrants issued in connection with the sale of notes, which was determined
to be approximately $4.0 million.


NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

Revenues

     Revenues decreased $2.7 million, from $97.3 million for the nine months
ended September 30, 2000 to $94.6 million for the corresponding 2001 period.
During 2001, we have experienced significant weakness in demand for our hosting
and professional services offerings, as compared to 2000, which we attribute to
negative economic developments and trends that exist in our industry sector,
including reduced corporate information technology spending, the failure of many
Internet-related companies, and reductions in demand for certain of our
services. Such reductions in revenue were partially offset by revenues
associated with our Oracle ERP professional services business acquired during
the second half of 2000.

     Our core recurring hosting product lines realized growth of approximately
$7.8 million, or 48%, as compared with the 2000 period (or approximately $7.1
million on a pro forma basis, after giving effect to acquisitions completed in
2000). This growth was led by increases in managed

                                       23

<PAGE>

hosting and branded (private label) web hosting solutions as a result of an
increase in the number of customers receiving such services.

     During the first half of 2001, we experienced a substantial decline in new
sales orders, as compared to 2000, which we attribute to negative economic
developments and trends that exist in our industry sector, including reduced
corporate information technology spending, the failure of many Internet-related
companies, and sharply reduced sales forecasts. Revenues in our ASP professional
services segment decreased $10.0 million from the 2000 period, and on a pro
forma basis, this segment experienced a revenue decline of approximately $23.2
million as compared to the 2000 period. This decline in ASP professional
services revenues was primarily driven by lower demand for our PeopleSoft ERP
and Onyx CRM offerings and reductions in networking and security hardware
product revenues as a result of sharp reductions in corporate information
technology spending in these areas.

Cost of Revenues

     Cost of revenues decreased by $4.8 million, from $68.5 million for the nine
months ended September 30, 2000 to $63.7 million for the corresponding 2001
period. This decrease was due primarily to lower costs of products sold stemming
from lower product revenue volume during the 2001 period and cost reductions,
namely lower salaries and related costs, realized in connection with the
execution of workforce reductions as part of the 2000 and 2001 restructuring
efforts. In the future, cost of revenues may fluctuate due to capacity
utilization, changes in mix of services, and fluctuations in bandwidth costs and
in levels of staffing to support demand for our services.

     Gross margin for the nine months ended September 30, 2001 and 2000 was
32.7% and 29.6%, respectively. The gross margin improvement is primarily the
result of a decline in professional services and product revenues, which
resulted in a higher proportion of our total revenues being derived from hosting
services. Revenues from hosting services typically generate higher gross margins
as compared with our professional services and product sales. In addition,
hosting revenues increased for 2001 as compared with the 2000 period, which
resulted in higher utilization of our fixed-cost data center and service
infrastructure. Gross margin from the sale of products was 19.6% and 18.4% for
the nine months ended September 30, 2001 and 2000, respectively. The increase
in gross margin from the sale of products was the result of an increase in the
sales mix toward higher-margin networking and security products.

Sales and Marketing

     Sales and marketing expense decreased by $3.1 million, from $28.3 million
for the nine months ended September 30, 2000 to $25.2 million for the
corresponding 2001 period. This decrease was attributable to lower marketing
expenditures, namely reductions in brand recognition programs and lesser
emphasis on direct marketing campaigns for the Web hosting segment, and lower
salaries and benefits associated with reductions in our sales headcount stemming
from our restructuring efforts, offset by increases from the sales and marketing
expenses of businesses acquired during the second half of 2000. We curtailed our
brand recognition programs and reduced emphasis on direct marketing campaigns
for the Web hosting segment.

     Sales and marketing expenses represented 29.1% and 26.7% of total revenues
for the nine months ended September 30, 2000 and 2001, respectively. We expect
sales and marketing expenses to continue to be a substantial component of our
cost structure in future periods.

General and Administrative

     General and administrative expense (excluding non cash compensation)
increased by $9.1 million, from $40.7 million for the nine months ended
September 30, 2000 to $49.8 million for the corresponding 2001 period. This
increase in general and administrative expense was

                                       24

<PAGE>

attributable primarily to the general and administrative expenses of businesses
acquired during the second half of 2000 and increases in bad debt provisions as
a result of weakened macro-economic conditions present during the 2001 period,
offset by expense decreases resulting from workforce reductions and improved
cost controls.

Non-cash compensation

     Non-cash compensation expense decreased by $16.0 million, from $11.3
million for the three months ended September 30, 2000 to a credit of $4.7
million for the corresponding 2001 period.

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

     During the nine months ended September 30, 2001, we recorded non-cash
compensation charges aggregating $1.5 million stemming from stock issuances to
our co-chairmen, and stock and warrant issuances and option grants to The Feld
Group, which is rendering executive-level services to us.

Depreciation

     Depreciation expense increased by $12.3 million, from $10.4 million for the
nine months ended September 30, 2000 to $22.7 million for the corresponding 2001
period. The increase in depreciation expense was attributable in part to
acquisitions consummated during 2000, and our investments in network software
and equipment, furniture and office equipment, and leasehold improvements during
2000 and 2001. 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 made in connection with an increase in the number of
managed hosting and private label web hosting customers.

Amortization of Intangible Assets

     Amortization expense increased by $3.4 million, from $29.0 million for the
nine months ended September 30, 2000 to $32.4 million for the corresponding 2001
period. This increase in amortization expense was attributable to the increase
in intangible assets related to the acquisitions consummated during 2000, of
which two acquisitions were completed during the latter part of the first
quarter of 2000. Such expense increases were offset by reductions of
amortization charges due to the substantial reduction in intangible assets
resulting from the asset impairment charges recorded for goodwill and
identifiable intangibles of approximately $27.6 million during the first half of
2001 (see Note 7 of Notes to Condensed Consolidated Financial Statements).

Impairment Loss on Long-lived Assets

     Impairment losses on long-lived assets were $124.2 million for the nine
months ended September 30, 2001. In conjunction with the events and
circumstances surrounding our April 2001 restructuring plan (see Notes 6 and 7
of Notes to Condensed Consolidated Financial Statements), we performed a review
of our long-lived assets to ascertain if such decisions

                                       25

<PAGE>

resulted in an impairment in our 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.

     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 our assessment of both 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 recorded an impairment charge in the first quarter of 2001 of
$36.2 million. In addition, during the second quarter we recorded an additional
$0.3 million of impairment losses associated with those businesses.

     During the second quarter of 2001, we began executing on a plan to exit
Interliant Europe. An impairment assessment was made with respect to the
long-lived assets associated with Interliant Europe, and the assessment
indicated that there was impairment evident in such assets. Consequently, we
recorded an impairment charge in the second quarter of 2001 of $4.7 million, to
write off property and equipment, identifiable intangible assets and other
long-term assets related to Interliant Europe.

     We determined that there were potential impairment indicators present in
our core hosting and professional services businesses that arose during the
third quarter of 2001 as a result of the continued economic uncertainties in
general, certain weaknesses in our market and lack of revenue growth for the
Company in particular. Accordingly, we conducted an impairment assessment with
respect to long-lived assets associated with such businesses. Further, for
businesses previously identified for sale or disposition, we updated the fair
value determination based on more current pricing terms from recent negotiations
with prospective buyers. Based on these assessments, we determined that there
was impairment evident in the assets associated with our core hosting businesses
and the PeopleSoft ERP professional services business. Consequently, we recorded
an impairment charge in the third quarter of 2001 of $82.9 million to write-off
the net book value of certain of the fixed assets used in those businesses
($49.2 million), other long term assets ($1.0 million) and identifiable
intangible assets and goodwill ($32.7 million) related to those businesses.

Interest income (expense)

     Net interest expense increased $11.9 million from $2.1 million in the nine
months ended September 30, 2001 to $14.0 million in the 2000 period, due
primarily to the interest on our 7% Convertible Subordinated Notes, increases in
capital lease obligations during 2000 and 2001, and the recognition of $3.3
million of interest expense in connection with the beneficial conversion feature
on our 8% Subordinated Convertible Notes. Interest income declined due to the
significant reduction in the amount of cash available for short-term investing
during the 2001 period.


LIQUIDITY AND CAPITAL RESOURCES

     We believe that our existing cash and cash equivalents will provide
sufficient funds to enable us to fund our operating needs and meet our
obligations through February 28, 2002. This assumes that the principal amount of
our 7% Notes, which are currently in default, does not become due and payable
(See Notes 3 and 10 of Notes to Condensed Consolidated Financial Statements). We
may not be able to continue our operations beyond February 28, 2002 unless we
are able to obtain additional funding through the sale of business divisions
and/or assets, or obtain equity financing or incur additional debt. Accordingly,
our ability to continue as a going concern for the next twelve months is in
question (See Note 1 of Notes to Condensed

                                       26

<PAGE>

Consolidated Financial Statements). We are in active discussions for the sale of
two non-core business units for expected aggregate cash proceeds of no more than
$10.0 million, which upon closing, should provide us with sufficient cash to
continue our operations through July 2002. However, there can be no assurances
that we will close either or both of those sales, and even if we do close those
sales, that the cash proceeds will be sufficient to continue our operations
beyond July 2002. We are currently attempting to complete the significant
business initiatives discussed herein, consisting of the divestiture of non-core
businesses and assets to reduce operating losses and generate cash,
restructuring our 7% Notes, and the completion of our business integration and
workforce reductions, in order to achieve cost savings and operational
efficiencies. The outcome of these initiatives is not determinable at this time
and we cannot predict with any certainty how successful we will be with these
activities, any of which can have a material positive or negative impact on our
financial position.

     As described in "2001 Business Restructuring and Asset Divestitures" above,
throughout 2001 we have been engaged in a broad-based restructuring effort. Our
plans in this regard were designed to further streamline our business and
thereby improve EBITDA results and cash flows. We engaged Zolfo Cooper, a
respected advisor in financial restructurings, to assist in the development and
execution of a capital restructuring plan, and we continue to evaluate all of
our alternatives in an effort to strengthen our financial position.

     Our restructuring activities and cost containment measures, along with the
business dispositions completed to date, have enabled us to significantly reduce
our cash used in operations. Cash used in operations was $16.0 million, $16.9
million and $9.5 million for the first, second and third quarters of 2001,
respectively. In addition, we've reduced our investments in fixed assets during
2001. Cash investments in fixed assets were $13.5 million, $8.7 million and $7.2
million for the first, second and third quarters of 2001, respectively. Such
reductions in cash purchases of fixed assets are attributable to the completion
of non-recurring data center and other facilities build outs, and purchases of
equipment and software infrastructure during the first half of 2001. We intend
to continue to drive further efficiencies in our operations infrastructure to
continue improving our cash flows from operating activities.

     In connection with our restructuring efforts, we did not pay the $5.8
million semi-annual interest payments on our 7% Notes on the August 16, 2001 due
date, nor at the end of the 30-day grace period. Consequently, the 7% Notes are
in default, although neither the trustee under the indenture nor the holders of
not less than 25% in aggregate principal amount of the 7% Notes have declared
the principal amount of, and accrued and unpaid interest on, all the 7% Notes to
be immediately due and payable. Under the terms of the indentures to the 7%
Notes, a declaration for acceleration of the entire $164.8 million principal
amount under the 7% Notes, plus accrued interest thereon, can only be made by
either the trustee of the indentures, or holders of not less than 25% in
principal amount of the 7% Notes, neither of whom have elected to take such
action to date. Rather, holders of 77% in principal amount of the 7% Notes have
agreed, under a privately negotiated Recapitalization and Exchange Agreement
(Private Exchange Agreement), not to accelerate or demand payment of any
principal or interest due under those notes, nor take any other action against
us due to the defaults, until the earlier of the termination of an exchange
offer or December 31, 2001. Further, based on discussions to date, we believe
the trustee of the indentures will similarly take no action regarding the
present default. We can provide no assurances, however, that the trustee will
not take any action regarding such default or whether holders of not less than
25% in the principal amount under the 7% Notes will not take any action in the
future. Accordingly, we have classified the 7% Notes as part of current
liabilities as of September 30, 2001. We expect that upon completion of both the
private and public exchange offers, the remaining 7% Notes, if any, and the new
senior notes issued in connection with such closing, will result in the
classification of such obligations as long-term liabilities based on the terms
of the respective debt issuances.

     We entered into the Private Exchange Agreement with eight holders of the 7%
Notes, which in the aggregate hold approximately $126.8 million principal
amount, or approximately 77%,

                                       27

<PAGE>

of the outstanding 7% Notes. Under this agreement, the eight holders agreed to
exchange their subordinated notes for a combination of $70.00 in cash, warrants
to purchase 67.50 shares of our Common Stock and $270.00 principal amount of 10%
senior convertible notes (10% Notes), due December 2006, for each $1,000
principal amount of outstanding 7% Notes. The closing of the Recapitalization
and Exchange Agreement is conditioned upon the consummation of an exchange offer
with holders of at least 35% of the remaining principal amount of the 7% Notes,
which is not subject to the Recapitalization and Exchange Agreement, although
the parties may mutually waive that condition. In November 2001, we made a
formal exchange offer to the remaining holders of the 7% Notes to exchange those
notes for the same consideration provided under the Private Exchange Agreement,
subject to the terms and conditions described in the offering circular for such
exchange. Assuming 85% of the holders of the 7% Notes consummate the
aforementioned exchanges, we would be required to pay $11.8 million in cash,
including estimated transaction costs (or $13.5 million if 100% of the holders
participate in the exchange) upon closing. However, such holders would not be
entitled to the past due semi-annual interest payments on the 7% Notes. Further,
the 10% Notes provided that interest payments may be made either in cash or
through the issuance of additional 10% Notes at our option.

     Our current default for failing to pay the August 16, 2001 interest payment
due under the 7% Notes may result in the default under certain of our other
agreements, including lease agreements, other borrowing facilities, vendor
agreements, strategic partnership agreements and customer agreements. As stated
above, we cannot predict at this time whether these agreements and exchange
offers will result in a successful debt restructuring. Further, such
restructuring activities could have a dilutive effect on current stockholders
and a significant effect on our operations. We cannot assure you that we will be
successful in concluding the exchange offer with all or some of the holders of
our 7% Notes or otherwise restructuring our capital structure.

     As part of our efforts to negotiate a restructuring of the terms of certain
of our capital leases, we decided to withhold monthly payments due under those
leases during the three months ended September 30, 2001. As of September 30,
2001, we were in arrears in the aggregate amount of $3.2 million of amounts due
under these leases. During the fourth quarter of 2001 we were successful in
negotiating restructured terms under certain of the leases. We are continuing to
negotiate with the lessors with whom we have not yet been successful in our
restructuring efforts and are continuing to withhold our payments due under some
of those leases. Our non-payment default of certain of those leases could result
in the lessors accelerating all amounts due under those leases, as well as
seeking to repossess the subject equipment. We believe we will reach mutually
acceptable restructured terms with such lessors where we are currently in
default. However, if we are unsuccessful restructuring such leases and do not
otherwise reinstate them prior to such acceleration or repossession event
occurring, such actions may have a material adverse effect on our financial
position and our ability to operate our business. Due to the uncertainties
surrounding these circumstances we have classified certain of the amounts
outstanding under the capital lease obligations as current.

     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 (8% Notes) and 27,273
warrants (Warrants) for the purchase of shares of our Common Stock for a total
sales price of $19.0 million. We received the entire $19.0 million of proceeds
in August 2001.

     The 8% Notes are convertible at the option of the holder, at any time prior
to maturity, into Common Stock at a conversion price of $1.10 per share, subject
to adjustment, which is equal to 90,909.09 shares of Common Stock, per $100,000
principal amount of the 8% Notes. Interest will be payable on the last day of
each calendar quarter by the issuance of additional 8% Notes. The 8% Notes
mature on June 30, 2003. The Warrants have an exercise price of $1.25 per share
and expire five years after issuance. Although the 8% Notes mature in June 2003,
we have classified such obligations as part of current liabilities as of
September 30, 2001 because the current default under the 7% Notes triggers a
cross-default under the 8% Notes. We expect that upon the completion of both the
private and public exchange offers, the remaining 7% Notes, if any, the 8%
Notes, and the new senior notes issued in connection with such closing, will be
classified as long-term liabilities based on the terms of the respective debt
issuances.

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<PAGE>

     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 approximated our cost of such investment. The closing of the EYT
transaction took place contemporaneously with the closing of the sale of Units
to Charterhouse and Softbank.

     We have agreed to revise certain of the terms of the 8% Notes and related
Warrants upon the consummation of the pending restructuring of the 7% Notes (See
Note 10). The conversion price of the $19.0 million aggregate principal amount
of the 8% Notes will be reduced from $1.10 per share to $1.00 per share and the
exercise price of the related Warrants will be reduced from $1.25 per share to
$0.60 per share.

     During the nine months ended September 30, 2001, we financed approximately
$15.0 million of computer equipment and furniture, including $5.1 million under
sale/leaseback arrangements. We are attempting to secure additional equipment
financing, although no assurances can be given that additional financing will be
available when needed.

     During the first half of 2001, we renegotiated certain of our private label
hosting customer contracts whereby such customers will retain ownership of the
network servers hosted by us. We believe that these arrangements will allow us
to significantly reduce our expenditures for network equipment in the future.
Currently, we are using our existing cash resources to fund all other capital
equipment additions.

     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% Notes and 8% Notes, and contingent
earnout payments to certain sellers of operating companies acquired by us. If
all targets for acquisition earnouts entered into through September 30, 2001 are
achieved in full, the maximum remaining cash consideration due pursuant to these
earnouts will be $0.7 million and $2.5 million in 2001 and 2002, respectively
including amounts due to the former owners of Interactive Software, Inc. (ISI)
and Milestone Services, Inc. (MSI). Certain of these agreements, however,
provide for issuance of Common Stock in lieu of cash, at our option.

     In July 2000, we purchased all of the outstanding stock of ISI and MSI. The
acquisition agreements provided for contingent purchase consideration or
"earnouts" if certain operating performance and product development targets are
achieved. In November 2001, we entered into an agreement with the shareholders
of ISI and MSI to settle a portion of our earnout obligations. As part of that
settlement, we issued promissory notes to each of the shareholders of ISI and
MSI with an aggregate principal amount of $1.38 million, which is repayable at
the rate of $100,000 per month commencing November 1, 2001 and continuing
through and including December 1, 2002 with interest thereon from September 14,
2001 at the rate of 7% per annum. In connection with that settlement, we also
agreed to issue on or about January 2002, additional notes to those shareholders
in an aggregate principal amount

                                       29

<PAGE>

not to exceed $2.7 million once certain earnout calculations have been
determined (2002 Notes). The principal amount of the 2002 Notes will be repaid
at the rate of $100,000 per month commencing January 1, 2003 and continuing
through and including July 1, 2005 with interest thereon from September 14, 2001
at the rate of 7% per annum. Upon our filing and having declared effective a
registration statement registering the resale of the 10% Notes, the shareholders
of ISI and MSI will exchange their respective 2002 Notes for 10% Notes having a
principal amount equal to the outstanding principal amount of the 2002 Notes at
the time of exchange. Upon such exchange, we shall be forever discharged and
released from all obligations under the 2002 Notes including all accrued
interest.

     The foregoing contains forward-looking statements which are based on our
current business plan and are predicated on certain assumptions. Those
assumptions include our ability to successfully implement our restructuring
plans and achieve the cost savings and cash generation benefits they are
designed to produce, our ability to successfully integrate acquisitions and
achieve the expected benefits, such as operational efficiencies and revenue
improvements from cross-selling opportunities, and our ability to successfully
dispose of non-core businesses and assets to generate additional cash to fund
our operations. If our plans change or our assumptions prove to be inaccurate,
we may be required to seek additional capital sooner than we currently
anticipate. In order to fund the repayment of our 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.

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<PAGE>

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We have exposure to financial market risks, including changes in interest
rates. From time to time we have short-term investments which 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. If we are not
able to hold such investments until maturity, changes in interest rates may
affect their value prior to maturity.

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

                                       31

<PAGE>

PART II. OTHER INFORMATION

                                INTERLIANT, INC.

ITEM 1.  LEGAL PROCEEDINGS.

     During September 2001, Cummings Properties, LLC initiated a summary
proceeding against Interliant Consulting and Professional Services, Inc., a
subsidiary of the Company (ICPS), in the District Court Department, Woburn
Division, in Woburn, Massachusetts. Cummings' action seeks possession of the
office space rented by ICPS from Cummings at 12 Gill Street in Woburn, as well
as a judgment in the amount of $9.7 million for past due rent and liquidated
damages for all rent that would be due for the remainder of the lease term
pursuant to a rent acceleration clause in the lease. During October 2001, ICPS
filed an action against Cummings in the Superior Court Department of the
Middlesex County Trial Court of the Commonwealth of Massachusetts seeking a
declaration that the rent acceleration clause in the lease is invalid and
unenforceable under Massachusetts' law, and seeking transfer of the Summary
Proceeding to the Superior Court. The application for transferring the
proceeding to Superior Court has been granted, but no decision has yet been
rendered on the declaratory action or on the issue of possession. ICPS is
diligently defending and asserting its rights in these proceedings.

     These proceedings followed ICPS' decision to withhold the September 2001
rent due under the lease of the Woburn premises as part of its efforts to
negotiate a restructuring of the terms of the lease. Those negotiations are
ongoing.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

(c)  In the nine months ended September 30, 2001, options to purchase 8,610
shares of Common Stock were exercised at a weighted average exercise price of
$0.67 per share.

     During the nine months ended September 30, 2001, in connection with the
attainment of certain earn-out targets, Interliant issued, as partial
consideration, 1,152,042 shares of Common Stock to former stockholders of
Triumph Technologies, Inc. and The Jacobson Group, Inc., Interactive Software,
Inc. and Milestone Services, Inc.

     During June 2001, Interliant issued 237,129 shares for a purchase price of
$0.47 per share in connection with its Employee Stock Purchase Plan to its
United States employees. During July 2001, Interliant issued 2,448 shares of
Common Stock for a purchase price of $0.47 per share to its United Kingdom
employees in connection with its Employee Stock Purchase Plan.

     During the nine months ended September 30, 2001, Interliant issued 750,000
shares of Common Stock to The Feld Group as a sign-on bonus under The Feld Group
Agreement, and 180,000 shares of Common Stock to each of its co-chairmen under
their respective amended agreements, in lieu of cash compensation for services
to be rendered through May 2002.

     Interliant believes 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 Interliant, to
information about Interliant, or were given an adequate opportunity to review
information about Interliant.

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<PAGE>

ITEM 5.  OTHER INFORMATION.

     In October, 2001 Interliant sold its shared and unmanaged dedicated retail
Web hosting business to Interland, Inc. A copy of the Account Purchase Agreement
is filed herewith as an Exhibit.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)  Exhibits

     Exhibit 10.51 Account Acquisition Agreement, dated as of October 26, 2001,
     between Interliant, Inc. and Interland, Inc.

(b)  Reports on Form 8-K:

     Form 8-K, filed on September 19, 2001, whereby Interliant, Inc. issued a
     press release announcing that it was in default with respect to its 7%
     Convertible Subordinated Notes due 2005.

     Form 8-K, filed on October 25, 2001, whereby Interliant issued a press
     release announcing that it had entered into a definitive agreement with a
     limited number of current holders representing a majority of the
     outstanding principal value of the its 7% Convertible Subordinated Notes
     due 2005, to restructure those notes.

     Form 8-K, filed on October 30, 2001, whereby Interliant issued a press
     release announcing the sale of its shared and unmanaged dedicated retail
     Web hosting business to Interland, Inc.

     Form 8-K, filed on November 2, 2001, whereby Interliant announced that it
     had entered into a Recapitalization and Exchange Agreement with a limited
     number of current holders representing a majority of the outstanding
     principal amount of its 7% Convertible Subordinated Notes due 2005 for the
     purpose of restructuring $126.8 million of the Company's $164.8 million in
     those notes.

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<PAGE>

                                   SIGNATURES



Pursuant to the requirements of the Securities and 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.



Date:  November 14, 2001               /s/ BRUCE GRAHAM
                                       -----------------------------------------
                                       Bruce Graham
                                       Chief Executive Officer and President


Date:  November 14, 2001               /s/ FRANCIS J. ALFANO
                                       -----------------------------------------
                                       Francis J. Alfano
                                       Chief Financial Officer

                                       34