<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 June 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 July 31,
2001 was 51,304,299.

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

<PAGE>

                               INTERLIANT, INC.
                                     INDEX

<TABLE>
<CAPTION>
                                                                  PAGE NO.
                                                                  --------
<S>                                                              <C>
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)

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

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

Condensed Consolidated Statements of Cash Flows
  for the Six Months Ended June 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                                  13

Item 3. Quantitative and Qualitative Disclosure of Market Risk         26

PART II.  OTHER INFORMATION                                            27

Item 2. Changes in Securities and Use of Proceeds

Item 6. Exhibits and Reports on Form 8-K
</TABLE>
<PAGE>

                               INTERLIANT, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                          June 30,                December 31,
                                                                                            2001                      2000
                                                                                       -------------             -------------
                                                                                        (unaudited)
<S>                                                                                    <C>                       <C>
Assets
Current assets:
 Cash and cash equivalents                                                              $  13,163,000              $  26,678,000
 Restricted cash                                                                            2,000,000                  1,558,000
 Short-term investments                                                                     4,483,000                 53,233,000
 Accounts receivable, net                                                                  20,625,000                 27,355,000
 Prepaid and other current assets                                                           7,531,000                  8,397,000
                                                                                        -------------              -------------
      Total current assets                                                                 47,802,000                117,221,000
                                                                                        -------------              -------------

 Fixed assets, net                                                                         69,740,000                 65,293,000
 Intangibles, net                                                                          76,900,000                 97,106,000
 Net assets of discontinued operations                                                                                37,568,000
 Other assets                                                                               7,355,000                  8,101,000
                                                                                        -------------              -------------
      Total assets                                                                      $ 201,797,000              $ 325,289,000
                                                                                        =============              =============

Liabilities and stockholders' (deficit) equity
Current liabilities:
  Notes payable and current portion of long-term debt
    and capital lease arrangements                                                      $  14,328,000              $  11,789,000
  Accounts payable and accrued expenses                                                    31,534,000                 34,536,000
  Deferred revenue                                                                          9,330,000                  7,556,000
  Net liabilities of discontinued operations                                                  936,000
  Restructuring reserve                                                                       160,000                  1,042,000
                                                                                        -------------              -------------
      Total current liabilities                                                            56,288,000                 54,923,000
                                                                                        -------------              -------------

Long-term debt and capital lease arrangements, less current portion                        14,907,000                 12,840,000
7% Convertible Subordinated Notes                                                         164,825,000                164,825,000
Other long-term liabilitiies                                                                  196,000                    196,000
Minority interest in subsidiary                                                                                        5,227,000

Stockholders' (deficit) equity:
  Common stock                                                                                513,000                    488,000
  Additional paid-in capital                                                              302,056,000                319,821,000
  Deferred Compensation                                                                       (12,000)               (16,336,000)
  Accumulated deficit                                                                    (335,706,000)              (216,051,000)
  Accumulated other comprehensive loss                                                     (1,270,000)                  (644,000)
                                                                                        -------------              -------------
      Total stockholders' (deficit) equity                                                (34,419,000)                87,278,000
                                                                                        -------------              -------------
      Total liabilities and stockholders' (deficit) equity                              $ 201,797,000              $ 325,289,000
                                                                                        =============              =============
</TABLE>

           See Notes to Condensed Consolidated Financial Statements

                                       1
<PAGE>

                               INTERLIANT, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                Three Months Ended                      Six Months Ended
                                                                     June 30,                               June 30,
                                                         -------------------------------      ------------------------------------
                                                             2001                2000              2001                   2000
                                                         -------------------------------      ------------------------------------
<S>                                                     <C>                <C>               <C>                    <C>
Revenues                                                 $ 31,242,000       $ 33,020,000      $  66,365,000          $  58,024,000

Costs and expenses:
  Cost of revenues                                         20,474,000         23,856,000         44,264,000             40,941,000
  Sales and marketing                                      10,287,000         10,753,000         22,157,000             18,322,000
  General and administrative (exclusive of non-cash
    compensation shown below)                              16,792,000         14,546,000         33,451,000             24,836,000
  Non-cash compensation                                    (7,130,000)         3,090,000         (4,776,000)             7,543,000
  Depreciation                                              7,993,000          3,225,000         14,952,000              5,475,000
  Amortization of intangibles                              10,014,000          9,865,000         22,585,000             18,470,000
  Restructuring charge                                      1,308,000                             1,308,000
  Impairment losses                                         5,037,000                            41,237,000
                                                         ------------       ------------      -------------          -------------
                                                           64,775,000         65,335,000        175,178,000            115,587,000
                                                         ------------       ------------      -------------          -------------
Operating loss                                            (33,533,000)       (32,315,000)      (108,813,000)           (57,563,000)
Other income (expense), net                                  (491,000)          (467,000)           (37,000)              (473,000)
Interest expense, net                                      (3,769,000)          (685,000)        (6,750,000)              (797,000)
                                                         ------------       ------------      -------------          -------------
Loss before minority interest, discontinued operations
  and cumulative effect of accounting change              (37,793,000)       (33,467,000)      (115,600,000)           (58,833,000)

Minority interest                                           3,543,000            320,000          5,166,000                320,000
                                                         ------------       ------------      -------------          -------------

Loss before discontinued operations and
  cumulative effect of accounting change                  (34,250,000)       (33,147,000)      (110,434,000)           (58,513,000)

Loss from discontinued operations                          (4,182,000)        (5,779,000)        (9,221,000)            (7,774,000)

Cumulative effect of accounting change                                                                                  (1,220,000)
                                                         ------------       ------------      -------------          -------------
Net loss                                                 $(38,432,000)      $(38,926,000)     $(119,655,000)         $ (67,507,000)
                                                         ============       ============      =============          =============

Basic and diluted loss per share:
  Loss before discontinued operations and
     cumulative effect of accounting change              $      (0.69)      $      (0.70)     $       (2.22)         $       (1.24)
  Loss from discontinued operations                             (0.08)             (0.12)             (0.19)                 (0.17)
  Cumulative effect of accounting change                                                                                     (0.03)
                                                         ------------       ------------      -------------          -------------
Net loss                                                 $      (0.77)      $      (0.82)     $       (2.41)         $       (1.44)
                                                         ============       ============      =============          =============

Weighted average shares outstanding - basic and diluted    50,223,104         47,624,787         49,686,569             46,807,127
                                                         ============       ============      =============          =============
</TABLE>

           See Notes to Condensed Consolidated Financial Statements

                                       2
<PAGE>

                               INTERLIANT, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                Six Months Ended
                                                                                    June 30,
                                                                    ----------------------------------------
                                                                        2001                       2000
                                                                    -------------              -------------
<S>                                                                 <C>                        <C>
Operating activities

  Net cash used in operating activities                             $ (32,850,000)             $ (13,715,000)
                                                                    -------------              -------------

Investing activities
  Purchases of fixed assets                                           (22,212,000)                (6,465,000)
  Sales and purchases of short-term investments, net                   48,682,000                (96,794,000)
  Acquisitions of businesses, net of cash acquired                     (1,352,000)               (18,869,000)
                                                                    -------------              -------------
  Net cash provided by (used in) investing activities                  25,118,000               (122,128,000)
                                                                    -------------              -------------
Financing activities
  Proceeds from sale of common stock                                      111,000                 26,834,000
  Proceeds from issuance of 7% Subordinated Convertible Notes                                    158,848,000
  Proceeds from exercise of options and warrants                           11,000
  Proceeds from sale/leaseback of equipment and furniture               2,613,000                    937,000
  Repayment of debt and capital leases                                 (8,358,000)                  (511,000)
                                                                    -------------              -------------
  Net cash (used in) provided by financing activities                  (5,623,000)               186,108,000
                                                                    -------------              -------------

Effect of exchange rate changes on cash                                  (160,000)

Net (decrease) increase in cash and cash equivalents                  (13,515,000)                50,265,000
Cash and cash equivalents at beginning of period                       26,678,000                 27,608,000
                                                                    -------------              -------------
Cash and cash equivalents at end of period                          $  13,163,000              $  77,873,000
                                                                    =============              =============
</TABLE>

           See Notes to Condensed Consolidated Financial Statements

                                       3
<PAGE>

                               Interliant, Inc.

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


1. BUSINESS

     Interliant, Inc. (the Company) is a leading 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 majority and controlling shareholder of the Company.
WEB's investors comprise Charterhouse Equity Partners III, L.P. and Chef
Nominees Limited (collectively, CEP Members), and WHO Management, LLC (WHO).

     For the period from inception to June 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's principal sources of cash to fund the
aforementioned activities has been from the sale of $152.3 million in Common and
Preferred Stock in public and private sales and the sale of $164.8 million of
Convertible Subordinated Notes. As of June 30, 2001, the Company had $17.6
million in cash, cash equivalents and short-term investments, of which $14.5
million was available for use by the Company's wholly-owned businesses; $3.1
million was available for use by the Company's 51% owned subsidiary, Interliant
Europe B.V. (Interliant Europe) (see Note 10).

     In April 2001, the Company entered into definitive agreements to obtain
additional funding ($20 Million Funding) (see Note 9). In March 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, if any,
from such sales will be used to fund the Company's ongoing operations (see Note
9). As further discussed in 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, the Company believes that it is highly
likely that it will need to raise additional funding during the first half of
2002.

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 June 30,
2001 and for the three- and six-month periods ended June 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.

                                       4
<PAGE>

     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 six month
periods ended June 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 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.

3. DEBT

     During the six months ended June 30, 2001, the Company financed
approximately $12.6 million of computer equipment and furniture with various
lenders under capital lease arrangements, of which $2.6 million was financed
under sale/leaseback arrangements. The leases are payable in monthly
installments over 24 to 36 months, with interest rates ranging from 11% to 17%
per annum.

                                       5
<PAGE>

4. STOCKHOLDERS' (DEFICIT) EQUITY

     During the six months ended June 30, 2001, the Company issued approximately
0.5 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, which
represented the market price of the Company's Common Stock at the grant date.
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, which are based on the fair
value of the shares vesting during the period. In the second quarter of 2001
such charges amounted to approximately $0.1 million. 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 six months ended June 30, 2001, the Company granted options to
purchase 7.6 million shares of Common Stock at exercise prices ranging from
$1.00 to $4.09 per share under the 1998 Stock Option Plan (Plan). The weighted-
average exercise price of the options granted was $1.78 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 June 30, 2001, options
to purchase 9.8 million shares of Common Stock under the Plan were outstanding,
of which options to purchase 1.6 million shares were vested.

     During the first quarter of 2001, the Company issued to its then-current
CEO options to purchase 1.0 million shares of Common Stock, of which, 0.3
million shares were immediately vested, at an exercise price of $3.56 per share.
Such options were issued outside of the Plan. In April 2001, said CEO terminated
his employment with the Company and, as a result, the entire option grant was
canceled as of July 2001 because the vested shares were not exercised within the
requisite ninety days of the employment termination.

     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

                                       6
<PAGE>

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.

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 six months ended June 30, 2001 and 2000 for each of
the segments is shown below.

<TABLE>
<CAPTION>
                                             Three Months Ended            Six Months Ended
                                                  June 30,                     June 30,
                                          -----------------------      -------------------------
                                             2001          2000           2001           2000
                                          ---------     ---------      ----------     ----------
                                                             (in thousands)
<S>                                       <C>           <C>            <C>            <C>
Revenues from external customers:
  Application hosting                     $   8,023     $   4,900      $   15,061     $    9,440
  Web hosting                                 3,574         6,745           7,600         12,515
  ASP professional services                  17,387        21,154          39,254         34,967
  Other                                       2,258           221           4,450          1,102
                                          ---------     ---------      ----------     ----------
    Total                                 $  31,242     $  33,020      $   66,365     $   58,024
                                          =========     =========      ==========     ==========

Operating income (loss):
  Application hosting                     $  (2,281)    $  (3,523)     $   (5,989)    $   (6,651)
  Web hosting                                (4,043)       (5,699)         (9,026)        (8,544)
  ASP professional services                     149         1,361             589          2,077
  Other                                     (27,358)      (24,454)        (94,387)       (44,445)
                                          ---------     ---------      ----------     ----------
    Total                                 $ (33,533)    $ (32,315)     $ (108,813)    $  (57,563)
                                          =========     =========      ==========     ==========

<CAPTION>
                                          June 30,    December 31,
                                            2001          2000
                                          ---------   ------------
                                                (in thousands)
<S>                                       <C>         <C>
Segment assets:
  Application hosting                     $  27,618    $   37,124
  Web hosting                                34,717        17,281
  ASP professional services                  27,595        32,376
  Other                                     111,867       238,508
                                          ---------    ----------
    Total                                 $ 201,797    $  325,289
                                          =========    ==========
</TABLE>

     The Company's management generally reviews the results of operations of
each segment exclusive of depreciation and amortization (aggregating $37.5
million and $23.9 million, respectively, for the six months ended June 30, 2001
and 2000), corporate expenses, non-cash compensation, restructuring expenses and
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 $41.2 million of charges associated with the long-lived
asset impairment loss (see Note 7), and $1.3 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.

                                       7
<PAGE>

6. RESTRUCTURING CHARGES

September 2000 Restructuring Charge

     In September 2000, the Company announced a plan to accelerate its
acquisition integration program by consolidating geographically dispersed
functions. The plan included the elimination of approximately 300 jobs including
employee attrition, the exit of certain leased facilities and other related
contractual arrangements, and the termination of a software development project.
The workforce reduction plan included reductions in operations and information
systems, customer care, sales, marketing, business development, finance and
administration. Consequently, the Company recorded a charge of $2.5 million for
the three months ended September 30, 2000. As of June 30, 2001, 138 employees
were terminated and approximately $2.1 million of the restructuring reserve was
utilized. A significant portion of the remaining positions were eliminated
through higher than expected attrition levels, whereby the employees who
voluntarily terminated their employment did not qualify for termination
benefits. This plan was completed by June 30, 2001, and the Company reversed
approximately $0.4 million of non-utilized restructuring reserves during the
second quarter.

The following table summarizes the status of the September 2000 restructuring
reserve by major component:

<TABLE>
<CAPTION>
                                        Severance and     Facilities' Exit      Capitalized
                                        Related Costs     and Related Costs      Software         Total
                                        ----------------------------------------------------------------
                                                               (amounts in thousands)
<S>                                     <C>               <C>                   <C>              <C>
Total reserve charged to expense          $ 1,802               $ 309              $ 389         $ 2,500

2000 Charges Against Reserve:                                                                          -
  Quarter ended September 30, 2000           (215)                  -               (389)           (604)
  Quarter ended December 31, 2000            (771)                (83)                 -            (854)
                                        ----------------------------------------------------------------
Balance as of December 31, 2000               816                 226                  -           1,042

2001 Charges Against Reserve:
  Quarter ended March 31, 2001               (410)               (103)              (110)           (623)
  Quarter ended June 30, 2001                 (59)                  -                  -             (59)

2001 Reserve Adjustments:
  Quarter ended June 30, 2001                (347)               (123)               110            (360)
                                        ----------------------------------------------------------------
Balance as of June 30, 2001               $     -               $   -              $   -         $     -
                                        ================================================================
</TABLE>

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, consists of a workforce reduction of approximately 200 additional
positions, of which 183 positions were eliminated as of June 30, 2001. This
action resulted in a charge for payment of severance and related costs of
approximately $1.7 million. The charge was recognized during the second quarter
of 2001.

     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, and additional workforce reductions. During the second quarter of
2001, the Company identified additional workforce reductions, totaling
approximately 70 positions, that were not included in the April Plan. The

                                       8
<PAGE>

Company will recognize a restructuring charge for the qualifying costs
associated with these additional workforce reductions in the third quarter of
2001, when the criteria required under EITF 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring), and SAB 100 were met.

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)
                                                ---------------------
Balance as of June 30, 2001                       $               160
                                                =====================

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 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 10). 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.

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

                                       9
<PAGE>

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 plan to dispose of a major line of business
of the Company's application hosting segment, its Managed Enterprise Resource
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 have 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 represents a separate
group of customers that will no longer be serviced by the Company, nor will the
Company retain the RSP employee base, as its skill set (e.g., operations and
sales personnel), in general, is 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 10).  The Company expects to dispose of the remaining outsourcing
operations of RSP by the end of 2001, other than $1.3 million of assets,
primarily consisting of computer equipment and software, which the Company plans
to retain.  The remaining net assets and operations of the outsourcing
operations of RSP are not significant.  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.  As of June 30, 2001, the net liabilities of RSP
totaled $0.9 million, which includes estimated RSP operating losses through the
expected disposal dates and estimated costs to dispose of the business.

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

                        Three Months Ended          Six Months Ended
                             June 30,                    June 30,
                       ---------------------      ----------------------
                         2001        2000           2001          2000
                       ---------   ---------      ---------    ---------
                                        (in thousands)
  Revenues             $  3,817    $  5,590       $  8,264     $  7,443

  Operating loss       $ (2,085)   $ (5,802)      $ (6,976)    $ (7,802)

                                       10
<PAGE>

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

                                           June 30,       December 31,
                                             2001             2000
                                         ----------       ------------
                                                 (in thousands)
  Current assets                                            $  13,616
  Property and equipment, net                                  11,730
  Intangibles, net                                             29,284
  Current liabilities                     $   (936)           (17,062)
                                         ----------       ------------
   Net assets (liabilities)               $   (936)         $  37,568
                                         ==========       ============
9.  FINANCING COMMITMENT

     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 (Notes) and 27,273 warrants (Warrants) for the purchase of
shares of Common Stock for a total sales price of $19.0 million. Under the
Agreement, the Company has the right to require Charterhouse and Softbank to
purchase their respective share of the Units, or a portion thereof, through
April 17, 2002.

     The Notes are convertible at the option of the holder, at any time prior to
maturity, into Common Stock at a conversion price of $1.10 per share, subject to
adjustment, which is equal to 90,909.09 shares of Common Stock, per $100,000
principal amount of the Notes. Interest payments will be payable on the last day
of each calendar quarter by the issuance of additional Notes.  The Notes mature
on June 30, 2003.  The Warrants have an exercise price of $1.25 per share and
expire five years after issuance.  Assuming the sale of all Units, the fair
value of the Warrants, which will be allocated to the total proceeds received
will be approximately $4.0 million.  Such amounts will be charged to interest
expense over the term of the Notes commencing with the sale of the Notes.  In
addition, the Notes contain a beneficial conversion feature, which will amount
to approximately $3.3 million, assuming the sale of all Units, that will be
immediately charged to interest expense upon receipt of the proceeds.

     At the same time, the Company entered into a definitive agreement with EYT,
Inc. (EYT), an entity controlled by Charterhouse and Softbank, under which EYT
committed to repurchase from the Company its investment in EYT for a purchase
price of $1.0 million, which approximates the Company's cost of such investment.
This asset is classified as other assets on the Company's balance sheet as of
June 30, 2001. The closing of the EYT transaction shall take place
contemporaneously with the closing of the first sale of Units to Charterhouse
and Softbank. The above transactions are collectively referred to herein as the
"$20 Million Funding."

     In July 2001, the Company notified Charterhouse and Softbank of its
intention to sell all of the Units.  The Company expects to receive the proceeds
of the entire $20 Million Funding in August 2001.

10. SUBSEQUENT EVENTS

     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

                                       11
<PAGE>

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. The Company has guaranteed the repayment of funds due
under the facility.

                                       12
<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: the uncertainty that
demand for our services will increase and other competitive market factors;
changes in our business strategy; an inability to execute our strategy due to
changes in the hosting and Internet services industries or the economy in
general; difficulties in the timely expansion of our network and data centers or
in the acquisition and integration of businesses; difficulties in retaining and
attracting new employees or customers; difficulties in developing or deploying
new services; risks associated with rapidly changing technology; and various
other factors that may prevent us from competing successfully or profitably in
existing or future markets. In light of these risks and uncertainties, there can
be no assurance that the forward-looking statements contained herein will in
fact be realized and we assume no obligation to update this information.

Overview

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

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

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

                                       13
<PAGE>

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

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

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

     Since our inception we have acquired 27 operating companies providing
application hosting, Web hosting and ASP professional services solutions, for
total consideration of approximately $210.9 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 June
30, 2001, of approximately $188.6 million of intangible assets.  Recoverability
of our investment in intangible assets is dependent on our ability to
successfully operate our businesses and generate positive cash flows from
operations. Intangible amortization charges will result in increased losses or
reduced net income.  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.
Application of the nonamortization provisions of the Statement is expected to
significantly reduce our net losses.

     For the period from inception to June 30, 2001, we have incurred net losses
and negative cash flows from operations, and have expended significant funds for
capital expenditures (property and equipment) and the acquisition of businesses.
Our principal sources of cash to fund the aforementioned activities were from
the sale of $152.3 million in Common and Preferred Stock in public and private
sales and the sale of $164.8 million of Convertible Subordinated Notes.  As of
June 30, 2001, we had $17.6 million in cash, cash equivalents and short-term
investments, of which $14.5 million is available for use in our wholly-owned
operations, and $3.1 million is available for use by Interliant Europe B.V.
(Interliant Europe), a consolidated subsidiary that was 51% owned by us at June
30, 2001.  See Note 10 of Notes to Condensed Consolidated Financial Statements
for a description of our disposition of Interliant Europe, which closed in
August 2001.

     We have entered into definitive agreements for the $20 Million Funding (see
Note 9 of Notes to Condensed Consolidated Financial Statements), the proceeds of
which we expect to receive in August 2001.  We are seeking additional sources of
cash to fund our business plan.  Accordingly, we intend to sell certain of our
businesses and assets, which we no longer consider core to our ongoing business
plans (see Notes 8 and 10 of Notes to Condensed Consolidated Financial
Statements).  Any proceeds from these planned sales will be used to further fund
our ongoing operations.  However, there can be no assurances that we will
successfully consummate a sale of any or all of the businesses and assets or
whether any such sale, if completed, will result in additional material cash
funding to further support our ongoing operations.

      As of June 30, 2001, we had an accumulated deficit of $335.7 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:

 .  expansion of our sales initiatives;
 .  funding of product development;
 .  completing and equipping our data centers; and

                                       14
<PAGE>

 .  implementation of billing, accounting, operations and customer service
   systems.

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

2001 Business Restructuring 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 Accounting Bulletin No. 100, Restructuring and Impairment Charges (SAB
100) to ascertain if these decisions and changed conditions caused an impairment
charge.

     The April Plan is being executed in two phases.  Phase 1, which began on
April 3, 2001, consists of a workforce reduction of approximately 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
reduction will range from $13.0 million to $15.0 million and 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.  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 June 30, 2001, the net liabilities of RSP totaled
$0.9 million.

     We continue to aggressively pursue the divestiture of certain other major
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.  In the event that we close some of the businesses, the
costs associated with such activities will likely include the termination of
additional employees and settlement of certain contractual obligations. The
costs of exiting the businesses will vary depending on the manner of
disposition. While those costs are not fully determinable at this time, we
estimate that in the event of a shut down of certain of these businesses, the
exit costs could

                                       15
<PAGE>

range as follows: workforce reductions ($1.0 million to $2.0 million) and
termination of facility leases and other contractual obligations ($1.0 million
to $3.0 million).

     In July 2001, we announced additional workforce reductions of approximately
70 positions.  We will recognize a restructuring charge in the third quarter of
2001 for the qualifying costs, which we estimate will be approximately $0.3
million, when the criteria required under EITF 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring), and SAB 100 were met.  We
expect the annualized savings from this workforce reduction to be approximately
$5.0 million.

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

     As part of the restructuring activities an impairment assessment was made
with respect to the long-lived assets associated with the businesses planned to
be sold or shut down. The assessment indicated that, on a held for use basis,
there was impairment evident in such assets. Further, based on our assessment of
internal and external facts and circumstances to which the impairment was
attributable, we concluded that the impairment indicators arose in the latter
half of the first quarter of 2001.  In connection therewith, we recorded
impairment charges during the six months ended June 30, 2001 of $41.2 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.

     During the second quarter of 2001, our management approved a plan to exit
Interliant Europe B.V. (Interliant Europe), a 51%-majority owned subsidiary with
operations in continental Europe.  In August 2001, we entered into definitive
agreements (Definitive Agreements) with @viso Limited (@viso) 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
form the dissolution and liquidation of that company. The Definitve 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.

     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 are actively seeking buyers for the remaining businesses to be exited
and related assets. However, no assurance 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

                                       16
<PAGE>

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:

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

     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,

                                       17
<PAGE>

we recognize license revenue upon shipment of a product to the end-user if a
signed contract exists, the fee is fixed and determinable and collection of the
resulting receivable is probable. For contracts with multiple elements (e.g.,
software products, maintenance and other services), we allocate revenue to each
element of the contract based on vendor specific objective evidence of the
element's fair value.

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

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

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

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

THREE MONTHS ENDED JUNE 30, 2001 AND 2000

Revenues

     Revenues decreased $1.8 million, from $33.0 million for the three months
ended June 30, 2000 to $31.2 million for the corresponding 2001 period.  During
the second quarter of 2001, we continued to experience 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.

     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 $1.4
million, or 33%, from the 2000 period, and our ERP and CRM professional services
revenues declined by $1.0 million (or approximately $5.0 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 restructuring plan.

     Our core recurring hosting product lines realized growth of approximately
$1.3 million, or 12%, 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 business segments contributed to the remaining revenue decline of $0.7
million.

Cost of Revenues

     Cost of revenues decreased by $3.3 million, from $23.8 million for the
three months ended June 30, 2000 to $20.5 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 associated with lower salaries and related costs in connection

                                       18
<PAGE>

with the execution of workforce reductions as part of the September 2000 and
April 2001 restructuring efforts.

     In the future, cost of revenues may fluctuate due to capacity utilization,
the timing of investments in data centers, 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 June 30, 2001 and 2000 was 34.5%
and 27.8%, respectively.  The overall gross margin improvement is primarily the
result of a decline in 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 24% and 10% for the three months ended June 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 security and networking products.

Sales and Marketing


     Sales and marketing expense decreased by $0.5 million, from $10.8 million
for the three months ended June 30, 2000 to $10.3 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, offset by increases
attributable to the sales and marketing expenses of businesses acquired during
the second half of 2000.  Sales and marketing expenses represented 33% of total
revenues for both periods.  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 $2.3 million, from $14.5 million for the three months ended June
30, 2000 to $16.8 million for the corresponding 2001 period.  This increase in
general and administrative expense was attributable in part 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.

Non-cash compensation

  Non-cash compensation expense decreased by $10.2 million, from $3.1 million
for the three months ended June 30, 2000 to a credit of $7.1 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 quarter ending June 30, 2001 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.

                                       19
<PAGE>

     During the second quarter of 2001, we recorded non-cash compensation
charges aggregating $1.3 million stemming from stock issuances to our co-
chairmen, and stock issuances and option grants to The Feld Group, which is
rendering executive-level services to us.

Depreciation

     Depreciation expense increased by $4.8 million, from $3.2 million for the
three months ended June 30, 2000 to $8.0 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 to support revenue growth.

Amortization of Intangible Assets

     Amortization expense increased by $0.1 million, from $9.9 million for the
three months ended June 30, 2000 to $10.0 million for the corresponding 2001
period. The increase in amortization expense was due to higher goodwill and
other identifiable intangibles balances associated with acquisitions completed
during the second half of 2000 and the issuance of cash and stock for the
attainment of contingent earn-out targets for certain acquired businesses. Such
expense increases were substantially offset by reductions of amortization
charges resulting from the write-off of goodwill and identifiable intangibles of
approximately $27.6 million (see Note 7 of Notes to Condensed Consolidated
Financial Statements).

Impairment Loss on Long-lived Assets

     Impairment losses on long-lived assets were $5.0 million in the second
quarter of 2001. These charges were primarily attributable to losses realized
for Interliant Europe, a 51%-majority owned subsidiary with operations in
continental Europe.  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, on a held for use basis, 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.  In
August 2001, we entered into a definitive agreement, whereby upon closing, we
no longer own any interest in Interliant Europe.  The remainder of the
impairment loss in the second quarter of 2001 related to an additional write-off
of assets used in the RSP business.

Interest income (expense)

     Net interest expense increased $3.1 million from $0.7 million to $3.8
million in the three months ended June 30, 2001 and 2000, respectively, due
primarily to the interest on our 7% Convertible Subordinated Notes and increases
in capital lease obligations during 2000 and 2001.  Interest income declined due
to the 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 (assuming the sale of all of the units) 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.
Such amounts will be charged to interest expense over the term of the Notes
commencing with the sale of the Notes.  In addition, the amounts related to the
beneficial conversion feature of approximately $3.3 million will be charged to
interest expense at the time of the sale of the notes, which is expected to take
place during the third quarter of 2001.

                                       20
<PAGE>

SIX MONTHS ENDED JUNE 30, 2001 AND 2000

Revenues

     Revenues increased $8.3 million, from $58.0 million for the six months
ended June 30, 2000 to $66.3 million for the corresponding 2001 period.  This
increase was primarily due to the four acquisitions completed during 2000.

     Our core recurring hosting product lines realized growth of approximately
$3.4 million, or 17%, as compared with the 2000 period.  This growth was led by
increases in managed hosting and branded 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.  While revenues in our ASP
professional services segment increased $4.3 million from the 2000 period, on a
pro forma basis, this segment experienced a revenue decline of approximately
$8.0 million as compared to the 2000 period.  The 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 increased by $3.4 million, from $40.9 million for the six
months ended June 30, 2000 to $44.3 million for the corresponding 2001 period.
This increase was due primarily to the acquisitions consummated during 2000,
offset by lower costs of products sold stemming from lower product revenue
volume during the 2001 period and cost reductions associated with lower salaries
and related costs in connection with the execution of workforce reductions as
part of the September 2000 and April 2001 restructuring efforts.  In the future,
cost of revenues may fluctuate due to capacity utilization, the timing of
investments in data centers, 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 six months ended June 30, 2001 and 2000 was 33.3% and
29.4%, 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 24% and 11% for the three months
ended June 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 increased by $3.9 million, from $18.3 million
for the six months ended June 30, 2000 to $22.2 million for the corresponding
2001 period.  This increase was attributable to sales and marketing expenses of
businesses acquired during 2000, and higher spending levels associated with the
expansion of our direct sales force during the latter part of 2000 and early
2001.  During 2001, we curtailed our brand recognition programs and placed
lesser emphasis on direct marketing campaigns for the Web hosting segment.
Sales and

                                       21
<PAGE>

marketing expenses represented 31.6% and 33.4% of total revenues for the six
months ended June 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 $8.7 million, from $24.8 million for the six months ended June 30,
2000 to $33.5 million for the corresponding 2001 period.  This increase in
general and administrative expense was attributable in part 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.

Non-cash compensation

     Non-cash compensation expense decreased by $12.3 million, from $7.5 million
for the three months ended June 30, 2000 to a credit of $4.8 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 quarter ending June 30, 2001 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 six months ended June 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 $9.5 million, from $5.5 million for the
six months ended June 30, 2000 to $15.0 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 to support revenue growth.

Amortization of Intangible Assets

     Amortization expense increased by $4.1 million, from $18.5 million for the
six months ended June 30, 2000 to $22.6 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 resulting from the write-off of goodwill and identifiable
intangibles of approximately $27.6 million (see Note 7 of Notes to Condensed
Consolidated Financial Statements).

                                       22
<PAGE>

Impairment Loss on Long-lived Assets

     Impairment losses on long-lived assets were $41.2 million for the six
months ended June 30, 2001.  In conjunction with the events and circumstances
surrounding our April 2001 restructuring plan (see Note 9 of Notes to Condensed
Consolidated Financial Statements), we performed a review of our long-lived
assets to ascertain if such decisions 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.

Interest income (expense)

     Net interest expense increased $6.0 million from $0.8 million in the six
months ended June 30, 2001 to $6.8 million in the 2000 period, due primarily to
the interest on our 7% Convertible Subordinated Notes and increases in capital
lease obligations during 2000 and 2001.  Interest income declined due to the
reduced amount of cash available for short-term investing during the 2001
period.

LIQUIDITY AND CAPITAL RESOURCES

     We have financed our operations and acquisitions primarily from private
placements of debt and equity, and our initial public offering of common stock.
We had $17.6 million in cash, cash equivalents and short-term investments at
June 30, 2001, including $3.1 million held for use by Interliant Europe, a
consolidated subsidiary that was 51% owned by us as of June 30, 2001.   See Note
10 of Notes to Condensed Consolidated Financial Statements regarding the
disposition of our interest in Interliant Europe.

     On April 16, 2001, we entered into a definitive agreement with affiliates
of Charterhouse Group International, Inc. (Charterhouse) and Softbank Technology
Ventures VI, L.P. and its related funds (Softbank) under which they agreed to
purchase, in the aggregate, 190 units (Units), each Unit consisting of $100,000
principal amount of 8% Convertible Subordinated Notes (Notes) and 27,273
warrants (Warrants) for the purchase of shares of our Common Stock for a total
sales price of $19.0 million. Under the definitive agreement we have the right
to require Charterhouse and Softbank to purchase their respective share of the
Units, or a portion thereof, through April 17, 2002. The Notes are convertible
at the option of the holder, at any time prior to maturity, into Common Stock at
a conversion price of $1.10 per share, subject to adjustment, which is equal to
90,909.09 shares of Common Stock, per $100,000 principal amount of the Notes.
Interest  payments will be payable on the last day of each calendar quarter by
the issuance of additional Notes. The Notes mature on June 30, 2003. The
Warrants have an exercise price of $1.25 per

                                       23
<PAGE>

share and expire five years after issuance. At the same time, we entered into a
definitive agreement with EYT, Inc. (EYT), an entity controlled by Charterhouse
and Softbank, under which EYT committed to repurchase from us our investment in
EYT for a purchase price of $1 million, which approximates our cost of such
investment. This asset is classified as other assets on our balance sheet as of
June 30, 2001. The closing of the EYT transaction shall take place
contemporaneously with the closing of the first sale of Units to Charterhouse
and Softbank. The above transactions are collectively referred to herein as the
"$20 Million Funding."

     In July 2001, we notified Charterhouse and Softbank of our intention to
sell all of the Units.  We expect to receive the proceeds of the entire $20
Million Funding in August 2001.

     During the six months ended June 30, 2001, we used $32.9 million in
operating cash activities. The net loss of $119.7 million included non-cash
charges for depreciation, amortization, asset impairment losses and other non-
cash items totaling $76.7 million.  Operating losses were further offset by cash
provided by working capital changes aggregating $10.1 million, including
decreases in accounts receivables, prepaids and other current assets, and
increases in operating liabilities.

     During the six months ended June 30, 2001, we added $21.5 million of
network software and equipment, furniture and office equipment, leasehold
improvements and capitalized software development.  Such fixed asset additions
were driven by the expansion of our Vienna, Virginia data center and other
facilities, and capitalized software associated with the development of our
hosting operating systems and platforms.  We currently have available lease
facilities totaling approximately $35.6 million, of which $27.1 million was
utilized as of June 30, 2001. The total lease capacity includes a $15.6 million
lease facility with Dell Financial Services (DFS), under which we are financing
all Dell equipment purchases.  During the six months ended June 30, 2001, we
financed approximately $12.6 million of computer equipment and furniture,
including $2.6 million under sale/leaseback arrangements. We expect to continue
such financing activities where possible and we will attempt to secure
additional equipment financing, although no assurances can be given that
additional financing will be available when needed.

     In addition to funding ongoing operations and capital expenditures, our
principal commitments consist of non-cancelable operating leases, semi-annual
interest payments due to holders of 7% Convertible Subordinated Notes (Notes)
and contingent earnout payments to certain sellers of operating companies
acquired by us.  If all targets for acquisition earnouts entered into through
June 30, 2001 are achieved in full, the maximum remaining cash consideration due
pursuant to these earnouts will be $3.3 million and $1.7 million in 2001 and
2002, respectively.  Certain of these agreements, however, provide for issuance
of Common Stock in lieu of cash, at our option.

     As described in "2001 Business Restructuring and Asset Divestitures" above,
we are engaged in a broad-based restructuring effort.  Our plans in this regard
are designed to further streamline our business and thereby improve EBITDA
results and cash flows.  We have also engaged Zolfo Cooper, a respected advisor
in financial restructurings, to assist in the development and execution of a
capital restructuring plan, and we are evaluating all of our alternatives in an
effort to strengthen our financial position.  With the assistance of Zolfo
Cooper, we are actively engaged in discussions with certain holders of our Notes
with regard to a potential restructuring of the Notes.  Any restructuring of our
Notes or of any other elements of our capital structure may involve, among other
actions, one or more of the issuance of equity, the issuance of new debt, and/or
the payment of cash.  Any such actions 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 reaching a favorable settlement with all or some
of the holders of our Notes or otherwise restructuring our capital structure.

     In connection with this restructuring effort, we have determined that while
we currently have the cash available to do so, we will not pay the $5.8 million
semi-annual interest payments

                                       24
<PAGE>

on our Notes on the August 16, 2001 due date. The terms of the indenture
governing the Notes provide us with a 30-day period to make the payment before
an event of default occurs with respect to the Notes. If we fail to make the
interest payments within the 30-day period, either the trustee under the
indenture or the holders of not less than 25% in aggregate principal amount of
the Notes then outstanding, may declare the principal amount of, and accrued and
unpaid interest on, all the Notes to be immediately due and payable. There is
currently $164.8 million in aggregate principal amount of our Notes outstanding.
In addition, if this default occurs under the Notes, it 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. We have not yet determined whether we will make the
interest payment prior to the expiration of the 30-day grace period. Our
determination in this regard will depend primarily on the results of our
discussion with noteholders on a potential restructuring of the Notes. As stated
above, these discussions are ongoing, and we cannot predict at this time whether
our discussions will result in a successful restructuring.

     We believe that our existing cash, cash equivalents and short-term
investments, together with the $20 Million Funding, will provide sufficient
funds to enable us to fund our operating needs and meet our obligations through
December 31, 2001.  This assumes that the principal amount of our Notes does not
become due and payable, either because we successfully restructure the Notes or
because we make the August 16 interest payment prior to the expiration of the
applicable 30-day grace period.  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 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.  Due to these uncertainties, we cannot currently predict how
long our cash resources will last.  However, we believe that it is highly likely
that we will need to raise additional cash during the first half of 2002 to fund
our operations and meet our obligations.

     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 existing debt service
obligations, we will either have to increase revenues without a commensurate
increase in costs to generate sufficient cash from operations, refinance
existing debt obligations, raise additional cash through debt or equity
financings, or execute a combination thereof.  We cannot be assured, however,
that if we need or seek additional capital that we will be successful in
obtaining it.

                                       25
<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We have exposure to financial market risks, including changes in
interest rates. At June 30, 2001, we had short-term investments of approximately
$4.5 million. These short-term investments consist of highly liquid investments
in debt obligations of highly rated entities with maturities of between 90 days
and one year. These investments are subject to interest rate risk and will fall
in value if market interest rates increase. We expect to hold these investments
until maturity, and therefore expect to realize the full value of these
investments, even though changes in interest rates may affect their value prior
to maturity. If interest rates decline over time, this will result in a
reduction of our interest income by approximately $45,000 annually for each
percentage decrease, based on the amount of short-term investments on hand as of
June 30, 2001.

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

                                       26
<PAGE>

PART II. OTHER INFORMATION

                               INTERLIANT, INC.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

(c)    In the six months ended June 30, 2001, options to purchase 8,910 shares
of Common Stock were exercised at a weighted average exercise price of $0.64 per
share.

       During the six months ended June 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.

       During the six months ended June 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.

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

       Exhibits

       Exhibit 10.48 - Amended Engagement Agreement, dated May 22, 2001, between
       The Feld Group, Inc. and Interliant, Inc.

       Exhibit 10.49 - Amendment to Employment Agreement, dated May 22, 2001,
       between Leonard J. Fassler and Interliant, Inc.

       Exhibit 10.50 - Amendment to Consulting Agreement, dated May 22, 2001,
       between Intensity Ventures, Inc. and Interliant, Inc.

(b)    Reports on Form 8-K:

       Form 8-K, filed on July 30, 2001, whereby Interliant, Inc. issued a press
       release on July 24, 2001 announcing the completion of the sale of the ERP
       hosting and related consulting services business of one of its
       subsidiaries, Interliant Managed Application Solutions, Inc., to
       Interpath Communications, Inc.

       Form 8-K, filed on August 6, 2001, whereby Interliant, Inc. filed the
       text of the Stock Purchase Agreement pertaining to the sale of the ERP
       hosting and related consulting services business of one of its
       subsidiaries, Interliant Managed Application Solutions, Inc., to
       Interpath Communications, Inc.

                                       27
<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: August 14, 2001                /s/ Bruce Graham
                                     --------------------------------------
                                     Bruce Graham
                                     Chief Executive Officer and President


Date: August 14, 2001                /s/ Francis J. Alfano
                                     --------------------------------------
                                     Francis J. Alfano
                                     Chief Financial Officer

                                       28