<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 March 1, 2001

                                       OR

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


                         Commission File Number: 0-17932

                            ________________________


                            Micron Electronics, Inc.
                            ------------------------
             (Exact name of registrant as specified in its charter)


     State or other jurisdiction of incorporation or organization: Minnesota


                            ________________________


        Internal Revenue Service - Employer Identification No. 41-1404301


                            ________________________

                     900 E. Karcher Road, Nampa, Idaho 83687
          (Address, including zip code of principal executive offices)

                                 (208) 898-3434
              (Registrant's telephone number, including area code)

                            ________________________


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

        The number of outstanding shares of the registrant's common stock as of
March 27, 2001 was 96,856,165.

                                       1
<PAGE>

PART I.  Financial Information
------------------------------

Item 1.  Financial Statements

Micron Electronics, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)

<TABLE>
<CAPTION>
                                                                        For the quarter ended        For the six months ended

                                                                   March 1,          March 2,          March 1,        March 2,
                                                                       2001              2000              2001            2000
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>               <C>               <C>             <C>
Revenues                                                        $    14,466       $     7,170       $    27,992     $    11,310
Cost of revenues                                                      9,196             4,872            18,724           7,778
                                                                -----------       -----------       -----------     -----------
   Gross margin                                                       5,270             2,298             9,268           3,532
                                                                -----------       -----------       -----------     -----------
Operating expenses:
   Sales, marketing and technical support                             8,698             5,865            18,251           7,727

   General and administrative                                        11,403             4,290            22,658           6,670
   Other expense (income), net                                          424               296            (3,964)            824
                                                                -----------       -----------       -----------     -----------
     Total operating expenses                                        20,525            10,451            36,945          15,221
                                                                -----------       -----------       -----------     -----------
Operating loss                                                      (15,255)          (8,153)           (27,677)        (11,689)
Loss on equity investments                                           (1,509)                -            (2,882)              -
Interest income, net                                                  2,588             3,082             4,407           6,415
                                                                -----------       -----------       -----------     -----------
Loss from continuing operations before taxes                        (14,176)           (5,071)          (26,152)         (5,274)
Income tax benefit                                                    4,472             1,299             8,070           1,549
                                                                -----------       -----------       -----------     -----------
Loss from continuing operations                                      (9,704)           (3,772)          (18,082)         (3,725)
                                                                -----------       -----------       -----------     -----------
Discontinued operations, net of tax:
   Income (loss) from discontinued operations                       (11,738)            9,497            (1,784)         24,069
   Loss on disposal of discontinued operations                     (147,500)                -          (147,500)              -
                                                                -----------       -----------       ------------    -----------
     Total income (loss) from discontinued operations              (159,238)            9,497          (149,284)         24,069
                                                                -----------       -----------       -----------     -----------
Net income (loss)                                               $  (168,942)      $     5,725       $  (167,366)    $    20,344
                                                                ===========       ===========       ===========     ===========

Net income (loss) per share, basic and diluted:

   Continuing operations                                        $     (0.10)      $     (0.04)      $     (0.19)    $     (0.04)
   Discontinued operations                                            (1.65)             0.10             (1.54)           0.25
                                                                -----------       -----------       -----------     -----------
                                                                $     (1.75)      $      0.06       $     (1.73)    $      0.21
                                                                ===========       ===========       ===========     ===========

Number of shares used in per share calculations:

   Basic and diluted                                                 96,796            96,357            96,734          96,318
</TABLE>

2000 amounts have been reclassified to reflect separately the results of
discontinued operations.
The accompanying notes are an integral part of the financial statements.

                                       2
<PAGE>

Micron Electronics, Inc.
Consolidated Balance Sheets
(In thousands, except par value)
(Unaudited)

<TABLE>
<CAPTION>
As of                                                                                        March 1, 2001         August 31, 2000
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>                   <C>
Assets
Cash and cash equivalents                                                                      $   133,059             $   200,003
Liquid investments                                                                                  64,906                 126,032
Receivables, net                                                                                    17,676                   4,404
Deferred income taxes                                                                               21,402                  13,152
Other current assets                                                                                 1,598                   2,845
                                                                                               -----------             -----------
Total current assets                                                                               238,641                 346,436
Property, plant and equipment, net                                                                  47,360                  37,673
Goodwill and intangibles, net                                                                       75,129                  81,821
Investments - held to maturity                                                                       7,250                   1,250
Other assets                                                                                         8,757                   8,511
Net assets of discontinued operations                                                                5,429                  81,472
                                                                                               -----------             -----------
Total assets                                                                                   $   382,566             $   557,163

Liabilities and Shareholders' Equity
Accounts payable and accrued expenses                                                          $    19,271             $    26,834
Current debt                                                                                           852                   1,971
                                                                                               -----------             -----------
Total current liabilities                                                                           20,123                  28,805
Deferred income taxes                                                                               12,427                  16,082
Other liabilities                                                                                    9,290                   5,696
                                                                                               -----------             -----------
Total liabilities                                                                                   41,840                  50,583
                                                                                               -----------             -----------
Commitments and contingencies
Common stock, $.01 par value, authorized 150 million shares; issued
     and outstanding 96.9 million and 96.7 million, respectively                                       969                     967
Additional capital                                                                                 135,995                 134,485
Retained earnings                                                                                  203,762                 371,128

Total shareholders' equity                                                                         340,726                 506,580
                                                                                               -----------             -----------
Total liabilities and shareholders' equity                                                     $   382,566             $   557,163
                                                                                               ===========             ===========
</TABLE>

2000 amounts have been reclassified to reflect separately the results of
discontinued operations.
The accompanying notes are an integral part of the financial statements.

                                       3
<PAGE>

Micron Electronics, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)

<TABLE>
<CAPTION>
Six months ended                                                                            March 1, 2001            March 2, 2000
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>                      <C>
Cash Flows From Operating Activities
Net (loss) income                                                                              $  (167,366)             $    20,344
Adjustments to reconcile net (loss) income to net cash (used in) provided
by operating activities from continuing operations:
         Loss (income) from discontinued operations                                                149,284                 (24,069)
         Depreciation and amortization                                                              11,263                   1,317
         Gain on sale of MCMS common stock                                                          (4,500)                      -
         Provision for doubtful accounts                                                             1,197                      44
         Changes in operating assets and liabilities, net of acquisitions:
              Receivables                                                                          (14,469)                 (2,622)
              Other current assets                                                                   1,247                    (801)
              Accounts payable and accrued expenses                                                 (7,563)                  4,723
              Deferred income taxes                                                                    523                   5,585
              Other                                                                                  3,371                   4,835
                                                                                               -----------             -----------
Net cash (used in) provided by operating activities of continuing operations                       (27,013)                  9,356
                                                                                               -----------             -----------

Cash Flows From Investing Activities
Expenditures for property, plant and equipment                                                     (13,762)                 (5,980)
Purchases of held to maturity investments                                                          (18,468)               (124,319)
Proceeds from maturities of investment securities                                                   80,274                 154,900
Proceeds from sale of MCMS common stock                                                              4,500                       -
Acquisitions, net of cash acquired                                                                       -                 (43,354)
Other                                                                                               (7,199)                (11,625)
                                                                                               -----------             -----------
Net cash provided by (used for) investing activities of continuing operations                       45,345                 (30,378)
                                                                                               -----------             -----------

Cash Flows From Financing Activities
Repayments of debt                                                                                  (1,119)                 (6,298)
Proceeds from issuance of common stock                                                               1,512                     428
                                                                                               -----------             -----------
Net cash used for financing activities of continuing operations                                        393                  (5,870)
                                                                                               -----------             -----------

Net cash provided by (used in) continuing operations                                                18,725                 (26,892)
Net cash provided by (used in) discontinued operations                                             (85,669)                 22,766
                                                                                               -----------             -----------
Net decrease in cash and cash equivalents                                                          (66,944)                 (4,126)
Cash and cash equivalents at beginning of period                                                   200,003                 200,950
                                                                                               -----------             -----------
Cash and cash equivalents at end of period                                                     $   133,059             $   196,824
                                                                                               ===========             ===========
</TABLE>

2000 amounts have been reclassified to reflect separately the results of
discontinued operations.
The accompanying notes are an integral part of the financial statements.

                                       4
<PAGE>

Micron Electronics, Inc.
Notes to Financial Statements
(Tabular amounts in thousands, except per share amounts)
(Unaudited)

1.   Nature of Business

General

Micron Electronics, Inc. and its subsidiaries (collectively the "Company")
provide a variety of computer products and related services through its PC
Systems, SpecTek, and HostPro business segments. The Company has adopted plans
to dispose of its PC Systems and SpecTek business segments, which are reported
separately as discontinued operations - See Footnote 3 "Discontinued
Operations." The Web hosting business ("HostPro"), will remain as the Company's
sole continuing operations. HostPro offers a range of business-to-business
Internet products and services, including turnkey e-commerce solutions, Web and
applications hosting, co-location and connectivity services to small -and
medium-sized businesses, government, education and retail markets. The PC
Systems business develops, markets, manufactures, sells and supports a wide
range of desktop and notebook systems and network servers under the micronpc.com
brand name and sells, resells, and supports a variety of additional peripherals,
software and services. SpecTek processes and markets various grades of memory
products in either component or module form for specific applications.

History of Operating Losses

HostPro has incurred net losses and losses from operations for each period from
inception through the first six months of 2001, and anticipates to incur losses
for at least the next two years. As of March 1, 2001, HostPro had accumulated
net losses of approximately $43 million. We do not expect HostPro to generate
positive cash flow from operations for at least one year.

The Company's future success is dependent upon its ability to achieve
profitability prior to the depletion of cash reserves and to raise funds,
thereafter, if needed. The Company cannot assure that HostPro will be profitable
in the future under its current Web and application hosting model or that
adequate funding will be available to allow the Company to continue operations
subsequent to the one-year time period.

2.   Summary of Significant Accounting Policies

Interim Unaudited Financial Information

The accompanying unaudited financial information as of March 1, 2001 and March
2, 2000 and for the three and six month periods ended on March 1, 2001 and March
2, 2000, has been prepared in accordance with generally accepted accounting
principles for interim financial information. Preparing the Company's financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates. Certain reclassifications, none of which affects net income or loss,
have been made to present the financial statements on a consistent basis.

The accompanying consolidated financial statements include the accounts of the
Company and its majority owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation. In the opinion of
management, the accompanying unaudited financial statements contain all
adjustments (consisting solely of normal recurring adjustments) necessary to
present fairly the financial position of the Company and its results of
operations and cash flows. Operating results for the six-month period ended
March 1, 2001 are not necessarily indicative of the results that may be expected
for the full year.

Basis of Presentation

This report on Form 10-Q ("10-Q") for the second quarter ended March 1, 2001,
should be read in conjunction with the Company's report on Form 10-K ("10-K")
for the fiscal year ended August 31, 2000. Portions of the accompanying
financial statements are derived from the audited year-end financial statements
contained in the 10-K. The Company's operations are reported on a fiscal basis,
which is a 52 or 53-week period ending on the Thursday closest to August 31. The
years ending August 30, 2001 and August 31, 2000 contain 52 weeks. All
references to periods, including annual and quarterly, are on a fiscal basis
unless otherwise indicated. As of March 1, 2001 Micron Technology, Inc. ("MTI")
owned 61% of the Company's outstanding common stock.

Revenue Recognition

Revenue from continuing operations is primarily generated by providing shared
and dedicated hosting, application hosting, and connectivity services. Revenue
is recognized as the services are provided. Hosting contracts generally are for
service periods ranging from 1 to 12 months and typically require up-front fees.
Such fees, including set-up fees for hosting services, are deferred and
recognized ratably over the customers' expected service period.

                                       5
<PAGE>

Micron Electronics, Inc.
Notes to Financial Statements--Continued
(In thousands, except per share amounts)
(Unaudited)

Basic and Diluted Income (loss) Per Share

The Company follows Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share." That statement requires the disclosure of basic net
income (loss) per share and diluted net income (loss) per share. Basic net
income (loss) per share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding during the period and does
not include any other potentially dilutive securities. Diluted net income (loss)
per share gives effect to potentially dilutive securities.

In addition to net income (loss) per share, the Company has also reported per
share amounts on the separate income statement components required by Accounting
Principles Board Opinion No. 30 ("APB No. 30") "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
Because the Company has reported a loss from continuing operations during each
period being reported, the effect of dilutive securities is excluded from the
calculation of per share amounts. Earnings per share exclude the effect of
antidilutive stock options, aggregating 9.0 million and 8.2 million in the
second quarters of 2001 and 2000, respectively.

Recently Issued Accounting Standards

In June 1998, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires that all
derivatives be recorded as either assets or liabilities in the balance sheet and
marked-to-market on an ongoing basis. SFAS No. 133 applies to all derivatives
including stand-alone instruments, such as forward currency exchange contracts
and interest rate swaps, or embedded derivatives, such as call options contained
in convertible debt investments. Along with the derivatives, the underlying
hedged items are also to be marked-to-market on an ongoing basis. These market
value adjustments are to be included either in the statement of operations or as
a component of comprehensive income, depending on the nature of the transaction.
SFAS No. 133 was implemented by the Company in the first quarter of 2001.
Implementation of SFAS No. 133 did not have any impact on the Company's results
of operations, financial position and cash flows.

In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB No. 101") No. 101 "Revenue Recognition in
Financial Statements". SAB No. 101 summarizes certain staff views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Adoption is currently required by the end of 2001, and early
adoption is permitted. The Company is currently evaluating the effect SAB No.
101 may have on its future results of operations, financial position and cash
flows.

3. Discontinued Operations

The Company has adopted plans to discontinue the operations of its PC Systems
and SpecTek business segments. These segments are accounted for as discontinued
operations in accordance with APB No. 30. Amounts in the financial statements
and related notes for all periods shown have been reclassified to reflect the
discontinued operations.

Operating results for the discontinued operations are reported, net of tax,
under "Income (loss) from discontinued operations" on the accompanying
Statements of Operations. In addition, an estimated loss for the disposal of the
discontinued operations has also been recorded, net of tax, under "Loss on
disposal of discontinued operations" on the accompanying Statements of
Operations in the second quarter of 2001. The estimate includes the anticipated
loss on the disposal of the discontinued operations and any future operating
losses incurred between the measurement date and the estimated disposal date.
Management believes that the estimated losses are reasonable, however they are
based on preliminary data and are subject to revision.

For financial reporting purposes, the assets, liabilities and provision for
losses of the discontinued operations are combined and classified in the
accompanying Balance Sheets as of March 1, 2001 and August 31, 2000, under "Net
assets of discontinued operations." Cash flows from the discontinued operations
are also stated separately on the accompanying Statements of Cash Flows, under
"Net cash provided by (used in) discontinued operations."

                                       6
<PAGE>

Micron Electronics, Inc.
Notes to Financial Statements--Continued
(In thousands, except per share amounts)
(Unaudited)

PC Systems

The Company has adopted a plan to discontinue the operations of its PC Systems
business segment, which is being accounted for as discontinued operations in
accordance with APB No. 30. The Company has signed a non-binding Letter of
Intent to sell its PC Systems business segment to a private,
technology-equity-investment firm. If a definitive agreement is signed, the
Company anticipates that the sale would be completed by May 31, 2001.

In accordance with APB No. 30, the Company has estimated that the disposal of
the PC Systems business will result in a loss of $147.5 million, net of tax,
which was recorded in the second quarter of 2001. Included in the estimate is a
$109.6 million loss, net of tax, related to the sale of the PC Systems business.
In addition, the Company has recorded anticipated losses of $37.9 million, net
of tax, from operating the PC Systems business between March 2, 2001 and May 31,
2001, the expected completion date for the sale. Management believes that the
estimated losses are reasonable; however, they are based on preliminary data and
are subject to revision.

Summarized below are the operating results for PC Systems business, which are
included together with SpecTek's operating results in the accompanying
Statements of Operations, under "Income (loss) from discontinued operations."
Also included below is the estimated loss on the disposal of the PC Systems
business, which is reported, in the accompanying Statements of Operations, under
"Loss on disposal of discontinued operations."

<TABLE>
<CAPTION>
                                                                        For the quarter ended          For the six months ended

                                                                   March 1,          March 2,          March 1,        March 2,
                                                                       2001              2000              2001            2000
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>               <C>               <C>             <C>
Net sales                                                       $   201,063       $   242,589       $   474,457     $   501,901
                                                                -----------       -----------       -----------     -----------
Loss before income taxes                                            (45,455)          (19,333)          (65,075)        (47,625)
Income tax benefit                                                   13,465             6,007            19,307          14,306
                                                                -----------       -----------       -----------     -----------
Loss from discontinued operations, net of tax                       (31,990)          (13,326)          (45,768)        (33,319)
Loss on disposal of discontinued operations, net of tax            (147,500)                -          (147,500)              -
                                                                -----------       -----------       -----------     -----------
Loss from discontinued operations, net of tax                   $  (179,490)      $   (13,326)      $  (193,268)    $   (33,319)
                                                                ===========       ===========       ===========     ===========
</TABLE>

Summarized below are the assets and liabilities of the PC Systems business,
which are included together with the assets and liabilities of SpecTek, in the
accompanying Balance Sheets under "Net assets of discontinued operations."

<TABLE>
<CAPTION>
As of                                                                                 March 1, 2001                August 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>                            <C>
Assets
Cash and equivalents                                                                    $    84,202                    $         -
Receivables                                                                                 104,123                        175,496
Inventories                                                                                  16,281                         17,138
Other current assets                                                                          9,524                          7,524
Property, plant and equipment, net                                                          130,241                        137,548
Other assets                                                                                  7,551                          6,437
                                                                                        -----------                    -----------
Total assets                                                                                351,922                        344,143
                                                                                        -----------                    -----------

Liabilities
Accounts payable and accrued expenses                                                       147,959                        215,241
Other liabilities                                                                            20,668                         24,585
                                                                                        -----------                    -----------
Total liabilities                                                                           168,627                        239,826
                                                                                        -----------                    -----------
Provision for losses                                                                       (152,900)                             -
                                                                                        -----------                    -----------
Net Assets of discontinued operations                                                   $    30,395                    $   104,317
                                                                                        ===========                    ===========
</TABLE>

                                       7
<PAGE>

Micron Electronics, Inc.
Notes to Financial Statements--Continued
(In thousands, except per share amounts)
(Unaudited)

SpecTek

The Company has adopted a plan to discontinue the operations of its SpecTek
business segment, which is accounted for as discontinued operations in
accordance with APB No. 30. Pursuant to the Amended and Restated Component
Recovery Agreement (as amended, the "Component Recovery Agreement"), dated
effective September 2, 1999, MTI has exercised its rights to purchase the assets
of the SpecTek business. On March 22, 2001 the Company entered into a Purchase
Agreement (the "Purchase Agreement") to sell all assets primarily used by
SpecTek and certain land, buildings and intellectual property assets, used
primarily by the PC Systems business, to MTI. Pursuant to the terms of the
Purchase Agreement, the Company transferred the land, buildings and intellectual
property to MTI on March 22, 2001. The assets used by SpecTek were transferred
to MTI on April 5, 2001. The Company has leased back a portion of the land and
buildings from MTI and has also been granted a license to use the intellectual
property. The estimated proceeds from the sale of assets under the Purchase
Agreement are $136 million, less $92 million of inter-company accounts payable
to MTI. The Company received $18 million of cash in excess of the historical
cost of the land, buildings, and intellectual property. This amount will be
recorded, net of tax, as an increase in additional paid in capital during the
third quarter of 2001.

The Company anticipates that SpecTek will provide income from its operations
through the disposal date of April 5, 2001. Income earned by SpecTek during this
period will be recognized in the third quarter of 2001. The Company continued to
purchase components from MTI through April 5, 2001, under the terms of the
Component Recovery Agreement. The cost to obtain components from MTI during the
phase-out period was 90% of pre-tax income attributable to the sale of such
components. Based on the terms of the Purchase Agreement, and in accordance with
APB 30, no estimated loss on disposal was recorded for the sale of SpecTek in
the second quarter of 2001.

Summarized below are the operating results for SpecTek, which are included
together with the PC Systems business' operating results, in the accompanying
Statements of Operations under "Income (loss) from discontinued operations."

<TABLE>
<CAPTION>

                                                                        For the quarter ended        For the six months ended

                                                                   March 1,          March 2,          March 1,        March 2,
                                                                       2001              2000              2001            2000
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>               <C>               <C>             <C>
Net sales                                                       $    96,989       $    84,001       $   214,105     $   173,500
                                                                -----------       -----------       -----------     -----------
Income before income taxes                                           28,987            32,604            62,836          81,983
Income tax provision                                                 (8,735)           (9,781)          (18,852)        (24,595)
                                                                -----------       -----------       -----------     -----------
Income from discontinued operations, net of tax                      20,252            22,823            43,984          57,388
Loss on disposal on discontinued operations, net of tax                   -                 -                 -              -
                                                                -----------       -----------       -----------     -----------
Income from discontinued operations, net of tax                 $    20,252       $    22,823       $    43,984     $    57,388
                                                                ===========       ===========       ===========     ===========
</TABLE>

Summarized below are the assets and liabilities of SpecTek, which are included
with the assets and liabilities of the PC Systems business, in the accompanying
Balance Sheets under "Net assets of discontinued operations."

<TABLE>
<CAPTION>
As of                                                                                 March 1, 2001                August 31, 2000
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>                            <C>
Assets
Receivables                                                                             $    38,430                    $    53,968
Inventories                                                                                  29,764                         13,620
Property, plant and equipment, net                                                           34,913                         36,205
Other assets                                                                                    469                            411
                                                                                        -----------                    -----------
Total assets                                                                            $   103,576                    $   104,204
                                                                                        ===========                    ===========
Liabilities

Accounts payable and accrued expenses                                                   $   128,323                    $   126,626
Other liabilities                                                                               219                            423
                                                                                        -----------                    -----------
Total liabilities                                                                           128,542                        127,049
                                                                                        -----------                    -----------
</TABLE>

                                       8
<PAGE>

Micron Electronics, Inc.
Notes to Financial Statements--Continued
(In thousands, except per share amounts)
(Unaudited)

<TABLE>
<S>                                                                                     <C>                            <C>
Net liabilities of discontinued operations                                              $   (24,966)                   $   (22,845)
                                                                                        ===========                    ===========
</TABLE>

                                       9
<PAGE>

Micron Electronics, Inc.
Notes to Financial Statements--Continued
(In thousands, except per share amounts)
(Unaudited)

4.   Receivables

<TABLE>
<CAPTION>
As of                                                                                 March 1, 2001                August 31, 2000
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>                             <C>
Trade receivables                                                                       $     8,200                     $    3,639
Taxes recoverable                                                                             9,205                              -
Other                                                                                         1,033                          1,070
Allowance for doubtful accounts                                                                (762)                          (305)
                                                                                        -----------                    -----------
                                                                                        $    17,676                    $     4,404
                                                                                        ===========                    ===========
</TABLE>

5.   Property, Plant and Equipment

<TABLE>
<CAPTION>
As of                                                                                 March 1, 2001                August 31, 2000
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>                            <C>
Computer equipment and software                                                         $    24,163                    $    16,986
Leasehold improvements                                                                       15,425                         10,550
Assets in progress                                                                           15,962                         14,990
Less accumulated depreciation and amortization                                               (8,190)                        (4,853)
                                                                                        -----------                    -----------
                                                                                        $    47,360                    $    37,673
                                                                                        ===========                    ===========
</TABLE>

6.   Acquired Intangibles and Goodwill

<TABLE>
<CAPTION>
As of                                                                                 March 1, 2001                August 31, 2000
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>                            <C>
Goodwill                                                                                $    64,312                    $    65,375
Acquired intangibles                                                                         24,700                         24,700
                                                                                        -----------                    -----------
                                                                                             89,012                         90,075
Less accumulated amortization                                                               (13,883)                        (8,254)
                                                                                        -----------                    -----------
                                                                                        $    75,129                    $    81,821
                                                                                        ===========                    ===========
</TABLE>

Amortization expense related to goodwill and acquired intangible assets amounted
to $2.8 million and $1.8 million for the quarters ended March 1, 2001 and March
2, 2000 and $5.6 million and $2.5 million for the first six months of 2001 and
2000, respectively.

7.   Equity Investment

On April 7, 2000, the Company invested $7 million in Bird on a Wire, Inc.
("BOAW"), a dedicated Web hosting start-up company in exchange for a
non-interest bearing convertible debenture (the "Debenture"). The Debenture is
convertible after April 7, 2003, or upon the occurrence of certain liquidity
events, into common shares that will provide the Company with up to 30% of the
issued and outstanding common shares of BOAW at the conversion date. The Company
accounts for this investment using the equity method of accounting.
Correspondingly, losses incurred by BOAW are treated as a reduction in its
equity investment. The book value of the BOAW investment was $3.5 million and
$6.4 million as of March 1, 2001 and August 31, 2000, respectively.

8.   Accounts Payable and Accrued Expenses

<TABLE>
<CAPTION>
As of                                                                                 March 1, 2001                August 31, 2000
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>                             <C>
Trade payable                                                                          $      8,714                    $     7,670
Deferred revenue                                                                              4,812                          3,198
Taxes payable                                                                                 2,150                          7,268
Accrued payroll and related liabilities                                                       1,345                          3,442
Other accrued expenses                                                                        2,250                          5,256
                                                                                        -----------                    -----------
                                                                                        $    19,271                    $    26,834
                                                                                        ===========                    ===========
</TABLE>

                                       10
<PAGE>

Micron Electronics, Inc.
Notes to Financial Statements--Continued
(In thousands, except per share amounts)
(Unaudited)

                                       11
<PAGE>

Micron Electronics, Inc.
Notes to Financial Statements--Continued
(In thousands, except per share amounts)
(Unaudited)

9.   Debt

<TABLE>
<CAPTION>
As of                                                                                 March 1, 2001                August 31, 2000
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>                            <C>
Notes payable in periodic installments through June 2001,
     weighted average interest rate of 7.93%                                            $       806                    $     1,854

Capitalized lease obligations payable in monthly installments through
     October 2002, interest rate of 10.29%                                                       46                            117
                                                                                        -----------                    -----------
Current debt                                                                            $       852                    $     1,971
                                                                                        ===========                    ===========
</TABLE>

On March 28, 2001, the Company terminated its unsecured credit agreement with a
group of financial institutions, which provided borrowings up to $100.0 million.
As of March 2, 2001, the Company had no borrowings outstanding under this
agreement.

10.  Transactions with Affiliates - Discontinued Operations

<TABLE>
<CAPTION>
                                                                                      March 1, 2001                  March 2, 2000
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>                            <C>
Net sales                                                                                $   12,356                     $    1,158

Inventory purchases                                                                          54,882                         18,144
Component recovery agreement expenses                                                        28,478                         31,124
Administrative services and other expenses (income)                                             (34)                           136
Property, plant and equipment purchases                                                       7,336                          4,840
Property, plant and equipment sales                                                          12,210                         43,710
</TABLE>

The transactions noted above were between the Company's discontinued operations
and MTI.

11.  Operating Segment and Geographic Information

The Company adopted Statement of Financial Accounting Standards (SFAS) 131,
"Disclosures about Segments of an Enterprise and Related Information" in 1999.
SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of its reportable segments. SFAS 131 also requires disclosures about
products and services, geographic areas, and major customers.

The Company had three business segments, PC Systems, SpecTek, and HostPro. As
discussed in Footnote 3 "Discontinued Operations", the PC Systems and SpecTek
business units are being reported as discontinued operations. HostPro, the
remaining business segment, is reported as the Company's continuing operation.

12.  Income Taxes

The effective income tax rate was approximately 32% and 26% for the second
quarter of 2001 and 2000, respectively. The effective income tax rate was
approximately 31% and 29% for the first six months of 2001 and 2000,
respectively. These rates principally reflect the federal statutory rate, net of
the effect of state taxes and tax exempt securities.

13.  Gain on Sale of Investment

On September 29, 2000, the Company sold its remaining 10% interest in MCMS, Inc.
("MCMS") for a net gain of $4.5 million which is reported in the Statements of
Operations under "Other expense (income), net". MCMS was formerly the Company's
wholly owned subsidiary, of which 90% was sold in September 1998.

                                       12
<PAGE>

Micron Electronics, Inc.
Notes to Financial Statements--Continued
(In thousands, except per share amounts)
(Unaudited)

14.  Commitments and Contingencies

The Company is defending a consumer class action lawsuit filed in the Federal
District Court of Minnesota based on the alleged sale of defective computers. No
class has been certified in the case. The case involves a claim that the Company
sold computer products with a defect that may cause errors when information is
written to a floppy disk. Substantially similar lawsuits have been filed against
other major computer manufacturers. The case is currently in the early stages of
discovery, and we are therefore unable to estimate total expenses, possible loss
or range of loss that may ultimately be connected with the matter.

During the third quarter of 1997, the Company began to collect and remit
applicable sales or use taxes in nearly all states. In association therewith,
the Company is party to agreements with nearly all states, which generally limit
its liability, if any, for non-remittance of sales and use taxes prior to such
agreements' effective dates. The Company believes the resolution of any matters
relating to the non-remittance of sales or use taxes prior to the balance sheet
date will not have a material adverse effect on its business, financial
position, and results of operations and cash flows.

Periodically, the Company is made aware that technology it uses may infringe on
intellectual property rights held by others. The Company has accrued a liability
and charged operations for the estimated costs of settlement or adjudication of
certain asserted and unasserted claims for alleged infringement prior to the
balance sheet date. Resolution of these claims could exceed the amounts reserved
by the Company, which could have a material adverse effect on future results of
operations, and could require changes in the Company's products or processes. In
addition, the Company is currently a party to various other legal actions
arising out of the normal course of business, none of which is expected to have
a material adverse effect on the Company's business, financial position, results
of operations and cash flows.

Pursuant to the Merger Agreement (see Footnote 15, "Subsequent Events - Business
Combination"), the Company has entered into a Bridge Loan Agreement (the "Loan
Agreement") with Interland, Inc. ("Interland"). Under the terms of the Loan
Agreement, the Company has agreed to advance up to an aggregate principal amount
of $10 million to Interland between June 30, 2001 and August 31, 2001. If the
closing of the Merger Agreement has not occurred prior to August 31, 2001, the
Company has agreed to advance up to $20 million.

At March 1, 2001, the Company had commitments of $1.6 million for the expansion
and upgrading of facilities and equipment and $9.2 million for infrastructure
software projects.

15.  Subsequent Events

Discontinued Operations

The Company has adopted plans to dispose of its PC Systems and SpecTek business
segments. See Footnote 3, "Discontinued Operations."

Business Combination

On March 23, 2001, the Company, Interland, and Imagine Acquisition Corporation
("Merger Sub"), a wholly owned subsidiary of the Company, entered into an
Agreement and Plan of Merger dated as of March 22, 2001 (the "Merger
Agreement"). Subject to the terms and conditions of the Merger Agreement, Merger
Sub will merge with and into Interland, with Interland to survive and become a
wholly owned subsidiary of the Company (the "Merger"). Each outstanding share of
Interland common stock will be exchanged for 0.861 (the "Exchange Ratio") shares
of Micron Electronics common stock, and options and warrants to purchase
Interland common stock will be exchanged for options or warrants, respectfully,
to purchase shares of the Company's common stock according to the Exchange
Ratio. Based on provisions of the Merger Agreement, the Exchange Ratio may be
subject to change. After the closing of the Merger, Interland shareholders and
MTI are expected to own approximately 30% and 42%, respectively, of the
Company's outstanding common shares.

Interland provides a broad range of Web hosting, applications hosting and other
related Web-based business solutions specifically designed to meet the needs of
small and medium-sized businesses. Interland had net sales of $34 million for
the year ended December 31, 2000 and a net loss of $67 million.

                                       13
<PAGE>

Micron Electronics, Inc.
Notes to Financial Statements--Continued
(In thousands, except per share amounts)
(Unaudited)

Sale of Connectivity Accounts

On March 26, 2001 the Company entered into an agreement to sell substantially
all of its consumer dial-up accounts for between $4 and $5 million. Revenue from
these accounts was approximately 12.4% of total revenues for the second quarter
of 2001. The sale of these accounts is not expected to have a substantial impact
on operating income. The Company expects that these accounts will be transferred
by August 2001.

                                       14
<PAGE>

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


Statements contained in this Form 10-Q that are not purely historical are
forward-looking statements and are being provided in reliance upon the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include but are not limited to statements
regarding our plans to sell our non-hosting businesses, the level of losses we
expect to incur in connection with the discontinuation of our PC Systems
business, our expectations regarding our liquidity needs over the next two
years, our plans to merge with Interland, our expectations regarding our future
operating results, including our planned expansion of HostPro's customer base,
increase in HostPro's revenue levels, sale of certain connectivity accounts and
increase in HostPro's operating expenses and the actions we expect to take in
order to maintain HostPro's existing customers and expand HostPro's operations
and customer base. All forward-looking statements are made as of the date hereof
and are based on current management expectations and information available to
the Company as of such date. The Company assumes no obligation to update any
forward-looking statement. It is important to note that actual results could
differ materially from historical results or those contemplated in the
forward-looking statements. Forward-looking statements involve a number of risks
and uncertainties, and include trend information. Factors that could cause
actual results to differ materially include, but are not limited to, those
identified in "Certain Factors" and in other Company filings with the Securities
and Exchange Commission. All quarterly references are to the Company's fiscal
periods ended March 1, 2001, August 31, 2000 or March 2, 2000, unless otherwise
indicated. All annual references are also on a fiscal basis, unless otherwise
indicated. All tabular dollar amounts are stated in thousands.

Overview

Micron Electronics, Inc. and its subsidiaries (collectively the "Company") has
historically provided a variety of computer products and related services
through its PC Systems, SpecTek, and HostPro business segments. We have adopted
plans to discontinue PC Systems, our computer manufacturing business, and
SpecTek, our memory products business. See Footnote 3 "Discontinued Operations"
to the accompanying financial statements. As a result, following the disposition
of these business segments, we will be exclusively a Web hosting company
(HostPro).

The Company was originally established April 7, 1995 through the merger of three
businesses: Micron Computer, Inc., Micron Custom Manufacturing Services, Inc.
and ZEOS International, LTD. As of March 1, 2001, Micron Technology, Inc.
("MTI") owned 61% of our outstanding common stock. HostPro, our continuing
operation, was formed through the integration of four companies purchased during
1999 and 2000. These include Los Angeles-based NetLimited, Inc., (d.b.a.
"HostPro"), Seattle-based LightRealm, Florida-based Worldwide Internet
Publishing Company, and Boise-based Micron Internet Services.

On March 23, 2001, Micron Electronics, Interland, Inc. ("Interland"), and
Imagine Acquisition Corporation ("Merger Sub"), our wholly owned subsidiary,
entered into an Agreement and Plan of Merger dated as of March 22, 2001 (the
"Merger Agreement"). Subject to the terms and conditions of the Merger
Agreement, Merger Sub will merge with and into Interland, with Interland to
survive and become our wholly owned subsidiary (the "Merger"). Each outstanding
share of Interland common stock will be exchanged for 0.861 (the "Exchange
Ratio") shares of our common stock, and options and warrants to purchase
Interland common stock will be exchanged for options or warrants, respectfully,
to purchase shares of our common stock according to the Exchange Ratio. Based on
provisions of the Merger Agreement, the Exchange Ratio may be subject to change.
After the closing of the Merger, Interland shareholders and MTI are expected to
own approximately 30% and 42%, respectively, of our outstanding common shares.
Interland provides a broad range of Web hosting, applications hosting and other
related Web-based business solutions specifically designed to meet the needs of
small and medium-sized businesses. Interland had net sales of $34 million for
the year ended December 31, 2000 and a net loss of $67 million.

HostPro offers a broad range of business-to-business Internet products and
services including managed dedicated hosting solutions, co-location and
connectivity services, e-commerce solutions, application hosting, and
entry-level shared and virtual Web hosting products. With data centers in Los
Angeles, California; Seattle, Washington; Moses Lake, Washington; Boca Raton,
Florida; and Boise, Idaho, we provide these services to small -and medium-sized
businesses, and government, education and retail markets. Our business is
rapidly evolving and we have a limited operating history. As a result, we
believe that period-to-period comparisons of our revenue and operating results,
including our cost of revenue and other operating expenses as a percentage of
total revenue, are not meaningful and should not be relied upon as indicators of
future performance. We do not believe that our historical growth rates are an
indication of future results.

Currently, HostPro derives a substantial majority of its revenues from shared
and dedicated, co-located and applications hosting services. We also derive
revenues from Internet access connectivity and the resale of equipment. Our
strategy is to grow our customer base and revenues by marketing value-added
services to small -and medium-sized businesses. We expect that our number of
customer

                                       15
<PAGE>

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

accounts will grow, and that the revenue from the sale of higher margin
services, such as shared and dedicated hosting, will increase more rapidly than
our revenues from our connectivity and resale of equipment. Currently, most of
our hosting revenues are generated from recurring monthly fees. The remainder is
derived from one-time-set-up fees for installation. We currently sell our
services under agreements having terms of one to twelve months. Most of our
customer agreements may be canceled within the first thirty days.

Our expenses consist of:

        .         Cost of revenue, which is mainly comprised of compensation and
                  related expenses for data center and provisioning operations,
                  Internet connectivity and other related telecommunications
                  expense, and depreciation and amortization of capital and
                  intangibles related to data center equipment and operations;

        .         Sales, marketing and technical support, which is mainly
                  comprised of compensation costs and costs associated with
                  technical support and marketing our products and services.
                  Compensation costs include salaries and related benefits,
                  commissions and bonuses. Our marketing expenses include the
                  costs of direct mail, advertising and other mass market
                  programs; and

        .         General and administrative, which is mainly comprised of
                  compensation and related expenses, occupancy costs, and
                  depreciation and amortization of capital and intangibles
                  related to the engineering, development and administrative
                  functions.

We intend to invest heavily in sales and marketing, the continued development of
our network infrastructure and technology, and engineering and development for
future product expansion. We expect to expand our operations and workforce,
including our network operations, technical support, and administrative
resources. In addition, we intend to continue to expand and develop new sales
channels and relationships. HostPro has incurred net losses and losses from
operations for each period from inception through the first six months of 2001,
and anticipates to incur losses for at least the next two years. As of March 1,
2001, HostPro had accumulated net losses of approximately $43 million. We do not
expect HostPro to generate positive cash flow from operations for at least one
year.

Discontinued Operations

     PC Systems

We have adopted a plan to discontinue the operations of our PC Systems business
segment, which is being accounted for as discontinued operations in accordance
with Accounting Principles Board Opinion No. 30 ("APB No. 30") "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." We have signed a non-binding Letter of Intent to sell our PC
Systems business segment to private, technology-equity-investment firm. If a
definitive agreement is signed, we anticipate the sale would be completed by May
31, 2001. However, we can provide no assurance that a definitive agreement will
be signed, the anticipated sale will close, or of the timing of the sale.

In accordance with APB No. 30, we have estimated that the disposal of the PC
Systems business will result in a loss of $147.5 million, net of tax, which has
been recorded in the second quarter of 2001. Included in the estimate is a
$109.6 million loss, net of tax, related to the sale of the PC Systems business.
In addition, we have recorded anticipated losses of $37.9 million, net of tax,
from operating the PC Systems business between March 2, 2001 and May 31, 2001,
the expected completion date for the sale. We believe that the estimated losses
are reasonable, however they are based on preliminary data and are subject to
revision.

The personal computer industry is highly competitive, with competition based
primarily upon brand name recognition, performance, price, reliability and
service and support. Market conditions coupled with consumer preferences and
concerns during the phase-out period are difficult to predict. We cannot assure
you that changes in market conditions, supply and demand, consumer preferences
or price stability will not have a material adverse effect on our estimated
operating loss during the phase-out period.

                                       16
<PAGE>

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

     SpecTek

We have adopted a plan to discontinue the operations of our SpecTek business
segment, which is accounted for as discontinued operations in accordance with
APB No. 30. On March 22, 2001, we entered into a Purchase Agreement (the
"Purchase Agreement") to sell all assets primarily used by SpecTek and certain
land, buildings and intellectual property assets, used primarily by the PC
Systems business, to MTI. Pursuant to the terms of the Purchase Agreement, we
transferred the land, buildings and intellectual property to MTI on March 22,
2001. The assets used by SpecTek were transferred to MTI on April 5, 2001. We
have leased back a portion of the land and buildings from MTI and have also been
granted a license to use the intellectual property. The estimated proceeds from
the sale of assets under the Purchase Agreement are $136 million, less $92
million of inter-company accounts payable to MTI. We received $18 million of
cash in excess of the historical cost of the land, buildings, and intellectual
property. This amount will be recorded, net of tax, as an increase in additional
paid in capital during the third quarter of 2001.

We expect the operations of SpecTek to post net earnings during the phase-out
period, which terminates when the assets transfer to MTI on April 5, 2001. In
accordance with APB No. 30, net earnings from SpecTek during this period will be
recorded as earned in the third quarter of 2001. We continued to purchase
components from MTI through April 5, 2001, under the terms of the Component
Recovery Agreement. The cost to obtain components from MTI during the phase-out
period was 90% of pre-tax income attributable to the sale of such components.
Based on the terms of the Purchase Agreement, and in accordance with APB 30, no
estimated loss on disposal was recorded for the sale of SpecTek in the second
quarter of 2001.

Results Of Continuing Operations

Our consolidated financial information presents the net effect of discontinued
operations separate from the results of the Company's continuing operations.
Historical financial information has been reclassified to present consistently
the discontinued operations, and the discussion and analysis that follows
generally focuses on continuing operations.

Net loss for the second quarter of 2001 was $9.7 million, or $ (0.10) per basic
and diluted share, on net sales of $14.5 million, compared to net loss of $3.8
million, or $ (0.04) per basic and diluted share, on net sales of $7.2 million
for the second quarter of 2000. The following table sets forth, for the periods
indicated, certain data derived from our consolidated statements of operations:

<TABLE>
<CAPTION>
                                                                       For the quarter ended             For the six months ended

                                                                   March 1,         March 2,           March 1,          March 2,
                                                                       2001             2000               2001              2000
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>               <C>                 <C>              <C>
Revenues                                                            100.0  %         100.0  %            100.0%            100.0%
Cost of revenues                                                     63.6             67.9                66.9              68.8
                                                                 --------          -------             -------          --------
   Gross margin                                                      36.4             32.0                33.1              31.2
                                                                 --------          -------             -------          --------
Operating expenses:
   Sales, marketing and technical support                            60.1             81.8                65.2              68.3
   General and administrative                                        78.8             59.8                80.9              59.0
   Other expense (income), net                                        2.9              4.1               (14.2)              7.3
                                                                 --------          -------             -------          --------
     Total operating expenses                                       141.9            145.8               132.0             134.6
Operating (loss)                                                   (105.5)          (113.7)              (98.9)           (103.4)
Loss on equity investment                                           (10.4)               -               (10.3)                -
Interest income, net                                                 17.9             43.0                15.7              56.7
                                                                 --------          -------             -------          --------
Loss from continuing operations before taxes                        (98.0)           (70.7)              (93.4)            (46.6)
Income tax benefit                                                   30.9             18.1                28.8              13.7
                                                                 --------          -------             -------          --------
Net loss from continuing operations                                 (67.1)%          (52.6)%             (64.6)%           (32.9)%
                                                                 ========          =======             =======          ========
</TABLE>

                                       17
<PAGE>

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

     Revenues

<TABLE>
<CAPTION>
                                                                       For the quarter ended             For the six months ended

                                                                   March 1,         March 2,            March 1,         March 1,
                                                                       2001             2000                2001             2000
---------------------------------------------------------------------------------------------------------------------------------
(Amounts in 1000's)
<S>                                                             <C>               <C>                  <C>             <C>
Hosting revenue                                                 $     9,977       $    3,924           $  18,610       $    5,384
Connectivity revenue                                                  2,784            2,124               5,557            4,042
Other revenue                                                         1,705            1,122               3,825            1,884
                                                                -----------       ----------           ---------       ----------
Total Revenues                                                  $    14,466       $    7,170           $  27,992       $   11,310
                                                                ===========       ==========           =========       ==========
</TABLE>

Revenues increased $7.3 million, or 102%, and $16.7 million or 147%,
respectively, for the quarter and for the six months ended March 1, 2001 when
compared to the same periods from the prior year. Revenue is primarily generated
by providing shared and dedicated hosting, co-location hosting, application
hosting, connectivity and equipment sales to customers. Revenue is recognized as
the services are provided. Hosting contracts generally are for service periods
ranging from 1 to 12 months and typically require up-front fees. Such fees,
including set-up fees for hosting services, are deferred and recognized ratably
over the customers expected service period. Other revenue is primarily the sale
of equipment to customers.

Hosting revenues increased $6.1 million or 154% and $13.2 million or 246%,
respectively, for the quarter and for the six months ended March 1, 2001 when
compared to the same periods from the prior year. The growth in hosting revenues
has been driven by new customer growth, upgrading existing customers and
acquisitions, which occurred, in fiscal 2000. Excluding the effect of the
acquisitions in 2000, hosting growth was 101% and 112%, respectively, for the
quarter and the six months ended March 1, 2001, when compared to the same
periods from the prior year. Sequential quarterly hosting revenue growth was
16%. Shared hosting revenues were 72% of hosting revenues for the quarter and
six months ending March 1, 2001, compared to 88% and 91%, respectively for the
same periods from the prior year. Dedicated hosting revenues were 21% and 22% of
hosting revenues, respectively, for the quarter and six months ending March 1,
2001, compared to 8% and 6%, respectively for the same periods from the prior
year. We have continued to focus on increasing our higher-end hosting services
and ended the quarter with the number of dedicated, managed and unmanaged
servers in excess of 1,200, compared to 234 from the same period a year ago.

Connectivity revenues increased $0.7 million or 31% and $1.5 million or 37%,
respectively, for the quarter and for the six months ended March 1, 2001 when
compared to the same period from the prior year. The growth in connectivity
revenues has been driven primarily by new customer growth.

We maintained over 138,000 paid hosted Web sites, 72,300 paid hosting accounts
and 40,100 Internet access accounts at the end of the second quarter of 2001.
These numbers compare to 78,900 paid hosted Web sites, 34,900 paid hosting
accounts and 34,800 Internet access accounts at the end of the second quarter of
2000.

On March 26, 2001 we entered into an agreement to sell substantially all of our
consumer dial-up accounts for between $4 and $5 million. Revenue from these
accounts was approximately 12.4% of total revenues for the second quarter of
2001. The sale of these accounts is not expected to have a substantial impact on
operating income. We expect that these accounts will be transferred by August
2001.

     Cost of Revenue

Cost of revenues increased 89% and 141% to $9.2 million and $18.7 million,
respectively, for the quarter and six-month periods ended March 1, 2001 from
$4.9 million and $7.8 million in the same periods of the prior year. The
increases in cost of revenues were related to supporting our higher customer
base and revenue levels and were primarily related to increased
telecommunications and Internet access costs, depreciation relating to data
center build-outs and equipment purchases, rent, technical personnel and the
cost of equipment sold to customers. Our cost of revenues as a percentage of
revenues decreased to 64% and 67%, respectively, for the quarter and six-month
periods ended March 1, 2001 from 68% and 69% for the same periods of the prior
year. We anticipate that costs of revenues will increase in absolute dollars,
but decline as a percentage of revenues as we continue to grow, and achieve a
more cost-effective scale of operations.

                                       18
<PAGE>

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

     Sales, Marketing and Technical Support

Sales, marketing and technical support expenses increased 48% and 136% to $8.7
million and $18.3 million, respectively, for the quarter and six-month periods
ended March 1, 2001 from $5.9 million and $7.7 million in the same periods of
the prior year. The increase in sales and marketing expenses during the quarter
ended March 1, 2001 was primarily related to increased sales and technical
support personnel costs and outsourced telemarketing costs, offset partially by
a reduction in advertising costs. The increase in sales and marketing expenses
during the six-month period ended March 1, 2001 was related to increased sales
personnel costs, outsourced telemarketing costs and amortization of acquisition
compensation costs. In addition, technical support costs were $2.3 million and
$4.9 million, respectively, for the quarter and the six-month period end March
1, 2001, compared to $1.0 million and $1.5 million from the same periods of the
prior year.

     General and Administrative

General and administrative expenses increased 166% and 240% to $11.4 million and
$22.7 million, respectively, for the quarter and six-month periods ended March
1, 2001 from $4.3 million and $6.7 million in the same periods of the prior
year. The increase in general and administrative expenses during the quarter and
the six-months ended March 1, 2001 was primarily related to increased
engineering, development, general and administrative personnel costs, goodwill
and intangible amortization, bad debt expenses, depreciation, consulting fees
and rent.

     Other Expense (income), net

On September 29, 2000, the Company sold its remaining 10% interest in MCMS, Inc.
("MCMS") for a net gain of $4.5 million which is reported in the Statements of
Operations under "Other expense (income), net". MCMS was formerly a wholly owned
subsidiary, of which 90% was sold in September 1998. Gain or loss from the
disposal of fixed assets and other non-operating costs are also included in
"other expense (income), net."

     Earnings Before Income Taxes, depreciation and Amortization ("EBITDA")

Our earnings before net interest, income taxes, depreciation and amortization
(including amortization of acquisition compensation costs) was a loss of $11.4
million and $18.6 million, respectively, for the quarter and six-month periods
ended March 1, 2001 compared to a loss of $5.7 and $8.2 million in the same
periods of the prior year. The increases in the level of EBITDA losses were
primarily due to increased expenditures needed to support our growth in
operations, including salaries and benefits for additional employees, network
costs, rent, and other costs related to the increase in the number of our data
centers as well as increased sales, technical support, and general and
administrative expenses. Although EBITDA should not be used as an alternative to
operating loss or net cash provided by (used for) operating activities,
investing activities or financing activities, each as measured under generally
accepted accounting principles, our management believes that EBITDA is an
additional meaningful measure of performance.

     Loss on Equity Investments

The loss on equity investments represents the Company's equity share of the
losses of Bird on a Wire, Inc. ("BOAW").

     Income Tax Provision

The effective income tax rate was approximately 32% and 26% for the second
quarter of 2001 and 2000, respectively. The effective income tax rate was
approximately 31% and 29% for the first six months of 2001 and 2000,
respectively. These rates principally reflect the federal statutory rate, net of
the effect of state taxes and tax exempt securities.

Liquidity and Capital Resources

As of March 1, 2001, we had $282.2 million in cash, cash equivalents and liquid
investments, of which $198 million was shown in continuing operations and $84.2
million was shown in discontinued operations. This represents a decrease of
$43.8 million compared to August 31, 2000. In addition there are also $7.3
million of held to maturity investments, with maturity terms in excess of one
year as of March 1, 2001.

Principal sources of liquidity, from continuing operations, in the first half of
2001 were $80.3 million of proceeds from maturing investments and $4.5 million
of proceeds from the sale MCMS common stock. We used $27.0 million of cash in
operating activities during the second quarter of 2001 primarily due to
increased operating expenses to position HostPro for future growth. In addition,

                                       19
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations--Continued
------------------------

other principal uses of cash during the quarter were $18.5 million of purchases
of held to maturity investments and $13.8 million for purchases of property,
plant and equipment.

                                       20
<PAGE>

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

The SpecTek and PC Systems dispositions will have a material impact on our
liquidity in the third quarter of 2001. Pursuant to the Amended and Restated
Component Recovery Agreement, dated effective September 2, 1999, (as amended,
the "Component Recovery Purchase Agreement") MTI has exercised its rights to
purchase the assets of the SpecTek business. On March 22, 2001, the Company
entered into a Purchase Agreement (the "Purchase Agreement") to sell all assets
primarily used by SpecTek and certain land, buildings and intellectual property
assets, used primarily by the PC Systems business, to MTI. We anticipate that
the proceeds from the completion of the transaction contemplated in the Purchase
Agreement will be approximately $43.0 million, in the third quarter of 2001.

SpecTek has been our only profitable segment and our only source of positive
cash flows, excluding interest income. The discontinuance of the SpecTek segment
will have a material adverse effect on our financial position, results of
operations and cash flows. HostPro does not expect to generate positive cash
flow from its operations for at least one year. However, we expect to have
adequate cash reserves to fund operations during this period. Our future success
is dependent upon our ability to achieve profitability prior to the depletion of
cash reserves and to raise funds, thereafter, if needed. We cannot assure that
HostPro will be profitable in the future under its current Web and application
hosting model or that adequate funding will be available to allow us to continue
operations subsequent to the one-year time period.

We have also signed a non-binding Letter of Intent to sell our PC Systems
business segment to a private, technology-equity-investment firm (the
"Investment Firm"). If the sale of the PC Systems business were consummated, we
would be required to meet certain working capital requirements based on the net
assets and liabilities to be transferred to the Investment Firm. In the third
quarter of 2001 we expect cash outflows of approximately $84.2 million to
satisfy the working capital requirements under the potential sale and to fund
the operations of the PC Systems business during the phase-out period. These
amounts are currently recorded as cash and cash equivalents in the discontinued
operations.

On March 28, 2001, we terminated our unsecured credit agreement with a group of
financial institutions, which provided borrowings up to $100.0 million. As of
March 2, 2001, we had no borrowings outstanding under this agreement. We
currently do not have any plans to obtain a new credit agreement.

At March 1, 2001, we had commitments of $1.6 million for the expansion and
upgrading of facilities and equipment and $9.2 million for infrastructure
software projects. We anticipate making capital expenditures in excess of $8.0
million during the remainder of 2001.

Certain Factors

You should carefully consider the following factors and all other information
contained in this Form 10-Q before you make any investment decisions with
respect to our securities. The risks and uncertainties we describe below are not
the only risks we face. If any of the adverse events described in the following
factors actually occur or we do not accomplish necessary events or objectives
described in the factors, our business, financial condition and operating
results could be materially and adversely affected, the trading price of our
common stock could decline and you could lose all or part of your investment.

Recently announced corporate developments have put a strain on our management,
may adversely affect our relationships with our customers and could adversely
affect our operating results. On March 23, 2001, we announced plans to sell our
non-hosting businesses and plans to acquire Interland. During fiscal 2000, our
non-hosting businesses accounted for 97.9% of our revenues and was responsible
for $89 million of our operating income, while our hosting business accounted
for only 2.1% of our revenue and was responsible for a $43 million operating
loss, before the elimination of intersegment transactions. Our plans to become a
company focused solely on the Web hosting industry represent a significant
change from the business we have conducted to date. Efforts to fulfill these
planned changes have placed, and are expected to continue to place, a
significant strain on our management team and have diverted, and are expected to
continue to divert, the attention of management from the day to day operation of
our businesses. Our plans to dispose of the PC Systems business have resulted in
customer uncertainty with respect to the future availability of products and
services currently provided by that business, which may adversely affect
continued demand for those products and services and ultimately may affect the
expected loss associated with the disposition of that business

Our historical financial information is not representative of our expected
results going forward. Given our plans to sell our non-hosting businesses, our
historical financial information as provided in previous filings will not be
representative of our future operating results. Including the discontinued
operations, HostPro has represented less than 3% for fiscal 2000, 5% for current
quarter, of our total revenues. In addition, HostPro's costs and expenses
include allocations of infrastructure costs associated with HostPro's use of or
benefit from centralized corporate services provided by Micron Electronics. The
historical financial information of the Web hosting business has been adjusted
to take into account the estimated impact of discontinued operations in order to
reflect what HostPro's financial position, results of operations and cash flows
would have been had HostPro been a separate entity during the periods presented.
These estimates could change significantly once the disposition of the non-
hosting businesses is completed and, therefore, the historical information is
not necessarily indicative of the future financial results of the Web hosting
business.

                                      21
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations--Continued
------------------------

Our proposed merger with Interland presents many risks and uncertainties,
including possible changes in the exchange ratio, significant accounting
charges, integration challenges and possible adverse reactions from customers
and suppliers. The exchange ratio of 0.861 shares of Micron Electronics common
stock for each outstanding share of Interland common stock will be adjusted if
the cash and cash equivalents of Micron Electronics less any reserves related to
Micron Electronics' PC Systems or SpecTek businesses - the Net Available Cash -
are less than $200 million at the time of the merger closing. The level of
adjustment depends on the amount of Net Available Cash as of the merger closing.
Any adjustment will increase the number of shares issuable to the shareholders
of Interland and will therefore further decrease the ownership of the combined
company by existing Micron Electronics shareholders. However, the exchange ratio
will not be adjusted for fluctuations in the trading price of Micron Electronics
common stock or Interland common stock.

Micron Electronics will account for the acquisition of Interland using the
purchase method of accounting. Under the purchase method, the purchase price of
Interland will be allocated to the assets acquired and liabilities assumed from
Interland. Micron Electronics expects to record a charge to operations upon the
completion of the merger related to any acquired in-process research and
development and to record amounts related to intangible assets and goodwill,
which will result in annual amortization expenses. These annual amortization
expenses will delay projected achievement of profitability for the Web hosting
business. Additional restructuring charges in connection with the acquisition
are also possible.

The announcement of the merger may increase the likelihood of a number of
changes to the business of HostPro. These potential changes include loss of key
management, development or other personnel; cancellation or decline in the rate
of orders for products or services or deterioration of customer relationships;
delays in product development or development of new service capabilities; and
loss of key strategic relationships, joint marketing arrangements or key
business partners.

Micron Electronics' acquisition of Interland involves risks related to the
integration and management of Interland's operations and personnel with those of
Micron Electronics' Web hosting business. The integration of Micron Electronics
and Interland will be a complex, time consuming and expensive process and may
disrupt the businesses of both companies if not completed in a timely and
efficient manner. After the merger, the company must operate as a combined
organization utilizing common information and communication systems, operating
procedures, financial controls and human resources practices.

Micron Electronics and Interland may encounter substantial difficulties, costs
and delays involved in integrating their operations. For example, Micron
Electronics' headquarters are located in Nampa, Idaho, while Interland's
headquarters are located in Atlanta, Georgia. The combined company will be
headquartered in Atlanta, Georgia. Micron Electronics' integration of
Interland's operations and personnel may be difficult due to the geographic
distance between the two companies. The challenges of integrating the operations
of HostPro and Interland will be increased by ongoing efforts associated with
the continuing integration of other recent acquisitions by Micron Electronics of
Web hosting businesses and Micron Electronics' continuing efforts to dispose of
its non-Web hosting businesses. If this integration effort is not successful,
then results of operations could be adversely affected, employee morale could
decline, key employees could leave and customers could cancel existing orders or
choose not to place new ones. In addition, the attention and effort devoted to
the integration of the two companies will significantly divert management's
attention from other important issues, such as expansion of the combined
company's customer base, which could negatively affect the business and
operating results of the combined company. Success of the merger will depend, in
significant part, on the continued services of HostPro's and Interland's senior
management personnel and of its key technical and sales personnel. If members of
the combined company's anticipated management were to terminate their employment
with HostPro or Interland, the ability of the combined company to manage its
business and workforce after the merger could be harmed and its operations could
be disrupted, and the benefits that the combined company anticipates from the
merger could be prevented or deferred.

If the total costs of the merger and related consolidation and integration
exceed estimates, or if the cost synergies of the merger are less than expected,
the financial results and or financial position of the combined company would
suffer. Any shortfall in anticipated operating results of the combined company
could cause the market price of Micron Electronics common stock to decline. In
addition, the market price of Micron Electronics common stock could decline
immediately, and perhaps significantly, if Micron Electronics does not
experience the business benefits of the merger as quickly or in as great an
amount as securities analysts expect.

The merger is subject to several closing conditions, including approval by
Interland's and Micron Electronics' shareholders, and we cannot assure you that
the merger will be successfully completed. In the event that the merger is not
successfully completed, Micron Electronics may be subject to a number of
material risks, including requirements to pay termination fees under certain
circumstances.

                                       22
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations--Continued
------------------------

If we fail to sell our PC Systems business we may incur a larger loss than
planned and the exchange ratio for the Interland merger could be impacted.
Micron Electronics is currently in negotiations with a potential buyer for its
PC Systems business and intends to sell or discontinue that business prior to
the closing of the Interland merger. The loss on disposal of the PC Systems
business segment, net of estimated income tax benefits, is estimated to be
$147.5 million, including costs associated with disposing of the business of
$109.6 million. Losses on the disposal of the PC Systems business may exceed
this estimate. If losses associated with the disposition of this business exceed
these estimates, Micron Electronics' operating results would be adversely
affected. In addition, if the losses from, or reserves related to, the PC
Systems business are greater than expected, the exchange ratio for the merger
may be adjusted.

HostPro has incurred losses since inception, and we expect it to incur losses
for at least the next two years. HostPro has incurred net losses and losses from
operations for each period from inception through the first six months of 2001.
As of March 1, 2001, HostPro had accumulated net losses of approximately $43
million. We do not expect HostPro, or the combined company if the Interland
merger is consummated, to generate positive cash flow from operations for at
least one year.

HostPro has a limited operating history and its business model is still
evolving, which makes it difficult to evaluate its prospects. HostPro's limited
operating history makes evaluating its business operations and prospects
difficult. HostPro was formed through the acquisition of four separate hosting
and ISP companies during the period from August 1999 through March 2000.
HostPro's range of product offerings has changed since its inception and its
business model is still new and developing. Because some of HostPro's products
are new, the market for these products is uncertain. As a result, the revenue
and income potential of its business, as well as the potential benefits of its
proposed merger with Interland, may be difficult to evaluate.

Our quarterly operating results may fluctuate and our future revenues and
profitability are uncertain. HostPro's past operating results have been subject
to seasonality and other fluctuations, on a quarterly and an annual basis.
HostPro may also experience significant fluctuations in quarterly and annual
operating results due to a wide variety of factors. Because of these
fluctuations, comparisons of operating results from period to period are not
necessarily meaningful and should not be relied upon as an indicator of future
performance. Factors that may cause operating results to fluctuate include, but
are not limited to:

        .    demand for and market acceptance of our services;

        .    introductions of new products or services or enhancements by us and
             our competitors;

        .    technical difficulties or system downtime affecting the Internet
             generally or our hosting operations specifically;

        .    the mix of products and services sold by us or our competitors;

        .    customer retention;

        .    the timing and success of our advertising and marketing efforts and
             introductions of new services to customers and the timing and
             success of the marketing efforts and introductions of new services
             to customers of our resellers;

        .    the timing and magnitude of capital expenditures, including
             construction costs relating to the expansion of operations;

        .    increased competition in the Web hosting and applications hosting
             markets;

        .    changes in our pricing policies and the pricing policies of our
             competitors;

        .    gains or losses of key strategic relationships; and

        .    other general and industry-specific economic factors.

In addition, a relatively large portion of our expenses are fixed in the
short-term, and therefore our results of operations are particularly sensitive
to fluctuations in revenues. Also, if we were unable to continue using
third-party products in our services offerings, our service development costs
could increase significantly.

The business and operating results of Micron Electronics' PC Systems business
also are subject to a variety of factors, which could affect the results of our
discontinued operations until that business is sold or fully discontinued. These
factors include:

        .    fluctuating market pricing for personal computers;

        .    seasonal cycles common in the personal computer industry and
             seasonal government purchasing cycles;

        .    inventory obsolescence;

        .    our ability to effectively manage inventory levels;

        .    customer acceptance of PC Systems' products during this transition
             period; and

                                       23
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations--Continued
------------------------

        .    fluctuating component costs.

                                       24
<PAGE>

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

Micron Electronics' stock price may be volatile. The future earnings and stock
price of Micron Electronics may be subject to significant volatility. Any
shortfall in revenue or earnings of HostPro from levels expected by securities
analysts, general decline in economic conditions, announcements by HostPro or
its competitors regarding new products and services introductions or material
reductions in spending by customers, could have an immediate and significant
adverse effect on the trading price of the common stock of Micron Electronics in
any given period. Additionally, Micron Electronics may not learn of such
shortfalls by the combined company until late in the fiscal quarter, which could
result in an even more immediate and adverse effect on the trading price of
Micron Electronics' common stock. In addition, the market price of Micron
Electronics common stock might decline significantly as a result of the proposed
merger with Interland if the combined company does not experience the benefits
of the merger as quickly as anticipated, or at all, or the costs of or
operational difficulties arising from the merger are greater than anticipated,
or the impact of the merger on the combined company's financial results is not
in line with the expectations of financial analysts. Similarly, the market price
of Micron Electronics' common stock might decline if we are not able to sell the
PC Systems business on satisfactory terms and conditions.

We may not effectively execute our Web hosting strategy and as a result, others
may seize the market opportunity that we have identified. If we fail to execute
our Web hosting strategy in a timely or effective manner, our competitors may be
able to seize the opportunity we have identified to address the Web hosting
needs of small- and medium-sized businesses. Our business strategy is complex
and requires that we successfully and simultaneously complete many tasks, and
the failure to complete any one of these may jeopardize our strategy as a whole.
Execution of our strategy may be more difficult in light of our planned merger
with Interland because the management team for the combined company will not
have worked together as a team prior to the merger closing. In order to be
successful, we will need to:

        .    market our services and build our brand name effectively;

        .    provide reliable and cost-effective services that can be expanded
             to meet the demands of our customers;

        .    develop new Internet applications products and services;

        .    continue to grow our infrastructure to accommodate additional
             customers and increased use of our network bandwidth;

        .    expand our channels of distribution and our international
             operations;

        .    continue to respond to competitive developments;

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

        .    attract, retain and motivate qualified personnel.

We operate in a new and evolving market with uncertain prospects for growth and
may not be able to sustain growth in our customer base. The market for Web
hosting and applications hosting services for small- and medium-sized businesses
has only recently begun to develop and is evolving rapidly. Our future growth,
if any, will depend upon the willingness of small and medium-sized businesses to
outsource Web hosting and applications hosting services, upon our ability to
increase our average revenue per customer, and upon retention of customers. If
this market fails to develop further or develops more slowly than expected, or
if our services do not achieve broader market acceptance, we will not be able to
grow our customer base. In addition, we must be able to differentiate ourselves
from our competition through our service offerings and brand recognition in
order to attract customers. These activities may be more expensive than we
anticipate, and we may not be successful in differentiating ourselves, achieving
market acceptance of our services or selling additional services to our existing
customer base. We may also experience difficulties that could delay or prevent
the successful development, introduction or marketing of these services. If we
are unable, for technical or other reasons, to develop and introduce new
services or products or enhancements to existing services in a timely manner, or
if new services do not achieve market acceptance in a timely manner or at all,
it would be difficult for us to attract customers.

                                       25
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations--Continued
------------------------

Micron Technology is our majority shareholder and is therefore able to control
matters requiring shareholder approval. As of April 15, 2001, Micron Technology
owned approximately 61% of Micron Electronics' outstanding common stock. After
the completion of the planned merger with Interland, Micron Technology is
expected to own approximately 42% of the outstanding common stock of Micron
Electronics. In addition, two of Micron Electronics' current directors are also
directors of Micron Technology, including Steven R. Appleton, Chairman and Chief
Executive Officer of Micron Technology. So long as Micron Technology continues
to own a substantial portion of Micron Electronics' outstanding common stock,
Micron Technology will have the ability to influence in a significant way
matters requiring shareholder approval, including the election of directors, and
potentially could control the management and corporate policies of the combined
company. The level of Micron Technology's ownership of Micron Electronics'
common stock may limit our ability to complete future equity financing. In
addition, the sale on the open market of substantial amounts of shares of Micron
Electronics' common stock currently held by Micron Technology could adversely
affect the prevailing market price of Micron Electronics' common stock. Micron
Technology's ability to sell shares of the combined company's common stock,
unless registered under the Securities Act of 1933, is subject to volume and
other restrictions pursuant to Rule 145 promulgated under the Securities Act and
is subject to contractual restrictions included in a voting agreement and a
shareholder agreement entered into between Micron Technology and Micron
Electronics in connection with the Interland merger.

HostPro faces intense competition. The Web hosting and applications hosting
markets are highly competitive and are becoming more so. There are few
substantial barriers to entry, and we expect that we will face additional
competition from existing competitors and new market entrants in the future. We
may not have the resources, expertise or other competitive factors to compete
successfully in the future. Many of our competitors have substantially greater
financial, technical and marketing resources, larger customer bases, longer
operating histories, greater name recognition and more established relationships
in the industry than we do. As a result, these competitors may be able to:

        .    develop and expand their network infrastructures and service
             offerings more rapidly;

        .    adapt to new or emerging technologies and changes in customer
             requirements more quickly;

        .    take advantage of acquisition and other opportunities more readily;
             and

        .    devote greater resources to the marketing and sale of their
             services and adopt more aggressive pricing policies than we can.

In an effort to gain market share, some of our competitors have offered Web
hosting services similar to ours at lower prices than ours or with incentives
not matched by us, including free start-up and domain name registration, periods
of free service, low-priced Internet access or free software. In addition, some
of our competitors may be able to provide customers with additional benefits,
including reduced communications costs, which could reduce the overall costs of
their services relative to ours. We may not be able to reduce the pricing of our
services or offer incentives in response to the actions of our competitors
without harming our business. Because of the fierce competition in the Web
hosting and applications hosting industry, the number of competitors could lead
to a surplus in service providers, leading to further reductions in the prices
of services. We also believe that the market in which we compete is likely to
consolidate further in the near future, which could result in increased price
and other competition that could damage our business.

Our current and potential competitors in the market include Web hosting service
providers, applications hosting providers, Internet service providers,
telecommunications companies, large information technology firms that provide a
wide array of information technology services and computer hardware suppliers.
Our competitors may operate in one or more of these areas and include companies
such as Concentric Network Corporation, Interland, a NEXTLINK Company, Data
Return Corp., Digex Corporation, EarthLink, Inc., Exodus Communications, Inc.,
Interliant, NTT Verio Inc., and Navisite, Inc. In addition, several large
diversified companies (such as Intel Corporation, Dell Computer Corporation,
International Business Machines Corporation and AT&T Corporation) have entered
or indicated their intent to enter into the e-services market, which will
intensify the competition.

Our ability to successfully market our services could be substantially impaired
if we are unable to deploy new Internet applications or if new Internet
applications deployed by us prove to be unreliable, defective or incompatible.
We cannot assure you that we will not experience difficulties that could delay
or prevent the successful development, introduction or marketing of Internet
application services in the future. If any newly introduced Internet
applications suffer from reliability, quality or compatibility problems, market
acceptance of our services could be greatly hindered and our ability to attract
new customers could be adversely affected. We cannot assure you that new
applications deployed by us will be free from any reliability, quality or
compatibility problems. If we incur increased costs or are unable, for technical
or other reasons, to host and manage new Internet applications or enhancements
of existing applications, our ability to successfully market our services could
be substantially impaired.

                                       26
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations--Continued
------------------------

Impairment of our intellectual property rights could negatively affect our
business or could allow competitors to minimize any advantage that our
proprietary technology may give us. We rely on a combination of patent,
copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect proprietary rights in our services. At
this point, we have no patented technology that would preclude or inhibit
competitors from entering the Web hosting market that we serve. While we may
file patent applications on particular aspects of our technology, we cannot be
sure that we will receive any patents. Policing unauthorized use of products or
methods of operation and fully protecting our proprietary rights is difficult,
and we cannot guarantee that the steps we have taken to protect our proprietary
rights will be adequate. In addition, effective copyright, trademark, trade
secret and patent protection may not be available in every country in which our
products and services are distributed. Further, Micron Electronics is currently,
and may in the future, be involved in legal disputes relating to the validity or
alleged infringement of our, or of a third party's, intellectual property
rights. Intellectual property litigation is typically extremely costly and can
be disruptive to our business operations by diverting the attention and energies
of management and key technical personnel. In addition, any adverse decisions
could subject us to significant liabilities, require us to seek licenses from
others, prevent us from manufacturing, using, licensing or selling certain of
our products and services, or cause severe disruptions to our operations or the
markets in which we compete, any one of which could dramatically impact our
business and results of operations.

Periodically, Micron Electronics is made aware that technology it uses may
infringe on intellectual property rights held by others. Micron Electronics has
accrued a liability and charged operations for the estimated costs of settlement
or adjudication of asserted and unasserted claims for alleged infringement prior
to March 1, 2001. Resolution of these claims could have a material adverse
effect on future results of operations and could require changes in the products
or processes of the combined company.

We will rely heavily on our key personnel. Our future success will depend, in
part, on our ability to attract and retain key management, technical and sales
and marketing personnel. We attempt to enhance our management and technical
expertise by recruiting qualified individuals who possess desired skills and
experience in certain targeted areas. We experience strong competition for such
personnel in the Web hosting industry. Our inability to retain employees and
attract and retain sufficient additional employees, and information technology,
engineering and technical support resources, could have a material adverse
effect on our business, financial condition, results of operations and cash
flows. We cannot assure you that we will not lose key personnel or that the loss
of any key personnel will not have a material adverse effect on our business,
financial position, results of operations and cash flows.

If we are unable to expand our network infrastructure capacity, we may not be
able to meet increasing demand, and could lose customers and may not be able to
sustain or increase our revenues. We must continue to expand and adapt our
network infrastructure to meet the increase in the number of users and the
amount of information they wish to transport and to meet changing customer
requirements. The expansion and adaptation of our telecommunications and hosting
facility infrastructure will require substantial financial, operational and
management resources as we negotiate for access to telecommunications systems
with existing and other network infrastructure suppliers. Significant and rapid
expansion of our network due to increased usage will place additional stress
upon our network hardware, traffic management systems and hosting facilities.
The ability of our network to connect and manage a substantially larger number
of customers at high transmission speeds is as yet unknown. In addition, our
ability to expand our network to its expected customer levels while maintaining
superior performance is unknown. As customers' bandwidth usage increases, we
will need to make additional investments in our infrastructure to maintain
adequate data transmissions speeds, the availability of which may be limited and
the cost of which may be significant. Additional network capacity may not be
available from third-party suppliers as it is needed by us. As a result, our
network may not be able to achieve or maintain a sufficiently high capacity of
data transmission, especially if customer usage increases. Any failure on our
part to achieve or maintain high-capacity data transmission could significantly
reduce consumer demand for our services and adversely affect our business.

If we are unable to obtain sufficient telecommunications network capacity at
reasonable costs, we may not be able to provide services at prices acceptable to
our customers, thereby reducing demand for our services. Our success will depend
upon the capacity, ease of expansion, reliability and security of our network
infrastructure, including the capacity leased from our telecommunications
network suppliers. Our network currently delivers service through Cable &
Wireless, McLeod, UUNet, Qwest, Electric Lightwave, Genuity, Worldcom, Level 3,
Nextlink, Sprint and Touch America. Some of these suppliers are also
competitors. Our operating results depend, in part, upon the pricing and
availability of telecommunications network capacity from a limited number of
providers. If capacity is not available to us as our customers' usage increases,
our network may not be able to achieve or maintain sufficiently high data
transmission capacity, reliability or performance. In addition, our business
would suffer if our network suppliers increased the prices for their services
and we were unable to pass along any increased costs to our customers. Any
failure on our part or the part of our third-party suppliers to achieve or
maintain high data transmission capacity, reliability or performance could
significantly reduce customer demand for our services, damage our business
reputation and increase our costs.

                                       27
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations--Continued
------------------------

                                       28
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations--Continued
------------------------

We depend on our reseller sales channel to market and sell many of our Web
hosting services. We will not control our resellers, and if we fail to develop
or maintain good relations with resellers, we may not achieve the growth in
customers and revenues that we expect. An element of the strategy for our growth
is to further develop the use of third parties who resell our services. Many of
these resellers are Web development or Web consulting companies that also sell
our Web hosting services, but that generally do not have established customer
bases to which they can market our services. Therefore, we do not focus our
direct marketing efforts on those markets. We are dependent on third parties to
stimulate demand for our services. Although we attempt to provide our resellers
with incentives such as price discounts on our services that the resellers seek
to resell at a profit, the failure of our services to be commercially accepted
in some markets, whether as a result of a reseller's performance or otherwise,
could cause our current resellers to discontinue their relationships with us,
and we may not be successful in establishing additional reseller relationships
as needed.

We may have additional liabilities for sales and use taxes. During the third
quarter of 1997, Micron Electronics began to collect and remit applicable sales
or use taxes in nearly all states. It is a party to agreements with nearly all
states, which generally limit our liability, if any, for non-remittance of sales
and use taxes prior to such agreements' effective dates. Micron Electronics
previously accrued a liability for the estimated settlement cost of issues
related to sales and use taxes not covered by such agreements. Our management
believes the resolution of any matters relating to the non-remittance of sales
or use taxes will not materially affect our business, financial position,
results of operations and cash flows.

HostPro will be subject to changes in technology and industry standards. In the
Web and applications hosting industry, service providers must keep pace with
evolving technologies in order to offer relevant, sophisticated services on a
timely basis to meet rapidly changing customer demands. Our future success will
depend, in part, upon our ability to offer services that incorporate leading
technologies, address the increasingly sophisticated and varied needs of our
current and prospective Web and applications hosting customers and respond to
technological advances and emerging industry standards and practices on a timely
and cost-effective basis. The market for our services is characterized by
rapidly changing and unproven technologies, evolving industry standards, changes
in customer needs, emerging competition and frequent introductions of new
services. To be successful, we must continually improve the performance,
features and reliability of our services, including our proprietary
technologies, and modify our business strategies accordingly. We could also
incur substantial costs if we need to modify our services or infrastructure in
order to adapt to these changes. Technological advances may have the effect of
encouraging some of our current or future customers to rely on in-house
personnel and equipment to furnish the services that we currently provide. If we
are unable to maintain the compatibility of our services with products offered
by our vendors, we could lose or fail to attract customers.

We believe that our ability to compete successfully also depends upon the
continued compatibility of our services with products offered by various
vendors. Enhanced or newly developed third-party products may not be compatible
with our infrastructure, and such products may not adequately address the needs
of our customers. Although we currently intend to support emerging standards,
industry standards may not be established, and, even if they are established, we
may not be able to conform to these new standards in a timely fashion in order
to maintain a competitive position in the market. Our failure to conform to the
prevailing standard, or the failure of a common standard to emerge, could cause
us to lose customers or fail to attract new customers. In addition, products,
services or technologies developed by others could render our services
noncompetitive or obsolete.

HostPro's ability to attract customers is dependent on the reliable performance
and growth of use of the Internet. As a Web and applications hosting company,
our success will depend in large part on continued growth in the use of the
Internet. The lack of continued growth in the usage of the Internet would
adversely affect our business because we would not gain additional customers and
our existing customers might not have any further use for our services. Internet
usage and growth may be inhibited for a number of reasons, such as:

     .    inadequate network infrastructure;

     .    security concerns;

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

     .    inconsistent quality of service;

     .    lack of availability of cost-effective, reliable, high-speed service;
          and

     .    failure of Internet use to expand internationally.

If Internet usage grows, the Internet infrastructure may not be able to support
the demands placed on it by this growth, or its performance and reliability may
decline. For example, Web sites have experienced interruptions in service as a
result of outages and

                                       29
<PAGE>

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

other delays occurring throughout the Internet network infrastructure. If these
outages or delays occur frequently, use of the Internet as a commercial or
business medium could in the future grow more slowly or decline.

                                       30
<PAGE>

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

HostPro is vulnerable to system failures, which could harm its reputation, cause
its customers to seek reimbursement for services, and cause its customers to
seek another provider for services. HostPro must be able to operate the systems
that manage our network around the clock without interruption. Our operations
will depend upon our ability to protect our network infrastructure, equipment
and customer files against damage from human error, fire, earthquakes,
hurricanes, floods, power loss, telecommunications failures, sabotage,
intentional acts of vandalism and similar events. Although we have attempted to
build redundancy into our networks, our networks are currently subject to
various points of failure, and a problem with one of our routers (devices that
move information from one computer network to another) or switches could cause
an interruption in the services we provide to a portion of our customers. In the
past, we have experienced periodic interruptions in service. In addition,
failure of any of our telecommunications providers to provide the data
communications capacity we require, as a result of human error, a natural
disaster or other operational disruption, could result in interruptions in
services. Any future interruptions could:

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

     .    require us to replace existing equipment or add redundant facilities;

     .    damage our reputation for reliable service;

     .    cause existing customers to cancel their contracts; or

     .    make it more difficult for us to attract new customers.

Our data centers and networks may be vulnerable to security breaches. A
significant barrier to electronic commerce and communications is the need for
secure transmission of confidential information over public networks. Some of
our services rely on security technology licensed from third parties that
provides the encryption and authentication necessary to effect the secure
transmission of confidential information. Despite the design and implementation
of a variety of network security measures by us, unauthorized access, computer
viruses, accidental or intentional actions and other disruptions could occur. In
the past, we have experienced, and in the future we may experience, delays or
interruptions in service as a result of the accidental or intentional actions of
Internet users, current and former employees or others. In addition,
inappropriate use of the network by third parties could also potentially
jeopardize the security of confidential information, such as credit card and
bank account numbers stored in our computer systems. These security problems
could result in our liability and could also cause the loss of existing
customers and potential customers. In addition, third parties could interfere
with the operation of our customers' Web sites through intentional attacks
including causing an overload of traffic to these Web sites.

Although we intend to continue to implement industry-standard security measures,
third parties may be able to overcome any measures that we implement. The costs
required to eliminate computer viruses and alleviate other security problems
could be prohibitively expensive and the efforts to address such problems could
result in interruptions, delays or cessation of service to our customers, and
harm our reputation and growth.

Disruption of our services caused by unknown software defects could harm our
business and reputation. Our service offerings depend on complex software,
including proprietary software tools and software licensed from third parties.
Complex software often contains defects, particularly when first introduced or
when new versions are released. We may not discover software defects that affect
our new or current services or enhancements until after they are deployed.
Although we have not experienced any material software defects to date, it is
possible that defects may occur in the software. These defects could cause
service interruptions, which could damage our reputation or increase our service
costs, cause us to lose revenue, delay market acceptance or divert our
development resources.

Providing services to customers with critical Web sites and Web-based
applications could potentially expose HostPro to lawsuits for customers' lost
profits or other damages. Because the Web hosting and applications hosting
services of HostPro are critical to many of our customers' businesses, any
significant interruption in the services provided by us could result in lost
profits or other indirect or consequential damages to both our customers as well
as negative publicity and additional expenditures to correct the problem for the
combined company. Although the standard terms and conditions of our customer
contracts disclaim liability for any such damages, a customer could still bring
a lawsuit against them claiming lost profits or other consequential damages as
the result of a service interruption or other Web site or application problems
that the customer may ascribe to them. A court might not enforce any limitations
on HostPro's liability, and the outcome of any lawsuit would depend on the
specific facts of the case and legal and policy considerations even if we
believe we would have meritorious defenses to any such claims. In such cases, we
could be liable for substantial damage awards. Such damage awards might exceed
our liability insurance by unknown but significant amounts, which would
seriously harm our business.

                                       31
<PAGE>

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

We could face liability for information distributed through our network. The law
relating to the liability of on-line services companies for information carried
on or distributed through their networks is currently unsettled. On-line
services companies could be subject to claims under both United States and
foreign law for defamation, negligence, copyright or trademark infringement,
violation of securities laws or other theories based on the nature and content
of the materials distributed through their networks. Several private lawsuits
seeking to impose such liability upon other entities are currently pending
against other companies. In addition, organizations and individuals have sent
unsolicited commercial e-mails from servers hosted by service providers to
massive numbers of people, typically to advertise products or services. This
practice, known as "spamming," can lead to complaints against service providers
that enable such activities, particularly where recipients view the materials
received as offensive. We may in the future receive letters from recipients of
information transmitted by our customers objecting to such transmission.

In addition, we may become subject to proposed legislation that would impose
liability for or prohibit the transmission over the Internet of some types of
information. Other countries may also enact legislation or take action that
could impose liability on us or cause us not to be able to operate in those
countries. The imposition upon us and other on-line services of potential
liability for information carried on or distributed through our systems could
require us to implement measures to reduce our exposure to such liability, which
may require us to expend substantial resources, or to discontinue service
offerings. The increased attention focused upon liability issues as a result of
these lawsuits and legislative proposals also could affect the growth of
Internet use.

Our business may be impacted by government regulation and legal uncertainties.
HostPro is not currently subject to direct federal, state or local government
regulation, other than regulations that apply to businesses generally. Only a
small body of laws and regulations currently applies specifically to access to,
or commerce on, the Internet. Due to the increasing popularity and use of the
Internet, however, laws and regulations with respect to the Internet may be
adopted at federal, state and local levels, covering issues such as user
privacy, freedom of expression, pricing, characteristics and quality of products
and services, taxation, advertising, intellectual property rights, information
security and the convergence of traditional telecommunications services with
Internet communications. We cannot fully predict the nature of future
legislation and the manner in which government authorities may interpret and
enforce. As a result, we and our customers could be subject to potential
liability under future legislation, which in turn could have a material adverse
effect on our business, results of operations and financial condition. For
example, if legislation were adopted in the U.S. or internationally that makes
transacting business over the Internet, such as e-commerce, less favorable or
otherwise curtails the growth of the Internet, our business would suffer. The
adoption of any such laws or regulations might decrease the growth of the
Internet, which in turn could decrease the demand for our services or increase
the cost of doing business or in some other manner harm our business.

In addition, applicability to the Internet of existing laws governing issues
such as property ownership, copyright and other intellectual property issues,
taxation, libel, obscenity and personal privacy is uncertain. These laws
generally pre-date the advent of the Internet and related technologies and, as a
result, do not consider or address the unique issues of the Internet and related
technologies. Changes to laws intended to address these issues could create
uncertainty in the marketplace that could reduce demand for our services or
increase the cost of doing business as a result of costs of litigation or
increased service delivery costs, or could in some other manner have a material
adverse effect on our business, results of operations and financial condition.

In addition, because our services are available over the Internet virtually
worldwide, and because we facilitate sales by our customers to end users located
in multiple states and foreign countries, such jurisdictions may claim that we
are required to qualify to do business as a foreign corporation in each such
state or that we have a permanent establishment in each such foreign country.

                                       32
<PAGE>

PART II.  Other Information
---------------------------

Item 1. Legal Proceedings
-------------------------

On August 28, 2000 Micron Technology, Inc. ("MTI") filed suit in the U.S.
District Court in Delaware against Rambus, Inc. ("Rambus") on several grounds
including seeking declaratory relief from the assertion of Rambus Patents. On
February 15, 2001, Rambus filed a patent infringement counterclaim alleging that
memory, memory interfaces and controllers sold by MTI and the Company infringe
U.S. Patents Nos. 5,915,105, 5,953,263, 5,954,804, 5,995,443, 6,032,215,
6,034,918 and 6,038,195. MTI has agreed to indemnify the Company for any
liability arising from the use of MTI products. The counterclaim is currently in
its early stages and we are therefore unable to estimate total expenses,
possible loss or range of losses that may ultimately be connected with this
matter.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
------------------------------------------------------------------

We use the U.S. Dollar as our functional currency. Aggregate transaction gains
and losses included in the determination of net income have not been material.

Substantially all of our cash equivalents, liquid investments and a
majority of our debt are at fixed interest rates, and therefore the fair value
of these instruments is affected by changes in market interest rates. As of
March 1, 2001, management believes the reported amounts of liquid investments
and debt to be reasonable approximations of their fair values and has the
ability and intent to hold these instruments to maturity. As a result,
management believes that the market risk arising from its holdings of financial
instruments is minimal.

                                       33
<PAGE>

PART II.  Other Information
---------------------------



Item 6.  Exhibits and Reports on Form 8-K
-----------------------------------------

     (a)  The following are filed as a part of this report:

      Exhibit      Description
      -------      -----------

          2.03     Purchase Agreement, dated March 22, 2001, by and among MEI
                   California, Inc., Micron Electronics, Inc. ("MEI") and Micron
                   Technology, Inc. ("MTI"). (1)

          2.04     Agreement and Plan of Merger dated March 22, 2001 (the
                   "Merger Agreement"), by and among Micron Electronics, Inc., a
                   Minnesota corporation, Imagine Acquisition Corporation, a
                   Delaware corporation, and Interland, Inc., a Georgia
                   corporation ("Interland"), the schedule describing any
                   adjustment to the Exchange Ratio (Schedule 1.6(a)(ii) to the
                   Merger Agreement) and all exhibits to the Merger Agreement,
                   including the form of Bridge Loan and Security Agreement
                   dated as of March 22, 2001 between Interland and MEI (Exhibit
                   5.18A to the Merger Agreement), the form of Promissory Note
                   to be issued in connection with the Bridge Loan and Security
                   Agreement (Exhibit 5.18B to the Merger Agreement), the form
                   of Amended and Restated Registration Rights Agreement between
                   MEI, MTI and certain shareholders of Interland (Exhibit 5.20A
                   to the Merger Agreement), the form of Registration Rights
                   Agreement dated as of March 22, 2001 between MEI, MTI and
                   Interland (Exhibit 5.20B to the Merger Agreement), the form
                   of MTI Shareholder Agreement dated as of March 22, 2001
                   between MEI and MTI (Exhibit 6.2(g)(1) to the Merger
                   Agreement) and the form of Shareholder Agreement dated as of
                   March 22, 2001 between MEI and certain shareholders of
                   Interland (Exhibit 6.2(g)(2) to the Merger Agreement). (2)

          10.77    Commercial Lease, dated March 22, 2001, between Micron
                   Technology, Inc. and Micron Electronics, Inc. (3)

          10.78    Commercial Sublease, dated March 22, 2001, between Micron
                   Technology, Inc. and Micron Electronics, Inc. (4)

          10.79    Severance Plan for Employees - 2001 Amendment and Restatement

          10.80    Change in Control ("CIC") Severance Plan

          10.81    HostPro, Inc. 2000 Incentive Plan II - Notice of Grant to
                   Joel Kocher

          10.82    Retention Agreement between Micron Electronics, Inc. and Mike
                   Adkins

          10.83    Retention Agreement between Micron Electronics, Inc. and
                   Steve Arnold

          10.84    Retention Agreement between Micron Electronics, Inc. and Sid
                   Ferrales

          10.85    Retention Agreement between Micron Electronics, Inc. and Lyle
                   Jordan

          10.86    Retention Agreement between Micron Electronics, Inc. and Jim
                   Stewart

     (b)  Reports on Form 8-K:
          The registrant did not file any reports on Form 8-K during the quarter
          ended March 1, 2001.

_________________
          (1)      Incorporated by reference herein from exhibit 2.01 to MEI's
                   Current Report on Form 8-K, filed April 10, 2001, with
                   respect to MEI's sale of the SpecTek business to MTI.

          (2)      Incorporated by reference herein from exhibit 2.01 to MEI's
                   Current Report on Form 8-K, filed April 10, 2001, with
                   respect to MEI's proposed merger with Interland.

          (3)      Incorporated by reference herein from exhibit 99.01 to MEI's
                   Current Report on Form 8-K, filed April 10, 2001, with
                   respect to MEI's sale of the SpecTek business to MTI.

          (4)      Incorporated by reference herein from exhibit 99.02 to MEI's
                   Current Report on Form 8-K, filed April 10, 2001, with
                   respect to MEI's sale of the SpecTek business to MTI.

                                       34
<PAGE>

                                   Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                              Micron Electronics, Inc.
                              --------------------------------------------------
                              (Registrant)

Dated: April 15, 2001
                              /s/ James R. Stewart
                              --------------------------------------------------
                              James R. Stewart, Senior Vice President Finance
                              Chief Financial Officer (Principal Financial and
                              Accounting Officer)

                                       35