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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, 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 May 31, 2002

Commission File Number: 0-17932

Interland, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                         |  |                                                
|------------------------------------------------------------------------ |  | -----------------------------------------------
|Minnesota
(State or other jurisdiction
of incorporation or organization) |  | 41-1404301
(I.R.S. Employer
Identification No.)

303 Peachtree Center Avenue, Suite 500, Atlanta, GA 30303
(Address, including Zip Code, of principal executive offices)

(404) 720-8301
(Registrants telephone number, including area code)

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Registered on The Nasdaq National Market

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

The number of outstanding shares of the registrants Common Stock on July 10,
2002 was 137,771,797.





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TABLE OF CONTENTS



|                                                   |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Part 1. Financial Information                     
|                                                   | Consolidated Statements of Operations                                                        
|                                                   | Consolidated Balance Sheets                                                                  
|                                                   | Consolidated Statements of Cash Flows                                                        
|                                                   | Notes to Consolidated Financial Statements                                                   
|                                                   | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
|                                                   | Item 3. Quantitative and Qualitative About Market Risk                                       
|PART II. OTHER INFORMATION                        
|                                                   | Item 2. Changes in Securities and Use of Proceeds                                            
|                                                   | Item 3. Defaults Upon Senior Securities                                                      
|                                                   | Item 4. Submission of Matters to a Vote of Security holders                                  
|                                                   | Item 5. Other Information                                                                    
|                                                   | Item 6. Exhibits and Reports on Form 8-K                                                     
|Agreement and Plan of Merger dated May 3,2002     
|Unofficial Restated Acticles of Incorporation     
|Unofficial Restated Bylaws                        
|Stock Repurchase Agreement dated November 12, 2001
|Amendment to Stocks Rights Agreement              



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##### Table of Contents



TABLE OF CONTENTS

|                                                                                         |                                            |  |    |      | 
|---------------------------------------------------------------------------------------- | ------------------------------------------ |  | -- | ---- | 
|                                                                                         |                                            |  |    | Page
|                                                                                         | Part I  Financial Information             |  |    |      | 
|                                                                                         |                                            |  |    |     
|1. Financial Statements (unaudited)                                                      |                                            |  |    |     
|                                                                                         | Consolidated Statements of Operations      |  |    | 3    | 
|                                                                                         | Consolidated Balance Sheets                |  |    | 4    | 
|                                                                                         | Consolidated Statements of Cash Flows      |  |    | 5    | 
|                                                                                         | Notes to Consolidated Financial Statements |  |    | 6    | 
|                                                                                         |                                            |  |    |     
|2. Managements Discussion and Analysis of Financial Condition and Results of
Operations |                                            |  | 12 |     
|                                                                                         |                                            |  |    |     
|3. Qualitative and Quantitative Disclosures about Market Risk                            |                                            |  | 34 |     
|                                                                                         |                                            |  |    |     
|                                                                                         | Part II  Other Information                |  |    |      | 
|                                                                                         |                                            |  |    |     
|2. Changes in Securities and Use of Proceeds                                             |                                            |  | 35 |     
|                                                                                         |                                            |  |    |     
|3. Defaults Upon Senior Securities                                                       |                                            |  | 35 |     
|                                                                                         |                                            |  |    |     
|4. Submission of Matters to a Vote of Security Holders                                   |                                            |  | 35 |     
|                                                                                         |                                            |  |    |     
|5. Other Information                                                                     |                                            |  | 35 |     
|                                                                                         |                                            |  |    |     
|6. Exhibits and Reports on Form 8-k                                                      |                                            |  | 36 |     





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PART 1.  FINANCIAL INFORMATION
Item 1.  Financial Statements
INTERLAND, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)(Unaudited)

|                                                 |                                        |                          |         |                       |        |                           |         |         |        |         |         |         |        |   |          |        |        | 
|------------------------------------------------ | -------------------------------------- | ------------------------ | ------- | --------------------- | ------ | ------------------------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | - | -------- | ------ | ------ | 
|                                                 |                                        |                          |         | For the quarter ended |        | For the nine months ended
|                                                 |                                        |                          |         | May 31,               |        | May 31,                   |         | May 31, |        | May 31,
|                                                 |                                        |                          |         | 2002                  |        | 2001                      |         | 2002    |        | 2001   
|                                                
|Revenues                                         |                                        | $                        | 26,390  |                       |        | $                         | 15,395  |         |        | $       | 76,806  |         |        | $ | 43,386   |       
|Cost of revenues                                 |                                        |                          | 13,085  |                       |        |                           | 9,715   |         |        |         | 41,009  |         |        |   | 28,438   |       
|                                                 |                                        |                          |         |                       |        |                           |         |         |        |         |         |         |        |   |          |       
|                                                 | Gross margin                           |                          |         | 13,305                |        |                           |         | 5,680   |        |         |         | 35,797  |        |   |          | 14,948 |       
|                                                 |                                        |                          |         |                       |        |                           |         |         |        |         |         |         |        |   |          |       
|Operating expenses:                              |                                        |                          |         |                       |        |                           |         |         |        |         |         |         |        |   |          |       
|                                                 | Sales, marketing and technical support |                          |         | 12,349                |        |                           |         | 9,509   |        |         |         | 39,278  |        |   |          | 27,760 |       
|                                                 | General and administrative             |                          |         | 12,596                |        |                           |         | 9,924   |        |         |         | 39,452  |        |   |          | 32,581 |       
|                                                 | Other expense, net                     |                          |         | 117                   |        |                           |         | 29      |        |         |         | 745     |        |   |          | 565    |       
|                                                 | Merger and integration costs           |                          |         | 98                    |        |                           |         |        |        |         |         | 6,869   |        |   |          |       |       
|                                                 |                                        |                          |         |                       |        |                           |         |         |        |         |         |         |        |   |          |       
|                                                 |                                        | Total operating expenses |         |                       | 25,160 |                           |         |         | 19,462 |         |         |         | 86,344 |   |          |        | 60,906 | 
|                                                 |                                        |                          |         |                       |        |                           |         |         |        |         |         |         |        |   |          |       
|Operating loss                                   |                                        |                          | (11,855 | )                     |        |                           | (13,782 | )       |        |         | (50,547 | )       |        |   | (45,958  | )     
|Loss on investments                              |                                        |                          |        |                       |        |                           | (2,037  | )       |        |         |        |         |        |   | (4,919   | )     
|Gain on sale of investment                       |                                        |                          |        |                       |        |                           |        |         |        |         |        |         |        |   | 4,500    |       
|Interest income (expense), net                   |                                        |                          | (25     | )                     |        |                           | 2,082   |         |        |         | 293     |         |        |   | 6,489    |       
|                                                 |                                        |                          |         |                       |        |                           |         |         |        |         |         |         |        |   |          |       
|Loss from continuing operations before taxes     |                                        |                          | (11,880 | )                     |        |                           | (13,737 | )       |        |         | (50,254 | )       |        |   | (39,888  | )     
|Income tax benefit                               |                                        |                          | 64,242  |                       |        |                           | 4,625   |         |        |         | 64,242  |         |        |   | 12,694   |       
|                                                 |                                        |                          |         |                       |        |                           |         |         |        |         |         |         |        |   |          |       
|Income (loss) from continuing operations         |                                        |                          | 52,362  |                       |        |                           | (9,112  | )       |        |         | 13,988  |         |        |   | (27,194  | )     
|                                                 |                                        |                          |         |                       |        |                           |         |         |        |         |         |         |        |   |          |       
|Loss from discontinued operations, net of tax    |                                        |                          |        |                       |        |                           |        |         |        |         |        |         |        |   | (1,784   | )     
|Loss on disposal of discontinued operations      |                                        |                          | (4,562  | )                     |        |                           | (31,442 | )       |        |         | (4,562  | )       |        |   | (178,942 | )     
|                                                 |                                        |                          |         |                       |        |                           |         |         |        |         |         |         |        |   |          |       
|Total loss from discontinued operations          |                                        |                          | (4,562  | )                     |        |                           | (31,442 | )       |        |         | (4,562  | )       |        |   | (180,726 | )     
|                                                 |                                        |                          |         |                       |        |                           |         |         |        |         |         |         |        |   |          |       
|Net income (loss)                                |                                        | $                        | 47,800  |                       |        | $                         | (40,554 | )       |        | $       | 9,426   |         |        | $ | (207,920 | )     
|                                                 |                                        |                          |         |                       |        |                           |         |         |        |         |         |         |        |   |          |       
|Basic net income (loss) per share:               |                                        |                          |         |                       |        |                           |         |         |        |         |         |         |        |   |          |       
|                                                 | Continuing operations                  |                          | $       | 0.38                  |        |                           | $       | (0.09   | )      |         | $       | 0.10    |        |   | $        | (0.28  | )     
|                                                 | Discontinued operations                |                          |         | (0.03                 | )      |                           |         | (0.33   | )      |         |         | (0.03   | )      |   |          | (1.87  | )     
|                                                 |                                        |                          |         |                       |        |                           |         |         |        |         |         |         |        |   |          |       
|                                                 |                                        | $                        | 0.35    |                       |        | $                         | (0.42   | )       |        | $       | 0.07    |         |        | $ | (2.15    | )     
|                                                 |                                        |                          |         |                       |        |                           |         |         |        |         |         |         |        |   |          |       
|Diluted net income (loss) per share:             |                                        |                          |         |                       |        |                           |         |         |        |         |         |         |        |   |          |       
|                                                 | Continuing operations                  |                          | $       | 0.38                  |        |                           | $       | (0.09   | )      |         | $       | 0.10    |        |   | $        | (0.28  | )     
|                                                 | Discontinued operations                |                          |         | (0.03                 | )      |                           |         | (0.33   | )      |         |         | (0.03   | )      |   |          | (1.87  | )     
|                                                 |                                        |                          |         |                       |        |                           |         |         |        |         |         |         |        |   |          |       
|                                                 |                                        | $                        | 0.35    |                       |        | $                         | (0.42   | )       |        | $       | 0.07    |         |        | $ | (2.15    | )     
|                                                 |                                        |                          |         |                       |        |                           |         |         |        |         |         |         |        |   |          |       
|Number of shares used in per share calculations: |                                        |                          |         |                       |        |                           |         |         |        |         |         |         |        |   |          |       
|                                                 | Basic                                  |                          |         | 136,366               |        |                           |         | 96,856  |        |         |         | 137,187 |        |   |          | 96,390 |       
|                                                 | Diluted                                |                          |         | 139,293               |        |                           |         | 96,856  |        |         |         | 139,080 |        |   |          | 96,390 |       

The accompanying notes are an integral part of
the consolidated financial statements.

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Interland, Inc.
CONSOLIDATED BALANCE SHEETS(In thousands)

|                                                                                                                                         |                           |                                            |         |                 |         |   |         |         |         |  | 
|---------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------------------------------------------ | ------- | --------------- | ------- | - | ------- | ------- | ------- |  | 
|As of                                                                                                                                    |                           | May 31, 2002                               |         | August 31, 2001
|                                                                                                                                        
|                                                                                                                                         |                           | (Unaudited)                                |         |                
|ASSETS                                                                                                                                   |                           |                                            |         |                 |         |   |         |        
|Cash and cash equivalents                                                                                                                |                           | $                                          | 108,678 |                 |         | $ | 142,675 |        
|Short-term investments                                                                                                                   |                           |                                            | 22,900  |                 |         |   | 31,468  |        
|Receivables, net of allowance of $2,910 and $1,810, respectively                                                                         |                           |                                            | 15,967  |                 |         |   | 11,576  |        
|Income taxes recoverable                                                                                                                 |                           |                                            | 3,088   |                 |         |   | 23,847  |        
|Other current assets                                                                                                                     |                           |                                            | 3,235   |                 |         |   | 4,223   |        
|                                                                                                                                         |                           |                                            |         |                 |         |   |         |        
|                                                                                                                                         | Total current assets      |                                            |         | 153,868         |         |   |         | 213,789 |        
|Restricted investments                                                                                                                   |                           |                                            | 34,475  |                 |         |   | 27,944  |        
|Property plant and equipment, net                                                                                                        |                           |                                            | 58,689  |                 |         |   | 59,849  |        
|Goodwill                                                                                                                                 |                           |                                            | 114,304 |                 |         |   | 104,406 |        
|Intangibles, net                                                                                                                         |                           |                                            | 49,206  |                 |         |   | 17,216  |        
|Investments held to maturity                                                                                                             |                           |                                            | 6,012   |                 |         |   | 6,000   |        
|Other assets                                                                                                                             |                           |                                            | 130     |                 |         |   | 76      |        
|                                                                                                                                         |                           |                                            |         |                 |         |   |         |        
|                                                                                                                                         | Total assets              |                                            | $       | 416,684         |         |   | $       | 429,280 |        
|                                                                                                                                         |                           |                                            |         |                 |         |   |         |        
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                     |                           |                                            |         |                 |         |   |         |        
|Accounts payable                                                                                                                         |                           | $                                          | 7,919   |                 |         | $ | 5,751   |        
|Accrued expenses                                                                                                                         |                           |                                            | 35,505  |                 |         |   | 57,676  |        
|Current portion of long-term debt and capital lease obligations                                                                          |                           |                                            | 14,250  |                 |         |   | 14,875  |        
|Deferred revenue                                                                                                                         |                           |                                            | 20,399  |                 |         |   | 15,859  |        
|                                                                                                                                         |                           |                                            |         |                 |         |   |         |        
|                                                                                                                                         | Total current liabilities |                                            |         | 78,073          |         |   |         | 94,161  |        
|Long-term debt and capital lease obligations                                                                                             |                           |                                            | 17,091  |                 |         |   | 24,231  |        
|Deferred revenue, long-term                                                                                                              |                           |                                            | 1,634   |                 |         |   | 1,563   |        
|Other liabilities                                                                                                                        |                           |                                            | 11,933  |                 |         |   | 12,895  |        
|                                                                                                                                         |                           |                                            |         |                 |         |   |         |        
|                                                                                                                                         | Total liabilities         |                                            |         | 108,731         |         |   |         | 132,850 |        
|                                                                                                                                         |                           |                                            |         |                 |         |   |         |        
|Commitments and contingencies (see Note 9)                                                                                               |                           |                                            |         |                 |         |   |         |        
|Common stock, $.01 par value, authorized 210 million shares; issued
and outstanding 137.6 million and 137.8 million shares, respectively |                           |                                            | 1,376   |                 |         |   | 1,378   |        
|Additional capital                                                                                                                       |                           |                                            | 286,742 |                 |         |   | 282,738 |        
|Warrants                                                                                                                                 |                           |                                            | 1,690   |                 |         |   | 1,690   |        
|Deferred compensation                                                                                                                    |                           |                                            | (2,480  | )               |         |   | (3,310  | )      
|Note receivable from shareholder                                                                                                         |                           |                                            | (2,735  | )               |         |   |        |        
|Retained earnings                                                                                                                        |                           |                                            | 23,360  |                 |         |   | 13,934  |        
|                                                                                                                                         |                           |                                            |         |                 |         |   |         |        
|                                                                                                                                         |                           | Total shareholders equity                 |         |                 | 307,953 |   |         |         | 296,430 | 
|                                                                                                                                         |                           |                                            |         |                 |         |   |         |        
|                                                                                                                                         |                           | Total liabilities and shareholders equity |         | $               | 416,684 |   |         | $       | 429,280 | 
|                                                                                                                                         |                           |                                            |         |                 |         |   |         |        

The accompanying notes are an integral part of the consolidated financial statements.

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Interland, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)
(Unaudited)

|                                                                                                                             |                                                                                                |                                       |         |         |         |   |          |         |         |   |  |  |  | 
|---------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ------- | ------- | - | -------- | ------- | ------- | - |  |  |  | 
|For the nine months ended                                                                                                    |                                                                                                | May 31,                               |         | May 31, |         |   |          |        
|                                                                                                                             |                                                                                                | 2002                                  |         | 2001    |         |   |          |        
|                                                                                                                             |                                                                                                |                                       |         |         |         |   |          |         |         |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                                         |                                                                                                |                                       |         |         |         |   |          |         |         |   |  | 
|Net income (loss)                                                                                                            |                                                                                                | $                                     | 9,426   |         |         | $ | (207,920 | )       |         |   |  | 
|Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities from continuing operations |                                                                                                |                                       |         |         |         |   |          |         |         |   |  | 
|                                                                                                                             | Loss from discontinued operations                                                              |                                       |         | 4,562   |         |   |          | 180,726 |         |   |  |  | 
|                                                                                                                             | Depreciation and amortization                                                                  |                                       |         | 25,293  |         |   |          | 17,106  |         |   |  |  | 
|                                                                                                                             | Gain on sale of investment                                                                     |                                       |         |        |         |   |          | (4,500  | )       |   |  |  | 
|                                                                                                                             | Loss on equity investment                                                                      |                                       |         |        |         |   |          | 4,919   |         |   |  |  | 
|                                                                                                                             | Provision for doubtful accounts                                                                |                                       |         | 5,615   |         |   |          | 1,619   |         |   |  |  | 
|                                                                                                                             | Other non-cash adjustments                                                                     |                                       |         | 4,019   |         |   |          | (1,103  | )       |   |  |  | 
|                                                                                                                             | Changes in operating assets and liabilities net of the effect
of the acquisition transactions: |                                       |         |         |         |   |          |         |         |   |  |  | 
|                                                                                                                             |                                                                                                | Receivables                           |         |         | (10,363 | ) |          |         | (24,603 | ) |  |  |  | 
|                                                                                                                             |                                                                                                | Income tax recoverable                |         |         | 18,585  |   |          |         |        |   |  |  |  | 
|                                                                                                                             |                                                                                                | Other current assets                  |         |         | (336    | ) |          |         | 1,029   |   |  |  |  | 
|                                                                                                                             |                                                                                                | Accounts payable and accrued expenses |         |         | (19,088 | ) |          |         | (3,468  | ) |  |  |  | 
|                                                                                                                             |                                                                                                | Other                                 |         |         |        |   |          |         | (769    | ) |  |  |  | 
|                                                                                                                             |                                                                                                |                                       |         |         |         |   |          |         |         |   |  | 
|Cash provided by (used in) operating activities of continuing operations                                                     |                                                                                                |                                       | 37,713  |         |         |   | (36,964  | )       |         |   |  | 
|                                                                                                                             |                                                                                                |                                       |         |         |         |   |          |         |         |   |  | 
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                                         |                                                                                                |                                       |         |         |         |   |          |         |         |   |  | 
|Expenditures for property, plant and equipment                                                                               |                                                                                                |                                       | (8,991  | )       |         |   | (18,176  | )       |         |   |  | 
|Purchases of held-to-maturity investment securities                                                                          |                                                                                                |                                       | (69,042 | )       |         |   | (116,344 | )       |         |   |  | 
|Proceeds from maturities of investment securities                                                                            |                                                                                                |                                       | 77,598  |         |         |   | 167,500  |         |         |   |  | 
|Deposits of restricted cash                                                                                                  |                                                                                                |                                       | (6,385  | )       |         |   |         |         |         |   |  | 
|Proceeds from sale of investment                                                                                             |                                                                                                |                                       |        |         |         |   | 4,500    |         |         |   |  | 
|Equity investments                                                                                                           |                                                                                                |                                       |        |         |         |   | (3,511   | )       |         |   |  | 
|Acquisitions, net of cash acquired                                                                                           |                                                                                                |                                       | (32,505 | )       |         |   |         |         |         |   |  | 
|Notes issued to related party                                                                                                |                                                                                                |                                       | (2,735  | )       |         |   |         |         |         |   |  | 
|Other                                                                                                                        |                                                                                                |                                       |        |         |         |   | (483     | )       |         |   |  | 
|                                                                                                                             |                                                                                                |                                       |         |         |         |   |          |         |         |   |  | 
|Cash provided by (used in) investing activities of continuing operations                                                     |                                                                                                |                                       | (42,060 | )       |         |   | 33,486   |         |         |   |  | 
|                                                                                                                             |                                                                                                |                                       |         |         |         |   |          |         |         |   |  | 
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                                         |                                                                                                |                                       |         |         |         |   |          |         |         |   |  | 
|Repayments of debt                                                                                                           |                                                                                                |                                       | (12,740 | )       |         |   | (1,948   | )       |         |   |  | 
|Proceeds from issuance of common stock                                                                                       |                                                                                                |                                       | 626     |         |         |   | 915      |         |         |   |  | 
|Purchase and retirement of common stock                                                                                      |                                                                                                |                                       | (7,278  | )       |         |   |         |         |         |   |  | 
|                                                                                                                             |                                                                                                |                                       |         |         |         |   |          |         |         |   |  | 
|Cash used in financing activities of continuing operations                                                                   |                                                                                                |                                       | (19,392 | )       |         |   | (1,033   | )       |         |   |  | 
|                                                                                                                             |                                                                                                |                                       |         |         |         |   |          |         |         |   |  | 
|Net cash used in continuing operations                                                                                       |                                                                                                |                                       | (23,739 | )       |         |   | (4,511   | )       |         |   |  | 
|Net cash used in discontinued operations                                                                                     |                                                                                                |                                       | (10,258 | )       |         |   | (81,094  | )       |         |   |  | 
|                                                                                                                             |                                                                                                |                                       |         |         |         |   |          |         |         |   |  | 
|Net decrease in cash and cash equivalents                                                                                    |                                                                                                |                                       | (33,997 | )       |         |   | (85,605  | )       |         |   |  | 
|Cash and cash equivalents at beginning of period                                                                             |                                                                                                |                                       | 142,675 |         |         |   | 200,002  |         |         |   |  | 
|                                                                                                                             |                                                                                                |                                       |         |         |         |   |          |         |         |   |  | 
|Cash and cash equivalents at end of period                                                                                   |                                                                                                | $                                     | 108,678 |         |         | $ | 114,397  |         |         |   |  | 
|                                                                                                                             |                                                                                                |                                       |         |         |         |   |          |         |         |   |  | 

The accompanying notes are an integral part of the consolidated financial statements.

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INTERLAND, INC.




Notes to Consolidated Financial Statements


(Unaudited)


1. General

Business Interland, Inc. (known as Micron Electronics, Inc. prior to August
6, 2001), together with its subsidiaries (collectively the Company), is a
leading Web hosting company that offers a broad range of business-to-business
Internet products and services, including standardized shared and dedicated
hosting services, electronic commerce services, applications hosting and other
Web hosting products.

Historically, the Company provided a variety of computer products and related
services through its PC Systems, SpecTek, and Web hosting business segments.
The Company disposed of its PC Systems and SpecTek business segments, which are
reported as discontinued operations  See Footnote 3 Discontinued Operations.
The Companys Web hosting business remains as the Companys sole continuing
operation. Prior to its disposal, the PC Systems business consisted of
developing, marketing, manufacturing, selling and supporting a wide range of
desktop and notebook systems and network servers under the micronpc.com brand
name and selling, reselling, and supporting a variety of additional
peripherals, software and services. Prior to its disposal, the SpecTek
business consisted of processing and marketing various grades of memory
products in either component or module form for specific applications.

History of operating losses Excluding the income tax benefit recorded during
the third quarter, the Companys Web hosting business has incurred net losses
and losses from operations for each period from inception through the first
nine months of fiscal 2002. Net of the effect of the income tax refund
received, the Company does not expect to generate positive cash flow from
operations until the end of the forth quarter of fiscal 2002. The Company
expects to have adequate cash resources to fund operations during this period.
The Companys future success is dependent upon its ability to achieve positive
cash flow prior to the depletion of cash resources and its ability to raise
funds, if needed. Management cannot assure that the Company will be cash flow
positive in the future under its current Web and applications hosting model or
that it will be able to raise funds if necessary. The Companys current
financial forecast indicates that there are sufficient cash resources on hand
until the Company reaches positive cash flow.

2. Significant Accounting Policies

Interim Unaudited Financial Information The accompanying unaudited
consolidated financial statements as of May 31, 2002 and May 31, 2001 and for
the three and nine month periods then ended, have been prepared in accordance
with generally accepted accounting principles for interim financial
information. In managements opinion, these statements include all adjustments
necessary for a fair presentation of the results of the interim periods shown.
All adjustments are of a normal recurring nature unless otherwise disclosed.
Operating results for the three and nine month periods ended May 31, 2002 are
not necessarily indicative of the results that may be expected for the full
year.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements. The amounts that
the Company will ultimately incur or recover could differ materially from its
current estimates. The underlying estimates and facts supporting these
estimates could change in 2002 and thereafter. Certain reclassifications,
none of which affect net loss, have been made to present the financial
statements on a consistent basis.

The financial statements include the accounts of Interland, Inc. and its wholly
owned subsidiaries. All significant intercompany balances and transactions
have been eliminated.

Basis of Presentation This report on Form 10-Q (10-Q) for the third quarter
ended May 31, 2002 should be read in conjunction with the Companys Annual
Report on Form 10-K (10-K) for the fiscal year ended August 31, 2001. The
Companys operations are reported on a fiscal basis. During fiscal year 2001,
the Company changed its year-end from a 52 or 53-week period ending on the
Thursday closest to August 31, to a fiscal year and quarter ending on the
calendar month-end. All references to periods including annual and quarterly
are on a fiscal basis.

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INTERLAND, INC.
Notes to Consolidated Financial Statements  Continued
(Unaudited)

Revenue recognition Revenues from continuing operations are primarily
generated from shared and dedicated hosting, e-commerce services, applications
hosting and domain name registrations. Revenues are recognized as the services
are provided. Hosting contracts generally are for service periods ranging from
one to 24 months and often require payment in advance. Prepaid fees, including
set-up fees for hosting services, are deferred and recognized ratably over the
customers expected service period. Deferred revenues represent the liability
for advance billings to customers for services not yet provided.

Basic and diluted income (loss) per share Basic earnings per share is
computed using the weighted average number of common shares outstanding.
Diluted earnings per share is computed using the weighted average number of
common shares outstanding and potential common shares outstanding when their
effect is dilutive. Potential common shares result from the assumed exercise
of outstanding stock options and warrants. Other than for the three months
ended May 31, 2002 (which had net income and thus included the effects of
dilutive securities), there is no difference between basic and diluted EPS in
the periods presented since the net loss position causes these options and
warrants to be antidilutive.

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 (APB) Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.

Recently issued accounting standards In June 2001, the FASB issued SFAS No.
143, Accounting for Asset Retirement
Obligations. The statement provides accounting and reporting standards for
recognizing obligations related to asset retirement costs associated with the
retirement of tangible long-lived assets. Under this statement, legal
obligations associated with the retirement of long-lived assets are to be
recognized at their fair value in the period in which they are incurred if a
reasonable estimate of fair value can be made. The fair value of the asset
retirement costs is capitalized as part of the carrying amount of the
long-lived asset and subsequently allocated to expense using a systematic and
rational method over the assets useful life. Any subsequent changes to the
fair value of the liability due to passage of time or changes in the amount or
timing of estimated cash flows is recognized as an accretion expense. The
Company will be required to adopt this statement no later than September 1,
2002. The Company is currently analyzing the impact the adoption of this
pronouncement may have on its consolidated financial position, results of
operations, or cash flows.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which is effective for fiscal years
beginning after Dec 15, 2001. This statement supercedes FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of. However, it retains the fundamental provisions of SFAS No.
121 for the recognition and measurement of the impairment of long-lived assets
to be held and used and the measurement of long-lived assets to be disposed of
by sale. Impairment of goodwill is not included in the scope of SFAS No. 144
and will be treated in accordance with the accounting standards established in
SFAS No. 142. Under SFAS No. 144, long-lived assets are to be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing or discontinued operations. The statement applies to all long-lived
assets, including discontinued operations, and replaces the provisions of APB
Opinion No. 30. The Company will be required to adopt this statement no later
than September 1, 2002. The Company is currently analyzing the impact the
adoption of this pronouncement may have on its consolidated financial position,
results of operations, or cash flows.

3. Discontinued Operations

The Company has discontinued the operations of its PC Systems and SpecTek
business segments. These segments are accounted for as discontinued operations
in accordance with APB No. 30.

Operating results for the discontinued operations are reported, net of tax,
under Loss from discontinued operations, net of tax on the accompanying
consolidated Statements of Operations. In addition, the 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 consolidated
Statements of Operations.

For financial reporting purposes, cash flows from the discontinued operations
are stated separately on the accompanying consolidated Statements of Cash
Flows, under Net cash used in discontinued operations.

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INTERLAND, INC.
Notes to Consolidated Financial Statements  Continued
(Unaudited)

PC Systems

On May 31, 2001, the Company sold its PC Systems business to GTG PC Holdings,
LLC (GTG PC), an affiliate of the Gores Technology Group. Under the terms of
the agreement, GTG PC received assets, which included $76.5 million in cash,
and assumed specified liabilities of the PC Systems business. For the year
ended August 31, 2001, the loss on disposal was $212.2 million. Included in
the loss on disposal was employee termination costs of approximately $15.4
million, of which $0.0 million and $0.3 million is included in the accompanying
consolidated Balance Sheets under Accrued liabilities at May 31, 2002 and
August 31, 2001, respectively. During the third quarter ended May 31, 2002,
the Company resolved disputed obligations with GTG PC related to amounts that
GTG PC claimed were owed by Interland less amounts Interland claimed were owed
by GTG PC. These claims relate to funds collected, transferred and paid by
each company subsequent to the close of the purchase. The net amount of the
obligations settled with GTG PC during the third quarter was $3.9 million.
Additionally, the Company wrote down certain sales tax receivable balances to
their net realizable value resulting in an additional charge to discontinued
operations expense of $0.7 million. The total loss on disposal of discontinued
operations during the third quarter amounted to $4.6 million and is included in
the accompanying consolidated Statement of Operations under Loss on disposal
of discontinued operations.

The Company retained all liabilities of the PC Systems business not assumed by
GTG PC, including, for example, liabilities for taxes arising prior to the
closing of the transaction, employee termination and related expenses, and any
contingent liabilities arising prior to the closing date. In addition, the
Company has agreed for a period of three years not to compete with the PC
Systems business, and for two years, not to solicit or hire prior employees of
the PC Systems business. For a transition period after the closing of the
purchase, GTG PC agreed to provide some information technology, financial,
telecommunications and human resources services to the Company at its cost plus
10% during the first four months after the closing, and at its cost plus 25%
for the following two months.

For a period of two years following the closing of the purchase, or for the
applicable statute of limitations with respect to taxes and government
contracts, the Company is obligated to indemnify the purchaser and affiliated
entities for any breaches of the representations and warranties contained in
the agreement. In addition, the Company is obligated for an indefinite period
of time to indemnify the purchaser and affiliated entities for any breaches in
covenants. The agreement provides that the maximum aggregate liability of the
Company for indemnification under the agreement is $10.0 million.

The agreement also provides that the Company would potentially be entitled to
receive a percentage of any proceeds in the event the PC Systems business is
sold or has an initial public offering of its securities within three years of
the closing of the purchase. The Company would receive a payment only after
the repayment of transaction costs, repayment of debt and capital
contributions, payment of a specified amount of cash to GTG PC and obligations
under employee incentive programs.

SpecTek

The Company has discontinued 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, Micron Technology, Inc. (MTI) 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 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, and
received $18 million of cash in excess of the historical cost from MTI. This
amount has been recorded, net of tax, as an increase in additional capital. In
addition, MTI agreed to pay the Company for the March 1, 2001 net book value of
the assets used by SpecTek, less any outstanding intercompany payables. The
proceeds from this transaction, net of intercompany payables, were
approximately $39.6 million, not including certain land, buildings and
intellectual property. Pursuant to the Purchase Agreement, the assets used by
SpecTek were transferred to MTI on April 5, 2001.

Summarized below are the operating results for the PC Systems and SpecTek
businesses, which are included in the accompanying consolidated Statements of
Operations under Loss from discontinued operations, net of tax.

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INTERLAND, INC.
Notes to Consolidated Financial Statements  Continued
(Unaudited)

|                                                        |  |                       |        |                           |  |         |         |         |  |   |        |   |  |   |          |  
|------------------------------------------------------- |  | --------------------- | ------ | ------------------------- |  | ------- | ------- | ------- |  | - | ------ | - |  | - | -------- | -
|                                                        |  | For the quarter ended |        | For the nine months ended
|                                                        |  | May 31,               |        | May 31,                   |  | May 31, |         | May 31,
|                                                        |  | 2002                  |        | 2001                      |  | 2002    |         | 2001   
|                                                       
|(in thousands)                                          |  |                       |        |                           |  |         |         |         |  |   |        |   |  |   |          |  
|Net sales                                               |  | $                     |       |                           |  | $       | 162,564 |         |  | $ |       |   |  | $ | 851,127  |  
|                                                        |  |                       |        |                           |  |         |         |         |  |   |        |   |  |   |          |  
|Loss before income taxes                                |  |                       |       |                           |  |         |        |         |  |   |        |   |  |   | (2,239   | )
|Income tax benefit                                      |  |                       |       |                           |  |         |        |         |  |   |       |   |  |   | 455      |  
|                                                        |  |                       |        |                           |  |         |         |         |  |   |        |   |  |   |          |  
|Loss from discontinued operations, net of tax           |  |                       |       |                           |  |         |        |         |  |   |       |   |  |   | (1,784   | )
|Loss on disposal of discontinued operations, net of tax |  |                       | (4,562 | )                         |  |         | (31,442 | )       |  |   | (4,562 | ) |  |   | (178,942 | )
|                                                        |  |                       |        |                           |  |         |         |         |  |   |        |   |  |   |          |  
|Loss from discontinued operations, net of tax           |  | $                     | (4,562 | )                         |  | $       | (31,442 | )       |  | $ | (4,562 | ) |  | $ | (180,726 | )
|                                                        |  |                       |        |                           |  |         |         |         |  |   |        |   |  |   |          |  

4. Merger and Integration Costs

During the fourth quarter of fiscal year 2001, the Company approved and
implemented a restructuring program in connection with its acquisition of
Interland-Georgia. The restructuring plan provides for the consolidation of
the Companys operations and elimination of duplicative facilities. The
Company expects to substantially complete merger and integration activities by
August 31, 2002. Accordingly, during 2001, the Company recorded a charge of
approximately $110.3 million related to employee termination benefits, facility
closure costs, asset disposals and other exit costs which the Company has
recorded in operating expenses.

The liability related to this restructuring program was $9.6 million and $12.5
million at May 31, 2002 and August 31, 2001, respectively. The Company expects
to pay these liabilities by the end of fiscal year 2004. The following
schedule reflects the changes in the accrual for the nine months ended May 31,
2002:

|                           |                   |              |       |                  |   |          |       |       |             |   |          |      |   |   |        |        |  
|-------------------------- | ----------------- | ------------ | ----- | ---------------- | - | -------- | ----- | ----- | ----------- | - | -------- | ---- | - | - | ------ | ------ | -
|                           |                   |              |       |                  |   |          |       |       |             |   | Employee |      |   |   |       
|                           |                   |              | Lease |                  |   |          |       |       | termination |   |          |      |  
|(In thousands)             |                   | abandonments |       | Other exit costs |   | benefits |       | Total
|                           |                   |              |       |                  |   |          |       |      
|Balance at August 31, 2001 |                   | $            | 8,721 |                  |   | $        | 3,528 |       |             | $ | 229      |      |   | $ | 12,478 |       
|                           | Cash paid         |              |       | (1,202           | ) |          |       | (487  | )           |   |          | (229 | ) |   |        | (1,918 | )
|                           | Other adjustments |              |       | (668             | ) |          |       | (318  | )           |   |          |     |   |   |        | (986   | )
|                           |                   |              |       |                  |   |          |       |       |             |   |          |      |   |   |        |       
|Balance at May 31, 2002    |                   | $            | 6,851 |                  |   | $        | 2,723 |       |             | $ |         |      |   | $ | 9,574  |       
|                           |                   |              |       |                  |   |          |       |       |             |   |          |      |   |   |        |       

The lease abandonment charge represents future lease payments for data centers
and office facilities being exited. The other exit costs represent termination
penalties for bandwidth and data connectivity contracts. During the third
quarter, the Company settled a disputed tenant improvement allowance with the
landlord of an exited facility. In connection with this settlement, the
Company is no longer responsible for paying approximately $0.7 million of the
remaining lease payments required over the remaining lease term, which was
originally accrued in the above restructuring charge. Accordingly, the lease
abandonment accrual was reduced by $0.7 million during the quarter as reflected
in the above table in Other adjustments. In connection with the sale of the
consumer dial-up accounts to SolutionPro, Inc. in the second quarter of 2002,
the Company assigned and transferred certain data connectivity contracts to
SolutionPro, which released the Company from future termination penalties that
had previously been accrued during the restructuring program. As such, the
Company reversed approximately $0.3 million of the accrual for these
termination penalties for
which it is no longer obligated to pay. The amount of the adjustment is
included in the above table as Other adjustments. The Company incurred
additional costs included in Merger and integration costs totaling $0.1
million and $6.9 million for the quarter and for the nine month period ended
May 31, 2002 for financial advisory services, legal, accounting, relocation,
employee stay bonuses and other direct expenses related to the
Interland-Georgia acquisition, net of the $1.0 million reversals noted above.
Included in the third quarter charge was approximately $0.3 million of employee
severance and termination benefits and $0.5 million of relocation and
professional services, offset by the above third quarter adjustment of $0.7
million.

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INTERLAND, INC.
Notes to Consolidated Financial Statements  Continued
(Unaudited)

5. Acquisitions

In October 2001, January 2002 and May 2002, the Company acquired the small
business-focused shared and dedicated Web hosting customer accounts of
Interliant, Inc., AT&T, and Burlee Networks LLC, respectively, resulting in the
recognition of approximately $24.8 million of acquired intangible assets. The
final purchase price of these account acquisitions is contingent upon certain
revenue thresholds earned over a future period of time, and accordingly, the
final purchase price for these acquisitions is subject to change. These
intangible assets are being amortized over a three-year useful life.

On February 8, 2002, the Company acquired 100 percent of the outstanding common
shares of CommuniTech.Net, Inc. by issuing 5,375,000 shares of the Companys
common stock in exchange for all shares of CommuniTech.Net common stock. The
value of the common shares issued was determined based on the average market
price of the Companys common shares over the 2-day period before and after the
terms of the acquisition were agreed to and announced on February 8, 2002. The
results of CommuniTech.Nets operations have been included in the consolidated
financial statements since the date of acquisition. CommuniTech.Net is a
Kansas City, Missouri-based Web and applications hosting company serving small
and medium-sized businesses. The aggregate purchase price was $11.0 million,
including equity issued with a value of $10.8 million and estimated direct
acquisition costs of $0.2 million.

In connection with the acquisition of CommuniTech.Net, the Company holds two
notes receivable with balances totaling $2.7 million at May 31, 2002 from a
seller of CommuniTech.Net. These notes, which bear interest at the rate of 5%
per annum, mature on February 8, 2004 with interest only payments due
quarterly. The loans are collateralized by 2.7 million shares of the Companys
common stock owned by the note holder. The receivable is shown on the balance
sheet as a reduction in equity.

The following table summarizes the preliminary purchase price allocation based on the
estimated fair values of the assets acquired and liabilities assumed at the
date of acquisition. The purchase price allocation is still being
finalized and is subject to adjustment.

|                                              |                         |   |            |        | 
|--------------------------------------------- | ----------------------- | - | ---------- | ------ | 
|                                              |                         |   | Fair Value
|                                             
|(In thousands)                                |                         |   |            |       
|                                              |                         |   |            |       
|Current assets                                |                         | $ | 502        |       
|Property and equipment                        |                         |   | 3,487      |       
|Amortizable
intangible assets
Core technology |                         |   | 360        |       
|                                              | Trademarks              |   |            | 210    | 
|                                              | Other intangible assets |   |            | 514    | 
|Customer relationships                        |                         |   | 4,800      |       
|Goodwill                                      |                         |   | 4,698      |       
|Current liabilities                           |                         |   | (3,565     | )     
|                                              |                         |   |            |       
|                                              | Net assets acquired     |   | $          | 11,006 | 
|                                              |                         |   |            |       

On May 3, 2002, the Company acquired 100 percent of the outstanding common
shares of Dialtone Internet, Inc. by paying $15.7 million in exchange for all
shares of Dialtone Internets common stock. The results of Dialtone Internets
operations have been included in the consolidated financial statements since
the date of acquisition. Dialtone Internet is a Ft. Lauderdale, Florida-based
Web and applications dedicated hosting company serving small and medium-sized
businesses. The aggregate purchase price was $15.8 million, including
estimated direct acquisition costs of $.05 million.

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INTERLAND, INC.
Notes to Consolidated Financial Statements  Continued
(Unaudited)

The following table summarizes the preliminary purchase price allocation based on the
estimated fair values of the assets acquired and liabilities assumed at the
date of acquisition. The purchase price allocation is still being
finalized and is subject to adjustment.

|                              |                         |   |            |        | 
|----------------------------- | ----------------------- | - | ---------- | ------ | 
|                              |                         |   | Fair Value
|                             
|(In thousands)                |                         |   |            |       
|                              |                         |   |            |       
|Current assets                |                         | $ | 1,049      |       
|Property and equipment        |                         |   | 3,630      |       
|Amortizable
intangible assets |                         |   |            |       
|                              | Core
technology         |   |            | 120    | 
|                              | Trademarks              |   |            | 290    | 
|                              | Other intangible assets |   |            | 88     | 
|Customer relationships        |                         |   | 6,800      |       
|Goodwill                      |                         |   | 6,716      |       
|Other assets                  |                         |   | 72         |       
|Current liabilities           |                         |   | (2,410     | )     
|Long-term liabilities         |                         |   | (571       | )     
|                              |                         |   |            |       
|                              | Net assets acquired     |   | $          | 15,784 | 
|                              |                         |   |            |       

6. Acquired Intangibles and Goodwill

In June 2001, the Financial Accounting Standards Board issued FAS No. 141
Business Combinations (FAS 141) and FAS No. 142 Goodwill and Other
Intangible Assets (FAS 142). FAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
FAS 141 also specifies the criteria applicable to intangible assets acquired in
a purchase method business combination to be recognized and reported apart from
goodwill. FAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for impairment, at
least annually. FAS 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and be reviewed for impairment.

The Company adopted FAS 141 and 142 effective September 1, 2001. Upon adoption
of FAS 142, the Company no longer amortizes goodwill. The following table
reflects net income (loss) adjusted to exclude amortization expense recognized
in the periods presented related to goodwill:

|                                |                                                                    |                                                                      |   |                       |        |                           |   |         |        |         |   |      |        |  |   |       |         |  
|------------------------------- | ------------------------------------------------------------------ | -------------------------------------------------------------------- | - | --------------------- | ------ | ------------------------- | - | ------- | ------ | ------- | - | ---- | ------ |  | - | ----- | ------- | -
|                                |                                                                    |                                                                      |   | For the quarter ended |        | For the nine months ended
|                                |                                                                    |                                                                      |   | May 31,               |        | May 31,                   |   | May 31, |        | May 31,
|                                |                                                                    |                                                                      |   | 2002                  |        | 2001                      |   | 2002    |        | 2001   
|                               
|(In thousands)                  |                                                                    |                                                                      |   |                       |        |                           |   |         |        |         |   |      |        |  |   |      
|                                |                                                                    |                                                                      |   |                       |        |                           |   |         |        |         |   |      |        |  |   |      
|                                |                                                                    | Net income (loss) from continuing operations as reported             |   | $                     | 52,362 |                           |   | $       | (9,112 | )       |   | $    | 13,988 |  |   | $     | (27,194 | )
|                                |                                                                    | Add back goodwill amortization                                       |   |                       |       |                           |   |         | 1,540  |         |   |      |       |  |   |       | 5,102   |  
|                                |                                                                    |                                                                      |   |                       |        |                           |   |         |        |         |   |      |        |  |   |      
|                                |                                                                    | Adjusted net income (loss) from continuing operations:               |   | $                     | 52,362 |                           |   | $       | (7,572 | )       |   | $    | 13,988 |  |   | $     | (22,092 | )
|                                |                                                                    |                                                                      |   |                       |        |                           |   |         |        |         |   |      |        |  |   |      
|Basic income (loss) per share  
|                                |                                                                    | Continuing operations as reported                                    |   |                       | 0.38   |                           |   |         | (0.09  | )       |   |      | 0.10   |  |   |       | (0.28   | )
|                                |                                                                    | Goodwill amortization                                                |   |                       |       |                           |   |         | 0.02   |         |   |      |       |  |   |       | 0.05    |  
|                                |                                                                    |                                                                      |   |                       |        |                           |   |         |        |         |   |      |        |  |   |      
|                                | Adjusted basic income (loss) per share from
continuing operations: |                                                                      | $ | 0.38                  |        |                           | $ | (0.07   | )      |         | $ | 0.10 |        |  | $ | (0.23 | )      
|                               
|Diluted income (loss) per share
|                                |                                                                    | Continuing operations as reported                                    |   |                       | 0.38   |                           |   |         | (0.09  | )       |   |      | 0.10   |  |   |       | (0.28   | )
|                                |                                                                    | Goodwill amortization                                                |   |                       |       |                           |   |         | 0.02   |         |   |      |       |  |   |       | 0.05    |  
|                                |                                                                    |                                                                      |   |                       |        |                           |   |         |        |         |   |      |        |  |   |      
|                                |                                                                    | Adjusted diluted income (loss) per share from
continuing operations: |   | $                     | 0.38   |                           |   | $       | (0.07  | )       |   | $    | 0.10   |  |   | $     | (0.23   | )

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INTERLAND, INC.
Notes to Consolidated Financial Statements  Continued
(Unaudited)

In accordance with the requirements of FAS 142, the Company has performed the
first of the required impairment tests of goodwill existing as of September 1,
2001 and has determined that goodwill is not impaired.

The changes in the carrying amount of goodwill for the nine months ended May
31, 2002, are as follows:

|                               |                   |   |         |        |  
|------------------------------ | ----------------- | - | ------- | ------ | -
|Balance as of August 31, 2001: |                   | $ | 104,406 |       
|                               | Goodwill acquired |   |         | 11,414 |  
|                               | Other adjustments |   |         | (1,516 | )
|                               |                   |   |         |       
|Balance as of May 31, 2002:    |                   | $ | 114,304 |       

In connection with the Interland-Georgia acquisition, the Company accrued
liabilities related to abandoned leases and estimated contract termination fees.
During the second quarter, the Company settled obligations with three vendors
resulting in a net increase to goodwill of $0.3 million. During the third
quarter, the Company sub-leased a portion of the abandoned facility through the
end of the lease term resulting in a reduction to the accrued liability and
goodwill in the amount of $0.4 million. Additionally, the Company received a
waiver and release from a vendor which released the Company from its
obligations under a terminated contract and as a result, the Company reversed
$1.4 million of liabilities previously accrued related to this contract. These
adjustments to goodwill are reflected in the above table in Other
adjustments.

The following table summarizes intangible assets by asset class and related
accumulated amortization as required by FAS 142:

|                                 |                                                  |   |                    |        |                      |   |                |        |              |   |        |        |  |   |     |     | 
|-------------------------------- | ------------------------------------------------ | - | ------------------ | ------ | -------------------- | - | -------------- | ------ | ------------ | - | ------ | ------ |  | - | --- | --- | 
|                                 |                                                  |   | As of May 31, 2002 |        | As of August 31,2002
|                                 |                                                  |   | Gross Carrying     |        | Accumulated          |   | Gross Carrying |        | Accumulated 
|                                 |                                                  |   | Amount             |        | Amortization         |   | Amount         |        | Amortization
|                                
|(In Thousands)                   |                                                  |   |                    |        |                      |   |                |        |              |   |        |        |  |   |     |    
|                                 |                                                  |   |                    |        |                      |   |                |        |              |   |        |        |  |   |     |    
|Amortizable intangible assets:   |                                                  |   |                    |        |                      |   |                |        |              |   |        |        |  |   |     |    
|                                 | Core technology                                  |   | $                  | 12,480 |                      |   | $              | 2,046  |              |   | $      | 12,000 |  |   | $   | 200 | 
|                                 | Customer account acquisitions                    |   |                    | 24,792 |                      |   |                | 3,252  |              |   |        |       |  |   |     |    | 
|                                 | Trademarks                                       |   |                    | 5,400  |                      |   |                | 615    |              |   |        | 4,900  |  |   |     | 58  | 
|                                 | Other intangible assets                          |   |                    | 1,161  |                      |   |                | 314    |              |   |        | 600    |  |   |     | 26  | 
|                                 |                                                  |   |                    |        |                      |   |                |        |              |   |        |        |  |   |     |    
|                                 |                                                  |   |                    |        |                      |   |                |        |              |   |        |        |  |   |     |    
|Total                            |                                                  | $ | 43,833             |        |                      | $ | 6,227          |        |              | $ | 17,500 |        |  | $ | 284 |    
|                                 |                                                  |   |                    |        |                      |   |                |        |              |   |        |        |  |   |     |    
|Unamortizable intangible assets: |                                                  | $ | 11,600             |        |                      |   |                |        |              |   |        |        |  |   |     |    
|                                 |                                                  |   |                    |        |                      |   |                |        |              |   |        |        |  |   |     |    
|Aggregate amortization expense:  |                                                  |   |                    |        |                      |   |                |        |              |   |        |        |  |   |     |    
|                                 | For the three and nine months ended May 31, 2002 |   | $                  | 2,807  |                      |   | $              | 5,975  |              |   |        |        |  |   |     |     | 
|                                 |                                                  |   |                    |        |                      |   |                |        |              |   |        |        |  |   |     |    
|Estimated amortization expense:  |                                                  |   |                    |        |                      |   |                |        |              |   |        |        |  |   |     |    
|                                 | For the year ended August 31, 2002               |   |                    |        |                      |   |                | 9,121  |              |   |        |        |  |   |     |     | 
|                                 | For the year ended August 31, 2003               |   |                    |        |                      |   |                | 12,934 |              |   |        |        |  |   |     |     | 
|                                 | For the year ended August 31, 2004               |   |                    |        |                      |   |                | 12,677 |              |   |        |        |  |   |     |     | 
|                                 | For the year ended August 31, 2005               |   |                    |        |                      |   |                | 7,072  |              |   |        |        |  |   |     |     | 
|                                 | For the year ended August 31, 2006               |   |                    |        |                      |   |                | 2,909  |              |   |        |        |  |   |     |     | 

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INTERLAND, INC.
Notes to Consolidated Financial Statements  Continued
(Unaudited)

All intangible assets are amortized on a straight line basis over a weighted
average of 4 years. Core technology is amortized over a weighted average of 5
years, trademarks are amortized over a weighted average of 7 years and all
other intangible assets are amortized on a weighted average of 3 years.

7. Accrued Expenses

|                                           |  |              |        |                 |  |   |        | 
|------------------------------------------ |  | ------------ | ------ | --------------- |  | - | ------ | 
|                                           |  | May 31, 2002 |        | August 31, 2001
|                                          
|(In thousands)                             |  |              |        |                 |  |   |        | 
|                                           |  |              |        |                 |  |   |        | 
|Accrued payroll and related liabilities    |  | $            | 5,431  |                 |  | $ | 7,694  | 
|Taxes payable                              |  |              | 617    |                 |  |   | 559    | 
|Accrued restructuring liabilities          |  |              | 9,574  |                 |  |   | 12,478 | 
|Acquisition related liabilities            |  |              | 9,392  |                 |  |   | 8,837  | 
|Accrued lease payments                     |  |              | 1,139  |                 |  |   | 3,398  | 
|Accrued legal liabilities                  |  |              | 1,263  |                 |  |   | 3,153  | 
|Accrued professional fees                  |  |              | 51     |                 |  |   | 2,070  | 
|Accrued discontinued operations settlement |  |              | 3,796  |                 |  |   |       | 
|Other                                      |  |              | 4,242  |                 |  |   | 19,487 | 
|                                           |  |              |        |                 |  |   |        | 
|                                           |  | $            | 35,505 |                 |  | $ | 57,676 | 
|                                           |  |              |        |                 |  |   |        | 

8. Loss on Sale of Connectivity Accounts

On January 31, 2002, the Company entered into an agreement to sell
substantially all of its Boise-based consumer dial-up accounts and certain data
center assets to SolutionPro, Inc. The sale resulted in a net loss of $1.0
million, which is reported in the Statement of Operations for the nine months
ended May 31, 2002, under Other expense (income), net. The sale of these
accounts is not expected to have a substantial impact on operating income and
cash flows.

9. Contingencies

Interland is defending a contract dispute lawsuit filed on October 2, 2001, in
Dallas County, Texas Court seeking damages of approximately $2.1 million for
goods purchased by our PC Systems business. The Company removed the case to
federal court, and counterclaimed for legal fees owed by the plaintiff for
legal fees they had agreed to indemnify the Company for that were incurred on
an unrelated patent lawsuit. These legal fees amounted to approximately $1.3
million. This claim is currently in the early stages of discovery, and the
Company is therefore unable to estimate total expenses, or possible loss that
may ultimately be connected with the matter. A Tolling and Dispute Resolution
Agreement was entered between the parties on January 21, 2002, in Dallas
County, Texas, and the lawsuit was dismissed on February 22, 2002. In
connection with the Tolling and Dispute Resolution Agreement the Company paid
$700,000 to the plaintiff. The parties are working on a designated meeting
place to negotiate final resolution, subject to an arbitration requirement if a
negotiated settlement cannot be reached. This potential liability remains with
Interland even though it sold the PC Systems business.

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 parties are currently negotiating settlement with
the named plaintiffs. The case is currently in the early stages of discovery,
and the Company is therefore unable to estimate total expenses, possible loss
or range of loss that may ultimately be connected with the matter. This
potential liability remains with Interland even though it sold the PC Systems
business.

The Company is defending an employee class action lawsuit claim filed in the
U.S. District Court for Idaho. The case involves alleged violations of the
Fair Labor Standards Act, particularly failures to pay non-exempt employees
overtime for hours worked in excess of 40 in a week as well as other alleged
violations of the FLSA and state wage and hour laws. No class has been
certified in the case. The case is currently in the early stages of discovery,
and the Company is therefore unable to estimate total expenses, possible loss
or

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INTERLAND, INC.
Notes to Consolidated Financial Statements  Continued
(Unaudited)

range of loss that may ultimately be connected with the matter. A
fact-finding mediation session was conducted on June 28, 2002, and discovery is
proceeding. This potential liability remains with Interland even though it
sold the PC Systems business.

The Company is party to various other legal actions arising in the normal
course of business, none of which is expected to have a material adverse effect
on its business, financial position, results of operations and cash flows.

10. Common Stock and Related Matters

During the second quarter ended February 28, 2002, the Micron Technology
Foundation, which beneficially owned approximately 43% of the Companys common
stock, sold all of the approximately 58.6 million shares of the Companys
common stock to institutional investors, together with the Company and four of
its directors. The Company re-purchased approximately 5.8 million shares of
common stock from the Foundation at an aggregate cost of $7.3 million.

11. Operating Segment Information

The Companys business activities are represented by a single industry segment,
web site and applications hosting.

12. Income Taxes

On March 9, 2002, the US Government passed an economic stimulus package
entitled the Job Creation and Worker Assistance Act of 2002. This law
contains a business provision that temporarily extends the general tax NOL
carryback period to five years. The five-year carryback period is available
for tax losses occurring in 2001 and 2002. During the third quarter, the
Company filed an application for refund in conjunction with its 2001 income tax
return under the provisions of the new tax law, and the benefit of $64.2
million reflects the results of the NOL carryback. The tax refund is included
in the accompanying consolidated Statement of Operations under Income tax
benefit from continuing operations at May 31, 2002. The company has set up a
full valuation allowance with respect to the current years losses.

The effective income tax rate from continuing operations was approximately 34%
and 32% for the quarter and nine months ended May 31, 2001. The rate
principally reflects the federal statutory rate, net of the effect of state
taxes, tax-exempt securities and non-deductible goodwill amortization.

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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.
Words such as anticipates, expects, intends, plans, believes,
seeks, estimates, and similar expressions identify forward-looking
statements. These forward-looking statements include but are not limited to
statements regarding Interlands expectations of the Companys future liquidity
needs, its expectations regarding future business and financial results, its
expectations regarding its future operating results including its planned
increase in its revenues levels and the actions the Company expects to take in
order to maintain its existing customers and expand its 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 it 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 below and in the Companys other filings with the
Securities and Exchange Commission.

All quarterly references are to the Companys fiscal periods ended May 31, 2002
or May 31, 2001, unless otherwise indicated. All annual references are also on
a fiscal basis, unless otherwise indicated. All tabular dollar amounts are
stated in thousands.

Overview

Interland is a leading Web hosting company offering a broad range of
business-class hosting products and services, including shared and dedicated
hosting services, electronic commerce and other applications hosting services,
and other Web hosting-related products and services. Historically, the Company
had provided a variety of computer products and related services through its PC
Systems, SpecTek, and Web hosting business segments. During fiscal 2001, the
Company discontinued its PC Systems business, its computer manufacturing
business, and SpecTek, its memory products business. See the note entitled
Discontinued Operations to the accompanying consolidated financial
statements. Following the disposition of these business segments, the Company
has become a Web hosting company.

The Company was originally established on April 7, 1995, as Micron Electronics,
Inc., through the merger of three businesses: Micron Computer, Inc., Micron
Custom Manufacturing Services, Inc., and ZEOS International, LTD. The Web
hosting business, the Companys continuing operation, was developed through the
acquisition and integration of seven companies and three customer account
acquisitions between 1999 and 2002.



| |  |  | On August 2, 1999, the Company acquired 100% of the outstanding stock
of NetLimited, Inc. d.b.a. HostPro, a Web and applications hosting
provider.                                                                                                                                                                                                                                                                                                                                                                                
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | On September 2, 1999, the Company acquired the property and equipment
of Micron Internet Services, formerly a division of Micron Technology, a
provider of dedicated, nationwide dial-up and broadband Internet access,
virtual private network solutions and e-commerce services.                                                                                                                                                                                                                                                  
| |  |  | On December 14, 1999, the Company acquired LightRealm, Inc., a
Kirkland, Washington-based Web and applications hosting and Internet
access company serving small- and medium-sized businesses.                                                                                                                                                                                                                                                                                                                                      
| |  |  | On March 16, 2000, the Company acquired Worldwide Internet Publishing
Corporation, a Boca-Raton, Florida-based Web hosting company that also
served small- and medium-sized businesses.                                                                                                                                                                                                                                                                                                                                             
| |  |  | On August 6, 2001, the Company acquired Interland, Inc.
(Interland-Georgia), an Atlanta, Georgia-based provider of 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. In connection with the acquisition of
Interland-Georgia, Micron Electronics, Inc., changed its name to
Interland, Inc., and its trading symbol to INLD. On November 30,
2001, Interland-Georgia was merged into the Company.
| |  |  | On October 26, 2001, the
Company acquired the
small business-focused shared and unmanaged dedicated retail Web hosting
accounts of Interliant, Inc.                                                                                                                                                                                                                                                                                                                                                                                 
| |  |  | On January 14, 2002, the
Company acquired the
small business-focused shared and dedicated Web hosting accounts of AT&T
relating to AT&T Small Business Hosting Service and Business Ready
Dedicated Hosting Services.                                                                                                                                                                                                                                                                                                               
| |  |  | On February 8, 2002, the Company acquired CommuniTech.Net, Inc., a
Kansas City, Missouri-based Web hosting company.                                                                                                                                                                                                                                                                                                                                                                                                                 

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



| |  |  | On May 3, 2002, the Company acquired Dialtone Internet, Inc., a Ft.
Lauderdale, Florida-based dedicated Web hosting company.                       
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | On May 23, 2002, the Company acquired the small business-focused
shared and unmanaged dedicated retail Web hosting accounts of Burlee
Networks LLC.

The Companys principal executive offices are located in Atlanta, Georgia.

The Company intends to invest in sales and marketing to expand its customer
base and to develop new sales channels and relationships. A component of the
Companys strategy is to achieve increased incremental margins by more fully
utilizing its existing infrastructure to accommodate additional customers.
The Companys future success is dependent upon its ability to achieve positive
cash flow prior to depletion of cash resources and its ability to raise funds,
if needed. While management currently believes that the Company has adequate
resources to maintain planned operations for at least one year from the balance
sheet date, they cannot assure you that the Company will be cash flow positive
in the future under its current Web and applications hosting model or that
adequate funding will be available to allow it to continue operations
subsequent to the one-year time period. The Company does not expect to
generate positive cash flows from ongoing operations until the end of the forth
quarter of fiscal 2002. The Companys current financial forecast indicates
that there are sufficient cash resources on hand until the Company reaches
positive cash flows from continuing operations.

Interlands business is rapidly evolving and has a limited operating history.
As a result, the Company believes that period-to-period comparisons of its
revenues and operating results, including its cost of revenues and other
operating expenses as a percentage of total revenue, are not meaningful and
should not be relied upon as indicators of future performance. The Company
does not believe that its historical growth rates are an indication of future
results.

Critical Accounting Policies and Estimates

Management based this discussion and analysis of our financial condition and
results of operations upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our critical accounting
policies and estimates, including those related to revenue recognition,
valuation of accounts receivable, property, plant and equipment, long-lived
assets, intangible assets, and contingencies. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements. These judgments and estimates affect the reported
amounts of assets and liabilities and the reported amounts of revenues and
expenses during the reporting periods. Changes to these judgments and
estimates could adversely affect the Companys future results of operations and
cash flows.



| |  |  | Valuation of Accounts Receivable. A considerable amount of judgment
is required when we assess the ultimate realization of receivables,
including assessing the probability of collection and the current
credit-worthiness of our customers. Significant portions of customer
payments are made by credit cards. Each month management reviews
historical charge-back and cancellation patterns and records an
allowance based on historical results as well as management judgment.
Additionally, each month management reviews the aged receivables balance
and records an allowance for uncollectible accounts based on the age of
the outstanding receivable balances, trends in outstanding balances and
management judgment. As a result of these analyses, we believe the
current allowance is adequate to cover any bad debts as of the date of
the balance sheet. Actual results differing from this estimate could
have a material impact on our results of operations and cash flows.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| |  |  | Property, Plant and Equipment. We utilize significant amounts of
property, plant and equipment in providing service to our customers. We
utilize straight-line depreciation for property and equipment over our
estimate of their useful lives. Changes in technology or changes in the
intended use of property, plant and equipment may cause the estimated
period of use or the value of these assets to change. We perform an
annual analysis to confirm the appropriateness of estimated economic
useful
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



| |   |  | lives for each category of current property, plant, and
equipment. Additionally, long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that their carrying
amounts may not be recoverable. Estimates and assumptions used in both
setting depreciable lives and testing for recoverability require
management judgment.                                                                                                                                                                                                                                                                                                                                                                                                               
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Goodwill and Intangible Assets. We periodically evaluate goodwill
and intangible assets for potential impairment indicators. If
impairment exists, we measure the impairment through the use of
discounted cash flows. Our judgments regarding the existence of
impairment indicators are based on legal factors, market conditions, and
operational considerations. Future events could cause us to conclude
that impairment indicators exist and that goodwill and other intangible
assets associated with our acquired businesses are impaired. Goodwill
is no longer amortized, but instead is subject to impairment tests at
least annually. Other intangible assets are amortized over our
estimate of their period of benefit.                                              
|
| |  |  | Contingencies. We are subject to proceedings, lawsuits and other
claims related to class action lawsuits and other legal and regulatory
proceedings that arise in the ordinary course of business. We are
required to assess the likelihood of any adverse judgments or outcomes
to these matters as well as potential ranges of probable losses. A
determination of the amount of loss accrual required, if any, for these
contingencies are made after careful analysis of each individual issue.
We consult with legal counsel and other experts where necessary to
assess any contingencies. The required accrual may change in the future
due to new developments in each matter or changes in approach such as a
change in settlement strategy in dealing with these matters.
|
| |  |  | Discontinued Operations. In connection with the 2001 sale and
discontinuance of our operations related to our PC Systems and SpecTek
businesses, we recorded an estimate of all retained liabilities. This
amount is subject to final determination with the purchaser, which could
result in a revision in the estimated loss on disposal of discontinued
operations. Actual results differing from our estimates related to our
discontinued operations could have a material impact on our financial
position and liquidity and require additional losses from discontinued
operations.                                                                                                                                                                                         
|
| |  |  | Restructuring and Acquisition Related Liabilities. We have
remaining reserves related to our restructuring program approved and
implemented in the fourth quarter of fiscal year 2001 in connection with
our acquisition of Interland-Georgia. These remaining liabilities
represent our estimate of future lease payments for data centers and
office facilities being exited that cannot be recovered through
subleases and termination penalties for bandwidth and data connectivity
contracts we are no longer utilizing.                                                                                                                                                                                                                                                      

Results Of Continuing Operations

The Companys consolidated financial information presents the net effect of
discontinued operations separate from the results of the Companys continuing
operations. The Companys financial results reflect the results of
Interland-Georgia, CommuniTech.Net and Dialtone Internet from the dates of
acquisition forward. The discussion and analysis that follows generally
focuses on continuing operations. The following table sets forth, for the
periods indicated, items included in the Companys consolidated Statements of
Operations, stated as a percentage of revenues:

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

|                                             |                                        |                          |  |                       |  |                           |       |         |      |         |       |         |       |         |       |      |       |  |        |      |       | 
|-------------------------------------------- | -------------------------------------- | ------------------------ |  | --------------------- |  | ------------------------- | ----- | ------- | ---- | ------- | ----- | ------- | ----- | ------- | ----- | ---- | ----- |  | ------ | ---- | ----- | 
|                                             |                                        |                          |  | For the quarter ended |  | For the nine months ended
|                                             |                                        |                          |  |                       |  |                           |       | May 31, |      | May 31, |       | May 31, |       | May 31,
|                                             |                                        |                          |  |                       |  |                           |       | 2002    |      | 2001    |       | 2002    |       | 2001   
|                                            
|Revenues                                     |                                        |                          |  |                       |  |                           | 100.0 | %       |      |         | 100.0 | %       |       |         | 100.0 | %    |       |  | 100.0  | %   
|Cost of revenues                             |                                        |                          |  |                       |  |                           | 49.6  |         |      |         | 63.1  |         |       |         | 53.4  |      |       |  | 65.5   |     
|                                             |                                        |                          |  |                       |  |                           |       |         |      |         |       |         |       |         |       |      |       |  |        |     
|                                             | Gross margin                           |                          |  |                       |  |                           |       | 50.4    |      |         |       | 36.9    |       |         |       | 46.6 |       |  |        | 34.5 |      
|                                             |                                        |                          |  |                       |  |                           |       |         |      |         |       |         |       |         |       |      |       |  |        |     
|Operating expenses:                          |                                        |                          |  |                       |  |                           |       |         |      |         |       |         |       |         |       |      |       |  |        |     
|                                             | Sales, marketing and technical support |                          |  |                       |  |                           |       | 46.8    |      |         |       | 61.8    |       |         |       | 51.1 |       |  |        | 64.0 |      
|                                             | General and administrative             |                          |  |                       |  |                           |       | 47.7    |      |         |       | 64.4    |       |         |       | 51.4 |       |  |        | 75.1 |      
|                                             | Other expense, net                     |                          |  |                       |  |                           |       | 0.4     |      |         |       | 0.2     |       |         |       | 1.0  |       |  |        | 1.3  |      
|                                             | Merger and integration costs           |                          |  |                       |  |                           |       | 0.4     |      |         |       |        |       |         |       | 8.9  |       |  |        |     |      
|                                             |                                        |                          |  |                       |  |                           |       |         |      |         |       |         |       |         |       |      |       |  |        |     
|                                             |                                        | Total operating expenses |  |                       |  |                           |       |         | 95.3 |         |       |         | 126.4 |         |       |      | 112.4 |  |        |      | 140.4 | 
|Operating loss                               |                                        |                          |  |                       |  |                           | (44.9 | )       |      |         | (89.5 | )       |       |         | (65.8 | )    |       |  | (105.9 | )   
|Loss on investments, net                     |                                        |                          |  |                       |  |                           |      |         |      |         | (13.2 | )       |       |         |      |      |       |  | (0.9   | )   
|Interest income (expense), net               |                                        |                          |  |                       |  |                           | (0.1  | )       |      |         | 13.5  |         |       |         | 0.4   |      |       |  | 14.9   |     
|                                             |                                        |                          |  |                       |  |                           |       |         |      |         |       |         |       |         |       |      |       |  |        |     
|Loss from continuing operations before taxes |                                        |                          |  |                       |  |                           | (45.0 | )       |      |         | (89.2 | )       |       |         | (65.4 | )    |       |  | (91.9  | )   
|Income tax benefit                           |                                        |                          |  |                       |  |                           | 243.4 |         |      |         | 30.0  |         |       |         | 83.6  |      |       |  | 29.2   |     
|                                             |                                        |                          |  |                       |  |                           |       |         |      |         |       |         |       |         |       |      |       |  |        |     
|Net income (loss) from continuing operations |                                        |                          |  |                       |  |                           | 198.4 | %       |      |         | (59.2 | )%      |       |         | 18.2  | %    |       |  | (62.7  | )%  
|                                             |                                        |                          |  |                       |  |                           |       |         |      |         |       |         |       |         |       |      |       |  |        |     

Revenues

Revenues from continuing operations are primarily generated from shared and
dedicated hosting services, e-commerce services, applications hosting, domain
name registration services, and other Web hosting-related products and
services. Revenues are recognized as the services are provided. Hosting
contracts generally are for service periods ranging from one to 24 months and
often require payments in advance. Prepaid fees, including set-up fees for
hosting services, are deferred and recognized ratably over the customers
expected service period. Deferred revenues represent the liability for advance
billings to customers for services not yet provided.

|                |  |                       |        |                           |  |         |        |         |  |   |        |  |  |   |        | 
|--------------- |  | --------------------- | ------ | ------------------------- |  | ------- | ------ | ------- |  | - | ------ |  |  | - | ------ | 
|                |  | For the quarter ended |        | For the nine months ended
|                |  | May 31,               |        | May 31,                   |  | May 31, |        | May 31,
|                |  | 2002                  |        | 2001                      |  | 2002    |        | 2001   
|               
|(In thousands)  |  |                       |        |                           |  |         |        |         |  |   |        |  |  |   |        | 
|Hosting revenue |  | $                     | 24,835 |                           |  | $       | 10,998 |         |  | $ | 71,110 |  |  | $ | 29,607 | 
|Other revenue   |  |                       | 1,555  |                           |  |         | 4,397  |         |  |   | 5,696  |  |  |   | 13,779 | 
|                |  |                       |        |                           |  |         |        |         |  |   |        |  |  |   |        | 
|Total Revenues  |  | $                     | 26,390 |                           |  | $       | 15,395 |         |  | $ | 76,806 |  |  | $ | 43,386 | 
|                |  |                       |        |                           |  |         |        |         |  |   |        |  |  |   |        | 

Total revenues increased $11.0 million, or 71.4%, and $33.4 million, or 77.0%,
respectively, for the quarter and for the nine months ended May 31, 2002 when
compared to the same periods of the prior fiscal year.

Hosting revenues increased 125.8% to $24.8 million and 140.2% to $71.1 million,
respectively, for the quarter and for the nine months ended May 31, 2002 when
compared to the same periods from the prior fiscal year. Hosting revenues are
comprised of shared and dedicated hosting services and domain name
registrations. The growth in hosting revenues has been driven by new customer
growth, acquisitions, and upgrading existing customers.

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

Other revenues decreased 64.6% to $1.6 million and 58.7% to $5.7 million,
respectively, for the quarter and for the nine months ended May 31, 2002 when
compared to the same periods from the prior fiscal year. Other revenues are
comprised of e-commerce and other applications hosting services, other Web
hosting-related products and services, Internet connectivity fees and equipment
sales to customers. The decrease in other revenue is due to the sale of
substantially all of the consumer dial-up accounts as the Companys strategy
moved away from connectivity services and the sale of hardware. The sale of
these accounts and the change in strategy is not expected to have a substantial
impact on future operating income.

Cost of Revenues

Cost of revenues increased 34.7% and 44.2% to $13.1 million and $41.0 million,
respectively, for the quarter and for the nine months ended May 31, 2002 from
$9.7 million and $28.4 million in the same periods of the prior year. The
increase in cost of revenues was primarily related to depreciation and leasing
costs for data centers and equipment, telecommunications and Internet access
costs, and technical personnel costs. The Companys cost of revenues as a
percentage of revenues decreased to 49.6% and 53.4% for the quarter and nine
month periods ended May 31, 2002 from 63.1% and 65.5% for the same periods of
the prior year. The increase in gross margin is primarily related to the
growth of the Companys core hosting revenues as well as the cost synergies
attributable to the Interland-Georgia acquisition and managements restructuring
plan implemented during the forth quarter of 2001. The Company anticipates
that costs of revenues will continue to increase in absolute dollars, but
decline as a percentage of revenues as the Company continues to grow and
executes its strategy to achieve a more cost-effective scale of operations.

Cost of revenues is mainly comprised of compensation and other expenses for
data center and provisioning operations, Internet connectivity and other
related telecommunications expense, and depreciation and amortization of
capital and intangible assets related to data center equipment and operations.

Operating Expenses

Sales, Marketing and Technical Support

Sales, marketing and technical support expenses increased 29.9% and 41.5% to
$12.3 million and $39.3 million, respectively, for the quarter and for the nine
months ended May 31, 2002 from $9.5 and $27.8 million in the same periods of
the prior year. The increase in sales, marketing and technical support
expenses was primarily related to increased sales and technical support
personnel costs related to the acquisition of Interland-Georgia and
CommuniTech.Net, outsourced telemarketing costs, and amortization of account
acquisition costs.

Sales, marketing and technical support is mainly comprised of compensation
costs and costs associated with technical support and marketing the Companys
products and services, and amortization of tangible and intangible assets
related to sales systems and customer acquisitions. Compensation costs include
salaries and related benefits, commissions and bonuses. Marketing expenses
include the costs of direct mail, advertising and other mass-market programs.

General and Administrative

General and administrative expenses increased 26.9% and 21.1% to $12.6 million
and $39.5 million, respectively, for the quarter and for the nine months ended
May 31, 2002 from $9.9 million and $32.6 million in the same period of the
prior year. The increase in general and administrative expenses was primarily
related to increased billing, accounting, information technology and other
general and administrative personnel costs related to the acquisition of
Interland-Georgia and CommuniTech.net, amortization of intangible assets
acquired during the Interland-Georgia acquisition, bad debt expenses,
consulting fees and outsourced billing and collection transition service costs
on acquired accounts.

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

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

Merger and Integration Costs

In connection with the acquisition of Interland-Georgia in August 2001, the
Company adopted a restructuring plan to close certain offices and data centers,
discontinue the use and development of certain software and eliminate other
redundant assets. As a result, the Company recorded a restructuring charge of
$110.3 million in the fourth quarter of fiscal 2001. The liability related to
this restructuring program was $9.6 million and $12.5 million at May 31, 2002
and August 31, 2001, respectively. The Company expects to pay these
liabilities by the end of fiscal year 2004. For the quarter and nine months
ended May 31, 2002, the Company incurred $0.1 million and $6.9 million,
respectively, in additional costs related to the continuation of its merger and
integration plan.

INTEREST INCOME (EXPENSE), NET

Interest income (expense), net decreased to $(0.03) million and $0.30 million
for the quarter and for the nine months ended May 31, 2002 from $2.1 million
and $6.5 million for the same periods of the prior year. Interest income
(expense), net consists of interest income earned on the Companys invested
cash and liquid investments, less interest expense on debt. The reduction in
interest income (expense), net is primarily due to the lower levels of cash and
liquid investments that were available for investment due to the sale of the PC
Systems business and lower interest rates during the first nine months of
fiscal 2002.

INCOME TAX BENEFIT

On March 9, 2002, the US Government passed an economic stimulus package
entitled the Job Creation and Worker Assistance Act of 2002. This law
contains a business provision that temporarily extends the general tax NOL
carryback period to five years. The five-year carryback period is available
for tax losses occurring in 2001 and 2002. During the third quarter, the
Company filed an application for refund in conjunction with its 2001 income tax
return under the provisions of the new tax law, and the benefit of $64.2
million reflects the results of the NOL carryback. The tax refund is included
in the accompanying consolidated Statement of Operations under Income tax
benefit from continuing operations at May 31, 2002. The company has set up a
full valuation allowance with respect to the current years losses.

The effective income tax rate from continuing operations was approximately 34%
and 32% for the quarter and nine months ended May 31, 2001. The rate
principally reflects the federal statutory rate, net of the effect of state
taxes, tax-exempt securities and non-deductible goodwill amortization.

DISCONTINUED OPERATIONS

PC SYSTEMS

The Company discontinued the operations of its PC Systems business segment,
which was accounted for as discontinued operations in accordance with
Accounting Principles Board Opinion (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. On
May 31, 2001, the Company sold its PC Systems business to GTG PC Holdings, LLC,
(GTG PC) an affiliate of the Gores Technology Group. In fiscal 2001, the
Company recognized an estimated loss on disposal of the PC Systems business of
$212.2 million. Included in the loss on disposal are employee termination
costs of approximately $15.4 million, of which $0.0 million and
$0.3 million is included in the accompanying consolidated Balance Sheets under
Accrued liabilities at May 31, 2002, and August 31, 2001, respectively.

During the third quarter ended May 31, 2002, the Company resolved disputed
obligations with GTG PC related to amounts that GTG PC claimed were owed by
Interland less amounts Interland claimed were owed by GTG PC. These claims
relate to funds collected, transferred and paid by each company subsequent to
the close of the purchase. The net amount of the obligations settled with GTG
PC during the third quarter was $3.9 million. Additionally, the Company wrote
down the certain sales tax receivable balances to their net realizable value
resulting in an additional charge to discontinued operations expense of $0.7
million. The total loss on disposal of discontinued operations during the
third quarter amounted to $4.6 million and is included in the accompanying
consolidated Statement of Operations under Loss on disposal of discontinued
operations.

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

SPECTEK

The Company discontinued the operations of its SpecTek business segment, which
was accounted for as discontinued operations in accordance with APB No. 30. On
March 22, 2001, the Company transferred the land, buildings and intellectual
property to MTI and received $18 million of cash in excess of the historical
cost from MTI. Net proceeds from the sale of the SpecTek assets under the
Purchase Agreement were $39.6 million.

ADJUSTED EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA)

The Companys adjusted EBITDA (loss from continuing operations, excluding
interest income (expense), income taxes, depreciation and amortization, as
further adjusted to exclude merger and integration costs, non-cash stock
compensation expense, gain/loss from sale of the Companys connectivity
accounts and loss on investments) , was a loss of $1.6 million and $16.9
million for the quarter and nine months ended May 31, 2002 compared with a loss
of $7.9 and $28.0 million for the same periods of the prior year. The decrease
in the adjusted EBITDA loss was primarily due to increased revenues and gross
margins for the periods offset by additional sales, technical support, general
and administrative personnel costs resulting from the acquisition of
Interland-Georgia. Adjusted EBITDA does not represent funds available for
discretionary use and is not intended to represent cash flow from operations as
measured under generally accepted accounting principles. Adjusted EBITDA
should not be considered as an alternative to net loss or net cash used in
operating activities, but may be useful to investors as an indication of
operating performance. The Companys calculation of adjusted EBITDA may not be
comparable to the computation of similarly titled measures of other companies.

Reconciliation of net income (loss) from continuing operations to adjusted EBITDA is as follows:

|                                             |  |                       |         |                           |  |         |        |        |  |   |         |   |  |   |         |  
|-------------------------------------------- |  | --------------------- | ------- | ------------------------- |  | ------- | ------ | ------ |  | - | ------- | - |  | - | ------- | -
|                                             |  | For the quarter ended |         | For the nine months ended
|                                             |  | May 31,               |         | May 31,                   |  | May 31, |        | May 1,
|                                             |  | 2002                  |         | 2001                      |  | 2002    |        | 2001  
|                                            
|(In thousands)                               |  |                       |         |                           |  |         |        |        |  |   |         |   |  |   |         |  
|Net income (loss) from continuing operations |  | $                     | 52,362  |                           |  | $       | (9,112 | )      |  | $ | 13,988  |   |  | $ | (27,194 | )
|Depreciation and amortization                |  |                       | 9,923   |                           |  |         | 5,843  |        |  |   | 25,293  |   |  |   | 17,106  |  
|Interest (income) expense, net               |  |                       | 25      |                           |  |         | (2,082 | )      |  |   | (293    | ) |  |   | (6,489  | )
|Non-cash compensation expense                |  |                       | 277     |                           |  |         | 31     |        |  |   | 831     |   |  |   | 805     |  
|Income tax benefit                           |  |                       | (64,242 | )                         |  |         | (4,625 | )      |  |   | (64,242 | ) |  |   | (12,694 | )
|Merger and integration costs                 |  |                       | 98      |                           |  |         |       |        |  |   | 6,869   |   |  |   |        |  
|Loss on sale of connectivity accounts, net   |  |                       |        |                           |  |         |       |        |  |   | 673     |   |  |   |        |  
|Loss on investments                          |  |                       |        |                           |  |         | 2,037  |        |  |   |        |   |  |   | 419     |  
|                                             |  |                       |         |                           |  |         |        |        |  |   |         |   |  |   |         |  
|Adjusted EBITDA                              |  | $                     | (1,557  | )                         |  | $       | (7,908 | )      |  | $ | (16,881 | ) |  | $ | (28,047 | )
|                                             |  |                       |         |                           |  |         |        |        |  |   |         |   |  |   |         |  

LIQUIDITY AND CAPITAL RESOURCES

On January 22, 2002, the Securities and Exchange Commission issued FR-61,
Commission Statement about Managements Discussion and Analysis of Financial
Condition and Results of Operations.The release sets forth certain views of
the Commission regarding disclosure that should be considered by registrants.
Disclosure matters addressed by the release are liquidity and capital resources
including off-balance sheet arrangements, certain trading activities that
include non-exchange traded contracts accounted for at fair value, and effects
of transactions with related and certain other parties. The following table
sets forth the information in a format described in the release with regard to
disclosures about contractual obligations and commercial commitments.

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

The following table discloses aggregate information about our contractual
obligations as of August 31, 2001 and the periods in which payments are due:

|                                   |  |       |       |        |  |           |      |           |  |         |       |  |  |   |      |  |  |   |      | 
|---------------------------------- |  | ----- | ----- | ------ |  | --------- | ---- | --------- |  | ------- | ----- |  |  | - | ---- |  |  | - | ---- | 
|                                   |  |       |       |        |  | Less than |      |           |  |         | After
|Contractual Obligations            |  | Total |       | 1 year |  | 1-3 years |      | 4-5 years |  | 5 years
|                                  
|                                  
|(In thousands)                     |  |       |       |        |  |           |      |           |  |         |       |  |  |   |      |  |  |   |      | 
|Long-term debt                     |  | $     | 5.3   |        |  | $         |     |           |  | $       | 5.3   |  |  | $ |     |  |  | $ |     | 
|Operating leases                   |  |       | 75.2  |        |  |           | 18.4 |           |  |         | 19.8  |  |  |   | 15.2 |  |  |   | 21.8 | 
|Capital leases                     |  |       | 39.1  |        |  |           | 18.1 |           |  |         | 20.7  |  |  |   | 0.3  |  |  |   |     | 
|                                   |  |      
|Total contractual cash obligations |  | $     | 119.6 |        |  | $         | 36.5 |           |  | $       | 45.8  |  |  | $ | 15.5 |  |  | $ | 21.8 | 
|                                   |  |      

As of May 31, 2002, the Company had $172.1 million in cash and cash
equivalents, investments and restricted investments. This represents a
decrease of $36.0 million compared to August 31, 2001. Cash used during the
nine month period includes approximately $47.2 million for operations, net of
an $18.5 million tax refund during the second quarter and a $66.4 million tax
refund during the third quarter, as well as $6.4 million for net deposits of
temporarily restricted cash, $12.7 million for repayments of debt, $7.3
million for the re-purchase of the Companys common stock, $10.3 million for
discontinued operation liabilities, $41.5 million for capital expenditures and
account acquisitions, $2.7 million for notes issued to a related party, offset
by approximately $8.6 million provided by matured investment securities.

On May 31, 2001, the Company sold its PC Systems business to GTG PC Holdings,
LLC, (GTG PC) an affiliate of the Gores Technology Group. Under the terms of
the agreement, GTG PC received assets, which included $76.5 million in cash,
and assumed specified liabilities of the PC Systems business. The Company
retained certain liabilities, including contingent liabilities arising prior to
the sale. Through May 31, 2003, or for the applicable statute of limitations
with respect to taxes and government contracts, the Company is obligated to
indemnify GTG PC and affiliated entities for any breaches of the
representations and warranties contained in the agreement. In addition, the
Company is obligated for an indefinite period of time to indemnify GTG PC and
affiliated entities for any breaches in covenants. The agreement provides that
the maximum aggregate liability of the Company for indemnification under the
agreement is $10.0 million. Claims related to this indemnification could result
in an additional cash payment by the Company to GTG PC and a corresponding
increase to the loss on disposal of discontinued operations.

On July 20, 2001, the Company entered into a financing arrangement with a
financial institution, under which the Company executed a $5.3 million credit
agreement. The full amount of the credit facility was outstanding at May 31,
2002 bearing an interest rate of prime less 100 basis points or 3.75%.
Additionally, in July 2001, the Company entered into a financing arrangement
for a sale and leaseback of up to $14.6 million for certain equipment,
primarily computer hardware. In January 2002, the Company repurchased certain
assets from the financial institution at a total cost of $2.9 million. In
connection with the repurchase, approximately $3.3 million of cash and equivalents became unrestricted lowering
the total pledged amount of cash and equivalents securing the lease line to
$21.6 million.

During the third quarter ended May 31, 2002, the Companys merchant bank
reduced the amount of restricted cash collateralizing the Companys merchant
banking activity by $12.5 million, bringing the total restricted collateral amount
required under the merchant agreement down to $10.0 million.

Prior to the acquisition of Dialtone Inc., Dialtone entered into a $2 million
line of credit with a financial institution, which bears interest at a rate of
prime plus 150 basis points. In connection with the acquisition of Dialtone,
Interland acquired the line of credit and as of May 31, 2002, the balance was
$0.7 million bearing a weighted average interest rate of approximately 5.75%.

The Company anticipates making capital expenditures between $1.5 and $2.0
million during the fourth quarter of fiscal 2002, generally for data center,
technical and customer support equipment and related software.

The Companys strategy includes acquisitions of businesses and customers and
these acquisitions may be accomplished through the issuance of shares, payment
of cash or debt.

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

The Company does not expect to generate positive cash flow from ongoing
operations until the end of the forth quarter of fiscal 2002. The Company
expects to have adequate cash resources to fund operations for at least one
year from the balance sheet date. The Companys future success is dependent
upon its ability to achieve positive cash flow prior to the depletion of cash
resources and to raise funds, thereafter, if needed. Management cannot assure
that the Company will be profitable in the future under its current Web and
applications hosting business model or that adequate funding will be available
to allow it to continue operations subsequent to the one-year time period. The
Companys current financial forecast indicates that there are sufficient cash
balances on hand until the Company reaches positive cash flows from ongoing
operations.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. The statement provides accounting and reporting standards for
recognizing obligations related to asset retirement costs associated with the
retirement of tangible long-lived assets. Under this statement, legal
obligations associated with the retirement of long-lived assets are to be
recognized at their fair value in the period in which they are incurred if a
reasonable estimate of fair value can be made. The fair value of the asset
retirement costs is capitalized as part of the carrying amount of the
long-lived asset and subsequently allocated to expense using a systematic and
rational method over the assets useful life. Any subsequent changes to the
fair value of the liability due to passage of time or changes in the amount or
timing of estimated cash flows is recognized as an accretion expense. The
Company will be required to adopt this statement no later than September 1,
2002. The Company is currently analyzing the impact the adoption of this
pronouncement may have on its consolidated financial position, results of
operations, or cash flows.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which is effective for fiscal years
beginning after Dec 15, 2001. This statement supercedes FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of. However, it retains the fundamental provisions of SFAS No.
121 for the recognition and measurement of the impairment of long-lived assets
to be held and used and the measurement of long-lived assets to be disposed of
by sale. Impairment of Goodwill is not included in the scope of SFAS No. 144
and will be treated in accordance with the accounting standards established in
SFAS No. 142. Under SFAS No. 144, long-lived assets are to be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing or discontinued operations. The statement applies to all long-lived
assets, including discontinued operations, and replaces the provisions of APB
Opinion No. 30. The Company will be required to adopt this statement no later
than September 1, 2002. The Company is currently analyzing the impact the
adoption of this pronouncement may have on its consolidated financial position,
results of operations, or cash flows.

CERTAIN FACTORS

If any of the adverse events described in the following factors actually occur
or Interland does not accomplish necessary events or objectives described in
the factors, its business, financial condition and operating results could be
materially and adversely affected, the trading price of the Companys common stock could decline and
shareholders could lose all or part of their investments. The risks and
uncertainties described below are not the only risks the Company faces.

Interland has incurred losses since inception.Excluding the income tax
benefit of $64.2 million, the Company has incurred net losses and losses from
operations for each period from inception through the third quarter of fiscal
2002. Interland expects to generate positive free cash flow from ongoing
operations by the end of fiscal 2002 (free cash flow consists of adjusted
EBITDA, as defined in MD&A, less cash used for capital expenditures).
Operating expenses could increase as a result of adapting network
infrastructure to accommodate additional customers, increasing sales and
marketing efforts, broadening customer support capabilities,
unanticipated liabilities from the sale of GTG PC, integrating the
Interland-Georgia, HostPro, CommuniTech.Net and Dialtone Internet businesses
and expanding administrative resources in anticipation of future growth. To
the extent that increased revenues do not offset increases in expenses, the
Companys results of operations and financial condition would be materially
affected. Even if Interland achieves profitability and positive cash flow, it
may not be able to sustain or improve those results on a quarterly or annual
basis in the future.

Interlands historical financial information will not be representative of its
future results.Since the Company has sold its non-hosting businesses, its
historical financial information, contained in previous filings with the
Securities and Exchange Commission, is not representative of its future
operating results. Including the operations of the non-hosting
businesses  which are classified as discontinued operations in the Companys
financial statements  Web hosting revenues represented less than 7% and 3% of
the

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

Companys total revenues for fiscal 2001 and 2000, respectively. By
contrast, Web hosting revenues constituted 92.6% of our total revenue in the
first nine months of 2002.

Interland has a limited operating history and its business model is still
evolving, which makes it difficult to evaluate its prospects.The Companys
limited operating history makes evaluating its business operations and
prospects difficult. The Companys range of service offerings has changed
since its inception and its current business model is still new and developing.
Because some of Interlands services are new, the market for them is
uncertain. As a result, the revenues and income potential of the Companys
business, as well as the potential benefits of the merger with
Interland-Georgia and other acquisitions may be difficult to evaluate.

Interlands quarterly operating results may fluctuate and its future revenues
and profitability are uncertain. The Companys past operating results have
been subject to fluctuations, on a quarterly and an annual basis. Interland
may also experience significant fluctuations in future 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 the Companys services;                                                                                                                                                                                  
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | introduction of new services or enhancements by Interland and its competitors;                                                                                                                                                               
|
| |  |  | technical difficulties or system downtime affecting the
Internet generally or the Companys hosting operations specifically;                                                                                                                 
|
| |  |  | the mix of services delivered by Interland, its subsidiaries or its competitors;                                                                                                                                                             
|
| |  |  | customer retention;                                                                                                                                                                                                                          
|
| |  |  | the timing and success of the Companys 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 its resellers;
|
| |  |  | increased competition and consolidation within the Web hosting and applications hosting markets;                                                                                                                                             
|
| |  |  | changes in the Companys pricing policies and the pricing policies of its competitors;                                                                                                                                                       
|
| |  |  | gains or losses of key strategic relationships; and                                                                                                                                                                                          
|
| |  |  | other general and industry-specific economic factors.                                                                                                                                                                                        

The Company cannot provide any assurances about the extent to which it will be
successful in achieving any plans to increase the size of its customer base,
the amount of services it offers or the amount, if any, of increase in revenues
it will experience during the next fiscal year, or beyond. In addition,
relatively large portions of Interlands expenses are fixed in the short-term,
and therefore its results of operations are particularly sensitive to fluctuations in revenues.
Also, if the Company was unable to continue using third-party products in its
service offerings, its service development costs could increase significantly.

In addition, the terrorist acts of September 11, 2001 have created an uncertain
economic environment and the Company cannot predict the impact of these events,
any subsequent terrorist acts or of any related military action, on its
customers or business. The Company believes that, in light of these events,
some businesses may curtail spending on information technology, which could
also affect its quarterly results in the future.

Interlands stock price may be volatile.The price has been and is likely to
continue to be highly volatile due to several factors, such as:



| |  |  | the Companys failure to experience the benefits of the merger
with Interland-Georgia as quickly as anticipated, or at all, or an
increase over estimates of the costs of or operational difficulties
arising from the merger;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the failure of the impact of the Interland-Georgia merger on
the Companys financial results to be in line with the expectations
of financial analysts;                                                                       
|
| |  |  | variations in actual and anticipated operating results;                                                                                                                                                                       
|
| |  |  | changes in earnings estimates by analysts;                                                                                                                                                                                    
|
| |  |  | variations in actual and anticipated operating results of customers or competitors;                                                                                                                                           

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



| |  |  | material reductions in spending by customers;                                                  
| | - |  | -----------------------------------------------------------------------------------------------
|
| |  |  | announcements by Interland or its competitors regarding new service introductions;             
|
| |  |  | the volatility inherent in stock within the sectors within which the Company conducts business;
|
| |  |  | any subsequent terrorist acts or of any related military action;                               
|
| |  |  | general decline in economic conditions; and                                                    
|
| |  |  | reductions in the volume of trading in the Companys common stock.                             

Interland operates in a new and evolving market with uncertain prospects for
growth and may not be able to sustain growth in its 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. The
Companys future growth, if any, will depend upon the willingness of small- and
medium-sized businesses to outsource Web and applications hosting services, the
Companys ability to increase its average revenues per customer, and its
ability to retain customers. The market for Interlands services may not
develop further, consumers may not widely adopt its services and significant
numbers of businesses or organizations may not use the Internet for commerce
and communication. If this market fails to develop further or develops more
slowly than expected, or if the Companys services do not achieve broader
market acceptance, the Company will not be able to grow its customer base. In
addition, the Company must be able to differentiate itself from its competition
through its service offerings and brand recognition. These activities may be
more expensive than the Company anticipates, and it may not be successful in
differentiating itself, achieving market acceptance of its services or selling
additional services to its existing customer base.

Interlands business is currently experiencing steady shared hosting account
gross adds each month. These results are encouraging in light of the fact that
they are achieved in a difficult economic environment with moderate marketing
expenditures. However, this steady performance is being offset by higher than
desirable churn. Overall, the Company is experiencing industry range monthly
churn rates. Churn can be broken down into three categories: Churn in the core
business, acquired customer breakage during migrations and intentional culling.
The Company is now nearing the end of its intentional culling of custom hosting
accounts and other non-strategic revenues. As the Company gains additional
experience in migrating acquired customers into its centralized platform, the
level of breakage is moderating. With regard to the core churn facing any
subscriber-based business, the hosting industry is generally one of mediocre
service and quality. Interland has devoted a significant amount of effort since
the beginning of the third quarter to improving service delivery, with
impressive results. Although the Company believes that improved service
delivery will lead to reduced churn, failure to execute on its service delivery
strategy could result in higher than anticipated churn rates.

Interlands target market presents substantial risks.The Company intends to
concentrate on serving small- and medium-sized businesses (SMB). The SMB
market contains many businesses that will not be successful, and are
consequently at substantially greater risk for non-collectible accounts
receivable, and for non-renewal. Moreover, a significant portion of this
target market is highly sensitive to price, and may be lost to a low-price
competitor. Because few businesses in this target market employ trained
technologists, they tend to generate a high number of customer service and
technical support calls. The expense of responding to these calls is
considerable, and the expense is likely to increase in direct proportion to
revenue, potentially limiting the scalability of the business. Additionally,
if the customer becomes dissatisfied with the Companys response to such calls,
cancellation, non-payment, or non-renewal becomes more likely. Interlands
strategy for minimizing the negative aspects of its target market include:



| |  |  | continued expenditures on sales and marketing to replace failing customers;                                                     
| | - |  | --------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | capitalizing on planned efficiencies to become a profitable provider at the lowest sustainable price;                           
|
| |  |  | automating customer care and technical support to reduce the cost per
call, and to minimize the time spent by Company personnel;
|
| |  |  | intensive training and supervision of customer care and technical
support personnel to maximize customer satisfaction.          

No assurance can be given, however, that any of these measures will be
successful, and the Companys failure to manage these risks could have a
material negative effect on the Companys revenues, costs, and prospects.

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

If the Company does not successfully integrate the operations and personnel of
its recent acquisitions in a timely manner, this will disrupt its business and
could negatively affect its operating results.The Companys acquisitions
involve risks related to the integration and management of these acquisitions
operations and personnel. Integrations are complex, time consuming and
expensive processes and may disrupt the Companys business if not completed in
timely and efficient manners. The Company must operate as a combined
organization utilizing common information and telecommunications systems,
operating procedures, financial controls and human resources practices.

The Company may encounter substantial difficulties, costs and delays involved
in integrating the operations of these companies, including:



| |  |  | potential incompatibility of business cultures;                                                                                                                                               
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | perceived adverse changes in business focus;                                                                                                                                                  
|
| |  |  | potential conflicts in marketing or other important relationships;                                                                                                                            
|
| |  |  | potential operating inefficiencies and increased costs
associated with having and integrating different information and
telecommunications systems currently used by each of the
acquisitions;
|
| |  |  | potential decline in the level of customer service and customer satisfaction; and                                                                                                             
|
| |  |  | the loss of key employees and diversion of the attention of management from other ongoing business concerns.                                                                                  

If these integration efforts are not successful, the 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 these integrations will
significantly divert managements attention from other important issues, such
as expansion of the combined customer base, which could negatively affect the
Companys business and operating results.

The benefits of the merger with Interland-Georgia and other acquisitions may be
less than expected and the costs associated with these mergers could be higher
than expected, which could harm the Companys financial results and cause a
decline in the value of its common stock.The Company has experienced cost
synergies and expects to realize additional cost reduction synergies created
by the merger with Interland-Georgia, CommuniTech.Net and Dialtone Inc., in
areas such as integration and expansion of nationwide technical support
capabilities over a larger customer base, integration of information and
telecommunications systems, marketing the larger combined business, elimination
of excess data center capacity and economies of scale for the combined
Companys telecommunications costs. Although the Company expects that it will
continue to realize cost synergies with the mergers, it cannot guarantee that it will realize these cost synergies or state
the amount of any cost synergies with any certainty. The Company expects to
incur costs associated with the consolidation and integration of the companies
services and operations. If the total costs of the mergers and related
consolidations and integrations exceed estimates, or if the cost synergies of
the mergers are less than expected, the Companys financial results would
suffer. Any shortfall in anticipated operating results could cause the market
price of the Companys common stock to decline. In addition, the market price
of Interlands common stock could decline significantly if it does not
experience the business benefits of the mergers as quickly or in as great
amounts as securities analysts expect.

The Company recorded a significant amount of goodwill related to the merger
with Interland-Georgia.The Company has accounted for the acquisition of
Interland-Georgia using the purchase method of accounting. Under the purchase
method, the purchase price of Interland-Georgia has been allocated to the
assets acquired and liabilities assumed. As a result, based upon the purchase
price of $127.2 million, the Company has recorded $17.5 million of intangible
assets and $102.9 million of goodwill on its balance sheet as of May 31, 2002.
Goodwill will be evaluated annually for impairment and any potential impairment
will affect the Companys financial results in the future.

When the Company acquires additional companies, customer accounts or
technologies, it faces risks similar to those it currently faces in connection
with the merger with Interland-Georgia.As part of its strategy to grow the
Web hosting business, the Company has made a number of acquisitions and
investments, and it may continue to pursue acquisitions of businesses or assets
that it believes are complementary to its business. The Company will be
required to record material goodwill and other intangible assets in the likely
event the purchase price of the acquired businesses exceeds the fair value of
the net assets acquired. In the past, this has resulted in significant
amortization charges, and these charges may increase as the Company continues
its acquisition strategy. The acquired businesses may not achieve the revenues
and earnings anticipated. If the Company acquires another company, it will
likely raise the same risks, uncertainties and disruptions as discussed above
with respect to its merger with Interland-Georgia. For example, the Company
may not be able to successfully assimilate the additional personnel,
operations, acquired technology and customer accounts

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

into its business.
Furthermore, the Company may have to incur debt or issue equity securities to
pay for any additional future acquisitions or investments, the issuance of
which could be dilutive to existing shareholders. As a result, there could be
a material adverse effect on the Companys future financial condition and
results of operations. The Company cannot assure you of the timing or size of
future acquisitions, or the effect future acquisitions may have on its
operating results.

Interland could incur liabilities in the future relating to its PC Systems
business.The Company could incur liabilities arising from the sale of the PC
Systems business to GTG PC. According to the terms of the agreement with GTG
PC, the Company agreed to retain liabilities relating to the operation of the
PC systems business arising prior to the closing of the transaction, including
liabilities for taxes, contingent liabilities and liabilities for accounts
payable accrued prior to the closing. The contingent liabilities could include
claims for violations of intellectual property rights, remittances of sales
taxes, and employee related claims. The Company also agreed to indemnify GTG
PC and its affiliates for any breach of the Companys representations and
warranties contained in the agreement for a period of two years, or for the
applicable statute of limitations for matters related to taxes. This
indemnification obligation is capped at $10.0 million. Except for claims for
fraud or injunctive relief, this indemnity is the exclusive remedy for any
breach of the Companys representations, warranties and covenants contained in
the agreement with GTG PC. Accordingly, in the future, Interland could be
required to satisfy obligations not assumed by GTG PC, or to make payments to
GTG PC and its affiliates in accordance with the agreement in which it sold the
PC Systems business, which could adversely affect its future results of
operations and cash flows.

Interland may be required to pay sales and use taxes related to its
discontinued operations.During the third quarter of 1997, the Company began
to collect and remit applicable sales or use taxes in nearly all states. The
Company is a 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 has previously accrued a liability
for the estimated settlement cost of issues related to sales and use taxes not
covered by such agreements. Although management believes the resolution of any
matters relating to the non-remittance of sales or use taxes will not result in
significant liabilities, there can be no assurance that there will not be an
adverse effect on the Companys business, financial position, results of
operations and cash flows. This potential liability will remain with Interland
even though it sold the PC Systems business.

Interland may not effectively execute its Web hosting strategy and, as a
result, others may seize the market opportunity that it has identified.If
Interland fails to execute its Web hosting strategy in a timely or effective
manner, its competitors may be able to seize the opportunity it has identified
to address the Web hosting needs of small- and medium-sized businesses.
Interlands business strategy is complex and requires that it successfully and simultaneously
complete many tasks. The failure to complete any one of these may jeopardize
its strategy as a whole. In order to be successful, the Company will need
to:



| |  |  | market its services and build its brand name effectively;                                                                      
| | - |  | -------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | provide reliable and cost-effective services that can be expanded to meet the demands of its customers;                        
|
| |  |  | develop new products and services;                                                                                             
|
| |  |  | continue to enhance the efficiency of its infrastructure to accommodate additional customers;                                  
|
| |  |  | continue to expand its customer base;                                                                                          
|
| |  |  | continue to respond to competitive developments;                                                                               
|
| |  |  | influence and respond to emerging industry standards and other changes; and
 attract, retain and motivate qualified personnel.

Interland faces intense competition.The Web hosting and applications hosting
markets are highly competitive. There are few substantial barriers to entry,
and the Company expects that it will face additional competition from existing
competitors and new market entrants in the future. The Company may not have
the resources, expertise or other competitive factors to compete successfully
in the future. Some of Interlands competitors may have greater name
recognition and more established relationships in the industry. 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                 

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



| |  |  | devote greater resources to the marketing and sale of their
services and adopt more aggressive pricing policies than the Company
can.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------

In an effort to gain market share, some of Interlands competitors have
offered, and may in the future offer, Web hosting services similar to Interland
at lower prices or with incentives not matched by Interland, including free
start-up and domain name registration, periods of free service, low-priced
Internet access or free software. In addition, some of its competitors may be
able to provide customers with additional benefits, including reduced
communications costs, which could reduce the overall cost of their services
relative to the Company. Interland may not be able to reduce the pricing of
its services or offer incentives in response to the actions of its competitors
without harming its 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. The Company also believes that the market in which it competes is
likely to consolidate further in the near future, which could result in
increased price and other competition that could damage its business.

Current and potential competitors in the market include Web hosting service
providers, applications hosting providers, Internet service providers,
telecommunications companies, computer hardware suppliers and large information
technology firms that provide a wide array of information technology services.
These competitors may operate in one or more of these areas and include
companies such as XO Communications and Verio. In addition, large companies
such as Sprint, WorldCom, Yahoo and SBC have entered or indicated their intent
to enter into one of more of these markets.

Interlands ability to successfully market its services could be substantially
impaired if it is unable to deploy new Internet applications or if new Internet
applications it deploys prove to be unreliable, defective or incompatible.The
Company could experience difficulties that 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 Interlands services
could be greatly hindered and its ability to attract and retain new customers
could be adversely affected. New applications Interland deploys may not be
free from reliability, quality or compatibility problems. If the Company
incurs increased costs or is unable, for technical or other reasons, to host
and manage new Internet applications or enhancements of existing applications,
its ability to successfully market its services could be substantially
impaired. In addition, its customers may not accept the Companys new services
or applications.

Impairment of Interlands intellectual property rights could negatively affect
its business or could allow competitors to minimize any advantage that
Interlands proprietary technology may give it.The Company relies on a
combination of patent, copyright, trademark, service mark and trade secret laws
and contractual restrictions to establish and protect proprietary rights in its
services. At this point, Interland has no patented technology that would
preclude or inhibit competitors from entering the Web hosting market that it
serves. While the Company may file patent applications on particular aspects
of its technology, it cannot be sure that it will receive any patents. While
it is the Companys practice to require all of its employees to enter into
agreements containing non-disclosure, non-competition and non-solicitation
restrictions and covenants, and while its agreements with some of its customers
and suppliers include provisions prohibiting or restricting the disclosure of
proprietary information, the Company cannot be sure that these contractual
arrangements or the other steps it takes to protect its proprietary rights will
prove sufficient to prevent illegal use of its proprietary rights or to deter
independent, third-party development of similar proprietary assets.

Policing unauthorized use of products or methods of operation and fully
protecting the Companys proprietary rights is difficult, and the Company
cannot guarantee that the steps it has taken to protect its proprietary rights
will be adequate. In addition, effective copyright, trademark, trade secret
and patent protection may not be available in every country in which the
Companys products and services are offered. Further, the Company is
currently, and may in the future be, involved in legal disputes relating to the
validity or alleged infringement of its, or of a third partys, intellectual
property rights. The Company expects that participants in the Web hosting
market will be increasingly subject to infringement claims as the number of
services and competitors in its industry segment grows. Intellectual property
litigation is typically extremely costly and can be disruptive to business
operations by diverting the attention and energies of management and key
technical personnel. In addition, any adverse decisions could subject the
Company to significant liabilities, require it to seek licenses from others,
prevent it from using, licensing or selling certain of its products and
services, or cause severe disruptions to its operations or the markets in which
it competes, any one of which could dramatically impact its business and
results of operations.

Periodically, the Company is made aware that technology it used in its
discontinued operations may have infringed on intellectual property rights held
by others. The Company has evaluated all such claims and, if necessary and
appropriate, sought to obtain licenses for the use of such technology. If the
Company or its suppliers were unable to obtain licenses necessary to use
intellectual property in

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

its discontinued operations products or processes, it
may be forced to defend legal actions taken against it relating to allegedly
protected technology. The Company evaluates all such claims and has accrued a
liability and charged operations for the estimated costs of settlement or
adjudication of claims for alleged infringement as of the respective dates of
the balance sheets included in this report. Resolution of these claims for
amounts greater than anticipated could have a material adverse effect on future
results of operations and cash flows.

Interland faces risks relating to existing litigation.Interland is defending
a contract dispute lawsuit filed on October 2, 2001, in Dallas County, Texas
Court seeking damages of approximately $2.1 million for goods purchased by our
PC Systems business. The Company removed the case to federal court, and
counterclaimed for legal fees owed by the plaintiff for legal fees they had
agreed to indemnify the Company for that were incurred on an unrelated patent
lawsuit. These legal fees amounted to approximately $1.3 million. This claim
is currently in the early stages of discovery, and the Company is therefore
unable to estimate total expenses, or possible loss that may ultimately be
connected with the matter. A Tolling and Dispute Resolution Agreement was
entered between the parties on January 21, 2002, in Dallas County, Texas, and
the lawsuit was dismissed on February 22, 2002. In connection with the Tolling
and Dispute Resolution Agreement the Company paid $700,000 to the plaintiff.
The parties are working on a designated meeting place to negotiate final
resolution, subject to an arbitration requirement if a negotiated settlement
cannot be reached. This potential liability remains with Interland even though
it sold the PC Systems business.

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 parties are
currently negotiating settlement with the named plaintiffs. The case is
currently in the early stages of discovery, and the Company is therefore unable
to estimate total expenses, possible loss or range of loss that may ultimately
be connected with the matter. This potential liability remains with Interland
even though it sold the PC Systems business.

The Company is defending an employee class action lawsuit claim filed in the
U.S. District Court for Idaho. The case involves alleged violations of the
Fair Labor Standards Act, particularly failures to pay non-exempt employees
overtime for hours worked in excess of 40 in a week as well as other alleged
violations of the FLSA and state wage and hour laws. No class has been
certified in the case. The case is currently in the early stages of discovery,
and the Company is therefore unable to estimate total expenses, possible loss
or range of loss that may ultimately be connected with the matter. A
fact-finding mediation session was conducted on June 28, 2002, and discovery is
proceeding. This potential liability remains with Interland even though it
sold the PC Systems business.

Interland will rely heavily on its key personnel.The future success of
Interland will depend, in part, on its ability to attract and retain key
management, technical and sales and marketing personnel. The Company attempts
to enhance its management and technical expertise by recruiting qualified
individuals who possess desired skills and experience in certain targeted
areas. The Company experiences strong competition for such personnel in the
Web hosting industry. The Companys 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 its business, financial condition, results of operations and cash
flows. The Company cannot assure you that it will not lose key personnel or
that the loss of any key personnel will not have a material adverse effect on
its business, financial position, results of operations and cash flows.

If the Company is unable to obtain sufficient telecommunications network
capacity at reasonable costs, it may not be able to provide services at prices
acceptable to its customers, thereby reducing demand for its services.The
success of Interland will depend upon the capacity, reliability and security of
its network infrastructure, including the capacity leased from its
telecommunications network suppliers. Interlands network currently delivers
service through Cable & Wireless, McLeod, Qwest, Genuity, WorldCom, Level 3,
XO Communications, Sprint, AT&T, BellSouth and Pacific Bell. Some of these
suppliers are also Interlands competitors. The Companys 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 as the Companys customers usage increases, the Companys network
may not be able to achieve or maintain sufficiently high data transmission
capacity, reliability or performance. In addition, the Companys business
would suffer if its network suppliers increased the prices for their services
and Interland proves unable to pass along any increased costs to its customers.
Any failure on the part of the Company or the part of its third-party suppliers
to achieve or maintain high data transmission capacity, reliability or
performance could significantly reduce customer demand for its services, damage
its business reputation and increase its costs.

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

Interland depends on its reseller sales channel to market and sell many of its
services. Interland does not control its resellers, and if it fails to develop
or maintain good relations with resellers, it may not achieve the growth in
customers and revenues that it expects.An element of the strategy for the
Companys growth is to further develop the use of third parties that resell its
services. Many of these resellers are Web development or Web consulting
companies that also sell Interlands Web hosting services, but that generally
do not have established customer bases to which they can market these services.
The Company is not currently dependent on any one reseller to generate a
significant level of business, but it has benefited from business generated by
the reseller channel. Although Interland attempts to provide its resellers
with incentives such as price discounts on its services that the resellers seek
to resell at a profit, the failure of its services to be commercially accepted
in some markets, whether as a result of a resellers performance or otherwise,
could cause its current resellers to discontinue their relationships with us,
and it may not be successful in establishing additional reseller relationships
as needed.

Interland 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. The future
success of Interland will depend, in part, upon its ability to offer services
that incorporate leading technologies, address the increasingly sophisticated
and varied needs of its 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 Web hosting
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, the Company must
continually improve the performance, features and reliability of its services,
including its proprietary technologies, and modify its business strategies
accordingly. Interland could also incur substantial costs if it needs to
modify its services or infrastructure in order to adapt to these changes.
Technological advances may have the effect of encouraging some of the Companys
current or future customers to rely on in-house personnel and equipment to
furnish the services that it currently provides.
Interland believes that its ability to compete successfully also depends upon
the continued compatibility of its services with products offered by various
vendors. Enhanced or newly developed third-party products may not be
compatible with the Companys infrastructure, and such products may not
adequately address the needs of its customers. Although Interland currently
intends to support emerging standards, industry standards may not be
established, and, even if they are established, the Company may not be able to
conform to these new standards in a timely fashion in order to maintain a
competitive position in the market. The Companys failure to conform to the
prevailing standard, or the failure of a common standard to emerge, could cause
it to lose customers or fail to attract new customers. In addition, products,
services or technologies developed by others could render the Companys
services noncompetitive or obsolete.

Interland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, Interlands 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 its business because it would not gain
additional customers and its existing customers might not have any further use
for its 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 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.

Interland 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.The Company must be able to operate the
systems that manage its network around the clock without interruption. Its
operations will depend upon its ability to protect its network infrastructure,

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

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 the
Company has attempted to build redundancy into its networks, its networks are
currently subject to various points of failure. For example, a problem with
one of its routers (devices that move information from one computer network to
another) or switches could cause an interruption in the services the Company
provides to a portion of its customers. In the past, the Company has
experienced periodic interruptions in service. In addition, failure of any of
its telecommunications providers to provide the data communications capacity
that the Company requires, as a result of human error, a natural disaster or
other operational disruption, could result in interruptions in services.
Future interruptions could:



| |  |  | cause customers or end users to seek damages for losses incurred;             
| | - |  | ------------------------------------------------------------------------------
|
| |  |  | require the Company to replace existing equipment or add redundant facilities;
|
| |  |  | damage the Companys reputation for reliable service;                         
|
| |  |  | cause existing customers to cancel their contracts; or                        
|
| |  |  | make it more difficult for the Company to attract new customers.              

Interlands 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
the Companys 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 the Company,
unauthorized access, computer viruses, accidental or intentional actions and
other disruptions could occur. In the past, the Company has experienced, and
in the future it 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 the
Companys computer systems. These security problems could result in the
Companys liability and could also cause the loss of existing and potential
customers. In addition, third parties could interfere with the operation of
customers Web sites through intentional attacks including causing an overload
of traffic to these Web sites.

Although the Company intends to continue to implement industry-standard
security measures, third parties may be able to overcome any measures that it
implements. 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 customers, and harm the Companys reputation and growth. Concerns
over the security of Internet transactions and the privacy of users may also
inhibit the growth of the Internet, especially as a means of conducting
commercial transactions.

Disruption of Interlands services caused by unknown software defects could
harm its business and reputation.The Companys 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. The Company may not
discover software defects that affect its new or current services or
enhancements until after they are deployed. Although Interland has 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 its reputation or increase its service costs, cause it to
lose revenue, delay market acceptance or divert its development resources.

Providing services to customers with critical Web sites and Web-based
applications could potentially expose Interland to lawsuits for customers lost
profits or other damages.Because the Companys Web hosting and applications
hosting services are critical to many of its customers businesses, any
significant interruption in those services could result in lost profits or
other indirect or consequential damages to its customers as well as negative
publicity and additional expenditures for it to correct the problem. Although
the standard terms and conditions of the Companys customer contracts disclaim
liability for any such damages, a customer could still bring a lawsuit against
it 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 it. A court might not enforce any limitations on its
liability, and the outcome of any lawsuit would depend on the specific facts of
the case and legal and policy considerations even if the Company believes it
would have meritorious defenses to any such claims. In such cases, it could be
liable for substantial damage awards. Such damage awards might exceed its
liability insurance by significant amounts, which would seriously harm its
business and financial condition and liquidity.

Interland could face liability for information distributed through its network.
The law relating to the liability of online services companies for information
carried on or distributed through their networks is currently unsettled.
Online services companies could be subject to claims under both United States
and foreign law for defamation, negligence, copyright or trademark
infringement, violation

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

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. The Company may, in the
future, receive letters from recipients of information transmitted by its
customers objecting to such transmission. Although the Company prohibits its
customers by contract from spamming, it cannot assure you that its customers
will not engage in this practice, which could subject it to claims for damages.

In addition, the Company 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 the Company or cause it not to be able to
operate in those countries. The imposition upon the Company and other online
services of potential liability for information carried on or distributed
through its systems could require it to implement measures to reduce its
exposure to this liability, which may require it 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.

Interlands business may be impacted by government regulation and legal
uncertainties.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. The Company cannot
fully predict the nature of future legislation and the manner in which
government authorities may interpret and enforce. As a result, Interland and
its customers could be subject to potential liability under future legislation,
which in turn could have a material adverse effect on the Companys business.
For example, if legislation were adopted in the U.S. or internationally that
makes transacting business over the Internet less favorable or otherwise
curtails the growth of the Internet, the Companys 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 the Companys services or
increase the cost of doing business or in some other manner harm its 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 the
Companys 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 its business.

In addition, because its services are available over the Internet virtually
worldwide, and because the Company facilitates sales by its customers to end
users located in multiple states and foreign countries, such jurisdictions may
claim that the Company is required to qualify to do business as a foreign
corporation in those states or that it have a permanent establishment in the
foreign country.

Interlands international operations are subject to risks.The Company derived
approximately 8.0% and 8.4% of its sales from customers residing outside of the
United States for the quarter and for the nine months ended May 31, 2002.
International business is subject to a number of special risks, including:



| |  |  | different regulatory requirements;                                                
| | - |  | ----------------------------------------------------------------------------------
|
| |  |  | different privacy, censorship and liability standards and regulations;            
|
| |  |  | less protective intellectual property laws;                                       
|
| |  |  | different technology standards;                                                   
|
| |  |  | unexpected changes in, or imposition of, regulatory requirements;                 
|
| |  |  | tariffs and other barriers and restrictions;                                      
|
| |  |  | general geopolitical risks such as political and economic instability;            
|
| |  |  | hostilities among countries and changes in diplomatic and trade relationships; and
|
| |  |  | other factors beyond the control of the Company.                                  

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

Substantial future sales of shares by shareholders could negatively affect
Interlands stock price.If Interlands shareholders sell substantial amounts
of the Companys common stock in the public market, the market price of the
Companys common stock could decline. Under a shareholder agreement, Mr. Joel
Kocher, the Companys Chairman of the Board and Chief Executive Officer, and
some Interland-Georgia shareholders agreed not to sell their shares of
Interland common stock, representing approximately 12% of the Companys
outstanding common stock through May 6, 2002. These shares, which were subject
to the agreement, are now available for resale. Additionally, Micron
Technology Foundation, which beneficially owned approximately 43% of our
outstanding common stock at the time of the Interland-Georgia transaction, also
agreed not to sell our shares through May 6, 2002, subject to limited
exceptions. The parties who purchased the shares held by the Foundation agreed
to observe the same restrictions. These shareholders have the right to require
the Company to register their shares for sale pursuant to an existing
registration rights agreement. After February 6, 2003, the shares purchased
from the Foundation will also be eligible for resale on the public markets
without registration, subject to volume limitations and holding period
requirements imposed by Rule 144 of the Securities Act.

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##### Table of Contents






Item 3.  Quantitative and Qualitative About Market Risk

Substantially all of the Companys cash equivalents, liquid investments and a majority of its
debt are at fixed rates, and therefore the fair value of these instruments is affected by changes in market
interest rates. As of May 31, 2002, approximately 0% of the Companys liquid investments mature within
three months and 79% mature within one year. As of May 31, 2002, 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
holding of financial instruments is minimal.

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##### Table of Contents









PART II.  OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

(a)  At the Annual Meeting of Shareholders on April 24, 2002, the
shareholders approved an amendment to the Companys Articles of Incorporation
to increase the authorized shares of common stock to 210,000,000.

(b)  Not applicable.




Item 3. Defaults Upon Senior Securities

(a)  Not applicable.

(b)  Not applicable.




Item 4. Submission of Matters to a Vote of Security holders

During the period covered by this report, the Company filed with the
Securities and Exchange and delivered to its stockholders the Companys Proxy
Statement for Annual Meeting of Shareholders to be held on April 24, 2002 (the
Proxy Statement).

(a)  The Companys Annual Meeting of Shareholders was held on April 24,
2002.

(b)  There was no election of directors at the meeting.

(c)  With respect to each matter (as more fully described in the Proxy
Statement) voted upon at the meeting, the inspector of election tabulated the
following votes:



| |     |                                       
| | --- | --------------------------------------
| | (i) | Approval of 2002 Equity Incentive Plan

|           |  |         |           |                 |  |                  |         | 
|---------- |  | ------- | --------- | --------------- |  | ---------------- | ------- | 
|For        |  | Against |           | Abstentions and
|           |  |         |           |                
|           |  |         |           |                 |  | Broker Non-Votes
|           |  |         |           |                 |  |                 
|79,093,456 |  |         | 4,964,742 |                 |  |                  | 280,131 | 
|           |  |         |           |                 |  |                  |         | 



| |      |                                                                                                                      
| | ---- | ---------------------------------------------------------------------------------------------------------------------
| | (ii) | Amendment to the Articles of
Incorporation to Increase the Number of Authorized Shares
of Common Stock to 210,000,000

|           |  |         |           |                 |  |                  |         | 
|---------- |  | ------- | --------- | --------------- |  | ---------------- | ------- | 
|For        |  | Against |           | Abstentions and
|           |  |         |           |                
|           |  |         |           |                 |  | Broker Non-Votes
|           |  |         |           |                 |  |                 
|81,841,009 |  |         | 2,241,736 |                 |  |                  | 254,584 | 
|           |  |         |           |                 |  |                  |         | 



|(d) |  | There was no solicitation subject to Rule 14a-11 of Regulation 14A
under the Securities Exchange Act of 1934.
|--- |  | -------------------------------------------------------------------------------------------------------------




Item 5. Other Information

None.

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PART II.  OTHER
INFORMATION




Item 6. Exhibits and Reports on Form 8-K

(A)  Exhibits:

Exhibit Description

|           |  |                                                                                                                                                                                        
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.07(1)(2) |  | Agreement and Plan of Merger dated as of May 3, 2002, by and
between Dialtone Inc., Jaguarcub Acquisition Corporation, Dialtone
Stockholders Representative, Inc., and Interland, Inc.
|3.01(1)    |  | Unofficial Restated Articles of Incorporation of Registrant (as
amended through April 24, 2002)                                                                                        
|3.02(1)    |  | Unofficial Restated Bylaws of the Registrant, (as amended through
August 6, 2001)                                                                                                      
|10.111(1)  |  | Stock Repurchase Agreement dated as of November 12, 2001 by and
between Ken Gavranovic and Interland, Inc.                                                                             
|10.112(1)  |  | Amendment to Stock Rights Agreement dated as of March 28, 2002 by and
among                                                                                                            

(1)  Filed herewith.

(2)  Schedules and exhibits have been omitted from this exhibit. A list of
omitted schedules and exhibits is set forth immediately following the table of
contents of the exhibit. Copies will be provided to the Commission upon
request.

(B)  Reports on Form 8-K.



| |      
| | -----
| | None.

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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.

|                     |  |                                                                                                                                    
|-------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------
|                     |  | Interland,
Inc.
(Registrant)                                                                                                       
|                    
|Dated: July 15, 2002 |  | /s/ David A. Buckel
David A. Buckel, Senior Vice President and
Chief Financial Officer (Principal Financial and
Accounting Officer)

37