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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

or

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from                    to                

Commission File Number 0-26115

INTERLIANT, INC.

(Exact name of registrant as specified in its charter)

TWO MANHATTANVILLE ROAD

PURCHASE, NEW YORK 10577

(Address of principal executive offices, zip code)

(914) 640-9000

(Registrant’s telephone number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 Par Value Per Share

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)

Yes    ¨    No    x

The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of Common Stock on June 30, 2002 of $0.10 as reported on the NASDAQ, was approximately $2.4 million. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of March 31, 2003, approximately 57,500,000 shares of Common Stock, $.01 par value per share, were outstanding.

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Interliant is a registered trademark of Interliant, Inc. This Report on Form 10-K contains trademarks of other companies. These trademarks are the property of their respective holders. All references to we, us, our, or Interliant in this Report on Form 10-K means Interliant, Inc.

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PART I

THE STATEMENTS IN THIS REPORT ON FORM 10-K THAT ARE NOT DESCRIPTIONS OF HISTORICAL FACTS MAY BE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT MANAGEMENT’S CURRENT VIEWS, ARE BASED ON CERTAIN ASSUMPTIONS AND ARE SUBJECT TO RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, RISKS DETAILED HEREIN AND IN OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, TO WHICH YOU ARE REFERRED.

BANKRUPTCY PROCEEDING; LIQUIDATION OF COMPANY

In August 2002, we and our domestic subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the Southern District of New York (“Bankruptcy Court”) for reorganization under Chapter 11 of the Bankruptcy Code (“Chapter 11 Proceeding”). Our United Kingdom subsidiaries are not debtors in the Chapter 11 Proceeding.

We are actively pursuing the sale of substantially all of our assets and operations and the assets of our domestic subsidiaries, including the capital stock of our non-debtor subsidiaries. Upon the consummation of such a sale, all of our remaining assets (including proceeds received from the sale of our assets) would be distributed to our creditors, without any distribution being made to holders of our Common Stock. We would then have no assets or operations. If we are unable to consummate a sale of our assets, we anticipate that we will have to cease operations in the second quarter of 2003 due to insufficient cash flows resulting from continuing operating losses and we would then liquidate our assets in the Chapter 11 Proceeding. Holders of Common Stock would not receive any proceeds of such a liquidation.

Accordingly, we do not expect to emerge from the Chapter 11 Proceeding with any assets or operations.

On April 11, 2003, we entered into an asset purchase agreement (“APA”) with an affiliate of Pequot Capital Management, Inc. (“Pequot”) to sell substantially all of our operations and assets, less certain liabilities. The closing of the transactions contemplated by the APA is subject to Bankruptcy Court approval and other conditions.

The following is a description of the business we currently conduct, which is to be sold in the above described transaction:

General

We provide managed infrastructure solutions, encompassing messaging and collaboration, managed hosting, bundled-in managed security, and an integrated set of professional services offerings that differentiate and add customer value to the core infrastructure solutions. We sell to the large/enterprise and medium markets through our direct sales force and through channel partners.

We offer secure infrastructure and a focused suite of e-business solutions. Our customers face significant challenges in doing business on the Internet due to its technical complexity, the shortage of technical resources and/or specialized skills, the time necessary to implement applications and the cost of implementation and ongoing support. Our offerings enable our customers to maintain critical business functions without maintaining an IT infrastructure and staff that are not central to their core competencies.

Services and Solutions

The Interliant Solutions Suite is comprised of the following offerings: Interliant Messaging and Collaboration, Interliant Managed Hosting, and Interliant Managed Security, plus related professional services (Interliant Services).

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Interliant Messaging and Collaboration

We offer email, collaboration and knowledge management solutions that allow a customer’s widely distributed work force to collaborate through shared software applications, intranets, extranets, and messaging services for internal and external communication. Interliant Messaging and Collaboration solutions help customers identify and implement the messaging and application strategy that best meets the needs of their businesses.

To support our end-to-end approach to messaging and collaboration, we offer a variety of products and services. We provide our customers with migration services from legacy mail systems, handling co-existence and integration issues. For customers who choose to outsource their messaging and collaboration infrastructures, we can manage their system in our data centers or remotely manage it in our own facility. Regardless of the location, we assume responsibility for the management, monitoring, and support of the resulting mission-critical messaging environment, ensuring a highly reliable solution with service level guarantees. Beyond messaging, we also create collaborative, Web-based applications as well as manage existing applications so that organizations can focus on their core business.

Messaging and Collaboration solutions include:

Interliant Managed Hosting

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

Interliant’s Managed Hosting solutions encompass:

Interliant Managed Security

Interliant Managed Security is bundled with the our core Messaging and Collaboration or Managed Hosting solutions. Our managed security solutions are based on third-parties’ firewall and virtual private network (“VPN”) technologies, bundled with security engineering as well as monitoring and management services. Interliant Managed

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Security leverages security products from providers such as Check Point Software, Nokia, Enterasys, Avaya, and other vendors.

We offer security planning for both existing networks and those under design. Our consultants and engineers help design, build, and deploy secure networks for both internal and external requirements. Our Managed Security solutions and services include security policy development; planning for existing and future network and Web initiatives; firewall design and implementation; VPN/remote access design; authentication and encryption services; managed firewall services: hosted, remote managed and remote monitored services; and managed VPN services.

Interliant Branded Solutions

The Interliant Branded Solutions program provides organizations with the ability to leverage our managed infrastructure solutions as a privately labeled or co-branded offering to our existing customers. We can tailor a portfolio of managed services for our partners or deliver a specific core offering that the partners then integrate with their existing service suite.

Interliant Professional Services

Interliant Professional Services include capabilities to create intranet, extranet, and numerous application hosting solutions for customers, as well as network design and implementation, security implementation and back-end Web development projects. In addition, we provide support for our customers’ enterprise networking needs. Our services include network architecture and design, strategic technology planning and application development and implementation.

The portfolio of Interliant Professional Services includes:

Infrastructure Consulting: Our services include email migration strategy, planning, and execution, as well as stability and performance tuning and security audits of existing infrastructure. We help our customers utilize the features of their chosen messaging and collaboration platforms, such as Lotus Domino^™, Domino.doc^®, IBM Lotus Web Conferencing and Instant Messaging (Sametime^®), QuickPlace^™, IBM WebSphere^®, Microsoft^® Active Directory^™, Outlook, and Microsoft Exchange. Our consultants can help troubleshoot problems and devise automated systems to improve customers’ staff efficiency.

Application Development and Consulting: Our consultants analyze customers’ business problems, legacy systems and data, and technology requirements, and develop applications using tools such as Lotus Domino, WebSphere, XML, Sun^® Java^™, IBM Lotus Web Conferencing and Instant Messaging and other Web technologies. We build systems that can integrate with relational databases and legacy systems.

Application Management: We can also assist customers by supporting existing applications.

Customers

We have a diversified customer base across our service offerings. Our customer contracts generally range in duration from month-to-month to three years. Our customers include end users representing a variety of business types, from mid-sized businesses to large enterprises. Our customers are principally in the United States and the United Kingdom.

Strategic Relationships

Our strategic relationships and partnerships with technology companies allow us to provide a wide range of services to meet customers’ needs. The companies that we maintain strategic relationships with include IBM, Lotus Development, Microsoft, Cisco Systems, Check Point Software and Sun.

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Technology Facilities and Network Operations.

Hosting Solutions

Although industry-standard Web servers are adequate for basic Web hosting, we believe that efficiently managing complex, Internet-based applications requires significant technological innovations. We have developed a proprietary managed hosting platform. Our hosting architecture provides customers with industry technologies, including EMC Symmetrix storage, Dell PowerEdge servers and Sun Enterprise servers.

Facilities and Operations

Our executive offices, leased by us, are located in Purchase, New York. We also lease the facilities that house our data centers in Houston, Texas and Vienna, Virginia, as well as a data center in London, England. The lease terms for our Houston, Vienna, and Purchase facilities have been recently restructured in conjunction with our Chapter 11 Proceeding. Additionally, we have entered into a new lease for substantially reduced space in the Boston, Massachusetts vicinity, where the professional services division is primarily located. We have network and server monitoring infrastructures in all three of our data centers. Our customer service representatives and systems administrators are located in our Houston and Vienna data centers.

Our Network Operations Centers (“NOCs”) are responsible for monitoring our entire network, server farm, security infrastructure and hosted applications. The NOCs also monitor our Internet and telecommunications connections to ensure that they are functional and that traffic is properly loaded. Our NOCs are located in each US data center for distributed management of each of the US and UK data centers.

Connectivity

Customers can access our data centers:

Customer Service

Through our customer service systems, customer service representatives can generally resolve issues via e-mail or a toll-free number. We also offer many of our customers a self-service customer support alternative, which provides site statistics such as disk storage capacity and bandwidth utilization. Certain customer accounts also have access to dedicated support engineers who are familiar with each unique configuration or requirement a larger customer may have.

Competition

The market we serve is highly competitive and is characterized by relative ease of entry. Our current and potential competitors include:

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Most of our competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we do. As a result, certain of these competitors may be able to develop and expand their network infrastructures and service offerings more rapidly, adapt to new or emerging technologies and changes in customer requirements more quickly, take advantage of acquisition and other opportunities more readily, devote greater resources to the marketing and sale of their services and adopt more aggressive pricing policies than we can. In addition, these competitors have entered and will likely continue to enter into joint ventures or consortia to provide additional services competitive with those provided by us.

Intellectual Property Rights

We rely on a combination of copyright, trademark, service mark, trade secret laws and contractual restrictions to establish and protect certain proprietary rights in our services. We have no patented technology that would preclude or inhibit competitors from entering our market. The steps taken by us to protect our intellectual property may not prove sufficient to prevent misappropriation of our technology or to deter independent third-party development of similar technologies. The laws of certain foreign countries may not protect our services or intellectual property rights to the same extent as do the laws of the United States. We also rely on certain technologies that we license from third parties. These third-party technology licenses may not continue to be available to us on commercially reasonable terms. The loss of the ability to use such technology could require us to obtain the rights to use substitute technology, which could be more expensive or offer lower quality or performance and therefore have an adverse effect on our business.

To date, we have not been notified that our services infringe on the proprietary rights of third parties, but third parties could claim infringement by us with respect to current or future services. From time to time, we are notified that the content of one of our customer’s sites infringes on a third party’s trademark or copyright. In response, we take steps pursuant to the Digital Millennium Copyright Act to inform the customer of such claim and, where appropriate, terminate a customer’s service. We expect that participants in our markets will be increasingly subject to infringement claims as the number of services and competitors in our industry segment grows. Any such claim, whether meritorious or not, could be time consuming, result in costly litigation, cause service installation delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to us or at all. As a result, any such claim could have an adverse effect upon our business.

Government Regulation

We currently are not subject to direct federal, state or local government regulation, other than regulations that apply to businesses generally. Only a relatively small body of laws and regulations currently applies specifically to hosting and e-commerce activities, or access to the Internet. Due to the increasing popularity and use of the Internet, however, it is possible that laws and regulations with respect to the Internet may be adopted at international, federal, state and local levels, covering issues such as user privacy, freedom of expression, pricing, characteristics and quality of products and services, taxation, advertising, intellectual property rights, information security and the convergence of traditional telecommunications services with Internet communications. Although sections of the Communication Decency Act of 1996 that, among other things, proposed to impose criminal penalties on anyone distributing “indecent” material to minors over the Internet were held to be unconstitutional by the U.S. Supreme Court, similar laws may be proposed, adopted and upheld. The nature of future legislation and the manner in which it may be interpreted and enforced cannot be fully determined and, therefore, legislation similar to the Communications Decency Act could subject us and/or our customers to potential liability, which in turn could have a material adverse effect on our business, results of operations and financial condition. The adoption of any such laws or regulations might decrease the growth of the Internet, which in turn could decrease the demand for our services, increase the cost of doing business or in some other manner have an adverse effect on our business.

We collect sales and other taxes in the states in which we have offices and are required by law to do so. We currently do not collect sales or other taxes with respect to the sale of services or products in all states and countries in which we do not have offices and are not required by law to do so. One or more jurisdictions have sought to impose sales or other tax obligations on companies that engage in online commerce within their jurisdictions. A successful assertion by one or more jurisdictions that we should collect sales or other taxes on our products and services, or remit payment of sales or other taxes for prior periods, could have an adverse effect on our business.

In addition, applicability to the Internet of existing laws governing issues such as property ownership, copyright and other intellectual property issues, taxation, libel, obscenity and personal privacy is uncertain. The vast majority of such laws

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were adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Changes to such laws intended to address these issues could create uncertainty in the marketplace that could reduce demand for our services, increase the cost of doing business as a result of costs of litigation or increased service delivery costs or could in some other manner have an adverse effect on our business.

Any new legislation or regulation, or the application of laws or regulations from jurisdictions whose laws do not currently apply to our business, could have an adverse effect on our business.

Employees

As of December 31, 2002, we had 176 employees, of which 24 were in sales, distribution and marketing, 96 were IT professionals, including engineering, technical and professional services, 18 were in customer care and 38 were in finance and administration. None of our employees are represented by a labor union and we believe that our employee relations are good.

Our executive offices, which we lease, are located in Purchase, New York. We also lease the facilities that house our data centers in Houston, Texas and Vienna, Virginia, as well as a data center in London, England. We lease an additional facility in the Boston, Massachusetts vicinity where the professional services division is primarily located. We believe these facilities are adequate for our current and near term needs.

In August 2002, we and our domestic subsidiaries filed voluntary petitions in the Bankruptcy Court for reorganization under Chapter 11 of the Bankruptcy Code. In the Chapter 11 Proceeding, and subject to the approval of the Bankruptcy Court, we are attempting to sell substantially all of our assets and operations. The cash proceeds generated by such a sale would be paid to our creditors, with no distribution being made to any holders of our Common Stock. If we are not able to consummate the sale of our assets, we anticipate ceasing operations during the second quarter of 2003 due to insufficient cash flows to support our operations. We do not expect to emerge from the Chapter 11 Proceeding with any assets or operations.

Not applicable

PART II

Market for Common Stock and Holders of Record

Our Common Stock commenced trading on the Nasdaq National Market under the symbol INIT on July 8, 1999. In July 2002, our Common Stock was delisted from Nasdaq and began trading on the Over The Counter Bulletin Board (“OTC”). The following table sets forth, for the periods indicated, the intra-day high and low sales prices per share of Common Stock on the Nasdaq National Market until July 2002 and on the OTC thereafter. Such prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

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As of March 31, 2003, there were approximately 210 stockholders of record of our Common Stock. We believe that as of March 31, 2003 we had approximately 12,500 beneficial owners of our Common Stock.

Dividends

We have never paid or declared cash dividends on our Common Stock.

Equity Compensation Plan Information

The following table sets forth information with respect to our equity compensation plans (including individual compensation arrangements) as of December 31, 2002.

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The following selected consolidated financial data should be read in conjunction with Interliant’s Consolidated Financial Statements and Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K. The statement of operations for the years ended December 31, 1998, 1999, 2000 and 2001 reclassified to give effect to discontinued operations and the balance sheet data as of December 31, 1998, 1999, 2000 and 2001, are derived from the consolidated financial statements of Interliant that have been audited by Ernst & Young LLP, independent auditors, whose report with respect thereto is included elsewhere in this Form 10-K. The statement of operations for the year ended December 31, 2002 and the balance sheet data as of December 31, 2002 are derived from the consolidated financial statements of Interliant, Inc. that have been audited by Urbach Kahn & Werlin LLP whose report with respect thereto is included elsewhere in this Form 10K.

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You should read the following description of our financial condition and results of operations in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this annual report on Form 10-K.

Forward Looking Statements And Associated Risks

This Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Certain forward-looking statements relate to, among other things, future results of operations, profitability, growth plans, sales, expense trends, capital requirements and general industry and business conditions applicable to our business. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. The words “anticipate,” “believe,” “estimate” and similar expressions used herein are generally intended to identify forward-looking statements. In addition to the other risks described elsewhere in this report and in other filings by the Company with the Securities and Exchange Commission, to which you are referred, important factors to consider in evaluating such forward-looking statements include but are not limited to: the uncertainty that demand for our services will increase and other competitive market factors; changes in our business strategy; an inability to execute our strategy due to unanticipated changes in our business, our industry or the economy in general; difficulties in the timely expansion of our network and data centers or in the acquisition and integration of businesses; difficulties in retaining and attracting new employees or customers; difficulties in developing or deploying new services; risks associated with rapidly changing technology; and various other factors that may prevent us from competing successfully or profitably in existing or future markets. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained herein will in fact be realized and we assume no obligation to update this information.

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BANKRUPTCY PROCEEDING; LIQUIDATION OF COMPANY

In August 2002, we and our domestic subsidiaries commenced the Chapter 11 Proceeding in the Bankruptcy Court. We are actively pursuing the sale of substantially all of our assets. We anticipate that upon completion of such a sale, all of our remaining assets (including proceeds received from the sale) will be distributed to our creditors, without any distribution being made to holders of our Common Stock. We would then have no assets or operations. If we are unable to consummate a sale of our assets, we anticipate that we will have to cease operations in the second quarter of 2003 due to insufficient cash flows available to support our operations. We would then liquidate our assets, with the proceeds thereof being paid to our creditors. Holders of Common Stock would not receive any proceeds of such a liquidation. Accordingly, we do not expect to emerge from the Chapter 11 Proceeding with any assets or operations.

On April 11, 2003, we entered into the APA with Pequot to sell substantially all of our operation assets, less certain liabilities. The closing of the transactions contemplated by the APA is subject to Bankruptcy Court approval and other conditions.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based 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 amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are primarily related to revenue recognition, as described below in “Results of Operations”. For a detailed discussion on the application of these and other accounting policies, see Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2002.

RESULTS OF OPERATIONS

Our reportable segments include managed infrastructure solutions and professional services. Our current major lines of business included in each of these segments are as follows:

Notes:

Our revenue streams consist of recurring service fees, and non-recurring professional services and product sales. We sell managed infrastructure solutions and Web hosting services for contractual periods generally ranging from one month to three years. Web hosting arrangements generally are cancelable by either party without penalty. Hosting revenues are recognized ratably over the contractual period as services are performed. Incremental fees for excess bandwidth usage and data storage are billed and recognized as revenue in the period that customers utilize such services. Payments received and billings made in advance of providing hosting services are deferred until the services are provided.

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Professional services revenues generally are recognized as the services are rendered, provided that no significant obligations remain and collection of the receivable is considered probable. Substantially all of our professional services contracts call for billings on a time and materials basis. Some of our contracts contain milestones and/or customer acceptance provisions. For these contracts, revenue is recognized as milestones are performed and accepted by the customer or when customer acceptance is attained.

Certain customer contracts contain multiple elements under which we sell a combination of any of the following: managed infrastructure solutions and professional services, computer equipment, software licenses and maintenance services to customers. We have determined that objective evidence of fair value exists for all elements and have recorded revenue for each of the elements as follows: (1) revenue from the sale of computer equipment and software products is recorded at the time of delivery; (2) revenue from service contracts is recognized as the services are performed; and (3) maintenance revenue and related costs are recognized ratably over the term of the maintenance agreement.

Under certain arrangements, we resell computer equipment and/or software and maintenance purchased from various computer equipment and software vendors. We are recording the revenue from these products and services on a gross basis pursuant to EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. Under these arrangements, we determined that we are the primary obligor. We present the end-user with a total solution from a selection of various vendor products, set final prices and perform certain services. Additionally, we have credit and back-end inventory risk. In August 2002, we sold the hardware component of this business.

In some circumstances we resell software and in connection with such sales, we apply the provisions of Statement of Position 97-2, (“SOP 97-2”), Software Revenue Recognition, as amended by Statement of Position 98-4. Under SOP 97-2, we recognize license revenue upon shipment of a product to the end-user if a signed contract exists, the fee is fixed and determinable and collection of the resulting receivable is probable. For contracts with multiple elements (e.g., software products, maintenance and other services), we allocate revenue to each element of the contract based on vendor specific objective evidence of the element’s fair value.

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

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

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

Restructuring and impairment charges:

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

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

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The April Plan was executed in two phases. Phase 1, which began on April 3, 2001, consisted of a workforce reduction of approximately 200 positions, and resulted in a charge for the payment of severance and related costs of approximately $1.7 million. This charge was recognized in the second quarter of 2001.

Phase 2 of the April Plan included exiting, via sale, certain businesses that we determined to be outside of the redefined scope of our service offerings and additional workforce reductions. In July 2001, we exited the Managed Enterprise Resource Planning (“ERP”) and Customer Relationship Management (“CRM”) product lines of our managed infrastructure solutions segment, formerly known as reSOURCE PARTNER (“RSP”), which had been a key component of our scope of services prior to the April Plan. In August 2001, we exited the remaining operations of RSP. The 2001 losses from discontinued operations of $10.4 million include losses incurred prior to the measurement date of approximately $6.5 million, and the estimated losses on disposal of $3.9 million.

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

In October 2001, we sold another of our non-core businesses, our shared and unmanaged dedicated retail Web hosting business (see Note 5 of Notes to Consolidated Financial Statements).

As part of the restructuring activities an impairment assessment was made at the end of the first quarter of 2001 with respect to the long-lived assets associated with the businesses planned to be sold or shut down. The assessment indicated that, on a held for use basis, there was impairment evident in such assets. Further, based on our assessment of internal and external facts and circumstances to which the impairment was attributable, we concluded that the impairment indicators arose in the latter half of the first quarter of 2001. In connection therewith we recorded impairment charges aggregating $36.5 million. Long-lived assets that are impaired consist of property and equipment, identifiable intangible assets and related goodwill. For purposes of measuring the impairment charge, fair value was determined based on a calculation of discounted cash flows or net realizable value if known.

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

We determined that there were potential impairment indicators present in our core hosting and professional services businesses that arose during the third quarter of 2001 as a result of the continued economic uncertainties in general, certain weaknesses in our market and lack of revenue growth for the Company in particular. Accordingly, we conducted an impairment assessment with respect to long-lived assets associated with such businesses. Further, for businesses previously identified for sale or disposition, we updated the fair value determination based on more current pricing terms from recent negotiations with prospective buyers. Based on these assessments, we determined that there was impairment evident in the assets associated with our core hosting businesses and the PeopleSoft ERP professional services business. Consequently, we recorded impairment charges of $85.5 million including $0.2 million in discontinued operations to write-off the net book value of certain of the fixed assets, including software, used in those businesses ($51.8 million), other long term assets ($1.0 million) and identifiable intangible assets and goodwill ($32.7 million) related to those businesses.

In the year ended December 31, 2002, business conditions continued to deteriorate and we determined that additional parts of our business had to be sold in order to provide cash flow to continue the remaining part of the business. Accordingly, in connection with this decision, and in accordance with the provisions of SFAS No.144 Accounting for Impairment of Long Lived Assets (SFAS144), we did a further assessment of the potential impairment in our long-lived

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assets and determined that substantially all of such assets were impaired and we recorded impairment charges of $22.6 million in 2002.

The following is a discussion of our results from continuing operations. Upon consummation of the proposed APA, there will no longer be any revenues and most expenses will be eliminated.

Years Ended December 31, 2002 and 2001

The following table sets forth in comparative format the historical results of operations for 2002 and 2001 reclassified to give effect to discontinued operations:

Revenues decreased $33.8 million, from $78.4 million in 2001 to $44.6 million in 2002. The decrease in revenues was due primarily to the lower revenues from the professional services and Web hosting segments.

Professional services revenues decreased $15.8 million, from $31.4 million in 2001 to $15.6 million in 2002. This decrease was due primarily to lower sales of products ($8.8 million) and consulting ($6.9 million) revenues resulting from reduced customer demand stemming from overall weaknesses in the economy and in the Information Technology sector in particular. The product business was sold in the third quarter of 2002. Other service revenues declined from $17.0 million in 2001 to $0.0 million in 2002 due to the Web hosting segment (included in other revenue) which was sold in the latter part of 2001, and had revenues of $12.5 million in 2001 as well as the sale of Interliant Europe in August 2001. Managed infrastructure solutions revenues decreased $1.0 million, from $30.0 million in 2001 to $29.0 million in 2002. This decrease was due primarily to overall weakness in the marketplace and customer resistance caused by our bankruptcy status.

Cost of Revenues

Cost of revenues decreased by $23.6 million, from $50.2 million in 2001 to $26.6 million in 2002. This decrease was due primarily to the lower cost of product sales as a result of lower revenue, reduced salaries and related costs as a result of the restructuring activities in 2001. In the future, cost of revenues may fluctuate due to capacity utilization, the timing of investments in data centers, changes in the mix of services and fluctuations in bandwidth costs.

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Gross margin was 40.4% for 2002 as compared to 36.0% for 2001. The higher gross margins are the result of an increase in the proportion of revenue from managed infrastructure solutions as compared with professional services and products, which typically generate lower gross margins as compared with our managed infrastructure solutions.

Sales and Marketing

Sales and marketing expense decreased by $15.7 million, from $26.1 million in 2001 to $10.4 million in 2002. This decrease was attributable to lower marketing expenditures, namely reductions in brand recognition programs and lesser emphasis on direct marketing campaigns for the Web hosting segment, and lower salaries and benefits associated with reductions in our headcount stemming from our restructuring efforts.

General and Administrative

General and administrative expense (excluding non-cash compensation) decreased by $35.4 million, from $56.8 million in 2001 to $21.4 million in 2002. This decrease resulted from workforce reductions, improved cost controls and elimination of certain facility leases as a result of the bankruptcy filing.

Non-cash compensation

Non-cash compensation expense increased by $5.4 million, from a credit of $4.6 million in 2001 to $0.8 million in 2002.

During the year ended December 31, 2001, we recorded non-cash compensation charges aggregating $1.3 million stemming from stock issuances to our co-chairmen, and stock and warrant issuances and option grants to The Feld Group, which is rendering executive-level service to us. During the year ended December 31, 2002 we recorded non-cash compensation charges aggregating $0.8 million for restricted stock issued to our chairman and certain officers in lieu of cash compensation and stock issued to the Feld Group as compensation for executive level services to us.

Restructuring Charges

As described in the “Results of Operations-Restructuring and Impairment Charges” herein, we recorded gross restructuring charges of $5.2 million during the year ended December 31, 2001 and added an additional $0.2 million to the reserve in 2002. As of December 31, 2001, $3.1 million of the restructuring reserve was utilized and 256 employees were terminated under the plan. During 2002, $1.2 million was utilized and $1.2 million was transferred to reorganization charges.

Depreciation

Depreciation expense decreased by $18.3 million, from $24.1 million in 2001 to $5.8 million in 2002. The decrease in depreciation expense was attributable to reductions in depreciation for assets which were either sold or written down in connection with impairment charges.

Amortization of Intangible Assets

Amortization expense decreased by $34.3 million, from $35.0 million in 2001 to $0.7 million in 2002. This decrease in amortization expense was attributable primarily to the reduction in the carrying amounts of intangible assets as a result of the impairment charges recorded in 2002 and 2001.

Impairment Loss on Long-lived Assets

Impairment losses on long-lived assets were $22.6 million and $126.5 million for the years ended December 31, 2002 and 2001, respectively. In conjunction with the events and circumstances surrounding our April 2001 restructuring plan (see Notes 4 and 14 of Notes to Consolidated Financial Statements), the plans to exit our European and ERP People Soft

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consulting businesses, and continued deterioration in the core consulting and hosting business we performed a series of reviews of our long-lived assets to ascertain if such decisions and economic factors resulted in an impairment in our long-lived assets pursuant to SFAS 121 in 2001 and SFAS 144 in 2002 and SAB 100. See “Results of Operations—Restructuring and Impairment Charges” herein.

Interest Income (Expense), Net

Net interest expense decreased by $10.9 million, from $18.1 million of net interest expense in 2001 to $7.2 million of net interest expense in 2002. In December 2001, we restructured our 7% convertible subordinated notes, issuing new 10% senior convertible notes. There was a gain on the transaction which was reduced by the interest to maturity on the 10% notes in accordance with FASB No. 15 “Troubled Debt Restructuring”. Accordingly, there was no interest expense related to such notes in 2002. In addition, as a result of the Bankruptcy filing, all interest was stayed, and consequently, no interest expense was recorded since the filing date (August 5, 2002). In 2002 and 2001 interest expense included $2.7 million and 3.3 million, respectively, related to the beneficial conversion feature of the 10% and 8% subordinated convertible notes sold in 2002 and 2001, respectively. Interest income was $1.8 million in 2001 and $0.1 million in 2002 as there was limited cash to invest in 2002.

Years Ended December 31, 2001 and 2000

The following table sets forth in comparative format the historical results of operations for 2001 and 2000 reclassified to give effect to discontinued operations.

Revenues

Revenues decreased $19.5 million, from $97.9 million in 2000 to $78.4 million in 2001. The decrease in revenues was due primarily to the lower revenues from the professional services and Web hosting segments offset by increased managed infrastructure solutions revenue as discussed below.

Managed infrastructure solutions revenues increased $5.0 million, from $25.0 million in 2000 to $30.0 million in 2001. This increase was due primarily to the successful expansion of our OEM or private label hosting activities under our branded solutions programs. Web hosting revenues decreased $7.1 million, from $19.6 million in 2000 to $12.5 million in 2001, resulting primarily from the sale of the retail Web hosting business in October, 2001 as well as the overall reduction in

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revenues as a result of the declining economy in 2001 and reduced direct marketing expenditures in 2001. Professional services revenues decreased $18.2 million, from $49.5 million in 2000 to $31.4 million in 2001. This decrease was due primarily to lower sales of products ($13.4 million) and consulting ($4.8 million) revenues resulting from reduced customer demand stemming from overall weaknesses in the economy and in the Information Technology sector in particular.

Cost of Revenues

Cost of revenues decreased by $18.7 million, from $68.9 million in 2000 to $50.2 million in 2001. This decrease was due primarily to the lower cost of product sales as a result of lower revenue, reduced salaries and related costs as a result of the restructuring activities in 2001, offset by the increased costs related to the acquisitions consummated during 2000. In the future, cost of revenues may fluctuate due to capacity utilization, the timing of investments in data centers, changes in the mix of services, fluctuations in bandwidth costs.

Gross margin was 36.0% for 2001 as compared to 29.6% for 2000. The higher gross margins are the result of an increase in the proportion of revenue from hosting services as compared with ASP professional services and products, which typically generate lower gross margins as compared with our hosting services.

Sales and Marketing

Sales and marketing expense decreased by $9.2 million, from $35.3 million in 2000 to $26.1 million in 2001. This decrease was attributable to lower marketing expenditures, namely reductions in brand recognition programs and lesser emphasis on direct marketing campaigns for the Web hosting segment, and lower salaries and benefits associated with reductions in our headcount stemming from our restructuring efforts, offset by increases from the sales and marketing expenses of businesses acquired during 2000.

General and Administrative

General and administrative expense (excluding non-cash compensation) increased by $4.1 million, from $52.7 million in 2000 to $56.8 million in 2001. This increase in general and administrative expense was attributable primarily to the general and administrative expenses of businesses acquired during 2000 and increases in bad debt provisions stemming from overall weaknesses in the economy and in the Information Technology sector in particular, offset by expense decreases resulting from workforce reductions and improved cost controls.

Non-cash compensation

Non-cash compensation expense decreased by $19.7 million, from $15.1 million in 2000 to a credit of $4.6 million in 2001.

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

During the year ended December 31, 2001, we recorded non-cash compensation charges aggregating $1.3 million stemming from restricted stock issuances to our co-chairmen, and stock and warrant issuances and option grants to The Feld Group, which was rendering executive-level service to us.

Restructuring Charges

As described in the “Results of Operations-Restructuring and Impairment Charges” herein, we recorded gross restructuring charges of $5.2 million during the year ended December 31, 2001. As of December 31, 2001, $3.1 million of the restructuring reserve was utilized and 256 employees were terminated under the plan.

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Depreciation

Depreciation expense increased by $8.6 million, from $15.5 million in 2000 to $24.1 million in 2001. The increase in depreciation expense was attributable to the acquisitions consummated during 2000, and investments in network software and equipment, furniture and office equipment, and leasehold improvements during 2001 and the second half of 2000, offset by reductions in depreciation for assets which were written down in connection with impairment charges. The fixed asset additions were driven by the expansion of our data centers and customer care facilities and customer-driven computer equipment and software purchases.

Amortization of Intangible Assets

Amortization expense decreased by $4.4 million, from $39.4 million in 2000 to $35.0 million in 2001. This decrease in amortization expense was attributable primarily to the reduction in the carrying amounts of intangible assets as a result of the impairment charges recorded in 2001, offset by increases in amortization due to the acquisitions consummated during 2000.

Impairment Loss on Long-lived Assets

Impairment losses on long-lived assets were $126.5 million and $0.0 million for the years ended December 31, 2001 and 2000, respectively. In conjunction with the events and circumstances surrounding our April 2001 restructuring plan (see Notes 4 and 14 of Notes to Consolidated Financial Statements), the plan to exit our European and ERP People Soft consulting businesses, continued deterioration in the core consulting and hosting business, we performed a series of reviews of our long-lived assets to ascertain if such decisions and economic factors resulted in an impairment in our long-lived assets pursuant to SFAS 121, and SAB100. See “Results of Operations-Restructuring and Impairment Charges” herein.

Interest income (expense), net

Net interest expense increased by $12.9 million, from $5.2 million of net interest expense in 2000 to $18.1 million of net interest expense in 2001. Interest expense increased $6.7 million, from $13.2 million in 2000 to $19.9 million in 2001 as a result of the issuance of the 7% Convertible Subordinated Notes in February 2001, the sale of $19.0 million of 8% Convertible Subordinated Notes in August 2001 (including a charge of $3.3 million related to the beneficial conversion feature of such notes) and capital lease obligations to finance equipment and furniture purchases during 2001. Interest income decreased $6.2 million, from $8.0 million in 2000 to $1.8 million in 2001. This decrease was due to the significant reduction in the amount of cash available for short term investing in 2001.

Liquidity and Capital Resources

On April 11, 2003, we entered the APA with Pequot to sell substantially all of our operations and assets, less certain liabilities. The closing of the transactions contemplated by the APA is subject to Bankruptcy Court approval and other conditions.

We believe that our existing cash, and cash equivalents, together with funding available under our Debtor-in-Possession financing line will not provide sufficient funds to enable us to operate beyond the second quarter of 2003. Accordingly, we are attempting to sell all or substantially all of our assets in the Chapter 11 Proceeding. If we consummate the APA sale, the proceeds thereof (together with our other remaining assets) will be distributed to our creditors, with no distribution being made to holders of our Common Stock. If we are unable to consummate a sale of our assets, we anticipate that we will have to cease operations around the end of the second quarter of 2003 due to insufficient cash flows resulting from continuing operating losses, and we would then liquidate our assets in the Chapter 11 Proceeding. Holders of Common Stock would not receive any proceeds of such a liquidation.

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During the year ended December 31, 2002, cash used in operating activities was $10.9 million. The net loss of $48.9 million included non-cash charges for depreciation, amortization and other non-cash charges totaling $46.6 million and non-cash income from gains on sale of businesses of $8.5 million. Cash was provided by decreases in accounts receivable and prepaid and other current assets totaling $7.7 million offset by a net decrease in operating liabilities of $4.9 million.

We have limited exposure to financial market risks, including changes in interest rates. Substantially all of our indebtedness bears interest at a fixed rate to maturity, which therefore minimizes our exposure to interest rate fluctuations.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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Independent Auditor’s Report

To the Board of Directors

and Shareholders of

Interliant Inc.:

We have audited the accompanying consolidated balance sheet of Interliant, Inc and subsidiaries (the “Company”) as of December 31, 2002, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Interliant, Inc. and subsidiaries at December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects the information set forth therein.

The accompanying 2002 financial statements have been prepared assuming that Interliant Inc. and its subsidiaries will continue as a going concern, which contemplates the realization of assets and the liquidation of its liabilities in the ordinary course of business. As discussed in Note 1, on August 5, 2002, the Company and its domestic subsidiaries (including indirectly owned subsidiaries) (collectively Debtor-in-Possession) filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. Interliant Inc. is currently operating its business as a Debtor-in-Possession under the jurisdiction of the Bankruptcy Court, and continuation of Interliant Inc. as a going concern is dependent upon, among other things, the confirmation of a Plan of Reorganization, Interliant Inc.’s ability to comply with all debt covenants under the existing debtor-in-possession financing agreement, and Interliant Inc.’s ability to generate sufficient cash from operations and to obtain financing sources to meet its future obligations. As further indicated in Note 18 to the consolidated financial statements, the Company has entered into an Asset Purchase Agreement to sell substantially all of its operations and assets. The uncertainties inherent in the bankruptcy process, Interliant Inc.’s recurring losses from operations and the completion of the proposed sale of assets raise substantial doubt about Interliant Inc.’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that might result from the outcome of these uncertainties.

/S/  URBACH KAHN & WERLIN LLP

New York, New York

April 12, 2003

.

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Independent Auditor’s Report

Board of Directors and Stockholders

Interliant, Inc.

We have audited the accompanying consolidated balance sheets of Interliant, Inc. (the “Company”) as of December 31, 2001, and the related consolidated statements of operations, stockholders’ (deficit) equity, and cash flows for each of the two years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects the consolidated financial position of Interliant, Inc. at December 31, 2001, and the consolidated results of its operations and its cash flows for each of the two years in period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 2 to the financial statements, in 2000 the Company changed its method of accounting for set-up fees to conform with Staff Accounting Bulletin 101, Revenue Recognition.

/S/  ERNST & YOUNG LLP

Stamford, Connecticut

February 14, 2002

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INTERLIANT, INC.

CONSOLIDATED BALANCE SHEETS