UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

For the quarterly period ended ~~November~~March 3031, ~~2005~~2007


o		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: 0-17932

~~Interland~~Web.com, Inc.

(Exact name of registrant as specified in its charter)


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

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

(404) 260-2477
(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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The number of outstanding shares of the registrant’s Common Stock on ~~November~~April 30, ~~2005~~2007 was 16,~~368~~796,~~346~~300.

PART 1. FINANCIAL INFORMATION			3
Item 1. Financial Statements			3
Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations			13
Item 3. Quantitative And Qualitative Disclosures About Market Risk			18
Item 4. Controls and Procedures			18
PART II. – OTHER INFORMATION			19
Item 1. Legal Proceedings			19
Item 1A. Risk Factors			21
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds			27
Item 3. Defaults Upon Senior Securities			27
Item 4. Submission of Matters to a Vote of Security Holders			27
Item 5. Other Information			27
Item 6. Exhibits			28
EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
EX-31.2 SECTION 302, CERTIFICATION OF THE CFO
EX-32.1 SECTION 906, CERTIFICATION OF THE CEO
EX-32.2 SECTION 906, CERTIFICATION OF THE CFO

Web.com, Inc.
Form 10-Q
For the Quarter Ended March 31, 2007
Index


		Page
*Part I. Financial Information*

Item 1. Financial Statements
	a) Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and 2006		3
	b) Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006		4
	c) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006		5
	d) Notes to Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures About Market Risk			17
Item 4. Controls and Procedures			17

*Part II. Other Information*

Item 1.	Legal Proceedings		19
Item 1A.	Risk Factors		19
Item 6.	Exhibits		26

*Signatures*			27
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

~~PART~~Part 1I. ~~FINANCIAL~~Financial ~~INFORMATION~~Information

Item 1. Financial Statements

~~INTERLAND~~Web.com, ~~INC~~Inc. ~~Consolidated Statements of Operations (In thousands except per share amounts) (Unaudited)~~

	For the three months ended
	November 30,			November 30,
	2005			2004
Revenues	$	12,148		$	23,061
Operating costs and expenses:
Network operating costs, exclusive of depreciation shown below		2,131			5,685
Sales and marketing, exclusive of depreciation shown below		2,517			3,966
Technical support, exclusive of depreciation shown below		1,803			3,813
General and administrative, exclusive of depreciation shown below		5,238			7,131
Bad debt expense		276			440
Depreciation and amortization		1,431			5,877
Restructuring costs		1,626			—
Other expense (income), net		(165	)		(13	)
Total operating costs and expenses		14,857			26,899
Operating loss		(2,709	)		(3,838	)
Interest income (expense), net		243			41
Loss from continuing operations before income taxes		(2,466	)		(3,797	)
Income tax benefit (expense)		—			—
Net loss from continuing operations		(2,466	)		(3,797	)
Income/(loss) from discontinued operations, net of tax		(122	)		601
Net loss	$	(2,588	)	$	(3,196	)
Net income/(loss) per share, basic and diluted:
Continuing operations	$	(0.15	)	$	(0.24	)
Discontinued operations		(0.01	)		0.04
	$	(0.16	)	$	(0.20	)
Number of shares used in per share calculation:
Basic and diluted		16,283			16,016

Consolidated Statements of Operations

(Unaudited, in thousands except per share amounts)


	For the Three Months Ended March 31,
	2007			2006
Revenues	$	13,032		$	12,262

Operating costs and expenses:
Network operating costs, exclusive of depreciation and amortization⁽¹⁾		2,154			2,384
Sales and marketing		4,699			3,150
Technical support		1,289			1,722
General and administrative		5,078			9,911
Bad debt expense		562			277
Depreciation and amortization		1,072			1,134
Restructuring costs		—			43

Total operating costs and expenses		14,854			18,621


Operating loss		(1,822	)		(6,359	)
Interest income (expense), net		255			261


Loss from continuing operations before income taxes		(1,567	)		(6,098	)
Income tax benefit		915			854

Net loss from continuing operations		(652	)		(5,244	)
Gain (loss) from discontinued operations, net of tax of $1,201		2,211			(259	)

Net income (loss)	$	1,559		$	(5,503	)


Net income (loss) per share, basic and diluted:
Continuing operations	$	(0.04	)	$	(0.32	)
Discontinued operations		0.13			(0.02	)

	$	0.09		$	(0.34	)


Number of shares used in per share calculation:
Basic and diluted		16,703			16,395

⁽¹⁾ Excludes depreciation and amortization as follows:

Network operating costs	$	752		$	813

The accompanying notes are an integral part of these consolidated financial statements

~~INTERLAND~~Web.com, ~~INC~~Inc. ~~Consolidated Balance Sheets (In thousands) (Unaudited)~~

	As of
	November 30,			August 31,
	2005			2005
Assets
Current assets
Cash and cash equivalents	$	23,268		$	16,891
Trade receivables, net of allowance for doubtful accounts		1,333			1,365
Other receivables		710			11,502
Other current assets		2,056			2,698
Restricted investments		276			258
Total current assets		27,643			32,714
Restricted investments		9,073			9,299
Securities, held-to-maturity		53			50
Property plant and equipment, net		6,003			5,858
Intangibles, net		2,176			3,038
Other assets		5,600			5,600
Total assets	$	50,548		$	56,559
Liabilities and shareholders’ equity
Current liabilities
Accounts payable	$	2,518		$	2,355
Accrued expenses		6,287			10,465
Accrued restructuring charges		5,425			4,717
Current portion of long-term debt and capital lease obligations		872			859
Deferred revenue		4,275			4,542
Total current liabilities		19,377			22,938
Long-term debt and capital lease obligations		2,269			2,510
Deferred revenue, long-term		208			229
Other liabilities		934			939
Total liabilities		22,788			26,616
Commitments and contingencies (note 6)		—			—
Shareholders’ equity
Common stock, $.01 par value, authorized 21 million shares, issued and outstanding 16.4 and 16.4 million shares, respectively		164			164
Additional capital		324,581			323,498
Warrants		2,128			2,806
Note receivable from shareholder		(735	)		(735	)
Accumulated deficit		(298,378	)		(295,790	)
Total shareholders’ equity		27,760			29,943
Total liabilities and shareholders’ equity	$	50,548		$	56,559

Consolidated Balance Sheets

(Unaudited, in thousands except par values)


	As of
	March 31, 2007			December 31, 2006
ASSETS
Current assets
Cash and cash equivalents	$	16,000		$	13,288
Trade receivables, net of allowance of $189 and $160, respectively		1,170			2,074
Other receivables		380			525
Prepaids and other current assets		1,052			1,154
Restricted investments		166			162

Total current assets		18,768			17,203

Restricted investments		7,405			7,666
Property, plant and equipment, net		4,074			4,128
Goodwill		1,003			1,003
Intangibles, net		4,900			5,233
Other assets		3,237			3,195


Total assets	$	39,387		$	38,428


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	1,425		$	1,623
Accrued expenses		4,281			4,709
Accrued restructuring charges		2,091			2,345
Current portion of long-term debt and capital lease obligations		1,725			1,703
Deferred revenue		4,633			4,687
Deferred tax liability – short term		286			—

Total current liabilities		14,441			15,067

Long-term debt and capital lease obligations		1,511			1,971
Deferred revenue		264			314
Other liabilities		70			120

Total liabilities		16,286			17,472


Contingencies (Note 8)		—			—

Shareholders’ equity
Common stock, $0.01 par value, authorized 26 million shares, issued and outstanding 16.8 and 16.8 million shares, respectively		168			168
Additional capital		332,535			331,949
Warrants		2,128			2,128
Note receivable from shareholder		(735	)		(735	)
Accumulated deficit		(310,995	)		(312,554	)

Total shareholders’ equity		23,101			20,956


Total liabilities and shareholders’ equity	$	39,387		$	38,428

The accompanying notes are an integral part of these consolidated financial statements

~~INTERLAND~~Web.com, ~~INC~~Inc. ~~Consolidated Statements of Cash Flows (In thousands) (Unaudited)~~

	For the three months ended
	November 30,			November 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(2,588	)	$	(3,196	)
Adjustments to reconcile net loss to net cash used in operating activities from continuing operations:
Income (loss) from discontinued operations		122			(601	)
Depreciation and amortization		1,431			5,877
Bad debt expense		276			440
Loss (gain) on sale of assets		—			(13	)
Stock-based compensation		385			158
Restructuring charges		1,626			—
Changes in operating assets and liabilities net of effect of acquisitions:
Cash received from sale of dedicated assets		11,267			—
Receivables		(719	)		(490	)
Other current assets		642			301
Accounts payable, accrued expenses and deferred revenue		(4,326	)		(2,583	)
Cash provided by (used in) operating activities of continuing operations		8,116			(107	)
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant, and equipment		(714	)		(827	)
Purchases of held-to-maturity investment securities		(3	)		—
Proceeds from held-to-maturity investment securities		—			1,500
Purchase of auction rate securities		—			(2,000	)
Net change in restricted investments		208			516
Cash used in investing activities of continuing operations		(509	)		(811	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of debt and capital lease obligations		(228	)		(940	)
Proceeds from exercises of stock options		20			4
Cash used in financing activities of continuing operations		(208	)		(936	)
Net cash provided by (used in) continuing operations		7,399			(1,854	)
Net cash used in discontinued operations		(1,022	)		(217	)
Net increase (decrease) in cash and cash equivalents		6,377			(2,071	)
Cash and cash equivalents at beginning of period		16,891			15,203
Cash and cash equivalents at end of period	$	23,268		$	13,132

Consolidated Statements of Cash Flows

(Unaudited, in thousands)


	For the Three Months Ended March 31,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss)	$	1,559		$	(5,503	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities from continuing operations:
(Gain) loss from discontinued operations		(3,412	)		259
Depreciation and amortization		1,072			1,134
Bad debt expense		562			277
Stock-based compensation		543			5,337
Restructuring costs		—			43
Changes in operating assets and liabilities:
Receivables		487			450
Other current and long term assets		60			313
Accounts payable, accrued expenses and deferred revenue		(994	)		(2,048	)
Deferred tax liability		286			—


Net cash provided by operating activities of continuing operations		163			262


CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment		(685	)		(931	)
Net change in restricted investments		257			446
Acquisition, net of cash acquired		—			14

Net cash used in investing activities of continuing operations		(428	)		(471	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt and capital lease obligations		(439	)		(450	)
Proceeds from issuance of common stock		43			103

Net cash used in financing activities of continuing operations		(396	)		(347	)


Net cash used in continuing operations		(661	)		(556	)


Net cash provided by (used in) discontinued operations:
Operating cash flows		3,373			(24	)
Investing cash flows		—			—
Financing cash flows		—			—

Total cash provided by (used in) discontinued operations		3,373			(24	)


Net increase (decrease) in cash and cash equivalents		2,712			(580	)

Cash and cash equivalents, beginning of period		13,288			17,370


Cash and cash equivalents, end of period	$	16,000		$	16,790

The accompanying notes are an integral part of these consolidated financial statements

~~INTERLAND~~Web.com, ~~INC~~Inc. ~~Notes to Consolidated Financial Statements~~

1.Notes ~~General~~to Consolidated Financial Statements

~~Business — Interland, Inc. together with its subsidiaries~~ (~~collectively the “Company”~~Unaudited), is a leader in efficiently packaging, distributing, and supporting business-class, online marketing solutions to small and medium businesses (“SMB”) owners, both directly and through partners, enabling those businesses to gain new relationships and better support communication with their existing customers locally and around the world. Interland offers a broad range of products and services, including shared hosting services, e-commerce, application hosting, website development, marketing, and optimization tools.

~~History~~Note of1 ~~operating~~– ~~losses — The Company’s Web hosting business has historically incurred net~~General losses and losses from operations. The Company’s future operations are dependent upon the ability to achieve and sustain positive cash flow prior to the depletion of cash resources. The Company expects to continue to have negative cash flows as it continues to execute on its business plan. There can be no assurance that Interland’s continuing efforts to stabilize or increase its revenue will be successful and the Company will be able to continue as a going concern. If the Company is unable to successfully execute its business plan, it may require additional capital, which may not be available on suitable terms. Nonetheless, management believes it has adequate cash and liquid resources to fund operations and planned capital expenditures through at least the next 12 months.

~~Change~~Business — Web.com, Inc. (“Web.com”) is a leader in ~~Fiscal~~providing ~~Year~~simple, ~~End~~yet -powerful ~~The~~solutions ~~Board~~for websites ofand ~~Directors~~web ofservices. ~~the~~We ~~Company~~offer ~~approved~~do-it-yourself ~~the~~and ~~change~~professional ofwebsite ~~the~~design, website ~~Company’s~~hosting, ~~fiscal~~eCommerce, ~~year~~web ~~end~~marketing ~~from~~and ~~August 31~~eMail. toOn ~~December~~March ~~31.~~20, ~~The~~2006, ~~Company~~our ~~plans~~name was changed from Interland, Inc. to ~~file~~Web.com ain ~~Transition Report~~order onto ~~Form~~more ~~10-Q~~closely ~~for~~align ~~the~~with ~~four~~our ~~months~~core ~~ending~~web ~~December 31,~~services ~~2005,~~business. Web.com ~~with~~trades on the ~~SEC~~NASDAQ onstock orexchange ~~before February 9,~~under ~~2006~~the stock symbol “WWWW”.

2History of operating losses — Our web services business has historically incurred losses from operations. ~~Significant~~Our ~~Accounting~~future ~~Policies~~operations are dependent upon our ability to achieve and sustain positive cash flow prior to the depletion of cash resources. There can be no assurance that our continuing efforts to stabilize or increase revenue will be successful and that we will be able to continue as a going concern. If we are unable to successfully execute our business plan, we may require additional capital, which may not be available on suitable terms. Nonetheless, management believes it has adequate cash and liquid resources to fund operations and planned capital expenditures through the next 12 months.

~~Interim~~Note ~~Unaudited~~2 ~~Financial~~– ~~Information~~Summary — The accompanying unaudited consolidated financial statements for the three-month periods ended November 30, 2005 and November 30, 2004, 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 statement of ~~the~~Significant ~~results~~Accounting ~~of the interim periods shown. All adjustments are of a normal recurring~~Policies ~~nature unless otherwise disclosed. Operating results for the three-month period ended November 30, 2005 are not necessarily indicative of the results that may be expected for the full fiscal year.~~

~~Basis~~Interim ofUnaudited ~~Presentation~~Financial Information – ~~This~~The ~~report~~accompanying onunaudited ~~Form~~consolidated ~~10-Q~~financial statements ~~(“10-Q”)~~include our results of operations for the ~~first~~three ~~quarter~~months ended ~~November~~March 3031, 2007 and 2006. ~~2005~~These ~~should~~financial bestatements ~~read~~were prepared in ~~conjunction~~conformity with ~~the~~accounting ~~Company’s~~principles ~~Annual~~generally accepted ~~Report~~in onthe ~~Form~~United ~~10-K~~States of America (“~~10-K~~U.S. GAAP”) for ~~the fiscal~~interim ~~year~~financial ~~ended August 31, 2005~~information. ~~The~~In management’s ~~financial~~opinion, these statements include all adjustments necessary for a fair statement of the ~~accounts~~results of ~~Interland,~~the ~~Inc~~interim periods shown. All adjustments are of a normal recurring nature unless ~~and~~otherwise ~~its~~disclosed. ~~wholly~~The ~~owned~~net ~~subsidiaries~~effect of discontinued operations is reported separately from the results of our continuing operations. ~~All~~Operating ~~significant~~results ~~intercompany~~for ~~balances~~the ~~and~~three ~~transactions~~month ~~have~~period ~~been~~ended March 31, ~~eliminated~~2007 are not necessarily indicative of the results that may be expected for the full fiscal year.

~~Use~~Basis of ~~Estimates~~Presentation —– ~~The~~This ~~preparation~~report ofon ~~financial~~Form ~~statements~~10-Q infor ~~conformity~~the ~~with~~three ~~accounting~~months ~~principles~~ended March 31, 2007 should ~~generally~~be ~~accepted~~read in ~~the~~conjunction ~~United~~with ~~States~~our ofAnnual ~~America~~Report ~~(U.S.~~on ~~GAAP)~~Form ~~requires~~10-K ~~management~~for tothe ~~make~~twelve months ended December 31, ~~estimates~~2006. ~~and~~The ~~assumptions~~financial ~~that~~statements ~~affect~~include ~~amounts~~the ~~reported~~accounts ~~therein~~of Web.com, ~~Due~~Inc. toand ~~the~~its ~~inherent~~wholly ~~uncertainty~~owned ~~involved~~subsidiaries. inAll ~~making~~significant ~~estimates,~~inter-company ~~actual~~balances ~~results~~and ~~reported~~transactions inhave ~~future~~been ~~periods~~eliminated. ~~may~~We operate ~~differ~~as ~~from~~one ~~those estimates~~reportable segment.

~~Reclassification~~Use of ~~Auction~~Estimates ~~Rate~~– ~~Securities~~The -preparation ~~Cash and cash equivalents consist~~ of ~~cash~~financial ~~and investments~~statements in ~~certificates~~conformity ~~of deposit, commercial paper and other highly liquid securities~~ with ~~original~~ ~~maturities less than 90 days~~U.S. WeGAAP ~~had historically classified auction rate securities as~~requires ~~cash~~management ~~and cash equivalents if the period between the interest rate resets was 90 days or less, which was based on our ability~~ to ~~either~~make ~~liquidate~~estimates our holding or roll our investments over to the next reset period. Based on our re-evaluation of the maturity dates associated with the underlying bonds, we have reclassified our auction rate securities, previously classified as cash and ~~cash equivalents,~~assumptions asthat ~~auction~~affect ~~rate~~amounts ~~securities~~reported ~~for each of the periods presented in the accompanying consolidated balance sheets~~therein. ~~Auction~~Due ~~rate securities are variable rate bonds tied~~ to ~~short term~~the ~~interest~~inherent ~~rates~~uncertainty ~~with~~involved ~~maturities on the face of the securities~~ in ~~excess~~making ~~of 90 days. Auction rate securities have interest rate resets through a modified Dutch auction~~estimates, atactual ~~predetermined~~results short term intervals, usually every 7, 28 or 35 days. They generally trade at par and are callable at par on any interest payment date at the option of the issuer. Interest paid during a given period is based upon the interest rate determined through the auction process. Although these securities are issued and rated as long term bonds, they are priced and traded as short term instruments because of the liquidity provided through the interest rate reset. All auction rate securities are available for sale and are reported ~~at fair value. These auction rate securities investments remained readily available to the Company and are considered short-term and liquid~~ in ~~accordance~~future ~~with~~periods ~~the reset~~may ~~period.~~differ Wefrom ~~reclassified~~those ~~certain amounts in the prior years’ consolidated Statement of Cash Flows to conform~~estimates. ~~to the current year presentation~~

Basic and diluted income (loss) per share – Basic income (loss) per share is computed using the weighted average number of common shares outstanding. Diluted income (loss) 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. Because we have reported a loss from continuing operations for all periods presented, the effect of these securities is excluded from the calculation of per share amounts for these periods, as their effect would be anti-dilutive. Employee stock options and warrants of approximately 3.3 million and 3.7 million outstanding as of March 31, 2007 and 2006, respectively, have been excluded.

In addition to net income (loss) per share, we have 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,” as the disposal activities of our discontinued operations were initiated prior to our adoption of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” on September 1, 2002. Because we have reported a loss from continuing operations for all periods presented, the effect of potentially dilutive securities has been excluded from the calculation of per share amounts for those periods.

Stock-Based Compensation – Effective September 1, 2005, we adopted Statement of Financial Accounting Standard No. 123 (R) (“SFAS No. 123(R)”). This statement replaces SFAS No. 123, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the grant date fair value of the award. This statement was adopted using the modified prospective method of application, which requires us to recognize compensation expense on a prospective basis. Therefore, prior period financial statements have not been restated. Under this method, in addition to reflecting compensation expense for new share-based awards, expense is also recognized to reflect the remaining service period of awards that had been

~~Interland~~Web.com, Inc. Notes to Consolidated Financial Statements – (~~continued~~Continued) (Unaudited)

asincluded ~~follows~~in pro forma disclosures in prior periods. SFAS No. 123(R) also requires that excess tax benefits (of which there was none in ~~thousands~~the current period due to tax losses): related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows.

	Previously
Consolidated Statement of Cash Flows - Three Months Ended November 30, 2004	Reported			Reclass			Revised
Purchases of held-to-maturity investment securities	$	(500	)	$	500		$	—
Proceeds from held-to-maturity investment securities		0			1,500			1,500
Purchases of auction rate securities		0			(2,000	)		(2,000	)
Proceeds from auction rate securities		0			0			0
Net Change	$	(500	)	$	—		$	(500	)

With the adoption of SFAS No. 123(R), we record the fair value of stock-based compensation awards as an expense. In order to determine the fair value of stock options on the date of the grant, we apply the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock price volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock price volatility, forfeiture rate and option life assumptions require a greater level of judgment which makes them critical accounting estimates.

3.We use an expected stock price volatility assumption that is based on historical volatilities of the underlying stock which is obtained from public data sources. With regard to the weighted-~~based~~average ~~compensation~~option life and forfeiture rate assumptions, we consider the behavior of past grants and in accordance with Staff Accounting Bulletin No. 107 (“SAB 107”), use the safe-harbor calculations recommended when historic trends of exercise are limited.

AsRecently ofIssued ~~November 30, 2005, the Company had established a number of stock option plans as discussed in more detail below. Prior to fiscal 2006, the Company applied the intrinsic value method as outlined in~~ Accounting ~~Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB~~Standards No. 25”) and related interpretations in accounting for stock options granted under these programs. Under the intrinsic value method, no compensation expense was recognized if the exercise price of the Company’s employee stock options equaled the market price of the underlying stock on the date of the grant. Accordingly, no compensation cost was recognized in the accompanying consolidated statements of earnings prior to fiscal year 2006 on stock options granted to employees, since all options granted under the Company’s stock option plans had an exercise price equal to the market value of the underlying common stock on the date of grant

~~Effective~~In September 12006, ~~2005,~~ the ~~Company~~Financial ~~adopted~~Accounting ~~SFAS~~Standards ~~No. 123(R),~~Board ~~“Share-Based Payment”~~ (“~~SFAS No. 123(R)~~FASB”). ~~This~~issued ~~statement replaces~~ SFAS No. ~~123~~157, ~~“Accounting~~Fair Value ~~for~~Measurements, ~~Stock-Based Compensation”~~ (“SFAS No. ~~123~~157”) ~~and~~which ~~supersedes~~defines ~~APB~~fair ~~No. 25.~~value, ~~SFAS~~establishes ~~No. 123(R)~~a ~~requires~~framework ~~that all stock-based compensation be~~for ~~recognized~~measuring asfair anvalue ~~expense~~ in ~~the~~generally ~~financial~~accepted ~~statements~~accounting principles, and ~~that~~expands ~~such~~disclosures ~~cost be measured at the fair~~about fair value ofmeasurements. ~~the~~SFAS ~~award~~No. 157 ~~This~~does ~~statement~~not ~~was~~require ~~adopted~~any ~~using~~new ~~the~~fair ~~modified~~value ~~prospective~~measurements, ~~method of~~but ~~application,~~provides ~~which~~guidance ~~requires~~on ushow to ~~recognize~~measure ~~compensation~~fair ~~expense~~value onby providing a ~~prospective~~fair ~~basis.~~value ~~Therefore, prior~~hierarchy ~~period~~used ~~financial~~to ~~statements~~classify the ~~have~~source ~~not~~of ~~been~~the ~~restated~~information. ~~Under~~This ~~this~~statement ~~method,~~is ineffective ~~addition to reflecting compensation expense~~ for ~~new~~us ~~share-based~~beginning ~~awards~~January 1, ~~expense~~2008. isWe are ~~also~~currently ~~recognized~~evaluating ~~to reflect~~ the ~~remaining~~potential ~~service~~impact ~~period of awards~~ that ~~had~~adoption ~~been~~of ~~included in pro forma disclosures in prior periods.~~ SFAS No. ~~123(R)~~157 ~~also~~will ~~requires~~have ~~that~~on ~~excess tax benefits (none for the Company due to tax~~our ~~losses)~~financial ~~related~~position, ~~to stock option exercises be reflected as financing~~ cash ~~inflows~~flows, ~~instead~~and results of ~~operating~~ ~~cash inflows~~operations.

~~With~~In ~~the adoption of SFAS No.~~June ~~123(R)~~2006, the ~~Company~~FASB isissued ~~required~~its tointerpretation ~~record~~FASB ~~the~~Interpretation ~~fair~~No. 48 ~~value~~– ofAccounting for ~~stock-based~~Uncertainty ~~compensation~~in ~~awards~~Income asTaxes – an ~~expense.~~interpretation Inof ~~order~~FASB toStatement ~~determine~~No. 109 ~~the~~– ~~fair~~Accounting ~~value~~for ~~of stock~~Income ~~options~~Taxes on(“FIN ~~the~~48”), ~~date~~which ofclarifies ~~grant,~~ the ~~Company~~accounting ~~applies~~and ~~the~~disclosure ~~Black-Scholes~~for ~~option-pricing~~uncertainty ~~model.~~in ~~Inherent~~tax positions. inFIN ~~this~~48 ~~model~~seeks ~~are~~to ~~assumptions~~reduce ~~related~~the todiversity ~~expected~~in ~~stock-price~~practice ~~volatility,~~associated ~~option~~with ~~life,~~certain ~~risk-free interest~~aspects ~~rate~~of the recognition and ~~dividend~~measurement ~~yield.~~related ~~While~~to ~~the~~accounting ~~risk-free~~for ~~interest~~income ~~rate~~taxes. ~~and~~The ~~dividend~~provisions ~~yield~~of ~~are~~FIN48 ~~less~~became effective ~~subjective~~for ~~assumptions,~~us ~~typically~~on ~~based~~January 1, on2007. ~~factual~~The ~~data~~implementation ~~derived~~of ~~from~~FIN ~~public~~48 ~~sources,~~did ~~the~~not ~~expected stock-price~~result ~~volatility,~~in ~~forfeiture~~any ~~rate~~adjustments ~~and~~to ~~option~~our ~~life~~financial ~~assumptions~~statements. ~~require~~For afurther ~~greater~~information ~~level~~regarding ofour ~~judgment~~adoption ~~which~~of ~~make~~FIN ~~them~~48, ~~critical~~see ~~accounting~~Note ~~estimates~~6 – Income Taxes.

~~The~~Note ~~Company~~3 ~~uses~~– anAcquisition expected stock-price volatility assumption that is based on historical implied volatilities of the underlying stock which is obtained from public data sources. With regard to the weighted-average option life and ~~forfeiture~~Impairment ~~rate assumptions, the Company considers the behavior~~ of ~~past~~WebSource ~~grants and uses the safe-harbor calculations recommended when there are limited exercises. During the three months ended November 30~~Media, ~~2005 the Company~~LLC ~~granted 831,261 options with a weighted average price per option of $3.01.~~

~~The~~On ~~fair~~May 19, ~~value~~2006, ofwe ~~stock-based~~acquired ~~awards~~WebSource ~~was~~Media, ~~estimated~~LLC ~~using~~(“WebSource Media”) a privately held web services provider. Except for assumed liabilities and debt payments, the ~~Black~~acquisition was structured as an earn-~~Scholes~~out ~~model~~in ~~with~~which the ~~following~~owners of WebSource Media would earn payments based on reaching revenue and ~~weighted-average~~profitability ~~assumptions~~goals. ~~for~~The majority of these payments were scheduled to occur only if the aforementioned goals were achieved over a three-year ~~months~~period. ~~ended~~At closing we paid approximately $3.1 ~~November 30~~million for the acquisition, ~~2005:~~incurred closing costs of $0.1 million and advanced $0.3 million to WebSource Media for working capital.

On June 12, 2006, approximately three weeks following the closing of the acquisition, the Federal Trade Commission (“FTC”) filed a sealed complaint in the U.S. District Court for the Southern District of Texas (the “FTC Litigation”) alleging that WebSource Media, among other defendants, had engaged in unfair and deceptive trade practices. Included among the other defendants were the four former principals of WebSource Media, Marc Smith, Keith Hendrick, Steve Kennedy and Kathleen Smalley (collectively, the “Smith Defendants”), each of whom were alleged by the FTC to have engaged in a common enterprise with WebSource Media and other corporate defendants (not affiliated with us) to engage in unfair and deceptive trade practices. In addition, the FTC also sought and obtained from the Court, an ex parte, Temporary Restraining Order and Order Appointing a Receiver over the assets of WebSource Media and its subsidiaries.

Because the WebSource Media business was placed under the general control and supervision of a Court-appointed Receiver and its business and operations were substantially restricted, we deconsolidated the investment and recorded the investment under the cost method as required by Accounting Research Bulletin No. 51, “Consolidated Financial Statements.” While the Receiver was in control of the business, the account base deteriorated significantly due to a combination of events such as the cancellation of billing services by some local exchange carriers (“LEC”), normal cancellation rates without corresponding sales and the possible invalidation of a number of accounts.

~~Interland~~Web.com, Inc. Notes to Consolidated Financial Statements – (~~continued~~Continued) (Unaudited)

		Quarter ended
		November 30,
		2005
Dividend yield		0.0%
Expected volatility		77.0% - 78.1%
Risk-free interest rate		3.7% - 4.4%
Expected term (in years)		5.8 years

In June 2006, our analysis of WebSource Media’s current customer base, the rate of deterioration of the business, along with the Receiver’s preliminary analysis led us to conclude that there would be little or no value after the Receiver returns control of the business to us. Our analysis estimated the discounted cash flows of the business based on the estimated number of accounts remaining at the time we would regain control of the business. Accordingly, we determined that an impairment of the entire value of the investment was required. This impairment in the amount of $3.2 million was recorded to the income statement in the second quarter of 2006. Additionally and also under the same assessment, we impaired advances to WebSource Media of $0.3 million and recorded them to the income statement in the second quarter of 2006. Those advances were made subsequent to our acquisition of WebSource Media but before our awareness of the appointment of the Receiver pursuant to the arrangement contemplated in the May 19, 2006 merger agreement, and at this time we consider those advances uncollectible.

InOn ~~October~~March ~~2005~~12, 2007, the ~~Financial~~court ~~Accounting~~formally ~~Standards~~adopted ~~Board~~the ~~issued~~final ~~FASB~~report ~~Staff~~of ~~Position (FSP) No. FAS 123(R)-2, “Practical Accommodation to~~ the ~~Application~~temporary ofreceiver, ~~Grant Date as defined in~~thereby ~~FASB~~terminating ~~Statement No. 123(R),” to provide guidance on determining~~ the ~~grant~~receivership ~~date~~over ~~for~~WebSource ~~an award as defined in SFAS No~~Media. ~~123(R).~~ ~~This~~WebSource ~~FSP~~Media ~~stipulates~~remains ~~that~~a ~~assuming~~defendant ~~all other criteria~~ in the ~~grant date~~FTC ~~definition~~Litigation ~~are~~and ~~met,~~remains asubject ~~mutual~~to ~~understanding of~~ the ~~key~~court’s ~~terms~~Second ~~and~~Modified ~~conditions~~Preliminary ofInjunction anOrder, ~~award to an~~which ~~individual~~imposes ~~employee~~substantial islimitations ~~presumed~~on toWebSource ~~exist upon the award~~Media’s ~~approval~~ability into ~~accordance~~market ~~with~~and ~~the~~sell ~~relevant corporate~~its ~~governance requirements~~products, manage ~~provided~~its ~~that~~business ~~the~~and ~~key~~dispose ~~terms~~of ~~and~~its ~~conditions~~assets. ofThose anlimitations, ~~award~~as ~~(a) cannot~~well beas ~~negotiated~~the uncertainty created by the ~~recipient~~FTC ~~with~~Litigation and the ~~employer~~ultimate ~~because~~liability ~~the~~of ~~award~~WebSource isMedia awould ~~unilateral~~have ~~grant,~~in that ~~and~~litigation, ~~(b) are~~left ~~expected~~in toplace besignificant ~~communicated~~uncertainty toregarding anour ~~individual~~ability ~~recipient~~to ~~within~~control aor ~~relatively~~exercise ~~short time~~significant ~~period~~influence ~~from~~over ~~the~~WebSource ~~date~~Media as of ~~approval.~~March ~~The~~31, ~~Company~~2007. ~~has~~Accordingly, ~~applied~~we ~~the~~continue ~~principles~~to ~~set~~account ~~forth~~for our investment in ~~this~~WebSource ~~FSP~~Media ~~upon its~~under ~~adoption~~the ofcost ~~SFAS No~~method. ~~123(R).~~

AsOn ~~of November~~April 3024, ~~2005~~2007, we reached an agreement in principle with the ~~Company~~staff ~~had~~attorneys ~~approximately~~of 4the FTC to settle the FTC litigation.~~6 million~~ ~~shares~~That ofproposed ~~common~~settlement ~~stock~~is ~~reserved~~described in further detail below in Note 8 ~~for~~– ~~future~~Contingencies. ~~issuance~~If ~~under~~that ~~our~~agreement ~~stock~~in ~~option~~principle ~~plans~~were approved by the Federal Trade Commission and filed ~~warrants~~with the federal court in a timely manner, we believe that WebSource Media would be able to pay the entire settlement amount from its own assets and funds and should be able to continue operating as a going concern.

~~The~~Note ~~Company~~4 ~~has~~– ~~four~~Restructuring ~~stock option plans, the 2005 Equity Incentive Plan (the “2005 Plan”), the 2002 Equity Incentive Plan (the “2002 Plan”), the 2001 Equity Incentive Plan (the “2001 Plan”)~~ and ~~the 1995~~Facility ~~Stock~~Exit ~~Option Plan (the “1995 Plan”), collectively referred to as the “Option Plans”. Options~~Costs issued under these option plans have an option term of 10 years. Vesting periods range from 3 to 5 years. All awards outstanding under the 2002 Plan, 2001 Plan and 1995 Plan continue in accordance with their terms, but no further awards will be granted under those plans.

AtThe ~~the~~detail ~~Company’s Annual Meeting~~ of ~~Shareholders on August 31, 2005,~~ the ~~Company’s~~annual ~~shareholders approved~~activity ~~the~~for ~~2005~~our ~~Plan.~~restructuring ~~The~~plans ~~Company~~from ~~has~~inception ~~reserved~~through ~~1,200,000 shares of common stock on August~~December 31, ~~2005~~2006 ~~for~~is ~~issuance~~disclosed ~~under~~in ~~the~~our ~~2005~~2006 ~~Plan.~~Annual ~~Exercise~~Report ~~prices of options under the 2005 Plan are 100% of the fair market value of the Company’s common stock~~ on ~~the~~Form ~~date of grant. The 2005 Plan contemplates that stock options granted will vest as to 33.3% of the shares issued after one year from the date of grant. Subsequent to the one~~10-~~year anniversary of the grant, the options become vested as to 2~~K.~~78%~~ ofA ~~the~~summary ~~total shares~~ of ~~the~~these ~~options~~plans ~~granted per month.~~follows:

2005 Plan – In ~~August~~ 2005, ~~Mr. Jeff~~in ~~Stibel,~~conjunction with the ~~Company’s~~sale ~~Chief~~of ~~Executive~~our ~~Officer,~~dedicated accounts and ~~Mr. Peter~~related ~~Delgrosso,~~assets and ~~Vice~~the ~~President~~assignment of ~~Corporate~~all ~~Communication,~~our ~~were~~data ~~granted~~centers ~~options~~and toin ~~purchase~~accordance ~~1,700,000~~with ~~and~~SFAS ~~200,000~~No. 146 “Accounting for Costs ~~shares,~~Associated ~~respectively,~~with ofExit ~~the~~or ~~Company’s~~Disposal ~~common~~Activities” ~~stock.~~(“SFAS ~~The~~146”), ~~options~~we ~~were~~initiated ~~granted~~a atrestructuring ~~$2.29~~plan requiring ~~per~~a ~~share~~reduction of force, ~~the~~ ~~closing~~exiting ~~sales~~a ~~price~~portion of the ~~common~~remaining ~~stock~~office onspace and the ~~day~~ termination of ~~the~~a ~~grant~~contract. ~~The~~We ~~options~~paid ~~expire~~the infinal ~~2013 and~~$0.1 million ~~vest~~of ~~over~~severance during the three ~~years~~months ended March 31, 2006. ~~These~~The ~~options~~outstanding ~~were~~liability ~~measured~~related ~~and~~to ~~expensed in~~the ~~accordance~~remaining ~~with~~lease ~~SFAS~~obligation ~~No.~~as ~~123(R) starting~~of ~~this~~March 31, ~~quarter~~2007 is $0.5 million.

~~Prior~~2001 toPlan – During the ~~Company’s~~fourth ~~adoption~~quarter of ~~SFAS No. 123(R)~~2001, ~~SFAS~~we ~~No. 123~~approved ~~required that the Company provide pro forma information regarding net earnings~~ and ~~net~~implemented ~~earnings~~a ~~per~~restructuring ~~common share as if compensation~~program ~~cost for the Company’s stock-based awards had been determined~~ in ~~accordance~~connection with ~~the~~our ~~fair~~acquisition ~~value method~~of ~~prescribed therein~~Interland-Georgia. ~~The~~During ~~Company~~the ~~had~~three ~~previously~~months ~~adopted~~ended ~~the~~March 31, 2006, ~~disclosure~~a ~~portion~~settlement of ~~SFAS No~~$0. ~~148,~~7 million ~~“Accounting~~was ~~for~~reached ~~Stock-Based~~on ~~Compensation~~the —exited ~~Transition~~office ~~and~~space ~~Disclosure,”~~lease. ~~requiring~~With ~~quarterly~~this ~~SFAS~~settlement ~~No. 123~~completed, ~~pro~~an ~~forma~~outstanding ~~disclosure.~~liability ~~The~~of ~~pro~~$2.2 million ~~forma~~was ~~charge~~recorded for ~~compensation~~the ~~cost~~remaining ~~related to~~lease ~~stock-based~~obligation, ~~awards~~net ~~granted~~of ~~was~~sublease ~~recognized~~income, ~~over~~for the ~~service~~exited ~~period.~~data ~~For~~center ~~stock~~facility ~~options,~~as ~~the service period represents the period~~ of ~~time~~March 31, ~~between~~2006. ~~the~~The outstanding ~~date~~liability offor ~~grant and~~ the ~~date~~remaining ~~each~~lease ~~option~~obligation ~~becomes exercisable~~as ~~without~~of ~~consideration~~March 31, of2007 ~~acceleration~~was ~~provisions~~$1.6 million.

~~The~~Note ~~following~~5 ~~table~~– ~~illustrates~~Purchase ~~the~~Business ~~effect~~Combination ~~on net earnings per common share as if the fair value~~Liabilities ~~method had been applied to all outstanding awards for the three months ended November 30, 2004 (unaudited):~~

In December 2005, we acquired the assets and accounts of Web Internet, LLC. In accordance with EITF 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” we recorded liabilities totaling $0.2 million. There is a liability balance of less than $0.1 million remaining at March 31, 2007.

In connection with the acquisition of Interland-Georgia in 2001, we accrued certain liabilities representing estimated costs of exiting certain facilities, termination of bandwidth contracts and involuntary termination of employees in accordance with EITF 95-3. During the three months ended March 31, 2007 we continued to make monthly lease payments and to collect offsetting rent from subtenants equaling $0.2 million, leaving an accrual balance of $0.3 million. These lease abandonment obligations are contractually scheduled to end in 2009.

Note 6 – Income Taxes

We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 – Accounting for Income Taxes (“FIN 48”) on January 1, 2007. As a result of the

~~Interland~~Web.com, Inc. Notes to Consolidated Financial Statements – (~~continued~~Continued) (Unaudited)

Net earnings/(loss), as reported	$	(3,196	)
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		158
Deduct:
Total stock-based compensation expense determined under fair value method for all awards		(416	)
Pro forma net earnings/(loss)	$	(3,454	)
Earning per common share:
Net earnings per common share — Basic & diluted, as reported	$	(0.20	)
Net earnings per common share — Basic & diluted, pro forma	$	(0.22	)

implementation of FIN 48, we did not recognize any material adjustment in the liability for unrecognized income tax benefits. At January 1, 2007, the total amount of unrecognized income tax benefits was zero.

AWe ~~summary~~are subject to U.S. federal income tax as well as income tax of ~~the~~multiple ~~transactions~~states ~~during~~and ~~the~~foreign jurisdictions. ~~three~~With ~~months~~few ~~ended~~exceptions, ~~November 30~~we are no longer subject to U.S, ~~2005~~federal, ~~with~~state ~~respect~~and local, or foreign income tax examinations by tax authorities for years prior to 1998. As of March 31, 2007, ~~the~~there ~~Company’s~~are ~~Stock~~no ~~Option~~notifications ~~Plans~~of ~~follows:~~any pending audits from any jurisdiction.

				Weighted-Avg		Aggregate		Weighted-Avg
	(000s)			Exercise		Intrinsic Value (1)		Contractual Life
	Shares			Price		(000s)		Remaining in Years
Outstanding at Aug 31, 2005		2,989		$	8.22
Granted at fair value		831		$	3.01
Exercised		(6	)	$	3.33
Forfeited		(124	)	$	15.77
Outstanding at November 30, 2005		3,690		$	6.70
Exercisable at November 30, 2005		1,186		$	15.50	$	937		7.91

Our continuing practice is to recognize interest and penalties related to uncertain tax positions in Other expense (income). As of January 1, 2007 and for the three months ended March 31, 2007, we did not have any interest or penalty expense or accruals related to uncertain tax positions.

~~(1)~~ The ~~intrinsic~~tax years ~~value~~1998 of– a2006 ~~stock~~remain ~~option~~open isto examination by the ~~amount~~major bytaxing jurisdictions in which ~~the~~we are ~~current~~subject ~~market~~to ~~value~~taxation, ofincluding ~~the~~federal, ~~underlying~~state ~~stock~~and ~~exceeds~~foreign jurisdictions. ~~the~~All ~~exercise~~tax ~~price~~years ofin ~~the~~which ~~option~~we generated a net operating loss are subject to examination, including federal, state and foreign jurisdictions.

~~During~~We ~~the~~do ~~three~~not ~~months~~expect ~~ended November 30, 2005~~ a ~~total~~material ofchange ~~6,500 options were exercised resulting~~ in athe ~~nominal~~ amount toof ~~the~~unrecognized ~~company~~tax ~~compared~~benefits ~~to 1,000 options exercised for the same period~~ in the ~~prior~~ ~~year.~~next ~~The~~twelve ~~total fair value of options vested during the three~~ months ~~ended November 30, 2005 was $0~~.~~4 million.~~

ADuring ~~summary~~the ofthree ~~the~~months ~~status~~ended ofMarch 31, ~~the~~2007, ~~Company’s~~we ~~non-vested~~had ~~options~~a asnet gain of ~~November~~$3.4 ~~30,~~million ~~2005,~~from ~~and~~discontinued ~~changes~~operations ~~during~~for ~~the~~which ~~three~~we ~~months~~recognized ~~ended~~income ~~November~~tax expense of $1.2 ~~30,~~million. ~~2005~~In continuing operations, a tax benefit of $0.9 million was recognized. Tax expense or benefit from continuing operations for interim periods is ~~presented~~based ~~below:~~on our estimated annualized tax rate.

				Weighted-Avg
	(000s)			Grant-Date
Nonvested Shares	Shares			Fair Value
Nonvested at September 1, 2005		1,922		$	1.53
Granted		831		$	2.06
Vested		(250	)	$	1.58
Nonvested at November 30, 2005		2,503		$	1.70

Note 7 – Discontinued Operations

~~Total~~In ~~net~~January 2007, ~~stock-based~~we ~~compensation~~entered ~~expense~~into isa ~~attributable~~settlement toagreement ~~the~~and ~~granting~~mutual release of ~~and~~claims ~~the~~with Certain ~~remaining~~Underwriters ~~requisite~~at ~~service~~Lloyd’s ~~periods~~of London in resolution of ~~stock~~our ~~options~~2005 ~~previously~~suit ~~granted.~~for ~~Compensation~~recovery ~~expense attributable~~of toattorney’s ~~net~~fees and ~~stock-based~~other ~~compensation~~amounts inrelated to the ~~three~~settlement ~~months~~of ~~ended~~an ~~November 30,~~earlier ~~2005~~case ~~was~~for ~~$0.4~~labor and employment claims ~~million,~~arising ~~increasing~~in ~~both~~the ~~basic~~years 2000 and ~~diluted~~2001 ~~loss~~and ~~per~~for ~~share~~which bywe ~~$0.02.~~were Asinsured ofunder ~~November 30,~~a ~~2005~~Directors, ~~the~~Officers and ~~total~~Company ~~unrecognized~~Liability ~~compensation~~Insurance ~~cost~~Policy. ~~related~~Because tothe ~~non-vested~~settlement ~~stock~~proceeds ~~awards~~relate ~~was~~to ~~$4.1 million~~discontinued operations, ~~and~~ the ~~related~~ ~~weighted-average~~net ~~period~~settlement ~~over~~of ~~which~~approximately it$3.6 million is ~~expected~~recorded toas beincome from ~~recognized~~discontinued isoperations ~~approximately~~in 3our ~~years~~March 31, 2007 financial statements.

In 2001, we sold our Micron PC Systems business to GTG PC Holdings, LLC (“GTG PC”), an affiliate of the Gores Technology Group. We retained all liabilities of the PC Systems business not assumed by GTG PC and any contingent liabilities arising prior to the closing date. During the three months ended March 31, 2006, we recognized a loss of $0.3 million, consisting primarily of legal fees; there were no comparative costs incurred related to PC Systems during the current period. Most of the Micron litigation has been settled and we do not expect to incur substantial expenses in the foreseeable future.

Note 8 – Contingencies

We are a party to several litigation matters outside of the ordinary course of business.

In January 2007, we entered into a settlement agreement and mutual release of claims with Certain Underwriters at Lloyd’s of London to resolve our suit in Idaho state court. We filed suit in 2005 to recover our attorneys’ fees and amounts paid in settlement of an earlier case in which a putative class of former employees claimed to be owed unpaid overtime and other wages. The underwriters had issued an insurance policy in 2000 that we contended should have provided indemnification and a defense in the employee litigation. Pursuant to the settlement, we received a payment of $6.0 million from the underwriters, resulting in net proceeds of approximately $3.6 million after deduction of legal fees and other expenses. This transaction is recorded as income from discontinued operations in our consolidated financial statements for the first quarter of 2007.

On August 2, 2006 we filed suit in the United States District Court for the Western District of Pennsylvania against Federal Insurance Company and Chubb Insurance Company of New Jersey. The suit seeks, among other things, a declaratory judgment that the two insurance companies owe us a defense and indemnification for costs associated with the Pair Networks

~~Interland~~Web.com, Inc. Notes to Consolidated Financial Statements – (~~continued~~Continued) (Unaudited)

4Litigation (see below). ~~Restructuring~~The ~~And~~suit ~~Facility~~also ~~Exit~~seeks ~~Costs~~recovery against the insurance companies for breach of contract, insurance company bad faith and breach of fiduciary duty.

~~2001~~On ~~Plan~~June 19, 2006, we filed suit in the United States District Court for the Northern District of Georgia against The Go Daddy Group, Inc. We are seeking damages, a permanent injunction and attorney fees related to alleged infringement of four of our patents. There can be no assurance that we will be able to recover the amounts claimed in this case.

~~During~~On June 12, 2006, the ~~fourth~~Federal ~~quarter~~Trade ofCommission ~~2001,~~(“FTC”) filed a sealed action in the ~~Company~~United ~~approved~~States District ~~and~~Court ~~implemented~~for athe ~~restructuring~~Southern ~~program~~District inof Texas against WebSource Media, LLC, n/k/a WebSource ~~connection~~Media, ~~with~~L.P., certain of its ~~acquisition~~former ofmembers, ~~Interland-Georgia~~Telsource Solutions and Telsource International (~~“the~~telemarketing ~~2001~~firms ~~Plan”~~that provided telemarketing services to WebSource Media) and certain of the principals of Telsource Solutions and Telsource International. ~~During~~In addition, the ~~three~~FTC ~~months~~obtained a ~~ended~~Temporary ~~November 30~~Restraining Order and Order Appointing a Temporary Receiver which, ~~2005~~among other things, froze ~~cash~~the ~~payments~~assets of ~~$0.4 million~~all ~~were~~of ~~made~~the ~~related~~defendants toand ~~the~~appointed ~~monthly~~a ~~lease obligations~~receiver for ~~lease~~WebSource ~~abandonment~~Media ~~leaving~~and anthe other ~~outstanding~~corporate ~~liability~~defendants. ofIn ~~$3.4 million~~its ascomplaint, ofthe ~~November~~FTC alleged that WebSource Media and the other ~~30,~~defendants ~~2005.~~were ~~The~~operated ~~annual~~as ~~activity~~a “common enterprise” for the purpose of inducing consumers to purchase websites from ~~inception~~WebSource ~~through~~Media ~~August 31,~~using ~~2005~~“unfair ~~are~~and ~~disclosed~~deceptive” intrade ~~the~~practices ~~2005~~sometimes known as ~~Annual~~“cramming.” ~~Report~~(See onNote ~~Form 10-K~~3 — Acquisition and Impairment of WebSource Media).

~~2005~~On ~~Plan~~March 12, 2007 the court formally adopted the final report of the temporary receiver, thereby terminating the receivership over WebSource Media. WebSource Media remains a defendant in the FTC Litigation and remains subject to the court’s Second Modified Preliminary Injunction Order, which imposes substantial limitations on WebSource Media’s ability to market and sell its products, manage its business and dispose of its assets. We previously impaired our entire investment in WebSource Media and continue to believe it has little or no value. There can be no assurance that WebSource Media will be able to continue as a going concern.

InOn ~~conjunction~~April 24, ~~with~~2007 ~~the~~we ~~sale~~reached ofan ~~its~~agreement ~~dedicated accounts and related assets and the assignment of all their data centers and~~ in ~~accordance~~principle with ~~SFAS~~the ~~No. 146~~staff ~~“Accounting~~attorneys ~~for~~of ~~Costs~~the ~~Associated with Exit~~Federal orTrade ~~Disposal~~Commission ~~Activities”~~to ~~(“SFAS~~settle ~~146”),~~ the ~~Company~~FTC ~~initiated~~litigation aagainst ~~restructuring~~WebSource ~~plan~~Media. ~~requiring~~That ~~a reduction of force~~agreement, ~~exiting~~reflected in a ~~portion~~one ofpage ~~the~~summary ~~remaining~~signed ~~office~~by ~~space~~attorneys ~~and~~for ~~the~~both ~~termination of a contract. During the three months ended November 30~~parties, ~~2005~~is ~~the~~expected ~~Company was able~~ to ~~negotiate~~be ~~down its~~set ~~contract~~forth ~~termination~~in ~~penalty by $0.2 million, leaving~~ a ~~remaining reserve of $0.8 million that~~formal ~~was~~written ~~settled~~agreement ~~and~~for ~~paid~~signature inby ~~full~~WebSource ~~in December~~Media. ~~The~~Thereafter, ~~Company~~the ~~also~~FTC ~~announced~~staff awould ~~reduction~~present ~~in force related~~the agreement to the ~~sale~~Commission offor ~~its~~consideration ~~dedicated accounts~~ and ~~recorded $0~~approval.~~8 million~~ ofWhile ~~severance,~~the ofCommission ~~which $0.6 million~~generally ~~was~~approves ~~paid~~settlements ~~out~~that ~~during~~are ~~the~~presented ~~three~~by ~~months~~the ~~ending~~FTC ~~November 30,~~staff ~~2005.~~in ~~The~~this ~~Company also exited a portion of its Atlanta office space on November 30~~process, ~~2005 in relation to~~ the ~~dedicated~~agreement ~~sale~~would ~~and recorded a~~not ~~restructuring~~be ~~reserve~~binding ofuntil ~~$1.0 million.~~approved ~~The~~by ~~remaining~~the ~~outstanding liability is $2~~Commission.~~1 million.~~

5The agreement in principle contemplates that WebSource Media will consent to the entry of judgment against it in the FTC Litigation, the imposition of a permanent injunction, and pay the FTC approximately $929,000 in three installments over a period of 180 days after the settlement agreement is finalized and entered by the court. ~~Purchase~~In ~~Business~~addition ~~Combination~~WebSource ~~Liabilities~~Media would also pay approximately $144,000 in fees and expenses that are due to the temporary receiver. If WebSource Media failed to make any of the required payments, the full amount of the suspended judgment of $24.7 million would be accelerated against WebSource Media. The judgment to be entered under the settlement would be against WebSource Media and its subsidiaries and not against Web.com. All of the settlement payments will be funded from WebSource Media’s assets and operating income. Accordingly, we have not recorded any liability relating to this matter as of March 31, 2007.

InThe ~~connection~~agreement ~~with~~in ~~the~~principle ~~acquisition~~also ofcontemplates ~~Interland-Georgia~~that inWebSource ~~2001,~~Media ~~INNERHOST~~would inbe ~~2002,~~permitted ~~and~~to ~~Trellix~~continue into ~~2003~~service ~~the~~its ~~Company~~customers ~~accrued~~who ~~certain~~are ~~liabilities~~billed ~~representing~~via ~~estimated~~LEC ~~costs~~billing, including a number of ~~exiting~~customers ~~certain~~whose billing ~~facilities,~~was ~~termination~~suspended as part of ~~bandwidth~~the ~~contracts~~temporary ~~and~~receivership. ~~involuntary~~The ~~termination~~permanent ofinjunction ~~employees~~would inrequire ~~accordance~~WebSource ~~with~~Media ~~EITF~~not ~~95-3,~~to ~~“Recognition~~make offalse ~~Liabilities~~representations into ~~Connection~~customers, ~~with~~not ato ~~Purchase~~bill ~~Business~~customers without their ~~Combination.”~~consent ~~During~~and ~~the~~to ~~three~~maintain ~~month~~accurate ~~period~~books ~~ended~~and ~~November 30~~records, ~~2005~~among ~~the~~other ~~Company~~provisions. ~~continued~~If tothe ~~make~~agreement in ~~its~~principle ~~monthly~~is ~~lease~~finalized, ~~payment~~approved ~~and~~by tothe ~~collect~~Federal ~~offsetting~~Trade ~~rent~~Commission ~~from~~and ~~its~~entered ~~subtenants~~by ~~equaling~~the ~~less~~court ~~than~~within ~~$0.1 million~~the ~~leaving~~next anfew ~~accrual~~months, ~~balance~~we ofwould ~~$0.5 million.~~expect ~~These~~WebSource ~~lease~~Media ~~abandonment~~to ~~obligations~~be ~~are contractually~~able ~~scheduled~~to continue to ~~end~~operate inas ~~2009~~a going concern.

In November, 2006, we commenced arbitration against the former members of WebSource Media, seeking damages for fraud, fraudulent inducement, and breach of contract. The outcome of arbitration cannot be assured and there can be no guarantee that we will be able to recover the amount claimed in this case. The former members of WebSource Media have denied liability and asserted counterclaims against us in the arbitration. They argue, among other things, that their employment was terminated without cause and that such termination entitles them to an accelerated payment of the earn-out consideration at issue in the May 19, 2006 merger agreement of up to approximately $7 million in cash, 1.325 million shares of our stock and warrants for the purchase of up to 750,000 shares of our stock at a purchase price of $6 per share. Any ~~Discontinued~~accelerated ~~Operations~~earn-out consideration is subject to certain limitations, deductions, off-sets and adjustments as further provided in the merger agreement. The former members of WebSource Media have also filed suit against us and that suit is now pending in the U.S. District Court for the Southern District of Texas. The civil suit makes many of the same claims as were asserted in the arbitration described above. We have asserted counterclaims in the civil suit that are substantially identical to those

In 2001, the Company sold its Micron PC Systems business to GTG PC Holdings, LLC (“GTG PC”), an affiliate of the Gores Technology Group. The Company retained all liabilities of the PC Systems business not assumed by GTG PC and any contingent liabilities arising prior to the closing date.

During the quarter, the Company recognized a loss of $0.1 million from discontinued operations. This loss consisted primarily of required legal fees in defense and settlement of Micron PC legal matters. The Company’s Micron litigation is ongoing and management expects that there will be additional defense costs throughout 2006.

7. Contingencies

In February 2003, the Company filed a lawsuit in Cobb County, Georgia against Mr. Gabriel Murphy, one of the former principals of Interland’s subsidiary, CommuniTech.Net, Inc. (“Communitech”), which was acquired by Interland in February 2002. The Company’s lawsuit claims, among other things, that Mr. Murphy breached certain covenants under his employment agreement and also demands payment of two promissory notes made by Mr. Murphy (one of which was “non-recourse” while the other was “recourse”). In March 2004, Interland foreclosed upon and retired the 273,526 shares of stock held as collateral and wrote off the $2,000,000 non-recourse promissory note, which had been carried as Stockholders’ Equity. The other $735,000 full recourse promissory note (also carried as Stockholders’ Equity) remains outstanding and continues to be a subject of the Cobb County litigation. Mr. Murphy has asserted various counterclaims in response to the Company’s suit.

In February 2003, Mr. Heitman, also a former principal of Interland’s subsidiary Communitech, and Mr. Murphy filed a lawsuit against Interland, its Chief Executive Officer, Mr. Joel Kocher, and Communitech, in Jackson County, Missouri claiming, among other things, that Interland acted unreasonably and thereby breached the Merger Agreement under which Interland acquired all of the stock of Communitech by failing to have the S-3 registration statement for their stock declared effective by the SEC on a timely basis and further claiming that Interland and/or Mr. Kocher made inaccurate disclosures in connection with Interland’s acquisition of Communitech. The complaint seeks compensatory and punitive damages in an

~~Interland~~Web.com, Inc. Notes to Consolidated Financial Statements – (~~continued~~Continued) (Unaudited)

~~unspecified~~asserted ~~amount.~~in ~~Interland~~the ~~believes~~arbitration ~~that~~described ~~these claims~~above. ~~are~~We ~~without~~have ~~merit~~asked ~~and~~the ~~will~~U.S. ~~not~~District ~~have~~Court ato ~~material~~dismiss ~~adverse~~the litigation ~~effect~~in onlight ~~Interland~~of ~~and is vigorously defending~~ the ~~claims~~arbitration proceeding.

~~Interland~~In ~~is defending another case in Jackson County, Missouri arising out of the shutdown of five unregistered servers at the Communitech data center in~~ February ~~2003.~~2006, ~~An entity called Bent Axis and its principal Jason Park~~Eslworldwide.com, a former ~~employee of Communitech~~customer, ~~have~~ filed suit against ~~the~~us ~~Company and~~in ~~its~~New ~~General~~York ~~Counsel, Jonathan Wilson, alleging a variety of contract and tort claims~~state court. InThis ~~its first~~case ~~complaint,~~was ~~Plaintiffs~~subsequently ~~asserted~~removed ~~that~~to ~~they~~federal ~~owned~~court ~~the~~and ~~five~~transferred ~~servers in question. They later amended their pleading~~ to ~~assert a different theory: that Bent Axis was using~~ the ~~servers by~~Northern ~~permission~~District of ~~certain Interland personnel including Gabriel Murphy~~Georgia. ~~Plaintiffs claim that they were damaged when the Company disconnected the servers in question~~Eslworldwide.com Toclaims ~~date~~lost ~~Plaintiffs have produced no documentary evidence that Bent Axis ever generated a profit (a requirement for the recovery of damages)~~ or ~~that~~deleted itdata, ~~had~~breach ~~any legal right to the free use~~ of ~~the~~contract, ~~servers in competition~~negligence ~~with~~and ~~Interland~~other torts. ~~The~~We ~~court~~believe ~~dismissed~~that ~~all of~~ the claims ~~against~~are ~~Jonathan~~without ~~Wilson on June 27~~merit, ~~2005. The~~plan ~~Company~~to iscontinue ~~vigorously~~to ~~defending~~contest the suit vigorously and ~~believes~~believe that itno material adverse effect will ~~not~~occur ~~have~~as a ~~material~~result ~~adverse effect~~of ~~on Interland~~this litigation.

~~Interland~~Vincent isSalazar ~~defending~~has aappealed ~~case involving~~ the ~~Telephone~~December 13, ~~Consumer~~2005 ~~Protection~~dismissal ~~Act~~of ~~(“TCPA”)~~his inlawsuit ~~state court~~against inus ~~Allegheny~~and ~~County,~~our predecessor ~~Pennsylvania~~HostPro. ASalazar’s ~~competing~~suit ~~web~~was ~~hosting company, PairNetworks,~~ filed ~~this case~~ in ~~December 2001~~state ascourt ain ~~putative~~Los ~~class~~Angeles ~~action,~~ claiming ~~that Interland’s distribution of a~~entitlement ~~facsimile on November 15, 2001~~ to ~~market~~money ~~domain~~as ~~name~~a ~~registration~~result ~~services~~of ~~violated~~his ~~the~~alleged ~~TCPA. Several~~involvement ~~years later, two additional plaintiffs joined~~ in ~~the~~brokering ~~action.~~our ~~The~~acquisition ~~plaintiffs have conceded that all~~ of ~~the~~accounts ~~putative~~from ~~class members were customers of Interland. Federal Communications~~AT&T ~~Commission regulations~~ in ~~effect at the time provided that the distribution of facsimiles to persons with whom the sender had an “established business relationship” did not amount to a violation of the TCPA~~January 2002. ~~Interland~~Salazar ~~has~~claimed ~~asked the court to deny class certification and a ruling on~~ that ~~motion~~he is ~~pending~~due ~~along~~20% ~~with a motion for summary judgment seeking dismissal~~ of the ~~named plaintiffs’~~revenue ~~claims. If the court denies class certification, Interland’s damages, even if it were liable, cannot exceed $1,500 for each of the three named plaintiffs. Interland believes~~ that ~~the plaintiffs’~~we ~~claims~~received ~~are~~from ~~without merit, plans to continue to contest~~ the ~~matter vigorously and~~ ~~believes~~acquired ~~that no material adverse effect on Interland will occur as a result of this litigation~~accounts. ~~Conversely, if the class is certified, its size may exceed 50,000.~~

In ~~addition~~March 2006, ~~Interland has filed~~ a ~~motion~~former ~~seeking~~employee, toRandy ~~dismiss~~Nein, ~~all~~also ofsued ~~the~~us ~~claims~~in ~~against~~state itcourt onin ~~the grounds~~California claiming that ~~the~~he ~~facsimile~~was atdue ~~issue~~compensation ~~did~~in ~~not~~connection ~~violate~~with ~~the~~our ~~TCPA~~acquisition ~~because it satisfied all~~ of ~~the requirements~~web ofhosting ~~applicable~~accounts ~~Federal~~from ~~Communications Commission~~AT&T ~~regulations~~ in ~~effect~~January 2002. atIn ~~the~~March 2007, ~~time~~ the ~~fax~~court ~~was~~granted ~~sent.~~our ~~Congress~~summary ~~has~~judgment ~~expressly~~motion ~~extended~~and ~~those regulations~~dismissed ~~through~~ the case ~~Junk~~in ~~Fax~~its ~~Act of 2005~~entirety. ~~Interland’s~~While ~~motion~~the ~~has~~plaintiff ~~been~~may ~~briefed~~appeal, ~~and~~we ~~argued~~believe to the trial court’s ~~and~~ruling ~~the~~should be ~~parties are awaiting a ruling~~upheld.

~~The~~We ~~Company~~continue isto ~~defending~~defend on appeal by BizRocket a ~~case~~$1 judgment entered against us in the United States District Court for the Southern District of Florida ~~arising~~relating to a dispute that arose out of the management of a co-located server byof ~~its~~our predecessor ~~company~~, Worldwide Internet Publishing Corporation. ~~The suit alleges that the Company is responsible for the loss of~~At ~~Plaintiff’s internet search engine that occurred after~~ the ~~resignation~~trial ~~of the officer managing the server, Mark Ismach,~~ in ~~October 1999.~~that ~~On September 2~~case, ~~2005, in a trial of this matter on~~ the ~~merits~~ ~~the~~ jury had returned a verdict ~~against Interland in the amount~~ of $800,000. Inagainst ~~response~~us towhich was ~~Interland’s~~subsequently ~~pre-trial~~reduced ~~and~~by ~~post-trial motions, however,~~ the court ~~subsequently reduced the verdict~~ to ~~nominal~~only ~~damages of~~ $1 ~~and entered judgment~~ in ~~that~~response ~~amount.~~to ~~The~~our ~~plaintiff~~pre-trial ~~has~~and ~~filed~~post-trial ~~a notice of appeal~~motions. ~~The Company has accordingly removed the $800,000 legal reserve that had been established~~ ~~during the previous quarter.~~

In May 2004, Net Global Marketing filed suit against ~~Interland~~us and ~~its~~our predecessor, Dialtone, in ~~state~~ state court in Los Angeles, California asserting claims for lost data. ~~Interland~~We had cancelled Net Global’s web hosting accounts in October 2002 and again in January 2003 as a result of complaints that the servers were being used to send spam, and ~~Interland~~we ~~has~~have asserted counterclaims arising from these incidents. ~~Interland~~We have removed the case to federal court ~~and filed a motion to dismiss in favor of arbitration which was denied, and Interland has appealed that decision to the Ninth Circuit Court of Appeals~~. ~~Interland~~We ~~believes~~believe ~~that,~~we ~~even~~have ~~if the litigation proceeds, it has~~ adequate defenses including provisions in the contract with the plaintiff that shield Dialtone from damages for “erasure” and “loss of data” and generally prohibit recovery of the kind of damages sought by ~~plaintiff. Interland believes that~~ the ~~plaintiff’s claims are without merit, plans to~~ ~~continue to contest the matter vigorously and believes that no material adverse effect on Interland will occur as a result of this litigation~~plaintiff.

OnIn ~~September~~February 142003, ~~2005,~~we ~~the~~filed ~~Honorable~~a ~~Judge~~lawsuit B.in ~~Lynn~~Cobb ~~Winmill~~County, ~~entered~~Georgia anagainst ~~Order~~Mr. Gabriel ~~approving~~Murphy, one of the former ~~terms~~principals of a ~~settlement~~our ~~reached~~subsidiary, ~~between~~CommuniTech.Net, ~~the~~Inc. ~~Company~~(“Communitech”), ~~and~~which ~~the~~was ~~Plaintiffs~~acquired in February 2002. ~~Smith~~We v.contend ~~Micron~~that ~~Electronics,~~Murphy ~~Inc.~~violated various covenants under his employment agreement and ~~(n/k/a~~related ~~Interland~~contracts, ~~Inc.)~~defamed us, ~~Case~~violated ~~No. CV-01-0244-S-BLW~~fiduciary ~~(D.~~duties ~~Idaho)~~and ~~(the~~duties ~~“Smith~~of ~~Litigation”).~~loyalty, ~~The~~and committed ~~settlement~~fraud. ~~provided~~In particular, in motions we filed, we contend that Murphy assisted a ~~payment~~former inemployee ~~the~~named Jason ~~amount~~Park ofin ~~$325,000~~creating ~~would~~a becompeting ~~made~~web tohosting ~~Plaintiffs~~company ~~after~~called ~~all of~~Bent ~~the~~Axis, ~~following~~LLC, ~~events~~using ~~have~~our ~~taken~~equipment and ~~place:~~facilities ~~(a) execution~~operating out of the ~~Settlement~~Communitech ~~Agreement~~data bycenter ~~all~~in ~~42 Plaintiffs~~Kansas ~~and~~City, ~~Opt-~~Missouri. In ~~Claimants;~~our motions, ~~(b) entry~~we ofalso contend that Murphy signed a ~~dismissal~~putative ~~with~~contract ~~prejudice~~on behalf of ~~all~~Interland ~~pending~~with ~~claims in~~a ~~the~~company ~~Smith~~formed ~~Litigation;~~by ~~(c) expiration~~Murphy for the purpose of ~~any~~billing ~~period~~us for Internet advertising and later had his wife use an ~~appeal~~assumed ~~from~~name ~~any~~in ~~decision~~an ~~entered~~effort byto collect invoices arising under the putative contract. In ~~Court~~this inlitigation ~~the~~we ~~Smith~~also ~~Litigation;~~seek ~~and~~to ~~(d) receipt~~recover payment of a promissory note signed by Murphy in February 2002 in the ~~Company~~approximate amount of $735,000, representing a ~~full~~cash ~~payment~~advance ~~for~~we made to Murphy at the ~~Court-awarded~~time ~~sanctions~~of ~~entered~~the ~~against~~closing ~~Plaintiffs~~of the Communitech acquisition. ~~The~~Murphy ~~Settlement~~has ~~Agreement~~asserted ~~contains~~various acounterclaims ~~full~~in ~~release of~~response.

In February 2003, Mr. Bryan Heitman, also a former principal of our subsidiary Communitech, and Mr. Murphy filed a lawsuit against us, our former Chief Executive Officer, Mr. Joel Kocher, and Communitech, in Jackson County, Missouri claiming, among other things, that we fraudulently induced Murphy and Heitman to enter into the Merger Agreement by making inaccurate or incomplete disclosures and, in the alternative, breached the Merger Agreement by failing to have the Form S-3 registration statement for their stock declared effective by the SEC on a timely basis. The complaint seeks compensatory and punitive damages. The court has set a trial date in October 2007.

In late 2001, Pair Networks, a competing web services company, attempted to mount a class action against us under the Telephone Consumer Protection Act after Pair Networks allegedly received a one-page fax from us (the “Pair Networks Litigation”). In February 2007, the court in Allegheny County, Pennsylvania, denied the motion of the plaintiffs to certify the class in the case. This ruling means that the three named plaintiffs in the case may only proceed with individual claims against us which can amount to not more than $1,500 each. The plaintiffs have indicated that they will appeal. We plan to defend that appeal and believe that no material adverse effect will occur as a result of this litigation.

We are also defendants in a number of other lawsuits seeking lesser amounts, and which we regard as unlikely to result in any material payment.

~~Interland~~Web.com, Inc. Notes to Consolidated Financial Statements – (~~continued~~Continued) (Unaudited)

~~all~~With ~~claims~~respect ~~that~~to each of the ~~Plaintiffs~~foregoing ~~asserted~~matters orwhere ~~could~~parties have asserted claims against ~~the~~us, ~~Company in~~we ~~the~~believe ~~Smith~~we ~~Litigation.~~have Onadequate ~~or about December 14~~defenses, ~~2005,~~intend ~~the~~to ~~final~~defend ~~Opt-In~~ourselves ~~Claimant signed the Settlement Agreement. On December 28~~vigorously, ~~2005~~and ~~Judge~~believe ~~Winmill~~that ~~entered an Order dismissing~~ the ~~Smith~~ ~~Litigation~~litigation ~~with prejudice. The period by which any appeal may be taken~~ will ~~run on or about January 27, 2006. The case will be finally resolved and~~ not ~~subject~~result toin ~~further review after the period for~~ any ~~appeal~~material ~~runs~~adverse ~~and the settlement payment has been made by the Company~~effect.

~~The~~Periodically, ~~Company~~we ~~has~~are amade ~~Directors,~~aware ~~Officers~~that ~~and~~technology ~~Company~~we ~~Liability~~have ~~Insurance~~used ~~Policy~~may ~~dated~~have ~~July 26,~~infringed ~~2000~~on intellectual ~~(the~~property ~~“Policy”)~~rights ~~issued~~held by ~~Certain~~others. ~~Underwriters~~We atevaluate ~~Lloyd’s~~all ofsuch ~~London~~claims ~~(“Underwriters”).~~and, ~~The~~if ~~Policy purports~~necessary toand ~~provide~~appropriate, obtain ~~coverage~~licenses for ~~certain~~the ~~types~~use of ~~labor~~such ~~and~~technology. ~~employment~~If ~~claims~~we ~~made~~or ~~during~~our ~~the~~suppliers are unable to obtain ~~applicable~~licenses ~~policy~~necessary ~~period~~to ~~(June 15,~~use ~~2000~~intellectual ~~through~~property ~~June 15,~~in ~~2001).~~the ~~This~~applicable ~~coverage~~products ~~purportedly~~or ~~applies to~~processes, ~~any~~we ~~“Loss”~~may ~~sustained~~be forced asto adefend ~~result~~legal ofactions ~~such~~taken aagainst ~~claim,~~us ~~including,~~relating ~~among~~to ~~other~~allegedly ~~things,~~protected ~~“damages,~~technology. We ~~judgments,~~evaluate ~~settlements~~all ~~and~~such ~~Costs,~~claims ~~Charges~~ and ~~Expenses~~accrue ~~incurred~~a byliability for the ~~Company~~estimated costs of settlement or adjudication of claims as appropriate.”

ToThe ~~date,~~outcome ~~Underwriters~~of ~~have~~litigation ~~denied~~may ~~coverage~~not ~~under~~be ~~the~~assured, ~~Policy~~and ~~for~~despite ~~any~~management’s ~~claims~~views ~~asserted~~of by the ~~Plaintiffs~~ inmerits ~~the~~of ~~Smith~~any litigation, ~~Litigation.~~or Asthe areasonableness ~~result,~~of ~~the~~our ~~Company~~estimates ~~has~~and ~~filed~~reserves, aour ~~lawsuit~~cash ~~against~~balances could ~~Underwriters~~nonetheless inbe ~~state~~materially ~~court~~affected inby ~~Idaho~~an ~~(see~~adverse ~~Interland, Inc~~judgment. v.In ~~Certain~~accordance ~~Underwriters~~with ~~at Lloyd’s~~SFAS ~~of London, Case~~ No. CV5 “Accounting ~~OC 0506184 (District Court~~ for ~~the Fourth Judicial District of Idaho~~Contingencies,” ~~County~~we ofbelieve ~~Ada))~~we ~~(the~~have ~~“Lloyd’s~~adequately ~~Litigation”)~~reserved ~~seeking~~for ~~a declaration that~~ the ~~Policy provides~~contingencies ~~coverage~~arising ~~for~~from the ~~Losses~~above ~~sustained~~legal bymatters ~~the~~where ~~Company~~an asoutcome awas ~~result~~deemed ofto ~~the~~be ~~claims~~probable ~~made~~and in the ~~Smith~~loss amount ~~Litigation.~~could ~~The~~be ~~Company~~reasonably isestimated. ~~seeking~~As insuch, ~~excess~~we ofdo ~~$1.7 million~~not inbelieve ~~damages~~that ~~from Underwriters. Although~~ the ~~Company~~anticipated ~~believes~~outcome itof ~~should~~the aforementioned ~~prevail~~proceedings inwill ~~its claims, Underwriters~~ have ~~indicated~~a ~~that they~~materially ~~will~~adverse ~~vigorously~~impact ~~defend~~on ~~this~~our ~~suit~~financial ~~and~~condition, ~~there can be no guarantee that the Company will be able~~cash toflows, ~~recover~~or ~~the~~results ~~amounts~~of ~~claimed in this case~~operations.

~~Notwithstanding~~Note ~~the~~9 ~~Lloyd’s~~– ~~Litigation,~~Subsequent ~~Underwriters and the Company have entered into an Interim~~Events Funding Agreement (the “Interim Agreement”) aimed at achieving a settlement of the Smith Litigation. Under the terms of the Interim Agreement, Underwriters have agreed to pay $250,000 of the $325,000 settlement payment that will be made to the Plaintiffs in the Smith Litigation. Both Underwriters and the Company have reserved all rights and made no admissions of liability under the terms of the Interim Agreement. While the Company believes that no material adverse effect on Interland will result from the Lloyd’s Litigation and, indeed, believes that it should recover losses sustained as a result of the Smith Litigation, Underwriters have reserved their rights in regards to monies contributed to the settlement.

~~Periodically~~On April 24, ~~the~~2007 ~~Company~~we isreached ~~made~~an ~~aware~~agreement ~~that~~in ~~technology~~principle itwith ~~has~~the ~~used~~staff ~~may~~attorneys ~~have~~of ~~infringed~~the onFederal ~~intellectual~~Trade ~~property~~Commission ~~rights~~to ~~held~~settle bythe ~~others.~~FTC ~~The~~litigation ~~Company~~against ~~evaluates~~WebSource ~~all~~Media. ~~such~~That ~~claims and~~agreement, ifreflected ~~necessary~~in ~~and~~a ~~appropriate,~~one ~~obtains~~page ~~licenses~~summary ~~for~~signed ~~the~~by ~~use~~attorneys offor ~~such~~both ~~technology.~~parties, Ifis ~~the~~expected ~~Company or its suppliers are unable~~ to ~~obtain~~be ~~licenses~~set ~~necessary~~forth ~~to use intellectual property~~ in ~~the~~a ~~applicable~~formal ~~products~~written oragreement ~~processes,~~for itsignature ~~may~~by beWebSource ~~forced~~Media. toThereafter, ~~defend~~the ~~legal~~FTC ~~actions~~staff ~~taken~~would ~~against~~present itthe agreement ~~relating~~ to ~~allegedly~~ ~~protected~~the ~~technology.~~Commission ~~The~~for ~~Company~~consideration ~~evaluates all such claims~~ and ~~accrues~~approval. aWhile ~~liability for~~ the ~~estimated~~Commission ~~costs~~generally approves ofsettlements ~~settlement~~that orare ~~adjudication~~presented ofby ~~claims~~the ~~for~~FTC ~~alleged~~staff ~~infringement~~in asthis ofprocess, the ~~respective~~ ~~dates~~agreement ofwould ~~the~~not be ~~balance~~binding ~~sheets~~until ~~included~~approved inby ~~this~~the ~~report~~Commission.

The ~~Company~~agreement isin ~~also~~principle acontemplates ~~defendant~~that inWebSource aMedia ~~number~~will ofconsent ~~other~~to ~~lawsuits~~the ~~seeking~~entry ~~lesser~~of ~~amounts,~~judgment against ~~and~~it ~~which~~in the ~~Company~~ ~~regards~~FTC asLitigation, ~~unlikely~~the toimposition ~~result~~of ina ~~any~~permanent ~~material~~injunction, ~~payment.~~and ~~The~~pay ~~outcome~~the ~~of litigation may not~~FTC beapproximately ~~assured~~$929,000 ~~and~~in ~~despite~~three ~~management’s~~installments ~~views~~over ofa ~~the~~period ~~merits~~ of ~~any~~180 days ~~litigation,~~after or the ~~reasonableness~~settlement ofagreement ~~its~~is ~~estimates~~finalized and ~~reserves,~~entered by the ~~Company’s~~court. ~~cash~~In ~~balances~~addition ~~could~~WebSource ~~nonetheless~~Media bewould ~~materially~~also ~~affected~~pay byapproximately an$144,000 ~~adverse~~in ~~judgment.~~fees Inand ~~accordance~~expenses ~~with~~that ~~SFAS~~are ~~No. 5~~due ~~“Accounting~~to ~~for~~the ~~Contingencies,”~~temporary ~~the~~receiver. ~~Company~~If WebSource ~~believes~~Media itfailed ~~has~~to ~~adequately~~make ~~reserved~~any ~~for~~of the ~~contingencies~~required ~~arising~~payments, ~~from~~the full amount of the ~~above~~suspended ~~legal~~judgment ~~matters~~of ~~where~~$24.7 million anwould ~~outcome~~be ~~was~~accelerated ~~deemed~~against WebSource Media. The judgement to be ~~probable~~entered ~~and~~under the ~~loss~~settlement ~~amount~~would ~~could~~ be ~~reasonably estimated. As~~against ~~such,~~WebSource ~~the~~Media ~~Company~~and ~~does~~its subsidiaries and not ~~believe~~against ~~that~~Web.com. All of the ~~anticipated~~settlement ~~outcome~~payments ofwill ~~the~~be ~~aforementioned~~funded ~~proceedings~~from ~~will~~WebSource ~~have~~Media’s aassets ~~materially~~and ~~adverse~~operating ~~impact~~income. onAccordingly, ~~its~~we ~~results~~have ofnot ~~operations,~~recorded ~~its~~any ~~financial~~liability ~~condition~~relating orto ~~its cash~~this ~~flows~~matter as of March 31, 2007.

8The agreement in principle also contemplates that WebSource Media would be permitted to continue to service its customers who are billed via LEC billing, including a number of customers whose billing was suspended as part of the temporary receivership. ~~Subsequent~~The ~~Event~~permanent injunction would require WebSource Media not to make false representations to customers, not to bill customers without their consent and to maintain accurate books and records, among other provisions. If the agreement in principle is finalized, approved by the Federal Trade Commission and entered by the court within the next few months, we would expect WebSource Media to be able to continue to operate as a going concern.

On December 23, 2005 Interland closed on the acquisition of substantially all of the web hosting and domain registration business of Web Internet, LLC (“WILLC”) and the domain name “Web.com”. The assets acquired include approximately 9,000 web hosting accounts, an accredited registrar business, and substantially all of the intellectual property, trademarks, domain name rights and contractual rights of WILLC, including the domain name “Web.com” and certain other assets.

The purchase price was approximately $4.8 million, which includes the assumption of approximately $3.7 in debt and other liabilities, the issuance of approximately $0.8 million in restricted stock and a cash payment of approximately $357,000 to WILLC. The assets purchased included approximately $352,000 in cash that Interland received from WILLC at closing.

Item 2. Management’s Discussion ~~And~~and Analysis Ofof Financial Condition ~~And~~and Results Of of Operations

~~Statements~~Special ~~contained~~Note inAbout 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 its future liquidity needs, its expectations regarding its future operating results including its planned increase in its revenue 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~~Looking ~~statements involve a number of risks and uncertainties, and include~~Statements ~~risks associated with our target markets and risks pertaining to our ability to successfully~~ integrate the operations and personnel of the recent acquisitions. Factors that could cause actual results to differ materially from expected results are identified in “Risk Factors” below, and in the Company’s annual report on Form 10-K for the year ended August 31, 2005 and in the Company’s other filings with the Securities and Exchange Commission. All quarterly references are to the Company’s fiscal periods ended November 30, 2005, or November 30, 2004, unless otherwise indicated. All annual references are also on a fiscal August 31st year-end basis, unless otherwise indicated. All tabular dollar amounts are stated in thousands.

Certain statements in Management’s Discussion and Analysis, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section of this report titled “Risk Factors” (see Part II, Item 1A). We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Overview

~~Interland~~Web.com, Inc. (NASDAQ:~~INLD~~ WWWW), is a leading ~~provider~~destination offor simple yet powerful solutions for websites and web services. ~~focused~~We ~~on helping~~offer ~~small~~do-it-yourself and ~~medium-sized~~professional ~~businesses~~website ~~(“SMBs”)~~design, ~~achieve~~website hosting, ~~success~~eCommerce, ~~online~~web marketing, and eMail. ~~Interland~~Since ~~offers~~1995, awe ~~wide~~have been helping individuals and ~~selection~~small businesses leverage the power of ~~online~~the ~~services,~~Internet ~~including~~to ~~Web~~build ~~hosting,~~a ~~eCommerce,~~web ~~applications~~presence. ~~hosting~~In ~~website development~~fact, ~~online~~more ~~marketing~~than four ~~and~~million ~~optimization~~websites ~~tools~~have been built or hosted using Web.com ~~The~~proprietary ~~current~~tools, services and patented technology. Our Web hosting business was formed through ~~the~~several company and account acquisitions that occurred from ~~October~~ 2001 through ~~June 2003~~2006.

~~Interland~~Web.com understands that ~~small~~people ~~business owners~~ want to ~~use~~leverage the power of the Internet to express themselves or to grow their business, but don’t typically have the time, resources or technical expertise to create, ~~develop~~manage anand ~~online~~promote ~~presence that~~a ~~attracts~~successful ~~prospects~~website. ~~and~~To ~~converts~~address ~~them~~the ~~into~~market’s ~~customers.~~growing ~~Even~~demands, ~~fewer~~we ~~have~~ offer a ~~clear~~virtual ~~understanding~~one-stop-shop of ~~how~~ ~~the~~simple, ~~Internet~~feature-rich ~~can~~web betools aand ~~central~~services ~~business~~including ~~tool~~do-it-yourself toand professional ~~manage~~website ~~and~~design, ~~serve~~website ~~those~~hosting, ~~customers.~~eCommerce, ~~Interland offers~~web amarketing, ~~variety~~and ofeMail. ~~integrated~~As ~~online~~one ~~tools~~of ~~and~~the longest-standing ~~services~~leaders ~~including~~in the website ~~design~~hosting ~~and~~industry, ~~publishing~~Web.com offers powerful, ~~hosting,~~ ~~email~~proprietary, point-and-click ~~domain~~technologies ~~registration,~~and ~~online~~expert ~~marketing~~support ~~tools~~professionals ~~and~~to ~~merchant~~ensure ~~services~~simplicity ~~specifically~~and ease-of-use ~~designed~~at ~~for~~every ~~small~~step ~~business~~of ~~owners~~the process.

~~Interland’s~~Key ~~core products are standardized, scalable managed hosting services that place numerous~~Metrics customers on a single shared server – a cost benefit that is passed along to the customer. Starter packages are designed for websites with relatively low volumes of traffic and allow customers to establish an online presence at minimal cost. Interland’s managed hosting services feature easy-to-use control panels and extensive on-line documentation that allow customers to control their own applications. Furthermore, customers who purchase entry-level plans can easily upgrade to more full-featured services as their needs evolve.

~~Interland’s~~As ~~hosting services are sold stand-alone or bundled with a suite~~ of ~~website~~March 31, ~~tools~~2007 ~~and services.~~we ~~The~~had ~~Company~~approximately ~~recognizes revenues as these services are provided. Interland’s do-it-yourself Sitebuilder tool enables even non-technical SMB customers to design~~158,000 ~~publish~~paid ~~and manage~~hosting asubscribers ~~professional website easily and at a fraction of the time and cost~~ compared to ~~custom-designed~~approximately ~~sites built by designers or web development firms. Additionally~~149,000 ~~Interland~~subscribers ~~offers custom~~as ~~website~~of ~~design services for customers who prefer to outsource website design and maintenance~~March 31, ~~but~~2006. ~~who~~This ~~want~~increase ais ~~more~~primarily ~~cost-effective~~due ~~alternative~~ to ~~traditional web design firms.~~our ~~Packaged~~focus ~~together~~on ~~with~~acquiring anew ~~comprehensive~~subscribers ~~variety~~at ofcompetitive ~~ecommerce,~~prices ~~marketing~~ and ~~promotional~~up-selling ~~tools, Interland’s~~our ~~website offerings provide SMB customers a turn~~value-~~key~~added ~~solution to establishing and~~services. ~~promoting their businesses online~~

~~Interland~~Average ~~also~~Monthly ~~makes~~Customer ~~available~~Churn ~~other~~(“Churn”) ~~complementary~~was ~~products~~3.1% and ~~services~~2.0% ~~including~~for ~~domain~~the ~~name registration~~quarters ended March 31, 2007 and ~~technical~~2006, ~~consulting~~respectively. The ~~Company~~increase ~~believes~~in ~~these~~churn ~~value-added~~is ~~products~~directly ~~and~~related to a substantial increase in the ~~services~~number ~~enable~~of subscribers. As the subscriber base increases, the percentage of customers in the early stage of their life cycle increases proportionally. Also, in the early stages of a ~~truly~~contract ~~turn-key~~term, the ~~website~~churn ~~solution~~ratio is much higher than that for ~~customers~~accounts tothat ~~create~~have been in place for longer periods. This combination of incremental subscriber additions and ~~maintain~~related anew ~~successful~~account turnover ratios result ~~Web~~in ~~presence~~a higher overall churn percentage. ~~The~~Churn ~~Company~~is ~~believes~~calculated ~~that~~as the ~~outsourcing~~number of ~~these~~subscribers ~~functions~~cancelled during isthe aperiod ~~desirable~~divided ~~and~~by the sum of the number of subscribers at the beginning of the period ~~increasingly~~plus ~~preferred~~the ~~alternative~~gross ~~for~~number ~~SMBs~~of subscribers added during the period, divided by the number of months in the period.

~~Interland~~Subscriber ~~has~~Acquisition ~~established~~Cost ~~and~~(“SAC”) ~~intends~~was to$117 ~~continue~~and to$103 ~~develop~~for ~~relationships~~the ~~with~~quarters ~~leading~~ended ~~technology providers~~March 31, ~~including~~2007 ~~major software~~and 2006, ~~hardware,~~respectively. ~~development~~The ~~and~~increase ~~Internet~~in ~~marketing~~SAC ~~organizations,~~is primarily attributed to ~~enhance~~ ~~the~~a ~~design~~corresponding increase in marketing and ~~sales~~testing of ~~its~~new ~~products~~ad ~~and~~campaigns. Subscriber Acquisition Cost is calculated as the media costs, calculated in accordance with GAAP, divided by gross subscriber additions other than through acquisitions during the period.

Average Revenue per User (“ARPU”) was $26.57 and $26.78 for the quarters ended March 31, 2007 and 2006, respectively. We continue to monitor ARPU with a view to increasing this metric as it is a driver of customer lifetime value. ARPU is calculated using the GAAP revenue for the quarter reported divided by the average number of subscribers for the period.

~~services.~~Results These relationships enable the Company to quickly gain access to innovative technologies, to provide more creative solutions for its customers, and to allow it to offer customers resources. The Company is also able to build upon the research, development and additional expertise of ~~these~~Continuing ~~companies in developing and launching new products. The Company~~Operations believes that these relationships will enable it to continue to provide its customers with the necessary tools to create, host and maintain a successful Web presence and to have access to sophisticated eCommerce and applications solutions.

~~Interland’s~~Comparison sales and marketing strategy focuses on providing demonstrable benefits to SMBs. The Company has identified target market segments and seeks to match each segment’s particular needs with a specific subset of the ~~Company’s~~Three ~~offered~~Months ~~products,~~Ended ~~pricing~~March 31, ~~and~~2007 ~~selling initiatives. The Company sells products through traditional~~ and ~~online marketing~~March 31, ~~as well as through a number of~~2006 ~~distribution partners.~~

~~Interland’s~~The ~~products~~loss ~~are~~from ~~sold~~continuing ~~directly~~operations decreased $4.5 million, or 87.6% to ~~business~~$0.7 million ~~customers~~for ~~and~~the ~~through~~three months ~~distribution~~ended ~~partners~~March 31, 2007 from $5.2 million for the three months ended March 31, 2006. This ~~Interland~~decrease ~~offers~~is aprimarily ~~number~~due ofto ~~products~~decreased ~~across~~stock-based ~~its~~compensation ~~channels~~and ofoperating ~~distribution.~~costs ~~Interland’s~~during ~~distribution~~the ~~partners~~current ~~now~~period ~~include~~compared ~~telecommunications~~to ~~companies~~the prior year, ~~Yellow~~offset ~~Pages~~by ~~publishers~~increased sales and marketing expenses in the current period. The basic and diluted loss per share from continuing operations decreased $0.28 per share to $0.04, ~~credit~~or ~~card~~87.5% ~~companies~~for the three months ended March 31, 2007 from $0.32 per share for the asthree ~~well~~months asended ~~local~~March 31, ~~resellers~~2006.

~~Results~~Revenues. OfTotal ~~Continuing~~revenues ~~Operations~~increased $0.7 million, or 6.3%, to $13.0 million for the three months ended March 31, 2007 from $12.3 million for the three months ended March 31, 2006. The revenue increase was primarily due to organic growth resulting from additional unit growth and price optimization, along with value up-selling of our website design and eCommerce products as well as other add-ons, offset by a decline in revenue attributable to a partner program with Verizon which ended in 2006.

The Company’s consolidated financial information presents the net effect of discontinued operations separate from the results of the Company’s continuing operations.


	For the Three Months Ended March 31,
	2007		2006
Hosting revenue	$	12,477	$	11,482
Other revenue		555		780

Total revenue	$	13,032	$	12,262

~~Comparison~~Hosting Ofrevenues ~~The~~increased ~~Quarters~~$1.0 million, ~~Ended~~or ~~November~~8.7%, for the three months ended March 3031, ~~2005~~2007, ~~And~~when compared ~~2004~~to the period ended March 31, 2006. Hosting revenues are comprised of shared hosting services and domain name registrations. The increase in hosting revenues is primarily attributable to organic growth.

~~The~~Other ~~loss~~revenues ~~from continuing operations~~ decreased $0.62 million, or 1928.08%, ~~to $2.6 million~~ for the ~~quarter~~ three months ended ~~November~~March 3031, ~~2005~~2007, ~~from~~when compared ~~$3.2 million~~to ~~for~~ the ~~quarter~~period ended ~~November~~March 3031, ~~2004~~2006. ~~The basic~~Other ~~and~~revenues ~~diluted~~are ~~loss~~primarily ~~per~~comprised ~~share~~of ~~decreased $0.04 per share, or 20.0% for the quarter ended November~~licensing 30fees, ~~2005~~royalties ~~when~~and ~~compared~~consulting ~~to the same period of the prior fiscal year~~services.

~~Revenues~~Operating Costs and Expenses

~~Total~~A ~~revenues~~summary ~~decreased~~of ~~$10.9 million, or 47.3%, to $12.1 million for~~ the ~~quarter~~total ~~ended~~operating ~~November 30,~~costs ~~2005~~and ~~from~~expenses ~~$23.1 million~~is ~~for~~presented ~~the quarter ended November 30, 2004.~~below:

	For the quarter ended
	For the Three Months Ended March 31,
	November 30,		November 30,
	2007		2006
	2005		2004
Network operating costs		2,154		2,384
Hosting revenue	$	11,320	$	21,910
Sales and marketing		4,699		3,150
Other revenue		828		1,151
Technical support		1,289		1,722
Total revenue	$	12,148	$	23,061
General and administrative		5,078		9,911
Bad debt expense		562		277
Depreciation and amortization		1,072		1,134
Restructuring costs		—		43
Total operating costs and expenses	$	14,854	$	18,621

~~When~~Network ~~compared~~Operating toCosts. ~~the~~Network ~~same~~operating ~~period~~costs ofwere ~~the prior fiscal year, hosting revenues decreased~~ $102.6 2 million, orand 48$2.~~3%,~~4 million for the three months ended ~~November~~March 3031, ~~2005.~~2007 ~~Hosting revenues are comprised of shared application hosting products~~ and ~~domain~~2006, ~~name registrations~~respectively. ~~The~~This ~~significant~~decrease ~~decline in hosting revenues is primarily attributable to the sale in May 2005~~ of ~~32,000 shared hosting accounts as well as accounts for customers who purchased shared hosting services under the Hostcentric brand and in August~~$0.2 ~~2005~~million, ~~Interland~~or ~~sold approximately 7~~9.6%,~~200~~ ~~dedicated web server~~is ~~accounts~~attributable to andecreases ~~unrelated~~in ~~buyer.~~labor ~~The combined sales of accounts~~ and ~~account~~employee-related ~~cancellations~~costs ~~net~~ of ~~new customers~~approximately ~~obtained~~$0.1 million ~~through sales~~ and ~~marketing activities resulted in the decrease mentioned above. Account cancellations occur as~~ a ~~result of: a) customer action; b) termination by the Company for~~ ~~non-payment;~~decrease orin c)professional ~~termination~~fees ~~by the Company as a result~~ of aapproximately ~~decision to no longer provide a particular service~~$0.1 million.

~~Other~~Sales ~~revenues~~and ~~decreased~~Marketing. Sales and marketing expenses were $04.37 million, orand 28$3.~~1%,~~2 million for the three months ended ~~November~~March 3031, ~~2005,~~2007 ~~when compared~~and to2006, ~~the~~respectively. ~~same~~This ~~period~~increase of ~~the~~approximately ~~prior fiscal year~~$1. ~~Other revenues are primarily comprised of consulting~~5 million, ~~bandwidth transfer overage billings, co-location services and Wed-based business~~ ~~solution~~or ~~services~~49.2%, ~~The decline in other revenues~~ is primarily ~~attributable~~due to increased ~~the~~media ~~sales~~advertising ~~of accounts~~expenditures of ~~the~~$0.9 million ~~dedicated~~and ~~assets~~increased labor and ~~the~~ employee-related costs ~~non-hosting~~of ~~revenues~~$0.4 million. ~~such~~During asthe ~~bandwidth transfer~~quarter ~~overage billings.~~

Asended ~~of November~~March 3031, ~~2005,~~2007 ~~the~~we ~~Company~~spent ~~had~~ approximately ~~137,000 paid shared hosting customer accounts compared to approximately 137,000 paid shared hosting customer accounts as of August 31, 2005. Customer churn was~~ $2.3~~% and 2.5% for the quarters ended November~~ ~~30, 2005 and August 31,~~million ~~2005,~~on ~~respectively~~media advertising. ~~Subscriber~~This ~~Acquisition~~significant ~~Cost~~increase ~~was~~over ~~$112~~previous ~~and $173 for the~~ quarters ~~ended~~is ~~November 30,~~expected ~~2005~~to ~~and August 31, 2005, respectively. The Company’s~~generate ~~Average~~additional ~~Revenue~~organic ~~Per~~growth ~~User~~in ~~(“ARPU”)~~our ~~was~~subscriber ~~$27~~base.~~21 and $27.64 for the quarters ended November 30, 2005~~ ~~and August 31, 2005, respectively.~~

~~Operating~~Technical ~~Costs~~Support. Technical support expenses were $1.3 million and ~~Expenses~~$1.7 million for the three months ended March 31, 2007 and 2006, respectively. The decrease of $0.4 million, or 25.1%, is primarily due to decreased labor and employee-related costs of $0.2 million and a decrease in outsourcing costs of $0.2 million. These cost reductions were the direct result of our platform consolidation efforts.

~~Network~~General ~~Operating~~and ~~Costs~~Administrative. General and administrative expenses were $5.1 million and $9.9 million for the three months ended March 31, 2007 and 2006, respectively. The decrease of $4.8 million, or 48.8%, is primarily attributable to a reduction of $4.8 million in stock-based compensation expense. Legal fees increased by $0.3 million in the current quarter, and were offset by savings in labor and insurance expense. Current quarter legal fees were $0.8 million.

~~Network~~Stock-based ~~operating~~compensation ~~costs~~represents ~~were~~non-cash ~~$2.1 million~~compensation ~~compared~~expense related to $5stock options and restricted stock, which were granted under several stock incentive plans.~~7 million~~ ~~for~~For the three months ~~ended~~ ~~November~~ended March 3031, ~~2005~~2007 and ~~2004~~2006, ~~respectively.~~compensation ~~This~~expense ~~decrease~~attributable ofto stock-based compensation was $30.65 million, orand ~~62.~~$5%.3 million, isrespectively. ~~attributable~~On March 31, 2006 the Compensation Committee of the ~~primarily~~Board toof aDirectors $0approved the acceleration of the remaining 1.96 million ~~reduction~~unvested instock ~~bandwidth~~options ~~connectivity~~of the ~~costs, a $~~1.49 million ~~reduction~~granted in ~~labor~~ ~~costs~~July 2005, and aalso ~~$0.7 million~~granted ~~reduction~~an inadditional ~~software~~677,500 ~~costs~~stock ~~primarily~~options ~~attributable~~ to our board of directors and management team that were fully vested upon their grant date. By accelerating the ~~sale~~vesting of these options in March 2006, we reduced future reported compensation ~~the~~expense, ~~Hostcentric~~before ~~accounts~~tax, ~~and~~by ~~the~~a ~~dedicated~~significant ~~assets~~amount ~~sold~~over tothe ~~Peer~~remainder 1of inthe ~~August 2005~~vesting periods.

~~Sales~~Included within general and ~~Marketing~~administrative are expenses related to our executives, human resources, finance and accounting, legal, business development, research & development, information technologies, product development and quality assurance teams.

~~Sales~~Bad ~~and~~Debt ~~marketing~~Expense. Bad debt expenses were $20.56 million ~~compared~~and to $4.0.3 million for the three months ended ~~November~~March 3031, ~~2005~~2007 and ~~2004,~~2006 respectively. The ~~Company’s~~increase ~~sales~~in ~~and~~bad ~~marketing~~debt ~~expenses~~expense asis aprimarily attributable ~~percentage~~to ofincreased ~~revenues~~churn ~~were~~during ~~20.7% for~~ the ~~quarter~~period, aswhich ~~compared~~was toa ~~17.2%~~direct inresult ~~the~~of ~~same~~increased ~~period~~subscriber ~~of the~~count ~~prior~~resulting ~~fiscal~~from ~~year~~organic growth. The ~~This~~combination ~~decrease~~ of ~~$1.4 million,~~incremental orsubscriber ~~36.5%,~~additions isand ~~primarily~~related ~~due~~new toaccount ~~the~~turnover ~~sale~~ratios ~~of accounts~~result in both ~~fiscal~~higher ~~2005~~churn and ahigher ~~decrease~~bad indebt ~~advertising costs related to functional centralization~~expense, ~~greater~~ ~~use~~both of ~~on-line~~which ~~advertising~~are ~~and~~expected ~~customer~~as ~~initiated on-line sales, and~~ a ~~reduction~~result ~~in reliance~~of ~~on more expensive print advertising and direct mail~~growth.

~~Technical~~Depreciation ~~Support~~and Amortization. Depreciation and amortization expenses were virtually unchanged at $1.1 million for the three months ended March 31, 2007 and 2006.

~~Technical~~Interest ~~support~~Income ~~expenses~~(Expense), ~~were $1~~Net.~~8 million~~ ~~compared~~Interest toincome was virtually unchanged at $30.83 million for the three months ended ~~November~~ March 3031, ~~2005~~2007 and ~~2004, respectively~~2006. ~~The~~Interest ~~Company’s~~income ~~technical~~(expense), ~~support expenses as a percentage of~~ net ~~revenues~~consists ~~were 14.8% for the quarter as compared to 16.5% in the same period~~ of ~~the prior~~interest ~~fiscal~~income ~~year.~~earned ~~The~~on ~~overall~~our ~~decrease~~combined ofcash ~~$2.0 million or 52.7% is primarily related to the Company’s continued reduction in customer call volume~~ and ~~contacts.~~cash ~~This~~equivalents, ~~reduction~~short-term ~~has occurred largely in part to outsourcing initiatives which began in fiscal year 2005~~investments, ~~as well as a continued focus on reducing customer contacts through increased first call resolution rates. These operational efficiencies yielded decreases of $0.3 million in contract labor~~ and ~~consultants, $0.1 million in~~restricted ~~telephone expenses~~investments, ~~$0.5 million~~net inof ~~facilities~~interest ~~overhead~~expense ~~and~~on ~~$1.6 million in salaries and benefits~~debt, ~~offset~~ byprimarily annotes ~~increase of $0~~payable.~~6 million in service agreement fees.~~

~~General~~Income ~~and~~Taxes. ~~Administrative~~During the three months ended March 31, 2007, a tax benefit of $0.9 million was recognized in continuing operations which partially offsets income tax expense of $1.2 recognized in discontinued operations due to a $3.4 million net gain on a litigation settlement.

~~General~~During ~~and administrative expenses were $5.2 million compared to $7.1 million for~~ the three months ended ~~November~~March 3031, ~~2005~~2006 ~~and~~we ~~2004~~resolved ~~respectively.~~several ~~This~~income ~~decrease~~tax ofaudits ~~$1.9 million~~which orallowed ~~26.5% is primarily~~us ~~attributable~~ to ~~the~~record ~~$1.4 million~~refunds ~~decrease in legal fees and legal settlement, which included the decrease~~ of ~~legal reserves of~~ $0.84 million ~~due~~from ~~to a favorable court verdict. Additional decreases are due to~~ the ~~sale~~IRS ofand ~~accounts~~release ~~in fiscal 2005, resulting in~~ $0.5 million ~~decrease~~of inreserves ~~technical~~that ~~and~~were on ~~professional~~our ~~fees~~books, ~~$0.2 million~~resulting ~~decrease~~ in ~~credit~~a ~~card fees, and~~ $0.19 million ~~decrease~~tax ~~in insurance expenses~~benefit. ~~Partially offsetting these~~ ~~reductions were increases in contract labor expense of $0.4 million, and an increase of $0.1 in staff training.~~

~~Bad~~Results ~~Debt~~of ~~Expense~~Discontinued Operations

~~Bad~~Due ~~debt~~to ~~expenses~~the ~~were~~litigation settlement described below, the basic and diluted income per share from discontinued operations increased $0.~~3 million~~15 ~~compared~~per share to $0.~~4 million~~13 for the three months ended ~~November 30~~March 31, 2007 ~~2005~~from ~~and~~a ~~2004~~loss ~~respectively~~of $0.02 ~~The~~per ~~decrease~~share infor ~~bad debt expense is attributable to~~ the ~~reduced customer~~three ~~base~~months ~~after~~ended ~~the~~March 31, ~~sale of accounts in fiscal 2005~~2006.

~~Depreciation~~Certain Underwriters/Lloyds Settlement. In January 2007, we entered into a settlement agreement and ~~Amortization~~mutual release of claims with Certain Underwriters at Lloyd’s of London in resolution of our 2005 suit for recovery of attorney’s fees and other amounts related to the settlement of an earlier case for labor and employment claims arising in the years 2000 and 2001 and for which we were insured under a Directors, Officers and Company Liability Insurance Policy. Because the proceeds relate to discontinued operations, the net settlement of approximately $3.6 million (gross settlement of $6.0 million, less $2.4 million in legal fees) is recorded as income from discontinued operations in our March 31, 2007 financial statements. For the three months ended March 31, 2007 additional legal fees related to this settlement were $0.1 million. Accrued legal fees related to this case were less than $0.1 million at March 31, 2007.

~~Depreciation~~PC ~~and~~Systems. ~~amortization~~In ~~expenses~~fiscal ~~were~~2001 ~~$1.4 million~~we ~~compared~~discontinued tothe ~~$5.9 million~~operations ~~for~~of ~~the~~our ~~three months~~PC ~~ended~~Systems ~~November 30~~business segment, which ~~2005~~was ~~and~~accounted ~~2004,~~for ~~respectively.~~as ~~The~~discontinued ~~decrease~~operations in ~~depreciation~~accordance ~~expense~~with isAccounting aPrinciples Board ~~result~~Opinion of(APB) No. 30, “Reporting the ~~disposition~~Results of ~~assets~~Operations ~~related~~— toReporting the ~~sale~~Effects of ~~the~~Disposal ~~dedicated~~of ~~accounts~~a Segment inof ~~August 2005.~~a Business, and Extraordinary, Unusual and Infrequently

Interest Income (Expense), net

~~Interest~~Occurring ~~income~~Events ~~was $0~~and Transactions.~~2 million~~” ~~compared~~A toloss ~~less~~of ~~than~~ $0.13 million was recognized for the three months ended ~~November~~ March 3031, ~~2005 and 2004~~2006, which ~~respectively.~~was ~~Interest~~primarily ~~income~~attributable ~~(expense),~~to ~~net~~legal ~~consists~~fees. ofThere ~~interest income~~were ~~earned~~no onlegal ~~the~~fees ~~Company’s~~or ~~combined~~acrruals ~~cash~~related ~~and~~to ~~cash equivalents, short-term investments, and~~PC ~~restricted~~Systems ~~investments~~in ~~less~~our ~~interest~~current ~~expense~~quarter onended ~~debt~~March 31, ~~primarily capital leases~~2007.

~~Restructuring~~Liquidity and ~~Facility~~Capital ~~Exit Costs~~Resources

~~Restructuring~~As ~~costs~~of ~~were~~March 31, 2007, we had $116.60 million ~~for~~in ~~the~~cash ~~three~~and ~~months~~cash ~~ended~~equivalents ~~November 30,~~as ~~2005~~noted ~~with~~on noour ~~comparative~~consolidated ~~charge~~balance ~~for~~sheet ~~the~~and ~~same~~statement ~~period~~of incash ~~the~~flows. ~~prior~~In ~~fiscal~~addition, ~~year.~~we ~~The~~had ~~increase~~$7.6 million in ~~expense~~short- ~~relates to~~and ~~termination~~long-term ~~benefits~~securities ~~paid to employees~~ and ~~exit~~restricted ~~costs~~investments, for ~~vacating~~ a ~~portion~~total of ~~the~~$23.6 million ~~office~~of ~~space~~restricted and ~~leased~~unrestricted bycash ~~the~~and ~~company,~~investments. ~~partially~~This ~~offset~~represents byan aincrease of $0.2.5 million ~~reduction~~or of11.6% compared to a ~~bandwidth~~total ~~termination reserve~~of $21.1 million as of December 31, 2006.

~~Net~~On ~~Cash~~a ~~Used~~comparative inbasis, ~~Operating~~cash ~~Activities~~provided ~~and~~by ~~Earnings~~operating ~~from~~activities ~~Continuing~~of ~~Operations~~continuing ~~Before~~operations ~~Interest~~decreased $0.1 million to $0.2 million for the three months ended March 31, 2007 compared to $0.3 million of ~~Taxes~~cash provided by operating activities for the period ended March 31, ~~Depreciation~~2006. ~~and~~The ~~Amortization~~decrease ~~(EBITDA)~~in cash provided by continuing operations is primarily due to fluctuations in working capital.

~~EBITDA~~Cash isused ~~defined~~in asinvesting ~~net~~activities ~~income~~remained ~~(loss) less~~virtually ~~(i)~~unchanged at $0.4 ~~provision~~million for ~~income~~the ~~taxes,~~three ~~(ii) interest income or~~months ~~expense,~~ended ~~and (iii)~~March ~~depreciation~~31, ~~and~~2007 ~~amortization. EBITDA is not an indicator of financial performance under generally accepted accounting principles~~ and ~~may not be comparable to similarly captioned information reported by other companies~~2006. In ~~addition,~~the itcurrent ~~does not replace net income (loss)~~quarter, ~~operating~~an ~~income~~increase ~~(loss),~~in orexpenditures ~~cash~~for ~~flows from operating activities as indicators of operating performance. The effect of taxes and interest on Interland’s net loss is not significant~~property, ~~but~~ ~~depreciation~~plant and ~~amortization,~~equipment ~~primarily as a result~~ of ~~acquisitions, is significant~~$0.2 million ~~The~~was ~~Company believes~~offset ~~that~~by ~~measuring~~a ~~the~~$0.2 million ~~performance~~decrease ~~of the business without regard to non-cash depreciation and amortization can make trends~~ in ~~operating results more readily apparent, and when considered with~~restricted ~~other information, assist investors and other users of the Company’s financial statements who wish to evaluate the Company’s ability to generate future cash flows~~investments.

~~The~~Cash ~~following~~used ~~table~~in ~~reflects~~financing ~~the~~activities ~~calculation~~increased ofby ~~EBITDA~~less ~~from~~than ~~continuing~~$0.1 million ~~operations~~to ~~and~~$0.4 million for the three ~~reconciliation~~months ended March 31, 2007 compared to ~~net~~$0.3 million ~~cash~~used ~~provided~~in byfinancing (activities for the period ended March 31, 2006. The increase in cash used in) ~~operating~~financing activities: is primarily due to the reduction of overall debt and capital lease obligations offset by proceeds from the issuance of common stock.

	For the quarter ended
	November 30,			November 30,
	2005			2004
	in thousands
Net loss	$	(2,588	)	$	(3,196	)
Depreciation and amortization		1,431			5,877
Interest expense (income)		(243	)		(41	)
Discontinued operations		122			(601	)
EBITDA	$	(1,278	)	$	2,039
Interest income / (expense)		243			41
Provision for bad debts		276			440
Restructuring charges		1,626			—
Loss on the sale of assets		—			(13	)
Other non-cash adjustments		385			158
Changes in assets and liabilities:
Cash received from sale of dedicated assets		11,267			—
Receivables, net		(719	)		(490	)
Other current assets		642			301
Accounts payable, accrued expenses, and deferred revenue		(4,326	)		(2,583	)
Net cash provided by (used in) operating activities	$	8,116		$	(107	)

Cash provided by discontinued operations increased to $3.3 million, an increase of $3.3 million for the three months ended March 31, 2007 compared to less than $0.1 million of cash used to fund discontinued operations during the period ended March 31, 2006. The increase in cash provided by discontinued operations was due to the settlement in January 2007 of our litigation with Certain Underwriters at Lloyd’s of London, offset by costs of settlement.

~~For~~In ~~the~~February 2004, ~~quarter~~we ~~ended~~executed ~~November~~a five-year promissory note with US Bancorp Oliver-Allen Technology Leasing for $4.8 30million. As of March 31, ~~2005~~2007, the ~~Company’s~~principal ~~EBITDA~~balance ~~decreased~~on the promissory note was $31.38 million. ~~to negative~~We pledged $15.30 million ~~compared~~as tocollateral afor ~~positive~~this promissory note; this amount will gradually decrease until the agreement terminates in February 2009. As of March 31, 2007, the amount of collateral is $2.0 million, which is included in restricted cash. The collateral required under the ~~same~~agreement ~~period~~prevents us from utilizing the related cash and cash equivalents until all of our obligations under the ~~prior~~note ~~year~~are satisfied. ~~This~~ ~~decrease~~The ispromissory ~~primarily~~note ~~due~~bears toan ~~the~~interest ~~sale~~rate of ~~the~~6.75% and ~~Company’s~~requires monthly payments of approximately $94,000 over a five year period ending in January 2009.

At the closing of the Web Internet LLC acquisition in December 2005, we assumed approximately $2.3 million in outstanding indebtedness of Web Internet to Web Service Company, Inc. and that indebtedness was amended and restated in that certain Amended and Restated Line of Credit Note and Loan Agreement. The Web Service note bears interest at the rate of 3% per year and is to be repaid in monthly installments of approximately $68,000 over a three year period ending December 2008. As of March 31, 2007, the principal balance on the indebtedness was $1.4 million.

During the three months ended March 31, 2007 and 2006, we made capital expenditures of $0.7 million and $0.9 million, respectively, primarily related to network storage equipment and servers.

Our web hosting business has historically incurred net losses and losses from operations. Our future operations are dependent upon our ability to achieve and sustain positive cash flow prior to the depletion of cash resources. We have reduced our level of cash requirements through a decrease in capital purchases with the sale of our dedicated accounts and related assets and by improving sales. We have also reduced cash outlays for payments associated with prior integration and discontinued operation liabilities and have reduced debt payments due to the buyout of capital lease obligations during the prior fiscal year. We expect to continue to have negative cash flows as we continue to execute our business plan. There can be no assurance that our continuing efforts to stabilize or increase revenue will be successful or that we will be able to continue as a going concern. If we are unable to successfully execute our business plan, we may require additional capital, which may not be available on suitable terms. Nonetheless, management believes we have adequate cash and liquid resources to fund operations and planned capital expenditures through the next 12 months.

~~dedicated~~Off-Balance ~~accounts~~Sheet ~~and related assets, resulting in additional restructuring charges and a reduction in revenues, partially offset by~~Arrangements ~~reductions in other operating expenses.~~

As of March 31, 2007, we did not have any relationships with unconsolidated entities or financial ~~Results~~partnerships, such as entities often referred to as structured finance, variable interest or special purpose entities, which would have been established for the purpose of ~~Discontinued~~facilitating off-balance ~~Operations~~sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

PCRelated ~~Systems~~Party Transactions

InWe ~~fiscal~~purchase ~~2001~~online ~~the~~marketing ~~Company~~services, ~~discontinued~~including ~~the~~online ~~operations~~advertising, offrom ~~its~~various PCvendors ~~Systems~~that ~~business~~are managed ~~segment~~by The Search Agency, Inc. (“TSA”), an entity in which Jeffrey M. Stibel, our Chief ~~was~~Executive ~~accounted~~Officer, ~~for~~has as ~~discontinued~~an ~~operations~~equity ininterest ~~accordance~~and ~~with~~is ~~Accounting~~also ~~Principles~~the ~~Board~~chairman ~~Opinion (APB) No~~of the board. ~~30,~~ ~~“Reporting~~Purchases ~~the~~of online ~~Results~~marketing services are made pursuant to our standard form of ~~Operations~~purchase —order. ~~Reporting~~There is no minimum commitment and the ~~Effects~~arrangement ofmay ~~Disposal~~be ofterminated aat ~~Segment~~any time. Fees are believed to be competitive with those of aalternative ~~Business,~~providers. ~~and~~The ~~Extraordinary,~~total ~~Unusual~~amount of TSA fees expensed were $0.1 million and ~~Infrequently~~less ~~Occurring~~than ~~Events~~$0.1 million for the three months ended March 31, 2007 and ~~Transactions~~2006, respectively.”

~~For~~Critical ~~the~~Accounting ~~three~~Policies months ended November 30, 2005 a loss of $0.1 million was recognized compared to a gain of $0.6 million for the three months ended November 30, 2004. The loss is primarily attributable to legal fees in defense and ~~settlement of Micron PC legal matters.~~Estimates

~~The~~There ~~Company~~have ~~has~~been ~~sales~~no ~~and~~material ~~use~~changes ~~tax~~to ~~assessments~~our ~~and~~critical ~~audit~~accounting ~~reserves~~policies ofand ~~$0.2 million,~~estimates ~~$0.7 million~~from inthe ~~contingent~~information ~~liabilities,~~provided ~~and~~in ~~$0.2~~Item ~~million~~2, ~~for~~“Management’s ~~other~~Discussion ~~liabilities~~and ~~related~~Analysis toof ~~the~~Financial ~~disposal~~Condition ofand ~~discontinued~~Results ~~operations~~of ~~that~~Operations,” ~~are~~ included in ~~accrued~~our ~~liabilities~~Annual Report on ~~the~~Form ~~Company’s~~10-K ~~consolidated balance~~for ~~sheet~~the asfiscal ofyear ~~November~~ended December 3031, ~~2005.~~2006, except as follows:

FIN 48 – We account for uncertain tax positions in accordance with FASB Interpretation No. 48 – ~~Liquidity~~Accounting ~~and~~for ~~Capital~~Uncertainty ~~Resources~~in Income Taxes – an interpretation of FASB Statement No. 109 – Accounting for Income Taxes (“FIN 48”), which is discussed in Note 6 to our consolidated financial statements in this Form 10-Q.

AsRecently ofIssued ~~November 30,~~Accounting ~~2005, the Company had $23.3 million in cash and cash equivalents as noted on the~~Standards Company’s consolidated balance sheet and statement of cash flows. In addition, the Company had $9.3 million in short- and long-term restricted investments representing a total of $32.6 million of restricted and unrestricted cash and investments. This represents an increase of $6.2 million or 23.3% compared to August 31, 2005.

OnFor a ~~comparative~~discussion ~~basis, cash provided by operating activities~~ of ~~continuing~~recently ~~operations~~issued ~~increased $8.2 million~~accounting ~~to $8.1 million for the quarter ended November 30~~standards, ~~2005~~see ~~versus~~Note the $0.1 million of cash used in operating activities for the same period in the prior year. The increase in cash provided in continuing operations is primarily due to the receipt of the proceeds of $11.3 million for the sale of the dedicated web server accounts and servers on August 31, 2005. Cash used in investing activities decreased $0.3 million to $0.5 million used for the three months ended November 30, 2005 versus $0.8 million of cash used in investing activities for the same period in the prior year. The decrease in cash used in investing activities is primarily related to a reduction in the purchase of investments. Cash used in financing activities decreased $0.7 million or 78.2~~% to $0.2 million for the quarter ended November 30~~, ~~2005~~Summary ~~versus the $0.9 million~~ of ~~cash~~Significant ~~used~~Accounting in financing activities for the same period of prior year. The decrease in cash used in financing activities is primarily due to the reduction of overall debt and capital lease obligations. Cash used in discontinued operations increased $0.8 million to $1.0 million for the quarter ended November 30Policies, ~~2005 versus the $0.2 million of cash used~~ to ~~fund discontinued operations during~~ the ~~same~~Consolidated ~~period~~Financial ~~of the prior year~~Statements. ~~The increase in cash used was primarily due~~ ~~to the $0.9 million payment relating to the settlement agreement with Novell.~~

~~In February~~Item ~~2004, the Company executed a five-year promissory note with US Bancorp Oliver-Allen Technology Leasing for $4.8 million. As of November 30, 2005, the principal balance on the promissory note was $~~3.~~1 million.~~ ~~The~~Quantitative Company has pledged $5.0 million as collateral for this promissory note; this amount will gradually decrease until the agreement terminates in February 2009. As of November 30, 2005, the amount of collateral is $3.4 million. These restrictions prevent the Company from utilizing the related cash and ~~cash~~Qualitative ~~equivalents~~Disclosures ~~until~~About ~~all~~Market ~~of its obligations under~~Risk ~~the note are satisfied. The new promissory note bears an interest rate of 6.75% and requires monthly payments of $94,000 over the next five years beginning in February 2004.~~

~~During~~We had cash and cash equivalents, short-term marketable securities and restricted cash totaling $23.6 and $21.1 million at March 31, 2007 and December 31, 2006, respectively, which management believes to be reasonable approximations of their fair values. The unrestricted cash, cash equivalents and short-term marketable securities are held for working capital purposes and are invested primarily in money market funds. In general, money market funds are not subject to market risk because the ~~first~~interest ~~fiscal~~paid ~~quarter~~on such funds fluctuates with the prevailing interest rate. We are exposed to interest rate risk with respect to our investments in commercial paper. A change in the prevailing interest rates may cause the fair value of our investments to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the fair value of our investment may decline. To minimize this risk, we have historically held many investments until maturity, and as a result, we receive interest and principal amounts pursuant to the underlying agreements. As of March 31, 2007 and 2006, net unrealized losses in these investments were not material. We invest in short-term securities and, therefore, changes in short term interest rates impact the ~~Company~~amount ~~made~~of ~~capital~~interest income ~~expenditures~~included in the statements of $0operations.7 As of March ~~million~~31, 2007, approximately 98% of our ~~primarily~~liquid ~~related~~investments mature within three months and the remaining 2% mature within one year. We do not use derivative financial instruments in our investment portfolio, nor do we enter into investments for trading or speculative purposes. Due to ~~network~~the ~~storage~~short-term ~~equipment~~nature of our investments, we ~~servers~~believe ~~and~~that ~~personal~~we ~~computers~~do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income.

~~The~~We ~~Company’s~~are ~~Web~~also ~~hosting~~exposed ~~business has historically incurred net losses and losses from operations. The Company’s future operation is dependent upon its ability~~ to ~~achieve~~interest ~~and~~rate ~~sustain~~risk ~~positive~~with ~~cash flow~~respect ~~prior~~ to ~~the~~our ~~depletion~~fixed ofinterest ~~cash~~rate ~~resources~~debt. The ~~Company~~fair value ~~has~~of ~~reduced~~our ~~its~~long-term ~~level~~debt ofmay ~~cash requirements~~be ~~through~~adversely ~~decreases~~impacted indue ~~capital~~to ~~purchases~~a ~~with~~rise ~~the~~in ~~sale~~interest ofrates, ~~its~~but ~~dedicated accounts and~~such ~~related~~changes ~~assets~~would ~~and~~not byimpact ~~improving~~our ~~sales~~financial ~~and~~position, ~~reducing~~cash ~~churn.~~flows ~~The~~or ~~Company~~results ~~has~~of ~~also~~operations. ~~reduced cash~~Generally, ~~outlays~~the ~~for~~fair ~~payments~~market ~~associated~~value ~~with~~of ~~prior~~fixed ~~integration~~interest ~~and~~rate ~~discontinued operation liabilities and has reduced~~ debt ~~payments~~will ~~because~~increase ofas ~~the~~interest ~~buyout~~rates offall ~~capital~~and decrease ~~lease~~as ~~obligations~~interest ~~during~~rates ~~the prior fiscal year~~rise. The ~~Company~~estimated ~~expects~~fair tovalue ~~continue~~of toour ~~have~~long-term ~~negative~~debt ~~cash~~at ~~flows~~March 31, ~~as it continues to execute~~2007 onwas ~~its business plan~~$3.2 million, ~~There~~which ~~can~~management bebelieves ~~no assurance that Interland’s continuing efforts~~ to ~~stabilize or increase its revenue will~~ be ~~successful~~reasonable orapproximations ~~that~~of ~~the~~their ~~Company~~fair ~~will be able to continue as a going concern~~values. ~~If the Company is~~

Item 4. Controls and Procedures

Disclosure controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules

~~unable~~13a-15(e) toand ~~successfully~~15d-15(e) ~~execute~~under ~~its~~the ~~business~~Securities ~~plan~~Exchange Act of 1934, itas ~~may~~amended ~~require~~(the ~~additional~~“Exchange ~~capital,~~Act”)) ~~which~~as ~~may~~of ~~not be~~the ~~available~~end onof ~~suitable~~the ~~terms~~period covered by this report. Based ~~Nonetheless,~~on ~~management~~such ~~believes~~evaluation, itour ~~has~~Chief ~~adequate~~Executive ~~cash~~Officer and ~~liquid~~Chief Financial Officer have concluded ~~resources~~that, toas ~~fund~~of ~~operations~~the ~~and~~end ~~planned~~of ~~capital~~such ~~expenditures~~period, ~~through~~our atdisclosure ~~least~~controls ~~the~~and ~~next~~procedures ~~12 months~~were effective.

~~Item 3~~Internal Control over Financial Reporting. ~~Quantitative~~There ~~And~~have ~~Qualitative~~not ~~Disclosures~~been ~~About~~any ~~Market~~changes ~~Risk~~in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~Substantially~~Inherent ~~all of the Company’s liquid investments and a majority of its debt are at fixed~~Limitations interest rates, and therefore the fair value of these instruments is affected by changes in market interest rates. As of November 30, 2005, approximately 99.8% of the Company’s liquid investments mature within three months and 0.2% mature within one year. The majority of the Company’s long-term debt is comprised of fixed-rate capital leases used to finance equipment purchases. In this regard the underlying debt instruments are not marketable and, therefore, there is no associated market risk. As of November 30, 2005, management believes the reported amounts of liquid investments and debt to be reasonable approximations of their fair values. Generally, the fair market value of fixed interest rate investment securities will increase as interest rates fall and decrease as interest rates rise. The Company does not use derivative financial instruments in its investment portfolio. The portfolio has been primarily comprised of commercial paper rated A1/P1, bank certificates rated AA or better, and corporate medium-term notes rated AA or better. At November 30, 2005, the Company’s investment portfolio included fixed rate securities with an estimated fair value of $22.3 million. The interest rate changes affect the fair market values but do not impact earnings or cash flows. The fair market value of long-term fixed interest rate debt is also subject to interest rate risk. Generally, the fair market of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The estimated fair value of the Company’s long-term debt at November 30, 2005 was $3.1 million.

~~Item 4~~Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all error and all fraud. ~~Controls~~A control system, no matter how well conceived and ~~Procedures~~operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. In particular, many of our current processes rely upon manual reviews and processes to ensure that neither human error nor system weakness has resulted in erroneous reporting of financial data.

The Company’s management, including its chief executive officer and chief financial officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13(a) – 14(c), and 14(d)) as of November 30, 2005. Based on this review, the chief executive officer and chief financial officer concluded that Interland’s disclosure controls and procedures were effective to provide reasonable assurances that such disclosure controls and procedures satisfy their objectives and that the information required to be disclosed by the Company in its periodic reports is accumulated and communicated to management, including its chief executive officer and chief financial officer as appropriate to allow timely decisions regarding disclosure and is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms.

Nevertheless, the Company’s management, including its chief executive officer and chief financial officer do not expect that the Company’s disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. The design may not succeed in achieving its stated goals under all potential future conditions. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, an evaluation of controls may not detect all control issues and instances of fraud, if any, within the Company. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. In particular, many of the Company’s current processes rely upon manual reviews and processes to ensure that neither human error nor system weakness has resulted in erroneous reporting of financial data. The Company has, however, designed its disclosure controls and procedures to provide, and believes that such controls and procedures do provide, reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

While we continued to make incremental improvements to our internal controls over financial reporting during the fiscal quarter, there were no changes in the Company’s internal control over financial reporting which have materially affected its internal controls.

~~Interland,~~Part ~~Inc~~II. Other Information

PART II. – OTHER INFORMATION

Item 1. Legal Proceedings

InFor ~~February 2003, the Company filed~~ a ~~lawsuit~~description ~~in Cobb County, Georgia against Mr. Gabriel Murphy, one~~ of ~~the~~material ~~former~~developments ~~principals~~relating ofto ~~Interland’s subsidiary, CommuniTech.Net, Inc. (“Communitech”), which was acquired by Interland in February 2002. The Company’s lawsuit claims, among other things, that Mr. Murphy breached~~ certain ~~covenants~~pending ~~under~~legal ~~his employment agreement and also demands payment of two promissory notes made by Mr. Murphy (one of which was “non-recourse” while the other was “recourse”). In March 2004~~proceedings, ~~Interland~~See ~~foreclosed upon and retired the 273,526~~Note ~~shares of stock held as collateral and wrote off the $2~~8,~~000,000~~ ~~non-recourse promissory note~~Contingencies, ~~which had been carried as Stockholders’ Equity. The other $735,000 full recourse promissory note (also carried as Stockholders’ Equity) remains outstanding and continues~~ to ~~be a subject of~~ the ~~Cobb County~~Consolidated ~~litigation.~~Financial MrStatements. ~~Murphy has asserted various counterclaims in response to the Company’s~~ ~~suit.~~

~~In February~~Item ~~2003, Mr~~1A. ~~Heitman,~~ ~~also~~Risk ~~a former principal of Interland’s subsidiary Communitech, and~~Factors Mr. Murphy filed a lawsuit against Interland, its Chief Executive Officer, Mr. Joel Kocher, and Communitech, in Jackson County, Missouri claiming, among other things, that Interland acted unreasonably and thereby breached the Merger Agreement under which Interland acquired all of the stock of Communitech by failing to have the S-3 registration statement for their stock declared effective by the SEC on a timely basis and further claiming that Interland and/or Mr. Kocher made inaccurate disclosures in connection with Interland’s acquisition of Communitech. The complaint seeks compensatory and punitive damages in an unspecified amount. Interland believes that these claims are without merit and will not have a material adverse effect on Interland and is vigorously defending the claims.

~~Interland~~You isshould ~~defending~~carefully ~~another~~consider ~~case in Jackson County, Missouri arising out of~~ the ~~shutdown~~following offactors ~~five unregistered~~and ~~servers~~all atother ~~the~~information ~~Communitech~~contained ~~data center~~ in ~~February~~this Form ~~2003.~~10-Q ~~An entity called Bent Axis~~ and ~~its~~our ~~principal~~Annual ~~Jason~~Report ~~Park,~~on aForm ~~former~~10-K ~~employee~~for ~~of Communitech, have filed suit against~~ the ~~Company and~~year ~~its~~ended ~~General Counsel~~December 31, ~~Jonathan~~2006 ~~Wilson,~~before ~~alleging~~you ~~a variety of contract and tort claims. In its~~make ~~first~~any ~~complaint,~~investment ~~Plaintiffs~~decisions ~~asserted~~with ~~that~~respect ~~they owned the five servers in question. They later amended their pleading~~ to ~~assert~~our ~~a different theory: that Bent Axis was using the servers by permission of certain Interland personnel including Gabriel Murphy~~securities. Plaintiffs claim that they were damaged when the Company disconnected the servers in question. To date Plaintiffs have produced no documentary evidence that Bent Axis ever generated a profit (a requirement for the recovery of damages) or that it had any legal right to the free use of the servers in competition with Interland. The ~~court~~risks ~~dismissed~~and ~~all~~uncertainties ~~of the claims against Jonathan Wilson on June 27, 2005.~~described ~~The~~below ~~Company~~may isnot ~~vigorously~~be ~~defending~~ the ~~suit~~only ~~and~~risks ~~believes~~ that itwe ~~will not have a material adverse effect on Interland~~face.

~~Interland~~We is defending a case involving the Telephone Consumer Protection Act (“TCPA”) in state court in Allegheny County, Pennsylvania. A competing web hosting company, PairNetworks, filed this case in December 2001 as a putative class action, claiming that Interland’s distribution of a facsimile on November 15, 2001 to market domain name registration services violated the TCPA. Several years later, two additional plaintiffs joined in the action. The plaintiffs have ~~conceded that~~incurred ~~all~~losses ofsince ~~the~~inception ~~putative~~and ~~class~~could ~~members~~incur ~~were~~losses ~~customers of Interland. Federal Communications Commission regulations~~ in ~~effect at~~ the ~~time provided that the distribution of facsimiles to persons with whom the sender had an “established business relationship” did not amount to a violation of the TCPA~~future. ~~Interland has asked the court to deny class certification and a ruling on~~ that motion is pending along with a motion for summary judgment seeking dismissal of the named plaintiffs’ claims. If the court denies class certification, Interland’s damages, even if it were liable, cannot exceed $1,500 for each of the three named plaintiffs. Interland believes that the plaintiffs’ claims are without merit, plans to continue to contest the matter vigorously and believes that no material adverse effect on Interland will occur as a result of this litigation. Conversely, if the class is certified, its size may exceed 50,000.

InWeb.com ~~addition, Interland~~ has ~~filed~~incurred anet ~~motion~~losses ~~seeking~~and tolosses ~~dismiss~~from ~~all~~operations offor ~~the claims against it on the grounds that the facsimile at issue did not violate the TCPA because it satisfied~~ all ofbut ~~the requirements~~two of ~~applicable~~each ~~Federal~~quarterly ~~Communications Commission regulations in effect at the time the~~period ~~fax~~from ~~was~~our ~~sent.~~inception ~~Congress has expressly extended those regulations~~ through the ~~Junk~~three ~~Fax~~month ~~Act~~period ofended ~~2005~~March 31, 2007. ~~Interland’s~~ ~~motion~~A ~~has~~number ~~been~~of ~~briefed~~factors ~~and~~could increase ~~argued~~operating toexpenses, ~~the~~such ~~court and the parties are awaiting a ruling.~~as:

~~The~~• ~~Company~~Adapting isnetwork ~~defending~~infrastructure aand ~~case~~administrative inresources ~~the~~to ~~United~~accommodate ~~States~~additional ~~District~~customers ~~Court~~and ~~for~~future ~~the~~growth; ~~Southern~~• ~~District~~Developing ~~of Florida~~products, ~~arising~~distribution, ~~out~~marketing, ofand ~~the~~ management ~~of a co-located server by its predecessor company, Worldwide Internet Publishing Corporation. The suit alleges that the Company is responsible~~ for the ~~loss~~broadest-possible ~~of Plaintiff’s~~market; ~~internet~~• ~~search~~Broadening ~~engine~~customer ~~that~~technical ~~occurred~~support ~~after~~capabilities; ~~the~~• ~~resignation~~Developing ofor ~~the~~acquiring ~~officer~~new ~~managing~~products ~~the server,~~and ~~Mark~~associated ~~Ismach,~~technical ininfrastructure; ~~October 1999.~~• OnDeveloping ~~September 2,~~additional ~~2005,~~indirect indistribution apartners; ~~trial~~• ofIncreased ~~this~~costs ~~matter~~from onthird ~~the merits~~party ~~the~~service ~~jury~~providers; ~~returned~~• aImproving ~~verdict~~network ~~against~~security ~~Interland~~features; inand ~~the~~• ~~amount~~Legal offees ~~$800,000. In response to Interland’s pre-trial~~ and ~~post-trial~~settlements ~~motions,~~associated ~~however,~~with ~~the~~litigation ~~court subsequently reduced the verdict to nominal damages of $1~~ and ~~entered judgment in that amount~~contingencies. ~~The~~

Ours is a recurring-revenue subscriber business and as such the effects of a net loss of monthly recurring revenue is magnified.

A large majority of our revenue is derived from monthly recurring charges. Accordingly, the termination of a single account will affect revenue every month in the future. The loss of such a customer at the beginning of a fiscal year will result in a twelve-fold reduction in revenue for that fiscal year. Absent the addition of customers through acquisitions, we had previously incurred a net loss in monthly recurring charges, and this situation may continue with material negative effects on reported revenue and net income. Although reductions in monthly recurring charges may be offset for a time by increases in revenue derived from one-time or non-recurring charges, the compounding effect of monthly recurring charges losses will likely result in a meaningful reduction of reported revenue over time. Moreover, because of our relatively low percentage of variable costs, significant revenue loss can result in a loss of net income. There can be no assurance that our continuing efforts to stabilize or increase monthly recurring charges and revenue will be successful. If revenue declines, we may eventually require additional capital, which may not be available on suitable terms. Although we can reduce spending to some degree, there can be no assurance in such an event that we would be able to continue as a going concern.

We operate in a new and evolving market with uncertain prospects for growth and may not be able to generate and sustain growth in our customer base.

We operate in a new and evolving market with uncertain prospects for growth and may not be able to achieve and sustain growth in our subscriber base, maintain our average revenue per user or subscriber acquisition costs. The market for web hosting and application hosting services for small and medium-sized businesses, and the consumer market, have only recently begun to develop and are evolving rapidly. The market for our services may not develop further, customers may not widely adopt our services and significant numbers of businesses or organizations may not use, or may discontinue the use of, the Internet for commerce and communication. If this market fails to develop further or develops more slowly than expected, or if our services do not achieve broader market acceptance, we will not be able to retain and grow our customer base. In addition, we must be able to differentiate ourselves from our competition through our service offerings and brand recognition. These activities may be more expensive than we anticipate, and we may not succeed in differentiating ourselves from our competitors, achieving market acceptance of our services, or sell additional services to our existing customer base.

~~plaintiff~~Because ~~has~~our ~~filed~~target amarkets ~~notice~~are ofvolatile, ~~appeal.~~we ~~The~~may ~~Company~~face ~~has~~a ~~accordingly~~loss ~~removed~~of ~~the~~customers ~~$800,000~~or ~~legal~~a ~~reserve~~high ~~that~~level ~~had been established during the~~of ~~previous~~non-collectible ~~quarter~~accounts.

OnWe ~~January 23,~~intend ~~2004,~~to ~~Vincent~~continue ~~Salazar,~~to anconcentrate ~~individual,~~on ~~sued~~serving ~~Interland~~the small and ~~its~~medium-sized ~~predecessor~~business ~~HostPro~~market. This ~~claiming~~market contains many businesses that hemay ~~was~~not ~~entitled~~be tosuccessful, ~~money~~and asconsequently present a substantially ~~result~~greater risk for non-collectible accounts receivable and for non-renewal. Moreover, a significant portion of ~~his~~this ~~alleged~~target ~~involvement~~market is highly sensitive to price, and may be lost to a competitor with a lower pricing structure. Because few businesses in ~~brokering~~this target market employ ~~Interland’s~~trained ~~acquisition~~technologists, they tend to generate a high number of ~~accounts~~customer ~~from~~service ~~AT&T~~and intechnical support ~~January 2002~~calls. The ~~case~~expense ~~was~~of ~~pending~~responding into ~~state~~these ~~court~~calls is considerable, and the call volume is likely to increase in ~~Los~~direct ~~Angeles.~~proportion Into ~~November 2005~~revenue, potentially limiting the ~~court~~scalability ~~granted~~of ~~summary~~the business. ~~judgment~~Additionally, inif ~~favor~~the ofcustomer ~~Interland~~becomes ondissatisfied ~~all~~with our response to such calls, ~~counts~~cancellation, non-payment, or non-renewal becomes more likely. Our strategy for minimizing the negative aspects of our target market includes:

In• ~~May 2004,~~Capitalizing ~~Net~~on ~~Global~~infrastructure ~~Marketing~~efficiencies ~~filed~~to ~~suit~~become against Interland and its predecessor, Dialtone, in state court in Los Angeles, California asserting claims for lost data. Interland had cancelled Net Global’s web hosting accounts in October 2002 and again in January 2003 as a ~~result~~profitable ofprovider ~~complaints that~~at the ~~servers~~lowest ~~were~~sustainable ~~being~~price; ~~used~~• toAutomating ~~send~~customer ~~spam,~~care and ~~Interland~~technical ~~has~~support ~~asserted~~to ~~counterclaims~~reduce ~~arising from these incidents. Interland removed~~ the ~~case~~cost toper ~~federal court and filed a motion to dismiss in favor of arbitration which was denied~~call, and ~~Interland has appealed that decision~~ to ~~the~~minimize ~~Ninth Circuit Court of Appeals. Interland believes that, even if~~ the ~~litigation~~time ~~proceeds,~~spent itby ~~has adequate~~our ~~defenses~~customer ~~including~~service ~~provisions~~and intechnical ~~the~~support ~~contract~~personnel; ~~with~~• ~~the~~Intensive ~~plaintiff~~training ~~that shield Dialtone from damages for “erasure”~~ and ~~“loss~~supervision of ~~data”~~customer care and ~~generally~~technical ~~prohibit~~support ~~recovery~~personnel ofto ~~the~~maximize ~~kind~~customer ofsatisfaction; ~~damages sought~~and by• ~~plaintiff.~~Increasing ~~Interland believes that~~ the ~~plaintiff’s~~number ~~claims~~and ~~are~~breadth ~~without~~of ~~merit,~~services ~~plans~~ to ~~continue~~ todifferentiate ~~contest~~ourselves from the ~~matter vigorously and believes that no material adverse effect on Interland will occur as a result of this litigation~~competition.

OnWe ~~September 14,~~can ~~2005,~~give ~~the~~no ~~Honorable Judge B. Lynn Winmill entered an Order approving the terms of a settlement reached between the Company and the Plaintiffs in Smith v. Micron Electronics~~assurance, ~~Inc. (n/k/a Interland~~however, ~~Inc.), Case No. CV-01-0244-S-BLW (D. Idaho) (the “Smith Litigation”). The settlement provided~~ that a payment in the amount of $325,000 would be made to Plaintiffs after all of the following events have taken place: (a) execution of the Settlement Agreement by all 42 Plaintiffs and Opt-In Claimants; (b) entry of a dismissal with prejudice of all pending claims in the Smith Litigation; (c) expiration of any ~~period for an appeal from any decision entered by the Court in the Smith Litigation; and (d) receipt by the Company~~ of athese ~~full~~measures ~~payment~~will for the Court-awarded sanctions entered against Plaintiffs. The Settlement Agreement contains a full release of all claims that the Plaintiffs asserted or could have asserted against the Company in the Smith Litigation. On or about December 14, 2005, the final Opt-In Claimant signed the Settlement Agreement. On December 28, 2005 Judge Winmill entered an Order dismissing the Smith Litigation with prejudice. The period by which any appeal may be ~~taken will run on or about January 27~~successful, ~~2006. The case will be finally resolved~~ and ~~not~~our ~~subject~~ failure to ~~further~~manage ~~review~~these ~~after~~risks ~~the period~~could ~~for~~decrease ~~any~~revenues ~~appeal runs~~ and ~~the~~increase ~~settlement payment has been made by the Company~~losses.

~~The~~We ~~Company~~depend ~~has~~on areseller ~~Directors, Officers~~ and ~~Company~~affiliate ~~Liability~~sales ~~Insurance~~channels ~~Policy~~to ~~dated~~market ~~July 26,~~and ~~2000 (the~~sell ~~“Policy”)~~many ~~issued by Certain Underwriters at Lloyd’s~~ of ~~London (“Underwriters”)~~services. ~~The~~We ~~Policy~~do not ~~purports~~control tothese ~~provide~~resellers ~~coverage for certain types of labor~~ and ~~employment claims made during the applicable policy period (June 15~~affiliates, ~~2000~~and ~~through~~if ~~June 15,~~we ~~2001).~~fail ~~This coverage purportedly applies~~ to ~~any~~develop ~~“Loss”~~or ~~sustained~~maintain asgood arelations ~~result~~with our ofresellers ~~such~~and ~~a claim~~affiliates, ~~including,~~we ~~among~~may ~~other~~not ~~things,~~achieve ~~“damages, judgments,~~growth ~~settlements~~in ~~and~~customers ~~Costs, Charges~~ and ~~Expenses incurred by the Company~~revenues.”

ToAn ~~date,~~element ~~Underwriters~~of ~~have~~the ~~denied~~strategy ~~coverage~~for ~~under~~our ~~the~~growth ~~Policy~~is ~~for~~to ~~any~~further ~~claims~~develop ~~asserted~~third byparty ~~the~~sales channels that ~~Plaintiffs~~resell inor ~~the~~recommend ~~Smith~~our ~~Litigation~~services. AsMany aof ~~result,~~these ~~the~~resellers ~~Company~~are ~~has~~web ~~filed~~development aor ~~lawsuit~~web ~~against~~consulting ~~Underwriters~~companies inthat ~~state~~also ~~court~~sell inour ~~Idaho~~web ~~(see~~hosting ~~Interland~~services, ~~Inc.~~but vthat generally do not have established customer bases to which they can market these services. ~~Certain~~We ~~Underwriters~~are atnot currently dependent on any one ~~Lloyd’s~~reseller to generate a significant level of ~~London~~business, ~~Case~~but ~~No. CV~~we OChave ~~0506184~~benefited ~~(District~~and ~~Court~~continue ~~for~~to significantly benefit from business generated by the ~~Fourth~~reseller ~~Judicial~~channel. ~~District~~Although ofwe attempt to ~~Idaho,~~provide ~~County~~our ofresellers ~~Ada))~~with ~~(the~~incentives ~~“Lloyd’s~~such ~~Litigation”)~~as ~~seeking~~price adiscounts ~~declaration~~on our services that the ~~Policy provides~~resellers ~~coverage~~seek ~~for~~to ~~the~~resell ~~Losses~~at ~~sustained~~a byprofit, the ~~Company~~failure of our services to be commercially accepted in some markets, whether as a result of ~~the~~a ~~claims~~reseller’s ~~made~~performance inor ~~the~~otherwise, ~~Smith Litigation.~~could ~~The~~cause ~~Company~~our iscurrent resellers ~~seeking~~to indiscontinue ~~excess~~their ofrelationships $1with us.~~7 million~~ inWe ~~damages~~are ~~from~~also ~~Underwriters.~~developing relationships with ~~Although~~larger ~~the~~distribution ~~Company~~partners, ~~believes~~and italthough ~~should~~the ~~prevail~~percentage inof ~~its~~our ~~claims,~~current ~~Underwriters~~revenues ~~have~~generated ~~indicated~~by ~~that~~any ~~they~~of ~~will~~these ~~vigorously~~relationships ~~defend~~is ~~this~~small, ~~suit~~if ~~and~~our ~~there~~strategy ~~can~~is besuccessful, nofuture ~~guarantee~~revenue ~~that~~growth ~~the Company~~ will be ~~able~~ todependent ~~recover~~on the ~~amounts~~success ~~claimed~~and inmaintenance ~~this~~of ~~case~~these relationships.

~~Notwithstanding~~If ~~the~~we ~~Lloyd’s~~are ~~Litigation,~~not ~~Underwriters~~able ~~and~~to ~~the~~attract ~~Company~~and ~~have~~retain ~~entered~~key ~~into an Interim Funding Agreement (the “Interim Agreement”) aimed at achieving a settlement of the Smith Litigation. Under the terms of the Interim Agreement~~personnel, ~~Underwriters~~we ~~have~~may ~~agreed~~not ~~to pay $250,000 of the $325,000 settlement payment that will~~ be ~~made~~able to ~~the~~compete ~~Plaintiffs in the Smith Litigation. Both~~effectively Underwriters and the Company have reserved all rights and made no admissions of liability under the terms of the Interim Agreement. While the Company believes that no material adverse effect on Interland will result from the Lloyd’s Litigation and, indeed, believes that it should recover losses sustained as a result of the Smith Litigation, Underwriters have reserved their rights in ~~regards~~ toour ~~monies contributed to the settlement~~markets.

~~Periodically,~~Our ~~the~~future ~~Company~~success isdepends, ~~made~~in ~~aware~~part, ~~that~~on ~~technology~~our itability ~~has~~to ~~used~~attract ~~may~~and ~~have~~retain ~~infringed~~key onmanagement, ~~intellectual~~technical, ~~property~~and ~~rights~~sales ~~held~~and bymarketing ~~others~~personnel. ~~The~~We ~~Company~~attempt ~~evaluates~~to ~~all~~enhance ~~such~~our ~~claims~~management and, iftechnical ~~necessary~~expertise by recruiting qualified individuals who possess desired skills and ~~appropriate,~~experience ~~obtains~~in ~~licenses~~certain targeted ~~for~~areas. ~~the~~There ~~use~~is ofstrong competition for such ~~technology.~~personnel Ifin the ~~Company~~web orhosting ~~its~~industry. Our ~~suppliers~~inability ~~are~~to ~~unable~~retain toemployees ~~obtain~~and ~~licenses~~attract ~~necessary~~and toretain ~~use~~sufficient ~~intellectual~~additional ~~property~~employees, ininformation technology, ~~the~~engineering, ~~applicable~~and technical support resources could adversely affect our ability to ~~products~~remain orcompetitive. ~~processes,~~We ithave ~~may~~faced beand ~~forced~~may continue to ~~defend~~face ~~legal~~the ~~actions~~loss ~~taken~~of ~~against~~key itpersonnel, ~~relating~~which could limit our ability to develop and market our products and services. ~~allegedly~~

Because we face intense competition, we may not be able to operate profitably in our markets.

The web hosting and applications hosting markets are highly competitive, which could hinder our ability to successfully market our products and services. We may not have the resources, expertise or other competitive factors to compete successfully in the future. Because there are few substantial barriers to entry, we expect to face additional competition from existing competitors and new market entrants in the future. Many of our current and potential competitors have greater name recognition and more established relationships in the industry and greater resources. 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;

	•		Devote greater resources to the marketing and sale of their services; and

	•		Adopt more aggressive pricing policies than we can.

~~protected~~Current ~~technology.~~and ~~The~~potential ~~Company~~competitors ~~evaluates~~in ~~all~~the ~~such~~market ~~claims~~include ~~and~~web ~~accrues~~hosting aservice ~~liability~~providers, ~~for~~applications ~~the~~hosting ~~estimated~~providers, ~~costs~~Internet ofservice ~~settlement~~providers, ortelecommunications ~~adjudication~~companies, oflarge ~~claims~~information technology ~~for~~firms ~~alleged~~and ~~infringement~~computer ashardware ofsuppliers. ~~the respective~~These ~~dates~~competitors may operate in one or more of these ~~the~~areas ~~balance~~and ~~sheets~~include ~~included~~companies insuch ~~this~~as ~~report~~Yahoo!, NTT/Verio, Affinity Internet, Website Pros, and Earthlink.

~~The~~Impairment ~~Company is also a defendant in a number~~ of ~~other~~our ~~lawsuits~~intellectual ~~seeking~~property ~~lesser~~rights ~~amounts,~~could ~~and~~negatively ~~which~~affect ~~the Company~~our ~~regards~~business ~~as unlikely to result in any material payment. The outcome of litigation may not be assured, and despite management’s views of the merits of any litigation,~~ or ~~the reasonableness of its estimates and reserves, the Company’s cash balances~~ could ~~nonetheless be materially affected~~allow bycompetitors an adverse judgment. In accordance with SFAS No. 5 “Accounting for Contingencies,” the Company believes it has adequately reserved for the contingencies arising from the above legal matters where an outcome was deemed to beminimize ~~probable~~any ~~and~~advantage ~~the loss amount could be reasonably estimated. As such, the Company does not believe~~ that ~~the~~our ~~anticipated~~proprietary ~~outcome~~technology ~~of the aforementioned proceedings will have a materially adverse impact on its results of operations, its financial condition or its cash flows~~provides.

~~Item 1A~~Although we have a number of patents that we believe should preclude competitors from practicing certain technologies, we do not currently have patented technology that would preclude or inhibit competitors from entering the web hosting market generally. ~~Risk~~While ~~Factors~~our practice is to enter into agreements with all employees and with some of our customers and suppliers to prohibit or restrict the disclosure of proprietary information, we cannot be sure that these contractual arrangements or the other steps taken to protect our proprietary rights will prove sufficient to prevent illegal use of our proprietary rights or to deter independent, third-party development of similar proprietary assets.

~~You~~Effective ~~should~~copyright, ~~carefully~~trademark, ~~consider~~trade ~~the~~secret ~~following~~and ~~factors~~patent ~~and~~protection ~~all~~may ~~other~~not ~~information~~be ~~contained~~available in every ~~this~~country ~~Form~~where ~~10-Q~~our products and services are offered. We sometimes are, and in the ~~Company’s~~future ~~recently~~may ~~filed~~be, involved ~~Form~~in ~~10-K~~legal ~~for~~disputes relating to the ~~fiscal~~validity ~~year~~or ~~ended~~alleged ~~August 31,~~infringement ~~2005~~of our intellectual ~~before~~property ~~you~~rights ~~make~~or ~~any~~those ~~investment~~of ~~decisions~~a ~~with~~third ~~respect~~party. Intellectual property litigation is typically extremely costly and can be disruptive to business operations by diverting the ~~Company’s~~attention ~~securities.~~and ~~The~~energies ~~risks~~of management and key technical personnel. In addition, any adverse decisions could subject us to ~~uncertainties~~significant ~~described~~liabilities, ~~below~~require ~~are~~us ~~not~~to ~~the~~seek ~~only~~licenses ~~risks~~from others, prevent us from using, licensing or selling certain products and services, or cause severe disruptions to operations or the ~~Company~~markets in ~~faces~~which we compete, which could result in decreased profitability.

~~Interland~~Periodically, ~~has~~we ~~incurred~~are ~~losses~~made ~~since~~aware ~~inception~~of ~~and~~claims, ~~could~~or ~~incur~~potential ~~losses~~claims, that the technology we used in discontinued operations may have infringed on intellectual property rights held by others. We have accrued a liability and charged operations for the ~~future~~estimated costs of settlement or adjudication of several asserted and unasserted claims for alleged infringement relating to prior discontinued operations. Resolution of these claims could be costly and decrease profitability.

~~Interland~~We ~~has~~are ~~incurred~~vulnerable ~~net~~to ~~losses~~system ~~and~~failures, ~~losses~~which ~~from~~could ~~operations~~harm ~~for~~our ~~all~~reputation, ~~but~~cause ~~one~~our ofcustomers ~~each~~to ~~quarterly~~seek ~~period~~reimbursement ~~from~~for ~~its~~services ~~inception~~paid ~~through~~for ~~the~~and ~~first~~not ~~quarter~~received, ofand ~~fiscal~~cause ~~2006.~~our Acustomers ~~number~~to ofseek ~~factors could~~another ~~increase~~provider ~~its~~for ~~operating expenses, such as:~~services.

•We ~~Adapting~~must be able to operate the systems that manage our network ~~infrastructure~~around ~~and~~the ~~administrative~~clock ~~resources~~without interruption. Our operations depend upon our ability to ~~accommodate~~protect ~~additional~~our ~~customers~~network infrastructure, equipment and ~~future~~customer ~~growth;~~files •against ~~Developing~~damage ~~products~~from human error, ~~distribution~~fire, ~~marketing~~earthquakes, ~~and~~hurricanes, floods, ~~management~~power ~~for~~loss, ~~the~~telecommunications ~~broadest-possible~~failures, ~~market;~~sabotage, •intentional ~~Broadening~~acts ~~customer~~of ~~technical~~vandalism ~~support~~and similar ~~capabilities;~~events. •Our ~~Developing~~networks orare ~~acquiring~~currently ~~new~~subject ~~products~~to ~~and~~various ~~associated~~points ~~technical~~of ~~infrastructure;~~failure. •For ~~Developing~~example, ~~additional~~a problem ~~indirect~~with ~~distribution~~one ~~partners;~~of •our ~~Increased~~routers ~~costs~~(devices ~~from~~that ~~third~~move ~~party~~information ~~service~~from ~~providers;~~one •computer ~~Improving~~ network ~~security~~to another) ~~features;~~or •switches ~~Legal~~could ~~fees~~cause ~~and~~an ~~settlements~~interruption ~~associated~~in ~~with~~the ~~litigation~~services ~~and~~we ~~contingencies;~~provide ~~and~~to •a Toportion of our customers. In the ~~extent~~past, ~~that~~we ~~increases~~have experienced periodic interruptions in ~~operating~~service. ~~expenses~~We ~~are~~have ~~not~~also experienced, ~~offset~~and byin ~~increases~~the future may continue to experience, delays or interruptions in ~~revenues~~service as a result of the accidental or intentional actions of Internet users, ~~operating~~current ~~losses~~and ~~will~~former ~~increase~~employees, or others. Any future interruptions could:

~~Interland’s~~• ~~management~~Cause ~~and~~customers ~~Board~~or ofend ~~Directors~~users ~~may~~to beseek ~~unable~~damages for losses incurred; • Require us to ~~execute~~replace ~~their~~existing ~~plans~~equipment or add redundant facilities; • Damage our reputation for reliable service; • Cause existing customers to ~~turn~~cancel ~~around the~~their ~~Company~~contracts, ~~grow~~or ~~its~~• ~~revenues~~Make ~~and~~it ~~achieve~~more ~~profitability~~difficult for us to attract new customers.

~~Interland’s~~Our ~~former~~data ~~Chief~~centers ~~Executive~~are ~~Officer,~~maintained ~~Joel J. Kocher, left the Company in the last month of fiscal 2005 and was replaced~~ by ~~Jeffrey~~third Mparties. ~~Stibel as Chief Executive Officer. At approximately the~~ same time, the Company added three new Directors to its Board of Directors. If the Company’s new Chief Executive Officer is unable to bring management to execute on the Company’s plans, or if management and the Board of Directors are unable to execute on those plans, then the Company’s plans may be insufficient to grow the Company’s revenues and achieve profitability.

~~Ours~~Substantially isall of the network services and computer servers we utilize in providing services to customers are housed in data centers owned by other service providers. In particular, a significant ~~recurring~~number of our servers are housed in the data center in Atlanta, Georgia that we sold to Peer 1 Networks on August 31, 2005. We obtain Internet connectivity for those servers, and for the customers who rely on those servers, in part through direct arrangements with network service providers and in part indirectly through Peer 1 Networks. We also utilize other third-~~revenue~~party ~~subscriber~~data centers, ~~business~~including those at other Peer 1 and asLevel ~~such~~3 ~~the~~locations. ~~effects~~In ofthe afuture, ~~net~~we ~~loss~~may ofhouse ~~monthly~~other ~~recurring~~servers ~~revenue~~and ~~are~~hardware ~~magnified~~items in facilities owned or operated by other service providers.

A ~~large~~disruption majority of our revenue is derived from monthly recurring charges incurred by owners of hosted websites. Accordingly, the termination of a single account paying $30.00 per month will affect revenue every month in the ~~future.~~ability ~~The loss~~ of ~~such~~one ~~a customer at the beginning~~ of athese ~~fiscal year~~service ~~will~~providers ~~result~~to inprovide aservice ~~twelve-fold~~to ~~reduction~~us incould ~~revenue for that fiscal year.~~cause ~~Absent the addition of customers through acquisitions, Interland has consistently incurred~~ a ~~net loss~~disruption in ~~monthly~~service ~~recurring~~to ~~charges,~~our ~~and this situation may continue with material negative effects on reported revenue and net income~~customers. ~~Although~~A ~~reductions~~service inprovider ~~monthly~~could ~~recurring charges may~~ be ~~offset for~~disrupted ~~a time~~ by ~~increases~~a innumber ~~revenue derived from one-time or non-recurring charges, the compounding effect~~ of ~~monthly recurring charges losses will almost certainly eventually result in a meaningful~~ ~~reduction~~contingencies, ofincluding ~~reported~~unauthorized ~~revenue. Moreover~~access, ~~because~~computer ofviruses, ~~Interland’s~~accidental ~~relatively~~or ~~low~~intentional ~~percentage of~~actions, ~~variable~~electrical ~~costs~~disruptions, aand ~~concomitantly~~other ~~high~~extreme ~~percentage~~conditions. ofAlthough ~~the~~we ~~amount~~believe ofwe ~~revenue loss results in a loss of~~have ~~EBITDA and of net income. There can be~~

notaken ~~assurance~~adequate steps ~~that Interland’s continuing efforts~~ to ~~stabilize~~ orprotect ~~increase~~ourselves ~~its~~through ~~monthly~~contractual ~~recurring~~arrangements ~~charges~~with ~~and~~our ~~revenue~~service ~~will~~providers, bewe ~~successful. If revenue~~cannot ~~continues~~eliminate ~~to decline,~~ the ~~Company~~risk ~~may~~of ~~eventually~~a ~~require~~disruption ~~additional~~in ~~capital, which may not be available on suitable terms~~service. ~~Although~~In ~~the~~addition, ~~Company~~a ~~can~~service ~~reduce~~provider ~~spending~~could toraise ~~some~~its prices ~~degree,~~or ~~there~~otherwise ~~can~~change ~~be no~~terms ~~assurance~~and conditions in ~~such~~a anway ~~event~~ that ~~the~~adversely ~~Company~~affects ~~would~~our beability ~~able~~ to support ~~continue~~our ascustomers aor ~~going~~financial ~~concern~~performance.

~~Unfavorable~~Data ~~results~~centers ofand ~~existing~~communications ~~litigation~~networks ~~may~~are ~~cause~~vulnerable ~~Interland~~ to ~~have~~security ~~additional~~breaches ~~expenses~~that orcould cause ~~operating~~disruptions ~~losses~~in ~~that~~service, ~~exceed~~liability ~~the~~to ~~Company’s~~third ~~ability~~parties, toor ~~pay~~loss of customers.

~~The~~A ~~Company~~significant isbarrier ~~defending~~to aelectronic ~~number~~commerce ofand ~~matters~~communications inis ~~active~~the ~~litigation~~need ~~(See~~for ~~Part II,~~secure ~~Item 1, “Legal~~transmission ~~Proceedings”).~~of ~~The~~confidential ~~cost~~information ofover ~~defending~~public ~~lawsuits,~~networks. ~~regardless~~Some of ~~their~~our ~~merit,~~services ~~can~~rely beon ~~substantial.~~security ~~The~~technology ~~Company~~licensed ~~spent~~from ~~approximately~~third ~~$5.0 million~~parties ~~during~~that ~~2005~~provide tothe ~~defend~~encryption ~~lawsuits.~~and ~~Although~~authentication ~~the~~necessary ~~Company~~to ~~has~~effect the ~~favorably~~secure ~~resolved~~transmission ~~a number~~ of ~~lawsuits~~confidential ~~through~~information. ~~rulings,~~Despite ~~verdicts,~~the ~~and~~design ~~settlements,~~ and ~~although the~~implementation ~~Company may be successful in defending ongoing litigation, the costs~~ of ~~defense~~a ~~cannot be~~variety ~~expected~~of tonetwork besecurity ~~avoided.~~measures, ~~The~~unauthorized ~~Company~~access, ~~believes~~computer itviruses, ~~has~~accidental ~~appropriately~~or ~~established reserves for the~~intentional ~~contingency~~actions ofand ~~adverse~~other ~~verdicts~~disruptions incould ~~accordance with GAAP~~occur. In ~~order for a loss contingency to be reserved for in the financial statements~~addition, ~~GAAP~~inappropriate ~~requires~~use ~~that~~of the ~~information~~network ~~available~~by ~~prior to~~third ~~issuance~~parties ofcould ~~the~~also ~~financial~~potentially ~~statements~~jeopardize ~~indicates~~the ~~that~~security itof isconfidential ~~probable~~information, ~~that~~such anas ~~asset had been impaired~~credit orcard aand ~~liability~~bank ~~had~~account ~~been~~numbers ~~incurred~~stored atin ~~the~~our ~~date~~computer ~~of the financial statements~~systems. ItSecurity isproblems ~~implicit~~could ~~in this~~create ~~condition~~liability ~~that~~to ituse ~~must be probable that one~~ or ~~more~~could ~~future~~cause ~~events will occur confirming~~ the ~~fact~~loss of ~~the~~ ~~loss~~existing and ~~the~~potential ~~amount of loss can be reasonably estimated~~customers. ~~Therefore, the Company has not~~ ~~reserved~~Although ~~for~~we ~~all~~continue ofto ~~its~~implement ~~pending~~industry-standard ~~lawsuits.~~security ~~Consequently~~measures, ~~lawsuits~~third ~~for~~parties ~~which~~may ~~there~~be isable ~~no reserve~~to ~~nonetheless~~overcome ~~pose~~any ameasures ~~risk~~that ofwe ~~substantial loss which would have a material effect on the Company’s financial position~~implement. ~~Additionally,~~The ~~even~~costs inrequired ~~those~~to ~~cases~~eliminate ~~where~~computer aviruses ~~reserve has been established, the~~and ~~amount~~alleviate ofother ~~the~~security ~~reserve~~problems iscould ~~necessarily~~be anprohibitively ~~estimate~~expensive and the ~~actual~~efforts ~~result~~to ~~may~~address ~~differ materially.~~such ~~Reserves~~problems ~~are~~could ~~established~~result ~~only~~in ~~for~~interruptions, ~~the~~delays ~~damages~~or ~~that~~cessation ~~may~~of beservice ~~assessed~~to customers, and doharm ~~not take into account~~our ~~the~~reputation ~~costs~~and ~~of litigation~~growth. ~~Even~~Concerns inover ~~those instances where Interland may ultimately prevail on appeal, an adverse verdict in a substantial amount may damage~~ the ~~reputation~~security of ~~the~~Internet ~~Company,~~transactions ~~may~~and ~~require~~ the ~~Company~~privacy ~~to post an appeal bond in an amount which deprives the Company~~ of ~~cash, and require~~users ~~additional~~may ~~expenditures~~also ~~for~~inhibit the ~~cost~~growth of ~~appeal.~~the ~~The outcome of litigation is unpredictable~~Internet, ~~and~~especially ~~an adverse~~as ~~final~~a ~~verdict~~means ~~could~~of ~~exceed~~conducting ~~the Company’s ability to pay~~commercial transactions.

~~Because~~Disruption ~~Interland’s historical financial information is not representative~~ of ~~its~~our ~~future~~services ~~results, investors~~caused ~~and~~by ~~analysts~~unknown ~~will~~software ~~have~~or ~~difficulty~~hardware ~~analyzing~~defects ~~Interland’s~~could ~~future~~harm ~~earnings~~our ~~potential~~business and reputation.

~~Because~~Our ~~the~~service ~~Company~~offerings ~~has~~depend ~~grown~~on ~~through~~complex ~~acquisition~~software and ~~its~~hardware, ~~past~~including ~~operating~~proprietary ~~results~~software ~~reflect~~tools and ~~the~~software ~~costs of~~licensed ~~integrating~~from ~~these~~third ~~acquisitions,~~parties. asComplex ~~well~~software asand ~~revenues~~hardware ~~from~~may ~~operations~~contain ~~which~~defects, particularly ~~have~~when ~~now~~first ~~been~~introduced ~~sold, historical~~or ~~results~~when new versions are released. We may not ~~representative~~discover ofsoftware or ~~future~~hardware ~~expected~~defects ~~operating~~that ~~results.~~affect ~~The~~new ~~Company~~or ~~has~~current services or enhancements until after they are ~~recognized~~deployed. ~~very~~Although ~~sizeable~~we ~~charges~~have ~~and~~not ~~expenditures~~experienced inany ~~the~~material ~~past~~software ~~for~~or ~~impairment~~hardware ~~charges,~~defects ~~restructuring costs~~to date, defects ~~network~~may ~~enhancements,~~exist ~~and~~or ~~exploration~~occur ofin the ~~mainstream market~~future. ~~Because~~These ~~these~~defects ~~items~~could ~~are~~cause ~~not~~service interruptions, which ~~necessarily~~could ~~recurring~~damage our reputation or increase service costs, itcause isrevenue ~~more~~losses, ~~difficult~~delay ~~for~~market acceptance ~~investors~~or todivert ~~predict~~our ~~future~~development ~~results~~resources.

~~Interland~~Providing ~~has~~services ato ~~limited~~customers ~~operating~~with ~~history~~critical websites and ~~its~~web ~~business~~services ~~model~~could ispotentially ~~still~~expose ~~evolving,~~us to ~~which~~lawsuits ~~makes~~for ~~it difficult~~customers’ tolost ~~evaluate~~profits ~~its~~or ~~prospects~~other damages.

~~Interland’s~~Because ~~limited~~our ~~operating~~web ~~history~~hosting ~~makes~~and ~~evaluating~~applications ~~its~~hosting ~~business~~services ~~operations~~are ~~and~~critical ~~prospects difficult.~~to ~~Its~~many ~~range~~ of ~~service~~our ~~offerings~~customers’ businesses, ~~has~~any ~~changed~~significant ~~since~~interruption ~~inception~~in ~~and~~those ~~its~~services ~~business~~could ~~model~~result ~~is still~~in ~~developing.~~lost ~~Interland~~profits ~~has~~or ~~changed~~other indirect ~~from~~or ~~being~~consequential ~~primarily~~damages ato ~~seller~~our ofcustomers ~~personal~~as ~~computers~~well as negative publicity and additional ~~related~~expenditures ~~accessories~~in order to ~~being~~correct ~~primarily~~the aproblem. ~~provider~~Although ofthe ~~Web~~standard ~~hosting~~terms and ~~Web~~conditions ~~based~~of ~~value~~our customer ~~added~~contracts ~~business solutions~~disclaim toliability ~~small~~for ~~and~~any ~~medium-sized~~such ~~businesses.~~damages, ~~Because~~a ~~some~~customer ofcould ~~its~~still ~~services~~bring ~~are~~a ~~new,~~lawsuit against us claiming lost profits or other consequential damages as the ~~market~~result of a service ~~for~~interruption ~~them~~or isother ~~uncertain~~website or application problems. AsA acourt ~~result~~might not enforce any limitations on our liability, and the ~~revenues~~outcome ~~and~~of ~~income~~any ~~potential~~lawsuit would depend on the specific facts of ~~its~~the ~~business~~case, along aswith ~~well~~legal asand policy considerations, even if we believe that we have meritorious defenses to ~~the~~any ~~potential~~such ~~benefits~~claims. ofIn ~~its~~such ~~acquisitions~~cases, ~~may~~we could be ~~difficult~~liable tofor ~~evaluate~~substantial damage awards. Such damage awards might exceed our liability insurance by unknown but significant amounts, which would seriously harm our business.

~~Quarterly~~We ~~and~~could ~~annual~~face ~~operating~~liability ~~results~~for ~~may~~information ~~fluctuate,~~distributed ~~which~~through ~~could~~our ~~cause Interland’s stock price to be volatile~~network.

~~Past~~The ~~operating~~law ~~results~~relating ~~have~~to ~~fluctuated~~the ~~significantly~~liability of online services companies for information carried on aor distributed ~~quarterly~~through ~~and~~their annetworks ~~annual~~is ~~basis~~currently unsettled. ~~Quarterly~~Online services companies could be subject to claims under both United States and ~~annual~~foreign ~~operating~~law ~~results~~for ~~may~~defamation, ~~continue~~negligence, tocopyright ~~significantly~~or trademark ~~fluctuate~~infringement, ~~due~~violation toof asecurities ~~wide~~laws ~~variety~~or other theories based on the nature and content of the materials distributed through their networks. Several private lawsuits seeking to ~~factors~~impose such liability are currently pending against other companies. ~~Because~~In addition, organizations and individuals have sent unsolicited commercial eMails from servers hosted by service providers to massive numbers of ~~these~~people, ~~fluctuations~~typically to advertise products or services. This practice, ~~comparing~~known ~~operating~~as ~~results~~“spamming,” can lead to complaints against service providers that enable such activities, particularly where recipients view the materials received as offensive. We may, in the future, receive letters from ~~period~~recipients of information transmitted by our customers objecting to ~~period~~such transmission. isAlthough ~~not~~we ~~necessarily~~contractually ~~meaningful~~prohibit our customers from spamming, ~~and~~we itcannot ~~would~~provide assurances that our customers will not beengage ~~meaningful~~in this practice, which could subject us to ~~rely~~claims ~~upon~~for ~~such~~damages. ~~comparisons~~In asaddition, anwe ~~indicator~~may become subject to proposed legislation that would impose liability for or prohibit the transmission over the Internet of ~~future~~some ~~performance~~types of information. ~~Factors~~Other countries may also enact legislation or take action that ~~may~~could impose liability on us or cause ~~its~~us ~~operating~~not to be ~~results~~able to ~~fluctuate~~operate ~~include,~~in ~~but~~those ~~are~~countries. ~~not~~The ~~limited~~imposition ~~to:~~upon us and other online service providers of potential liability for information carried on or distributed through our systems could

• Demand for and market acceptance of the Company’s services and products; • Introduction of new services or enhancements by Interland or its competitors; • Costs of implementing new network security features, CRM systems, and billing modules; • Technical difficulties or system downtime affecting the Internet generally or its hosting operations specifically; • Customer retention;

•require ~~Increased~~us to ~~competition~~implement ~~and~~measures ~~consolidation~~to ~~within~~reduce ~~the~~our ~~Web~~exposure ~~hosting~~to ~~and~~this ~~applications~~liability, ~~hosting~~which ~~markets;~~may •require ~~Changes~~us into ~~its~~expend substantial ~~pricing~~resources, ~~policies~~or ~~and~~to ~~the~~discontinue ~~pricing~~service ~~policies~~offerings. ofThe ~~its~~increased ~~competitors;~~attention •focused ~~Gains~~upon liability orissues ~~losses~~as ofa ~~key~~result ~~strategic~~of ~~partner~~these ~~relationships;~~lawsuits ~~• Impairment charges; • Restructuring charges; • Merger~~ and ~~integration~~legislative ~~costs;~~proposals •also ~~Litigation~~could ~~expenses;~~affect •the ~~Insurance~~rate of ~~expenses;~~growth ~~• Marketing expenses; and • Seasonality~~ of ~~customer~~Internet ~~demand~~use.

~~Interland~~Our ~~cannot~~business ~~provide~~operates ~~any assurances that it will succeed~~ in ~~its~~an ~~plans~~uncertain tolegal ~~increase~~environment ~~the~~where ~~size~~future ~~of its~~government ~~customer~~regulation ~~base, the amount of services it offers, or its revenues during the next fiscal year~~ and ~~beyond. In addition, relatively large portions of its expenses are fixed in the short term, and~~ ~~therefore~~lawsuits ~~its~~could ~~results~~restrict ofour ~~operations~~business ~~are~~or ~~particularly~~cause ~~sensitive~~unexpected ~~to fluctuations in revenues~~losses. ~~Also,~~ ~~if it cannot continue using third-party products in its service offerings, its service development costs could increase significantly.~~

~~Interland~~Due ~~operates~~to inthe aincreasing ~~new~~popularity and ~~evolving~~use ~~market~~of the Internet, laws and regulations with ~~uncertain~~respect ~~prospects~~to ~~for~~the Internet ~~growth~~may be adopted at federal, state and local levels, covering issues such as user privacy, freedom of expression, pricing, characteristics and quality of products and services, taxation, advertising, intellectual property rights, information security and the convergence of traditional telecommunications services with Internet communications. We cannot fully predict the nature of future legislation and the manner in which government authorities may ~~not~~interpret beand enforce such ~~able~~legislation. toAs ~~generate~~a result, we and ~~sustain~~our customers could be subject to potential liability under future legislation, which in turn could have a material adverse effect on our business. The adoption of any such laws or regulations might decrease the growth of the Internet which in ~~its~~turn ~~customer~~could ~~base~~decrease the demand for our services, or increase the cost of doing 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.

~~Interland~~Quarterly ~~operates in a new~~ and ~~evolving~~annual ~~market~~operating ~~with~~results ~~uncertain prospects for growth and~~ may not be able to achieve and sustain growth in its customer base or to maintain its average revenue per customer account. The market for Web hosting and applications-hosting services for small and medium-sized businessesfluctuate, ~~and~~which ~~especially~~could ~~the~~cause ~~mainstream~~our ~~market,~~stock ~~has~~price ~~only recently begun~~ to develop and is evolving rapidly. 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 Interland’s services do not achieve broader market acceptance, Interland will not be ~~able to grow its customer base. In addition, Interland must be~~ ~~able to differentiate itself from its competition through its service offerings and brand recognition~~volatile. ~~These activities may be more expensive than Interland anticipates, and Interland may~~ ~~not succeed in differentiating itself from its competitors, achieving market acceptance of its services, or selling additional services to its existing customer base.~~

~~Because~~Past ~~Interland’s~~operating ~~target~~results ~~markets~~have ~~are~~fluctuated ~~volatile,~~significantly ~~the~~on ~~Company~~a quarterly and an annual basis. Quarterly and annual operating results may ~~face~~continue to fluctuate due to a ~~loss~~wide variety of ~~customers~~factors. orBecause aof these ~~high~~fluctuations, comparing operating results from period to period is not necessarily ~~level~~meaningful, ofand ~~non-collectible~~it ~~accounts~~would not be meaningful to rely upon such comparisons as an indicator of future performance. Factors that may cause operating results to fluctuate include, but are not limited to:

~~The~~• ~~Company~~Demand ~~intends~~for ~~to continue to concentrate on serving the small~~ and ~~medium-sized business~~ market. ~~This~~acceptance ~~market~~of ~~contains~~our ~~many~~services ~~businesses that may not be successful,~~ and ~~consequently~~products; ~~present a~~• ~~substantially~~Introduction ~~greater~~of ~~risk~~new ~~for~~services ~~non-collectible~~or ~~accounts~~enhancements ~~receivable~~by ~~and~~us ~~for~~or ~~non-renewal.~~by ~~Moreover, a~~our ~~significant~~competitors; ~~portion~~• Costs of ~~this~~implementing ~~target~~new ~~market~~network issecurity ~~highly~~features, ~~sensitive~~CRM ~~to price~~systems, and ~~may~~billing bemodules; ~~lost~~• toTechnical ~~a competitor~~difficulties ~~with~~or asystem ~~lower~~downtime ~~pricing~~affecting ~~structure.~~the ~~Because~~Internet ~~few~~generally ~~businesses~~or inhosting ~~this~~operations ~~target~~specifically; ~~market~~• ~~employ trained~~Customer ~~technologists,~~retention; ~~they~~• ~~tend~~Increased tocompetition ~~generate~~and aconsolidation ~~high~~within ~~number~~the ofweb ~~customer~~hosting ~~service~~ and ~~technical support~~applications ~~calls.~~hosting ~~The~~markets; ~~expense~~• ofChanges ~~responding~~in toour ~~these~~pricing ~~calls~~policies ~~is considerable,~~ and the ~~call~~pricing ~~volume~~policies ~~is likely~~of toour ~~increase~~competitors; in• ~~direct~~Gains ~~proportion~~or tolosses ~~revenue, potentially limiting the scalability~~ of ~~the business.~~key ~~Additionally,~~strategic ifpartner ~~the~~relationships; ~~customer~~• ~~becomes~~Impairment ~~dissatisfied~~charges; ~~with~~• ~~the~~Restructuring ~~Company’s~~charges; ~~response~~• toMerger ~~such calls,~~and ~~cancellation,~~integration ~~non-payment,~~costs; or• ~~non-renewal~~Litigation ~~becomes~~expenses; ~~more~~• ~~likely.~~Insurance ~~Interland’s~~expenses; ~~strategy~~and ~~for minimizing~~• ~~the~~Marketing ~~negative aspects of its target market include:~~ expenses.

•We ~~Capitalizing~~cannot onprovide ~~infrastructure~~any ~~efficiencies~~assurances tothat ~~become~~we awill ~~profitable~~succeed ~~provider~~in atour ~~the~~plans ~~lowest~~to ~~sustainable~~increase ~~price;~~the •size ~~Automating~~of our customer ~~care~~base, ~~and~~the ~~technical~~amount ~~support~~of toservices ~~reduce~~we offer, or our revenues during the ~~cost~~next ~~per~~fiscal ~~call,~~year and beyond. toIn ~~minimize~~addition, ~~the~~relatively ~~time~~large ~~spent~~portions byof ~~Company~~our ~~personnel;~~expenses •are ~~Intensive~~fixed ~~training~~in ~~and~~the ~~supervision~~short ofterm, ~~customer~~and therefore ~~care~~results ~~and~~of ~~technical~~operations ~~support~~are ~~personnel~~particularly sensitive to ~~maximize~~fluctuations ~~customer~~in ~~satisfaction;~~revenues. ~~and~~Also, •if ~~Increasing~~we cannot ~~the~~continue ~~number~~using ~~and~~third-party ~~breadth~~products ofin ~~services~~our toservice ~~differentiate~~offerings, ~~the~~our ~~Company~~service ~~from~~development ~~competition~~costs could increase significantly.

~~The~~Further, ~~Company~~because ~~can~~we ~~give~~have nogrown ~~assurance,~~through ~~however,~~acquisition ~~that~~and ~~any~~our past operating results reflect the costs of integrating these ~~measures~~acquisitions, ~~will~~as bewell ~~successful~~as revenues from operations which have now been sold, historical ~~and~~results ~~the~~are not representative of future expected operating results. We have previously ~~Company’s~~recognized ~~failure~~very tosizeable ~~manage~~charges ~~these~~and ~~risks~~expenditures ~~could~~for ~~decrease~~impairment ~~revenues~~charges, restructuring costs and network ~~increase~~enhancements. ~~losses~~Because these items are not necessarily recurring, it is more difficult for investors to predict future results.

~~Interland~~Our ~~could~~stock ~~incur~~price ~~liabilities~~may inbe ~~the~~volatile ~~future~~which ~~relating~~could tocause ~~its~~an PCinvestment ~~Systems~~in ~~business,~~our ~~which~~common ~~could cause~~stock ~~additional~~to ~~operating losses~~decrease significantly.

The market price of our common stock has experienced significant volatility. The price has been and is likely to continue to be highly volatile. The following are examples of factors or developments that would likely cause our stock price to continue to be volatile:

~~Interland~~• ~~could~~Variations ~~incur~~in ~~liabilities~~operating ~~from~~results ~~the~~and ~~sale~~analyst ofearnings ~~the~~estimates; PC• ~~Systems~~The ~~business~~volatility toof ~~GTG~~stock ~~PC.~~within ~~According to~~ the ~~terms~~sectors ofwithin ~~its~~which ~~agreement~~we ~~with~~conduct ~~GTG~~business; ~~PC,~~• itAnnouncements ~~retained~~by ~~liabilities~~us ~~relating~~or toby ~~the~~our ~~operation~~competitors ofregarding ~~the~~introduction ~~PC systems~~of ~~business~~new ~~prior~~services; to• ~~the~~General ~~closing~~changes ofin ~~the~~economic ~~transaction~~conditions; ~~including~~• ~~liabilities~~Changes ~~for~~in ~~taxes~~trading volume, ~~contingent~~ ~~liabilities~~ and ~~liabilities~~• ~~for~~Our ~~accounts~~inability ~~payable accrued prior~~ to ~~the~~reduce ~~closing. It also agreed to indemnify GTG PC and its affiliates for any breach of its representations and warranties contained in~~ the ~~agreement~~rate ~~for a period~~ of ~~two~~account ~~years~~cancellations, or ~~for the applicable statute of limitations for matters related~~ to ~~taxes.~~increase ~~Its indemnification obligation is capped at $10.0 million. Except for claims for fraud or injunctive relief, this indemnity is~~ the ~~exclusive~~rate ~~remedy for any breach~~ of ~~its representations,~~account ~~warranties and covenants contained in the agreement with GTG PC. Accordingly~~additions, ~~it could~~or ~~be required in the future to make payments to GTG PC and its affiliates in accordance with the agreement, which could adversely affect its future results of operations and cash flows~~both. ~~To date it has not had to satisfy any such claims.~~

~~Because~~During ~~Interland~~the ~~faces~~52 weeks ~~intense~~ended ~~competition~~March 31, it2007 ~~may~~the ~~not~~high beand ~~able~~low toclosing ~~operate~~price ~~profitably~~for inWeb.com ~~its~~common stock on ~~markets~~NASDAQ was $6.45 and $3.63, respectively.

~~The~~We ~~Web hosting and applications hosting markets are highly competitive, which~~ could hinder Interland’s ability to successfully market its products and services. The Company may not have the resources, expertise or other competitive factors to compete successfully in the future. Because there are few substantial barriers to entry, the Company expects that it will face ~~additional competition~~liability ~~from existing competitors~~ and ~~new~~expense ~~market entrants~~ in ~~the~~connection ~~future.~~with ~~Many~~our acquisition of ~~Interland’s current~~WebSource ~~and~~Media ~~potential competitors have greater name recognition~~ and ~~more established relationships~~ inrelated ~~the industry and greater resources~~litigation. ~~As a result, these competitors may be able to:~~

•On ~~Develop~~May 19, ~~and~~2006 ~~expand~~we ~~their~~acquired ~~network~~WebSource ~~infrastructures~~Media, ~~and~~LLC ~~service~~which ~~offerings~~was ~~more~~merged ~~rapidly;~~into •a ~~Adapt~~wholly-owned tosubsidiary. On ~~new~~June 12, or2006 ~~emerging~~the ~~technologies~~Federal ~~and~~Trade ~~changes~~Commission filed a complaint under seal in ~~customer~~federal ~~requirements~~court ~~more~~in Texas ~~quickly;~~alleging •that ~~Devote~~WebSource ~~greater~~Media, ~~resources~~its toformer owners and other defendants, engaged in unfair and deceptive trade practices in connection with the marketing and sale of ~~their~~WebSource ~~services;~~Media’s products. All WebSource Media telemarketing activities and sales to new customers were halted on or about June 13, •2006. ~~Adopt~~On ~~more~~June 21, ~~aggressive~~2006 ~~pricing~~the ~~policies~~Federal ~~than~~court entered an order that froze the ~~Company~~assets ~~can~~of WebSource Media and appointed a Receiver over WebSource Media. We are not a party to the FTC litigation. The receivership was subsequently terminated by the court on March 12, 2007.

~~Current~~In November, 2006, we commenced arbitration against the former members of WebSource Media, seeking damages for fraud, fraudulent inducement, and ~~potential~~breach ~~competitors~~of contract. The outcome of arbitration cannot be assured and there can be no guarantee that we will be able to recover the amount claimed in this case. The former members of WebSource Media have denied liability and asserted counterclaims against us in the ~~market~~arbitration. ~~include~~They ~~Web~~argue, ~~hosting~~among ~~service~~other ~~providers~~things, ~~applications~~that their employment ~~hosting~~was ~~providers~~terminated without cause and that such termination entitles them to an accelerated payment of the earn-out consideration at issue in the May 19, ~~Internet~~2006 ~~service~~merger ~~providers~~agreement of up to approximately $7 million in cash, ~~telecommunications~~1.325 million ~~companies~~shares of our stock and warrants for the purchase of up to 750,000 shares ~~large~~of ~~information~~our stock at a purchase price of $6 per share. Any accelerated earn-out consideration is ~~technology~~subject ~~firms~~to certain limitations, deductions, off-sets and ~~computer~~adjustments ~~hardware~~as ~~suppliers~~further provided in the merger agreement. ~~These~~The ~~competitors~~former ~~may~~members ~~operate~~of WebSource Media have also filed suit against us and that suit is now pending in ~~one~~the orU.S. ~~more~~District Court for the Southern District of Texas. The civil suit ~~these~~makes ~~areas~~many ~~and~~of ~~include~~the ~~companies~~same ~~such~~claims as ~~Yahoo!,~~were ~~NTT/Verio,~~asserted ~~Affinity~~in ~~Internet,~~the ~~and~~arbitration ~~Earthlink~~described above. We will assert counterclaims in the civil suit that are substantially identical to those asserted in the arbitration described above. We have asked the U.S. District Court to dismiss the litigation in light of the arbitration proceeding.

~~Impairment~~We could face liability and expense in connection with these matters. We cannot determine at this time what liability, if any, WebSource Media may have as a result of ~~Interland’s~~the ~~intellectual~~FTC ~~property~~litigation. ~~rights~~WebSource Media ~~could~~may ~~negatively~~also ~~affect~~face ~~its~~liability ~~business~~to orthird parties in connection with the acts and practices alleged by ~~could~~the ~~allow~~FTC ~~competitors~~in that litigation. Even if WebSource Media is ultimately determined to ~~minimize~~have ~~any~~no ~~advantage~~liability for the acts and practices alleged by the FTC, we expect that ~~Interland’s~~WebSource ~~proprietary~~Media ~~technology~~will ~~may~~have ~~give~~little or itno residual value.

~~The~~We ~~Company~~may ~~currently~~incur ~~has~~expense noand ~~patented~~experience ~~technology~~inconvenience ~~that~~and ~~would~~distraction ~~preclude~~in orconnection ~~inhibit~~with ~~competitors from~~our ~~entering~~involvement in the ~~Web~~litigation ~~hosting~~and ~~market~~as ~~that~~the itowner ~~serves.~~of ~~While~~WebSource itMedia. isIn ~~the~~addition, ~~Company’s~~although ~~practice~~we ~~to enter into~~have ~~agreements~~sued ~~with~~the ~~all~~former ~~employees~~owners ~~and with some~~ of ~~its~~WebSource ~~customers~~Media and ~~suppliers~~seek to ~~prohibit~~recover ordamages ~~restrict the~~from ~~disclosure~~those ~~of proprietary information~~defendants, ~~the~~there can ~~Company cannot~~ be ~~sure~~no guarantee that ~~these~~we ~~contractual arrangements~~will orprevail ~~the~~in ~~other~~that ~~steps~~litigation itor, ~~takes~~if towe ~~protect~~prevail, ~~its~~that ~~proprietary~~the ~~rights~~ defendants will ~~prove~~have sufficient ~~to prevent~~resources ~~illegal use of its proprietary rights or~~ to ~~deter~~pay ~~independent,~~us ~~third-party development of similar proprietary assets~~damages.

~~Effective~~Unfavorable ~~copyright,~~results ~~trademark,~~of ~~trade~~existing ~~secret~~litigation ~~and patent protection~~ may ~~not~~cause beus ~~available in every country in which its products and services are offered. Interland currently is, and in the future may be, involved in legal disputes relating~~ to ~~the~~have ~~validity~~additional orexpenses ~~alleged infringement of its intellectual property rights~~ or ~~those of a third party. Intellectual property litigation is~~operating ~~typically~~losses ~~extremely~~that ~~costly~~exceed ~~and~~our ~~can~~ability ~~be disruptive~~ to ~~business operations by diverting the attention and energies of management and key technical personnel~~pay. ~~In addition, any adverse decisions could~~ subject it 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 operations or the markets in which it competes which could decrease profitability.

~~Periodically~~We are defending a number of matters in active litigation (See Note 8 – Contingencies, to the Consolidated ~~Company~~Financial isStatements). ~~made~~The ~~aware~~cost of ~~claims~~defending lawsuits, orregardless ~~potential~~of ~~claims~~their merit, ~~that~~can be ~~technology~~substantial. itAlthough ~~used~~we inhave favorably resolved a number of lawsuits through rulings, ~~its~~verdicts, ~~discontinued~~and ~~operations~~settlements, and although we may ~~have~~be ~~infringed~~successful onin ~~intellectual~~defending ~~property~~ongoing ~~rights~~litigation, ~~held~~the costs byof ~~others~~defense cannot be expected to be avoided. ~~The~~We believe we have appropriately established ~~Company~~reserves ~~has~~for ~~accrued~~the contingency of adverse verdicts in accordance with GAAP. In order for a ~~liability~~loss contingency ~~and~~to ~~charged~~be ~~operations~~reserved for in the ~~estimated~~financial ~~costs~~statements, ofGAAP ~~settlement~~requires orthat the information ~~adjudication~~available prior to issuance of ~~several~~the ~~asserted~~financial ~~and~~statements ~~unasserted~~indicates ~~claims~~that ~~for~~it ~~alleged~~is ~~infringement~~probable ~~relating~~that toan ~~its~~asset ~~discontinued~~had ~~operations~~been ~~prior~~impaired toor ~~the~~a ~~balance~~liability ~~sheet~~had been incurred at the date of the financial statements. ~~Resolution~~It ofis implicit ~~these~~in ~~claims~~this ~~could~~condition that it must be probable that one or more future events will occur ~~costly~~confirming the fact of the loss and ~~decrease~~the ~~profitability~~amount of loss can be reasonably estimated. Therefore, we have not reserved for all of our pending lawsuits. Consequently, lawsuits for which there is no reserve pose a risk of substantial loss which could have a material

If Interland is unable to attract and retain key personnel, it may not be able to compete effectively in its market.

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, information technology, engineering, and technical support resources could adversely affect its ability

toeffect ~~remain~~on ~~competitive~~our inresults ~~its~~and financial ~~markets~~position. ~~The~~Additionally, ~~Company~~even in those cases where a reserve has been established, the amount of the reserve is necessarily an estimate and the actual result may ~~continue~~differ tomaterially. Reserves ~~face~~are established only for the ~~loss~~damages ofthat ~~key~~may ~~personnel~~be assessed, ~~which~~and ~~could~~do ~~limit~~not take into account the ~~ability~~costs of ~~the~~litigation. ~~Company~~Even in those instances where we may ultimately prevail on appeal, an adverse verdict in a substantial amount may damage our reputation, may require us to post an appeal ~~develop~~bond in an amount which deprives us of cash, and ~~market~~require ~~its~~additional ~~products~~expenditures for the cost of appeal. The outcome of litigation is unpredictable, and ~~services~~an adverse final verdict could exceed our ability to pay.

~~Interland~~Substantial ~~depends~~future ~~on its reseller~~ sales ~~channel to market and sell many~~ of ~~its~~shares ~~services.~~by ~~Interland does~~shareholders ~~not~~could ~~control~~negatively ~~its~~affect ~~resellers,~~our ~~and~~stock ~~if it fails to develop or maintain good relations with resellers, it may not achieve the growth in customers and revenues that it expects~~price.

AnA ~~element~~number of ~~the~~groups ~~strategy for the Company’s growth is to further develop the use~~ of ~~third~~investors ~~parties that~~hold ~~resell~~substantial ornumbers ~~recommend its services. Many~~ of ~~these~~our ~~resellers are Web development or Web consulting companies that also sell Interland’s Web hosting services~~shares, ~~but~~including ~~that generally do not~~current ~~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~~employees, ~~but it has benefited and continues to significantly benefit from business generated by~~ the ~~reseller~~former ~~channel. Although~~shareholders ~~Interland~~of ~~attempts~~acquired ~~to provide its resellers with incentives such as price discounts on its services that the resellers seek to resell at a profit~~companies, ~~the~~and ~~failure~~hedge offunds ~~its~~reported ~~services~~ to behave ~~commercially~~investment ~~accepted~~styles inthat ~~some~~lead ~~markets, whether as a result of a reseller’s performance or otherwise, could cause its current resellers~~ to ~~discontinue~~short-term ~~their relationships with the Company~~holdings. ~~The~~ ~~Company~~Substantial ~~also~~sales ~~is developing relationships with larger distribution partners, and although the percentage of the Company’s current revenues generated~~ by ~~any of~~ these ~~relationships~~holders ~~is currently~~may ~~small,~~adversely ifaffect ~~the~~our ~~Company’s~~stock ~~strategy is successful, future revenue growth will be dependent on the success and maintenance of these relationships~~price.

~~Interland~~We ~~is vulnerable to system failures, which~~ could ~~harm~~lose ~~its~~our ~~reputation,~~ability ~~cause its customers~~ to ~~seek~~ ~~reimbursement~~process ~~for~~credit ~~services,~~card ~~and cause its customers to seek another provider for services~~transactions.

~~The~~A ~~Company~~substantial ~~must~~portion beof ~~able~~our torevenues ~~operate~~are ~~the~~collected ~~systems~~by ~~that~~credit ~~manage~~card ~~its~~payments ~~network~~and ~~around~~we ~~the~~require ~~clock~~a ~~without~~valid ~~interruption.~~credit ~~Its~~card ~~operations~~to ~~will~~be ~~depend~~on ~~upon~~file ~~its~~for ~~ability~~nearly toall ~~protect~~of ~~its~~our ~~network~~retail ~~infrastructure, equipment~~customers. ~~and~~Credit ~~customer~~card ~~files~~fraud ~~against~~occurs ~~damage~~when ~~from~~an Internet ~~human~~user ~~error,~~attempts ~~fire,~~to ~~earthquakes,~~open ~~hurricanes, floods,~~an ~~power~~account ~~loss,~~with ~~telecommunications~~us ~~failures,~~using ~~sabotage,~~an ~~intentional~~invalid ~~acts~~credit ofcard. ~~vandalism~~Although ~~and~~we have ~~similar~~controls ~~events.~~in ~~The~~place ~~Company’s~~intended ~~networks~~to ~~are~~reduce ~~currently~~or ~~subject~~mitigate tothe ~~various~~impact ~~points~~ of ~~failure.~~credit ~~For example~~card fraud, awe ~~problem~~cannot ~~with~~prevent all ~~one~~credit ofcard ~~its~~fraud. ~~routers~~Significant ~~(devices~~amounts ~~that~~of ~~move~~credit ~~information~~card ~~from~~fraud ~~one~~may ~~computer~~introduce ~~network to~~error ~~another)~~into orour reported ~~switches~~revenues. ~~could~~In ~~cause~~addition, anwhen ~~interruption~~we inuncover ~~the~~subscriber ~~services~~accounts ~~the~~that ~~Company~~were ~~provides~~created towith ainvalid ~~portion~~credit ofcards, ~~its~~we ~~customers.~~routinely Incancel ~~the~~those ~~past,~~accounts. ~~the~~Such ~~Company~~cancellations ~~has~~can ~~experienced~~result ~~periodic~~in ~~interruptions~~charge-backs into ~~service.~~the ~~The~~owner ~~Company~~of ~~has~~the ~~also~~credit ~~experienced,~~card and inexcessive ~~the~~charge-backs ~~future~~and itother ~~may~~negative ~~continue~~experiences toresulting from ~~experience,~~credit ~~delays or~~card ~~interruptions~~fraud incould ~~service~~lead ascredit acard ~~result~~companies ofto deny us the ~~accidental~~ability orto ~~intentional~~process ~~actions~~credit card oftransactions ~~Internet~~or ~~users, current~~could ~~and~~result ~~former~~in ~~employees,~~us orpaying ~~others.~~higher ~~Any~~fees ~~future~~to ~~interruptions~~credit ~~could:~~card companies.

•We ~~Cause~~could ~~customers~~incur orliabilities ~~end~~in ~~users to seek damages for losses incurred; • Require~~ the ~~Company~~future torelating ~~replace existing equipment or add redundant facilities; • Damage the Company’s reputation for reliable service; • Cause existing customers~~ to ~~cancel~~our ~~their~~discontinued ~~contracts;~~PC orSystems •business, ~~Make~~which could itcause ~~more~~additional ~~difficult~~operating ~~for the Company to attract new customers~~losses.

~~Interland’s~~We ~~data~~could ~~centers~~incur liabilities from the sale of the PC Systems business to GTG PC. According to the ~~are~~terms ~~maintained~~of byour agreement with GTG PC, we retained liabilities relating to the operation of the PC systems business including liabilities for taxes, contingent liabilities and accounts payable accrued prior to the closing. We also agreed to indemnify GTG PC and its affiliates for any breach of representations and warranties for a ~~third~~period ~~party~~of two years, or for the applicable statute of limitations for matters related to taxes. Our 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 its representations, warranties and covenants contained in the agreement with GTG PC. Accordingly, we could be required in the future to make payments to GTG PC and its affiliates in accordance with the agreement, which could adversely affect our future results of operations and cash flows.

Substantially all of the network services and computer servers utilized by Interland in its provision of services to customers are housed in data centers owned by other service providers. In particular, substantially all of Interland’s servers are housed in the data center in Atlanta, Georgia that Interland sold to Peer 1 Networks on August 31, 2005. Interland obtains Internet connectivity for those servers, and for the customers who rely on those servers, in part through direct arrangements with network service providers and in part indirectly through Peer 1 Networks. In the future, Interland may house other servers and hardware items in facilities owned or operated by other service providers.

A disruption in the ability of one of these service providers to provide service to Interland could cause a disruption in service to Interland’s customers. A service provider could be disrupted in its operations through a number of contingencies, including unauthorized access, computer viruses, accidental or intentional actions, electrical disruptions, and other extreme conditions. Although Interland believes it has taken adequate steps to protect itself through its contractual arrangements with its service providers, Interland cannot eliminate the risk of a disruption in service resulting from the accidental or intentional disruption in service by a service provider. In addition, a service provider could raise its prices or otherwise change its terms and conditions in a way that adversely affects the Company’s ability to support its customers or financial performance.

Data centers and communications networks are vulnerable to security breaches that could cause disruptions in service, liability to third parties, or loss of customers.

~~A significant barrier to electronic commerce and communications is the need for secure transmission of confidential information over public networks~~Item 6. ~~Some of the Company’s services rely on security~~Exhibits 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 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 customers and potential customers.

Although the Company continues 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.


Exhibit		Description

3.01		Unofficial Restated Articles of Incorporation of Registrant (as amended through April 24, 2002) (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2002).

3.01(b)		Articles of Amendment to Articles of Incorporation of Registrant (incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended August 31,2003).

3.01(c)		Articles of Merger effective as of March 20, 2006 (incorporated by reference to Exhibit 3.01(c) to the Registrant’s Current Report on Form 8-K filed on March 21, 2006).

3.01(d)		Articles of Amendment to Articles of Incorporation of Registrant dated March 31, 2006 (incorporated by reference to Exhibit 3.01(d) to Registrant’s Form 8-K filed April 3, 2006).

3.01(e)		Certificate of Designation, Rights and Preferences of the Series A Junior Participating Preferred Stock, as filed with the Secretary of State of Minnesota on August 7, 2006 (incorporated by reference to Exhibit 3.1 to Registrant’s Form 8-K filed August 7, 2006).

3.01(f)		Statement of Cancellation of the Statement Fixing the Rights and Preferences of the Series A Junior Participating Preferred Stock, as filed with the Secretary of State of Minnesota on April 3, 2007 (incorporated by reference to Exhibit 3.01(f) to Registrant’s Form 8-K filed April 6, 2007).

4.11		Rights Agreement Amendment dated as of March 12, 2007 (incorporated by reference to the Registrant’s Form 8-K filed on March 13, 2007).

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.

Disruption of Interland’s services caused by unknown software or hardware defects could harm its business and reputation.

The Company’s service offerings depend on complex software and hardware, including proprietary software tools and software licensed from third parties. Complex software and hardware may contain defects, particularly when first introduced or when new versions are released. The Company may not discover software or hardware defects that affect its new or current services or enhancements until after they are deployed. Although Interland has not experienced any material software or hardware defects to date, it is possible that defects may exist or occur in the future. 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 websites 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 website or application problems that the customer may ascribe to it. A court might not enforce any limitations on Interland’s 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 unknown but significant amounts, which would seriously harm its business.

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 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 provide assurances 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 rate of growth of Internet use.

Interland’s business operates in an uncertain legal environment where future government regulation and lawsuits could restrict Interland’s business or cause unexpected losses.

Due to the increasing popularity and use of the Internet, 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 such legislation. 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. 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. 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.

Interland’s stock price may be volatile which could cause an investment in its common stock to decrease significantly.

The market price of its common stock has experienced a significant decline. The price has been and is likely to continue to be highly volatile. The following are examples of factors or developments that would likely cause the Company’s stock price to continue to be volatile:

• Variations in operating results and analyst earnings estimates; • The volatility of stock within the sectors within which it conducts business; • Announcements by Interland or its competitors regarding introduction of new services; • General decline in economic conditions; • Reductions in the volume of trading in its common stock, and; • The Company’s inability to reduce the rate of account cancellations, or to increase the rate of account additions, or both.

During the 52 weeks ended November 30, 2005 the high and low closing price for Interland common stock on NASDAQ was $4.03 and $1.86, respectively.

Substantial future sales of shares by shareholders could negatively affect Interland’s stock price.

A number of groups of investors hold substantial numbers of Interland shares, including the former shareholders of acquired companies, and hedge funds reported to have investment styles that lead to short-term holdings. Substantial sales by these holders may adversely affect Interland’s stock price.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

Not Applicable

Item 3. Defaults Upon Senior Securities

Not Applicable

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

Not Applicable

Item 5. Other Information

(a) None

(b) None

Item 6. Exhibits

Exhibits:

Exhibit		Description
2.01(1)		Asset Purchase Agreement between Interland, Inc., Web Internet, LLC and William Pemble dated November 29, 2005 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on 11/30/05).
3.01		Unofficial Restated Articles of Incorporation of Registrant (as amended through April 24, 2002) (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended 5/31/02).
3.01(b)		Articles of Amendment to Articles of Incorporation of Registrant (incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended 8/31/03).
3.02		Unofficial Restated Bylaws of the Registrant (as amended through August 6, 2001) (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended 5/31/02).
10.136		Form of Separation Agreement and Mutual Release of All Claims as of October 18, 2005 by and between Interland, Inc. and Allen L. Shulman (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on 10/18/05).
10.137		Settlement and Mutual Release Agreement between Interland, Inc. and Novell, Inc. dated October 28, 2005 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on 11/3/05).
10.138		Intellectual Property Purchase and Sale Agreement between Interland, Inc. and Web Service Company, Inc. dated November 29, 2005 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on 11/30/05).
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.

(1) In accordance with Item 601(b)(2) of Regulation S-K, certain of the schedules have been omitted and a list briefly describing the schedules is at the end of the Exhibit. The Registrant will furnish supplementally a copy of any omitted schedule to the commission upon request.

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.
		Web.com, Inc. (Registrant)
		(Registrant)
Dated: May 10, 2007		/s/ Gonzalo Troncoso Gonzalo Troncoso
Dated: January 9, 2006		/s / Gonzalo Troncoso
		Executive Vice President and Chief Financial Officer
		Gonzalo Troncoso
		(Principal Financial Officer)
Executive Vice President and Chief Financial Officer,
(Principal Financial Officer)

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Filing Compare · WEB.COM, INC.