UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
DC 20549
  
 
 FORM
10-K/A
    
  x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the fiscal year ended December 31, 2007
 
 OR
 
  ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the transition period from

to 
.
 
 Commission
file number: 000-31989
 
 INTERNAP
NETWORK SERVICES CORPORATION
 (Exact
Name of Registrant as Specified in Its Charter)
 
   Delaware
              
              91-2145721(State
      or Other Jurisdiction of
                Incorporation
      or Organization)
              
              (I.R.S.
      Employer
                Identification
      No.)250
      Williams Street
                Atlanta,
      Georgia
              
              30303(Address
      of principal executive offices)
              
              (Zip
      Code)
 
 (404)
302-9700
 (Registrant’s
telephone number, including area code)
 Securities
registered pursuant to Section 12(b) of the Act:
 
 Title
      of Each Class
              
              Name
      of Exchange on Which RegisteredCommon
      Stock, $0.001 par value
              
              The
      NASDAQ Stock Market LLC
                (NASDAQ
      Global Market)
 
 Securities
registered pursuant to Section 12(g) of the Act: None
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.     Yes   o
    No   x
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.     Yes  
o
    No   x
  
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.    Yes   x
    No   o
 
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A or any
amendment to this Form 10-K/A.   o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
 
 Large
      accelerated filer o
              Accelerated
      filer xNon-accelerated
      filer o
                (Do
      not check if a smaller reporting company)
              Smaller
      reporting company o
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).     Yes   o
    No   x
 
 The
aggregate market value of the registrant’s outstanding common stock held by
non-affiliates of the registrant was $698,160,175 based on a closing price of
$14.42 on June 30, 2007 as quoted on the NASDAQ Global Market.
 
 As of
March 6, 2008, 49,793,430 shares of the registrant’s common stock, par
value $0.001 per share, were issued and outstanding.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 None.
  
 
 
 
  
 
 EXPLANATORY
NOTE
  Internap Network Services Corporation
(the “Company” or “Internap”) is filing this Amendment No. 1 on Form 10-K/A (the
“Amendment”) to amend its Annual Report on Form 10-K for the fiscal year ended
December 31, 2007, originally filed on March 31, 2008 (the “Original Filing”) to
set forth the information required by Items 10, 11, 12, 13, and 14 under Part
III of Form 10-K because a definitive proxy statement containing such
information will not be filed within 120 days after the end of the fiscal year
covered by the Company’s original Form 10-K filing. This Annual Report on Form
10-K/A amends Part III of the Company’s Original Filing only, and all other
portions of the Company’s Original Filing remain in effect and have not been
amended to reflect events and developments since the original March 31, 2008
filing date.
  As required by Rule 12b-15 promulgated
under the Securities and Exchange Act of 1934, our Chief Executive Officer and
Chief Financial Officer are providing Rule 13a-14(a) certifications dated April
30, 2008 in connection with this Amendment No. 1 on Form 10-K/A and written
statements pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated April
30, 2008.
  The
Original Filing as amended hereby continues to speak as of the date of the
Original Filing and the disclosures have not been amended to speak to any later
date. Any items in the Original Filing that are not expressly amended hereby
shall be as set forth in the Original Filing. The Company has included the
portions of the Original Filing that are not amended by this Amendment for
informational purposes only. All information contained in this Amendment and the
Original Filing is subject to updating and supplementing as provided in our
subsequent periodic reports filed with the Securities and Exchange
Commission.
 TABLE
OF CONTENTS
  PagePART
      IITEM 1.
              
              BUSINESS.
              
              4ITEM
      1A.
              
              RISK
      FACTORS.
              
              14ITEM
      1B.
              
              UNRESOLVED
      STAFF COMMENTS.
              
              27ITEM 2.
              
              PROPERTIES.
              
              27ITEM 3.
              
              LEGAL
      PROCEEDINGS.
              
              27ITEM 4.
              
              SUBMISSION OF
      MATTERS TO A VOTE OF SECURITY HOLDERS.
              
              27PART
      IIITEM 5.
              
              MARKET FOR
      REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES.
              
              27ITEM 6.
              
              SELECTED
      FINANCIAL DATA.
              
              30ITEM 7.
              
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.
              
              32ITEM 7A.
              
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
              
              54ITEM 8.
              
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA.
              
              55ITEM 9.
              
              CHANGES IN AND
      DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.
              
              55ITEM 9A.
              
              CONTROLS AND
      PROCEDURES.
              
              55ITEM
      9B.
              
              OTHER
      INFORMATION.
              
              56PART
      IIIITEM 10.
              
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
              
              57ITEM 11.
              
              EXECUTIVE
      COMPENSATION.
              
              60ITEM 12.
              
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.
              
              78ITEM 13.
              
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.
              
              80ITEM 14.
              
              PRINCIPAL
      ACCOUNTING FEES AND SERVICES.
              
              80PART
      IVITEM 15.
              
              EXHIBITS AND
      FINANCIAL STATEMENT SCHEDULES.
              
              81SIGNATURES
              85
  
 
 
 
  FORWARD-LOOKING
STATEMENTS
 
 This
Annual Report on Form 10-K/A contains “forward-looking statements” within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements include statements regarding industry trends, our
future financial position and performance, business strategy, revenues and
expenses in future periods, projected levels of growth, and other matters that
do not relate strictly to historical facts. These statements are often
identified by the use of words such as “may,” “will,” “seeks,” “anticipates,”
“believes,” “estimates,” “expects,” “projects,” “forecasts,” “plans,” “intends,”
“continue,” “could,” “should,” or similar expressions or variations. These
statements are based on the beliefs and expectations of our management team
based on information currently available. Such forward-looking statements are
not guarantees of future performance and are subject to risks and uncertainties
that could cause actual results to differ materially from those contemplated by
forward-looking statements. Important factors currently known to our management
that could cause or contribute to such differences include, but are not limited
to, those set forth in this annual report under “Item 1A
 
 As used
herein, except as otherwise indicated by context, references to “we,” “us,”
“our,” or the “Company” refer to Internap Network Services
Corporation.
  
  
 PART
I
  ITEM 1. BUSINESS.
 
 Overview
 
 We were
incorporated as a Washington corporation in 1996 and reincorporated in Delaware
in 2001. Our principal executive offices are located at 250 Williams Street,
Suite E-100, Atlanta, Georgia 30303, and our telephone number at that location
is (404) 302-9700. Our common stock trades on the NASDAQ Global Market under the
symbol “INAP.”
 
 We market
products and services that optimize the performance and reliability of strategic
business Internet applications for e-commerce, customer relationship management,
or CRM, multimedia streaming, Voice-over Internet-Protocol, or VoIP, virtual
private networks, or VPNs, and supply chain management. Our product and service
offerings are complemented by value-added services such as colocation and data
center services and managed security services. We also provide products and
services for storing and delivering audio and video digital media to large
audiences over the Internet through a subsidiary, VitalStream Holdings, Inc., or
VitalStream. Our content delivery network, or CDN, was purpose-built for
streaming digital media and enables content owners to monetize their digital
media assets via both subscription and advertising-based business models. Our
VitalStream subsidiary also offers: proprietary advertising selection and
advertising insertion capabilities, enabling customers to turn existing
streaming traffic into content packaged with advertising; Internet Protocol
Television, or IPTV; professional services; and small business services.
Additionally, we offer high levels of pre- and post- installation service and
consulting.
 
 As of
December 31, 2007, we delivered services through our 50 service points across
North America, Europe, Asia, and Australia, which feature direct high-speed
connections to multiple major Internet backbones such as AT&T Inc., Sprint
Nextel Corporation, Verizon Communications Inc., Savvis, Inc., Global Crossing
Limited, Level 3 Communications, Inc., and Verio, an NTT Communications Company.
Our proprietary route optimization technology monitors the performance of
Internet networks allowing our customer traffic to be “intelligently” routed
over the optimal path in a way that maximizes performance and reliability of the
transactions by minimizing loss and delays inherent across the Internet. We
believe our unique managed multi-network approach provides better performance,
control and reliability compared to conventional Internet connectivity
alternatives. Our service level agreements, or SLAs, guarantee performance
across the entire Internet, excluding local connections, whereas providers of
conventional Internet connectivity typically only guarantee performance on their
own network. Internap serves customers in a variety of industries including
financial services, entertainment and media, travel, e-commerce, retail, and
technology. As of December 31, 2007, we provided our services
to approximately 3,800 customers in the United States and
abroad.
 
 4
 Developments
in 2007
 
 VitalStream
Acquisition.On February 20, 2007, we completed our acquisition of
VitalStream pursuant to an Agreement and Plan of Merger, dated October 12,
2006. As a result, we issued approximately 12.2 million shares of common
stock to VitalStream stockholders, which represented approximately 25% of
our outstanding shares.  We also assumed outstanding options for the
purchase of shares of VitalStream common stock, which we converted into options
to purchase approximately 1.5 million shares of Internap common stock. 
VitalStream is now a wholly-owned subsidiary of Internap.
 
 Restructuring
Liability. 
On March 31, 2007, we incurred a restructuring and impairment charge totaling
$10.3 million. The charge was the result of a review of our business,
particularly in light of our acquisition of VitalStream, and the finalization of
our overall integration and implementation plan during the  first
quarter. The charge to expense included $7.8 million for leased facilities,
representing both the net present value of costs less anticipated sublease
recoveries that will continue to be incurred without economic benefit to us and
costs to terminate leases before the end of their term. The charge also included
severance payments of $1.1 million for the termination of certain Internap
employees and $1.4 million for impairment of assets. Related expenditures are
estimated to be $10.7 million, of which $2.8 million has been paid during the
year ended December 31, 2007, and the balance continuing through December 2016,
the last date of the longest lease term. The impairment charge of $1.3 million
was related to the leases referenced above and less than $0.1 million for other
assets.
  We also
incurred a $1.1 million impairment recorded for a sales order-through-billing
system, which was a result of an evaluation of the existing infrastructure
relative to our new financial accounting system and the acquisition of
VitalStream.
  Write-Off
of Investment. In connection with the preparation of our quarterly report for the
quarter ended June 30, 2007, we wrote-off an investment, totaling $1.2 million,
representing the remaining carrying value of our investment in series D
preferred stock of Aventail Corporation, or Aventail. We made an initial cash
investment of $6.0 million in Aventail series D preferred stock pursuant to an
investment agreement in February 2000. In connection with a subsequent round of
financing by Aventail, we recognized an initial impairment loss on our
investment of $4.8 million in 2001. On June 12, 2007, SonicWall, Inc. announced
that it had entered into an agreement to acquire Aventail for approximately
$25.0 million in cash. The transaction closed on July 11, 2007, and all shares
of series D preferred stock were cancelled and the holders of series D preferred
stock did not receive any consideration for such
shares.  Consequently, we recorded a write-off of our investment in
Aventail to reduce our carrying value to $0.
  Rights Agreement.On March 15, 2007, the Board of Directors declared a dividend of one
preferred share purchase right, or a Right, for each outstanding share of common
stock, par value $0.001 per share, of the Company. The dividend was payable on
March 23, 2007 to the stockholders of record on that date. Each Right entitles
the registered holder to purchase from the Company one one-thousandth of a share
of Series B Preferred Stock of the Company, par value $0.001 per share, or the
Preferred Shares, at a price of $100.00 per one one-thousandth of a Preferred
Share, subject to adjustment. The description and terms of the Rights are set
forth in a Rights Agreement between the Company and American Stock
Transfer & Trust Company, as Rights Agent dated April 11,
2007.
  Data Center
Expansion.On June 12, 2007, we announced that we approved an investment of up to
$40.0 million to fund the expansion of our data center facilities in several key
markets. We anticipate implementing the expansion over the next several calendar
quarters, with at least a portion of the funding to be provided under our credit
agreement, discussed below.  As of December 31, 2007, we have incurred
costs of less than $10.0 million pursuant to this expansion.
 
 5
 Credit Agreement.On September 14, 2007, we entered into a $35.0 million credit agreement.
We discuss this agreement in note 10 to the consolidated financial statements
and the section captioned “Liquidity and Capital Resources” under “Item 2.
Managements Discussion and Analysis of Financial Condition and Results of
Operations.”
 
 Industry
Background
 
 The
emergence of multiple Internet networks
 
 The
Internet originated as a restricted network designed to provide efficient and
reliable long distance data communications among the disparate computer systems
used by government-funded researchers and organizations. As the Internet
evolved, businesses began to use the Internet for functions critical to their
core business and communications. Telecommunications companies established
additional networks to supplement the original public infrastructure and satisfy
increasing demand. Currently, the Internet is a global collection of multitudes
of interconnected computer networks, forming a network of networks. These
networks were developed at great expense but are nonetheless constrained by the
fundamental limitations of the Internet’s architecture. Each network must
connect to one another, or peer, to permit its users to communicate with each
other. Consequently, many Internet network service providers, or ISPs, have
agreed to exchange large volumes of data traffic through a limited number of
public network access points and a growing number of private connections called
peering.
 
 Peering
network access points are not centrally managed. We believe that no single
entity has the economic incentive or ability to facilitate problem resolution or
to optimize peering within the public network access points, nor the authority
to bring about centralized routing administration. Additionally, since these
arrangements are based on non-regulated agreements, disagreements between
carriers impact performance. As a consequence of the lack of coordination among
networks at these public peering points, and in order to avoid the increasing
congestion and the potential for resulting data loss at the public network
access points, a number of the ISPs have established private interfaces
connecting with their peers for the exchange of traffic. Although private
peering arrangements are helpful for exchanging traffic, they do not solve all
of the structural and economic shortcomings of the Internet.
 
 The
problem of inefficient routing of data traffic on the Internet
 
 An
individual ISP only controls the routing of data within its network, and its
routing practices tend to compound the inefficiencies of the Internet. When an
ISP receives a packet that is not destined for one of its own customers, it must
route that packet to another ISP to complete the delivery of the packet on the
Internet. Since the use of a public network access point or a private peering
point typically involves no economic settlement, an ISP will often route the
data to the nearest point of traffic exchange, in an effort to get the packet
off its network and onto a competitor’s network as quickly as possible to reduce
capacity and management burdens on its transport network. Once the origination
traffic leaves the network of an ISP, service level agreements with that ISP
typically do not apply since that carrier cannot control the quality of service
on another ISPs network. Consequently, in order to complete a communication,
data ordinarily passes through multiple networks and peering points without
consideration for congestion or other factors that inhibit performance. For
customers of conventional Internet connectivity providers, this transfer can
result in lost data, slower and more erratic transmission speeds, and an overall
lower quality of service, especially where the ISP is not familiar with the
performance of the destination network. Equally important, these customers have
no control over the transmission arrangements and have no single point of
contact that they can hold accountable for degradation in service levels, such
as poor data transmission performance, or service failures. As a result, it is
virtually impossible for a single ISP to offer a high quality of service across
disparate networks.
  6
  The
problem of poor application performance over distant network paths
 
 The major
protocols often utilized over data networks perform poorly when network latency
is large or network paths are subject to packet and data loss. Network latency
is a measure of the time it takes data to travel between two network points. In
networks, network latency often depends on physical distance but may also depend
on conditions such as congestion. One measure of performance is effective
throughput. Throughput is defined as the rate of data transfer, typically
expressed in bits per second or megabits per second, or Mbps. It can be limited
by the size of the network connection, for example, 1.5Mbps for a standard T1
data connection, or it can be limited by the protocols reacting to certain
network conditions such as latency or packet loss. Typically, throughput is
inversely proportional to network latency. Network latency is a significant
factor when communicating over vast distances such as the global network paths
between two continents. The more distant the communicating parties are from each
other, the higher the network latency will be resulting in lower effective
throughput. This throughput may be lower than the available network capacity and
often results in poor utilization of purchased network capacity. Additionally,
many network protocols react to packet loss by requesting a retransmission of
the missing data. This retransmission is often interpreted as intermediate
network congestion by the protocol that then responds with more conservative
network usage and a further reduction of effective throughput. As a result,
business applications that must communicate over the vast distances common in
the global economy are subject to these limitations, which result in poor
application performance and poor utilization of network assets. Network
conditions vary significantly in many parts of the developing world and may also
result in poor application performance. Yet the global economy is a factor in
many businesses operating in these parts of the developing world where distances
are vast and network conditions are poor.
 
 The
growing importance of the Internet for business-critical Internet-based
applications
 
 Once
primarily used for e-mail and basic information retrieval, the Internet is now
used as a communications platform for an increasing number of business-critical
Internet-based applications, such as those relating to electronic commerce,
VoIP, supply chain management, customer relationship management, project
coordination, streaming media, and video conferencing and
collaboration.
 
 Businesses
are unable to benefit from the full potential of the Internet primarily because
of performance issues discussed above. The emergence of technologies and
applications that rely on network quality and require consistent, high-speed
data transfer, such as VoIP, multimedia document distribution and streaming, and
audio and video conferencing and collaboration, are hindered by inconsistent
performance. We believe that providers who provide a consistently high quality
of service that enables businesses to successfully and cost effectively execute
their business-critical Internet-based applications over the public network
infrastructure through superior performance Internet routing services will drive
the market for Internet services.
 
 The
growing demand for delivery of rich media content over the Internet
 
 The
proliferation of Internet-connected devices and broadband Internet connections
coupled with increased consumption of media over the Internet including
personalized media content have created a demand for delivery of rich media
content. Increasingly, as the volume and quality of dynamic content progresses,
viewers of all ages are spending more and more time using the
Internet.  Viewers now expect to be able to watch a movie or
television show online, view the latest news clips, take a virtual walk-through
of a home, hear a podcast, watch a live sporting event or concert, or
participate in an educational course just to name a few
examples.  Companies that need to deliver rich media content can
either deliver the content using basic Internet connectivity or utilize a
content distribution network, or CDN.  Because of the inherit
weaknesses of the Internet, delivery of rich media content is not
reliable.  To overcome this problem, companies can either invest
substantial capital to build the infrastructure to bypass the public Internet or
utilize a third party’s CDN.
  Our
Market Opportunity
 
 Historically,
network service providers, or NSPs, have maintained at-will agreements to
deliver Internet traffic on a “best efforts” basis without guaranteeing various
levels of quality of service. This best efforts delivery is sub-optimal for
time-sensitive and real-time applications that require uninterrupted streams of
data such as voice and video. For companies that rely on the Internet as a
medium for commerce or relationship management, this unpredictable performance
often translates into lost revenue, decreased productivity and dissatisfied
customers.
  7
  The
Internet serves as a core component of many direct sales, supply chain and
collaboration strategies and has extended our customers’ ability to reach global
partners, suppliers and customers. This changing landscape, combined with an
increasingly dispersed workforce and the adoption of emerging technologies like
VoIP and streaming media, has increased the need for fast, reliable connectivity
and delivery of content rich media. We believe Internap meets this requirement
and is well positioned to help businesses leverage the Internet to attain
improved productivity, decreased transactional costs and new revenue
streams.
 
 Services
and Technology
 
 We offer
the following managed services and premise-based products:
 
 High Performance Internet
Protocol, or IP
 
 Our
managed intelligent routing service provides fast, reliable connectivity to all
major backbones and dynamically identifies the optimal path for our customers’
traffic. The service is also supported by industry leading service level
agreements with 100 percent network availability, excluding local connections.
Our team of certified network engineers supports our customers 24 hours a day,
every day of the year. We charge for these services based on a fixed-fee, usage
or a combination of both fixed fee and usage basis.
 
 Data Center Services
 
 We
operate data centers where customers can host their applications directly on our
network to eliminate issues associated with the quality of local connections.
Data center services also enable us to have a more flexible product offering,
such as bundling our high performance IP connectivity and managed services such
as content delivery along with hosting customers’ applications. We charge
monthly fees for data center services based on the amount of square footage that
the customer leases in our facilities. We also have relationships with various
providers to extend our Private Network Access Point, or P-NAP, model into
markets with high demand.
  Our data center services allow us to expand the reach of our high
performance IP services to customers who wish to take advantage of locating
their network and application assets in secure, high performance facilities. To
maximize this footprint, we use a combination of facilities owned by third
parties and facilities we own to our best strategic and financial advantage. We
also leverage this unique product combination position to create a
differentiated offering that has proven to be competitive.
 
 Flow Control Platform, or
FCP
 
 Our FCP
is a premise-based intelligent routing hardware product for customers who
run their own multiple network architectures, known as multi-homing. The
prevalence of multi-homed networks is increasing. To operate each network at the
highest performance level, a significant amount of expertise is required to
monitor and adjust to global Internet routing, which is very dynamic in nature.
The FCP functions similarly to our P-NAP, monitoring the global Internet and
automatically adjusting routing real-time to balance the traffic across multiple
links to optimize performance. FCP can be tuned to manage network traffic on two
dimensions: cost and performance. The user can set thresholds that balance
performance against cost, for example routing all traffic across low cost
providers while specific minimum performance thresholds are met. If the
performance deteriorates, then the traffic can be routed over a better
performing but more costly provider to maintain minimum specified performance.
This option allows the customer to enjoy service with the optimized performance
and economics. Another key feature is minute-by-minute visibility reports and
logs on the performance and operation of the customer’s network. Our customers
find this information to be very useful for carrier SLA verification, monitoring
and overall network management.
  8
  FCP is
one of only a few of the industry’s route control appliances that analyzes and
re-routes Internet traffic flows in real-time. We offer FCP as either a one-time
hardware purchase or as a monthly subscription service. Sales of FCP also
generate annual maintenance fees and professional service fees for installation
and ongoing network configuration. Since the FCP emulates our P-NAP service in
many ways, this product affords us the opportunity to serve customers outside of
our P-NAP market footprint.
 
 Other Products &
Services
 
 To
complement our existing portfolio, we also offer managed Internet services via
third parties. These services include virtual private networking and managed
security services, including VeriSign, Inc. intrusion detection/prevention and
managed firewall services to more broadly support our clients’
Internet applications. These also include a continuation of Akamai Technologies,
Inc., or Akamai, CDN services through September 30, 2007.
 
 We offer
the following products and services based on our CDN:
  Next Generation Cluster
Architecture Content Delivery Network
  Our CDN
is designed to optimize delivery of streaming media content. The network
incorporates high performance equipment with unparalleled 10 Gigabit uplinks to
multiple tier-1 network providers and geographic diversity. The network is
comprised of multiple data centers containing distributed server clusters. This
multi-homed network helps minimize exposure at congested peers. Our close
proximity to other backbone providers ensures we can quickly add bandwidth when
needed. Distributed clustering technology for streaming and hosting services
allows us to scale the network based on customer demand.
  Our
network is protected by advanced security systems, including firewalls, proxies
and private networking to protect critical systems from intruders. We
continuously monitor for security vulnerabilities and malicious activity and
employ a staff of security experts to respond to security-related incidents.
Additionally, we provide various encryption and digital rights management
services that allow our customers to protect their content on our
network.
  Streaming Service for
Flash
  We worked
hand-in-hand with Adobe, which was formerly known as Macromedia, to develop a
Flash streaming platform, and are an experienced Flash video streaming service
provider. This method of delivering video on demand is reliable, interactive and
easy to use, giving our customers the opportunity to utilize their existing
Flash development environment, and streamlining their workflow. Our Flash video
streaming service permits our customers to upload files to our streaming network
without having to set up and maintain video servers.
  As an
Adobe Flash Video Streaming Service provider, we can support Flash 8 and Flash
Media Server 2.0. The new video features found in the Flash Platform with the
announcement of Flash Player 8 offer enhanced capabilities for interactive
video, enabling our customers to deliver high-quality video at the smallest file
sizes while ensuring faster and smoother video playback. These enhancements
significantly improve the overall viewing experience of streaming
video.
  Streaming Service for
Windows Media
  Our
streaming service for windows media is ideal for businesses seeking to
distribute or sell their high-quality video online with maximum control of their
content. Windows Media is a flexible platform that enables content providers to
protect and deliver live events, corporate presentations, news, sports, music,
entertainment events, or movies with the confidence that digital media files
will stay protected, no matter how they are distributed. We have been a
Microsoft Premier Certified Hosting Service provider since October
2002.
  Content Delivery
Service
  Our
streaming customers often need to utilize download services as part of their
business solution. In response to this customer demand, we provide file download
services to enable our customers to download critical content including HTML,
graphics, media files, software, and podcasts to their customers.
  9
  Professional
Services
  This
division assists our customers in building the unique solutions required for
their specialized business models. Through internal and external resources,
these services design, build and deploy custom solutions, such as video players,
graphical userinterfaces, or GUIs, advertising components, control
panels for content management and reporting, authentication web services, and
Flash Communication Server applications. These solutions are fully integrated
into our CDN. We also architect, design, build, and deploy web applications that
feature video or audio streaming and interface with existing customer systems.
Fees for these services vary by project.
  Authentication
  Our
authentication service provides token-based authentication services. This
service protects and delivers customers’ offerings by allowing only authorized
viewers to access content, which enables customers to take greater advantage of
the Internet as a reliable and cost-effective distribution channel.
  Managed
Servers
  Our
managed servers are an outsourced hosting service for our customers. We provide
server hardware, bandwidth and continuous system administration, including
server and network monitoring, reporting, ongoing maintenance, security, and
backup. We charge a fixed monthly fee for standard hosting
services.
  Advertising
  Internap
advertising services provides customers with a one-stop solution for delivering
integrated streaming and digital advertising content on the Internet. The
solution inserts in-stream advertisements into “live” and “on-demand” Internet
streaming broadcasts to target specific listener demographics, enabling
advertisers to reach the most engaged opt-in audio and video audiences with a
seamless, in-stream advertising experience. Campaign management and advertising
results reporting complete the comprehensive solution.
  Network
Access Points, Points of Presence and Data Centers
 
 We
provide our services through our network access points across North America, and
in Europe, Asia, and Australia. Our network access points and data centers
feature direct high speed connections to multiple major ISPs, including AT&T
Inc., Sprint Nextel Corporation, Verizon Communications Inc., Savvis, Inc.,
Global Crossing Limited, Level 3 Communications, and Verio, an NTT
Communications Company, as well as Internet Initiative Japan, Inc. and KDDI
Corp. in Asia. Through our CDN points of presence, or POPs, we provide access to
the Internet for our CDN customers. As of December 31, 2007, we provided
services worldwide through 50 IP service points, 42 data center locations and 12
POPs. We directly operate eight of these sites and have operating agreements
with third parties for the remaining locations in the following
markets:
  Internap
      operated
              
              Operated
      under third party agreementsAtlanta
              
              Boston
              Orange
      County/
              AmsterdamBoston
              
              Chicago
              San
      Diego
              Hong
      KongHouston
              
              Dallas
              Philadelphia
              LondonNew
      York
              
              Denver
              Phoenix
              Osaka(1)Seattle
              
              Los
      Angeles
              San
      Francisco
              SingaporeMiami
              San
      Jose
              SydneyNew
      York
              Washington
      DC
              Tokyo(1)Oakland
              
              Toronto
  
 (1)
              Through
      our joint venture in Internap Japan Co., Ltd. with NTT-ME Corporation and
      Nippon Telegraph and Telephone
Corporation.
   10
  We are
dependent upon the ISPs noted above as well as other ISPs, telecommunications
carriers and other vendors in the United States, Europe and the Asia-Pacific
region, some of whom have experienced significant system failures and electrical
outages in the past. Users of our services may experience difficulties due to
system failures unrelated to our systems and services. If for any reason, our
vendors and providers fail to provide the required services, our business,
consolidated financial condition, results of operations or cash flows could be
materially adversely impacted.
 
 Segments
 
 As
discussed in note 5 to the consolidated financial statements included in
this annual report on Form 10-K/A, we operate in three business segments: IP
services, data center services and CDN services.
 
 The
following is a brief description of each of our reportable business
segments.
 
 IP
Services
  Our
patented and patent-pending network performance optimization technologies
address the inherent weaknesses of the Internet, allowing enterprises to take
advantage of the convenience, flexibility and reach of the Internet to connect
to customers, suppliers and partners. Our solutions take into account the unique
performance requirements of each business application to ensure performance as
designed, without unnecessary cost. Prior to recommending appropriate network
solutions for our customers’ applications, we consider key performance
objectives including (1) performance and cost optimization, (2) application
control and speed and (3) delivery and reach. Our charges for IP services are
based on a fixed-fee, usage or a combination of both fixed fee and
usage.
  Our IP
services segment also includes our flow control platform, or FCP. The FCP
provides network performance management and monitoring for companies with
multi-homed networks and redundant Internet connections.  The FCP
proactively reviews customer networks for the best performing route or the most
cost-effective and routes according to our customers’ requirements.  We
offer FCP as either a one-time hardware purchase or as a monthly subscription
service. Sales of FCP also generate annual maintenance fees and professional
service fees for installation and ongoing network configuration. Since the FCP
emulates our private network access points, or P-NAP, service in many ways, this
product affords us the opportunity to serve customers outside of our P-NAP
market footprint. This product represents approximately 4% of our IP services
revenue and approximately 2% of our consolidated revenue for the year ended
December 31, 2007.
  Data
Center Services
  Our data
center services provide a single source for network infrastructure, IP and
security, all of which are designed to maximize solution performance while
providing a more stable, dependable infrastructure, and are backed by guaranteed
service levels and our team of dedicated support professionals. We offer a
comprehensive solution at 42 service points, including eight locations managed
by us and 34 locations managed by third parties.
 
 Data
center services also enable us to have a more flexible product offering,
including bundling our high performance IP connectivity and managed services,
such as content delivery, along with hosting customers' applications. We charge
monthly fees for data center services based on the amount of square footage that
the customer leases in our facilities. We also have relationships with various
providers to extend our P-NAP model into markets with high demand.
 
 CDN
Services
  Our CDN
services enable our customers to quickly and securely stream and distribute
video, audio, advertising, and software to audiences across the globe through
strategically located data centers. Providing capacity-on-demand to handle large
events and unanticipated traffic spikes, content is delivered with high quality
regardless of audience size or geographic location. Our MediaConsole® content
management tool provides our customers the benefit of a single, easy to navigate
system featuring Media Asset Management, Digital Rights Management, or DRM,
support, and detailed reporting tools. With MediaConsole, our customers can use
one application to manage and control access to their digital assets, deliver
advertising campaigns, view network conditions, and gain insight into habits of
their viewing audience.
  11
  Our CDN
and monetization services provide a complete turnkey solution for the
monetization of online media. These multi-faceted “live” and “on-demand”
advertising insertion and advertising placement solutions include a full
campaign management suite, inventory prediction tools, audience research and
metrics, and extensive reporting features to effectively track advertising
campaigns in real-time. Online advertising solutions enable our customers to
offset the costs associated with the creation, transformation, licensing, and
management of online content. Prior to our acquisition of VitalStream on
February 20, 2007, we did not offer proprietary CDN services, but instead, we
were a reseller of third party CDN services for which the results of
operations are included in Other revenues and direct costs of network, sales and
services, discussed below.
  Other
  Other
revenues and direct costs of network, sales and services include our
non-segmented results of operations, including certain reseller and
miscellaneous services such as third party CDN services, termination fee
revenue, other hardware sales, and consulting services.
 
 Financial
Information about Geographic Areas
 
 For each
of the years ended December 31, 2007, 2006 and 2005, less than 10% of our total
revenues was derived from our operations outside the United States.
 
 Sales
and Marketing
 
 Our sales
and marketing objective is to achieve market penetration and increase brand
recognition among business customers in key industries that use the Internet for
strategic and business-critical operations. We employ a direct sales team with
extensive and relevant sales experience with our target market. Our sales
offices are located in key cities across North America, as well as one office
each in the United Kingdom and Singapore.
 
 Our sales
and service organization includes 116 employees in direct and channel sales,
professional services, account management, and technical
consulting.  As of December 31, 2007, we had approximately 45 direct
sales representatives whose performance is measured on the basis of achievement
of quota objectives.
 
 To
support our sales efforts and promote the Internap brand, we conduct
comprehensive marketing programs.  Our marketing strategies include
on-line advertisements, participation at trade shows, an active public relations
campaign, and continuing customer communications.  As of December 31,
2007, we had seven employees in our marketing department.
 
 Research
and Development
 
 Product
development costs are primarily related to network engineering costs associated
with changes to the functionality of our proprietary services and network
architecture. Such costs that do not qualify for capitalization as software
development costs are expensed as incurred. Research and development costs,
which are included in product development cost and are expensed as incurred,
primarily consist of compensation related to our development
and enhancement of IProuting technology, progressive download and
streaming technology for our CDN, and acceleration technologies. Research and
development costs were $3.1 million, $2.4 million and $2.9 million for the years
ended December 31, 2007, 2006, and 2005, respectively. These costs do not
include $1.6 million and $0.9 million in internal software development costs
capitalized during the years ended December 31, 2007 and 2006, respectively. We
did not capitalize any software development costs during the year ended December
31, 2005.
 
 12
  Customers
 
 As of
December 31, 2007, we had approximately 3,800 customers. We provide
services to customers in multiple vertical industry segments including financial
services, media and communications, travel, e-commerce and retail, and
technology. However, our customer base is not concentrated in any particular
industry. In each of the past three fiscal years, no single customer has
accounted for 10 percent or more of our net sales. No significant amounts of
revenue for any of the years ended December 31, 2007, 2006 and 2005 were derived
from contracts or subcontracts terminable or renegotiation at the election of
the federal government, and we do not expect such contracts to be a significant
percentage of our total revenue in 2008.
 
 Competition
 
 The
market for managed services, premise-based products and content delivery is
intensely competitive and is characterized by technological change, the
introduction of new products and services, and price erosion. We believe that
the principal factors of competition for service providers in our target markets
include: speed and reliability of connectivity, quality of facilities, level of
customer service and technical support, price, and brand recognition. We believe
that we compete favorably on the basis of these factors.
 
 Our
current and potential competition primarily consists of:
  ·
              network
      service providers that provide connectivity services, including AT&T
      Inc., Sprint Nextel Corporation, Verizon Communications Inc., Level 3
      Communications, Inc., Global Crossing Limited, and Verio, an NTT
      Communications Company.;·
              regional
      Bell operating companies that offer Internet access and managed
      services;·
              global,
      national and regional ISPs such as Orange Business Services (formerly
      Equant), BT Infonet and Savvis, Inc.;·
              providers
      of specific applications or solutions, such as content delivery, security
      or storage such as Akamai Technologies, Inc., Limelight Networks, Inc.,
      Mirror Image Internet, Inc., Symantec Corporation, Network Appliance,
      Inc., and Virtela Communications, Inc.;·
              software-based,
      Internet infrastructure companies focused on IP route control and wide
      area network optimization products such as Riverbed Technology, Inc., F5
      Networks, Inc. and Radware Ltd.; and·
              colocation
      and data center providers, including Equinix, Inc., Terremark Worldwide,
      Inc., Navisite, Inc., 365 Main Inc., Savvis, Inc., and Neon Communications
      Group, Inc., formerly known as The Globix
  Corporation.
  Competition
has resulted, and will continue to result, in declining prices for our
services.
  Many of
our competitors have longer operating histories and presence in key markets,
greater name recognition, larger customer bases and significantly greater
financial, sales and marketing, distribution, technical, and other resources
than we have. As a result, these competitors may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements or to
devote greater resources to the promotion and sale of their products. In all of
our target markets, we also may face competition from newly established
competitors, suppliers of products or services based on new or emerging
technologies, and customers that choose to develop their own network solutions.
We also may encounter further consolidation in the markets in which we compete.
In addition, competitors may develop technologies that more effectively address
our markets with services that offer enhanced features or lower costs. Increased
competition could result in pricing pressures, decreased gross margins and loss
of market share, which may materially and adversely affect our business,
consolidated financial condition, results of operations and cash
flows.
  13
  See “Risk Factors--We may not be able to compete successfully
against current and future competitors” below.
  Intellectual
Property
 
 We rely
on a combination of copyright, patent, trademark, trade secret, and other
intellectual property law, nondisclosure agreements, and other protective
measures to protect our proprietary rights. We also utilize unpatented
proprietary know-how and trade secrets and employ various methods to protect
such intellectual property. As of December 31, 2007, we have five patents that
extend to various dates between approximately 2019 and 2026, and eight
registered trademarks.  Taken as a whole, we believe our intellectual
property rights are significant and that the loss of all or a substantial
portion of such rights could have a material adverse effect on our results of
operations. We can offer no assurancesthat our intellectual
property protection measures will be sufficient to prevent misappropriation of
our technology. In addition, the laws of many foreign countries do not protect
our intellectual properties to the same extent as the laws of the United States.
From time to time, third parties have or may assert infringement claims against
us or against our customers in connection with their use of our products or
services. In addition, we may desire or be required to renew or to obtain
licenses from others in order to further develop and market commercially viable
products or services effectively. We can offer no assurances that any necessary
licenses will be available on reasonable terms.
 
 Employees
 
 As of
December 31, 2007, we had approximately 420 full-time employees. None of our
employees are represented by a labor union, and we have not experienced any work
stoppages to date. We consider the relationships with our employees to be good.
Competition for technical personnel in the industry in which we compete is
intense. We believe that our future success depends in part on our continued
ability to hire, assimilate and retain qualified personnel. To date, we believe
that we have been successful in recruiting and retaining qualified employees,
but we can offer no assurances that we will continue to be successful in the
future.
 
 Other
Matters
 
 While we
are dependent upon our proprietary technology and vendors, including ISPs,
telecommunications carriers and others, we are not dependent upon raw materials.
Our business is generally not seasonal.  We do not have significant
backlog orders, nor do we have any practices relating to required working
capital items.
  Available
Information
 
 Internap
files annual, quarterly and current reports, proxy statements, and other
information with the Securities and Exchange Commission, or SEC. The Company
makes its annual report on Form 10-K/A, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to such reports filed pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended,
or the Exchange Act, available free of charge on or through its Internet site,
located at www.internap.com, as soon as reasonably practicable after they are
filed with or furnished to the SEC. You may read and copy any materials Internap
files with the SEC, at the SEC’s Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. For information on the operation of the Public Reference
Room, call the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers such as Internap that file electronically with the SEC at
http://www.sec.gov. Information on the Company’s Web site is not incorporated by
reference into this Form 10-K/A.
  ITEM 1A. RISK FACTORS.
 
 You
should carefully consider the risks described below. These risks are not the
only ones that we may face. Additional risks and uncertainties that we are
unaware of, or that we currently deem immaterial, also may become important
factors that affect us. If any of the following risks occurs, our business,consolidated financial condition, results of operations or cash
flows could be materially and adversely affected.
  14
  Risks Related to Our Business
 
 We
have a history of losses and may not sustain profitability.
  We
incurred net losses in each quarterly and annual period since we began
operations in May 1996 through the year ended December 31, 2005. For the
years ended December 31, 2007, 2006 and 2005, we recognized net loss of$5.6 million, net income of $3.7 million and net loss of $5.0 million,
respectively. As of December 31, 2007, our accumulated deficit was
$862.0 million. Considering the competitive and evolving nature of the
industry in which we operate, we may not be able to achieve or sustain
profitability on a quarterly or annual basis, and our failure to do so could
materially and adversely affect our business, including our ability to raise
additional funds.
  Our
operations have historically been cash flow negative, and we have depended on
equity and debt financings to meet our cash requirements, which may not be
available to us in the future on favorable terms.
  Historically,
we have experienced negative operating cash flows and have depended upon equity
and debt financings, as well as borrowings under our credit facilities, to meet
our cash requirements in most quarterly and annual periods since we began our
operations in May 1996. We expect to meet our cash requirements for 2008 through
a combination of cash flows from operations, existing cash, cash equivalents and
investments in marketable securities, and borrowings under our credit
facilities. Our capital requirements depend on several factors, including the
rate of market acceptance of our services, the ability to expand and retain our
customer base and other factors. If our cash requirements vary materially from
those currently planned, if our cost reduction initiatives are unsuccessful or
have unanticipated adverse effects on our business or if we fail to generate
sufficient cash flows from the sales of our services, we may require additional
financing sooner than anticipated. We can offer no assurances that we will be
able to obtain additional financing on commercially favorable terms, or at all.
In addition, provisions in our credit agreement limit our ability to incur
additional indebtedness.  Our business could be materially and
adversely affected by our failure to obtain such funding.  We might
also be required to take other actions that could lessen the value of our stock
in order to obtain such funding, such as issuing securities with greater rights
than our common stock or borrowing money on terms that are not favorable to
us.
  We
have identified a material weakness in our internal control over financial
reporting that may prevent us from accurately reporting our financial results in
a timely manner.
  We must
maintain effective internal controls in order to provide reliable and accurate
financial reports and prevent fraud. In addition, Section 404 of the
Sarbanes-Oxley Act of 2002 requires that we assess the design and operating
effectiveness of our internal control over financial reporting. In
connection with our evaluation of internal control over financial reporting, we
identified a material weakness related to effective controls over the analysis
of requests for sales credits and billing adjustments to provide timely
information for management to assess the completeness, accuracy, valuation
and disclosure of sales adjustments. We may also discover additional areas
of our internal controls that need improvement. We discuss our efforts regarding
internal controls in detail in this report under Item 9A, “Controls and
Procedures.” We cannot be certain that any remedial measures we take will
sufficiently address and eliminate this material weakness. Remedying this
material weakness, any additional deficiencies, significant deficiencies, or
material weaknesses that we may identify in the future, could require us to
incur significant costs, expend significant time and management resources or
make other changes. We have not yet remediated this material weakness. As a
result, we may be required to report in our Quarterly Report on Form 10-Q for
the first quarter of 2008 or in subsequent reports filed with the Securities and
Exchange Commission that a material weakness in our internal control over
financial reporting continues to exist. Any delay or failure to design and
implement new or improved controls, or difficulties encountered in their
implementation or operation may cause us to fail to meet our financial reporting
obligations or prevent us from providing reliable and accurate financial reports
or avoiding or detecting fraud. Disclosure of this material weakness, any
failure to remediate such material weakness in a timely fashion or having or
maintaining ineffective internal controls could cause investors to lose
confidence in our reported financial information.
 We
may not be able to compete successfully against current and future
competitors.
  The
Internet connectivity and IP services market is highly competitive, as evidenced
by recent declines in pricing for Internet connectivity services. The content
delivery market is also intensely competitive and rapidly
changing.  We expect competition from existing competitors to continue
to intensify in the future, and we may not have the financial resources,
technical expertise, sales and marketing abilities, or support capabilities to
compete successfully. Our competitors currently include: regional Bell operating
companies that offer Internet access; global, national and regional ISPs;
providers of specific applications or solutions such as content delivery,
security or storage; software-based and other Internet infrastructure providers
and manufacturers; and colocation and data center providers. In addition, ISPs
may make technological advancements, such as the introduction of improved
routing protocols to enhance the quality of their services, which could
negatively impact the demand for our products and services.
  In addition, we will face additional competition as we expand our
managed services product offerings, including competition from technology and
telecommunications companies. A number of telecommunications companies and ISPs
have offered or expanded their network services. Further, the ability of some of
these potential competitors to bundle other services and products with their
network services could place us at a competitive disadvantage. Various companies
also are exploring the possibility of providing, or are currently providing,
high-speed, intelligent data services that use connections to more than one
network or use alternative delivery methods including the cable television
infrastructure, direct broadcast satellites and wireless local loop. Many of our
existing and future competitors may have greater market presence, engineering
and marketing capabilities, and financial, technological and personnel resources
than we have. As a result, our competitors may have significant advantages over
us and may be able to respond more quickly to emerging technologies and ensuing
customer demands. Increased competition and technological advancements by our
competitors could materially and adversely affect our business, consolidated
financial condition, results of operations and cash flows.
  15
  In
addition, more and more businesses are deciding to develop their own solutions
rather than outsource such solutions to providers like us.  If we are
unable to provide services that are competitive with such in-sourced solutions,
we will lose customers and our business and financial results will
suffer.
  Failure to develop new products and
services, as well as enhancements to our existing services, may cause our
operating results to suffer.
  Our
industry is constantly evolving.  The process of developing new
services and the technologies that support them is expensive, time and labor
intensive and uncertain.  We may fail to understand the market demand
for new services or not be able to overcome technical problems with new
services.  In addition, our customers’ needs may change in ways that
we do not anticipate and these changes could eliminate our customers’ needs for
our services and render our products and services obsolete. If we fail to
develop new products and services before our competitors, we may lose market
share, resulting in a decrease in our revenues and earnings.
  Many
of our current and potential customers are pursuing emerging or unproven
business models and the demand for our services and products may decline if such
models are unsuccessful.
  The need
for a content delivery network is a recent technological advancement and our
customers’ business models that rely on the delivery of streaming video and
other content remain unproven.  These customers will not continue to
purchase our products and services if their investment does not generate a
sufficient return.  A reduction in spending on CDN services by such
customers could materially and adversely affect our financial
condition.
  Pricing
pressure could decrease our revenue and threaten the attractiveness of our
premium priced services.
  Pricing
for Internet connectivity services has declined significantly in recent years
and may decline in the future. An economic downturn could further contribute to
this effect. We currently charge, and expect to continue to charge, higher
prices for our high performance IP services than prices charged by our
competitors for their connectivity services. By bundling their services and
reducing the overall cost of their solutions, certain of our competitors may be
able to provide customers with reduced communications costs in connection with
their Internet connectivity services or private network services, thereby
significantly increasing the pressure on us to decrease our prices. Increased
price competition, significant price deflation and other related competitive
pressures could erode our revenueand could materially and adversely
affect our results of operations if we are unable to control or reduce our
costs. Because we rely on ISPs to deliver our services and have agreed with some
of these providers to purchase minimum amounts of service at predetermined
prices, our profitability could be adversely affected by competitive price
reductions to our customers even if accompanied with an increased number of
customers.
  In
addition, in light of economic factors and technological advances, companies
that require Internet connectivity have evaluated and will continue to evaluate
the cost of such services, particularly high performance connectivity services
such as those we currently offer. Consequently, existing and potential customers
may be less willing to pay premium prices for high performance Internet
connectivity services and may choose to purchase lower quality services at lower
prices, which could materially and adversely affect our business, consolidated
financial condition, results of operations and cash flows.
 
 Failure
to increase our revenues may cause our business and financial results to
suffer.
 
 We have
considerable fixed expenses and we plan to continue to incur significant
expenses with the expansion of our colocation facilities.  We must,
therefore, generate higher revenues to maintain
profitability.  Numerous factors could affect our ability to increase
revenue, either alone or in combination with other factors,
including:
 ·
              failure
      to increase sales of our products and services;·
              pricing
      pressures;·
              failure
      of our services or software to operate as expected;
  16
  ·
              loss
      of customers and inability to attract new customers;·
              inability
      of a customer to pay our fees; or·
              network
      failures and any breach or unauthorized access to our
    network.
 
 We
depend on a number of ISPs to provide Internet connectivity to our network
access points. If we are unable to obtain required connectivity services on a
cost-effective basis, or at all, or if such services are interrupted or
terminated, our growth prospects and business, consolidated financial condition,
results of operations and cash flows may be adversely affected.
  In
delivering our services, we rely on a number of Internet networks, many of which
are built and operated by others. In order to provide high performance
connectivity services to our customers through our network access points, we
purchase connections from several ISPs. We can offer no assurances that these
ISPs will continue to provide service to us on a cost-effective basis or on
otherwise competitive terms, if at all, or that these providers will provide us
with additional capacity to adequately meet customer demand or to expand our
business. Consolidation among ISPs limits the number of vendors from which we
obtain service, possibly resulting in higher network costs to us. We may be
unable to establish and maintain relationships with other ISPs that may emerge
or that are significant in geographic areas, such as Asia and Europe, in which
we may locate our future network access points. Any of these situations could
limit our growth prospects and materially and adversely affect our business,
consolidated financial condition, results of operations and cash
flows.
 
 We
depend on third party suppliers for services and key elements of our network
infrastructure. If we are unable to obtain products or services, such as network
access loops or local loops, on favorable terms, or at all, or in the event of a
failure of these suppliers to deliver their products and services as agreed, our
ability to provide our services on a competitive and timely basis may be
impaired and our consolidated financial condition, results of operations and
cash flows could be adversely affected.
  In
addition to depending on services from third party ISPs, we depend on other
companies to supply various key elements of our infrastructure, including the
network access loops between our network access points and our ISPs and the
local loops between our network access points and our customers’ networks.
Pricing for such network access loops and local loops has risen significantly
over time, and we generally bill these charges to our customers at low or no
margin. Some of our competitors have their own network access loops and local
loops and are, therefore, not subject to similar availability and pricing
issues. In addition, we currently purchase routers and switches from a limited
number of vendors. Furthermore, we do not carry significant inventories of the
products we purchase, and we have no guaranteed supply arrangements with our
vendors. A loss of a significant vendor could delay any build-out of our
infrastructure and increase our costs. If our limited source of suppliers fails
to provide products or services that comply with evolving Internet standards or
that interoperate with other products or services we use in our network
infrastructure, we may be unable to meet all or a portion of our customer
service commitments, which could materially and adversely affect our business,
consolidated financial condition, results of operations and cash
flows.
 
 A
failure in the redundancies in our network operations centers, network access
points or computer systems could cause a significant disruption in our IP
services, and we may experience significant disruptions in our ability to
service our customers.
  Our
business depends on the efficient and uninterrupted operation of our network
operations centers, our network access points and our computer and
communications hardware systems and infrastructure. Interruptions could result
from natural or human-caused disasters, power loss, telecommunications failure,
and similar events. If we experience a problem at our network operations
centers, including the failure of redundant systems, we may be unable to provide
IP services to our customers, provide customer service and support or monitor
our network infrastructure or network access points, any of which would
seriously harm our business and operating results. Also, because we provide
continuous Internet availability under our service level agreements, we may be
required to issue a significant amount of customer credits as a result of such
interruptions in service. These credits could negatively affect ourrevenues and results of
operations. In addition, interruptions in serviceto our customers could
harm our customer relations, expose us to potential lawsuits and require
additional capital expenditures.
  17
  A
significant number of our network access points are located in facilities owned
and operated by third parties. In many of those arrangements, we do not have
property rights similar to those customarily possessed by a lessee or subtenant
but instead have lesser rights of occupancy. In certain situations, the
financial condition of those parties providing occupancy to us could have an
adverse impact on the continued occupancy arrangement or the level of service
delivered to us under such arrangements.
  The
increased use of high power density equipment may limit our ability to fully
utilize our data centers.
  Customers
continue to increase their use of high-density equipment, such as blade servers,
in our data centers, which has significantly increased the demand for power on a
per cabinet basis. The current demand for electrical power may exceed our
designed capacity in these facilities. As electrical power, not space, is
typically the primary factor limiting capacity in our data centers, our ability
to fully utilize our data centers may be limited in these
facilities.  If we are unable to adequately utilize our data centers,
our ability to grow our business cost-effectively could be materially and
adversely affected.
 
 Our
business could be harmed by prolonged electrical power outages or shortages,
increased costs of energy or general availability of electrical
resources.
 
 Our data
centers and P-NAPs are susceptible to regional costs of power, electrical power
shortages, planned or unplanned power outages or natural disasters, and
limitations, especially internationally, on availability of adequate power
resources. Power outages could harm our customers and our business. We attempt
to limit exposure to system downtime by using backup generators anduninterruptible power systems. We may not be able to limit our exposure
entirely, however, even with these protections in place, as has been the case
with power outages we have experienced in the past and may experience in the
future. In addition, we may not be able to pass on to our customers the
increased cost of energy caused by power shortages.
  In each
of our markets, we rely on utility companies to provide a sufficient amount of
power for current and future customers. At the same time, power and cooling
requirements are growing on a per unit basis. As a result, some customers are
consuming an increasing amount of power per cabinet. We do not have long-term
power agreements in all our markets for long-term guarantees of provisioned
amounts and may face power limitations in our centers. This limitation could
have a negative impact on the effective available capacity of a given center and
limit our ability to grow our business, which could have a negative impact on
our consolidated financial condition, results of operations and cash
flows.
 
 Any
failure of our physical infrastructure or services could lead to significant
costs and disruptions that could reduce our revenue and harm our business
reputation, consolidated financial condition, results of operations and cash
flows.
 
 Our
business depends on providing customers with highly reliable service. We must
protect our infrastructure and our customers’ data and their equipment located
in our data centers. The services we provide in each of our data centers are
subject to failure resulting from numerous factors, including:
 ·
              human
      error;·
              physical
      or electronic security breaches;·
              fire,
      earthquake, flood, and other natural disasters;·
              water
      damage;
  18
  ·
              fiber
      cuts;·
              power
      loss;·
              sabotage
      and vandalism; and·
              failure
      of business partners who provide our resale products.
 
 Problems
at one or more of the data centers operated by us or any of our colocation
providers, whether or not within our control, could result in service
interruptions or significant equipment damage, which could result in difficulty
maintaining our service level commitments to these customers. If we incur
significant financial commitments to our customers in connection with a loss of
power or we fail to meet other service level commitment obligations, our revenue
reserves may not be adequate. In addition, any loss of services, equipment
damage or inability to meet our service level commitment obligations could
reduce the confidence of our customers and could consequently impair our ability
to obtain and retain customers, which would adversely affect both our ability to
generate revenues and our operating results.
 
 Furthermore,
we are dependent upon ISPs and telecommunications carriers in the United States,
Europe and the Asia-Pacific region, some of whom have experienced significant
system failures and electrical outages in the past. Users of our services may
experience difficulties due to system failures unrelated to our systems and
services. If for any reason, these providers fail to provide the required
services, our business, consolidated financial condition, results of operations
and cash flows could be materially adversely impacted.
 
 No
prevention or defense against denial of service attacks exists. During a
prolonged denial of service attack, Internet service may not be available for
several hours, thus negatively impacting hosted customers’ on-line business
transactions. Affected customers might file claims against us under such
circumstances, and our property and liability insurance may not be adequate to
cover these claims.
 
 Our
results of operations have fluctuated in the past and may continue to fluctuate,
which could have a negative impact on the price of our common
stock.
  We have
experienced fluctuations in our results of operations on a quarterly and annual
basis. The fluctuation in our operating results may cause the market price of
our common stock to decline. We expect to experience significant fluctuations in
our operating results in the foreseeable future due to a variety of factors,
including:
 ·
              competition
      and the introduction of new services by our competitors;·
              continued
      pricing pressures resulting from competitors’ strategies or excess
      bandwidth supply;·
              fluctuations
      in the demand and sales cycle for our services;·
              fluctuations
      in the market for qualified sales and other personnel;·
              changes
      in the prices for Internet connectivity we pay to ISPs;·
              the
      cost and availability of adequate public utilities, including
      power;·
              our
      ability to obtain local loop connections to our network access points at
      favorable prices;·
              integration
      of people, operations, products, and technologies of acquired
      businesses; and·
              general
      economic conditions.
   19
  In
addition, fluctuations in our results of operations may arise from strategic
decisions we have made or may make with respect to the timing and magnitude of
capital expenditures such as those associated with the expansion of our
colocation facilities, the deployment of additional network access points and
the terms of our network connectivity purchase agreements. These and other
factors discussed in this annual report on Form 10-K/A could have a material
adverse effect on our business, consolidated financial condition, results of
operations and cash flows. In addition, a relatively large portion of our
expenses are fixed in the short-term, particularly with respect to lease and
personnel expense, depreciation and amortization and interest expense. Our
results of operations, therefore, are particularly sensitive to fluctuations in
revenue. Because our results of operations have fluctuated in the past and are
expected to continue to fluctuate in the future, we can offer no assurance that
the results of any particular period are an indication of future performance in
our business operations. Fluctuations in our results of operations could have a
negative impact on our ability to raise additional capital and execute our
business plan. Our operating results in one or more future quarters may fail to
meet the expectations of securities analysts or investors, which could cause an
immediate and significant decline in the trading price of our
stock.
 
 We
have acquired and may acquire other businesses, and these acquisitions involve
numerous risks.
  We may
pursue acquisitions of complementary businesses, products, services, and
technologies to expand our geographic footprint, enhance our existing services,
expand our service offerings, and enlarge our customer base. If we complete
future acquisitions, we may be required to incur or assume additional debt, make
capital expenditures or issue additional shares of our common stock or
securities convertible into our common stock as consideration, which would
dilute our existing stockholders’ ownership interest and may adversely affect
our results of operations. Our ability to grow through acquisitions involves a
number of additional risks, including the following:
  ·
              the
      ability to identify and consummate complementary
    acquisitions;·
              the
      possibility that we may not be able to integrate the operations,
      personnel, technologies, products, and services of the acquired companies
      in a timely and efficient manner;·
              diversion
      of management’s attention from other ongoing business
      concerns;·
              insufficient
      revenue to offset significant unforeseen costs and increased expenses
      associated with the acquisitions;·
              challenges
      in completing projects associated with in-process research and development
      being conducted by the acquired businesses;·
              risks
      associated with our entrance into markets in which we have little or no
      prior experience and where competitors have a stronger market
      presence;·
              deferral
      of purchasing decisions by current and potential customers as they
      evaluate the likelihood of success of our acquisitions;·
              incurring
      or assuming contingent liabilities and amortization expense for acquired
      intangible assets;·
              incurring
      acquisition liabilities as a result of integrating acquired
      businesses;·
              difficulties
      in successfully integrating the management teams and employees of both
      companies; and·
              loss
      of key employees of the acquired companies.
  Failure
to effectively manage our growth through acquisitions could adversely affect our
growth prospects, business, consolidated financial condition, results of
operations and cash flows.
 
 20
  The
terms of our existing credit agreement impose restrictions upon us.
  The terms
of our existing credit agreement impose operating and financial restrictions on
us and require us to meet certain financial tests. These restrictions may also
have a negative impact on our business, consolidated financial condition,
results of operations and cash flows by significantly limiting or prohibiting us
from engaging in certain transactions. The credit agreement contains certain
covenants, including covenants that restrict our ability to incur further
indebtedness.
  The
failure to comply with any of these covenants would cause a default under the
credit agreement. Any defaults, if not waived, could result in the lender
ceasing to make loans or extending credit to us, accelerating or declaring all
or any obligations immediately due, or taking possession of or liquidating
collateral. If any of these events occur, we may not be able to borrow
sufficient funds to refinance the credit agreement on terms that are acceptable
to us, which could materially and adversely impact our business, consolidated
financial condition, results of operations and cash flows.
  As of
December 31, 2007, we were in compliance with the various loan covenants
required by the credit agreement.
  Our
investments in auction rate securities are subject to risks that may cause
losses and affect the liquidity of these investments.
  As of
December 31, 2007, we held $7.2 million of auction rate securities classified as
short-term investments. Auction rate securities are variable rate bonds tied to
short-term interest rates with maturities on the face of the securities in
excess of 90 days and have interest rate resets through a modified Dutch
auction, at predetermined short-term intervals, usually every 7, 28 or 35
days.  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 resets.  The underlying
assets of our auction rate securities are state-issued student and educational
loans that are substantially backed by the federal government and carried
AAA/Aaa ratings as of December 31, 2007.  The Dutch auctions have in
the past provided a liquid market for these types of securities. With the
liquidity issues experienced in global credit and capital markets, auctions of
each of the auction rate securities that we hold failed subsequent to December
31, 2007, as the amount of securities submitted for sale exceeded the amount of
purchase orders. If the uncertainties in the credit and capital market continue,
these markets deteriorate further or the various rating agencies downgrade any
of the auction rare securities that we hold, we may be required to adjust the
value of these investments through an impairment charge to earnings if the fair
value of these securities has declined to below their cost and such decline is
assessed to be “other than temporary” under SFAS No. 115. Further, we may not be
able to liquidate these investments until successful auctions occur, a buyer
outside the auction process is found, the issuer calls these debt securities, or
the securities mature.
  Continued
overcapacity in the Internet connectivity and IP services market may result in
our recording additional significant restructuring charges and goodwill
impairment.
 
 We have
undertaken significant operational restructurings and have taken restructuring
and impairment charges and recorded total restructuring costs of $11.3 million
for the year ended December 31, 2007 and less than $1.0 million for the
years ended December 31, 2006 and 2005. We may incur additional restructuring
charges or adjustments in the future. Such additional restructuring charges or
adjustments could materially and adversely affect our business, net profit and
stockholders’ equity.
 
 Adverse
experience in the CDN services market may result in our recording additional
goodwill impairment charges.
 
 Upon
completion of our acquisition of VitalStream, we recorded $154.8 million in
goodwill.  We tested this goodwill in August of 2007 as part of our
annual testing, and concluded that such goodwill had not been
impaired.  We can offer no assurances, however, that this goodwill
will remain unimpaired.  We may incur impairment charges in the
future, which could materially and adversely affect our net profit and
stockholders’ equity.
 
 21
  If
we are unable to deploy new network access points or do not adequately control
expense associated with the deployment of new network access points, our results
of operations could be adversely affected.
 
 As part
of our strategy, we intend to continue to expand our network access points,
particularly into new geographic markets. We will face various risks associated
with identifying, obtaining and integrating attractive network access point
sites, negotiating leases for centers on competitive terms, cost estimation
errors or overruns, delays in connecting with local exchanges, equipment and
material delays or shortages, the inability to obtain necessary permits on a
timely basis, if at all, and other factors, many of which are beyond our control
and all of which could delay the deployment of a new network access point. We
can offer no assurance that we will be able to open and operate new network
access points on a timely or profitable basis. Deployment of new network access
points will increase operating expense, including expense associated with
hiring, training, retaining, and managing new employees, provisioning capacity
from ISPs, purchasing new equipment, implementing new systems, leasing
additional real estate, and incurring additional depreciation expense. If we are
unable to control our costs as we expand in geographically dispersed locations,
our consolidated financial condition, results of operations and cash flows could
be materially and adversely affected.
  Our
international operations may not be successful.
 
 We have
limited experience operating internationally and have only recently begun to
achieve successful international experiences. We currently have network access
points in London, England, Hong Kong, Singapore, and Sydney, Australia. Wealso participate in a joint venture with NTT-ME Corporation and Nippon
Telegraph and Telephone Corporation, or NTT Holdings, that operates a network
access point in Tokyo and Osaka, Japan and maintain a marketing agreement with
Telefonica USA, which provides us with further access in Europe and access to
the Latin American market. As part of our strategy to expand our geographic
markets, we may develop or acquire network access points or complementary
businesses in additional international markets. The risks associated with
expansion of our international business operations include:
  ·
              challenges
      in establishing and maintaining relationships with foreign customers as
      well as foreign ISPs and local vendors, including data center and local
      network operators;·
              challenges
      in staffing and managing network operations centers and network access
      points across disparate geographic areas;·
              limited
      protection for intellectual property rights in some
    countries;·
              challenges
      in reducing operating expense or other costs required by local
      laws;·
              exposure
      to fluctuations in foreign currency exchange rates;·
              costs
      of customizing network access points for foreign countries and
      customers;·
              protectionist
      laws and practices favoring local competition;·
              political
      and economic instability; and·
              compliance
      with governmental regulations.
  We may be
unsuccessful in our efforts to address the risks associated with our
international operations, which may limit our international sales growth and
materially and adversely affect our business and results of
operations.
  22
  Disputes
with vendors regarding the delivery of services may materially impact our
results of operations and cash flows.
  In
delivering our services, we rely on a number of Internet network,
telecommunication and other vendors. We work directly with these vendors to
provide services such as establishing, modifying or discontinuing services for
our customers. Because of the volume of activity, billing disputes inevitably
arise. These disputes typically stem from disagreements concerning the starting
and ending dates of service, quoted rates, usage, and various other factors. We
research and discuss disputed costs, both in the vendors’ favor and our favor,
with vendors on an ongoing basis until ultimately resolved. We record the cost
and a liability based on our estimate of the most likely outcome of the dispute.
These estimates are periodically reviewed by management and modified in light of
new information or developments, if any. Because estimates regarding disputed
costs include assessments of uncertain outcomes, such estimates are inherently
vulnerable to changes due to unforeseen circumstances that could materially and
adversely affect our consolidated financial condition, results of operations and
cash flows.
  We
depend upon our key employees and may be unable to attract or retain sufficient
numbers of qualified personnel.
  Our
future performance depends to a significant degree upon the continued
contributions of our executive management team and other key employees. To the
extent we are able to expand our operations and deploy additional network access
points, we may need to increase our workforce. Accordingly, our future success
depends on our ability to attract, hire, train, and retain highly skilled
management, technical, sales, marketing, and customer support personnel.
Competition for qualified employees is intense, and we compete for qualified
employees with companies that may have greater financial resources than we have.
Our employment security plan with our executive officers provide that either
party may terminate their employment at any time. Consequently, we may not be
successful in attracting, hiring, training, and retaining the people we need,
which would seriously impede our ability to implement our business
strategy.
 
 Our
senior management team has had limited time to develop a working relationship
with each other and may not be able to manage our business
effectively.
 
 Our Chief
Operating Officer, General Counsel, Chief Technology Officer, and Chief Strategy
Officer have been hired since March 2007, and we are currently seeking a Chief
Financial Officer.  This limited experience working together could
harm our management team’s ability to quickly and efficiently respond to
problems and effectively manage our business.
  If
we fail to adequately protect our intellectual property, we may lose rights to
some of our most valuable assets.
  We rely
on a combination of copyright, patent, trademark, trade secret, and other
intellectual property law, nondisclosure agreements, and other protective
measures to protect our proprietary rights. We also utilize unpatented
proprietary know-how and trade secrets and employ various methods to protect
such intellectual property. Taken as a whole, we believe our intellectual
property rights are significant and that the loss of all or a substantial
portion of such rights could have a material adverse effect on our results of
operations. We can offer no assurance that our intellectual property protection
measures will be sufficient to prevent misappropriation of our technology. In
addition, the laws of many foreign countries do not protect our intellectual
property to the same extent as the laws of the United States. From time to time,
third parties have or may assert infringement claims against us or against our
customers in connection with their use of our products or services.
 
 In
addition, we rely on the intellectual property of others. We may desire or be
required to renew or to obtain licenses from these other parties in order to
further develop and market commercially viable products or services effectively.
We can offer no assurance that any necessary licenses will be available on
reasonable terms.
  We
may face litigation and liability due to claims of infringement of third party
intellectual property rights.
  The
Internet services industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement.
From time to time, third parties may assert patent, copyright, trademark, trade
secret, and other intellectual property rights to technologies that are
important to our business. Any claims that our products or services infringe or
may infringe proprietary rights of third parties, with or without merit, could
be time-consuming, result in costly litigation, divert the efforts of our
technical and management personnel, or require us to enter into royalty or
licensing agreements, any of which could significantly harm our operating
results. In addition, our customer agreements generally provide for us to
indemnify our customers for expenses and liabilities resulting from claimed
infringement of patents or copyrights of third parties, subject to certain
limitations. If an infringement claim against us were to be successful, and we
were not able to obtain a license to the relevant technology or a substitute
technology on acceptable terms or redesign our products or services to avoid
infringement, our ability to compete successfully in our competitive market
would be materially impaired.
 
 23
  We may become involved in other
litigation that may adversely affect us.
 
 In the
ordinary course of business, we are or may become involved in litigation,
administrative proceedings and governmental proceedings.  Such matters
can be time-consuming, divert management’s attention and resources and cause us
to incur significant expenses.  Furthermore, the results of any such
actions could have a material adverse effect on our business, consolidated
financial condition, results of operations or cash flows.
 
 Risks
Related to Our Industry
 
 We
cannot predict with certainty the future evolution of the high performance
Internet connectivity market, and therefore the role of our products and
services.
  We face
the risk that the market for high performance Internet connectivity services
might develop more slowly or differently than currently projected, or that our
services may not achieve continued widespread market acceptance. Furthermore, we
may be unable to market and sell our services successfully and cost-effectively
to a sufficiently large number of customers. We typically charge a premium for
our services, which may affect market acceptance of our services or adversely
impact the rate of market acceptance. We believe the danger of non-acceptance is
particularly acute during economic slowdowns, which exert significant pricing
pressure on ISPs. If the Internet becomes subject to a form of central
management, or if ISPs establish an economic settlement arrangement regarding
the exchange of traffic between Internet networks, the demand for our IP
services could be materially and adversely affected.
  If
we are unable to respond effectively and on a timely basis to rapid
technological change, we may lose or fail to establish a competitive advantage
in our market.
  Our
industry is characterized by rapidly changing technology, industry standards and
customer needs, as well as by frequent new product and service introductions.
New technologies and industry standards have the potential to replace or provide
lower cost alternatives to our services. The adoption of such new technologies
or industry standards could render our existing services obsolete and
unmarketable. Our failure to anticipate the prevailing standard, to adapt our
technology to any changes in the prevailing standard or the failure of a common
standard to emerge could materially and adversely affect our business. Our
pursuit of necessary technological advances may require substantial time and
expense, and we may be unable to successfully adapt our network and services to
alternative access devices and technologies.
 
 Our
network and software are subject to potential security breaches and similar
threats that could result in our liability for damages and harm our
reputation.
  A number
of widespread and disabling attacks on public and private networks have occurred
recently. The number and severity of these attacks may increase in the future as
network assailants take advantage of outdated software, security breaches or
incompatibility between or among networks. Computer viruses, intrusions and
similar disruptive problems could cause us to be liable for damages under
agreements with our customers, and our reputation could suffer, thereby
deterring potential customers from working with us. Security problems or other
attacks caused by third parties could lead to interruptions and delays, or to
the cessation of service to our customers. Furthermore, inappropriate use of the
network by third parties could also jeopardize the security of confidential
information stored in our computer systems and in those of our customers and
could expose us to liability under unsolicited commercial e-mail, or “spam,”
regulations. In the past, third parties have occasionally circumvented some of
these industry-standard measures. We can offer no assurance that the measures we
implement will not be circumvented. Our efforts to eliminate computer viruses
and alleviate other security problems, or any circumvention of those efforts,
may result in increased costs, interruptions, delays or cessation of service to
our customers, which could hurt our business, consolidated financial condition,
results of operations and cash flows.
 
 24
  Terrorist
activity throughout the world and military action to counter terrorism could
adversely impact our business.
  The
continued threat of terrorist activity and other acts of war or hostility may
have an adverse effect on business, financial and general economic conditions
internationally. Effects from any future terrorist activity, including cyber
terrorism, may, in turn, increase our costs due to the need to provide enhanced
security, which would adversely affect our business, consolidated financial
condition, results of operations and cash flows. These circumstances may also
damage or destroy the Internet infrastructure and may materially and adversely
affect our ability to attract and retain customers, our ability to raise capital
and the operation and maintenance of our network access points.
 
 If
governments modify or increase regulation of the Internet, the provision of our
services could become more costly.
  International
bodies and federal, state and local governments have adopted a number of laws
and regulations that affect the Internet and are likely to continue to seek to
implement additional laws and regulations. For example, a federal law regulating
spam was enacted in 2003. In addition, federal and state agencies are actively
considering regulation of various aspects of the Internet, including taxation of
transactions, and imposing access fees for voice over IP, or VoIP. The Federal
Communications Commission and state agencies also review the regulatory
requirements, if any, that should be applicable to VoIP. If we seek to offer
additional products and services, we could be required to obtain certain,
additional authorizations from regulatory agencies. We may not be able to obtain
such authorizations in a timely manner, or at all, and conditions could be
imposed upon such authorization that may not be favorable to us.
  Congress
recently extended the Internet Tax Freedom Act, which placed a moratorium
against certain state and local taxation of Internet access, until
November 1, 2014. Pursuant to this moratorium, most of our services are not
subject to state and local taxation.
 In
addition, laws relating to the liability of private network operators and
information carried on or disseminated through their networks are unsettled,
both in the United States and abroad.  Network operators have been
sued in the past based on the content of material disseminated through their
networks.  We may become subject to legal claims such as defamation,
invasion of privacy and copyright infringement in connection with content stored
on or distributed through our network.  Also, our reputation could
suffer as a result of our perceived association with the type of content that
some of our customers deliver.
 
 The
adoption of any future laws or regulations might decrease the growth of the
Internet, decrease demand for our services, impose taxes or other costly
technical requirements, regulate the Internet similar to the regulation of
traditional telecommunications services, or otherwise increase the cost of doing
business on the Internet in some other manner. Any of these actions could have a
significantly harmful effect on our customers or us. Moreover, the nature of any
new laws and regulations and the interpretation of applicability to the Internet
of existing laws governing intellectual property ownership and infringement,
copyright, trademark, trade secret, obscenity, libel, employment, personal
privacy, and other issues is uncertain and developing. We cannot predict the
impact, if any, that future regulation or regulatory changes may have on our
business.
 
 If our ability to deliver media
files in certain formats is restricted or becomes cost-prohibitive, demand for
our services would decline and our financial results would
suffer.
 
 Our CDN
products and services depend on our ability to deliver media content in all
major formats.  If our legal right to store and deliver content in
certain formats, like Adobe Flash or Windows Media, for example, was limited, we
could not serve our customers and the demand for our services would
decline.  Owners of proprietary content formats may be able to block,
restrict or impose fees or other costs on our use of such formats, leading to
additional expenses or prevent our delivery of this type of content, which could
materially and adversely affect our operating results.
  25
  Risks
Related to Our Capital Stock
  Our
common stockholders may experience significant dilution, which could depress the
market price of our common stock.
  Holders
of our stock options and warrants to purchase common stock may exercise their
options or warrants to purchase our common stock, which would increase the
number of outstanding shares of common stock in the future. As of December 31,
2007, options to purchase an aggregate of 3.2 million shares of our common
stock at a weighted average exercise price of $13.29 were outstanding, and
warrants to purchase approximately 34,000 shares of our common stock
at an exercise price of $9.50 per share were outstanding. Also, the vesting
of 0.7 million outstanding restricted stock awards will increase the weighted
average number of shares used for calculating diluted net income per share. We
issued approximately 12.2 million shares of our common stock to VitalStream’s
stockholders in connection with the acquisition in February of 2007. We also
assumed outstanding options for the purchase of shares of VitalStream
common stock, converted into options to purchase approximately 1.5 million
shares of Internap common stock. Furthermore, greater than expected capital
requirements could require us to obtain additional financing through the
issuance of securities, which could be in the form of common stock or preferred
stock or other securities having greater rights than our common stock. The
issuance of our common stock or other securities, whether upon the exercise of
options and warrants, the futurevesting and issuance of stock awards to
our executives and employees, or in financing transactions, could depress the
market price of the common stock by increasing the number of shares of common
stock or other securities outstanding on an absolute basis or as a result of the
timing of additional shares of common stock becoming available on the market.
 
 Provisions
of our charter documents, our stockholder rights plan and Delaware law may have
anti-takeover effects that could prevent a change in control even if the change
in control would be beneficial to our stockholders.
 
 Provisions
of our certificate of incorporation, as amended, amended and restated bylaws and
Delaware law could make an acquisition more difficult, even if doing so would be
beneficial to our stockholders.  In addition, our Board of Directors
recently adopted a stockholder rights plan that renders the consummation of an
acquisition without the approval of the Board of Directors more
difficult.
  Our
stock price may be volatile.
  The
market for our equity securities has been extremely volatile. Our stock price
could suffer in the future as a result of any failure to meet the expectations
of public market analysts and investors about our results of operations from
quarter to quarter. The following factors could cause the price of our common
stock in the public market to fluctuate significantly:
 
 ·
              actual
      or anticipated variations in our quarterly and annual results of
      operations;·
              changes
      in market valuations of companies in the Internet connectivity and
      services industry;·
              changes
      in expectations of future financial performance or changes in estimates of
      securities analysts;·
              fluctuations
      in stock market prices and volumes;
   26
  ·
              future
      issuances of common stock or other securities;·
              the
      addition or departure of key personnel; and·
              announcements
      by us or our competitors of acquisitions, investments or strategic
      alliances.
 
 Changes in financial accounting
standards may adversely affect our reported results of
operations.
 
 New
accounting pronouncements and interpretations have occurred and may occur in the
future that adversely affect on our reported results.  For example,
Statement of Financial Accounting Standards No. 123 (revised 2004) “Share Based
Payment,” or SFAS No. 123R, required us to account for our stock-based awards as
a compensation expense and, as a result, our net income and net income per share
in subsequent periods has been significantly reduced.
  ITEM 1B.  UNRESOLVED STAFF
COMMENTS.
  None.
  ITEM 2.  PROPERTIES.
  Our
principal executive offices are located in Atlanta, Georgia adjacent to our
network operations center, one of our P-NAPs and data center facilities. The
Atlanta facility consists of 120,298 square feet under a lease agreement that
expires in 2020. We lease other facilities to fulfill our real estate
requirements in metropolitan areas and specific cities where ourservice
points are located. We believe our existing facilities are adequate for our
current needs and that suitable additional or alternative space will be
available in the future on commercially reasonable terms as needed.
  ITEM 3.  LEGAL
PROCEEDINGS.
  We
currently, and from time to time, are involved in litigation incidental to the
conduct of our business. Although the amount of liability that may result from
these matters cannot be ascertained, we do not currently believe that, in the
aggregate, such matters will result in liabilities material to our consolidated
financial condition, results of operations or cash flows.
  ITEM 4.  SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS.
  None.
 
 PART
II
  ITEM 5.  MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERSAND ISSUER PURCHASES OF EQUITY
SECURITIES
  Our
common stock is listed on the NASDAQ Global Market under the symbol “INAP” and
has traded on the NASDAQ Global Market since September 19, 2006. Our common
stock traded on the American Stock Exchange under the symbol “IIP” from February
18, 2004 through September 18, 2006. Our common stock traded on the NASDAQ Small
Cap Market from October 4, 2002 through February 17, 2004.   The following
table presents, for the periods indicated, the range of high and low per share
sales prices for our common stock, as reported on the NASDAQ Global Market since
September 19, 2006 and on the American Stock Exchange prior to
September 19, 2006.
  On
July 11, 2006, we implemented a one-for-ten reverse stock split of our
common stock. The information in the following table has been adjusted to
reflect this stock split. Our fiscal year ends on December 31.
  27
  Year
      Ended December 31, 2007:
              
              High
              
              
              LowFourth
      Quarter
              
              $
              17.18
              
              
              $
              8.14Third
      Quarter
              
              
              16.15
              
              
              
              13.04Second
      Quarter
              
              
              19.33
              
              
              
              12.95First
      Quarter
              
              
              20.98
              
              
              
              15.60
  Year
      Ended December 31, 2006:
              
              High
              
              
              LowFourth
      Quarter
              
              $
              21.25
              
              
              $
              14.10Third
      Quarter
              
              
              16.80
              
              
              
              9.30Second
      Quarter
              
              
              15.50
              
              
              
              9.00First
      Quarter
              
              
              10.60
              
              
              
              4.20
  As of
March 6, 2008, the number of stockholders of record of our common stock was
approximately 24,600.
 
 We have
never declared or paid any cash dividends on our capital stock, and we do not
anticipate paying cash dividends in the foreseeable future. We are prohibited
from paying cash dividends under covenants contained in our current credit
agreement. We currently intend to retain our earnings, if any, for future
growth. Future dividends on our common stock, if any, will be at the discretion
of our board of directors and will depend on, among other things, our
operations, capital requirements and surplus, general financial condition,
contractual restrictions, and such other factors as our board of directors may
deem relevant.
  The
following table provides information regarding our current equity compensation
plans as of December 31, 2007 (shares in thousands):
 
 
 Equity
      Compensation Plan InformationPlan category
              
              Number
      of securities to
                be
      issued upon exercise
                of
      outstanding options,
                warrants
      and rights
                (a)
              
              Weighted-average
                exercise
      price of
                outstanding
      options,
                warrants
      and rights
                (b)
              
              Number
      of securities
                remaining
      available for
                future
      issuance under
                equity
      compensation
                plans
      (excluding
                securities
      reflected in
                column
      (a)
                (c)Equity
      compensation plans
                approved
      by security holders
              
              3,173
              (1)
              $
      13.29
              
              5,990
              (2)Equity
      compensation plans not
                approved
      by security holders
              
              —
              
              —
              
              —Total
              
              3,173
              
              $
      13.29
              
              5,990
  
 (1)
              Excludes
      purchase rights accruing under the 2004 Employee Stock Purchase Plan
      ("Purchase Plan"). Under the Purchase Plan, each eligible employee may
      purchase up to $12,500 worth of common stock at each semi-annual
      purchase date (the last business day of June and December each year),
      but not more than $25,000 worth of such stock (determined on the basis of
      the fair market value per share on the date or dates such rights are
      granted) per calendar year his or her purchase right remains outstanding.
      The purchase price payable per share will be equal to ninety-five percent
      (95%) of the closing selling price per share of common stock on the
      semi-annual purchase date.
 
 (2)
              Includes
      276,000 shares available for issuance under the Purchase
    Plan.
  
 28
  STOCK
PERFORMANCE GRAPH
  The graph
set forth below compares cumulative total return to our stockholders from an
investment in our common stock with the cumulative total return of the NASDAQ
Market Index and the Hemscott Group Index, resulting from an initial assumed
investment of $100 in each on December 31, 2002, assuming the reinvestment of
any dividends, ending at December 31, of each year, 2003 - 2007,
respectively.
 
 
 
 
  29
  ITEM 6.  SELECTED FINANCIAL
DATA.
  The
consolidated statement of operations data and other financial data presented
below were prepared using our consolidated financial statements for the five
years ended December 31, 2007. You should read this selected consolidated
financial data together with the consolidated financial statements and related
notes contained in this annual report on Form 10-K/A and in our 2006 and 2005
annual reports on Form 10-K/A and Form 10-K, respectively, filed with the SEC,
as well as the section of this annual report and of our 2006 and 2005 annual
reports on Form 10-K/A and Form 10-K, respectively, entitled, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
 
 Year
      Ended December 31,2007
      (1)
              
              
              2006 (2)
              
              
              2005
              
              
              2004
              
              
              2003(in
      thousands, except per share data)Consolidated Statement of
      Operations Data:Revenue
              
              $
              234,090
              
              
              $
              181,375
              
              
              $
              153,717
              
              
              $
              144,546
              
              
              $
              138,580Operating
      costs and expenses:Direct
      costs of network, sales and services,  exclusive of depreciation
      and amortization, shown below (3)
              
              
              118,394
              
              
              
              97,338
              
              
              
              81,958
              
              
              
              76,990
              
              
              
              78,200Direct
      costs of amortization of acquired technologies (3)
              
              
              4,165
              
              
              
              516
              
              
              
              577
              
              
              
              579
              
              
              
              134Direct
      costs of customer support
              
              
              16,547
              
              
              
              11,566
              
              
              
              10,670
              
              
              
              10,180
              
              
              
              9,483Product
      development
              
              
              6,564
              
              
              
              4,475
              
              
              
              4,864
              
              
              
              6,412
              
              
              
              6,982Sales
      and marketing
              
              
              31,533
              
              
              
              27,173
              
              
              
              25,864
              
              
              
              23,411
              
              
              
              21,491General
      and administrative
              
              
              32,512
              
              
              
              22,104
              
              
              
              20,096
              
              
              
              24,772
              
              
              
              16,711Depreciation
      and amortization
              
              
              22,242
              
              
              
              15,856
              
              
              
              14,737
              
              
              
              15,461
              
              
              
              37,087Gain
      on disposals of property and equipment
              
              
              (5
              )
              
              
              (113
              )
              
              
              (19
              )
              
              
              (3
              )
              
              
              (53
              )Restructuring
      and asset impairment
              
              
              11,349
              
              
              
              323
              
              
              
              44
              
              
              
              3,644
              
              
              
              1,084Acquired
      in-process research and development
              
              
              450
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Amortization
      of deferred stock compensation
              
              
              —
              
              
              
              —
              
              
              
              60
              
              
              
              —
              
              
              
              390Pre-acquisition
      liability adjustment
              
              
              50
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (1,313
              )Total
      operating costs and expense
              
              
              243,801
              
              
              
              179,238
              
              
              
              158,851
              
              
              
              161,446
              
              
              
              170,196(Loss)
      income from operations
              
              
              (9,711
              )
              
              
              2,137
              
              
              
              (5,134
              )
              
              
              (16,900
              )
              
              
              (31,616
              )Non-operating
      (income) expense
              
              
              (937
              )
              
              
              (1,551
              )
              
              
              (87
              )
              
              
              772
              
              
              
              2,158(Loss)
      income before income taxes and equity in earnings of equity method
      investment
              
              
              (8,774
              )
              
              
              3,688
              
              
              
              (5,047
              )
              
              
              (17,672
              )
              
              
              (33,774
              )(Benefit)
      provision for income taxes
              
              
              (3,080
              )
              
              
              145
              
              
              
              —
              
              
              
              —
              
              
              
              —Equity
      in (earnings) loss of equity-method investment, net of
    taxes
              
              
              (139
              )
              
              
              (114
              )
              
              
              (83
              )
              
              
              390
              
              
              
              827Less
      deemed dividend related to beneficial conversion feature (4)
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              34,576Net
      (loss) income
              
              $
              (5,555
              )
              
              $
              3,657
              
              
              $
              (4,964
              )
              
              $
              (18,062
              )
              
              $
              (69,177
              )Net
      (loss) income per share:Basic
              
              $
              (0.12
              )
              
              $
              0.11
              
              
              $
              (0.15
              )
              
              $
              (0.63
              )
              
              $
              (3.96
              )Diluted
              
              $
              (0.12
              )
              
              $
              0.10
              
              
              $
              (0.15
              )
              
              $
              (0.63
              )
              
              $
              (3.96
              )Weighted
      average shares used in per share calculationsBasic
              
              
              46,942
              
              
              
              34,748
              
              
              
              33,939
              
              
              
              28,732
              
              
              
              17,460Diluted
              
              
              46,942
              
              
              
              35,739
              
              
              
              33,939
              
              
              
              28,732
              
              
              
              17,460
  30
   December
      31,2007
      (1)
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Consolidated
      Balance Sheet Data:Cash,
      cash equivalents and short-term
                marketable
      securities
              
              $
              71,599
              
              
              $
              58,882
              
              
              $
              40,494
              
              
              $
              45,985
              
              
              $
              18,885Non-current
      marketable securities
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              4,656
              
              
              
              —Total
      assets
              
              
              427,010
              
              
              
              173,702
              
              
              
              155,369
              
              
              
              168,149
              
              
              
              135,839Note
      payable and capital lease obligations, less current
portion
              
              
              17,806
              
              
              
              3,364
              
              
              
              7,903
              
              
              
              12,837
              
              
              
              12,742Total
      stockholders’ equity
              
              
              346,633
              
              
              
              126,525
              
              
              
              109,728
              
              
              
              113,738
              
              
              
              70,524
  Year
      Ended December 31,2007(1)
              
              2006
              
              2005
              
              2004
              
              2003Other
      Financial Data:Purchases
      of property and equipment
              
              $
              30,271
              
              
              $
              13,382
              
              
              $
              10,161
              
              
              $
              13,066
              
              
              $
              3,799Net
      cash provided by (used in) operating activities
              
              
              27,592
              
              
              
              29,599
              
              
              
              5,493
              
              
              
              (1,150
              )
              
              
              (11,175
              )Net
      cash (used in) provided by investing activities
              
              
              (36,393
              )
              
              
              (10,399
              )
              
              
              (9,428
              )
              
              
              (29,659
              )
              
              
              561Net
      cash provided by (used in) financing activities
              
              
              15,240
              
              
              
              1,957
              
              
              
              (5,454
              )
              
              
              45,747
              
              
              
              4,280
  (1)
              On
      February 20, 2007 we completed our acquisition of VitalStream, whereby
      VitalStream became a wholly-owned subsidiary of Internap. Prior to our
      acquisition of VitalStream, we did not offer proprietary CDN services, but
      instead, we were a reseller of third party CDN services. Under the
      purchase method of accounting, we allocated the total estimated purchase
      price to VitalStream’s net tangible and intangible assets based on their
      estimated fair values as of February 20, 2007. We recorded the excess
      purchase price over the value of the net tangible and identifiable
      intangible assets as goodwill. Also, as a result of the acquisition we
      issued approximately 12.2 million shares of Internap common
      stock.
  (2)
              Effective
      January 1, 2006, we adopted SFAS No. 123 (revised 2004),
      “Share-Based Payment” (SFAS No. 123R) and related
      interpretations, using the modified prospective transition method and
      therefore have not restated prior periods’ results. Prior to the adoption
      of SFAS No. 123R on January 1, 2006, we accounted for
      stock-based compensation plans under the recognition and measurement
      provisions of Accounting Principles Board (APB) Opinion No. 25,
      “Accounting for Stock Issued to Employees,” and related interpretations.
      We also provided disclosures in accordance with SFAS No. 123,
      “Accounting for Stock-Based Compensation,” as amended by
      SFAS No. 148, “Accounting for Stock-Based Compensation —
      Transition and Disclosures — an Amendment of FASB Statement
      No. 123.” Accordingly, no expense was recognized for options to
      purchase our common stock that we granted with an exercise price equal to
      fair market value at the date of grant and no expense was recognized in
      connection with purchases under employee stock purchase plans for any
      periods prior to January 1,
2006.
 
 (3)
              Prior
      to 2007, direct costs of amortization of acquired technologies were
      included in the caption direct costs of network, sales and services,
      exclusive of depreciation and amortization.  In 2007, we
      reclassified these costs to a separate caption.  These
      reclassifications had no effect on previously reported operating loss
      (income) or net loss (income).
 
 (4)
              In
      August 2003, we completed a private placement of our common stock, which
      resulted in a decrease of the conversion price of our series A preferred
      stock to $9.50 per share and an increase in the number of shares of common
      stock issuable upon conversion of all shares of series A preferred stock
      by 3.5 million shares. We recorded a deemed dividend of $34.6 million in
      connection with the conversion price adjustment, which is attributable to
      the additional incremental number of shares of common stock was issuable
      upon conversion of our series A preferred
stock.
  31
  ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
  The
following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes provided under Part II, Item 8 of
this annual report on Form 10-K/A.
 
 Overview
 
 We
deliver high performance and reliable Internet solutions through a suite of
network optimization and delivery products and services. These solutions,
combined with progressive and proactive technical support, enable companies to
confidently migrate business-critical applications, including audio and video
streaming and monetization services, to the Internet. Our suite of products and
services support a broad range of Internet applications. We currently
have approximately 3,800 customers, serving financial services, healthcare,
technology, retail, travel, and media/entertainment markets. Our customers are
located in the United States and abroad and include several Fortune 1000 and
mid-tier enterprises. Our product and service offerings are complemented by
Internet protocol, or IP, access solutions such as data center services, content
delivery networks, or CDN, and managed security. We deliver services through our
50 service points across North America, Europe and the Asia-Pacific region. Our
Private Network Access Points, or P-NAPs, feature multiple direct high-speed
connections to major Internet networks including AT&T Inc., Sprint
Nextel Corporation, Verizon CommunicationsInc., Savvis, Inc., Global
Crossing Limited, and Level 3 Communications, Inc.
  The key
characteristic that differentiates us from our competition is our portfolio of
patented and patent-pending route optimization solutions that address the
inherent weaknesses of the Internet and overcome the inefficiencies of
traditional IP connectivity options. Our intelligent routing technology can
facilitate traffic over multiple carriers, as opposed to just one carrier's
network, to ensure highly reliable performance over the Internet.
  We
believe our unique managed multi-network approach provides better performance,
control and reliability compared to conventional Internet connectivity
alternatives. Our service level agreements guarantee performance across the
entire Internet in the United States, excluding local connections, whereas
providers of conventional Internet connectivity typically only guarantee
performance on their own network.
 
 On
October 12, 2006, we entered into a definitive agreement to acquire VitalStream
Holdings, Inc., or VitalStream, in an all-stock transaction accounted for using
the purchase method of accounting for business combinations. The transaction
closed on February 20, 2007. Our results of operations include the activities of
VitalStream from February 21, 2007 through December 31, 2007.
  As
discussed in note 18 to our consolidated financial statements, we revised our
quarterly statement of operations for the quarter ended September 30, 2007 to
appropriately record (1) $0.5 million for sales adjustments, which reduced net
accounts receivable and revenue, and (2) $0.1 million for accretion of interest
income that we initially included as unrealized gain in accumulated other
comprehensive income within stockholders’ equity.  The effect of these
revisions had no impact on our consolidated statement of cash
flows.  We have determined that these adjustments are not material to
our consolidated financial statements for any of the affected quarterly
periods.  Accordingly, we have not revised the 2007 quarterly
financial statements included in our previously filed Forms 10-Q for the
quarterly periods ended March 31, June 30 and September 30, 2007, for these
adjustments.
 We
operate in three business segments: IP services, data center services and CDN
services. For additional information about these segments, see note 5 to the
consolidated financial statements included in Part II, Item 8.
  The
following is a brief description of each of our reportable business
segments.
 
 IP
Services
  Our
patented and patent-pending network performance optimization technologies
address the inherent weaknesses of the Internet, allowing enterprises to take
advantage of the convenience, flexibility and reach of the Internet to connect
to customers, suppliers and partners. Our solutions take into account the unique
performance requirements of each business application to ensure performance as
designed, without unnecessary cost. Prior to recommending appropriate network
solutions for our customers’ applications, we consider key performance
objectives including (1) performance and cost optimization, (2) application
control and speed and (3) delivery and reach. Our charges for IP services are
based on a fixed-fee, usage or a combination of both fixed fee and
usage.
  32
  Our IP
services segment also includes our flow control platform, or FCP. The FCP
provides network performance management and monitoring for companies with
multi-homed networks and redundant Internet connections.  The FCP
proactively reviews customer networks for the best performing route or the most
cost-effective and routes according to our customers’ requirements.  We
offer FCP as either a one-time hardware purchase or as a monthly subscription
service. Sales of FCP also generate annual maintenance fees and professional
service fees for installation and ongoing network configuration. Since the FCP
emulates our P-NAP service in many ways, this product affords us the opportunity
to serve customers outside of our P-NAP market footprint. This product
represents approximately 4% of our IP services revenue and approximately 2% of
our consolidated revenue for the year ended December 31, 2007.
 
 Data
Center Services
  Our data
center services provide a single source for network infrastructure, IP and
security, all of which are designed to maximize solution performance while
providing a more stable, dependable infrastructure, and are backed by guaranteed
service levels and our team of dedicated support professionals. We offer a
comprehensive solution at 42 service points, including eight locations managed
by us and 34 locations managed by third parties.
 
 Data
center services also enable us to have a more flexible product offering,
including bundling our high performance IP connectivity and managed services,
such as content delivery, along with hosting customers' applications. We charge
monthly fees for data center services based on the amount of square footage that
the customer leases in our facilities. We also have relationships with various
providers to extend our P-NAP model into markets with high demand.
 
 CDN
Services
  Our CDN
services enable our customers to quickly and securely stream and distribute
video, audio, advertising, and software to audiences across the globe through
strategically located data centers. Providing capacity-on-demand to handle large
events and unanticipated traffic spikes, content is delivered with high quality
regardless of audience size or geographic location. Our MediaConsole® content
management tool provides our customers the benefit of a single, easy to navigate
system featuring Media Asset Management, Digital Rights Management, or DRM,
support, and detailed reporting tools. With MediaConsole, our customers can use
one application to manage and control access to their digital assets, deliver
advertising campaigns, view network conditions, and gain insight into habits of
their viewing audience.
 
 Our CDN
and monetization services provide a complete turnkey solution for the
monetization of online media. These multi-faceted “live” and “on-demand”
advertisement insertion and advertising placement solutions include a full
campaign management suite, inventory prediction tools, audience research and
metrics, and extensive reporting features to effectively track advertising
campaigns in real-time. Online advertising solutions enable our customers to
offset the costs associated with the creation, transformation, licensing, and
management of online content. Prior to our acquisition of VitalStream on
February 20, 2007, we did not offer proprietary CDN services, but instead, we
were a reseller of third party CDN services for which results of operations
are included in Other revenues and direct costs of network, sales and services,
discussed below.
 
 Other
  Other
revenues and direct costs of network, sales and services include our
non-segmented results of operations, including certain reseller and
miscellaneous services such as third party CDN services, termination fee
revenue, other hardware sales, and consulting services.
 
 Highlights
and Outlook
 ·
                Due to the nature of the
      services we provide, we generally price our IP services at a premium
      compared to the services offered by conventional Internet connectivity
      service providers. We believe customers with business-critical
      Internet applications will continue to demand the highest quality of
      service as their Internet connectivity needs grow and become even more
      complex and, as such, will continue to pay a premium for our high
      performance managed IP
services.
 
  33
  ·
              Our success in executing our
      premium pricing strategy depends, to a significant degree, on our ability
      to differentiate our connectivity solutions from lower cost
      alternatives. The key measures of our success in achieving this
      differentiation are revenue and customer growth. During 2007, we
      added approximately 1,500 net customers (including
      approximately 900 VitalStream customers that we added as part of the
      VitalStream acquisition), bringing our total to approximately 3,800
      enterprise customers as of December 31, 2007. Revenue for the year ended
      December 31, 2007 increased 29% to $234.1 million, compared to revenue of
      $181.4 million for the year ended December 31,
  2006.
 ·
              We intend to increase revenue
      by leveraging the capabilities of our existing network access
      points. In our existing markets, we realize incremental margins as
      new customers are added. Additional volume in an existing market allows
      improved utilization of existing facilities and an improved ability to
      cost-effectively predict and acquire additional network capacity. We
      experienced a net increase in customers from 2006 to 2007. Conversely,
      decreases in the number of customers in an established market lead to
      decreased facility utilization and increase the possibility that direct
      network resources are not cost-efficiently employed. These factors have a
      direct bearing on our financial position and results of
      operations.·
              We offer a 100% operational
      uptime guarantee for our network performance
      management. Coupled with the lowest packet loss and latency in
      the industry, we provide our customers with a proactive industry-leading
      Service Level Agreement (SLA) that covers the entire Internet - not just
      one single network. Unlike our competitors, we believe so strongly in
      the consistent performance of our network that we offer proactive SLA
      notification and automatic bill credits
      if we ever break our SLAs.  We believe that this commitment
      allows us to provide the best network performance
    available.
 
 Developments
in 2007
 
 VitalStream
Acquisition. On February 20, 2007, we completed the previously announced
acquisition of VitalStream Holdings, Inc., or VitalStream, for approximately
$214.0 million, whereby VitalStream became a wholly-owned subsidiary of
Internap. VitalStream provides products and services for storing and delivering
digital media to large audiences over the Internet and advertisement insertion
and related advertising services to companies that stream digital media over the
Internet. VitalStream enhances our position as a leading provider of high
performance route control products and services by adding complementary service
offerings in the rapidly growing content delivery and on-line advertising
markets. Integrating VitalStream's digital media delivery platform into our
portfolio of products and services enables us to provide customers with one of
the most complete product lines in content delivery solutions, content
monetization and on-line advertising, while supporting the significant long-term
growth opportunities in the network services market. We also considered the
following:
 
 ·
              VitalStream’s
      services were a logical extension and complement to our high performance
      route control products and
services.
 ·
              We
      evaluated demand for CDN services within our customer base and determined
      that a market for proprietary CDN services
  existed.
 ·
              VitalStream’s
      services offered our legacy customers additional high growth and high
      margin revenue streams.
 ·
              We
      believed that large audio and video files are more effectively delivered
      over the Internet with a combination of VitalStream’s platform and our
      route management network.
 ·
              VitalStream’s
      initiatives in the rich media advertising services business present an
      entirely new set of opportunities and potential customer relationships for
      us, as advertisers seek to access a large and growing base of Internet
      users that watch increasing amounts of video
  online.
  34
  We
accounted for the acquisition using the purchase method of accounting in
accordance with SFAS No. 141, “Business Combinations.” Our results of
operations include the activities of VitalStream from February 21, 2007 through
December 31, 2007.
  RestructuringLiability.  On March 31, 2007, we incurred a restructuring and impairment
charge totaling $10.3 million. The charge was the result of a review of our
business, particularly in light of our acquisition of VitalStream, and our plan
to finalize the overall integration and implementation plan before the end of
the first quarter. The charge to expense included $7.8 million for leased
facilities, representing both the net present value of costs less anticipated
sublease recoveries that will continue to be incurred without economic benefit
to us and costs to terminate leases before the end of their term. The charge
also included severance payments of $1.1 million for the termination of certain
Internap employees and $1.4 million for impairment of assets. Related
expenditures are estimated to be $10.7 million, of which $3.7 million has been
paid during the year ended December 31, 2007, and the balance continuing through
December 2016, the last date of the longest lease term. The impairment charge of
$1.3 million was related to the leases referenced above and less than $0.1
million for other assets.
  We also
incurred a $1.1 million impairment recorded for a sales order-through-billing
system, which was a result of an evaluation of the existing infrastructure
relative to our new financial accounting system and the acquisition of
VitalStream.
  Write-Off
of Investment. In connection with the preparation of our quarterly report for the
quarter ended June 30, 2007, we wrote-off an investment, totaling $1.2 million,
representing the remaining carrying value of our investment in series D
preferred stock of Aventail Corporation, or Aventail. We made an initial cash
investment of $6.0 million in Aventail series D preferred stock pursuant to an
investment agreement in February 2000. In connection with a subsequent round of
financing by Aventail, we recognized an initial impairment loss on our
investment of $4.8 million in 2001. On June 12, 2007, SonicWall, Inc. announced
that it had entered into an agreement to acquire Aventail for approximately
$25.0 million in cash. The transaction closed on July 11, 2007, all shares of
series D preferred stock were cancelled and the holders of series D preferred
stock did not receive any consideration for such
shares.  Consequently, we recorded a write-off of our investment in
Aventail to reduce our carrying value to $0.
  Rights
Agreement.On March 15, 2007, the Board of Directors declared a dividend
of one preferred share purchase right, or a Right, for each outstanding share of
common stock, par value $0.001 per share, of the Company. The dividend was
payable on March 23, 2007 to the stockholders of record on that date. Each Right
entitles the registered holder to purchase from the Company one one-thousandth
of a share of Series B Preferred Stock of the Company, par value $0.001 per
share, or the Preferred Shares, at a price of $100.00 per one one-thousandth of
a Preferred Share, subject to adjustment. The description and terms of the
Rights are set forth in a Rights Agreement between the Company and American
Stock Transfer & Trust Company, as Rights Agent dated April 11, 2007.
  Data Center
Expansion.On June 12, 2007, we announced that we approved an investment of up to
$40.0 million to fund the expansion of our data center facilities in several key
markets. We anticipate implementing the expansion over the next several calendar
quarters, with at least a portion of the funding to be provided under our credit
agreement, discussed below. Through December 31, 2007, we have spent less than
$10.0 million.
  Credit Agreement.On September 14, 2007, we entered into a $35.0 million credit agreement.
We discuss this agreement in note 10 to the consolidated financial statements
and the section captioned “Liquidity and Capital Resources” under “Item 2.
Managements Discussion and Analysis of Financial Condition and Results of
Operations.”  At December 31, 2007, the outstanding balance was $19.8
million, of which we used $4.4 million to repay prior debt, approximately $7.8
million for capital expenditures and the balance for general corporate and other
purposes.  The availability under the revolving credit facility and
term loan was $1.1 million and $10.0 million, respectively at December 31,
2007.
 
 35
  Critical
Accounting Policies and Estimates
 
 The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue, and expense, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
summarized below. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ materially from these estimates under
different assumptions or conditions.
 
 Management
believes the following critical accounting policies affect the judgments and
estimates used in the preparation of our consolidated financial
statements.
 
 Revenue
recognition. The
majority of our revenue is derived from high performance IP services, related
data center services, CDN services, and other ancillary products and services
throughout the United States. Our IP services revenue is derived from the sale
of high performance Internet connectivity services at fixed rates or usage-based
pricing to our customers that desire a DS-3 or faster
connection.  Slower T-1 and fractional DS-3 connections are provided
at fixed rates.  Data center revenue includes both physical space for
hosting customers’ network and other equipment plus associated services such as
redundant power and network connectivity, environmental controls and
security.  Data center revenue is based on occupied square feet and
both allocated and variable-based usage.  CDN revenue includes three
components, none of which are sold separately: (1) data storage; (2)
streaming/delivery and (3) a user interface/reporting tool.  We
provide the CDN service components via internally developed and acquired
technology that resides on our network.  CDN revenue is based on
either fixed rates or usage-based pricing.  All of the foregoing
revenue arrangements have contractual terms and in many instances, include
minimum usage commitments.  Other ancillary products and services
include our Flow Control Platform, or FCP, product, server management and
installation, virtual private networking, managed security, data backup, remote storage and
restoration.
  We
recognize revenue in accordance with the Securities
and Exchange Commission’s Staff Accounting Bulletin No. 104,Revenue Recognition,or
SAB No. 104,and
the Financial Accounting Standards Board’s,
orFASB,Emerging
Issues Task Force Issue No. 00-21,Revenue Arrangements with Multiple Deliverables,
or EITF No. 00-21.Revenue
is recognizedwhen persuasive evidence of an arrangement exists, the
product or service has been delivered, the fees are fixed or determinable and
collectibility is probable. For most of our IP, data center and CDN
revenue, services are delivered ratably over the contract term. Contracts and
sales or purchase orders are used to determine the existence of an arrangement.
We test for availability or connectivity to verify delivery of our services. We
assess whether the fee is fixed or determinable based on the payment terms
associated with the transaction and whether the sales price is subject to refund
or adjustment.  Because the software component of our FCP is more than
incidental to the product as a whole, we recognize associated FCP revenue in
accordance with the American Institute of Certified Public Accountants’ (AICPA)
Statement of Position 97-2, Software
Revenue Recognition.
  We
derive revenue from the sale ofIP services, data center services andCDN services to customers
under contracts that generally commit the customer to a minimum monthly level of
usage on a calendar month basis and provide the rate at which the customer must
pay for actual usage above the monthly minimum. For these services, we recognize
the monthly minimum as revenue each month provided that an enforceable contract
has been signed by both parties, the service has been delivered to the customer,
the fee for the service is fixed or determinable and collection is reasonably
assured. Should a customer’s usage of our services exceed the monthly minimum,
we recognize revenue for such excess in the period of the usage. We record the
installation fees as deferred revenue and recognize as revenue ratably over the
estimated life of the customer arrangement. We also derive revenue from services
sold as discrete, non-recurring events or based solely on usage. For these
services, we recognize revenue after both parties have signed an enforceable
contract, the fee is fixed or determinable, the event or usage has occurred and
collection is reasonably assured.
 
 36
  Wealsoenter into multiple-element arrangements
or bundled services, such as combiningIP serviceswith data center,CDN servicesor both.  When we enter into such arrangements,
we account for each element
separately over its respective service period or at the time of delivery,
provided that there is objective evidence of fair value for the separate
elements. Objective evidence of fair value includes the price charged for the
element when sold separately. If we cannot objectively determine the fair value
of each element, we recognize the total value of the arrangement ratably over
the entire service period to the extent that we have begun to provide the
services, and other revenue recognition criteria have been
satisfied.
  Deferred
revenue consists of revenue for services to be delivered in the future and
consist primarily of advance billings, which are amortized over the respective
service period. Revenue associated with billings for installation of customer
network equipment are deferred and amortized over the estimated life of the
customer relationship, which was two to three years for each of the three years
in the period ended December 31, 2007.  Revenue for installation
services is deferred and amortized because the installation service is integral
to our primary service offering and does not have value to a customer on a
stand-alone basis. Deferred post-contract customer support associated with sales
of our FCP solution and similar products are amortized ratably over the contract
period, which is generally one year.
  Customer
credit risk.
We routinely review the creditworthiness of our customers. If we determine that
collection of service revenue is uncertain, we do not recognize revenue
until collection  is probable. Additionally, we maintain allowances
for doubtful accounts resulting from the inability of our customers to make
required payments on accounts receivable. The allowance for doubtful accounts is
based upon specific and general customer information, which also includes
estimates based on management's best understanding of the customer’s ability to
pay. A customer’s ability to pay takes into consideration payment history, legal
status (i.e., bankruptcy) and the status of services we are
providing.  Once we have exhausted all collection efforts, we write the
uncollectible balance off against the allowance for doubtful accounts.
  We record
an amount for sales adjustments, which reduces net accounts receivable and
revenue. The amount for sales adjustments is based upon specific and general
customer information, including outstanding promotional credits, customer
disputes, credit adjustments not yet processed through the billing system, and
historical activity.
  Accounting
for leases and leasehold improvements.
We record leases as capital or operating leases and account for leasehold
improvements in accordance with SFAS No. 13, “Accounting for Leases” and related
literature. We record rent expense for operating leases in accordance with FASB
Technical Bulletin (FTB) No. 88-1, “Issues Relating to Accounting
for Leases.” This FTB requires lease agreements that include periods of free
rent or other incentives, specific escalating lease payments, or both, to be
recorded on a straight-line or other systematic basis over the initial lease
term and those renewal periods that are reasonably assured. The difference
between rent expense and rent paid is recorded as deferred rent in non-current
liabilities in the consolidated balance sheets.
 
 Investments. We account for investments
without readily determinable fair values at historical cost, as determined by
our initial investment. The recorded value of cost-basis investments is
periodically reviewed to determine the propriety of the recorded basis. When a
decline in the value that is judged to be other than temporary has occurred,
based on available data, the cost basis is reduced and an investment loss is
recorded. We incurred a charge during the three months ended June 30, 2007,
totaling $1.2 million, representing the write-off of the remaining carrying
value of our investment in series D preferred stock of Aventail Corporation, or
Aventail. See note 6 to the consolidated financial statements for further
discussion of this investment and the recorded loss.
 
 37
  We
account for investments that provide us with the ability to exercise significant
influence, but not control, over an investee using the equity method of
accounting. Significant influence, but not control, is generally deemed to exist
if we have an ownership interest in the voting stock of the investee of between
20% and 50%, although other factors, such as minority interest protections, are
considered in determining whether the equity method of accounting is
appropriate. As of December 31, 2007, Internap Japan Co, Ltd. (Internap Japan),
our joint venture with NTT-ME Corporation of Japan and NTT Holdings, qualifies
for equity method accounting. We record our proportional share of the income and
losses of Internap Japan one month in arrears on the consolidated balance sheets
as a component of non-current investments and asa separate caption on
the consolidated statement of operations.
 
 Pursuant
to our formal investment policy, investments in marketable securities include
high credit quality corporate debt securities, auction rate securities,
commercial paper, and U.S. Government Agency debt securities. Auction rate
securities are variable rate bonds tied to short-term interest rates with
maturities on the face of the securities in excess of 90 days and have interest
rate resets through a modified Dutch auction, at predetermined short-term
intervals, usually every 7, 28 or 35 days.  Auction rate securities
generally trade at par and are callable at par on any interest payment date at
the option of the issuer.  Interest received 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 of our marketable
securities are classified as available for sale and are recorded at fair value
with changes in fair value reflected in other comprehensive income.
 
 Goodwill.
We account for goodwill under SFAS No. 142, “Goodwill and Other Intangible
Assets.” This statement requires an impairment-only approach to accounting for
goodwill. The SFAS No. 142 goodwill impairment model is a two-step process. As a
first step, it requires a comparison of the book value of net assets to the fair
value of the related operations that have goodwill assigned to them. If the fair
value is determined to be less than book value, a second step is performed to
compute the amount of the impairment. In this process, a fair value for goodwill
is estimated, based in part on the fair value of the operations used in the
first step, and is compared to the carrying value for goodwill. Any shortfall of
the fair value below carrying value represents the amount of goodwill
impairment. SFAS No. 142 requires goodwill to be tested for impairment annually
at the same time every year and when an event occurs or circumstances change
such that it is reasonably possible that impairment may exist. We selected
August 1 as our annual testing date. We also assess on a quarterly basis whether
any events have occurred or circumstances have changed that would indicate an
impairment could exist.
  Accruals for
disputed telecommunication costs. In delivering our services,
we rely on a number of Internet network, telecommunication and other vendors. We
work directly with these vendors to provision services such as establishing,
modifying or discontinuing services for our customers. Because of the volume of
activity, billing disputes inevitably arise. These disputes typically stem from
disagreements concerning the starting and ending dates of service, quoted rates,
usage, and various other factors. For potential billing errors made in the
vendor’s favor, for example a duplicate billing, we initiate a formal dispute
with the vendor and record the related cost and liability on a range of 5% to
100% of the disputed amount, depending on our assessment of the likely outcome
of the dispute. Conversely, for billing errors in our favor, such as the
vendor’s failure to invoice us for new service, we record an estimate for the
related cost and liability based on the full amount that we should have been
invoiced. Disputed costs, both in the vendors’ favor and our favor, are
researched and discussed with vendors on an ongoing basis until ultimately
resolved. Estimates are periodically reviewed by management and modified in
light of new information or developments, if any. Conversely, any resolved
disputes that will result in a credit over the disputed amounts are recognized
in the appropriate month when the resolution has been determined. Because
estimates regarding disputed costs include assessments of uncertain outcomes,
such estimates are inherently vulnerable to changes due to unforeseen
circumstances that could materially and adversely affect our consolidated
financial condition, results of operations and cash flows.
 
 Accrued
liabilities.
Similar to accruals for disputed telecommunications costs above, it is necessary
for us to estimate other significant costs such as utilities and sales, use,
telecommunications, and other taxes. These estimates are often necessary either
because invoices for services are not received on a timely basis from our
vendors or by virtue of the complexity surrounding the costs. In every instance
in which an estimate is necessary, we record the related cost and liability
based on all available facts and circumstances, including but not limited to
historical trends, related usage, forecasts, and quotes. Management periodically
reviews and modifies estimates in light of new information or developments, if
any. Because estimates regarding accrued liabilities include assessments of
uncertain outcomes, such estimates are inherently vulnerable to changes due to
unforeseen circumstances that could materially and adversely affect our results
of operations and cash flows.
 
 38
  Restructuring
liability. When
circumstances warrant, we may elect to exit certain business activities or
change the manner in which we conduct ongoing operations. When we make such a
change, management will estimate the costs to exit a business or restructure
ongoing operations. The components of the estimates may include estimates and
assumptions regarding the timing and costs of future events and activities that
represent management's best expectations based on known facts and circumstances
at the time of estimation. Management periodically reviews its restructuring
estimates and assumptions relative to new information, if any, of which it
becomes aware. Should circumstances warrant, management will adjust its previous
estimates to reflect what it then believes to be a more accurate representation
of expected future costs. Because management's estimates and assumptions
regarding restructuring costs include probabilities of future events, such
estimates are inherently vulnerable to changes due to unforeseen circumstances,
changes in market conditions, regulatory changes, changes in existing business
practices, and other circumstances that could materially and adversely affect
our results of operations. A 10% change in our restructuring estimates in a
future period, compared to the $10.1 million restructuring liability at December
31, 2007 would result in an $1.0 million expense or benefit in the statement of
operations during the period in which the change in estimate
occurred.
 
 Deferred
taxes.
We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. Historically, we have
recorded a valuation allowance equal to our net deferred tax assets. Although we
consider the potential for future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the valuation
allowance, in the event we determine we would be able to realize our deferred
tax assets in the future in excess of our net recorded amount, an adjustment to
reduce the valuation allowance would increase income in the period such
determination was made.
 
 Forthe year ended December 31, 2007,the tax provision includes
a net benefit of $3.5 million related to the release ofthe valuation allowance associated withU.K.deferred taxassets. The gross amount ofU.K.deferred tax assets was $4.4 million,
which was offset by a reserve of $0.9 million. The net tax provision benefit of
$3.5 million reduced our loss for the year ended December 31,
2007.
 
 Thereduction invaluation allowance was due tothe existence ofsufficient positive
evidenceas of December 31,
2007to indicate thatournet operating lossesin theU.K.wouldmore likely than not be realized in the
future.Theevidenceprimarilyconsistsof the results of prior performancein theU.K.and the expectation of future
performance based on historical results.  Wewillcontinue to assessin the future the recoverability ofU.S.andother deferred tax assets, and whether or not the valuation
allowance should be reduced relative to theU.S.and other deferred tax assets outside
theU.K.
 
 Stock-based
compensation. We account for stock-based instruments issued to employees
in exchange for their services under the fair value recognition provisions of
SFAS No. 123 (revised 2004), “Share-Based Payment,” or SFAS No. 123R, and
related interpretations. Under SFAS No. 123R, share-based compensation cost is
measured at the grant date based on the calculated fair value of the award. The
expense is recognized over the employee’s requisite service period, generally
the vesting period of the award. Prior to the adoption of SFAS No. 123R on
January 1, 2006, we utilized the disclosure only provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation,” and accounted for stock-based
compensation plans under the recognition and measurement provisions of APB
Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
interpretations. Accordingly, we did not recognize any expense for options to
purchase our common stock granted with an exercise price equal to fair market
value at the date of grant and did not recognize any expense in connection with
purchases under our employee stock purchase plans for any periods prior to
January 1, 2006.
 
 We
elected to adopt SFASNo.123R
using the modified prospectiveapplicationmethod.
Under thismethod, compensationcost
recognized during the period includes:(1) compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1,
2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS No.123
amortized over the awards’ vesting period, and (2) compensation cost
for all share-based payments granted subsequent to January 1, 2006, based
on the grant-date fair value estimated in accordance with the provisions of SFAS
No.123R
amortized on a straight-line basis over the awards’ vesting period. The fair
value of stock options is estimated at the date of grant using the Black-Scholes
option pricing model with weighted average assumptions for the activity under
our stock plans. Option pricing model input assumptions such as expected term,
expected volatility, and risk-free interest rate, impact the fair value
estimate. Further, the forfeiture rate impacts the amount of aggregate
compensation. These assumptions are subjective and generally require significant
analysis and judgment to develop.
  39
  The
expected term represents the weighted average period of time that granted
options are expected to be outstanding, giving consideration to the vesting
schedules and our historical exercise patterns. Because our options are not
publicly traded, assumed volatility is based on the historical volatility of our
stock. The risk-free interest rate is based on the U.S. Treasury yield curve in
effect at the time of grant for periods corresponding to the expected life of
the options. We have also used historical data to estimate option exercises,
employee termination and stock option forfeiture rates. Changes in any of these
assumptions could materially impact our results of operations in the period the
change is made.
 
 Recent
Accounting Pronouncements
 
 In September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurements,”or SFAS No. 157.SFAS No. 157 defines fair value,
establishes a framework for measuring fair value undergenerally accepted accounting
principles, orGAAP, and
expands disclosures about fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after December 15, 2007. In February
2008, the FASB issuedStaff
Position, or FSP,FAS
157-1, which provides supplemental guidance on the application of SFAS
No. 157, and FSP FAS 157-2, which delays the effective date of SFAS
No. 157 for nonfinancial assets and nonfinancial liabilities. We are
currently in the process of evaluating the impact that the adoption of SFAS
No. 157 will have on our financial position, results of operations and cash
flows.
 
 In February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities,”or SFAS NO. 159.SFAS No. 159 permits companies to
choose to measure, on an instrument-by-instrument basis, many financial
instruments and certain other assets and liabilities at fair value that are not
currently required to be measured at fair value. SFAS No. 159 is effective
as of the beginning of a fiscal year that begins after November 15, 2007.
While we will not elect to adopt fair value accounting to any assets or
liabilities allowed by SFAS No. 159, we are currently in the process of
evaluating SFAS No. 159 and its potential impact to us.
 
 In December 2007, the FASB issued SFAS
No. 141 (revised 2007), “Business Combinations,”orSFAS No. 141R. SFAS No. 141R
replaces SFAS No. 141, “Business Combinations.” SFASNo.141R establishes principles and
requirements for how an acquiror recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any noncontrolling interest in the acquiree,and the goodwill acquired or a gain
from a bargain purchase. SFAS No. 141R also determines disclosure
requirements to enable the evaluation of the nature and financial effects of the
business combination. SFAS
No. 141Rapplies
prospectively to business combinations for which the acquisition date is on or
after the beginning of a fiscal year that begins on or after December 15,
2008 andhasimplications for acquisitions that occur
prior to this date. We are currently in the process of evaluating the impact
that the adoption of SFASNo. 141Rwill have on
our financial position, results of operations and cash
flows.
 
 In December 2007, the FASB issued
SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” or SFAS No.
160.SFAS No. 160
amendsAccounting Research
Bulletin51,“Consolidated Financial
Statements,”or ARB 51,and requires all entities to report
noncontrolling (minority) interests in subsidiaries within equity in the
consolidated financial statements, but separate from the parent shareholders’
equity. SFAS No. 160 also requires any acquisitions or dispositions of
noncontrolling interests that do not result in a change of control to be
accounted for as equity transactions. Further, SFAS No. 160 requires that a
parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. SFAS No. 160 is effective for fiscal years beginning on or
after December 15, 2008. Wedo not expectthe adoption of SFAS No. 160 will
havea significant, if any,
impact onour financial
position, results of
operations and cash flows.
  40
  Results of Operations
 
 Revenues.
Revenues are generated primarily from the sale of IP services, data center
services and CDN services. Our revenues typically consist of monthly recurring
revenues from contracts with terms of one year or more. These contracts usually
have fixed minimum commitments based on a certain level of usage with additional
charges for any usage over a specified limit. We also provide premise-based
route optimization products and other ancillary services, such as server
management and installation services, virtual private networking services,
managed security services, data back-up, remote
storage, restoration services, and professional services.
 
 Direct costs of
network, sales and services.Direct costs of network, sales and services
are comprised primarily of:
 
 ·
              
              costs
      for connecting to and accessing Internet network service providers, or
      ISPs, and competitive local exchangeproviders;·
              
              facility
      and occupancy costs for housing and operating our and our customers’
      network equipment;·
              
              costs
      of license fees for operating systems software, advertising royalties to
      content rights owners and advertisingdistribution
      costs;·
              
              costs
      incurred for providing additional third party services to our customers;
      and·
              
              costs
      of FCP solutions sold.
 To the
extent a network access point is located a distance from the respective ISP, we
may incur additional local loop charges on a recurring basis. Connectivity costs
vary depending on customer demands and pricing variables while network access
point facility costs are generally fixed in nature. Direct costs of network,
sales and services do not include compensation, depreciation or
amortization.
 
 Direct costs of
amortization of acquired technologies. Direct costs of amortization of
acquired technologies are for technologies acquired through business
combinations that are an integral part of the services and products we sell. The
cost of the acquired technologies is amortized over original lives of three to
eight years.
 
 Direct costs of
customer support. Direct costs of customer support consist primarily of
compensation and other personnel costs for employees engaged in connecting
customers to our network, installing customer equipment into network access
point facilities, and servicing customers through our network operations
centers. In addition, facilities costs associated with the network operations
center are included in direct costs of customer support.
 
 Product
development costs.Product development costs consist principally of
compensation and other personnel costs, consultant fees and prototype costs
related to the design, development and testing of our proprietary technology,
enhancement of our network management software and development of internal
systems. Costs for software to be sold, leased or otherwise marketed are
capitalized upon establishing technological feasibility and ending when the
software is available for general release to customers. Costs associated with
internal use software are capitalized when the software enters the application
development stage until the software is ready for its intended use. All other
product development costs are expensed as incurred.
 
 Sales and
marketing costs.Sales and marketing costs consist of compensation,
commissions and other costs for personnel engaged in marketing, sales and field
service support functions, as well as advertising, tradeshows, direct response
programs, new service point launch events, management of our web site, and other
promotional costs.
 
 General and
administrative costs.General and administrative costs consist primarily
of compensation and other expense for executive, finance, human resources and
administrative personnel, professional fees, and other general corporate
costs.
 
 41
  The
following table sets forth, as a percentage of total revenue, selected statement
of operations data for the periods indicated:
  Year
      Ended December 31,2007
              
              2006
              
              2005Revenues:Internet
      protocol (IP) services
              
              
              51.2
              %
              60.5
              %
              68.3
              %Data
      center services
              
              
              35.5
              
              31.0
              
              24.1Content
      delivery network (CDN) services
              
              
              7.6
              
              —
              
              —Other
              
              
              5.7
              
              8.5
              
              7.6Total
      revenues
              
              
              100.0
              
              100.0
              
              100.0Operating
      costs and expenses:Direct
      costs of network, sales and services, exclusive of depreciation and
      amortization, shown below:IP
      services
              
              
              18.7
              
              21.9
              
              25.0Data
      center services
              
              
              25.4
              
              25.6
              
              22.9CDN
      services
              
              
              2.8
              
              —
              
              —Other
              
              
              3.7
              
              6.1
              
              5.4Direct
      costs of amortization of acquired technologies
              
              
              1.8
              
              0.3
              
              0.4Direct
      costs of customer support
              
              
              7.1
              
              6.4
              
              6.9Product
      development
              
              
              2.8
              
              2.5
              
              3.2Sales
      and marketing
              
              
              13.4
              
              15.0
              
              16.8General
      and administrative
              
              
              13.9
              
              12.2
              
              13.1Depreciation
      and amortization
              
              
              9.5
              
              8.7
              
              9.6Restructuring
      and asset impairment
              
              
              4.9
              
              0.2
              
              —Other
      operating costs and expenses
              
              
              0.2
              
              (0.1
              )
              —Total
      operating costs and expenses
              
              
              104.2
              
              98.8
              
              103.3(Loss)
      income from operations
              
              
              (
      4.2
              ) %
              1.2
              %
              (3.3
              )
      %
 
 Revenues
  Revenues
for the years ended December 31, 2007, 2006 and 2005 are summarized as follows
(in thousands):
  Year
      Ended December 31,2007
              
              
              2006
              
              
              2005Revenues:Internet
      protocol (IP) services
              
              $
              119,848
              
              
              $
              109,748
              
              
              $
              105,032Data
      center services
              
              
              83,058
              
              
              
              56,152
              
              
              
              36,996Content
      delivery network (CDN) services
              
              
              17,718
              
              
              
              —
              
              
              
              —Other
              
              
              13,466
              
              
              
              15,475
              
              
              
              11,689$
              234,090
              
              
              $
              181,375
              
              
              $
              153,717
 
 Segment
information. We have three business segments: IP services, data center
services and CDN services. IP services include managed and premise-based high
performance IP and route optimization technologies. Data center services include
hosting of customer applications directly on our network to eliminate issues
associated with the quality of local connections. Data center services are
increasingly bundled with our high performance IP connectivity services. CDN
services include products and services for storing, delivering and monetizing
digital media to large global audiences over the Internet. Prior to our
acquisition of VitalStream on February 20, 2007, we did not offer proprietary
CDN services, but instead, we were a reseller of third party CDN services
for which revenues and direct costs are included in other revenues and direct
costs of network, sales and services, discussed below.
 
 42
  Our
reportable segments are strategic business units that offer different products
and services. As of December 31, 2007, our customer base
totaled approximately 3,800 customers across more than 20 metropolitan
markets.
 
 IP
services. Revenue for IP services increased $10.1 million, or 9%, to
$119.9 million for the year ended December 31, 2007, compared to $109.7 million
for the year ended December 31, 2006. The increase in IP revenue is driven by an
increase in demand, partially offset by a decline in pricing, and an increase in
sales of our premise-based FCP products and other large hardware sales. We
continue to experience increasing demand for our traditional IP services, with
IP traffic for the year ended December 31, 2007 increasing approximately 35%
from the year ended December 31, 2006. The increase in IP traffic has resulted
from both existing and new customers requiring greater overall capacity due to
growth in the usage of their applications, as well as in the nature of
applications consuming greater amounts of bandwidth. In particular, we have
continued to add high-traffic customers through competitive IP pricing and
minimum commitments during the year ended December 31, 2007. New IP services
customers added approximately $1.7 million of revenue. Ongoing industry-wide
pricing declines over the last 12 months, however, offset a portion of our gains
in customers and IP traffic. The blended rate in megabits per second, orMbps, decreased
approximately 23% annually from December 31, 2006 to December 31, 2007. We
recorded approximately $0.5 million of sales adjustments in the fourth quarter
of 2007 related predominantly to disputes over contractual service
periods.
 Revenue
for IP services increased $4.7 million, or 5%, to $109.7 million for the year
ended December 31, 2006, compared to $105.0 million for the year ended December
31, 2005. This change is due to the increase in demand for IP traffic, partially
offset by declining prices. During the year ended December 31, 2006, IP traffic
over our networks increased approximately 83% from the year ended December 31,
2005. The increase in IP traffic has come as both existing and new customers
require greater overall capacity due to growth in the usage of their
applications as well as in the nature of applications consuming greater amounts
of bandwidth. In particular, we added a number of high-traffic customers through
competitive IP pricing and minimum commitments during the year ended December
31, 2006.
 
 Data center
services. Data center services are a significant source of revenue growth
for our business. Revenue for data center services increased $26.9 million, or
48%, to $83.1 million for the year ended December 31, 2007, compared to $56.2
million for the year ended December 31, 2006. During the year ended December 31,
2007, we (1) implemented a broad-based rate increase, generating additional
revenue of approximately $8.0 million, (2) began executing a data center growth
initiative and (3) completed the build-out of our Seattle
facility.  The overall increase in revenue has resulted from both new
and existing customers, with new customers adding approximately $1.7 million of
revenue during 2007. The remaining increase is largely due to existing customers
using more space within our facilities, and the design and installation revenue
from new customers.We
have also structured our data center business to accommodate larger, global
customers and ensure a platform for robust traffic growth.
 
 Revenue
for data center services increased $19.2 million, or 52%, to $56.2 million for
the year ended December 31, 2006, compared to $37.0 million for the year ended
December 31, 2005. The revenue increase is primarily attributable to growth in
new and existing data center customers. Revenue growth is facilitated in part by
the continued expansion of our available data center space and our continued
efforts to bundle our IP and data center services. The demand for data center
services has outpaced industry-wide supply, which has allowed us to increase the
overall pricing for the data center component of our pricing
models.
 
 CDN
services. Revenue for our CDN services segment was $17.7 million for the
year ended December 31, 2007. This activity represents the operations from our
acquisition of VitalStream, which we completed on February 20,
2007. Revenue for the year was slightly lower than originally anticipated as we
completed the integration of the VitalStream business with and into our network
and infrastructure.  As previously noted, we did not offer proprietary
CDN services prior to our acquisition of VitalStream, but instead, we were a
reseller of third party CDN services, which is included in Other revenue,
below. We expect CDN to be an area of significant growth and have upgraded and
expanded related infrastructure, including in Europe and Asia, to serve the
expected industry-wide demand, particularly in those regions. In December 2007,
we extended our 100% uptime SLA to CDN services. I n the
second half of 2007, the Company experienced platform instability in its CDN
business, which caused an increase in customer dissatisfaction and a higher than
historical amount of customer disputes over service billings. In the fourth
quarter of 2007, we recorded a total of appoximately $1.4 million in sales and
billing adjustments related to both service interruptions and disputes over
contractual service periods. These sales and  billing adjustments have been
recorded against revenue. We have substantially completed integrating our
combined networks through technological improvements and systems integration
with operational stability achieved late in the year and expect this integration
to result in a decrease in performance-related adjustments in 2008.
  43
  Other.
Otherrevenues primarily include reseller and miscellaneous services such
as third party CDN services, termination fee revenue, referral fees for other
hardware sales, and consulting services. Other revenues decreased substantially
as the revenue streams from our acquisition of VitalStream replaced the activity
of the former third party CDN service provider.
  Direct
Costs of Network, Sales and Services (exclusive of depreciation and
amortization)
  IP
services. Direct costs of IP network, sales and services, exclusive of
depreciation and amortization, increased $3.9 million, or 10%, to $43.7 million
for the year ended December 31, 2007, compared to $39.7 million for the year
ended December 31, 2006. For the year ended December 31, 2006 compared to the
year ended December 31, 2005, the related direct costs increased $1.4 million,
or 4%, to $39.7 million as of December 31, 2006, compared to $38.4 million as of
December 31, 2005. While IP services revenue has increased, the
direct costs of IP network, sales and services has continued to be approximately
36% of IP services revenue for each of the last three years, even as we have had
a change in the mix of revenue with traditionally higher margin IP services,
lower margin high volume customers, and FCP and other hardware
sales.  Connectivity costs vary based upon customer traffic and other
demand-based pricing variables. Costs for IP services are especially subject to
ongoing negotiations for pricing and minimum commitments. As our IP traffic
continues to grow, we expect to have greater bargaining power for lower
bandwidth rates and more opportunities to proactively manage network costs, such
as utilization and traffic optimization among network service
providers.
  Data
center services. The direct costs of data center services, exclusive of
depreciation and amortization, increased $13.0 million, or 28%, to $59.4 million
for the year ended December 31, 2007, compared to $46.5 million for the year
ended December 31, 2006. For the year ended December 31, 2006 compared to the
year ended December 31, 2005, the related direct costs increased $11.2 million,
or 32%, to $46.5 million as of December 31, 2006, compared to $35.2 million as
of December 31, 2005. As data center services revenue has increased, direct
costs of data center services as a percentage of corresponding revenue have
decreased to approximately 72%, 83% and 95% for the year ended December 31,
2007, 2006 and 2005, respectively. This trend is the result of an increase in
total occupancy at higher rates, as discussed with revenues above, while
substantial direct costs are subject to previously negotiated
rates.  Direct costs of data center services, exclusive of
depreciation and amortization, have substantial fixed cost components, primarily
for rent, but also significant demand-based pricing variables, such as
utilities, which are highest in the summer for cooling the
facilities.
  The
growth in data center services largely follows our expansion of data center
space. The demand for data center services is outpacing industry-wide supply,
which contributes to our improvement of data center direct costs as a percentage
of data center revenue. At December 31, 2007, we had approximately 179,000
square feet of data center space with a utilization rate of approximately
75%, as compared to approximately 149,000 square feet of data center space
with a utilization rate of approximately 79% at December 31, 2006. At December
31, 2005, we had approximately 124,000 square feet of data center space with a
utilization rate of approximately 76%. Our recent data center expansion has
resulted in the lower utilization rate as of December 31, 2007 compared to
December 31, 2006. However, the recent expansion should provide us lower costs
per occupied square foot in future periods, enabling us to increase revenue
compared to relatively lower direct costs of data center services.  At
December 31, 2007, 104,000 square feet, or approximately 58% of total square
feet, was in data centers operated by us versus data centers operated by our
vendors, or partner sites. Additionally, approximately 62% of our available
square feet as of December 31, 2007 are in data centers operated by
us.
  CDN
services. Direct costs of network, sales and services, exclusive of
depreciation and amortization, for our CDN services segment were $6.6 million
for the year ended December 31, 2007. Direct costs of CDN network, sales and
serviceswere approximately 37% of CDN services revenue for the year
ended December 31, 2007, which was a little more favorable than our initial
expectations. This activity represents the operations from our acquisition of
VitalStream, which was completed on February 20, 2007. The direct costs include
the benefit of lower rates throughout the year as we have migrated VitalStream’s
former contracts and terms to our own. Direct costs of CDN network sales and
services also includes an allocation of $0.7 million from direct costs of IP
network sales and services based on the average cost of actual usage by the CDN
segment.  As previously noted, we did not offer proprietary CDN
services prior to our acquisition of VitalStream, but instead, we were a
reseller of third party CDN services, which is included in Other direct
costs, below. We expect CDN to be an area of significant growth and are
expanding related infrastructure, including in Europe and Asia, to serve the
expected industry-wide demand, particularly in those regions.
 
 44
  Other.
Other direct costs of network, sales and services, exclusive of depreciation and
amortization primarily include reseller and miscellaneous services such as third
party CDN services and consulting services. These costs decreased substantially
as the revenue streams from our acquisition of VitalStreamreplaced the
activity of the former third party CDN service provider.
 Other
Operating Expenses
 
 Other
than direct costs of network, sales and services, compensation and
facilities-related costs have the most pervasive impact on operating
expenses.  Compensation and benefits comprise the largest expenses
after direct costs of network, sales and services. Cash-basis compensation and
benefits increased $12.0 million to $53.4 million for the year ended December
31, 2007 from $41.4 million for the year ended December 31, 2006. Stock-based
compensation increased $2.8 million to $8.7 million for the year ended December
31, 2007 from $5.9 million for the year ended December 31, 2006. All of the
increases in compensation and benefits are primarily due to increased headcount,
largely attributable to the additional employees resulting from the VitalStream
acquisition.  For the year ended December 31, 2007, the additional
VitalStream employees accounted for $6.6 million of the increase in cash-basis
compensation and $1.3 million of the increase in stock-based compensation.
Compensation also increased due to the hiring of other employees throughout the
Company, including at the senior management level. Total headcount increased to
420 at December 31, 2007 compared to 330 at December 31, 2006.
 
 As
discussed in note 2 of the consolidated financial statements, we adopted SFAS
No. 123R on January 1, 2006. Accordingly, total operating costs and expense and
net income for 2007 and 2006 includes stock-based compensation expense in the
following amounts:
 
 
 Year
      Ended December 31,2007
              
              
              2006Direct
      costs of customer support
              $
              1,892
              
              
              $
              1,102Product
      development
              
              856
              
              
              
              628Sales
      and marketing
              
              2,135
              
              
              
              2,145General
      and administrative
              
              3,798
              
              
              
              2,067Total
      stock-based compensation
              $
              8,681
              
              
              $
              5,942
 
 Total
unrecognized compensation costs related to non-vested stock-based compensation
as of December 31, 2007 was $26.9 million with a weighted-average remaining
recognition period of 2.8 years.
 
 Cash-basis
compensation and benefits decreased $1.5 million to $41.4 million for the year
ended December 31, 2006 from $42.9 million for the year ended December 31, 2005,
which reflects a net decrease in salaries and wages and a decrease in employee
benefits, partially offset by a net increase in commissions. The decreases in
compensation and benefits reflect a consistent headcount of approximately 330
full-time employees for both 2006 and 2005, but favorable experience on
self-insured medical claims in 2006, while the increase in commissions is
revenue driven. Compensation for the year ended December 31, 2006 also includes
an increase of $1.8 million in employee bonuses over the year ended December 31,
2005.
 
 Prior to
the adoption of SFAS No. 123R on January 1, 2006, we utilized the
disclosure-only provisions of SFAS No. 123 and accounted for stock-based
compensation plans under the recognition and measurement provisions of APB
Opinion No. 25 and related interpretations. Accordingly, we did not recognize
any expense for options to purchase our common stock with an exercise price
equal to fair market value at the date of grant for any periods prior to January
1, 2006.
 
 45
  Pro forma
stock-based compensation expense as previously reported for 2005 was $9.7
million. The decrease of $3.8 million in recorded stock-based compensation
expense for the year ended December 31, 2006 compared to the pro forma
stock-based compensation expense for the year ended December 31, 2005 is due
primarily to cancellations of outstanding stock options and the difference
between estimated and actual forfeitures. SFAS No. 123R requires compensation
expense to be recorded net of estimated forfeitures with a subsequent adjustment
to reflect actual forfeitures as they occur. Previously, forfeitures of unvested
stock options were accounted for on a pro forma basis as they were incurred,
generally resulting in higher pro forma stock compensation than under the
current provisions of SFAS No. 123R. In addition, a significant number of
unvested stock options were forfeited upon the resignation of Mr. Gregory
Peters, our former Chief Executive Officer, thus reducing the number of
outstanding stock options for determining comparative stock-based compensation
expense for the year ended December 31, 2006.
 
 Overall,
facility and related costs, including repairs and maintenance, communications
and office supplies but excluding direct costs of network, sales and services,
increased $1.0 million, or 17%, to $7.0 million for the year ended December 31,
2007 compared to $6.0 million for the year ended December 31, 2006. The increase
is primarily due to $0.7 million of VitalStream post-acquisition operating
costs.
  Facility and related costs
decreased $0.9 million, or 13%, to $6.0 million for the year ended December 31,
2006 compared $6.9 million for the year ended December 31, 2005. Facility costs
decreased $0.7 million in sales and marketing and $0.9 million in general and
administrative primarily through consolidation and cost containment
efforts.
 
 Other
significant operating costs are discussed with the financial statement captions
below:
 
 Direct
costs of amortization of acquired technologies
 
 Direct
costs of amortization of acquired technologies increased $3.7 million from $0.5
million for the year ended December 31, 2006 to $4.2 million for the year ended
December 31, 2007. The increase in amortization expense is due to the
amortization of the post-acquisition intangible technology assets of
VitalStream.
 
 Direct costs of
customer support
 
 Direct
costs of customer support increased 43% from $11.6 million for the year ended
December 31, 2006 to $16.5 million for the year ended December 31, 2007. The
increase of more than $4.9 million was primarily due to compensation of
employees and facilities-related costs as discussed above. VitalStream employees
accounted for $1.7 million of added cash-basis compensation and benefits and
$0.5 million of additional stock-based compensation for the year ended December
31, 2007. Other increases in cash-basis and stock-based compensation amounted to
$1.3 million and $0.3 million, respectively, whereas facilities-related costs
increased $0.6 million.
 
 Direct
costs of customer support increased 8% from $10.7 million for the year ended
December 31, 2005 to $11.6 million for the year ended December 31, 2006. The
increase of $0.9 million was primarily due to increases in costs related to
stock-based compensation of $1.1 million, offset by decreased compensation and
employee benefits of $0.7 million, as discussed above. In addition, facilities
and related expenses increased $0.7 million based on more accurate data for
allocation of costs, primarily from sales and marketing.
 
 Product
development
 
 Product
development costs for the year ended December 31, 2007 increased 47% to $6.6
million from $4.5 million for the year ended December 31, 2006. The increase of
$2.1 million is primarily attributable to the addition of VitalStream employees
and facilities-related costs. For the year ended December 31, 2007, the
additional VitalStream employees accounted for $1.0 million of additional
cash-basis compensation and benefits costs and $0.3 million of additional
stock-based compensation costs. In addition, facilities-related costs amounted
to $0.3 million of this increase.
 
 46
  Product
development costs for the year ended December 31, 2006 decreased 8% to $4.5
million from $4.9 million for the year ended December 31, 2005. The decrease of
$0.4 million is attributable to decreases in costs related to compensation and
employee benefits of $0.5 million, outside professional services of $0.5 million
and training expenses of $0.1 million. The decreases were offset by an increase
in stock-based compensation expense of $0.6 million for the year ended December
31, 2006, as discussed above. The decrease in compensation and employee benefits
partially reflects the redeployment of technical resources from product support
to internal network support, which is accounted for in general and
administrative expense. The decrease in outside professional services is
primarily due to a specific project in 2005.
 
 Sales
and marketing
 
 Sales and
marketing costs for the year ended December 31, 2007 increased 16% to $31.5
million from $27.2 million for the year ended December 31, 2006. The increase of
more than $4.3 million is primarily comprised of VitalStream employee costs.
Cash-basis compensation, benefits and commissions related to VitalStream
employees accounted for $2.8 million and stock-basis compensation for these
employees amounted to $0.4 million for the year ended December 31,
2007.
 
 Sales and
marketing costs for the year ended December 31, 2006 increased 5% to $27.2
million from $25.9 million for the year ended December 31, 2005. The net
increase of $1.3 million was primarily due to increases in stock-based
compensation expense of $2.1 million and commissions of $1.6 million, offset by
decreases in compensation and employee benefits expenses of $1.4 million, all of
which were discussed above. Also, as discussed with direct costs of customer
support above, facilities and related expenses decreased $0.7 million largely
due to more accurate data allocations of expenses to direct costs of customer
support. Outside professional services decreased $0.3 million and travel,
entertainment and training expenses decreased $0.2 million. The decreases in
outside professional services and training are the result of better utilization
of internal resources while the decrease in travel and entertainment resulted
from an effort to reduce less-essential travel. All of these reductions were
partially offset by an increase of $0.3 million in marketing and advertising
efforts during the year ended December 31, 2006.
 
 General and
administrative
 
 General
and administrative costs for the year ended December 31, 2007 increased 47% to
$32.5 million from $22.1 million for the year ended December 31, 2006. The
increase of $10.4 million is primarily due to increases in cash-basis
compensation and benefits, professional services and stock-based compensation.
Cash-basis compensation and benefits for the year ended December 31, 2007
increased $3.6 million, including $1.0 million for the additional VitalStream
employees. As discussed earlier, the other cause for the increase in cash-basis
compensation is the hiring of other employees throughout the Company, including
at the senior management level. The overall increase in head-count caused us to
accrue employee bonuses $0.3 million higher during 2007 than we did for 2006 and
caused higher self-insured medical claims of $0.6 million compared to 2006.
Professional services for the year ended December 31, 2007 increased $2.0
million primarily due to consultation fees on our information technology
systems, compliance activities for domestic and international tax and financial
statement requirements, recruiting fees and contract labor to fill a number of
open job requisitions, and legal fees, including those associated with new proxy
disclosure requirements and ongoing litigation. Bad debt expense increased
approximately $1.7 million to $2.2 million for the year ended December 31,
2007.  The increase in bad debt expense is due primarily to our
integration of VitalStream with their legacy customers causing bad debt expense
to be greater than our historical expense.  Stock-based compensation
costs increased $1.7 million for the year ended December 31, 2007 due to annual
grants of stock options and unvested restricted common stock to non-employee
directors, the stock options assumed in the VitalStream acquisition and initial
grants and awards to new members of senior management.
 
 General
and administrative costs for the year ended December 31, 2006 increased 10% to
$22.1 million from $20.1 million for the year ended December 31, 2005. The
increase of $2.0 million primarily reflects a $2.4 million increase in taxes
(non-income based), licenses, fees, a $2.1 million increase in stock-based
compensation expense, and a $1.1 million increase in compensation and employee
benefits. These increases were offset by decreases in outside professional
services of $0.9 million, bad debt expense of $0.9 million, facility and related
expense of $0.9 million, a reduction of insurance and administrative expense of
$0.3 million, and a reduction of training expense of $0.2 million. Part of the
increase in cash-basis compensation and benefits is the redeployment of
technical resources from product support as noted under the caption product
development above.
 
 47
 
 The increase in taxes, licenses and fees is principally related
to a March 2005 reduction in an accrual for an assessment of $1.4 million,
including interest and penalties, received in July 2004 from the New York State
Department of Taxation and Finance. The New York assessment resulted from an
audit of our state franchise tax returns for the years 2000-2002. In March 2005,
New York State Department of Taxation and Finance reduced the assessment to $0.1
million, including interest, and waived penalties.
 
 The
increases in compensation and benefits, including stock-based compensation, and
the decrease in facility-related costs are discussed above. In addition, the
decrease in outside professional services can be attributed to a number of
factors, including focused cost control and better utilization of internal
resources. Professional services for the year ended December 31, 2006 also
includes $0.6 million related to an abandoned corporate development
project.
 
 Restructuring
and asset impairment
 
 As
discussed in note 4 to the financial statements, we incurred a restructuring and
asset impairment charge of $10.3 million during the three months ended March 31,
2007. The charge was the result of a review of our business, particularly in
light of our acquisition of VitalStream and our plan to finalize the overall
integration and implementation plan before the end of the first quarter. The
charge to expense included $7.8 million for leased facilities, representing both
the costs less anticipated sublease recoveries that will continue to be incurred
without economic benefit to us and costs to terminate leases before the end of
their term. The charge also included severance payments of $1.1 million for the
termination of certain employees and $1.4 million for impairment of assets. Net
related expenditures were estimated to be $10.7 million, of which $2.8 million
has been paid during the year ended December 31, 2007, and the balance
continuing through December 2016, the last date of the longest lease
term.  These expenditures are expected to be paid out of operating
cash flows. Cost savings from the restructuring were estimated to be
approximately $0.8 million per year through 2016, primarily for rent
expense.
 
 We
incurred a $1.1 million impairment charge during the three months ended March
31, 2007 for the sales order-through-billing system, which was a result of an
evaluation of the existing infrastructure relative to our new financial
accounting system and the acquisition of VitalStream.
 
 Depreciation
and amortization
 
 For the
year ended December 31, 2007, depreciation and amortization, including other
intangible assets but excluding acquired technologies, increased 40% to $22.2
million compared to $15.9 million for the year ended December 31, 2006. The
increase of $6.4 million primarily relates to post-acquisition depreciation and
amortization of VitalStream property and equipment and acquired amortizable
intangible assets, excluding amortization of acquired technologies. The
VitalStream property and equipment and acquired amortizable intangible assets
account for $5.8 million of the expense for the year ended December 31,
2007.  The remaining increase in depreciation and amortization relates
to the expansion of P-NAPs and on-going expansion of data center facilities. The
restructuring and asset impairment described above initially reduced
depreciation and amortization by approximately $0.4 million per year, decreasing
to $0 in 2009. The amortization of acquired technologies is included in its own
caption and discussed above.
 
 Depreciation
and amortization, including other intangible assets, for the year ended December
31, 2006 increased 8% to $15.9 million compared to $14.7 million for the year
ended December 31, 2005. The increase of $1.2 million was primarily attributed
to an increased depreciable base of assets as we upgraded our P-NAP facilities
and continue to expand our data center facilities.
  48
  Write-off
of investment
 
 We
incurred a charge of $1.2 million representing the write-off of the remaining
carrying value of our investment in series D preferred stock of Aventail
Corporation, or Aventail. We made an initial cash investment of $6.0 million in
Aventail series D preferred stock pursuant to an investment agreement in
February 2000. In connection with a subsequent round of financing by Aventail,
we recognized an initial loss on our investment of $4.8 million in 2001. On June
12, 2007, SonicWall, Inc. announced that it entered into an agreement to acquire
Aventail for approximately $25.0 million in cash. The transaction closed on July
11, 2007, and all shares of series D preferred stock were cancelled and the
holders of series D preferred stock did not receive any consideration for such
shares. The write-off is included in non-operating (income) expense in the
accompanying consolidated statement of operations.
 
 Income
taxes
 
 The
provision for income taxes was a net benefit of $3.1 million for the year ended
December 31, 2007 and expense of $0.1 million for the year ended December 31,
2006. Forthe year ended December 31, 2007,the tax provision includes
a $4.4 million benefit related to the release ofthevaluation allowance associated withourU.K.deferred tax assets.  TheU.K.benefit is offset by a reserve of $0.9
million and aU.S.deferred tax liability relating to the
VitalStream acquisition.
 
 Thereduction invaluation allowance was due tothe existence
ofsufficient positive
evidenceas of December 31,
2007to indicate thatournet operating lossesin theU.K.wouldmore likely than not be realized in the
future.Theevidenceprimarilyconsistsof the results of prior performancein theU.K.and the expectation of future
performance based on historical results.  Wewillcontinue to assessin the future the recoverability ofU.S.andother deferred tax assets, and whether or not the valuation
allowance should be reduced relative to theU.S.and other deferred tax assets outside
theU.K.
 
 Liquidity and Capital Resources
 
 Cash
Flows for the Years Ended December 31, 2007, 2006 and 2005
 
 Net
cash from operating activities.
 
 Net cash
provided by operating activities was $27.6 million for the year ended December
31, 2007.  Our net loss, adjusted for non-cash items, generated cash
from operations of $32.1 million while changes in operating assets and
liabilities, excluding effects of the VitalStream acquisition, represented a use
of cash from operations of $4.5 million.  The primary non-cash
adjustment was $26.4 million for depreciation and amortization, which includes
the amortizable intangible assets acquired through the acquisition of
VitalStream on February 20, 2007 and the expansion of our P-NAP and data center
facilities throughout 2007. Non-cash adjustments also include $8.7 million for
stock-based compensation expense, which is discussed above in the section
captioned “Results of Operations.” The change in working capital includes an
increase in accounts receivable of $15.8 million. The increase in accounts
receivable results in quarterly days sales outstanding at December 31, 2007
increasing to 54 days from 38 days as of December 31, 2006. This
increase in accounts receivable is largely due to revenue growth and also, in
part, our day sales outstanding trending up from lower than historical levels at
December 31, 2006.  We have also experienced some collection delays on
certain larger, high credit quality customers that tend to pay over longer terms
and in conjunction with the migration of some former VitalStream and other
customers to Internap billing and systems platforms. We expect our quarterly
days sales outstanding to improve over the next several quarters. The change in
working capital also includes a net increase in accounts payable of $7.9 million
due to the growth of our business, primarily attributed to the acquisition of
VitalStream and our data center growth initiative. A portion of the increase is
also caused by the implementation near year-end of a new telecommunications
expense management system for our direct costs. We do not expect this
implementation to have an impact on our accounts payable balance in the future.
We anticipate continuing to generate cash flows from our results of operations,
that is net income (loss) adjusted for non-cash items and manage changes in
operating assets and liabilities towards a net $0 change over time in subsequent
periods.  We also expect to use cash flows from operating activities
to fund a portion of our capital expenditures and other requirements, to repay
our outstanding debt as it becomes due and to meet our other commitments and
obligations as they become due.
 
 49
  Net cash
provided by operating activities was $29.6 million for the year ended December
31, 2006, and was primarily due to net income of $3.7 million adjusted for
non-cash items of $25.4 million offset by changes in working capital items of
$0.5 million. The changes in working capital items include net use of cash for
accounts receivable of $1.7 million, inventory, prepaid expense and other assets
of $1.8 million, and accrued restructuring of $1.5 million. These were offset by
net sources of cash in accounts payable of $3.0 million, accrued liabilities of
$1.4 million and deferred revenue of $1.1 million. The increase in receivables
at December 31, 2006 compared to December 31, 2005 was related to the 18%
increase in revenue. Quarterly days sales outstanding at December 31, 2006
decreased to 38 days from 43 days as of December 31, 2005. The
increase in payables is primarily related to the timing of payments with the
2006 balance being consistent with our normal operating expenses and payment
terms.
 
 Net cash
provided by operating activities was $5.5 million for the year ended December
31, 2005, and was primarily due to the net loss of $5.0 million adjusted for
non-cash items of $19.7 million offset by changes in working capital items of
$9.3 million. The changes in working capital items include net use of cash for
accounts payable of $5.4 million, accounts receivable of $3.6 million, accrued
restructuring of $1.9 million, and $0.2 million of inventory, prepaid expense
and other assets. These were offset by net sources of cash in accrued
liabilities of $0.8 million and deferred revenue of $1.0 million. The increase
in receivables at December 31, 2005 compared to December 31, 2004 was related to
the 6% increase in revenue. The decrease in payables is primarily related to a
general decrease in expenses when compared to last year.
  Net cash from investing activities.
 
 Net cash
used in investing activities for the year ended December 31, 2007 was $36.4
million primarily due to capital expenditures of $30.3 million and net purchases
of short-term investments of $6.1 million. Our capital expenditures were
principally for the expansion of our data center facilities, CDN infrastructure
and upgrading our P-NAP facilities and were funded from both cash from
operations and borrowings from the new credit agreement we entered into on
September 14, 2007. We discuss the credit agreement in greater detail in the
section below captioned “Liquidity.”  Our forecast for capital
expenditures in 2008 ranges from $45 - $50 million.  However, our
credit agreement, discussed below, limits us to unfunded capital expenditures of
$25.0 million per year. Investing activities for the year ended December 31,
2007 also includes purchases and sales of auction rate securities. While we have
noted auction rate reset failures in the market and have experienced our own
auction rate reset failures subsequent to year-end, we do not expect to incur
any significant liquidity constraints in the current auction rate securities
market and anticipate that, based on the nature of the underlying assets, we
will be able to recover the full cost basis of the assets within one
year.
 
 Net cash
used in investing activities for the year ended December 31, 2006 was $10.4
million primarily due to capital expenditures of $13.4 million. Our capital
expenditures were principally for upgrading our P-NAP facilities and the
expansion of our data center facilities.
 
 Net cash
used in investing activities for the year ended December 31, 2005 was $9.4
million primarily due to capital expenditures of $10.2 million. Our capital
expenditures were principally comprised of leasehold improvements related to the
upgrade of several data center facilities.
 
 Net
cash from financing activities.
 
 Net cash
provided by financing activities for the year ended December 31, 2007 was $15.2
million. Cash provided by financing activities was primarily due to proceeds
from note payable of $19.7 million, net of discount, and proceeds from stock
compensation plan activity of $8.6 million, partially offset by the repayment of
prior outstanding debt of $11.3 million and payments on capital leases of $1.6
million. The proceeds from note payable were a result of entering into the new
credit agreement on September 14, 2007.  As a result of these
activities, we had balances of $19.8 million in a note payable (net of discount)
and $1.3 million in capital lease obligations as of December 31, 2007 with $3.2
million in the note payable and capital leases scheduled as due within the next
12 months. While we anticipate funding a large portion of our capital
expenditures by drawing down on our credit facility, we expect to meet most of
our cash requirements, including repayment of debt as it becomes due, through
cash from operations, and as needed, cash on hand and short-term
investments.  We may also utilize our revolving line of credit if we
consider it economically favorable to do so.
 
 50
  Net cash
provided by financing activities for the year ended December 31, 2006 was $2.0
million. Cash provided by financing activities was primarily due to proceeds
from stock options, employee stock purchase plan and exercise of warrants of
$6.8 million offset by principal payments on a note payable of $4.4 million and
payments on capital lease obligations of $0.5 million. As a result of these
activities, we had balances of $7.7 million in a note payable and $0.4 million
in capital lease obligations as of December 31, 2006 with $4.7 million in the
note payable and capital leases scheduled as due within the next 12
months.
 
 Net cash
used in financing activities for the year ended December 31, 2005 was $5.5
million. Cash used in financing activity included principal payments on notes
payable of $6.5 million and payments on capital lease obligations of $0.5
million. These payments were partially offset by proceeds received from the
exercise of stock options of $1.5 million. As a result of these activities, we
had balances of $12.0 million in notes payable and $0.8 million in capital lease
obligations as of December 31, 2005.
 
 Liquidity
 
 We
recorded a net loss of $5.6 million of the year ended December 31, 2007 and net
income of $3.7 million for the year ended December 31, 2006. As of December 31,
2007, our accumulated deficit was $862.0 million. Our net loss for the year
ended December 31, 2007 includes $13.0 million in charges for restructuring,
asset impairment, write-off of an investment, and acquired in-process research
and development, none of which we expect to incur on a regular basis. We cannot
guarantee that we will return to profitability given the competitive and
evolving nature of the industry in which we operate. We may not be able to
sustain or increase profitability on a quarterly basis, and our failure to do so
would adversely affect our business, including our ability to raise additional
funds.
  We expect
to meet our cash requirements in 2008 through a combination of net cash provided
by operating activities, existing cash, cash equivalents and short-term
investments in marketable securities, and borrowings under our credit agreement,
especially for capital expenditures.  We expect to incur these capital
expenditures primarily for the expansion of our P-NAP and data center
facilities. We may also utilize our revolving line of credit, particularly if we
consider it economically favorable to do so. Our capital requirements depend
on a number of factors, including the continued market acceptance of our
services and products, the ability to expand and retain our customer base and
other factors. If our cash requirements vary materially from those currently
planned, if our cost reduction initiatives have unanticipated adverse effects on
our business or if we fail to generate sufficient cash flows from the sales of
our services and products, we may require greater or additional financing sooner
than anticipated. We can offer no assurance that we will be able to obtain
additional financing on commercially favorable terms, or at all, and provisions
in our existing credit agreement limit our ability to incur additional
indebtedness. We believe we have sufficient cash to operate our business for the
foreseeable future.
 
 Short-term
investments.Short-term investments primarily consist of high
credit quality corporate debt securities, auction rate securities whose
underlying assets are state-issued student and educational loans which are
substantially backed by the federal government, commercial paper, and U.S.
Government Agency debt securities. At December 31, 2007, our balance in
short-term investments was $19.6 million, of which $7.2 million were auction
rate securities carrying AAA/Aaa ratings as of December 31,
2007.  Auction rate securities are variable rate bonds tied to
short-term interest rates with maturities on the face of the securities in
excess of 90 days and have interest rate resets through a modified Dutch
auction, at predetermined 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 received
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.  We have also
noted auction rate reset failures in the market and have experienced our own
auction rate reset failures subsequent to year-end, however, we do not expect to
incur any significant liquidity constraints and anticipate that, based on the
nature of the underlying assets, we will be able to recover the full cost basis
of the assets within one year. We expect to hold the auction rate securities
until liquidity improves or the borrower calls the underlying securities. All
short-term investments either (1) have original maturities greater than 90 days
but less than one year or (2) are auction rate securities expected to be
liquidated within one year, are classified as available for sale, and reported
at fair value.
 
 51
  Credit agreement. On September 14, 2007, we entered into a $35.0 million credit
agreement, or the Credit Agreement, with Bank of America, N.A., as
administrative agent, and lenders who may become a party to the Credit Agreement
from time to time.  VitalStream Holdings, Inc., VitalStream, Inc.,
PlayStream, Inc., and VitalStream Advertising Services, Inc., four of our
subsidiaries, are guarantors of the Credit Agreement.
 
 The
Credit Agreement replaced the prior creditagreement, a $5.0 million
revolving credit facility and a $17.5 million term loan, which was evidenced by
a Loan and Security Agreement between the Company and Silicon Valley Bank that
was last amended on December 27, 2005.  We paid off and terminated
this prior credit  agreement concurrently with the execution of the Credit
Agreement.
 
 Our
obligations under the Credit Agreement are pledged, pursuant to a pledge and
security agreement and an intellectual property security agreement by a security
interest granted in substantially all of our assets including the capital stock
of our domestic subsidiaries and 65% of the capital stock of our foreign
subsidiaries.
 
 The
Credit Agreement provides for a four-year revolving credit facility, or the
Revolving Credit Facility, in the aggregate amount of up to $5.0 million which
includes a $5.0 million sub-limit for letters of credit.  With the
prior approval of the administrative agent, we may increase the total
commitments by up to $15.0 million for a total commitment under the Revolving
Credit Facility of $20.0 million.  The Revolving Credit Facility is
available to finance working capital, capital expenditures and other general
corporate purposes. As December 31, 2007, no amounts were outstanding on the
Revolving Credit Facility.
 
 The
Credit Agreement also provides for a four-year term loan, or the Term Loan, in
the amount of $30.0 million.  We borrowed $20.0 million concurrently
with the closing and used a portion of the proceeds from the Term Loan to pay
off our prior credit facility.  We intend to use the remaining
proceeds to fund capital expenditures related to the expansion of our data
center facilities.
 
 The
interest rate on the Revolving Credit Facility and Term Loan is a tiered
LIBOR-based rate that depends on our 12-month trailing EBITDA. As of December
31, 2007, the interest rate was 7.075%.
 
 We will
only pay interest on the Term Loan during the first 12 months of its four-year
term.  Commencing on the last day of the first calendar quarter after
the first anniversary of the closing, the outstanding amount of the Term Loan
will amortize on a straight-line schedule with the payment of 1/16 of the
original principal amount of the Term Loan due quarterly.  We will pay
all unpaid amounts at maturity, which is September 14, 2011.
 
 The
Credit Agreement includes customary representations, warranties, negative and
affirmative covenants, including certain financial covenants relating to net
funded debt to EBITDA ratio and fixed charge coverage ratio, as well as
customary events of default and certain default provisions that could result in
acceleration of the Credit Agreement.  As of December 31, 2007, we
werein compliance with the
financial and other covenants.
 
 The net
proceeds received from the Term Loan were reduced by $0.3 million for fees paid
to Bank of America and its agents. We treated these fees as a debt discount and
will amortize the fees to interest expense using the interest method over the
term of the loan. We recorded less than $0.1 million of related amortization
during the year ended December 31, 2007. As of December 31, 2007, the balance on
the Term Loan, net of the discount, was $19.8 million. We incurred other costs
of less than $0.1 million in connection with entering into the Credit Agreement,
which were recorded as debt issue costs and will amortize over the term of the
Credit Agreement.
 
 52
  As a
result of the transactions discussed above, we recorded a loss on extinguishment
of debt of less than $0.1 million during the year ended December 31, 2007. The
loss on extinguishment of debt is included in Other, net in the non-operating
(income) expense section of the consolidated statements of
operations.
 
 Also
during the year ended December 31, 2007, we paid off the term loans and line of
credit issued pursuant to the loan and security agreement assumed in the
VitalStream acquisition.
 
 Capital
leases. Our future minimum lease payments on remaining capital lease
obligations at December 31, 2007 totaled $1.4 million.
 
 Commitments and
other obligations. We have commitments and other obligations that are
contractual in nature and will represent a use of cash in the future unless
there are modifications to the terms of those agreements. Network commitments
primarily represent purchase commitments made to our largest bandwidth vendors
and contractual payments to license data center space used for resale to
customers. Our ability to improve cash used in operations in the future would be
negatively impacted if we do not grow our business at a rate that would allow us
to offset the service commitments with corresponding revenue
growth.
  
 The following table summarizes our credit obligations and future
contractual commitments as of December 31, 2007 (in thousands):
 
 Payments
      Due by PeriodTotal
              
              Less
      than
                1
      year
              
              1-
      3
                Years
              
              3-5
                Years
              
              More
                than
      5
                yearsNote
      payable(1)
              
              $
              23,815
              
              $
              3,980
              
              $
              11,980
              
              $
              7,855
              
              $
              —Capital
      lease obligations
              
              
              1,392
              
              
              922
              
              
              470
              
              
              —
              
              
              —Operating
      lease commitments
              
              
              220,894
              
              
              28,211
              
              
              50,689
              
              
              53,208
              
              
              88,786Service
      commitments
              
              
              22,014
              
              
              12,167
              
              
              9,847
              
              
              —
              
              
              —$
              268,115
              
              $
              45,280
              
              $
              72,986
              
              $
              61,063
              
              $
              88,786
  (1)
              As
      noted in the section captioned “Credit Agreement” under this Item 7, the
      interest rate on the Term Loan is a tiered LIBOR-based rate that depends
      on our 12-month trailing EBITDAas defined in the Credit Agreement.
      As of December 31, 2007, the interest rate was 7.075%. The projected
      interest included in the debt payments above incorporates this
      rate.
  Common
and preferred stock.Our
Certificate of Incorporation includes designation for 3.5 million shares of
preferred stock, which includes 0.5 million shares of series B preferred stock.
As of December 31, 2007, no shares of preferred stock were issued or
outstanding.
 
 We issued
approximately 12.2 million shares of our common stock to the former stockholders
of VitalStream in connection with the acquisition, which closed on February 20,
2007.
 
 On July
10, 2006, we implemented a one-for-ten reverse stock split and amended our
Certificate of Incorporation to reduce our authorized shares from 600 million to
60 million. We began trading on a post-reverse split basis on July 11, 2006. All
share and per share information herein (including shares outstanding, earnings
per share and warrant and stock option data) have been retroactively adjusted
for all periods presented to reflect this reverse split.
  53
  In June
2006, our stockholders approved a measure to reprice certain outstanding options
under our existing equity incentive plans. Options with an exercise price per
share greater than or equal to $13.00 were eligible for the repricing. The
repricing was implemented through an exchange program under which eligible
participants were offered the opportunity to exchange their eligible options for
new options to purchase shares. Each new option had substantially the same terms
and conditions as the eligible options cancelled except as follows:
 
 ·
              The
      exercise price per share of each replacement option granted in the
      exchange offer was $14.46, the average of the closing prices of the common
      stock as reported by the American Stock Exchange and the NASDAQ Global
      Market, as applicable, for the 15 consecutive trading days ending
      immediately prior to the grant date of the replacement
      options;
  ·
              For
      all eligible options with an exercise price per share greater than or
      equal to $20.00, the exchange ratio was 1-for-2;
  and
  ·
              Each
      new option has a three-year vesting period, vesting in equal monthly
      installments over three years, so long as the grantee continues to be a
      full-time employee of the company and a ten-year
  term.
  Employees of the Company eligible to participate in the exchange
offer tendered, and we accepted for cancellation, eligible options to purchase
an aggregate of 344,987 shares of common stock, representing 49.4% of the total
shares of common stock underlying options eligible for exchange in the exchange
offer. We issued replacement options to purchase an aggregate of 179,043 shares
of common stock in exchange for the cancellation of the tendered eligible
options.
  As discussed
in note 15 to the consolidated financial statements, warrants to purchase
approximately 34,000 shares of our common stock at a weighted exercise price of
$9.50 per share were outstanding as of December 31, 2007.
 
 ITEM 7A.  QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
  Short-term
investments in marketable securities. Short-term investments primarily
consist of high credit quality corporate debt securities, auction rate
securities whose underlying assets are state-issued student and educational
loans which are substantially backed by the federal government, commercial
paper, and U.S. Government Agency debt securities. All of our investments have
original maturities greater than 90 days but less than one year, except for
investments in auction rate securities, further discussed below. All short-term
investments are classified as available for sale and reported at fair value. Due
to the short-term nature of our investments in marketable securities, we do not
believe there is any material exposure to market risk changes in interest
rates.   We estimate that a change in the effective yield of 100
basis points would change our interest income by less than $0.2 million per
year.
 
 Auction
rate securities are variable rate bonds tied to short-term interest rates with
maturities on the face of the securities in excess of 90 days and have interest
rate resets through a modified Dutch auction, at predetermined short-term
intervals, usually every 7, 28 or 35 days.  Auction rate securities
generally trade at par and are callable at par on any interest payment date at
the option of the issuer.  Interest received 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 resets.  Uncertainties in
the credit markets may affect the liquidity of our holdings in auction rate
securities.  We did not experience any unsuccessful auction rate
resets during the year ended or the initial rate resets immediately following
December 31, 2007, however, we have experienced failures on each of our
subsequent auction rate resets.  Nevertheless, we continue to receive
interest every 28-35 days. While our investments are of high credit quality, at
this time we are uncertain as to whether or when the liquidity issues relating
to these investments will worsen or improve. We do not expect to incur any
significant liquidity constraints and anticipate that, based on the nature of
the underlying assets, we will be able to recover the full cost basis of the
assets within one year.  Therefore, we do not believe that adjusting
the fair value of our portfolio of auction rate securities is necessary at this
time. We expect to hold the auction rate securities until liquidity improves or
the borrower calls the underlying securities. In the meantime, we believe we
have sufficient liquidity through our cash balances, other short-term
investments and available credit. As of December 31, 2007, we have a total of
$7.2 million invested in auction rate securities.
  54
  Other
investments. We have invested $4.1 million in Internap Japan, our joint
venture with NTT-ME Corporation and NTT Holdings. We account for this investment
using the equity-method and to date we have recognized $3.3 million in
equity-method losses, representing our proportionate share of the aggregate
joint venture losses and income. Furthermore, the joint venture investment is
subject to foreign currency exchange rate risk. The market for services offered
by Internap Japan has not been proven and may never materialize.
 
 Interest rate
risk. Our objective in managing interest rate risk is to maintain
favorable long-term fixed rate or a balance of fixed and variable rate debt that
will lower our overall borrowing costs within reasonable risk parameters.
Currently, our strategy for managing interest rate risk does not include the use
of derivative securities. We estimate that a change in the interest rate of 100
basis points would change our interest expense and payments by less than $0.2
million per year. The table below presents principal cash flows by expected
maturity dates for our debt obligations that extend beyond one year as of
December 31, 2007 (dollars in thousands):
  2008
                
                2009
                
                2010
                
                2011
                
                Fair
                  ValueLong-term
      debt:Term
      loan
                $
                2,500
                
                
                $
                5,000
                
                
                $
                5,000
                
                
                $
                7,500
                
                
                $
                20,000Interest
      rate
                
                7.075
                %
                
                
                7.075
                %
                
                
                7.075
                %
                
                
                7.075
                %
                
                
                7.075
                %
 
 Foreign currency
risk. Substantially all of our revenue is currently in U.S. dollars and
from customers primarily in the U.S. We do not believe, therefore, that we
currently have any significant direct foreign currency exchange rate
risk.
  ITEM 8. 
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
  Our
consolidated financial statements, financial statement schedule and the report
of the independent registered public accounting firm appear in Part IV of this
annual report on Form 10-K/A.  Our report on internal controls over
financial reporting appear in Item 9A of this annual report on Form
10-K/A.
  ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
  None.
 
 ITEM 9A.  CONTROLS AND
PROCEDURES.
  Evaluation of Disclosure Controls and Procedures
  Our management,
with the participation of our Chief Executive Officer and Principal Accounting
Officer, evaluated the effectiveness of our disclosure controls and procedures
as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) as of December 31, 2007.  Our disclosure
controls and procedures are designed to ensure that information we are required
to disclose in the reports we file or submit under the Exchange Act is
accumulated and communicated to our management, including our Chief Executive
Officer and Principal Accounting Officer, as appropriate, to allow timely
decisions regarding required disclosures, and is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms.  Based upon the evaluation described above our Chief Executive
Officer and Principal Accounting Officer concluded that, as of December 31,
2007, our disclosure controls and procedures were not effective because of the
material weakness described below in Management's Report on Internal Control
Over Financial Reporting.
 
 Background
 
 During its
review of sales credit activity subsequent to year end, management
identified the activity as an area for further review and investigation.
Management concluded that an investigation was appropriate to identify the
underlying cause and to obtain completeness, accuracy, valuation, and disclosure
of sales adjustments. This investigation caused the Company to file this annual
report on  Form 10-K late.
 
 Management’s Report on Internal Control Over Financial
Reporting
 
 Our management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f).
  We assessed the
effectiveness of our internal control over financial reporting as of December
31, 2007. In making this assessment, we used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control — Integrated Framework.
 
 A material
weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a
material misstatement of the company's annual or interim financial statements
will not be prevented or detected on a timely basis.
 
 Management
identified the following material weakness in our internal control over
financial reporting as of December 31, 2007:
 
 We did not
maintain effective controls over the completeness, accuracy, valuation, and
disclosure of sales adjustments. Specifically, we did not maintain effective
controls, including controls over the analysis of requests for sales credits and
billing adjustments, to provide timely information for management to assess
the completeness, accuracy, valuation, and disclosure of sales
adjustments.  This control deficiency resulted in the misstatement of
our revenue, net accounts receivable and related financial disclosures, and in
the revision of the Company’s consolidated financial statements for the quarter
ended September 30, 2007 and in an adjustment to the consolidated financial
statements for the quarter ended December 31, 2007. Additionally, this control
deficiency could result in misstatements of the aforementioned accounts and
disclosures that would result in a material misstatement of the consolidated
financial statements that would not be prevented or detected. Accordingly, our
management has determined that this control deficiency constitutes a material
weakness.
 
 As a result of
the material weakness described above, management concluded that our internal
control over financial reporting was not effective as of December 31, 2007 based
on the criteria established in Internal Control - Integrated Framework issued by the
COSO.
  The
effectiveness of our internal control over financial reporting as of December
31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report, which is included
herein.
 55
  Plan for Remediation of the
Material Weakness
 
 To
remediate the material weakness described above and to enhance our internal
control over financial reporting, management implemented plans in the first
quarter of 2008, or will supplement plans during 2008, to  its
existing controls for the analysis of requests for sales adjustments, which
may include but are not limited to, the following additional processes and
controls:
 
 ·
                  A single,
      common logging system for customers to record all disputes, disconnects
      and requests for credits,
 ·
                  A weekly
      review of a customer request log with appropriate designated management
      and approval pursuant to the schedule of
  authorization,
 ·
                  A more
      robust, proactive tracking of customer usage patterns and overall customer
      satisfaction, and
 ·
                  Perform
      a review by the appropriate designated finance management of the
      accounting estimates developed from the relevant, sufficient, and reliable
      data collected above
 
 Notwithstanding
the material weakness, management believes that the financial statements
included in this report fairly present in all material respects our financial
position, results of operations and cash flows for the periods
presented.
 
 Changes in Internal Control Over
Financial Reporting
 
 No change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the quarter ended December
31, 2007 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
 ITEM 9B.  OTHER
INFORMATION.
  None.
 
 
 56
   PART
III
  ITEM 10.  DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE.
  Our
Executive Officers and Directors
  The
following table sets forth information regarding our executive officers and
Directors as of December 31, 2007.
  Name
                
                Age
                
                PositionJames
      P. DeBlasio
                
                52
                
                President, Chief
      Executive Officer and DirectorTamara
      Augustyn
                
                38
                
                Vice
      President and Principal Accounting OfficerDavid
      A. Buckel
                
                45
                
                Vice
      President and Chief Financial Officer (1)Richard
      Dobb
                
                53
                
                Vice
      President and General CounselPhil
      Kaplan
                
                41
                
                Chief
      Strategy OfficerVince
      Molinaro
                
                44
                
                Chief
      Operating Officer (2)
 Charles
      B. Coe
                
                60
                
                Director
      (4) (5)Eugene
      Eidenberg
                
                68
                
                Director
      (5)William
      J. Harding
                
                60
                
                Director
      (3)Patricia
      L. Higgins
                
                58
                
                Director
      (3) (4) (5)Kevin
      L. Ober
                
                47
                
                Director
      (3)Gary
      Pfeiffer
                
                58
                
                Director
      (3) (4)
 Daniel
      C. Stanzione
                  
                  62
                  
                  Director
      (4) (5)
 (1)
                Mr.
      Buckel resigned his position as Vice President and Chief Financial Officer
      on November 19, 2007.(2)
                Mr.
      Molinaro resigned his position as Chief Operating Officer on April 7,
      2008.
 (3)
                  Member
      of the Audit Committee.(4)
                  Member
      of the Compensation Committee.
 (5)
                    Member
      of the Nominations and Governance
Committee.
 Directors
and Executive Officers
  James
DeBlasio was appointed as Internap’s President and Chief Executive
Officer in November 2005, after serving as President and Chief Operating Officer
of Internap from September 2005 until November 2005. Mr. DeBlasio
has served as a Director of Internap since July 2003. His term expires in 2010.
He also previously served as Chairman of the Audit Committee and member of the
Nominations and Governance Committee of Internap’s Board of Directors, until he
resigned from these committee appointments upon commencing employment as the
Company’s President and Chief Operating Officer in September 2005. From 2003
until September 2005, Mr. DeBlasio served as Financial Vice President
of the wireline and wireless product portfolio of Lucent Technologies, a network
communications equipment provider. Prior to that, from 2002 to 2003, he was
Financial Vice President for Lucent’s Mobility Solutions Group. He served as
Financial Vice President—CorporatePlanning and Analysis for
Lucent from 2001 to 2002, as Chief Financial Officer of Lucent’s Optical
Networking Group from 2000 to 2001 and as Financial Vice President and Chief
Financial Officer of Lucent’s Wireless Networks Group from 1997 to
2000. Mr. DeBlasio holds a M.B.A degree in Finance and Financial
Portfolio Analysis from Seton Hall University and a B.S. degree in Industrial
Management from Villanova University.
  Eugene Eidenberghas served
as a Director since November 1997 and non-executive chairman of our Board of
Directors since April 2002. Dr. Eidenberg’s term expires in 2011. From November
1997 until April 2002, Dr. Eidenberg was the chairman of the Board of
Directors. From July 2001 until April 2002, Dr. Eidenberg served as our
chief executive officer. Dr. Eidenberg has been a Strategic Advisor of
Granite Venture Associates LLC, an early-stage high tech venture capital firm,
since 2005, after co-founding the firm and serving as a Managing Director from
1999 until 2005. He has served as a Principal of Hambrecht & Quist
Venture Associates, an early-stage high tech venture capital firm, since 1998
and was an advisory director at the San Francisco investment-banking firm of
Hambrecht & Quist from 1995 to 1998. Dr. Eidenberg served for 12
years in a number of senior management positions with MCI Communications
Corporation. His positions at MCI included Senior Vice President for Regulatory
and Public Policy, President of MCI’s Pacific Division, Executive Vice President
for Strategic Planning and Corporate Development and Executive Vice President
for MCI’s international businesses. Dr. Eidenberg was Secretary to the
Cabinet and Assistant to the President during the Carter Administration.
Dr. Eidenberg is currently a director of several private companies.
Dr. Eidenberg holds a Ph.D. and a M.A. degree from Northwestern University
and a B.A. degree from the University of Wisconsin.
  Charles B. Coehas served as
a Director since July 2003. His term expires in 2009. Mr. Coe is a
28-year veteran of the telecommunications industry, including 15 years with
BellSouth. During his tenure at BellSouth, he served as President of
BellSouth Network Services, President of BellSouth Telecommunications, President
of BellSouth International, and Group President of Customer Operations for
BellSouth Telecommunications. Previously, Mr. Coe had served in
various management positions with AT&T Communications and American
Telesystems Corporation. Mr. Cole is currently a director of Dycom
Industries, Inc. Mr. Coe holds a M.B.A. degree from Georgia State
University and a B.S. degree from The Citadel.
 William J. Hardingis
currently a Managing Director of VantagePoint Venture Partners since October
2007. Dr. Harding’s term expires in 2011. Dr. Harding served as a Managing
Member of Morgan Stanley Venture Partners III, LLC since 1997 and a Managing
Director of Morgan Stanley & Co., Inc. from 1999 until October 2007. He
joined Morgan Stanley & Co., Inc. in October 1994. Dr. Harding is
currently a director of Aviza Technology, Inc. and several private companies.
Prior to joining Morgan Stanley, Dr. Harding was a General Partner of
several venture capital partnerships affiliated with J.H. Whitney & Co.
Previously, Dr. Harding was associated with Amdahl Corporation from 1976 to
1985, serving in various technical and business development roles. Prior to
Amdahl, Dr. Harding held several technical positions with Honeywell
Information Systems. Dr. Harding holds a B.S. degree in Engineering
Mathematics and a M.S. degree in Systems Engineering from the University of
Arizona and a Ph.D. in Engineering from Arizona State University.
Dr. Harding also served as an officer in the Military Intelligence Branch
of the United States Army Reserve.
  Patricia L. Higginshas
served as a Director since December 2004. Her term expires in 2009.
Ms. Higgins has nearly 30 years of experience in the telecommunications
industry. Ms. Higgins is the former President, CEO, and a
Board member of Switch & Data Facilities Company, Inc., a leading
provider of neutral interconnection and collocation services. Until 2000,
Ms. Higgins served as Chairman and CEO of The Research Board, a premier
consulting and research services company for information technology. Prior to
1999, Ms. Higgins was the CIO of Alcoa Inc. and also held senior management
positions at UNISYS Corporation, Verizon (NYNEX) and AT&T Inc.
Ms. Higgins currently serves on the Board of Directors of The Travelers
Companies, Inc., Visteon Corporation and Barnes and Noble, Inc. Ms. Higgins
holds a B.A. degree from Montclair State University and attended Harvard
Business School’s Advanced Management Program.
 Kevin L. Oberhas served as a
Director of Internap since October 1997 and is a Managing Partner of Divergent
Venture Partners. Mr. Ober’s term expires in 2010. Mr. Ober currently leads
Divergent’s investment in Plaint Technology. Prior to Divergent, he spent seven
years with Vulcan Ventures, a national venture capital firm owned by Paul Allen,
co-founder of Microsoft Corporation. While with Vulcan, he led investments in
Internet infrastructure companies such as Nexabit Networks, Wavtrace and Net
Perceptions, as well as Internap. Other investments included Command Audio,
Capstone Turbine, Colorado Micro Displays, ShareWave, Terastor, and Netschools.
Prior to working at Vulcan Ventures, Mr. Ober served in various positions
at Conner Peripherals, Inc., a computer hard disk drive manufacturer in San Jose
California. He holds a B.S. degree in Business Administration from St. John’s
University and a M.B.A. degree from Santa Clara University.
 57
 Gary Pfeifferhas
served as a Director since August 2007. His term expires in 2008. Mr. Pfeiffer
joined Delaware-based E. I. du Pont de Nemours and Company, in 1974, where he
held numerous positions in finance and international operations in several
DuPont divisions. He served as Senior Vice President and Chief Financial Officer
of the company from 1997 to 2006. Currently a member of the Board of Directors
of The Talbots, Inc., Mr. Pfeiffer serves as Presiding Director, Chairperson of
the Compensation Committee, and is also a member of the Audit Committee. He also
serves as a Director of Quest Diagnostics, Inc. where he chairs the Audit and
Finance Committee and is a member of the Compensation Committee, Governance
Committee and Executive Committee.
  Daniel C.
Stanzionehas served as a Director since October 2004. Dr.
Stanzione’s term expires in 2011. Dr. Stanzione retired from Lucent
Technologies in 2000 where he served as Chief Operating Officer and President of
Bell Laboratories. At Lucent’s formation in 1995, Dr. Stanzione was
President of Network Systems, Lucent’s business unit that sold products and
services to telecommunication service providers around the
world. Dr. Stanzione is currently a director of Quest Diagnostics
Inc., a public company, and Telecordia, a private company. Dr. Stanzione is
currently a consultant and serves on the Network Advisory Board at
Accenture. Dr. Stanzione holds a B.S. degree in Electrical
Engineering, a M.S. degree in Environmental Systems Engineering and a Ph. D. in
Electrical and Computer Engineering, all from Clemson
University.
 Tamara
Augustyn assumed the role of the Company’s Principal Accounting Officer
effective as of November 19, 2007 in addition to serving as Vice President,
Finance and Chief Accountant since January 2007.  Ms. Augustyn served
as the Company’s Corporate Controller and Chief Accountant from August 2006 to
January 2007, and prior to that time, as the Company’s Operational Controller
since June 2004. Before she joined the Company in June 2004, Ms. Augustyn held a
number of positions with American Tower Corporation from June 1999 to January
2004, most recently as the Director of Finance for one of its wholly-owned
subsidiaries, Galaxy Engineering Services, which was acquired by Incode Telecom
Group in August of 2003.  Ms. Augustyn worked in Internal Audit at
Fluor Corporation from 1997 to 1999 and began her career in the audit department
of Dixon Hughes PLLC.  Ms. Augustyn has a B.S. degree in Business from
Wake Forest University and is a certified public accountant.
  David A. Buckel served as the
Company’s Vice President and Chief Financial Officer from May 2004 to November
2007, after serving as Financial Vice President from October 2003 until May
2004. Mr. Buckel also previously served as an Investor Relations
consultant with the Company from July 2003 until October 2003. From November
2002 to July 2003, he served as Senior Manager and President of AJC
Finance & Market Group, a financial consulting firm. Prior to that,
Mr. Buckel was Senior Vice President and Chief Financial Officer
for two NASDAQ-listed companies, Web.com, which was formerly known as Interland
Corporation, a provider of applications and web hosting and consulting
services from March 2001 through November 2002, and Applied Theory
Corporation, a provider of hosting, software development and Internet
connectivity products, from July 1995 through March 2001. Mr. Buckel, a
Certified Management Accountant, holds a B.S. degree in Accounting from
Canisius College and a M.B.A. degree in Finance and Operations Management from
Syracuse University.
 
 Richard Dobb has served as
Vice President, General Counsel and Secretary of the Company since April
2007.  Prior to joining the Company, Mr. Dobb served as Chief Legal
Officer and Corporate Secretary for S1 Corporation from 2001 -
2007.  Prior to joining S1, Mr. Dobb was Vice President, General
Counsel and Corporate Secretary of eShare Communications, Inc., a global
provider of Web-based customer care software solutions. Mr. Dobb has also served
as a senior counsel at Digital Equipment Corporation, as Chief Legal Officer of
the Georgia Institute of Technology. Additionally, he was a member of the
corporate finance practice at King & Spalding.   Mr. Dobb
holds a B.A. from Rutgers University and J.D from the Emory University School of
Law.
 
 Philip N. Kaplanhas served
as Chief Strategy Officer of the Company since February 2007 when the Company
acquired VitalStream Holdings, Inc., or VitalStream.  He served as
president of VitalStream since November 2004, as chief operating officer and a
director of VitalStream since April 2002, and as Secretary of VitalStream from
April 2002 until November 2004. Mr. Kaplan served as chief operating officer,
secretary and a director of VitalStream, Inc. since its inception in March 2000,
which merged with VitalStream in 2002. Mr. Kaplan was also co-founder of
AnaServe, Inc. where he held the position of senior vice president, secretary
and treasurer from its formation in 1995 until its acquisition by Concentric
Network Corporation in August 1998. Mr. Kaplan remained employed by Concentric
until April 1999. Mr. Kaplan received a Bachelor of Arts degree in Economics
with a minor in Russian language from the University of California,
Davis.
 
 Vincent J. Molinaroserved as
the Company’s Chief Operating Officer from April 2007 to April 7, 2008. From
December 2006 to April 2007, Mr. Molinaro served as president of the Europe
& North Region for Alcatel-Lucent. From July 2005 to December 2006, Mr.
Molinaro served as president of North America Region for Lucent Technologies and
led the sales, technical support and delivery teams to grow the company’s
service provider business and extend its legacy products into next-generation
enterprise solutions. Additionally, from December 1994 to July 2000, Mr.
Molinaro lived in the Netherlands serving as vice president and chief operating
officer of Lucent’s Europe, Middle East & Africa Regions. In that position,
he oversaw all marketing, sales, service, support, and program management for
Internet and telecommunications companies throughout the region. He was also an
executive in the Data Networking Systems Group and the Applications Software
Business Unit. Mr. Molinaro joined AT&T Bell Laboratories as a member of the
technical staff in 1988, and then transferred to AT&T Network Systems two
years later. During his tenure with AT&T he held many global roles ranging
from systems engineering and product management to marketing and business
development.  Mr. Molinaro holds a Bachelor of Science degree in
Biomedical Engineering from Boston University and a Master of Science in
Electrical Engineering from the University of Bridgeport.
  Family
Relationships
  No family
relationships exist among any of our Directors or executive
officers.
  Agreements
to Elect Directors or Executive Officers
  No
agreements exist to elect any of our Directors or our executive
officers.
  58
 
  Board
of Directors’ Committees and Meetings
  The Board
of Directors conducts its business through meetings and it may take action by
unanimous written consent of the full Board, but only in rare instances
following fulsome consideration and discussion of the issues presented, and
through three standing committees of the Board, which are an Audit Committee, a
Compensation Committee and a Nominations and Governance Committee. The Board of
Directors has adopted a charter for each of these committees that can be found
on our website at www.internap.com.
  During
the fiscal year ended December 31, 2007, the Board of Directors held nine
meetings, the Audit Committee held 11 meetings, the Compensation Committee held
nine meetings, and the Nominations and Governance Committee held six meetings.
During the fiscal year ended December 31, 2007, each member of our Board of
Directors attended at least 75% of the meetings of the Board of Directors and of
the committees on which he or she served that were held during the period for
which he or she was a Director or committee member.
  We have
not adopted a formal policy regarding Director attendance at our annual
meetings. We, however, strongly encourage all Directors to attend the annual
meeting.  Each of our Directors, who was a Director at the time of our
2007 annual meeting, was in attendance at the 2007 annual meeting of
stockholders.
  Audit Committee. The Audit
Committee is composed of Dr. Harding, Ms. Higgins, Mr. Ober, and
Mr. Pfeiffer. Ms. Higgins is the Chair of the Audit Committee. The Audit
Committee is responsible for, among other things:
  •
                    directly
      appointing our independent registered public
  accountants;
  •
                    discussing
      with our independent registered public accountants their independence from
      management;
  •
                    reviewing
      with our independent registered public accountants the scope and results
      of their audit;
  •
                    approving
      all audit services and pre-approving all permissible non-audit services to
      be performed bythe
      independent registered public
accountants;
  •
                    overseeing
      the financial reporting process and discussing with management and our
      independent registeredpublic
      accountants the interim and annual financial statements that we file with
      the SEC; and
  •
                    reviewing
      and monitoring our accounting principles, policies and financial and
      accounting controls.
  All
committee members are independent as defined in applicable NASDAQ rules. The
Board of Directors has determined that Ms. Higgins, the current committee
Chair, qualifies as an audit committee financial expert within the meaning of
NASDAQ rules and regulations.
  Compensation Committee. The
Compensation Committee consists of Mr. Coe, Ms. Higgins, Mr. Pfeiffer,
and Dr. Stanzione. Mr. Harman was a member of the Compensation Committee
prior to his resignation on March 15, 2007. Mr. Coe currently serves
as Chair of the Compensation Committee. The Compensation Committee reviews and
recommends to the Board the compensation and benefits of all our officers and
establishes and reviews general policies relating to compensation and benefits
for our employees. All committee members are independent as defined in
applicable NASDAQ rules.
  Nominations and Governance
Committee. The Nominations and Governance Committee consists of Doctors
Stanzione and Eidenberg, Mr. Coe, and Ms. Higgins. Dr. Stanzione
currently serves as Chair of the Nominations and Governance Committee. The
Nominations and Governance Committee is responsible for assisting the Board of
Directors in identifying and attracting highly qualified individuals to serve as
Directors and selecting Director nominees and recommending them to the Board for
election at annual meetings of stockholders. Each member of the Nominations and
Governance Committee is independent as defined in applicable NASDAQ rules. The
Nominations and Governance Committee is also responsible for monitoring
significant developments in the regulation and practice of corporate governance
and the duties and responsibilities of directors generally, evaluating and
administering the Corporate Governance Guidelines of the Company and
recommending changes to the Board and periodically reviewing the Company’s
governance structure.
 Section 16(a) Beneficial
Ownership Reporting Compliance
  Section 16(a)
of the Exchange Act and regulations of the SEC thereunder require our Directors,
officers and persons who own more than 10% of our common stock, as well as
certain affiliates of such persons, to file initial reports of their ownership
of our common stock and subsequent reports of changes in such ownership with the
SEC. Directors, officers and persons owning more than 10% of our common stock
are required by SEC regulations to furnish us with copies of all
Section 16(a) reports they file.
  Based
solely on our review of these reports or of certifications to us that no report
was required to be filed, we believe that all of our Directors and executive
officers complied with all Section 16(a) filing requirements applicable to
them during the 2007 fiscal year, except: Mr. Buckel, who filed two late
Form 4s in connection with the sale of shares of his common stock; Mr.
Abrahamson, who resigned in August of 2007, who filed one late Form 4 in
connection with his exercise of stock options prior to the Board’s determination
that he no longer have filing obligations pursuant to Section 16(a); Mr. Kaplan,
who filed one late Form 4 in connection with his grant of stock options; and Ms.
Augustyn, who filed one late Form 4 in connection with her grant of stock
options.
 Code
of Conduct
 
 We have
adopted a code of conduct that applies to our officers and all of our employees,
which includes an addendum that applies to our senior executive and financial
officers. A copy of the code of conduct is available on our website at www.internap.com. We
will furnish copies without charge upon request at the following address:
Internap Network Services Corporation, Attn: General Counsel, 250 Williams
Street, Atlanta, Georgia 30303.
 
 If we
make any amendments to the code of conduct other than technical, administrative
or other non-substantive amendments, or grant any waivers, including implicit
waivers, from the addendum to this code, we will disclose the nature of the
amendment or waiver, its effective date and to whom it applies on our website or
in a current report on Form 8-K filed with the SEC.
  Selection
of Director Nominees
  General Criteria and Process.
The policy of the Nominations and Governance Committee is to consider candidates
for Board membership received by Nominations and Governance Committee members,
other Board members, management, the Company’s stockholders, third party search
firms, and any other appropriate sources. In identifying and evaluating Director
candidates, the Nominations and Governance Committee has not set specific
criteria for Directors. Under its committee charter, the Nominations and
Governance Committee is responsible for determining desired skills and
attributes and may consider strength of character, mature judgment, career
specialization, relevant technical skills, diversity, and the extent to which
the candidate would fill a present need on the Board. The Nominations and
Governance Committee may retain a third party search firm to identify Director
candidates and has sole authority to select the search firm and approve the
terms and fees of any Director search engagement.
 
 Stockholder Nominations.
Stockholders who wish to recommend nominees for consideration by the Nominations
and Governance Committee must submit their nominations in writing to our
Corporate Secretary. Submissions must include sufficient biographical
information concerning the recommended individual for the committee to consider
the recommended nominee, including age, five-year employment history with
employer names and a description of the employer’s business, whether such
individual can read and comprehend basic financial statements, and other board
memberships, if any, held by the recommended individual. The submission must be
accompanied by a written consent of the individual to stand for election if
nominated by the Board of Directors and to serve if elected by the stockholders.
The Nominations and Governance Committee may consider such stockholder
recommendations when it evaluates and recommends nominees to the Board of
Directors for submission to the stockholders at each annual meeting. Stockholder
nominations made in accordance with these procedures and requirements must be
addressed to Internap Network Services Corporation, Attn: Corporate Secretary,
at 250 Williams Street, Suite E-100, Atlanta, Georgia 30303.
  59
 
  In
addition, stockholders may nominate Directors for election without consideration
by the Nominations and Governance Committee. Any stockholder of record may
nominate an individual by following the procedures and deadlines set forth in
the “Stockholders’ Proposals for 2009 Annual Meeting” section of this proxy
statement and by complying with the eligibility, advance notice and other
provisions of our bylaws. Under our bylaws, a stockholder is eligible to submit
a stockholder proposal if the stockholder is of record and entitled to vote at
the annual meeting. The stockholder also must provide timely notice of the
proposal to us. To be timely, the stockholder must provide advance notice not
less than 90 nor more than 120 calendar days prior to the anniversary date of
the preceding year’s annual meeting.
  As of
December 31, 2007, the Nominations and Governance Committee had not
received a recommended nominee from any stockholder or group of stockholders
that beneficially owned more than 5% of our common stock for at least one year
as of the date of the
recommendation.
  Compensation
of Directors
  We
discuss the compensation of our Directors in the section “Compensation
Discussion and Analysis.”
  Stockholder
Communications with the Board of Directors
  The Board
of Directors has a policy and process to facilitate stockholder communications
with Directors. Stockholders who wish to communicate directly with the Board of
Directors may do so by writing to Internap Network Services Corporation, 250
Williams Street, Suite E-100, Atlanta, Georgia 30303, Attn: Corporate Secretary
or by sending electronic mail to boardofdirectors@internap.com.
  The
Corporate Secretary will forward all communications received without reviewing
or editing them. The Chairman of the Board of Directors, or the other Director
to whom your communication is addressed, if other than the Board, will decide
whether and how to respond to your communication. Such person may consult with
the Corporate Secretary regarding his or her response.
 ITEM 11.  EXECUTIVE
COMPENSATION.
  Compensation
Discussion and Analysis
  Introduction
  In this
section, we discuss certain aspects of our compensation program as it pertains
to our principal executive officer, our principal accounting officer, our three
other most highly compensated executive officers as of December 31, 2007, and
one individual who would have been among the three most highly compensated
executive officers had he been an executive officer as of December 31, 2007. We
refer to these individuals as the “named executive officers.” Our discussion
focuses on compensation and practices relating to 2007, our most recently
completed fiscal year, and includes relevant actions we have taken thus far in
2008 that affect the compensation of our named executive officers.
  We
believe that the individual performance of our named executive officers can have
a significant impact on our overall results. We, therefore, place considerable
importance on the design and administration of our executive compensation
program.
  This
Compensation Discussion and Analysis will outline our compensation philosophy,
the administration of our policies, our use of consultants, and provide a
detailed description of how and why we paid each element of the compensation
plan to our named executive officers.
  Philosophy
 
 Our
executive compensation program is designed to: (1) attract, motivate,
reward, and retain high quality executives necessary for our leadership;
(2) ensure that compensation provided to executive officers is closely
aligned with our short and long-term business objectives, financial performance
and strategic goals; (3) build a strong link between an individual’s
performance and his or her related paid compensation; and (4) further align
the interests of management with our stockholders  by providing equity
incentive compensation. Our executive compensation practices are intended to
provide each executive a total annual compensation that is commensurate with the
executive’s responsibilities, experience and demonstrated performance and are
intended to be competitive with a select group of peer companies, as well as a
larger group of other technology companies.
 
 The
Company is in an industry characterized by intense competition, rapid
technological change and the introduction of new products and services.
Successful companies in this industry are those that achieve growth in this
environment.  Our compensation program reflects our commitment to
growth and increasing stockholder value by providing for bonuses and equity
awards only when the Company has achieved certain levels of
growth.  For example, the bonuses received by our named executive
officers in 2007 for performance in 2006 were the first such bonuses awarded by
the Company and coincided with the Company’s unprecedented financial
performance.
 
 Determination
Process
 
 The
Compensation Committee, or the Committee, oversees the establishment of
executive compensation policies and programs consistent with our corporate
objectives and stockholder interests, as well as reviews the general policies
relating to the compensation and benefits for all of our employees. The Board of
Directors determines the Committee’s membership. All members of the Committee
are independent Directors under NASDAQ rules. The Committee meets at scheduled
times during the year, and it may take action by unanimous written consent, but
only in rare instances following fulsome consideration and discussion of the
issues presented. The Chair of the Committee reports on Committee actions and
recommendations at meetings of the full Board of Directors. The Committee
engages independent compensation consultants and considers their data and
input.
  The
Committee’s charter, which is available on our website, mandates that the
Committee annually review each named executive officer’s compensation package.
The Committee considers: (1) the extent to which we attained specified
corporate objectives for the preceding year; (2) the extent to which the
named executive officer attained his or her individual objectives for the
preceding year; (3) the recommendations of the Chief Executive Officer with
respect to compensation of the other named executive officers; (4) the
experience and contribution levels of the named executive officer;
(5) internal pay equity; and (6) benchmarking the total compensation
levels of executive officers in similar positions in companies in a select group
of peer companies, as well as a larger group of other technology companies,
through surveys conducted by independent compensation consultants.
  The
Committee approves the total compensation, including base salary adjustments,
cash bonus and long-term incentive awards, of the named executive officers,
other than the Chief Executive Officer, based on the factors described in the
preceding paragraph. The Committee considers the same factors when evaluating
the Chief Executive Officer’s performance and recommends a compensation package,
including base salary adjustments, cash bonus and long-term incentive awards, to
the Board of Directors for its review, discussion and approval. A majority of
the independent Directors of the full Board of Directors must approve the
compensation of our Chief Executive Officer.
  The
Committee typically makes changes to our named executive officers’ base salaries
in December of each year, but made such adjustments to base salaries for 2007 in
January of 2007.  The Committee typically determines bonus awards in
March after financial results for the preceding year are
available.  The Committee also determines the long-term incentives in
March during its prescheduled meeting.
  60
 
  Use
of Consultants
  We
recognize that competitive compensation is critical for attracting, motivating
and rewarding qualified executives. To ensure our named executive officers are
compensated appropriately, the Committee retained the services of Aon
Consulting, or Aon, an independent compensation consultant, to identify
appropriate compensation levels and compensation program design
features.  Aon assisted the Committee in identifying and establishing
median total compensation goals and assisted in general oversight of our
executive compensation program. This oversight includes helping the Committee
evaluate compensation practices and assisting the Committee with developing and
implementing our executive compensation program and philosophy. The Committee
used information provided by Aon when approving or recommending compensation
levels, but does not delegate authority to set compensation to Aon or to any
other party.
  At the
Committee’s direction to ensure independence, neither Aon nor any of its
affiliates or subsidiaries provided any other services to the
Company.
 Compensation
for 2007
  In
September 2006, Aon conducted a review of labor market salary levels for top
executives in similar sized companies and similar industries using published
compensation surveys and a selected peer group of companies. Aon provided a
preliminary list of potential peer companies using publicly available databases
and screening on relevant industry categories.  The Committee reviewed
this preliminary list and considered the similarities of products and services
offered, revenue size, market capitalization, and number of employees, as well
as revenue growth and profitability. Based on this review, the Committee
determined that the following companies would constitute the peer group: Akamai
Technologies Inc., Arbinet-Thexchange Inc., Cbeyond Communications Inc., Cogent
Communications Group, Covad Communications Group, Equinix Inc., Globix Corp.,
Infospace Inc., Internet Security Systems Inc., Ipass Inc., ITC Deltacom Inc.,
Navisite Inc., Savvis Inc., Terremark Worldwide Inc., and VitalStream Holdings,
Inc. The peer group companies are Internet infrastructure companies, as well as
a larger group of similarly situated and sized technology companies, but these
companies are not necessarily dispositive of the companies we consider in all
comparative analyses. While the these peer companies differed in relative
revenue size, Aon used regression analysis of its database to factor in size
differences and to calculate actual and expected compensation for executives
relative to net sales and completed an analysis that linked the peer group
executive regression data, the published survey data and the Company’s internal
hierarchy. Aon matched our executive positions to published compensation survey
data for similarly sized companies. These surveys are generally broad in scope
and incorporate the comparison data from hundreds of respondent companies. The
survey sources on which Aon relied included Aon’s Radford Technology
Compensation Surveys and surveys from other well-known sources, including
William M. Mercer and Watson Wyatt. Data utilized represented companies of
similar size, industry and scope to us, with revenues generally less than $200
million.
  Aon
conducted a regression analysis using the peer group database to calculate
actual and expected compensation for chief executive officers relative to 2005
net sales and completed an analysis that linked the peer group chief executive
officer regression data, the published survey data and our internal hierarchy.
This analysis compared relative values from published surveys of positions below
the chief executive officer by creating a published survey index to the chief
executive officer. Aon set the chief executive officer index at 100% and the
indices for positions below the chief executive officer are calculated by
dividing the published survey median results for each position by the published
median for the chief executive officer’s compensation. These indices were
applied to calculate expected compensation levels for the positions below the
chief executive officer.
  For base
salaries, the Committee focused on the published survey data results because the
Committee viewed those results as more indicative of the labor market since the
published survey data sources covered many more companies. For total cash
compensation, which is salary plus bonus and total direct compensation, which is
total cash plus the present value of stock or other long-term compensation, the
Committee focused on the peer group regression results because those companies
are growth companies and better represented the labor market on these elements
of compensation.
  Aon
identified the market median salary for each of our named executive officers.
Based on that median, we concluded that the base salaries of our named executive
officers were between 94% and 112% of the published surveys’ market median
salary for each position. We also concluded that our named executive officers
had total cash compensation that ranged from 105% to 139% of expected total cash
compensation from the peer group regressions, and total direct compensation that
ranged from 85% to 151% of the expected total direct compensation from the peer
group regressions.
  The
overall results of the Aon engagement provided the foundation for our actions
involving executive compensation in 2007.
  Compensation
for 2008
  To assist
with its decisions for executive compensation for 2008, the Committee asked Aon
to conduct a review of the competitiveness of Internap’s executive compensation
program for its top executives and to compare Internap’s executive compensation
to published surveys and a mutually selected peer
group.    Aon presented the results of this review in August
of 2007 and formed the foundation for our actions related to executive
compensation in 2008.
  Aon
utilized published surveys and a selected peer group of similar companies to
Internap.  Aon developed key findings from an analysis of competitive
compensation data and its review of reports and documents provided by the
Company.  Aon compared the Company’s top executive positions to the
executives listed in the proxy statement of each of the selected peer
companies.  The Committee, with Aon’s advice, selected the peer
companies.  Aon then matched the Company’s executive positions to
published compensation survey data for similarly sized companies.  The
surveys are generally broad in scope and incorporate the compensation data from
hundreds of respondent companies.  Aon aged this salary information to
October 1, 2007 at a 3.5% annualized increase rate, which was based on actual
2006 and projected 2007 median merit salary increase rates for technology
companies.  The surveys Aon used were:
  ●               
The 2005 Radford Executive Compensation Survey, Telecommunications
Products/Services with revenues from $200 million to $1 billion;
  ●               The
2006 William M. Mercer Executive Compensation Report, All Organizations with
revenues less than $500 million; and
  ●               The
2006 Watson Wyatt Industry Report on Top Management Compensation, All
Organizations with revenues from $150 million to $750 million.
  61
 
  Aon then
evaluated the Company’s compensation components and total compensation levels,
including base salary and annual and long-term incentives, for the positions
matched to the survey sources.  Aon also developed a database of
compensation and financial information for the Company and the peer
group.  The peer group consisted of the following companies: Akamai
Technologies Inc., Cbeyond Communications Inc., Cogent Communications Group,
Covad Communications Group, Equinix Inc., Infospace Inc., ITC Deltacom Inc.,
Limelight Networks Inc., Navisite Inc., Neustar Inc., Premier Global Services,
Radiant Systems Inc., Savvis Inc., Switch & Data Facilities Co., and
Terremark Worldwide Inc.
 The
following companies were included as peers in Aon’s 2006 analysis, but were not
included as peers in this 2007 analysis: Arbinet-Thexchange Inc., Globix Corp.,
Internet Security Systems Inc., Ipass Inc., and VitalStream Holdings,
Inc.  The Committee did not include Globix because it underwent
business changes and portions were acquired.  Similarly, the Committee
did not include Internet Security Systems Inc. or VitalStream Holdings, Inc.
because both were acquired.  The following companies were not included
as peers in the 2006 analysis, but were peers in this 2007 analysis: Infospace
Inc., Limelight Networks Inc., Neustar Inc., Premier Global Services, Radiant
Systems Inc., and Switch & Data Facilities Co.  The Committee did
not include Limelight in its 2006 analysis because it was not publicly
traded.  It added Infospace, Neustar, Premier, Radiant, and Switch
& Data this year because those companies are succeeding in areas we expect
to grow. The Committee did not include Arbinet-Thexchange Inc. and Ipass Inc.
because it concluded that the newly included companies were more relevant
peers.
  Aon then
conducted regression analyses using the peer group database to calculate actual
and expected CEO compensation. Aon completed an Executive Value Index analysis
that linked peer group CEO regression data, the published survey data and the
Company’s internal hierarchy.  This analysis compared relative values
from published surveys of positions below the CEO by creating a published survey
index to CEO.  The CEO index is set at 100% and the indices for
positions below the CEO are calculated by dividing the published survey results
for each position by the published survey median for the CEO’s compensation.
This approach is particularly accurate in measuring job values based on the
duties and responsibilities of each job, rather than a ranking of by salary
only.
  Aon also
identified the prevalence of performance-based long-term incentive grants for
the peer companies.  Aon evaluated stock compensation dilution levels
for the peer companies to identify competitive annual stock compensation grants
and total stock compensation shares outstanding and available for grant relative
to total shares issued and outstanding.
  Aon then
developed recommended target compensation levels for certain executives,
including target base salaries, bonus opportunity ranges and long-term incentive
award ranges.
  Based on
the published survey data, Aon concluded that the Company’s base salaries for
these executives were 103.7% of the median survey data and 87.2% of the 75th
percentile survey data. Based on the trended peer group analysis, which was
unadjusted for differences in net sales size, Aon concluded that the Company’s
base salaries for these executives was 98.7% of the median survey data and 88.7%
of the 75th
percentile survey data.
  Executive
Compensation Program Overview
  The three
primary components of our executive compensation program are:
  •
                Base
      salary;
  •
                Annual
      cash incentives; and
  •
                Long-term
      equity incentives, which consist of stock options and restricted
      stock.
  We strive
to provide sufficiently competitive levels of base salary and annual and
long-term incentive opportunities in order to attract and retain the talent
needed to ensure continued operational and financial success, high quality
customer service and creation of sustained stockholder value.  To this
end, we target each element to the median of our peer group and the broader
published survey pay data for similar sized companies in the technology
industry, which reflects the Committee’s commitment to pay for performance. When
the Company’s performance exceeds established benchmarks, the compensation of
our named executive officers will exceed this median.
  We
believe that the compensation of our named executive officers should be
predominately performance-based because these individuals have the greatest
ability to influence our performance. To that end, our compensation practices
provide ong-term award opportunities to reflect the strategic roles of our named
executive officers in leading us toward long-term growth, increasing
profitability and stockholder value creation.  Accordingly, the
Committee does not target a particular mix of compensation elements and the
amounts awarded or paid pursuant to each element do not affect decisions
regarding the other elements.
  A
description of these three components and related programs follows.
  62
 Executive
Summary
  The total
compensation of our President and Chief Executive Officer, Jim DeBlasio, was
$1,750,408,  which consisted of base salary of $425,000, awards of
restricted stock of $524,831, awards of stock options of $435,452, and a bonus
of $337,663 of which $297,500 was paid in cash and $40,163 was paid in shares of
common stock.  The cash component of Mr. DeBlasio’s compensation
equals approximately 41% of his total compensation and the equity component of
his compensation equals approximately 59% of his total
compensation.
  The total
compensation of our former Chief Financial Officer, David Buckel, was $750,248,
which consisted of salary of $240,333, which is a prorated amount of his base
salary of $260,000 for the portion of the year he was employed by the Company,
awards of restricted stock of $222,204 and awards of stock options of
$287,711.  The cash component of Mr. Buckel’s compensation equals
approximately 32% of his total compensation and the equity component of his
compensation equals approximately 68% of his total compensation.
  The total
compensation of our Chief Operating Officer, Vincent Molinaro, was $661,336,
which consisted of salary of $247,917, which is a prorated amount of his base
salary of $350,000 for the portion of the year he was employed by the Company, a
portion of his signing bonus of $13,333, awards of restricted stock of $325,086,
and a cash bonus of $75,000.  The cash component of Mr. Molinaro’s
compensation equals approximately 51% of his total compensation and the equity
component of his compensation equals approximately 49% of his total
compensation.
  The total
compensation of our Vice President and General Counsel, Richard Dobb, was
$381,363, which consisted of salary of $180,000, which is a prorated amount of
his base salary of $240,000 for the portion of the year he was employed by the
Company, awards of restricted stock of $78,783 and a bonus of $122,580 of which
$108,000 was paid in cash and $14,180 was paid in shares of common
stock.  The cash component of Mr. Dobb’s compensation equals
approximately 76% of his total compensation and the equity component of his
compensation equals approximately 24% of his total compensation.
  The total
compensation of our Vice President and Chief Strategy Officer, Phil Kaplan, was
$726,137, which consisted of base salary of $230,808, which is a prorated amount
of his base salary of $235,000 for the portion of the year he was employed by
the Company, awards of stock options of $396,641 and a bonus of $98,688 of which
$87,000 was paid in cash and $11,688 was paid in shares of common
stock.  The cash component of Mr. Kaplan’s compensation equals
approximately 44% of his total compensation and the equity component of his
compensation equals approximately 56% of his total compensation.
  The total
compensation of our Vice President and Principal Accounting Officer, Tamara
Augustyn, was $347,428, which consisted of base salary of $172,500 awards of
restricted stock of $42,987, awards of stock options of $41,941, and a cash
bonus of $90,000.  The cash component of Ms. Augustyn’s compensation
equals approximately 76% of her total compensation and the equity component of
her compensation equals approximately 24% of her total
compensation.
  
 1.
                Base
      Salary
  The
Committee establishes base salaries that are sufficient to attract and retain
individuals with the qualities it believes are necessary for our long-term
financial success and that are competitive in the marketplace. A named executive
officer’s base salary generally reflects the officer’s responsibilities, tenure,
job performance, special circumstances, and direct competition for the officer’s
services. In other cases, the Committee determines salaries in negotiations to
recruit certain highly qualified executives for key positions, after
consideration of, with no specific weighting, the importance of the position
being filled, the experience and background of the candidate, the level of
compensation required to induce the candidate to leave his or her current
position, and the compensation historically paid to others in that
position.
  The
Committee reviews the salaries of our executive officers annually. In addition
to these periodic reviews, the Committee may at any time review the salary of an
executive who has received a significant promotion, whose responsibilities have
been increased significantly or who is a retention risk. Salaries for the named
executive officers generally are based upon their personal performance in light
of individual levels of responsibility, our overall performance and
profitability during the preceding year, economic trends that may affect us, and
the competitiveness of the executive’s salary with the salaries of executives in
comparable positions at companies of comparable size or with operational
characteristics. While the Committee considered each of these factors, it did
not assign a specific value to each factor.
  63
  As part
of the compensation setting process for the named executive officers other than
the Chief Executive Officer, the Committee met with our Chief Executive Officer
and reviewed the performance of each of the other named executive officers. The
Committee considered the recommendations of the Chief Executive Officer along
with the competitiveness of the named executive officer’s salary compared to
salaries of executives of our peer group. The base salary component of our
executive compensation provides each named executive officer with a fixed
minimum amount of annual cash compensation. Set forth below and effective as of
January 2007 are the fiscal year 2007 base salaries for our named executive
officers:
  Name
                
                Base SalaryJames
      DeBlasio
                
                $
                425,000Vincent
      Molinaro
                
                $
                350,000David
      Buckel
                
                $
                260,000
                (1)Richard
      Dobb
                
                $
                240,000Phil
      Kaplan
                
                $
                235,000Tamara
      Augustyn
                
                $
                175,000
 
  (1)
                Mr. Buckel
      resigned his position as Chief Financial Officer in November
      2007.
  In
December 2007, the Board conducted its annual review of the salaries of the
named executive officers. The Board compared each named executive officer’s base
salary to market median levels and considered each named executive officer’s
experience and sustained performance in the position and also considered each
named executive officer’s job performance balanced against his or her retention
risk. Effective January 1, 2008, the Board increased Mr. DeBlasio’s base
salary to $460,000, increased Mr. Molinaro’s base salary to $360,000,
Mr. Dobb’s base salary to $248,000, Mr. Kaplan’s base salary to
$244,000, and Ms. Augustyn’s base salary to $185,000.
  2.
                Annual
      Cash Incentives
  We
believe that our compensation program should focus the named executive officers
and other key executives on our annual financial performance and should reward
individual performance. To that end, we have adopted the 2007 Executive Bonus
Award Incentive Plan, or the Plan. Named executive officers and other executives
participate in the Plan and our Chief Executive Officer may recommend to the
Committee that other key contributors participate in the Plan.
  The
purpose of the Plan is to:
  •
                Focus
      participants’ actions on the achievement of annual revenue growth and
      profitability goals;
  •
                Align
      participants’ actions on the accomplishment of key operational and
      strategic goals;
  •
                Encourage
      and reward participants for the achievement of specific objectives;
      and
  •
                Maintain
      a competitive range of incentive compensation
    opportunities.
  Each
named executive officer’s award is based on the following three
criteria:
  1.
                Achievement
      of revenue goals by us, which comprises 25% of the potential
      award;
  2.
                Achievement
      of adjusted EBITDA goals by us, which comprises 50% of the potential
      award; and
  3.
                Achievement
      of individual goals by the named executive officer, which comprises 25% of
      the potential award.
  64
 We must
meet a threshold of financial performance based on revenue, adjusted EBITDA and
net income, which excludes equity compensation expenses, for the year in order
for any awards to be made pursuant to the Plan. The Board established this
minimum financial performance in November of 2006 as part of our business plan
for 2007. In addition, a named executive officer must achieve a certain rating
in his or her performance review, which includes attaining his or her individual
and department budget objectives, to receive any award pursuant to the
Plan.
  We choose
to base awards pursuant to the Plan on adjusted EBITDA and revenue because we
believe they are accurate measurements of our core performance. We chose to base
the majority of awards pursuant to the Plan based on adjusted EBITDA because
adjusted EBITDA has become a commonly used metric, especially for
capital-intensive technology companies such as ours, for assessing operating
performance, liquidity and valuations by investors, analysts and
banks.
 
 For 2007,
the adjusted EBITDA target was $36.1 million and the revenue target was $235.0
million, compared to an adjusted EBITDA target of $18.8 million and revenue
target of $160.1 million for 2006. The change in these targets from 2006 to 2007
represents an approximately 92% increase in adjusted EBITDA and a 46% increase
in revenue.
  The
Committee chose these revenue and adjusted EBITDA targets because they reflected
the substantial growth the Company expected in 2007, particularly in light of
its acquisition of VitalStream Holdings, Inc.  Further, these targets
complemented the earnings guidance the Company issued, which was adjusted EBITDA
of $34-37 million and revenue of $235 million.
  With
respect to individual goals, the Chief Executive Officer establishes his goals
with the Committee and the Chief Executive Officer oversees the establishment of
each of the other named executive officer’s goals for the upcoming year. Upon
completion of the year, the Chief Executive Officer rates each of the other
named executive officer on the attainment of those goals. A named executive
officer receives a Needs Improvement rating, or NI, a Meets Expectations rating,
or ME, an Often Exceeds Expectations rating, or OE, or an Exceeds Expectations
rating, or EE. The Board rates the Chief Executive Officer using the same rating
system. If a named executive officer receives a Needs Improvement rating, he or
she is not eligible for any award pursuant to the Plan, regardless of the
Company’s financial performance.
  To be
eligible for awards, a participant must be a full-time employee at the time the
Board determines achievement under the Plan. If an executive joins the Company
mid-year, his or her award is pro-rated for the portion of the year during which
he or she was an executive.
  The Board
assigns each executive a target level as a percentage of his or her salary,
which are based on survey analysis. The target award levels for 2007
were:
  Name
                
                Target
                
                
                MaximumJames
      DeBlasio
                
                70
                %
                
                140
                %David
      Buckel (1)
                
                50
                %
                
                100
                %Vincent
      Molinaro
                
                50
                %
                
                100
                %Richard
      Dobb
                
                45
                %
                
                90
                %Phil
      Kaplan
                
                37
                %
                
                74
                %Tamara
      Augustyn (2)
                
                --
                %
                
                --
                %
  
  (1)
                Mr. Buckel
      resigned his position as Chief Financial Officer in November
      2007.
  (2)
                Ms. Augustyn
      assumed the role of Principal Accounting Officer following Mr.
      Buckel’s resignation in November 2007 and was not a participant in the
      Plan when the Board established these
  percentages.
  The Board
retains the sole discretion to determine whether the Company and the named
executive officer have met the objectives.
  The Board
established the following four levels for each of the three criteria: threshold,
target, above and maximum.
  65
 Potential
payment for achievement of the “Threshold” objective for the annual revenue goal
and annual adjusted EBITDA goal equals 40% of each respective criterion’s
allocated percentage of the individual named executive officer’s target award
amount, which is 40% of 25% of the total target award amount in the case of the
annual revenue goal and 40% of 50% of the total target award amount, in the case
of the annual adjusted EBITDA goal. Potential payment for achievement of the
threshold objective for the individual goals is $0.
  Potential
payment of achievement of the “Target” objective for the annual revenue goal,
annual adjusted EBITDA goal and individual goals equals 100% of each criterion’s
allocated percentage of the named executive officer’s total target award amount,
which are 25%, 50% and 25% of the total target award amount,
respectively.
  Potential
payment for achievement of the “Above” objective for the annual revenue goal,
annual adjusted EBITDA goal and individual goals are 130% of each respective
goal’s allocated portion of the individual’s target award amount.
  Potential
payment for achievement of the “Maximum” objective for the annual revenue goal,
annual adjusted EBITDA goal and individual goals is 200% of each such goal’s
allocated portion of the individual’s target award amount.
  The Board
determines the potential payment for performance for the annual revenue and
annual adjusted EBITDA goals that fall between the “Target,” “Threshold,”
“Above,” or “Maximum” objectives by interpolating on a straight-line basis to
determine an incentive amount.
  The
following table is an illustrative example for a named executive officer whose
salary is $240,000 and whose target award is 45%.
  Weight
                
                
                Threshold
                
                
                Target
                
                
                Above
                
                
                MaximumAnnual
      Revenue Bonus Payout
                
                25
                %
                
                
                95
                %
                
                
                100
                %
                
                
                105
                %
                
                
                110
                %$
                10,800
                
                
                $
                27,000
                
                
                $
                35,100
                
                
                $
                54,000Annual
      Adjusted EBITDA Bonus Payout
                
                50
                %
                
                
                90
                %
                
                
                100
                %
                
                
                110
                %
                
                
                120
                %$
                21,600
                
                
                $
                54,000
                
                
                $
                70,200
                
                
                $
                108,000Individual
      Goals Bonus Payout
                
                25
                %
                
                
                NI
                
                
                
                ME
                
                
                
                OE
                
                
                
                EE$
                0
                
                
                $
                27,000
                
                
                $
                35,100
                
                
                $
                54,000
  If our
annual revenue was 110% of the annual revenue goal established by the Board,
then this named executive officer would receive a bonus for those criteria of
$54,000. If our annual adjusted EBITDA objective was 110% of the adjusted EBITDA
goal established by the Board, then this named executive officer would receive a
bonus of $70,200. If this named executive officer received a rating of Often
Exceeds Expectations, or OE, this named executive officer would receive a bonus
of $35,100. In total, this named executive officer would receive a total bonus
of $159,300.
  The Board
decided that the Company would pay the Target Award Level, as defined in the
Plan, in cash and  pay the excess of the Target Award Level in shares
of common stock.  The Company determined the number of shares of
common stock to be awarded based on the closing price of the Company’s stock
price on the day preceding the date on which the Company paid such
bonus.  The Company withheld the number of shares necessary to cover
the taxes each participant owed the Internal Revenue Service as a result of the
vesting of the shares of common stock.
  66
 In 2007,
the Company’s revenue was $235 million, which equaled the revenue target
established in the Plan, and adjusted EBITDA was $37.7 million, which exceeded
the adjusted EBITDA target established in the Plan.  In consideration
of this matrix and as provided in the Plan, the Committee determined in 2008 and
approved bonus payment amounts not directly calculated by reference to the Plan
in excess of the targets established in the Plan for each named executive
officer, other than the Chief Executive Officer, and the Board determined the
bonus payment for the Chief Executive Officer, as follows and paid such amounts
on March 15, 2008:
  
 Name:
                
                Total
      Bonus Amount
                
                
                Cash
      Portion
                
                
                Stock
      PortionJames
      DeBlasio
                
                $
                337,663
                
                
                $
                297,500
                
                
                $
                40,163,
      or 6,638 sharesDavid
      Buckel (1)
                
                
                --
                
                
                
                --
                
                
                
                --Vincent
      Molinaro
                
                $
                75,000
                
                
                $
                75,000
                
                
                $
                0Richard
      Dobb
                
                $
                122,580
                
                
                $
                108,000
                
                
                $
                14,580,
      or 2,409 sharesPhil
      Kaplan
                
                $
                98,688
                
                
                $
                87,000
                
                
                $
                11,688,
      or 1,931 sharesTamara
      Augustyn (2)
                
                $
                90,000
                
                
                $
                90,000
                
                
                $
                0
  
  (1)
                Mr. Buckel
      resigned his position as Chief Financial Officer in November 2007 and
      thus, was not eligible for an award pursuant to the
  Plan.(2)
                Ms.
      Augustyn assumed the role of Principal Accounting Officer following
      Mr. Buckel’s resignation in November
2007.
  In the fourth
quarter of 2007, the Board established the target revenue and target adjusted
EBITDA goals for 2008. The Committee established the following target award
levels for our named executive officers, other than our Chief Executive Officer,
and the Board established the target award level for
Mr. DeBlasio:
  Name
                
                Target
                
                
                MaximumJames
      DeBlasio
                
                70
                %
                
                140
                %David
      Buckel (1)
                
                --
                %
                
                --
                %Vice
      President and Chief Financial Officer
                
                50
                %
                
                100
                %Vincent
      Molinaro (2)
                
                50
                %
                
                100
                %Richard
      Dobb
                
                45
                %
                
                90
                %Phil
      Kaplan
                
                45
                %
                
                90
                %Tamara
      Augustyn (3)
                
                --
                %
                
                --
                %
  
  (1)
                Mr. Buckel
      resigned his position as Vice President and Chief Financial Officer on
      November 18, 2007.(2)
                Mr.
      Molinaro resigned his position as Chief Operating Officer on April 7,
      2008.
 (3)
                Ms.
      Augustyn will not be a participant in the Plan for
  2008.
  The
changes in performance targets are not an indication of how we will perform in
2008. The sole purpose of these targets, which the Board established in the
fourth quarter of 2007, is to establish internal performance-based goals under
an annual incentive compensation plan. Consistent with our pay-for-performance
compensation philosophy, the Board establishes these goals to align executive
compensation with our performance and to encourage the achievement of our goals.
As disclosed in the press release we furnished in our Current Report on Form 8-K
on February 28, 2008, we issued revenue guidance of 25% growth and full year
adjusted EBIDTA of approximately 20% of total revenue. We are not providing any
guidance, nor updating any prior guidance, of our future performance with the
disclosure of these performance targets, and you are cautioned not to place any
reliance on these performance targets as an indication of our future
performance.
  67
  3.
                Long-Term
      Equity Incentives
  Historically,
the primary form of equity compensation that we awarded consisted of
non-qualified stock options. We selected this form because of the favorable
accounting and tax treatments and the near universal expectation by employees in
our industry that they would receive stock options. Beginning in 2006, however,
the accounting treatment for stock options changed as a result of Statement of
Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment
(revised 2004), making the accounting treatment of stock options less attractive
because it required the Company to record an expense related to stock options.
As a result, we assessed the desirability of granting shares of restricted stock
to employees, particularly members of senior management, and concluded that
restricted stock would provide an equally motivating form of incentive
compensation while permitting us to issue fewer shares, thereby reducing
potential dilution. We continue to award stock options to new hires, upon a
promotion, as a result of performance evaluations, and in other special
situations.
  The
Committee grants stock options and restricted stock to named executive officers,
other than the Chief Executive Officer, under the Amended and Restated Internap
Network Services Corporation 2005 Incentive Stock Plan, or the Stock Plan, which
our stockholders approved, to provide long-term incentives that are aligned with
the creation of increased stockholder value over time. We believe an executive
who owns options or restricted stock will have an increased personal interest in
our growth and success. Because these awards vest over time, they also serve as
a retention device. The Committee recommends the amounts of the Chief Executive
Officer’s awards to the Board and the Board determines his grants. The strike
price of options is the fair market value of our stock at the date of grant.
Options also typically have a ten-year term and generally vest 25% on the first
anniversary of the grant date and in 36 equal monthly installments thereafter.
Shares of restricted stock typically vest in 16 equal quarterly
installments.
  The
Committee reviews long-term incentive levels for all named executive officers
each fiscal year in light of long-term strategic and performance objectives and
each named executive officer’s current and anticipated contributions to our
future performance. When determining the number of stock options or restricted
shares to be awarded to a named executive officer, the Committee considers:
(1) the named executive officer’s current contribution to our performance;
(2)  the named executive officer’s anticipated contribution in meeting
our long-term strategic performance goals and (3) comparisons to formal
surveys of executive long-term incentive awards relative to the median of the
peer group, as well as a larger group of other similarly sized technology
companies.
  With the
exception of significant promotions and new hires, we generally make these
awards at the first meeting of the Committee each year following the
availability of the financial results for the prior year. These grants were made
on March 15, 2007 for our 2006 fiscal year and March 20, 2008 for our 2007
fiscal year. We selected this timing in March because it enables us to consider
both the Company’s performance and the named executive officer’s performance for
the previous year, as well as to consider our expectations for the current year.
The Committee’s schedule is determined several months in advance and the
proximity of any awards to earnings announcements or other market events is
coincidental.
  We do not
time, and have never timed, the grant of stock options or restricted stock in
coordination with the release of material non-public information nor have we
timed our release of non-public information for the purpose of affecting the
value of executive compensation. Although our Chief Executive Officer may
recommend the amount of stock awards granted to management, the Committee, or in
the case of awards to our Chief Executive Officer, the Board, approves the grant
of all stock awards and does not delegate the timing of grants. We have retained
a third party service provider to administer the day-to-day activities of the
Stock Plan, but the provider does not determine the recipient of stock awards,
the amount of stock awards granted to a participant, the exercise price, or
vesting of stock awards.
  Prior to
the scheduled meeting of the Committee in March, our Chief Executive Officer
provided a list of recommended incentive restricted stock grants for the other
named executive officers to the Committee. The following paragraph describes the
formula he used to determine the number of shares restricted stock he
recommended that the other named executive officers receive.
  The named
executive officer’s base salary is multiplied by the target bonus percentage
established by the Board for that named executive officer for 2007 to arrive at
a target bonus. The target bonus percentage is multiplied by a market
competitive multiple, which Aon developed based on its analysis. Based on this
analysis, the Committee determined that our chief executive officer would
receive a multiple of 6.0. Other executives receive a lower multiple, which is
expressed in increments of 0.5 based on his or her decreasing level of
responsibilities from the chief executive officer. These multiples of target
bonus reinforce our named executive officers’ strategic role in driving the
achievement of our long-term performance objectives and the creation of
stockholder value. We calculated the target long-term incentive opportunities
for our named executive officers using the following multiples of their target
bonus percentages:
  Name
                
                MultipleJames
      DeBlasio
                
                6.0David
      Buckel (1)
                
                --Vince
      Molinaro
                
                5Richard
      Dobb
                
                4Phil
      Kaplan
                
                4Tamara
      Augustyn
                
                1.5
  
  (1)
                Mr. Buckel
      resigned his position as Vice President and Chief Financial Officer on
      November 18, 2007 prior to the Board’s determination of awards and
      thus, was not eligible for an award pursuant to the Stock
      Plan.
  68
  The
target bonus percentage multiplied by this multiple yields a target long-term
incentive as a percentage of target salary. This percentage of target salary is
then multiplied by the named executive officer’s 2007 base salary to yield a
target long-term incentive amount. This target long-term incentive amount is
then divided by the volume-weighted average price of our common stock from March
19, 2007 to March 19, 2008 to yield a target number of restricted shares. Our
Chief Executive Officer then presented his recommendations to the
Committee.
  The
calculation of these awards is materially different from such calculation in
2007 in that the Committee chose to use the volume-weighted average price of our
common stock from March 19, 2007 to March 19, 2008 rather than the closing price
of the stock on the day before the grant.  Using the volume-weighted
average price rather than the closing price the day before reduced the number of
shares granted by approximately 66%.  In making its determination to
use the volume-weighted average price, the Committee considered the unusual
volatility of the stock price and that the closing price of the Company’s stock
on March 19, 2007 was $16.49, while the closing price on March 19, 2008 was
$4.09. Given this decline in value, the Committee concluded that using the
closing price the day before rather than the volume-weighted average price would
result in equity awards that do not reflect the goal of paying for
performance.
  The Board
concluded that half of each award should be time-based and half should be
performance-based in order to tie the long term incentive to
performance.  Previous equity awards were all
time-based.  The Board made this change to further align the interest
of our named executive officers with our stockholders’ interests. For the
time-based portion, the shares vest in 16 equal quarterly
installments.  For the performance-based portion, the shares vest in
33% annual increments starting with the year that includes the first anniversary
of the grant date.  Executives earn annual tranches of awards, which
vest on each of the first three anniversaries from the date of grant, to the
extent that the Company achieves certain revenue and EBITDA targets established
by the Board of Directors for each respective year in the performance
cycle.  The Company will either meet or not meet both goals in a given
year.  With respect to all shares of performance-based restricted
stock that do not vest during any of the three years, 50% of such shares will
vest on the fourth anniversary of the date of the grant.
  The vesting
of any restricted stock (including both time-based and performance-based) is
subject to the executive being an employee in good standing on the date of
vesting.
  The
Committee considered the recommendation in light of the named executive
officer’s contribution and anticipated contribution and the results provided
from Aon’s competitive market survey. In making its determination of both cash
incentives and long-term incentive awards and its recommendation to the Board
for Mr. DeBlasio’s awards, the Committee considered the Company’s
performance in 2007 and granted each named executive officer, other than the
Chief Executive Officer, a target award based on the above-described
matrix.
  The Board
then considered the number of shares of restricted stock to grant to our Chief
Executive Officer. The Board applied the same process as described above, and
granted Mr. DeBlasio 149,776 shares, as indicated in the following
table.
  69
  Name
                
                Total
                  Number of Shares
                Time-Based
                Performance-BasedJames
      DeBlasio
                
                149,776
                74,888
                74,888David
      Buckel (1)
                
                --
                --
                --Vincent
      Molinaro
                
                69,771
                34,886
                34,886Richard
      Dobb
                
                34,607
                17,303
                17,303Phil
      Kaplan
                
                34,048
                17,024
                17,024Tamara
      Augustyn
                
                3,980
                3,980
                --
 
  (1)
                Mr. Buckel
      resigned his position as Vice President and Chief Financial Officer on
      November 18, 2007 prior to the Board’s determination of awards and
      thus, was not eligible for an award pursuant to the Stock
      Plan.
  Stock
Retention Guidelines
  On March 20,
2008, the Board adopted stock retention guidelines for certain
executives.  The stock retention guidelines arebased on net
shares obtained from option exercises or vesting of restricted shares after
costs of exercise and taxes. The percentage of net shares obtained from option
exercises or vesting of restricted shares after costs of exercise and taxes that
each executive is to retain and the time in which he or she is to hold such
shares are set forth in the following table:
  Position
                
                Retention
      Ratio
                
                Time
      to RetainChief
      Executive Officer
                
                50.0%
                
                5
      Years from date of
                  acquisitionChief
      Operating Officer
                
                33.3%
                
                4
      Years from date of
                  acquisitionChief
      Financial Officer
                
                33.3%
                
                4
      Years from date of
                  acquisitionChief
      Technology Officer
                
                25.0%
                
                3
      Years from date of
                  acquisitionChief
      Strategy Officer
                
                25.0%
                
                3
      Years from date of
                  acquisitionVice
      President, Human Resources
                
                25.0%
                
                3
      Years from date of
                  acquisitionVice
      President and General Counsel
                
                25.0%
                
                3
      Years from date of
                  acquisitionVice
      President, Sales
                
                25.0%
                
                3
      Years from date of
                  acquisition
  These
guidelines apply to the grants made pursuant to the Stock Plan on March 20, 2008
described above and will apply to all future grants.  The enumerated
executives are subject to these guidelines for as long as he or she is an
employee of the Company.
  The Board
concluded that the emerging best practices in corporate governance include such
guidelines and and adopted these stock retention guidelines to further align the
interests of the executives with our stockholders’ interests.
  Perquisites;
Other Compensation
  We
annually review any perquisites that our named executive officers may receive.
In general, we do not provide our named executive officers with many of the
types of perquisites that other companies offer their executives. As reflected
in our Summary Compensation Table, our Chief Executive Officer received $18,900
for corporate housing and $8,561.91 for car service during fiscal year 2007. The
aggregate cost of these perquisites was $27,462.
  70
 We
provide named executive officers with the same benefit package available to all
of our salaried employees. This package includes:
  •
                Health
      and dental insurance;
  •
                Basic
      life insurance;
  •
                Long-term
      disability insurance; and
  •
                Participation
      in our 401(k) plan, including matching
  contributions.
  Limitations
on the Deductibility of Executive Compensation
  Compensation
payments in excess of $1 million to the chief executive officer or the other
five most highly compensated executive officers are subject to a limitation on
deductibility by us under Section 162(m) of the Internal Revenue Code of
1986, as amended. Certain performance-based compensation is not subject to the
limitation on deductibility. The Committee does not expect cash compensation in
2007 to our Chief Executive Officer or any other named executive officer to be
in excess of $1 million. We intend to maintain qualification of the Amended and
Restated Internap Network Services Corporation 2005 Incentive Stock Plan for the
performance-based exception to the $1 million limitation on deductibility of
compensation payments.
  Summary
Compensation Table
  The
following table sets forth total compensation for 2007 for our named executive
officers.
  Name
      and Principal
                    Position
                
                Year
                
                Salary
                  $(1)
                
                
                Bonus
                  $
                
                Stock
                  Awards
                  $(2)
                
                Option
                  Awards
                  $ (2)
                
                Non-Equity
                  Incentive Plan
                  Compensation(3)
                  $
                
                Change
      in
                  Pension
                  Value
      &
                  Non-Qualified
                  Deferred
                  Compensation
                  Earnings
                  $
                
                All
      Other
                  Compensation
                  $
                
                Total
                  $James
      DeBlasio
                  Chief
      Executive Officer
                
                2007
                
                
                425,000
                
                
                —
                
                
                524,831
                
                
                435,452
                
                
                337,663
                
                
                —
                
                
                27,462
                
                
                1,750,4082006
                
                
                350,000
                
                
                —
                
                
                119,918
                
                
                435,452
                
                
                —
                
                
                —
                
                
                47,599
                
                
                952,969David
      Buckel (4)
                  Chief
      Financial Officer
                
                2007
                
                
                240,333
                
                
                —
                
                
                222,204
                
                
                287,711
                
                
                —
                
                
                —
                
                
                —
                
                
                750,2482006
                
                
                235,385
                
                
                —
                
                
                70,097
                
                
                390,611
                
                
                100,000
                
                
                —
                
                
                —
                
                
                796,093Vincent
      Molinaro
                  Chief
      Operating Officer
                
                2007
                
                
                247,917
                
                
                13,333
                
                
                325,086
                
                
                —
                
                
                75,000
                
                
                —
                
                
                —
                
                
                661,3362006
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Richard
      Dobb
                  Vice
      President and
                  General
      Counsel
                
                2007
                
                
                180,000
                
                
                —
                
                
                78,783
                
                
                —
                
                
                122,580
                
                
                —
                
                
                —
                
                
                381,3632006
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Philip
      Kaplan
                  Chief
      Strategy Officer
                
                2007
                
                
                230,808
                
                
                —
                
                
                —
                
                
                396,641
                
                
                98,688
                
                
                —
                
                
                —
                
                
                726,1372006
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Tamara
      Augustyn
                  Vice
      President and Principal
                  Accounting
      Officer
                
                2007
                
                
                172,500
                
                
                —
                
                
                42,987
                
                
                41,941
                
                
                90,000
                
                
                —
                
                
                —
                
                
                347,4282006
                
                
                152,274
                
                
                —
                
                
                14,902
                
                
                41,227
                
                
                50,000
                
                
                —
                
                
                —
                
                
                202,274
  (1)
                The
      salary of each of  Mr. Buckel, Mr. Molinaro, Mr. Dobb, and Mr.
      Kaplan is prorated for the portion of the year he was employed by the
      Company.(2)
                Represents
      the proportionate amount of the total fair value of stock and option
      awards recognized by the Company as an expense in 2007 and 2006 forinancial
      accounting purposes, excluding forfeitures related to service-based
      vesting conditions. The fair values of these awards and the amounts
      expensedwere
      determined in accordance with FAS 123R. The awards for which expense is
      shown in this table include the awards described in the Grants of
      Plan-BasedAwards
      table of this Proxy Statement, as well as awards granted in prior years
      for which the Company continued to recognize expense in 2007 and 2006.The
      assumptions used in determining the grant date fair values of these awards
      are set forth in the notes to the Company’s consolidated financial
      statements,which
      are included in our Annual Report on Form 10-K for the year ended
      December 31, 2007.(3)
                As
      provided in the Plan, the Committee determined and approved bonus payments
      in 2008 in excess of the targets established in thePlan
      for each named executive officer, other than the Chief Executive Officer,
      and the Board determined the bonus payment for theChief
      Executive Officer, and paid such excess in shares of common stock on
      March 15, 2008. Mr. DeBlasio’s bonus consisted of $297,500 paid incash
      and $40,163 paid in shares of  common stock. Mr. Dobb’s bonus
      consisted of $108,000 paid in cash and $14,180 paid in shares of common
      stock. Mr.Kaplan’s
      bonus consisted of $87,000 paid in cash and $11,688 paid in shares of
      common stock. The amounts reported in this column include the value of
      such shares.The
      value of these shares is not, however, reflected in column
      (e).(4)
                Mr.
      Buckel resigned as Chief Financial Officer in November of 2007. As a
      result, he forfeited 9,375 options that were a part of a grant made on May
      12, 2004, 1,597options
      that were part of a grant made on September 28, 2006, 1,298 options that
      were part of a second grant made on September 28, 2006, 5,090 options that
      were partof
      a third grant made on September 28, 2006, as well as 30,934 shares of
      restricted common stock that were part of an award made on January 18,
      2006 and 65,625 sharesof
      restricted common stock that were part of an award made on March 15,
      2007.  The aggregate amount of this forfeiture is $249,525.60
      based on the assumptionsdelineated
      in footnote (2) above.
   71
 All Other
Compensation
  Name
      and Principal Position
                  
                  Perquisites
                    and
      Other
                    Personal
                    Benefits
                    $
                  
                  
                  Tax
                    Reimburse-
                    ments
                    $
                  
                  Dividend
                    Equivalents
                    $
                  
                  Payments/
                    Accruals
      on
                    Termination
                    Plans
                    $
                  
                  Registrant
                    Contributions
                    to
      Defined
                    Contribution
                    Plans
                    $
                  
                  Insurance
                    Premiums
                    $
                  
                  Other
                    $James
      DeBlasio
                    Chief
      Executive Officer
                  
                  
                  27,462
                  (1)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —David
      Buckel
                    Chief
      Financial Officer
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Vincent
      Molinaro
                    Chief
      Operating Officer
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Richard
      Dobb
                    Vice
      President and General Counsel
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Philip
      Kaplan
                    Chief
      Strategy Officer
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Tamara
      Augustyn
                    Vice
      President and Principal
                    Accounting
      Officer
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
  
  (1)
                The
      amounts shown for fiscal 2007 include personal use of corporate housing of
      $18,900 and car service of $8,562.
  Grants
of Plan-Based Awards Table
  The
following table sets forth information regarding grants of annual incentive
awards and stock based compensation for 2007 for each named executive
officer.
  Grant
                    Date
                  
                  Estimated
      Future Payouts
                    Under
      Non-Equity Incentive
                    Plan
      Awards
                  
                  Estimated
      Future Payouts
                    Under
      Equity Incentive Plan
                    Awards
                  
                  All
                    Other
                    Stock
                    Awards:
                    Number
                    of
                    Shares
                    of
      Stock
                    or
      Units
                    #
                  
                  All
      Other
                    Stock
                    Awards:
                    Number
      of
                    Securities
                    Underlying
                    Options
                    #
                  
                  Exercise
                    or
      Base
                    Price
      of
                    Option
                    Awards
                    $/Sh
                  
                  Grant
                    Date
                    Fair
                    Value
      of
                    Stock
                    and
                    Option
                    AwardsName
      and Principal
                      Position
                  
                  
                  
                  Threshold
                    $
                  
                  Target
                    $
                  
                  Maximum
                    $
                  
                  Threshold
                    #
                  
                  Target
                    #
                  
                  Maximum
                    #James
      DeBlasio
                    Chief
      Executive Officer
                  
                  3/15/2007
                  
                  
                  —
                  
                  —
                  
                  
                  —
                  
                  —
                  
                  —
                  
                  —
                  
                  125,000
                  
                  —
                  
                  
                  —
                  
                  $
                  2,082,5003/15/2008
                  (1)
                  
                  —
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  6,638
                  
                  
                  
                  
                  
                  
                  
                  40,160David
      Buckel
                    Chief
      Financial Officer
                  
                  3/15/2007
                  
                  
                  —
                  
                  —
                  
                  
                  —
                  
                  —
                  
                  —
                  
                  —
                  
                  75,000
                  
                  —
                  
                  
                  —
                  
                  
                  1,249,500Vincent
      Molinaro
                    Chief
      Operating Officer
                  
                  4/24/2007
                  
                  
                  —
                  
                  —
                  
                  
                  —
                  
                  —
                  
                  —
                  
                  —
                  
                  125,000
                  
                  —
                  
                  
                  —
                  
                  
                  2,005,000Richard
      Dobb
                  
                  4/23/2007
                  
                  
                  —
                  
                  —
                  
                  
                  —
                  
                  —
                  
                  —
                  
                  —
                  
                  30,000
                  
                  —
                  
                  
                  —
                  
                  
                  474,600Vice
      President and
                    General
      Counsel
                  
                  3/15/2008
                  (1)
                  
                  —
                  
                  —
                  
                  
                  —
                  
                  —
                    —
                  
                  —
                    —
                  
                  —
                    —
                  
                  2,409
                  
                  —
                  
                  
                  —
                  
                  
                  14,574Philip
      Kaplan
                  
                  6/22/2007
                  
                  
                  —
                  
                  —
                  
                  
                  —
                  
                  —
                  
                  —
                  
                  —
                  
                  —
                  
                  30,000
                  
                  
                  13.64
                  
                  
                  409,200Chief
      Strategy Officer
                  
                  3/15/2008
                  (1)
                  
                  —
                  
                  —
                  
                  
                  —
                  
                  —
                  
                  —
                  
                  —
                  
                  1,931
                  
                  —
                  
                  
                  —
                  
                  
                  11,683
  72
  Tamara
      Augustyn
                    Vice
      President and Principal Accounting Officer
                  
                  03/15/07
                    12/19/2007
                  
                  
                  —
                  
                  —
                    —
                  
                  
                  —
                    —
                  
                  —
                    —
                  
                  —
                    —
                  
                  —
                    —
                  
                  7,500
                    —
                  
                  —
                    10,000
                  
                  
                  —
                    9.15
                  
                  
                  124,950
                    91,500
  (1)As provided in the Plan, the Committee determined and
approved bonus payments in 2008 in excess of the targets established in the Plan
for each named executive officer, other than the Chief Executive Officer, and
the Board determined the bonus payment for the Chief
Executive Officer, and paid such excess in shares of common stock on
March 15, 2008. Mr. DeBlasio’s bonus consisted of $297,500 paid incash and
$40,163 paid in shares of common stock, or 6,638 shares. Mr. Dobb’s bonus
consisted of $108,000 paid in cash and $14,180 paid in shares of commonstock, or
2,409 shares. Mr. Kaplan’s bonus consisted of $87,000 paid in cash and $11,688
paid in shares of common stock, or 1,931 shares.  The Company includedthese
shares even though the Company did not award these shares in fiscal year 2007 to
enhance the overall disclosure of our executive compensation
policies.
  Outstanding
Equity Awards Table
  The
following table provides a detail of outstanding stock options and restricted
stock awards for each named executive officer as of December 31,
2007.
  Option
      Awards
                
                
                Stock
      AwardsName
      and Principal
                    Position
                
                Number
      of
                  Securities
                  Underlying
                  Unexercised
                  Options
                  #
                  Exercisable
                
                
                Number
      of
                  Securities
                  Underlying
                  Unexercised
                  Options
                  #
                  Unexercisable
                
                Equity
                  Incentive
                  Plan
                  Awards:
                  Number
      of
                  Securities
                  Underlying
                  Unexercised
                  Unearned
                  Options
                  #
                
                Option
                  Exercise
                  Price
                  $
                
                Option
                  Expiration
                  Date
                
                
                Number
                  of
                  Shares
                  or
      Units
                  of
      Stock
                  That
                  Have
                  Not
                  Vested
                  #
                
                
                Market
                  Value
      of
                  Shares
      or
                  Units
      of
                  Stock
                  That
                  Have
      Not
                  Vested (1)
                  $
                
                Equity
                  Incentive
                  Plan
                  Awards:
                  Number
                  of
                  Unearned
                  Shares,
                  Units
      or
                  Other
                  Rights
                  That
                  Have
      Not
                  Vested
                  #
                
                Equity
                  Incentive
                  Plan
                  Awards:
                  Market
                  or
      Payout
                  Value
      of
                  Unearned
                  Shares,
                  Units
      or
                  Other
                  Rights
                  That
                  Have
      Not
                  Vested
                  $James
      DeBlasio
                  Chief
      Executive Officer
                
                8,000
                  17,000
                  2,000
                  2,000
                  312,5000
                (2)
                
                —
                  —
                  —
                  —
                  —
                
                —
                  —
                  —
                  —
                  —
                
                
                13.50
                  13.50
                  14.90
                  4.60
                  4.80
                
                9/16/2013
                  9/16/2013
                  5/27/2014
                  6/23/2015
                  9/30/2015
                
                
                33,330
                  101,562
                  —
                  —
                  —
                (3)
                  (4)
                
                
                277,639
                  846,011
                  —
                  —
                  —
                
                —
                  —
                  —
                  —
                  —
                
                —
                  —
                  —
                  —
                  —David
      Buckel
                  Chief
      Financial Officer
                
                15,000
                  65,625
                  903
                  734
                  2,877
                (5)
                
                —
                  —
                  —
                  —
                  —
                
                —
                  —
                  —
                  —
                  —
                
                
                11.10
                  14.30
                  14.46
                  14.46
                  14.46
                
                10/31/2013
                  5/12/2014
                  9/28/2016
                  9/28/2016
                  9/28/2016
                
                
                —
                  —
                  —
                  —
                  —
                
                
                
                —
                  —
                  —
                  —
                  —
                
                —
                  —
                  —
                  —
                  —
                
                —
                  —
                  —
                  —
                  —Vincent
      Molinaro
                  Chief
      Operating Officer
                
                —
                
                
                —
                
                —
                
                
                —
                
                —
                
                
                125,000
                (6)
                
                
                1,041,250
                
                —
                
                —Richard
      Dobb
                  Vice
      President and
                  General
      Counsel
                
                —
                
                
                —
                
                —
                
                
                —
                
                —
                
                
                30,000
                (7)
                
                
                249,900
                
                —
                
                —Philip
      Kaplan
                  Chief
      Strategy Officer
                
                25,569
                  13,471
                  24,056
                (8)
                
                —
                  13,471
                  52,924
                
                —
                  —
                  —
                
                
                4.06
                  10.53
                  17.31
                
                12/2/2014
                  12/16/2015
                  07/13/2016
                
                
                —
                  —
                  —
                
                
                
                —
                  —
                  —
                
                —
                  —
                  —
                
                —
                  —
                  —30,000
                (9)
                —
                
                
                13.64
                
                6/22/2017
                
                
                —
                
                
                
                —
                
                —
                
                —Tamara
      Augustyn
                  Vice
      President and Principal
                
                13,125
                  479
                
                
                1,875
                  521
                (10)
                —
                  —
                
                
                12.10
                  5.30
                
                6/30/2014
                  1/18/2016
                
                
                6,250
                  6,094
                (11)
                  (12)
                
                
                52,063
                  50,763
                
                —
                  —
                
                —
                  —Accounting
      Officer
                
                —
                
                
                10,000
                
                —
                
                
                9.15
                
                12/19/2017
                
                
                —
                
                
                
                —
                
                —
                
                —
 
  
  (1)
                The
      fair market value of a share of Internap stock on the last day of the 2007
      fiscal year was $8.33.(2)
                Mr.
      DeBlasio was granted 500,000 options on September 30, 2005. 25% vested
      immediately, but were not exercisable until September 30, 2006 with the
      remainingshares
      vesting annually over a four-year period beginning September 30, 2005, and
      the other options were granted for Mr. DeBlasio’s service as a
      Director.(3)
                Mr. DeBlasio
      was awarded restricted shares on September 30, 2005. 50% of those
      shares vested on September 30, 2006, with the remaining shares
      vesting annuallyover
      a three-year period beginning September 30,
  2006.
  73
  (4)
                Mr.
      DeBlasio was granted 125,000 shares of restricted stock on March 15, 2007
      that vest in a series of 16 quarterly installmentsat
      the end of each calendar quarter beginning with the second quarter of
      2007.(5)
                Mr.
      Buckel was granted options on October 31, 2003, May 12,
      2004, January 18, 2006, and three separate grants on
      September 29, 2006. The options vest over afour-year
      period with the exception of options granted on September 28, 2006.
      The options vest monthly over a three-year period.(6)
                Mr.
      Molinaro was granted 125,000 shares of restricted common stock on April
      24, 2007 of which 25% of the award vests onthe
      anniversary of grant.(7)
                Mr.
      Dobb was granted 30,000 shares of restricted common stock on April 23,
      2007 and 25% of the award vests on theanniversary
      of grant.(8)
                Mr.
      Kaplan was granted options on December 2, 2004, December 16, 2005 and July
      13, 2006.  One-fourth of the number of sharesvested
      on the anniversary of the grant date and then vest quarterly over the next
      three years.(9)
                Mr.
      Kaplan was granted 30,000 options on June 22, 2007.  One-fourth
      of the number of shares vest on each of the first, second,third,
      and fourth anniversary of the grant date.(10)
                Ms.
      Augustyn was granted options on June 30, 2004, January 18, 2006 and
      December 19, 2007.  One-fourth of the number
      ofshares
      vest on the anniversary of the grant date and 1/48of the
      number of shares vest per month thereafter.(11)
                Ms.
      Augustyn was granted 10,000 shares of restricted common stock on February
      27, 2006.  One-eighth of the number of sharesvest
      every six months after the grant date.(12)
                Ms.
      Augustyn was granted 7,500 shares of restricted common stock on March 15,
      2007 that vest in a series of 16 quarterlyinstallments
      at the end of each calendar quarter beginning with the second quarter of
      2007.
  Option
Exercises and Stock Vesting
  The
following table provides information with respect to options exercised during
fiscal 2007.
  Option
      Awards
                
                Stock
      AwardsName
      and Principal Position
                
                Number of Shares
                  Acquired
      on
                  Exercise
                  #
                
                Value Realized
                  Upon
      Exercise
                  $
                
                Number of Shares
                  Acquired
      on
                  Vesting
                  #
                
                
                Value Realized
                  On
      Vesting
                  $James
      DeBlasio
                  Chief
      Executive Officer
                
                —
                
                
                —
                
                40,108
                
                
                
                535,124David
      Buckel
                  Chief
      Financial Officer
                
                —
                
                
                —
                
                19,689
                
                
                
                288,753Vincent
      Molinaro
                  Chief
      Operating Officer
                
                —
                
                
                —
                
                —
                
                
                
                —Richard
      Dobb
                  Vice
      President and General Counsel
                
                —
                
                
                —
                
                —
                
                
                
                —Philip
      Kaplan
                  Chief
      Strategy Officer
                
                —
                
                
                —
                
                —
                
                
                
                —Tamara
      Augustyn
                  Vice
      President and Principal Accounting Officer
                
                —
                
                
                —
                
                3,906
                
                
                
                59,222
 
  
  Pension
Benefits
  None of
our named executive officers are covered by a pension plan or other similar
benefit plan that provides for payments or other benefits at, following or in
connection with retirement.
  Nonqualified
Deferred Compensation
  None of
our named executive officers are covered by a nonqualified defined contribution
or other nonqualified plan that provides for the deferral of
compensation.
  Employment
Agreements and Potential Payments Upon Termination or Change in
Control
  We have
entered into an employment security plan with Mr. Molinaro, Mr. Dobb, Mr.
Kaplan, and certain other officers and an employment agreement with Mr. DeBlasio
that provide for payments in the event of a change in control or termination of
the officer’s employment. We believe that we should protect these individuals in
the event of a change in control. We also believe that the interests of our
stockholders will be best served if the interests of these officers are aligned
with them. Providing change in control benefits should eliminate, or at least
reduce, the reluctance of these officers to pursue potential change in control
transactions that may be in the best interests of our stockholders. The
employment security plan and Mr. DeBlasio’s employment agreement are designed to
promote stability and continuity of our officers.
  74
  Mr. DeBlasio’s
employment agreement provides that if the Company terminates his employment
without cause, as defined in the agreement, or if Mr. DeBlasio terminates his
employment for good reason, also as defined in the agreement, Mr. DeBlasio shall
receive a cash severance payment equal to one and one-half (1-1/2) times his
then-current base salary. If the Company terminates Mr. DeBlasio’s employment
without cause or if Mr. DeBlasio terminates his employment for good reason
within 24 months of a change in control, as such term is defined in the
agreement, instead of the severance benefits previously described,
Mr. DeBlasio shall receive a severance payment equal to two (2) times
the sum of his then-current base salary plus the greater of (A) his maximum
bonus for the year in which the termination occurs and (B) his average bonus
during the prior two completed years (as a percentage of his base salary upon
which his bonus awards were calculated) multiplied by his then-current base
salary, and all of his then-unvested stock options and additional equity
compensation shall vest and become exercisable. In addition, he will continue to
receive health care and life insurance coverage for 18 months as if he were an
active employee, subject to the employee portion of premiums for such
coverage.  If Mr. DeBlasio dies while employed pursuant to this
agreement, all of his unvested equity compensation that would, had he not have
died, have become vested within twelve months after the date of his death
(assuming fulfillment of any performance criteria and his continued employment
by the Company) shall become vested, free of restrictions, other than those
imposed by law, and  immediately exercisable for  a period
ending on the earlier of twelve months after the date of death and the original
expiration date thereof.
 
 On November
14, 2007, the Company entered into an Employment Security Plan for certain
executive officers of the Company (the “Plan”).  The
Plan supersedes the employment agreements that were in place for the
executives who executed Joinder Agreements to the Plan, including Mr. Molinaro,
Mr. Dobb and Mr. Kaplan.  The Board adopted the Plan in order to bring
consistency to its executives’ agreements and to minimize the negotiation of
individual contracts. The Board and Mr. DeBlasio decided to keep Mr. DeBlasio’s
employment agreement in place rather than have him enter into the Plan in order
to preserve maximum flexibility and to acknowledge the unique relationship of a
chief executive officer with a company.
 
 The purpose
of the Plan is to provide certain benefits in the event an executive’s
employment is terminated, either in connection with or unrelated to a change of
control of the Company.
 
 Upon a
qualifying termination, as defined in the Plan, other than during a protection
period, also as defined in the Plan, a participant will receive severance equal
to his or her then-current base salary.  Upon a qualifying termination
during a protection period, a participant will receive severance equal to the
sum of his or her then-current base salary plus maximum bonus for the
participant under the applicable bonus plan as established by Company’s Board of
Directors for the year in which the termination occurs, and all of his or her
unvested equity-based compensation will vest.
 
 A participant
is entitled to severance benefits under the Plan in consideration for his or her
execution of an agreement with terms substantially similar to the terms of the
General Release and Separation Agreement set forth as Exhibit B to the
Plan.  The Company’s obligation to provide such severance benefits is
also conditioned upon the participant’s continued compliance with
confidentiality, non-competition, non-solicitation, and non-disparagement
covenants.
 
 The Joinder
Agreement for each of Mr. Molinaro, Mr. Dobb and Mr. Kaplan preserves certain
benefits of each executive’s superseded employment agreement that were greater
than those provided by the Plan.
 
 Upon a
qualifying termination, as defined in the Plan, other than during a protection
period, also as defined in the Plan, Mr. Molinaro receives severance equal to
one and one-half times his then-current base salary.  Upon a
qualifying termination during a protection period, he receives severance equal
to the sum of two times his then-current base salary plus maximum bonus for him
under the applicable bonus plan.
 
 Upon a
qualifying termination during a protection period, Mr. Dobb receives severance
equal to the sum of two times his then-current base salary plus maximum bonus
for him under the applicable bonus plan.
 
 Upon a
qualifying termination during a protection period, Mr. Kaplan receives severance
equal to the sum of two times his then-current base salary plus maximum bonus
for him under the applicable bonus plan and the options holds that were
originally granted on December 2, 2004 and December 16, 2005, shall become
vested in their entirety.
  The table
below details the calculation of the payments based upon an assumed
January 1, 2008 termination date and assuming the termination was without
cause:
  75
  Potential
Termination and Change in Control Payments
  
 Termination
      Benefit
                
                Change
      in Control BenefitName
      and Principal
                    Position
                
                Estimate
                  of
                  Total
                  Severance
                  Value
                  $
                
                Termination
                  Reason
                
                Cash
                  Severance
                  Multiple
                
                Equity
                  Treatment (3)
                
                Benefit
                  Continu-
                  ation
                
                Retirement
                  Continu-
                  ation
                
                Other
                
                Estimate
                  of Total
                  Change
      in
                  Control
                  Value
                  $
                
                Protection
                  Period
                
                Cash
                  Severance
                  Multiple
                
                Equity
                  Award
                  Treatment
                
                Benefit
                  Continu-
                  ation
                
                Retirement
                  Continu-
                  ationJames
      DeBlasio
                  Chief
      Executive Officer
                
                
                637,500
                
                Involuntary
      Termination Without cause
                
                1.5x
      Base Salary
                
                No accelerated
      vesting - Executive has 90 days to exercise vested options
                
                18
      months
                
                —
                
                —
                
                
                2,332,400
                
                24
      months
                
                2x(Base
      Salary + Maximum Target Bonus)
                
                100% vesting
      of restricted stock and options
                
                18
      months
                
                —David
      Buckel (1)
                  Chief
      Financial Officer
                
                
                —
                
                —
                
                —
                
                —
                
                —
                
                —
                
                —
                
                
                —
                
                —
                
                —
                
                —
                
                —
                
                —Vincent
      Molinaro
                  Chief
      Operating Officer
                
                
                525,000
                
                Involuntary
      Termination Without cause
                
                1.5x
      Base Salary
                
                No accelerated
      vesting - Executive has 90 days to exercise vested
      options
                
                18
      months
                
                —
                
                —
                
                
                2,091,250
                
                24
      months
                
                2x(Base
      Salary + Maximum Target Bonus)
                
                100% vesting
      of restricted stock and options
                
                18
      months
                
                —Richard
      Dobb
                  Vice
      President and General Counsel
                
                
                240,000
                
                Involuntary
      Termination Without cause
                
                1x
      Base Salary
                
                No accelerated
      vesting - Executive has 90 days to exercise vested
      options
                
                18
      months
                
                —
                
                —
                
                
                924,900
                
                24
      months
                
                2x(Base
      Salary + Maximum Target Bonus)
                
                100% vesting
      of restricted stock and options
                
                18
      months
                
                —Philip
      Kaplan
                  Chief
      Strategy Officer
                
                
                235,000
                
                Involuntary
      Termination Without cause
                
                1x
      Base Salary
                
                No accelerated
      vesting - Executive has 90 days to exercise vested
      options
                
                18
      months
                
                —
                
                —
                
                
                643,900
                
                24
      months
                
                2x(Base
      Salary + Maximum Target Bonus)
                
                100% vesting
      of restricted stock and options
                
                18
      months
                
                —Tamara
      Augustyn
                  Vice
      President and Principal Accounting Officer
                
                
                —
                
                —
                
                —
                
                —
                
                —
                
                —
                
                —
                
                
                —
                
                —
                
                —
                
                —
                
                —
                
                —
   (1)
                  Mr.
      Buckel resigned in November of
2007.
 Compensation
of Directors
  Effective
as of January 1, 2007, compensation for non-employee Directors is as
follows:
  •
                The
      cash fee for Directors for attendance at a Board meeting in person is
      $1,500 and by telephone is  $750 per meeting;•
                The
      cash fee for Directors for attendance at a Committee meeting in person is
      $1,000 and by telephone is  $750 per meeting;•
                The
      annual retainer paid to each Director is $20,000.•
                An
      annual stock option grant to each Director of 5,000 shares of the
      Company’s common stock. The options have an exercise price equal to 100%
      of the fair market value of our common stock on the date of grant and are
      fully vested and exercisable as of the date of
  grant;
 •
                An
      annual grant of 2,500 restricted stock units, which vests ratably over a
      three-year period, subject to the terms in the stock grant agreement and
      Stock Plan under which the restricted stock units are
    granted;
 •
                The
      Chair of the Compensation Committee of the Board of Directors receives an
      annual retainer of $7,500;
 •
                Other
      members of the Compensation Committee receive an annual retainer of
      $2,500;
 •
                Members
      of the Audit Committee, other than the Chair, receive an annual retainer
      of $5,000. The Audit Committee Chair’s retainer is
  $10,000.•
                The
      Chair of the Nominations and Governance Committee of the Board of
      Directors receives an annual retainer of
$5,000.
 •
                The
      Chairman of the Board of Directors receives an annual retainer of
      $40,000.
 •
                New
      non-employee Directors receive a grant of 12,500 restricted stock units,
      which vests ratably over a three-year period, subject to the terms of the
      stock grant agreement and Stock Plan under which the restricted stock
      units are  granted.
  We also
reimburse Directors for certain expenses in connection with attendance at Board
of Director and committee meetings. Directors who are also employees do not
receive any additional compensation for serving on the Board of Directors or any
committees of the Board of Directors.
  In
addition, the Board adopted a stock retention policy starting in 2007 that
requires each Director to retain a fixed percentage of the “net shares” he or
she acquires through stock option exercise and vesting of restricted stock
units. Net shares are shares obtained after costs of exercise and taxes to the
Director. For 2007, the stock retention requirement is fifty percent
(50%) of these net shares. A Director must retain the stock so acquired
until six months following the completion of his or her service as a Director.
The Board concluded that the best practices emerging in corporate governance
include such retention policies and adopted this stock retention policy to
further align the interests of the Directors with our stockholders’
interests.
  76
 The
following table provides information concerning the compensation of our
non-employee Directors for our most recently completed fiscal year.
  Name
                
                Fees
                  Earned or
                  Paid
      in
                  Cash
      $
                
                Stock
                  Awards
                  $(1)
                
                Option
                  Awards
                  $(1)
                
                Non-Equity
                  Incentive
                  Plan
                  Compensation
      $
                
                Change
      in
                  Pension Value and
                  Non-Qualified
                  Deferred
                  Compensation
                  Earnings
      $
                
                All
                  Other
                  Compensation
      (2)
                  $
                
                Total
      $Eidenberg,
      Eugene
                
                
                42,000
                
                4,779
                
                
                57,631
                
                —
                
                —
                
                
                9,879
                
                
                114,289Higgins,
      Patricia
                
                
                45,250
                
                4,779
                
                
                57,631
                
                —
                
                —
                
                
                —
                
                
                107,659Coe,
      Charles
                
                
                35,875
                
                4,779
                
                
                57,631
                
                —
                
                —
                
                
                2,113
                
                
                100,397Harding,
      William
                
                
                10,250
                
                4,779
                
                
                57,631
                
                —
                
                —
                
                
                1,497
                
                
                74,157Harman,
      Frederick (3)
                
                
                9,000
                
                —
                
                
                —
                
                —
                
                —
                
                
                2,399
                
                
                11,399Ober,
      Kevin
                
                
                33,000
                
                4,779
                
                
                57,631
                
                —
                
                —
                
                
                8,347
                
                
                103,757Pfeiffer,
      Gary
                
                
                10,250
                
                17,813
                
                
                —
                
                —
                
                —
                
                
                3,069
                
                
                31,132Stanzione,
      Daniel
                
                
                36,000
                
                4,779
                
                
                57,631
                
                —
                
                —
                
                
                124
                
                
                98,533
  
  (1)
                Based
      on the grant date fair value of outstanding awards that vested in 2007
      computed in accordance with FAS
123R.
 (2)
                Includes
      consulting fees and reimbursement for expenses.(3)
                Mr.
      Harman resigned on March 15, 2007.
  The Board also targets its compensation to the median based on a survey provided
by Aon for software and Internet technology companies with $200 to $499.9
million in revenues.
  The
following table lists the number of outstanding stock options and restricted
stock awards held by our non-employee Directors as of December 31,
2007.  All outstanding options are fully vested.
 
 Name
                  
                  Options
                  
                  Shares
      of
                    Restricted
                    StockEidenberg,
      Eugene
                  
                  
                  142,999
                  
                  2,500Higgins,
      Patricia
                  
                  
                  34,000
                  
                  2,500Coe,
      Charles
                  
                  
                  36,000
                  
                  2,500Harding,
      William (1)
                  
                  
                  —
                  
                  —Harman,
      Frederick (2)
                  
                  
                  —
                  
                  —Ober,
      Kevin
                  
                  
                  21,000
                  
                  2,500Pfeiffer,
      Gary
                  
                  
                  —
                  
                  12,500Stanzione,
      Daniel
                  
                  
                  34,000
                  
                  2,500
 
 (1)
                  
                  Dr.
      Harding retired from Morgan Stanley Venture Partners III, LLC and Morgan
      Stanley & Co., Inc. in October of 2007.  He assigned all of
      his equity compensation received while serving on our Board of Directors
      to Morgan Stanley, which consists of 2,500 shares of restricted common
      stock and options to purchase 27,000 shares of common stock that are
      vested and exercisable.  Dr. Harding disclaims beneficial
      ownership in all such shares. Because Dr. Harding has retired from Morgan
      Stanley, such shares are excluded from the table
  above.
 (2)
                  
                  Mr.
      Harman resigned on March 15,
2007.
  77
  Compensation
Committee Report
  The
Compensation Committee has reviewed and discussed with management the
Compensation Discussion and Analysis and, based on this review and discussion,
recommends that the Compensation Discussion and Analysis be included in the
proxy statement and filed with the Securities and Exchange
Commission.
  The
      Compensation CommitteeCharles
      B. Coe
 Patricia
      L. HigginsGary
      Pfeiffer
 Daniel
      Stanzione
  Note that
Mr. Harman served as a member of the Compensation Committee and resigned
from the Board of Directors on March 15, 2007. Accordingly, he did not
review the Compensation Discussion and Analysis and did not sign the
Compensation Committee Report.
  Compensation
Committee Interlocks and Insider Participation
  None of
the members of the Compensation Committee is a former or current officer or
employee of the Company or any of its subsidiaries. None of our executive
officers or Directors serves as a member of the board of directors or
compensation committee of any entity that has one or more ofits executive officers serving as a member of
our Board of Directors or Compensation
Committee.
  ITEM 12.  SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
  The
following table sets forth the beneficial ownership of shares of common stock as
of March 25, 2008 for:
  •
                our
      Directors and Director nominees;•
                our
      principal executive officer, our principal accounting officer, our three
      most highly compensated named executive officers other than the principal
      executive officer and principal accounting officer as of December 31,
      2007, and one individual who would have been the principal financial
      officer had he been an executive officer as of December 31,
      2007;•
                our
      Directors, Director nominees and executive officers as a group;
      and
 •
                each
      stockholder who holds more than a 5% interest in our outstanding common
      stock.
  Unless
otherwise indicated in the footnotes, all of such interests are owned directly
and the indicated person or entity has sole voting and disposition
power.
  Beneficial
ownership is determined in accordance with the rules of the SEC. In computing
the number of shares beneficially owned by a person and the percentage of
ownership held by that person, shares of common stock subject to options and
warrants held by that person that are currently exercisable or will become
exercisable within 60 days after March 25, 2008 are deemed outstanding,
while these shares are not deemed outstanding for computing percentage ownership
of any other person.
  78
 The
percentage of common stock beneficially owned is based on 50,249,871 shares of
our common stock outstanding at March 25, 2008.
  The
address for those individuals for which an address is not otherwise indicated
is: c/o Internap Network Services Corporation, 250 Williams Street, Atlanta,
Georgia 30303.
  Common
      Stock Beneficially OwnedNumber of Shares
                
                Percent of ClassTamara
      Augustyn (1)
                
                36,751
                
                *David
      A. Buckel (2)
                
                --
                
                --Charles
      B. Coe (3)
                
                53,500
                
                *James
      P. DeBlasio (4)
                
                681,323
                
                *Richard
      Dobb (5)
                
                66,235
                
                *Eugene
      Eidenberg (6)
                
                242,656
                
                *Franklin
      Resources, Inc. (7)
                
                3,696,290
                
                7.4%William
      J. Harding (8)
                
                24,783
                
                *Patricia
      L. Higgins (9)
                
                41,229
                
                *Integral
      Capital Management VII, LLC, Integral Capital Management VIII, LLC
                  and
      ICP Absolute Return Management, LLC (10)
                
                2,999,000
                
                6.0%Phil
      Kaplan (11)
                
                437,862
                
                *Kornitzer
      Capital Management, Inc. (12)
                
                3,736,800
                
                7.4%Vince
      Molinaro (13)
                
                194,771
                
                *Kevin
      L. Ober (14)
                
                23,500
                
                *Gary
      Pfeiffer (15)
                
                12,500
                
                *Daniel
      C. Stanzione (16)
                
                45,500
                
                *All
      Directors and executive officers as a group (13 persons)
                
                1,860,610
                
                3.7%
 
  
  * Less
than 1%.
 (1)
                Consists
      of 3,980 shares of restricted common stock awarded on March 20, 2008 that
      vest in 16 quarterly installments, 7,500shares
      of restricted common stock awarded on March 15, 2007 that vest in 16
      quarterly installments, 10,000 shares of restrictedcommon
      stock awarded on February 27, 2006 of which 12.5% vest every six months,
      and options to purchase 15,271 shares ofcommon
      stock that are vested and exercisable or that will vest within 60
      days.(2)
                Mr.
      Buckel resigned his position as Vice President and Chief Financial Officer
      on November 19, 2007.(3)
                Consists
      of 15,000 shares of common stock, 2,500 shares of restricted common stock
      awarded on June 22, 2007 one-third
      of which vest on each of the first, second and third anniversary of the
      grant date, provided Mr. Coe is a Directorof
      the Company on such date,and options to purchase 36,000 shares of
      common stock that arevested
      and exercisable.(4)
                Consists
      of: (i) 5,000 shares purchased in the open market; (ii) 100,000 shares of
      restricted stock of which 50,000 vested onSeptember
      30, 2006 and 17,325 shares were withheld to cover taxes, 16,667 vested on
      September 30, 2007 with 16,667 sharesto
      vest on September 30, 2008 and 16,666 shares to vest on September 30,
      2009, provided that Mr. DeBlasio is employed by the Company on such
      vesting dates.  Thus far, Mr. DeBlasio has sold 27,000 shares in
      accordance with his 10b-5 plan; (iii) 125,000shares
      of restricted stock that vest in a series of 16 quarterly installments at
      the end of each calendar quarter beginning with thesecond
      quarter of 2007 provided that Mr. DeBlasio is employed by the Company
      at the end of such quarter; (iv) 149,776 shares of restricted common stock
      awarded on March 20, 2008,half of which are
      time-based and half are performance-based vesting. The
      time-based portion vests in 16 equal quarterly installments. The
      performance-based portion vests in increments of one-third beginning on
      the first anniversary of the grant date if the Company achieves revenue
      and EBITDA levels established by theBoard.
      The Company will either meet or not meet both goals in a given year. With
      respect to all shares of performance-basedrestricted  stock
      that do not vest during any of the three years, 50% of such shares will
      vest on the fourth anniversary of the dateof
      the grant. The vesting of any restricted stock (including both time-based
      and performance-based) is subject to Mr. DeBlasiobeing
      an employee in good standing on the date of vesting; (v) 4,372 shares
      awarded on March 15, 2008; and (vi) and options to purchase 341,500 shares
      of common stock that are vested and exercisable or that will vest within
      60 days.(5)
                Consists
      of 30,000 shares of restricted common stock awarded on April 23, 2007 and
      25% of the award vests on the anniversaryof
      grant, provided that Mr. Dobb is employed by the Company on that date,
      1,628 shares awarded on March 15, 2008 that arefully
      vested, and 34,607 shares of restricted common stock awarded on March 20,
      2008, half of which are time-based and half are performance-based vesting.
      The time-based portion vests in 16 equal quarterly installments. The
      performance-based portion vests in increments of one-third beginning on
      the first anniversary of the grant date if the Company achieves revenue
      andEBITDA
      levels established by the Board. The Company will either meet or not meet
      both goals in a given year. With respectto
      all shares of performance-based restricted  stock that do not
      vest during any of the three years, 50% of such shares will veston
      the fourth anniversary of the date of the grant. The vesting of any
      restricted stock (including both time-based andperformance-based)
      is subject to Mr. Dobb being an employee in good standing on the date of
      vesting.(6)
                Consists
      of the 2,500 shares of restricted common stock awarded on June 22, 2007
      one-third of which vest on each of the first, second and third anniversary
      of the grant date, provided Dr. Eidenberg is a Director of the Company on
      such date, 236 shares of common stock held by Mr.Eidenberg,
      45,556 shares of common stock held by Mr. Eidenberg, as trustee of the
      Eugene Eidenberg Trust dated 9/97, 2,799shares
      of common stock held by Eugene Eidenberg, as trustee of the Anna M. Chavez
      Educational Trust, 40,000 shares ofcommon
      stock held by the Eugene Eidenberg Grantor Retained Annuity Trust, 8,566
      shares held by Anna M. Chavez, andoptions
      to purchase 142,999 shares of common stock that are vested and
      exercisable.
  79
  (7)
                  As
      of December 31, 2007. The address of Franklin Resources, Inc. is One
      Franklin Parkway, San Mateo, California 94403.(8)
                  Dr.
      Harding retired from Morgan Stanley Venture Partners III, LLC and Morgan
      Stanley & Co., Inc. in 2007.  He assigned all of his equity
      compensation received while serving on our Board of Directors to Morgan
      Stanley, which consists of 2,500 shares of restricted common stock and
      options to purchase 27,000 shares of common stock that are vested and
      exercisable.  Dr. Harding disclaims beneficial ownership in all
      such shares. Because Dr. Harding has retired from Morgan Stanley, such
      shares are excluded from the table above.(9)
                  Consists
      of 4,729 shares of common stock, 2,500 shares of restricted common stock
      awarded on June 22, 2007 one-third of which vest on each of the first,
      second and third anniversary of the grant date, provided Ms. Higgins is a
      Director of the Company on such date, and options to purchase 34,000
      shares of common stock that are vested and exercisable.(10)
                  As
      of January 4, 2008.  The address is 3000 Sand Hill Road,
      Building 3, Suite 240, Menlo Park, California
   94025.(11)
                  Consists
      of 329,321 shares owned by Mr. Kaplan’s family trust, options to purchase
      74,493 shares of common stock that are vested and exercisable or that will
      vest within 60 days and 34,048 shares of restricted common stock
      awarded on March 20, 2008, half of which are time-based and half are
      performance-based vesting. The time-based portion vests in 16 equal
      quarterly installments. The performance-based portion vests in increments
      of one-third beginning on the first anniversary of the grant date if the
      Company achieves revenue and EBITDA levels established by the Board. The
      Company will either meet or not meet both goals in a given year. With
      respect to all shares of performance-based restricted  stock
      that do not vest during any of the three years, 50% of such shares will
      vest on the fourth anniversary of the date of the grant. The vesting of
      any restricted stock (including both time-based and performance-based) is
      subject to Mr. Kaplan being an employee in good standing on the date of
      vesting.(12)
                  As
      of December 31, 2007. The address is 5420 West 61st Place, Shawnee
      Mission, Kansas  66205.(13)
                  Consists
      of 125,000 shares of restricted common stock awarded on April 24, 2007 of
      which 25% of the award vests on the anniversary of grant, provided that
      Mr. Molinaro is employed by the Company on that date and 69,771 shares of
      restricted common stock awarded on March 20, 2008, half of which are
      time-based and half are performance-based vesting. The time-based portion
      vests in 16 equal quarterly installments. The performance-based portion
      vests in increments of one-third beginning on the first anniversary of the
      grant date if the Company achieves revenue and EBITDA levels established
      by the Board. The Company will either meet or not meet both goals in a
      given year. With respect to all shares of performance-based restricted
      stock that do not vest during any of the three years, 50% of such shares
      will vest on the fourth anniversary of the date of the grant. The vesting
      of any restricted stock (including both time-based and performance-based)
      is subject to Mr. Molinaro being an employee in good standing on the date
      of vesting.  Mr. Molinaro resigned his position as Chief
      Operating Officer on April 7, 2008 and plans to remain an employee through
      June 30, 2008.(14)
                  Consists
      of 2,500 shares of restricted common stock awarded on June 22, 2007
      one-third of which vest on each of the first, second and third anniversary
      of the grant date, provided Mr. Ober is a Director of the Company on such
      date, and options to purchase 21,000 shares of common stock that are
      vested and exercisable.(15)
                  Consists
      of 12,500 shares of restricted common stock awarded on August 21, 2007
      one-third of which vest on each of the first, second and third anniversary
      of the grant date, provided Mr. Pfeiffer is a Director of the Company on
      such date.(16)
                  Consists
      of 9,000 shares purchased in the open market, 2,500 shares of restricted
      common stock awarded on June 22, 2007 one-third of which vest on each of
      the first, second and third anniversary of the grant date, provided Dr.
      Stanzione  is a Director of the Company on such date, and
      options to purchase 34,000 shares of common stock that are vested and
      exercisable.
  Equity
Compensation Plan Information
  Information
concerning our equity compensation plans is set forth under Part II - Item 5
"Equity Compensation Plan Information."
  ITEM 13.  CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
  We have
entered into indemnification agreements with our Directors and executive
officers for the indemnification of and advancement of expenses to such persons
to the fullest extent permitted by law. We also intend to enter into these
agreements with our future Directors and executive officers.
  There are
no transactions, since the beginning of our last fiscal year, or any currently
proposed transaction, in which the Company was or is to be a participant and the
amount involved exceeds $120,000, and in which any related person had or will
have a direct or indirect material interest.
  We do not
have policies and procedures for the review, approval, or ratification of any
transactions with related persons because we have never had occasion to consider
a related party transaction.
  The Board of Directors has
affirmatively determined that each current non-employee Director is an
“independent director” as that term is defined under NASDAQ rules and
regulations. Mr. DeBlasio, thePresident and Chief Executive Officer,
is not an independent Director because of his employment by the Company.
Mr. DeBlasio does not participate in any action of the Board or the
Compensation Committee related to his compensation.
  Additional information
concerning the independence of the members of our Board of Directors and its
committees is set forth under Part III - Item 10, "Directors, Executive Officers
and Corporate Governance."
 ITEM 14.  PRINCIPAL ACCOUNTING FEES
AND SERVICES.
 The
following table shows the fees paid or accrued by us for the audit and other
services provided by PricewaterhouseCoopers LLP for the fiscal years ended
December 31, 2007 and 2006.
  2007
                
                2006Audit
      Fees (1)
                
                $
                1,988,994
                
                $
                1,298,297Audit-Related
      Fees (2)
                
                
                325,694
                
                
                399,966Tax
      Fees (3)
                
                
                78,530
                
                
                52,768All
      Other Fees (4)
                
                
                1,500
                
                
                142,804Total
                
                $
                2,394,718
                
                $
                1,893,835
 
 
 
 (1)
                Fees
      related to the audit of Internap’s annual financial statements, including
      the audit of the effectiveness of internal control overfinancial
      reporting and the reviews of the quarterly financial statements filed on
      Forms 10-Q, and, for 2006, included the audit of management’s assessment
      of internal control over financial reporting.(2)
                Fees
      primarily related to international statutory filings and, in 2006, also
      included registration statements.(3)
                Fees
      primarily related to tax compliance, advice and
  planning.(4)
                Fees
      related to services performed in conjunction with other professional
      services.
  Approval
of Audit and Permissible Non-Audit Services
  Our Audit
Committee Charter requires the Audit Committee to review and approve all audit
services and all permissible non-audit services to be performed for us by our
independent registered public accounting firm, and the Audit Committee will not
approve any services that are not permitted by SEC rules.
  The Audit
Committee pre-approved all audit and audit related, tax and non-audit related
services to be performed for us by our independent registered public accounting
firm.
   80
  
 PART
IV
  ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES.
  (a)
              Documents
      filed as a part of the report:
  (1)
              Consolidated
      Financial Statements.
  The
following consolidated financial statements of the Company and its subsidiaries
are filed herewith:
 PageReport
      of Independent Registered Public Accounting Firm
              
              F-2Consolidated
      Statements of Operations
              
              F-3Consolidated
      Balance Sheets
              
              F-4Consolidated
      Statement of Stockholders’ Equity and Comprehensive Loss
              
              F-5Consolidated
      Statements of Cash Flows
              
              F-6Notes
      to Consolidated Financial Statements
              
              F-8
  (2)
              Financial
      Statement Schedule.
  The
following financial statement schedule of the Company and its subsidiaries is
filed herewith:
 PageSchedule
      II - Valuation and Qualifying Accounts for the Three Years Ended December
      31, 2007
              
              S-1
  (3)
              Index
      to Exhibits.
  Exhibit
                Number
              
              Description2.1
              
              Agreement
      and Plan of Merger dated October 12, 2006, by and among the Company, Ivy
      Acquisition Corp. and VitalStream Holdings, Inc. (incorporated herein by
      reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K,
      filed on October 12, 2006).3.1
              
              Certificate
      of Incorporation of the Company, as amended (incorporated by reference
      herein to Exhibit 4.1 to the Company’s Registration Statement on Form S-3,
      filed on September 8, 2003, File No. 333-108573).3.2
              
              Certificate
      of Amendment of Certificate of Incorporation of the Company (incorporated
      by reference herein to Exhibit 3.1 to the Company’s Current Report on Form
      8-K filed on July 11, 2006).3.3
              
              Amended
      and Restated Bylaws of the Company (incorporated by reference herein to
      Exhibit 4.2 to the Company’s Registration Statement on Form S-3, filed
      September 8, 2003, File No. 333-108573).3.4
              
              Certificate
      of Designation of Rights, Preferences and Privileges of Series B Preferred
      Stock (incorporated by reference herein to Exhibit 3.4 to the Company’s
      Current Report on Form 8-K filed on April 13, 2007).4.1
              
              Rights
      Agreement, dated as of April 11, 2007, between Internap Network Services
      Corporation and American Stock Transfer & Trust Company, as Rights
      Agreement (incorporated by reference to Exhibit 4.1 to the Company’s
      Current Report on Form 8-K, filed on April 13, 2007).10.1
              
              Form
      of Indemnification Agreement between the Company and each of its directors
      and certain of its officers (incorporated herein by reference to Exhibit
      10.1 to the Company’s Registration Statement on Form S-1, File No.
      333-84035 dated July 29, 1999).+
  
  81
  10.2
              
              Amended
      and Restated Internap Network Services Corporation 1998 Stock Option/Stock
      Issuance Plan (incorporated herein by reference to Exhibit 10.1 to the
      Company’s Quarterly Report on Form 10-Q for the quarter ended September
      30, 2000, filed on November 14, 2000).+10.3
              
              Internap
      Network Services Corporation 1999 Non-Employee Directors’ Stock Option
      Plan (incorporated herein by reference to Appendix L to the Company’s
      Definitive Proxy Statementdated
      April 29, 2003).+10.4
              
              First
      Amendment to the Internap Network Services Corporation 1999 Non-Employee
      Directors’ Stock Option Plan (incorporated herein by reference to
      Appendix  E to the Company’s Definitive Proxy Statement dated
      April 29, 2003).+10.5
              
              Internap
      Network Services Corporation 1999 Employee Stock Purchase Plan
      (incorporated herein by reference to Exhibit 10.4 to the Company’s
      Registration Statement on Form S-1, File No. 333-84035 dated July 29,
      1999).+10.6
              
              Amended
      and Restated Internap Network Services Corporation 1999 Stock Incentive
      Plan for Non-Officers (incorporated herein by reference to Exhibit 10.2 to
      the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2000, filed on November 14, 2000).+10.7
              
              Amended
      Internap Network Services Corporation 1999 Equity Incentive Plan
      (incorporated herein by reference to Exhibit 10.7 to the Company’s
      Registration Statement on Form S-1, File No. 333-95503 dated January 27,
      2000).+10.8
              
              Form
      of 1999 Equity Incentive Plan Stock Option Agreement (incorporated herein
      by reference to Exhibit 10.8 to the Company’s Registration Statement on
      Form S-1, File No. 333-84035 datedJuly
      29, 1999).+10.9
              
              Internap
      Network Services Corporation 2000 Non-Officer Equity Incentive Plan
      (incorporated herein by reference to Exhibit 99.1 to the Company’s
      Registration Statement on Form S-8, File No. 333-37400 dated May 19,
      2000).+10.10
              
              Internap
      Network Services Corporation 2002 Stock Compensation Plan (incorporated
      herein by reference to Exhibit 99(d)(1) to the Company’s Tender Offer
      Statement on Schedule TO, filed onNovember
      18, 2002).+10.11
              
              Form
      of Nonstatutory Stock Option Agreement under the Internap Network Services
      Corporation2002
      Stock Compensation Plan (incorporated herein by reference to Exhibit
      99(d)(2) to the Company’s Tender Offer Statement on Schedule TO, filed on
      November 18, 2002).+10.12
              
              Form
      of Employee Confidentiality, Nonraiding and Noncompetition Agreement used
      between Company and its Executive Officers (incorporated herein by
      reference to Exhibit 10.11 to the Company’s Registration Statement on Form
      S-1, File No. 333-84035 dated July 29, 1999).10.13
              
              Form
      of Warrant (incorporated herein by reference to Appendix E to the
      Company’s Definitive Proxy Statement dated August 10,
    2001).10.14
              
              Amended
      and Restated 2005 Incentive Stock Plan, dated March 15, 2006 (incorporated
      by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
      10-Q for the quarter ended March 31, 2006, filed on May 10,
      2006).+
  82
  10.15
              
              Employment
      Agreement dated as of July 10, 2007 between the Company and James DeBlasio
      (incorporated herein by reference to Exhibit 99.1 to the Company’s Current
      Report on Form 8-K, filed on July 11, 2007).+10.16
              
              First
      Amendment to Employment Agreement between James P. DeBlasio and Internap
      Network Services Corporation dated November 14, 2007 (incorporated herein
      by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K,
      filed on November 19, 2007).+
 10.17
              
              Amended
      and Restated 2004 Internap Network Services Corporation Employee Stock
      Purchase Plan, dated January 11, 2006 (incorporated by reference to
      Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended March 31, 2006, filed on May 10, 2006).+10.18
              
              Form
      of Stock Grant Certificate under the Amended and Restated Internap Network
      Services Corporation 2005 Incentive Stock Plan (incorporated by reference
      to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended June 30, 2006, filed on August 8, 2006).+10.19
              
              Form
      of Stock Option Grant Certificate under the Amended and Restated Internap
      Network Services Corporation 2005 Incentive Stock Plan (incorporated by
      reference to Exhibit 10.2 to the Company’sQuarterly
      Report on Form 10-Q for the quarter ended June 30, 2006, filed on August
      8, 2006).+10.20
              
              VitalStream Holdings, Inc. 2001
      Stock Incentive Plan (Third Amended and Restated) (incorporated by
      reference to Exhibit 4.4 to the Company’s Registration Statement on Form
      S-8, File No. 333-141245, filed on March
      13, 2007).+10.21
              
              Employment
      Agreement dated as of October 12, 2006 between the Company and Patrick
      Ritto (incorporated by reference to Exhibit 10.4 to the Company’s
      Registration Statement on Form S-4, filed on November 29, 2006, File No.
      33-138993 ).+10.22
              
              General
      Release and Separation Agreement between Eric Klinker and Internap Network
      ServicesCorporation
      (incorporated by reference to Exhibit 10.1 to the Company’s Current Report
      on Form 8-K, filed on April 12, 2007).+10.23
              
              2007
      Executive Bonus Award Incentive Plan (incorporated by reference to Exhibit
      10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      March  31, 2007, filed on May 10, 2007).+10.24
              
              Amendment
      to the 2007 Executive Bonus Award Incentive Plan (incorporated herein by
      reference to Exhibit 99.6  to the Company’s Current Report on
      Form 8-K, filed on November 19, 2007).+10.25
              
              Credit
      Agreement dated as of September 14, 2007 by and among Internap Network
      Services Corporation, as the Borrower, Bank of America, N.A., as
      Administrative Agent, Swing Line Lender and L/C Issuer, and the other
      Lenders party thereto (incorporated by reference to Exhibit 10.1 to the
      Company’s Current Report on Form 8-K, filed on September 19,
      2007).10.26
              
              Pledge
      and Security Agreement dated as of September 14, 2007 among Internap
      Network Services Corporation, and certain of its Subsidiaries party
      thereto from time to time, as Grantors, and Bank of America, N.A., as
      Administrative Agent (incorporated by reference to Exhibit 10.2 to the
      Company’s Current Report on Form 8-K, filed on September 19,
      2007).10.27
              
              Intellectual
      Property Security Agreement dated as of September 14, 2007 among Internap
      Network Services Corporation, and certain of its Subsidiaries party
      thereto from time to time, as Grantors, and Bank of America, N.A., as
      Administrative Agent (incorporated by reference to Exhibit 10.3 to the
      Company’s Current Report on Form 8-K, filed on September 19,
      2007).
  83
  10.28
              
              Employment
      Security Plan dated November 14, 2007 (incorporated herein by reference to
      Exhibit 99.2 to the Company’s Current Report on Form 8-K, filed on
      November 19, 2007).+10.29
              
              Joinder
      Agreement to the Employment Security Plan executed by Richard Dobb
      (incorporated herein by reference to Exhibit 99.3 to the Company’s Current
      Report on Form 8-K, filed on November 19, 2007).+10.30
              
              Joinder
      Agreement to the Employment Security Plan executed by Phil Kaplan
      (incorporated herein by reference to Exhibit 99.4 to the Company’s Current
      Report on Form 8-K, filed on November 19, 2007).+10.31
              
              Joinder
      Agreement to the Employment Security Plan executed by Vince Molinaro
      (incorporated herein by reference to Exhibit 99.5 to the Company’s Current
      Report on Form 8-K, filed on November 19, 2007).+21.1*
              
              List
      of Subsidiaries.23.1*
              
              Consent
      of PricewaterhouseCoopers LLP, Independent Registered Public Accounting
      Firm.31.1*
              
              Rule
      13a-14(a)/15d-14(a) Certification, executed James P. DeBlasio, President,
      Chief Executive Officer and Director the Company.31.2*
              
              Rule
      13a-14(a)/15d-14(a) Certification, executed by George Kilguss, Vice
      President and Chief Financial Officer of the
  Company.32.1*
              
              Section
      1350 Certification, executed by James P. DeBlasio, President, Chief
      Executive Officer and Director the Company.32.2*
              
              Section
      1350 Certification, executed by George Kilguss, Vice President and
      Chief Financial Officer of the
Company.
  
 *
              Documents
      filed herewith.
 
 +
              Management
      contracts and compensatory plans and arrangements required to be filed as
      exhibits pursuant to Item 15(c) of this
Report.
 
 
 84
 
 SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
 
 INTERNAP
      NETWORK SERVICES CORPORATIONDate:
      April 30, 2008By:
              
              /s/
      George KilgussGeorge
      Kilguss
                Vice
      President and ChiefFinancial
      Officer
   85
  Internap
Network Services Corporation
 Index
to Consolidated Financial Statements
 
 PageReport
      of Independent Registered Public Accounting Firm
              F-2Consolidated
      Statements of Operations
              F-3Consolidated
      Balance Sheets
              F-4Consolidated
      Statement of Stockholders' Equity and Comprehensive Loss
              F-5Consolidated
      Statements of Cash Flows
              F-6Notes
      to Consolidated Financial Statements
              F-8Financial
      Statement Schedule
              S-1
  
 
 F -
1
 
 Report
of Independent Registered Public Accounting Firm
 To the
Board of Directors and Stockholders of
 Internap
Network Services Corporation
 
 In our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(a)(1) present fairly, in all material respects, the financial
position of Internap Network Services Corporation and its subsidiaries, at
December 31, 2007 and 2006, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2007 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 15(a)(2) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. Also in our opinion, the Company did
not maintain, in all material respects, effective internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) because a material weakness in internal control over
financial reporting related to the completeness, accuracy, valuation and
disclosure of sales adjustments existed at that date.  A material
weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a
material misstatement of the annual or interim financial statements will not be
prevented or detected on a timely basis. The material weakness referred to above
is described in Management's Report on Internal Control Over Financial Reporting
appearing under Item 9A. We considered this material weakness in determining the
nature, timing, and extent of audit tests applied in our audit of the 2007
consolidatedfinancial statements,
and our opinion regarding the effectiveness of the Company’s internal control
over financial reporting does not affect our opinion on those consolidatedfinancial statements.
The Company’s management is responsible for these financial statements and
financial statement schedule, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in management's report referred to
above. Our responsibility is to express opinions on these financial statements,
on the financial statement schedule, and on the Company’s internal control over
financial reporting based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
 
 As
discussed in Note 2 to the consolidated financial statements, the Company
changed the manner in which it accounts for share-based compensation in 2006 and
the manner in which it accounts for uncertain tax positions in
2007.
  A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  /s/  PricewaterhouseCoopers
LLP
 Atlanta,
GA
 March 28,
2008
 F -
2
  INTERNAP NETWORK SERVICES CORPORATION AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (In
thousands, except per share amounts)
 
 Year
      Ended December 31,2007
              
              
              2006
              
              
              2005Revenues:Internet
      protocol (IP) services
              
              $
              119,848
              
              
              $
              109,748
              
              
              $
              105,032Data
      center services
              
              
              83,058
              
              
              
              56,152
              
              
              
              36,996Content
      delivery network (CDN) services
              
              
              17,718
              
              
              
              —
              
              
              
              —Other
              
              
              13,466
              
              
              
              15,475
              
              
              
              11,689Total
      revenues
              
              
              234,090
              
              
              
              181,375
              
              
              
              153,717Operating
      costs and expenses:Direct
      costs of network, sales and services, exclusive of depreciation and
      amortization, shown below:IP
      services
              
              
              43,681
              
              
              
              39,744
              
              
              
              38,377Data
      center services
              
              
              59,439
              
              
              
              46,474
              
              
              
              35,244CDN
      services
              
              
              6,584
              
              
              
              —
              
              
              
              —Other
              
              
              8,690
              
              
              
              11,120
              
              
              
              8,337Direct
      costs of amortization of acquired technologies
              
              
              4,165
              
              
              
              516
              
              
              
              577Direct
      costs of customer support
              
              
              16,547
              
              
              
              11,566
              
              
              
              10,670Product
      development
              
              
              6,564
              
              
              
              4,475
              
              
              
              4,864Sales
      and marketing
              
              
              31,533
              
              
              
              27,173
              
              
              
              25,864General
      and administrative
              
              
              32,512
              
              
              
              22,104
              
              
              
              20,096Depreciation
      and amortization
              
              
              22,242
              
              
              
              15,856
              
              
              
              14,737Gain
      on disposals of property and equipment
              
              
              (5
              )
              
              
              (113
              )
              
              
              (19
              )Restructuring
      and asset impairment
              
              
              11,349
              
              
              
              323
              
              
              
              44Acquired
      in-process research and development
              
              
              450
              
              
              
              —
              
              
              
              —Other
              
              
              50
              
              
              
              —
              
              
              
              —Amortization
      of deferred stock compensation
              
              
              —
              
              
              
              —
              
              
              
              60Total
      operating costs and expenses
              
              
              243,801
              
              
              
              179,238
              
              
              
              158,851(Loss)
      income from operations
              
              
              (9,711
              )
              
              
              2,137
              
              
              
              (5,134
              )Non-operating
      (income) expense:Interest
      income
              
              
              (3,228
              )
              
              
              (2,305
              )
              
              
              (1,284
              )Interest
      expense
              
              
              1,111
              
              
              
              883
              
              
              
              1,373Write-off
      of investment
              
              
              1,178
              
              
              
              —
              
              
              
              —Other,
      net
              
              
              2
              
              
              
              (129
              )
              
              
              (176
              )Total
      non-operating (income) expense
              
              
              (937
              )
              
              
              (1,551
              )
              
              
              (87
              )(Loss)
      income before income taxes and equity in earnings of equity-method
      investment
              
              
              (8,774
              )
              
              
              3,688
              
              
              
              (5,047
              )(Benefit)
      provision for income taxes
              
              
              (3,080
              )
              
              
              145
              
              
              
              —Equity
      in earnings of equity-method investment, net of taxes
              
              
              (139
              )
              
              
              (114
              )
              
              
              (83
              )Net
      (loss) income
              
              $
              (5,555
              )
              
              $
              3,657
              
              
              $
              (4,964
              )Net
      (loss) income per share:Basic
              
              $
              (0.12
              )
              
              $
              0.11
              
              
              $
              (0.15
              )Diluted
              
              $
              (0.12
              )
              
              $
              0.10
              
              
              $
              (0.15
              )Weighted
      average shares used in per share calculations:Basic
              
              
              46,942
              
              
              
              34,748
              
              
              
              33,939Diluted
              
              
              46,942
              
              
              
              35,739
              
              
              
              33,939
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
 
 F -
3
 INTERNAP NETWORK SERVICES CORPORATION AND
SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 (In
thousands, except per share amounts)
  December
      31,2007
                
                
                2006ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                52,030
                
                
                $
                45,591Short-term
      investments in marketable securities
                
                
                19,569
                
                
                
                13,291Accounts
      receivable, net of allowance of $5,470 and $888,
    respectively
                
                
                36,429
                
                
                
                20,282Inventory
                
                
                304
                
                
                
                474Prepaid
      expenses and other assets
                
                
                8,464
                
                
                
                3,818Deferred
      tax asset, current portion
                
                
                479
                
                
                
                —Total
      current assets
                
                
                117,275
                
                
                
                83,456Property
      and equipment, net
                
                
                65,491
                
                
                
                47,493Investments
                
                
                1,138
                
                
                
                2,135Intangible
      assets, net
                
                
                43,008
                
                
                
                1,785Goodwill
                
                
                190,677
                
                
                
                36,314Restricted
      cash
                
                
                4,120
                
                
                
                —Deferred
      tax asset, non-current
                
                
                3,014
                
                
                
                —Deposits
      and other assets
                
                
                2,287
                
                
                
                2,519Total
      assets
                
                $
                427,010
                
                
                $
                173,702LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Notes
      payable, current portion
                
                $
                2,413
                
                
                $
                4,375Accounts
      payable
                
                
                19,624
                
                
                
                8,776Accrued
      liabilities
                
                
                10,159
                
                
                
                8,689Deferred
      revenue, current portion
                
                
                4,807
                
                
                
                3,260Capital
      lease obligations, current portion
                
                
                805
                
                
                
                347Restructuring
      liability, current portion
                
                
                2,396
                
                
                
                1,400Other
      current liabilities
                
                
                108
                
                
                
                84Total
      current liabilities
                
                
                40,312
                
                
                
                26,931Notes
      payable, less current portion
                
                
                17,354
                
                
                
                3,281Deferred
      revenue, less current portion
                
                
                2,275
                
                
                
                1,080Capital
      lease obligations, less current portion
                
                
                452
                
                
                
                83Restructuring
      liability, less current portion
                
                
                7,697
                
                
                
                3,384Deferred
      rent
                
                
                11,011
                
                
                
                11,432Deferred
      tax liability
                
                
                398
                
                
                
                —Other
      long-term liabilities
                
                
                878
                
                
                
                986Total
      liabilities
                
                
                80,377
                
                
                
                47,177Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $0.001 par value, 200,000 shares authorized, no shares issued or
      outstanding
                
                
                —
                
                
                
                —Common
      stock, $0.001 par value, 60,000 shares authorized, 49,759 and 35,873
      shares issued and outstanding, respectively
                
                
                50
                
                
                
                36Additional
      paid-in capital
                
                
                1,208,191
                
                
                
                982,624Accumulated
      deficit
                
                
                (862,010
                )
                
                
                (856,455
                )Accumulated
      items of other comprehensive income
                
                
                402
                
                
                
                320Total
      stockholders’ equity
                
                
                346,633
                
                
                
                126,525Total
      liabilities and stockholders’ equity
                
                $
                427,010
                
                
                $
                173,702
 
 F -
4
 
 INTERNAP NETWORK SERVICES CORPORATION AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE (LOSS) INCOME
 For
the Three Years Ended December 31, 2007
 (In
thousands)
 
 Common
      StockShares
              
              
              Par
                Value
              
              
              Additional
                Paid-In
                Capital
              
              
              Treasury
                Stock
              
              
              Deferred
                Stock
                Compensation
              
              
              Accumulated
                Deficit
              
              
              Accumulated
                Items
      of
                Comprehensive
      Income (Loss)
              
              
              Total
                Stockholders’
                EquityBalance,
      December
      31, 2004
              
              
              33,815
              
              
              $
              34
              
              
              $
              968,255
              
              
              $
              —
              
              
              $
              —
              
              
              $
              (855,148
              )
              
              $
              597
              
              
              $
              113,738Net loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (4,964
              )
              
              
              —
              
              
              
              (4,964
              )Change in unrealized gains and
      losses on investments, net of taxes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (118
              )
              
              
              (118
              )Foreign currency translation
      adjustment
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (474
              )
              
              
              (474
              )Total
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,556
              )Deferred stock compensation
      grant
              
              
              —
              
              
              
              —
              
              
              
              480
              
              
              
              —
              
              
              
              (480
              )
              
              
              —
              
              
              
              —
              
              
              
              —Amortization of deferred stock
      compensation
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              60
              
              
              
              —
              
              
              
              —
              
              
              
              60Stock compensation plans
      activity
              
              
              353
              
              
              
              —
              
              
              
              1,486
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,486Balance,
      December
      31, 2005
              
              
              34,168
              
              
              
              34
              
              
              
              970,221
              
              
              
              —
              
              
              
              (420
              )
              
              
              (860,112
              )
              
              
              5
              
              
              
              109,728Net income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              3,657
              
              
              
              —
              
              
              
              3,657Change in unrealized gains and
      losses on investments, net of taxes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              80
              
              
              
              80Foreign currency translation
      adjustment
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              235
              
              
              
              235Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,972Reclassification of deferred
      stock compensation resulting from implementation of SFAS No.
      123R
              
              
              —
              
              
              
              —
              
              
              
              (420
              )
              
              
              —
              
              
              
              420
              
              
              
              —
              
              
              
              —
              
              
              
              —Stock-based
      compensation
              
              
              578
              
              
              
              1
              
              
              
              5,985
              
              
              
              (395
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              5,591Stock compensation plans
      activity
              
              
              576
              
              
              
              1
              
              
              
              3,030
              
              
              
              395
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              3,426Exercise
      of warrants
              
              
              551
              
              
              
              —
              
              
              
              3,808
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              3,808Balance,
      December
      31, 2006
              
              
              35,873
              
              
              
              36
              
              
              
              982,624
              
              
              
              —
              
              
              
              —
              
              
              
              (856,455
              )
              
              
              320
              
              
              
              126,525Net loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (5,555
              )
              
              
              —
              
              
              
              (5,555
              )Change in unrealized gains and
      losses on investments, net of taxes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (25
              )
              
              
              (25
              )Foreign currency translation
      adjustment
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              107
              
              
              
              107Total
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,473
              )Stock issued in connection with
      VitalStream acquisition
              
              
              12,206
              
              
              
              12
              
              
              
              208,281
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              208,293Stock-based
      compensation
              
              
              420
              
              
              
              1
              
              
              
              8,705
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              8,706Stock compensation plans
      activity
              
              
              1,260
              
              
              
              1
              
              
              
              8,581
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              8,582Balance,
      December
      31, 2007
              
              
              49,759
              
              
              $
              50
              
              
              $
              1,208,191
              
              
              $
              —
              
              
              $
              —
              
              
              $
              (862,010
              )
              
              $
              402
              
              
              $
              346,633
 
 See note
2 for information on effect of 10-for-1 reverse stock split in July
2006.
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
 
 F -
5
 
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (In
thousands)
  Year
      Ended December 31,2007
              
              
              2006
              
              
              2005Cash
      flows from operating activities:Net
      (loss) income
              
              $
              (5,555
              )
              
              $
              3,657
              
              
              $
              (4,964
              )Adjustments
      to reconcile net (loss) income to net cash provided by operating
      activities:Depreciation
      and amortization
              
              
              26,407
              
              
              
              16,372
              
              
              
              15,314Gain
      on disposal of property and equipment, net
              
              
              (5
              )
              
              
              (113
              )
              
              
              (19
              )Asset
      impairment
              
              
              2,454
              
              
              
              319
              
              
              
              —Acquired
      in-process research and development
              
              
              450
              
              
              
              —
              
              
              
              —Stock-based
      compensation expense
              
              
              8,681
              
              
              
              5,942
              
              
              
              75Write-off
      of investment
              
              
              1,178
              
              
              
              —
              
              
              
              —Equity
      in earnings from equity-method investment
              
              
              (139
              )
              
              
              (114
              )
              
              
              (83
              )Provision
      for doubtful accounts
              
              
              2,261
              
              
              
              548
              
              
              
              1,431Non-cash
      changes in deferred rent
              
              
              (421
              )
              
              
              2,247
              
              
              
              2,690Lease
      incentives
              
              
              —
              
              
              
              —
              
              
              
              713Deferred
      income taxes
              
              
              (3,095
              )
              
              
              —
              
              
              
              —Other,
      net
              
              
              (84
              )
              
              
              212
              
              
              
              (397
              )Changes
      in operating assets and liabilities, excluding effects of
      acquisition:Accounts
      receivable
              
              
              (15,825
              )
              
              
              (1,702
              )
              
              
              (3,616
              )Inventory,
      prepaid expenses, deposits and other assets
              
              
              (2,182
              )
              
              
              (1,778
              )
              
              
              (170
              )Accounts
      payable
              
              
              7,920
              
              
              
              3,010
              
              
              
              (5,433
              )Accrued
      and other liabilities
              
              
              (2,466
              )
              
              
              1,422
              
              
              
              805Deferred
      revenue
              
              
              2,704
              
              
              
              1,070
              
              
              
              1,023Accrued
      restructuring liability
              
              
              5,309
              
              
              
              (1,493
              )
              
              
              (1,876
              )Net
      cash flows provided by operating activities
              
              
              27,592
              
              
              
              29,599
              
              
              
              5,493Cash
      flows from investing activities:Purchases
      of short-term investments in marketable securities
              
              
              (38,508
              )
              
              
              (17,427
              )
              
              
              (18,710
              )Maturities
      of short-term investments in marketable securities
              
              
              32,395
              
              
              
              20,277
              
              
              
              19,350Purchases
      of property and equipment
              
              
              (30,271
              )
              
              
              (13,382
              )
              
              
              (10,161
              )Proceeds
      from disposal of property and equipment
              
              
              5
              
              
              
              133
              
              
              
              17Cash
      received from acquisition, net of costs incurred for the
      transaction
              
              
              3,203
              
              
              
              —
              
              
              
              —Change
      in restricted cash, excluding effects of acquisition
              
              
              (3,217
              )
              
              
              —
              
              
              
              76Net
      cash flows used in investing activities
              
              
              (36,393
              )
              
              
              (10,399
              )
              
              
              (9,428
              )
 
 
 F -
6
 
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS
OF CASH FLOWS (Continued)
 (In
thousands)
  Year
      Ended December 31,2007
              
              
              2006
              
              
              2005Cash
      flows from financing activities:Proceeds
      from notes payable, net of discount
              
              
              19,742
              
              
              
              —
              
              
              
              —Principal
      payments on notes payable
              
              
              (11,318
              )
              
              
              (4,375
              )
              
              
              (6,483
              )Payments
      on capital lease obligations
              
              
              (1,617
              )
              
              
              (538
              )
              
              
              (512
              )Debt
      issuance costs
              
              
              (65
              )
              
              
              —
              
              
              
              —Proceeds
      from exercise of stock options and employee stock purchase
      plan
              
              
              8,582
              
              
              
              3,031
              
              
              
              1,471Proceeds
      from exercise of warrants
              
              
              —
              
              
              
              3,808
              
              
              
              —Other,
      net
              
              
              (84
              )
              
              
              31
              
              
              
              70Net
      cash flows provided by (used in) financing activities
              
              
              15,240
              
              
              
              1,957
              
              
              
              (5,454
              )Net
      increase (decrease) in cash and cash equivalents
              
              
              6,439
              
              
              
              21,157
              
              
              
              (9,389
              )Cash
      and cash equivalents at beginning of period
              
              
              45,591
              
              
              
              24,434
              
              
              
              33,823Cash
      and cash equivalents at end of period
              
              $
              52,030
              
              
              $
              45,591
              
              
              $
              24,434Supplemental disclosure of cash
      flow information:Common
      stock issued and stock options assumed for acquisition of
      VitalStream
              
              $
              208,293
              
              
              $
              —
              
              
              $
              —Cash
      paid for interest, net of amounts capitalized
              
              
              1,152
              
              
              
              793
              
              
              
              1,223Cash
      paid for income taxes
              
              
              103
              
              
              
              149
              
              
              
              —Non-cash
      acquisition of property and equipment
              
              
              148
              
              
              
              162
              
              
              
              971Capitalized
      stock-based compensation
              
              
              25
              
              
              
              44
              
              
              
              —
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
 
 F -
7
 
 INTERNAP
NETWORK SERVICES CORPORATIONAND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 1.
              DESCRIPTION
      OF THE COMPANY AND NATURE OF
OPERATIONS
 
 Internap
Network Services Corporation (“Internap,” “we,” “us,” “our,” or the “Company”)
delivers high performance and reliable Internet solutions through a suite of
network optimization and delivery products and services. These solutions,
combined with progressive and proactive technical support, enable companies to
confidently migrate business-critical applications, including audio and video
streaming and monetization services, to the Internet. Our suite of products and
services support a broad range of Internet applications. We serve both domestic
and international customers in the financial services, healthcare, technology,
retail, travel, media/entertainment and other markets. Our product and service
offerings are complemented by Internet Protocol, or IP, access solutions such as
data center services, content delivery networks, or CDN, and managed security.
We deliver services through our 50 service points across North America, Europe
and the Asia-Pacific region. Our Private Network Access Points, or P-NAPs,
feature multiple direct high-speed connections to major Internet networks
including AT&T Inc., Sprint Nextel Corporation, Verizon Communications
Inc., Savvis Inc., Global Crossing Limited, and Level 3 Communications, Inc. We
operate and manage the Company in three business segments: IP services, data
center services and CDN services. Prior to 2007 we operated and managed the
Company as a single business segment.
 
 The
nature of our business subjects us to certain risks and uncertainties frequently
encountered by rapidly evolving markets. These risks include the failure to
develop or supply technology or services, the ability to obtain adequate
financing, competition within the industry and technology trends.
 
 Although
we have been in existence since 1996, we have incurred significant operational
restructurings in recent years, which have included substantial changes in our
senior management team, streamlining our cost structure, consolidating network
access points, terminating certain non-strategic real estate leases and license
arrangements. We have a history of quarterly and annual period net losses
through the year ended December 31, 2005. For the year ended December 31, 2006
we recognized net income in each quarter. For the year ended December 31, 2007
we recognized a year to date net loss $5.6 million. At December 31, 2007, our
accumulated deficit was $862.0 million. We continue to analyze our business to
control our costs, principally through making process enhancements and
renegotiating network contracts for more favorable pricing and
terms.
  As
discussed in note 18, we revised our quarterly statement of operations for the
quarter ended September 30, 2007 to appropriately record (1) $0.5 million for
sales adjustments, which reduce net accounts receivable and revenue, and (2)
$0.1 million for accretion of interest income that we initially included as
unrealized gain in accumulated other comprehensive income within stockholders’
equity.
 2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
  Accounting
principles
 
 The
consolidated financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States of
America. The consolidated financial statements include the accounts of Internap
and all majority owned subsidiaries. Significant inter-company transactions have
been eliminated in consolidation.
 
 Estimates
and assumptions
 
 The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenue
and expense, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates, including those related to revenue
recognition, doubtful accounts, cost-basis investments, intangible assets,
accruals, stock-based compensation, income taxes, restructuring costs, long-term
service contracts, contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ materially
from these estimates.
  F -
8
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Cash
and cash equivalents
 
 We
consider all highly liquid investments purchased with an original maturity of
three months or less at the date of purchase and money market mutual funds to be
cash equivalents. We invest our cash and cash equivalents with major financial
institutions and may at times exceed federally insured limits. We believe that
the risk of loss is minimal. To date, we have not experienced any losses related
to cash and cash equivalents.
 
 Restricted
cash
 
 Restricted
cash represents time deposits used to secure letters of credit on certain of our
real estate leases and a capital lease for equipment. The letters of credit for
the real estate leases were secured by our former credit agreement and are in
the process of being secured under our new credit agreement.  The
letter of credit securing the capital lease for equipment was assumed in the
VitalStream acquisition.
 
 Investments
in marketable securities
 
 We
account for marketable securities in accordance with Statement of Financial
Accounting Standards, or SFAS, No. 115, “Accounting for Certain Investments in
Debt and Equity Securities.” Management determines the appropriate
classification of marketable securities at the time of purchase. At December 31,
2007 and 2006, all marketable securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses reported in other comprehensive income. Our marketable
securities are reviewed each reporting period for declines in value that are
considered to be other-than-temporary and, if appropriate, written down to their
estimated fair value. Any realized gains or losses or declines in value judged
to be other-than-temporary on available-for-sale securities are included in
other non-operating (income) expense in the consolidated statements of
operations. The cost of securities sold is based on the specific identification
method. Interest on securities classified as available-for-sale is included in
interest income in the consolidated statements of operations.
 
 Other
investments
 
 We
account for investments without readily determinable fair values at historical
cost, as determined by our initial investment. The recorded value of cost basis
investments is periodically reviewed to determine the propriety of the recorded
basis. When a decline in the value that is judged to be other than temporary has
occurred based on available data, the cost basis is reduced and an investment
loss is recorded.
 
 We
incurred a charge during the three months ended June 30, 2007, totaling $1.2
million, representing the write-off of the remaining carrying value of our
investment in series D preferred stock of Aventail Corporation, or Aventail. See
note 6 for further discussion of this investment and the recorded loss. As
of December 31, 2006, the carrying value of the Aventail investment of $1.2
million was recorded in non-current investments in the accompanying consolidated
balance sheet.
 
 We
account for investments that provide us with the ability to exercise significant
influence, but not control, over an investee using the equity method of
accounting. Significant influence, but not control, is generally deemed to exist
if we have an ownership interest in the voting stock of the investee of between
20% and 50%, although other factors, such as minority interest protections, are
considered in determining whether the equity method of accounting is
appropriate. As of December 31, 2007, Internap Japan Co. Ltd., or Internap
Japan, our joint venture with NTT-ME Corporation and Nippon Telegraph and
Telephone Corporation, or NTT Holdings, qualifies for equity method accounting.
We record our proportional share of the income and losses of Internap Japan one
month in arrears on the consolidated balance sheets as a component of
non-current investments and our share of Internap Japan’s income and losses, net
of taxes, as separate caption in our consolidated statement of
operations.
  Fair
value of financial instruments
 
 Our
short-term financial instruments, including cash and cash equivalents, accounts
receivable, accounts payable, note payable, and capital lease obligations are
carried at cost. Our investments in marketable securities are recorded at fair
value. Our marketable securities are designated as available for sale with
changes in fair value reflected in other comprehensive income. The carrying
value of our long-term financial instruments, including note payable and capital
lease obligations, approximate fair value as the interest rates approximate
current market rates of similar debt obligations.
 
 F -
9
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Financial
instrument credit risk
 
 Financial
instruments that potentially subject us to a concentration of credit risk
principally consist of cash, cash equivalents, marketable securities and trade
receivables. We currently invest the majority of our cash and cash equivalents
in money market funds and maintain them with financial institutions with high
credit ratings. We also invest in high credit quality corporate debt securities,
auction rate securities whose underlying assets are state-issued student and
educational loans which are substantially backed by the federal government,
commercial paper, and U.S. Government Agency debt securities pursuant to a
formal investment policy. As of December 31, 2007, we have a total of $7.2
million invested in auction rate securities.  Uncertainties in the
credit markets may affect the liquidity of our holdings in auction rate
securities.  We did not experience any unsuccessful auction rate
resets during the year ended or on the initial rate resets immediately following
December 31, 2007, however we have experienced failures on each of our
subsequent auction rate resets.  Nevertheless, we continue to receive
interest every 28-35 days. While our investments are of high credit quality, at
this time we are uncertain as to whether or when the liquidity issues relating
to these investments will worsen or improve. We do not believe that it is
necessary at this time to adjust the fair value of our portfolio of auction rate
securities. We also perform periodic evaluations of the relative credit ratings
of the financial institutions with whom we invest as part of our cash management
process. We have not experienced any credit losses on our cash, cash equivalents
or marketable securities.
 
 Inventory
 
 Inventory
is carried at the lower of cost or market using the first-in, first-out method.
Cost includes materials related to the assembly of our Flow Control Platform, or
FCP solutions.
 
 Property
and equipment
 
 Property
and equipment are carried at original acquisition cost less accumulated
depreciation and amortization. Depreciation and amortization are calculated on a
straight-line basis over the lesser of the estimated useful lives of the assets
or the lease term. Estimated useful lives used for network equipment are
generally three years; furniture, equipment and software are three to seven
years; and leasehold improvements are seven years or over the lease term,
depending on the nature of the improvement, but in no event beyond the expected
lease term. The duration of lease obligations and commitments range from 24
months for certain networking equipment to 240 months for certain facility
leases. Additions and improvements that increase the value or extend the life of
an asset are capitalized. Maintenance and repairs are expensed as incurred.
Gains or losses from disposals of property and equipment are charged to
operations.
 
 Leases
and leasehold improvements
 
 We record
leases as capital or operating leases and account for leasehold improvements in
accordance with SFAS No. 13, “Accounting for Leases” and related literature.
Rent expense for operating leases is recorded in accordance with Financial
Accounting Standards Board, or FASB, Technical Bulletin, or FTB, No. 88-1,
“Issues Relating to Accounting for Leases.” This FTB requires lease agreements
that include periods of free rent or other incentives, specific escalating lease
payments, or both, to be recorded on a straight-line or other systematic basis
over the initial lease term and those renewal periods that are reasonably
assured. The difference between rent expense and rent paid is recorded as
deferred rent in non-current liabilities in the consolidated balance
sheets.
  F -
10
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Costs
of computer software development
 
 In
accordance with the American Institute of Certified Public Accountants’
Statement of Position 98-1, “Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use,” we capitalize certain direct costs
incurred developing internal use software. We capitalized $1.6 million and $0.9
million in internal software development costs for the years ended December 31,
2007 and 2006, respectively. We did not capitalize any costs during the year
ended December 31, 2005. During the year ended December 31, 2007, we impaired
$1.1 million of software development costs capitalized prior to December 31,
2005 related to the implementation of a billing and order entry system initiated
during 2004. Subsequent to our acquisition of VitalStream, we determined that we
would utilize our legacy billing system and abandon the former project because
(1) the developer of our financial software purchased the developer of our
legacy billing system, and (2) the legacy billing system would be more flexible
in integrating the VitalStream business.  During the year ended
December 31, 2006, we impaired $0.3 million of software development costs
capitalized prior to December 31, 2005 related to the implementation of our
financial system software also initiated during 2004. Amortization expense on
internally developed software commences when the software project is ready for
its intended use.
 
 As of
December 31, 2007 and 2006, the balance of unamortized software costs was $2.7
million and $2.5 million, respectively, and for the year ended December 31,
2007, amortization expense was $0.2 million. The software was not ready for its
intended use and had not been placed in service as of December 31, 2006;
therefore, no amortization expense was recorded for the years ended December 31,
2006 or 2005.
  For the
year ended December 31, 2005 we capitalized $0.5 million of costs for internally
developed software in accordance with SFAS No. 86, “Accounting for the Costs of
Computer Software to Be Sold, Leased or Otherwise Marketed.” No amounts were
capitalized for the years ended December 31, 2007 or 2006. As of December 31,
2007 and 2006, the balance of unamortized software costs was $0.1 million and
$0.2 million, respectively. Amortization expense was $0.2 million, $0.2 million,
and $0.4 million for the years ended December 31, 2007, 2006, and 2005,
respectively.
 
 Goodwill
and other intangible assets
  In
accordance with SFAS No. 142 "Goodwill and Other Intangible Assets," we
review our goodwill for impairment annually, or more frequently, if facts and
circumstances warrant a review. The provisions of SFAS No. 142 require that
a two-step test be performed to assess goodwill for impairment. First, the fair
value of each reporting unit is compared to its carrying value. If the fair
value exceeds the carrying value, goodwill is not impaired and no further
testing is performed. The second step is performed if the carrying value exceeds
the fair value. The implied fair value of the reporting unit's goodwill must be
determined and compared to the carrying value of the goodwill. If the carrying
value of a reporting unit's goodwill exceeds its implied fair value, an
impairment loss equal to the difference will be recorded. We completed our
annual goodwill impairment test as of August 1, 2007 and determined that the
carrying amount of goodwill was not impaired.
  Other
acquired intangible assets, including developed technologies and patents, have
finite lives and we have recorded these assets at cost less accumulated
amortization. Amortization is calculated on a straight-line basis over the
estimated economic useful life of the assets, which are three to seven years for
developed technologies and fifteen years for patents.
 
 Valuation
of long-lived assets
 
 Management
periodically evaluates the carrying value of its long-lived assets, including,
but not limited to, property and equipment pursuant to the guidance provided by
SFAS No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets.”
The carrying value of a long-lived asset is considered impaired when the
undiscounted cash flows from such asset is separately identifiable and is
estimated to be less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
value of the long-lived asset. Fair value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved.
Losses on long-lived assets to be disposed of would be determined in a similar
manner, except that fair values would be reduced by the cost of disposal. Losses
due to impairment of long-lived assets are charged to operations during the
period in which the impairment is identified.
  F -
11
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Accruals
for disputed telecommunication costs
  In
delivering our services, we rely on a number of Internet network,
telecommunication and other vendors. We work directly with these vendors to
provision services such as establishing, modifying or discontinuing services for
our customers. Because of the volume of activity, billing disputes inevitably
arise. These disputes typically stem from disagreements concerning the starting
and ending dates of service, quoted rates, usage, and various other factors. For
potential billing errors made in the vendor’s favor, for example a duplicate
billing, we initiate a formal dispute with the vendor and record the related
cost and liability on a range of 5% to 100% of the disputed amount, depending on
our assessment of the likely outcome of the dispute. Conversely, for billing
errors in our favor, such as the vendor’s failure to invoice us for new service,
we record an estimate for the related cost and liability based on the full
amount that we should have been invoiced. Disputed costs, both in the vendors’
favor and our favor, are researched and discussed with vendors on an ongoing
basis until ultimately resolved. Estimates are periodically reviewed by
management and modified in light of new information or developments, if any.
Conversely, any resolved disputes that will result in a credit over the disputed
amounts are recognized in the appropriate month when the resolution has been
determined. Because estimates regarding disputed costs include assessments
of uncertain outcomes, such estimates are inherently vulnerable to changes due
to unforeseen circumstances that could materially and adversely affect our
consolidated financial condition, results of operations and cash
flows.
 
 Accrued
liabilities
 
 Similar
to accruals for disputed telecommunications costs above, it is necessary for us
to estimate other significant costs such as utilities and sales, use,
telecommunications, and other taxes. These estimates are often necessary either
because invoices for services are not received on a timely basis from our
vendors or by virtue of the complexity surrounding the costs. In every instance
in which an estimate is necessary, we record the related cost and liability
based on all available facts and circumstances, including but not limited to
historical trends, related usage, forecasts, and quotes. Management periodically
reviews and modifies estimates in light of new information or developments, if
any. Because estimates regarding accrued liabilities include assessments of
uncertain outcomes, such estimates are inherently vulnerable to changes due to
unforeseen circumstances that could materially and adversely affect our results
of operations and cash flows.
 
 Restructuring
liability
 
 When
circumstances warrant, we may elect to exit certain business activities or
change the manner in which we conduct ongoing operations. When we make such a
change, management will estimate the costs to exit a business or restructure
ongoing operations. The components of the estimates may include estimates and
assumptions regarding the timing and costs of future events and activities that
represent management's best expectations based on known facts and circumstances
at the time of estimation. Management periodically reviews its restructuring
estimates and assumptions relative to new information, if any, of which it
becomes aware. Should circumstances warrant, management will adjust its previous
estimates to reflect what it then believes to be a more accurate representation
of expected future costs. Because management's estimates and assumptions
regarding restructuring costs include probabilities of future events, such
estimates are inherently vulnerable to changes due to unforeseen circumstances,
changes in market conditions, regulatory changes, changes in existing business
practices, and other circumstances that could materially and adversely affect
our results of operations.
 
 Taxes
 
 We
account for income taxes under the liability method. Deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities, and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. We provide a valuation allowance to reduce our deferred tax assets to
their estimated realizable value.
 
 F -
12
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  In June
2006, the FASB issued FASB Interpretation No.  48, “Accounting for
Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109,” or FIN 48. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized under SFAS No.109,
“Accounting for Income Taxes .” FIN 48 prescribes a recognition threshold
and measurement attribute for financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return and also provides
guidance on various related matters such as derecognition, interest and
penalties, and disclosure. We adopted FIN 48 on January 1, 2007. As of January
1, 2007, no material tax benefit existed for uncertain tax
positions.  During 2007, as discussed in Note 12, we recognized a FIN
48 liability of $0.9 million that was netted on the balance sheet with U.K.
deferred tax assets.
 
 We
classify interest and penalties arising from the underpayment of income taxes in
the statement of operations under general and administrative expenses. As of
December 31, 2007, we have no accrued interest or penalties related to uncertain
tax positions, as a result of substantial U.K. net operating loss
carryforwards.
 
 We
account for telecommunication, sales and other similar taxes on a net basis in
general and administrative expense.
 
 Stock-based
compensation
 
 Effective
January 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment,”
or SFAS No. 123R, and related interpretations. SFAS No. 123R establishes the
accounting for equity instruments exchanged for employee services. Under SFAS
No. 123R, share-based compensation cost is measured at the grant date based on
the calculated fair value of the award. The expense is recognized over the
employees’ requisite service period, generally the vesting period of the award.
Prior to the adoption of SFAS No. 123R on January 1, 2006, we accounted for
stock-based compensation plans under the recognition and measurement provisions
of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock
Issued to Employees” and related interpretations. We also provided disclosures
in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” as
amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and
Disclosures—an Amendment of FASB Statement No. 123.” Accordingly, no expense was
recognized for options to purchase our common stock that were granted with an
exercise price equal to fair market value at the date of grant and no expense
was recognized in connection with purchases under our employee stock purchase
plans for any periods prior to January 1, 2006.
  We
elected to adopt SFASNo.123R
using the modified prospectiveapplicationmethod.
Under thismethod, compensationcost
recognized during the period includes: ( 1) compensation
cost for all share-based payments granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS No.123
amortized over the awards’ vesting period, and ( 2) compensation
cost for all share-based payments granted subsequent to January 1, 2006,
based on the grant-date fair value estimated in accordance with the provisions
of SFAS No.123R
amortized on a straight-line basis over the awards’ vesting period. The fair
value of stock options is estimated at the date of grant using the Black-Scholes
option pricing model with weighted average assumptions for the activity under
our stock plans. Option pricing model input assumptions such as expected term,
expected volatility, and risk-free interest rate, impact the fair value
estimate. Further, the forfeiture rate impacts the amount of aggregate
compensation. These assumptions are subjective and generally require significant
analysis and judgment to develop.
  On
November 10, 2005, the FASB issued FASB Staff Position No. FAS 123R-3,
“Transition Election Related to Accounting for Tax Effects of Share-Based
Payment Awards,” that allows for a “short-cut” method to establish the beginning
balance of the additional paid-in capital, or APIC, pool related to the tax
effects of employee stock-based compensation, and to determine the subsequent
impact on the APIC pool and consolidated statements of cash flows of the tax
effects of employee stock-based compensation awards that are outstanding upon
adoption of SFAS No. 123R. In 2006, we adopted the alternative transition method
provided in the FASB Staff Position for calculating the tax effects of
stock-based compensation pursuant to SFAS No. 123R. The adoption did not have a
material impact on our results of operations and financial
condition.
  SFAS No.
123R does not allow the recognition of a deferred tax asset for unrealized tax
benefits associated with the tax deductions in excess of the compensation
recorded (excess tax benefit). At adoption of SFAS No. 123R on January 1, 2006,
we elected to utilize the “with and without” approach for utilization of tax
attributes upon realization of net operating losses in the future. This method
allocates stock compensation benefits lastamong other tax benefits
recognized.  In addition, we elected to adopt the “direct only” method
of calculating the amount of windfalls or shortfalls.
 
 F -
13
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Treasury
stock
 
 As
permitted by our stock-based compensation plans, we may, from time to time,
acquire shares of treasury stock as payment of taxes due from employees for
stock-based compensation. During 2006, shares of treasury stock were acquired as
payment of taxes and subsequently reissued as part of our stock-based
compensation plans. When shares are reissued, we use the weighted average cost
method for determining cost. The difference between the cost of the shares and
the issuance price is added or deducted from additional contributed
capital.
 
 Reverse
stock split
 
 On July
10, 2006, we implemented a one-for-ten reverse stock split on our common stock
and amended our Certificate of Incorporation to reduce our authorized shares
from 600 million to 60 million. We began trading on a post reverse split basis
on July 11, 2006. All share and per share information herein (including shares
outstanding, earnings per share and warrant and stock option data) have been
retroactively adjusted for all periods presented to reflect this reverse
split.
 
 Revenue
recognition and concentration of credit risk
 
 The
majority of our revenue is derived from high performance IP services, related
data center services, CDN services, and other ancillary products and services
throughout the United States. Our IP services revenue is derived from the sale
of high performance Internet connectivity services at fixed rates or usage-based
pricing to our customers that desire a DS-3 or faster connection. Slower T-1 and
fractional DS-3 connections are provided at fixed rates.  Data center
revenue includes both physical space for hosting customers’ network and other
equipment plus associated services such as redundant power and network
connectivity, environmental controls and security.  Data center
revenue is based on occupied square feet and both allocated and variable-based
usage.  CDN revenue includes three components, none of which are sold
separately: (1) data storage; (2) streaming/delivery and (3) a user
interface/reporting tool.  We provide the CDN service components via
internally developed and acquired technology that resides on our
network.  CDN revenue is based on either fixed rates or usage-based
pricing.  All of the foregoing revenue arrangements have contractual
terms and in many instances, include minimum usage commitments.  Other
ancillary products and services include our Flow Control Platform, or FCP,
product, server management and installation, virtual private networking, managed
security, data
backup, remote storage
and restoration.
  We recognize revenue in accordance with the Securities
and Exchange Commission’s Staff Accounting Bulletin No. 104,Revenue Recognition,
or SAB No. 104, and the Financial Accounting Standards Board’s, or
FASB, Emerging Issues Task Force Issue No. 00-21,Revenue Arrangements with Multiple Deliverables,
or EITF No. 00-21.Revenue
is recognizedwhen persuasive evidence of an arrangement exists, the
product or service has been delivered, the fees are fixed or determinable and
collectibility is probable. For most of our IP, data center and CDN revenue,
services are delivered ratably over the contract term. Contracts and sales or
purchase orders are used to determine the existence of an arrangement. We test
for availability or connectivity to verify delivery of our services. We assess
whether the fee is fixed or determinable based on the payment terms associated
with the transaction and whether the sales price is subject to refund or
adjustment.  Because the software component of our FCP is more than
incidental to the product as a whole, we recognize associated FCP revenue in
accordance with the American Institute of Certified Public Accountants’ (AICPA)
Statement of Position 97-2, Software
Revenue Recognition, or SOP 97-2.
 
 We derive revenue from the sale ofIP services, data center
services andCDN services
to customers under contracts that generally commit the customer to a minimum
monthly level of usage on a calendar month basis and provide the rate at which
the customer must pay for actual usage above the monthly minimum. For these
services, we recognize the monthly minimum as revenue each month provided that
an enforceable contract has been signed by both parties, the service has been
delivered to the customer, the fee for the service is fixed or determinable and
collection is reasonably assured. Should a customer’s usage of our services
exceed the monthly minimum, we recognize revenue for such excess in the period
of the usage. We record the installation fees as deferred revenue and recognize
as revenue ratably over the estimated life of the customer arrangement. We also
derive revenue from services sold as discrete, non-recurring events or based
solely on usage. For these services, we recognize revenue after both parties
have signed an enforceable contract, the fee is fixed or determinable, the event
or usage has occurred and collection is reasonably assured.
 
 F -
14
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Wealsoenter
into multiple-element arrangements or bundled services, such as combiningIP
serviceswith
data center and (or) CDN services.  When
we enter into such arrangements, we
account for each element separately over its respective service period or at the
time of delivery, provided that there is objective evidence of fair value for
the separate elements. Objective evidence of fair value includes the price
charged for the element when sold separately. If we cannot objectively determine
the fair value of each element, we recognize the total value of the arrangement
ratably over the entire service period to the extent that we have begun to
provide the services, and other revenue recognition criteria have been
satisfied.
  Deferred
revenue consists of revenue for services to be delivered in the future and
consist primarily of advance billings, which are amortized over the respective
service period. Revenue associated with billings for installation of customer
network equipment are deferred and amortized over the estimated life of the
customer relationship, which was two to three years during the three year period
ended December 31, 2007. Revenue for installation services is deferred and
amortized because the installation service is integral to our primary service
offering and does not have value to customers on a stand-alone basis. Deferred
post-contract customer support associated with sales of our FCP solution and
similar products are amortized ratably over the contract period, which is
generally one year.
  We
routinely review the creditworthiness and payment status of our customers. If we
determine that collection of service revenue is uncertain, we do not recognize
revenue until  collection is probable. Additionally, we maintain
allowances for doubtful accounts resulting from the inability of our customers
to make required payments on accounts receivable. The allowance for doubtful
accounts is based upon specific and general customer information, which also
includes estimates based on management's best understanding of our customers'
ability to pay and their payment status. Customers' ability to pay takes into
consideration payment history, legal status (i.e., bankruptcy), and the
status of services we are providing. We assess the payment status of
customers by reference to the terms under which services or goods are provided
with any payments not made on or before their due date considered past-due. Once
all collection efforts have been exhausted, we write the uncollectible balance
off against the allowance for doubtful accounts.
  We record an amount for
sales adjustments, which reduces net accounts receivable and revenue.
The amount for sales adjustments is based upon specific customer
information, including outstanding promotional credits, customer disputes,
credit adjustments not yet processed through the billing system and
historical activity. If the financial condition of our customers were to
deteriorate, or management becomes aware of new information impacting a
customer's credit risk, additional adjustments may be required.
  Research
and product development costs
  Product
development costs are primarily related to network engineering costs associated
with changes to the functionality of our proprietary services and network
architecture. Such costs that do not qualify for capitalization as software
development costs are expensed as incurred. Research and development costs,
which are included in product development cost and are expensed as incurred,
primarily consist of compensation related to our development
and enhancement of IProuting technology, progressive download and
streaming technology for our CDN, and acceleration technologies. Research and
development costs were $3.1 million, $2.4 million and $2.9 million for the years
ended December 31, 2007, 2006, and 2005, respectively.
  Advertising
costs
  We
expense all advertising costs as incurred. Advertising costs for the years ended
December 31, 2007, 2006 and 2005 were $1.2 million, $1.3 million and $0.2
million, respectively.
  F -
15
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Net
(loss) income per share
 
 Basic and
diluted net (loss) income per share has been computed using the weighted average
number of shares of common stock outstanding during the period. Diluted net
(loss) income per share is computed using the weighted average number of common
and potentially dilutive shares outstanding during the period. Potentially
dilutive shares consist of the incremental common shares issuable upon the
exercise of outstanding stock options and warrants and unvested restricted stock
using the treasury stock method. The treasury stock method calculates the
dilutive effect for only those stock options and warrants for which the sum of
proceeds, including unrecognized compensation and windfall tax benefits, if any,
is less than the average stock price during the period presented. Potentially
dilutive shares are excluded from the computation of net (loss) income per share
if their effect is anti-dilutive.
  Basic and diluted net (loss) income per share for the years ended
December 31, 2007, 2006 and 2005 are calculated as follows (in thousands, except
per share amounts):
 
 Year
      Ended December 31,2007
              
              
              2006
              
              
              2005Net
      (loss) income
              
              $
              (
      5,555
              )
              
              $
              3,657
              
              
              $
              (4,964
              )Weighted
      average shares outstanding, basic
              
              
              46,942
              
              
              
              34,748
              
              
              
              33,939Effect
      of dilutive securities:Stock
      compensation plans
              
              
              —
              
              
              
              984
              
              
              
              —Warrants
              
              
              —
              
              
              
              7
              
              
              
              —Weighted
      average shares outstanding, diluted
              
              
              46,942
              
              
              
              35,739
              
              
              
              33,939Net
      (loss) income per share:Basic
              
              $
              (
      0.12
              )
              
              $
              0.11
              
              
              $
              (0.15
              )Diluted
              
              $
              (
      0.12
              )
              
              $
              0.10
              
              
              $
              (0.15
              )Anti-dilutive
      securities not included in diluted net (loss) income per share
      calculation:Stock
      compensation plans
              
              
              3,860
              
              
              
              1,408
              
              
              
              3,656Warrants
      to purchase common stock
              
              
              34
              
              
              
              —
              
              
              
              1,5003,894
              
              
              
              1,408
              
              
              
              5,156
  F -
16
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Reclassifications
 
 Prior to
2007, “Direct costs of amortization of acquired technologies” were included in
the caption “Direct costs of network, sales and services, exclusive of
depreciation and amortization.” In 2007 we reclassified these costs to a
separate caption in the accompanying Consolidated Statements of Operations with
the following effect (in thousands):
  Year
      Ended December 31,2006
                
                2005Direct
      costs of network, sales and services, exclusive of depreciation and
      amortization show below:Previously
      reported
                
                $
                97,854
                
                
                
                82,535Reclassification
                
                
                (516
                )
                
                
                (577
                )As
      reclassified
                
                $
                97,338
                
                
                $
                81,958
  A
      reconciliation of total direct costs of network, sales and services,
      exclusive of depreciation and amortization to the accompanying
      consolidated statements of operations is shown below (in
      thousands):Year
      Ended December 31,2006
              
              2005IP
      services
              
              $
              39,744
              
              
              $
              38,377Data
      center services
              
              
              46,474
              
              
              
              35,244Other
              
              
              11,120
              
              
              
              8,337Total
              
              $
              97,338
              
              
              $
              81,958
 This reclassification had no effect on previously reported (loss)
income from operations or net (loss) income.
 
 Segment
information
 
 We use
the management approach for determining which, if any, of our services and
products, locations, customers or management structures constitute a reportable
business segment. The management approach designates the internal organization
that is used by management for making operating decisions and assessing
performance as the source of any reportable segments. As a result of our
acquisition of VitalStream Holdings, Inc., as discussed in note 3, and the
information presented to executive management, we classified our operations into
three reportable business segments: IP services, data center services and CDN
services. In accordance with SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information,” we have presented the corresponding items
of segment information for the years ended December 31, 2006 and
2005.
 
 Recent
accounting pronouncements
 
 In September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value,
establishes a framework for measuring fair value under GAAP, and expands
disclosures about fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after December 15, 2007. In February 2008, the FASB
issuedStaff Position, or
FSP,FAS 157-1, which
provides supplemental guidance on the application of SFAS No. 157, and FSP
FAS 157-2, which delays the effective date of SFAS No. 157 for nonfinancial
assets and nonfinancial liabilities. We are currently in the process of
evaluating the impact that the adoption of SFAS No. 157 will have on our
financial position, results of operations and cash flows.
 
 In February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities.” SFAS No. 159 permits companies to
choose to measure, on an instrument-by-instrument basis, many financial
instruments and certain other assets and liabilities at fair value that are not
currently required to be measured at fair value. SFAS No. 159 is effective
as of the beginning of a fiscal year that begins after November 15, 2007.
While we will not elect to adopt fair value accounting to any assets or
liabilities allowed by SFAS No. 159, we are currently in the process of
evaluating SFAS No. 159 and its potential impact to us.
 
 In December 2007, the FASB issued SFAS
No. 141 (revised 2007), “Business Combinations,”orSFAS No. 141R. SFAS No. 141R
replaces SFAS No. 141, “Business Combinations.” SFASNo.141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired or a gain from
a bargain purchase. SFAS No. 141R also determines disclosure requirements
to enable the evaluation of the nature and financial effects of the
business combination. SFAS
No. 141Rapplies
prospectively to business combinations for which the acquisition date is on or
after the beginning of a fiscal year that begins on or after December 15,
2008 and there are also implications for acquisitions that occur prior to this
date. We are currently in the process of evaluating the impact that the adoption
of SFASNo. 141Rwill have on
our financial position, results of operations and cash
flows.
 
 F -
17
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  In December 2007, the FASB issued
SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.”SFAS No. 160 amendsAccounting Research Bulletin51,“Consolidated Financial
Statements”,or ARB 51,and requires all entities to report
noncontrolling (minority) interests in subsidiaries within equity in the
consolidated financial statements, but separate from the parent shareholders’
equity. SFAS No. 160 also requires any acquisitions or dispositions of
noncontrolling interests that do not result in a change of control to be
accounted for as equity transactions. Further, SFAS No. 160 requires that a
parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. SFAS No. 160 is effective for fiscal years beginning on or
after December 15, 2008. Wedo not expectthe adoption of SFAS No. 160 will
havea significant, if any,
impact onour financial
position, results of
operations and cash flows.
 
 3.
              BUSINESS
      COMBINATION
 
 On
February 20, 2007, we completed the previously announced acquisition of
VitalStream Holdings, Inc., or VitalStream, for approximately $214.0 million,
whereby VitalStream became a wholly owned subsidiary of Internap. VitalStream
provides products and services for storing and delivering digital media to large
audiences over the Internet and advertisement insertion and related advertising
services to companies that stream digital media over the Internet. VitalStream
also enhances our position as a leading provider of high performance route
control products and services by adding complementary service offerings in the
rapidly growing content delivery and on-line advertising markets. Integrating
VitalStream's digital media delivery platform into our portfolio of products and
services enables us to provide customers with one of the most complete product
lines in content delivery solutions, content monetization and on-line
advertising, while supporting the significant long-term growth opportunities in
the network services market. We accounted for the transaction using the purchase
method of accounting in accordance with SFAS No. 141, “Business
Combinations.” Our results of operations include the activities of VitalStream
from February 21, 2007 through December 31, 2007.
 
 Purchase
Price
  Assets
acquired and liabilities assumed were recorded at their fair values as of
February 20, 2007. The total $214.0 million purchase price is comprised of
the following (in thousands):
 
 Value
      of Internap stock issued
              
              $
              197,272Fair
      value of stock options assumed
              
              
              11,021Direct
      transaction costs
              
              
              5,729Total purchase
      price
              
              $
              214,022
  As a
result of the acquisition, we issued approximately 12.2 million shares of
Internap common stock based on an exchange ratio of 0.5132 shares of
Internap common stock for each outstanding share of VitalStream common stock as
of February 20, 2007. This fixed exchange ratio gave effect to the one-for-ten
reverse stock split by Internap implemented on July 11, 2006 and the
one-for-four reverse stock split by VitalStream implemented on April 4,
2006. The average market price per share of Internap common stock of $16.16 was
based on an average of the closing prices for a range of trading days from
October 10, 2006 through October 16, 2006, which range spanned the announcement
date of the transaction on October 12, 2006.
  Under the
terms of the merger agreement, each VitalStream stock option that was
outstanding and unexercised was converted into an option to purchase Internap
common stock and we assumed that stock option in accordance with the terms of
the applicable VitalStream stock option plan and terms of the stock option
agreement. Based on VitalStream's stock options outstanding at February 20,
2007, we converted options to purchase approximately 3.0 million shares of
VitalStream common stock into options to purchase approximately 1.5 million
shares of Internap common stock.
  F -
18
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Purchase
Price Allocation
  Under the
purchase method of accounting, we allocated the total estimated purchase price
to VitalStream's net tangible and intangible assets based on their estimated
fair values as of February 20, 2007. We recorded the excess purchase price over
the value of the net tangible and identifiable intangible assets as goodwill. We
determined the fair value assigned to identifiable intangible assets acquired
using the income approach, which discounts expected future cash flows to present
value using estimates and assumptions determined by management. The allocation
of the purchase price and the estimated useful lives are as follows (dollars in
thousands):
 
 EstimatedAmount
              
              Useful
      LifeNet
      tangible assets
              
              $
              12,286
              
              —Identifiable
      intangible assets:Developed
      technologies
              
              
              36,000
              
              8
      yearsCustomer
      relationships
              
              
              9,000
              
              9
      yearsTrade
      name and other
              
              
              1,500
              
              3-6
      yearsAcquired
      in-process research and development
              
              
              450
              
              —Goodwill
      (1)
              
              
              154,786
              
              —Total
      estimated purchase price
              
              $
              214,022
 
 (1)
Subsequent to the finalization of the purchase price allocation, we recorded a
net increase of $0.1 million to goodwill as a result of adjustments to
certain pre-acquisition assets and liabilities and decrease of $0.4 million as a
result of the utilization of a portion of VitalStream’s net operating loss
carryforwards.
 
 Net tangible assets. We
recorded VitalStream's tangible assets and liabilities as of February 20, 2007
at their fair value. Net tangible assets included restricted and unrestricted
cash of $9.8 million, accounts receivable of $3.2 million, property and
equipment of $11.2 million, other assets of $2.2 million, loan and security
agreement (including both term loans and an outstanding line of credit) and
capital lease obligations of $6.1 million, and accounts payable and other
liabilities of $8.0 million. Subsequent to the acquisition of VitalStream, we
paid off the term loans and line of credit assumed in the VitalStream
acquisition.
  Identifiable intangible
assets.   Developed technologies relate to VitalStream products
that have reached technological feasibility and include processes and trade
secrets acquired or developed through design and development of their products.
Customer relationships represent contracts with existing customers. Trade name
primarily relates to the VitalStream and other product names. We valued each of
the identifiable intangible assets using various forms of the income approach,
detailed financial projections and various assumptions, including, among others,
the evolution of the existing technology platforms to future technology,
expected net cash flows, customer attrition rates, tax rates, and discount
rates.   Amortization of identifiable intangibles is on a
straight-line basis over their respective useful lives.
  In-process research and
development.  As of the closing date, one project was in development
that has not reached technological feasibility and therefore qualifies as
in-process research and development. The amount allocated to in-process research
and development was charged to the statement of operations as of the date of
acquisition.
  Goodwill.
  Goodwill is the residual of the excess of fair value over the book
value of the acquired entity's net assets at the date of acquisition. We note
that under SFAS No. 141, an assembled workforce shall not be recognized apart
from goodwill and therefore is embedded in goodwill. Part of the acquisition
included an assembled workforce that is included as a component of
goodwill.  Another component of goodwill is the estimated fair value
of the expected synergies and other benefits from combining ours and
VitalStream’s net assets and businesses. Our expected synergies are significant
in this acquisition, including synergies in the sales channel, our network
costs, general and administrative costs, and capital expenditures. We allocated
approximately $154.8 million to goodwill for the CDN services segment. In
accordance with SFAS No. 142, we will not amortize goodwill but
instead will test it for impairment at least annually, or more frequently if
certain indicators are present. A total of $18.3 million of goodwill
will be deductible for tax purposes.
  F -
19
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Pro
Forma Results (Unaudited)
 VitalStream
provides products and services for storing and delivering digital media to large
audiences over the Internet and ad insertion and related advertising services to
companies that stream digital media over the Internet. VitalStream also enhances
our position as a leading provider of high performance route control products
and services by adding complementary service offerings in the rapidly growing
content delivery and on-line advertising markets. Integrating VitalStream's
digital media delivery platform into our portfolio of products and services
enables us to provide customers with one of the most complete product lines in
content delivery solutions, content monetization and on-line advertising, while
supporting the significant long-term growth opportunities in the network
services market.
 The
following unaudited pro forma consolidated financial information reflects the
results of our operations for the year ended December 31, 2007 and 2006, as if
the acquisition of VitalStream had occurred at the beginning of each period.
Prior to the acquisition, VitalStream was a customer of ours, and for the years
ended December 31, 2007 and 2006 we recognizedrevenues of $0.4 million
and $0.2 million, respectively, from VitalStream which has been excluded from
pro forma revenues below. The related receivables were settled in the normal
course of business. The pro forma results presented below are not necessarily
indicative of what our operating results would have been had the acquisition
actually taken place at the beginning of each period (in thousands, except per
share amounts):
  Year
      Ended December 31,2007
                
                2006Pro
      formarevenues
                
                $
                236,418
                
                
                $
                205,052Pro
      forma net loss
                
                
                (
      14,269
                )
                
                
                (16,153
                )Pro
      forma net loss per share, basic and diluted
                
                
                (
      0.25
                )
                
                
                (0.34
                )
 
 4.
              ASSET
      IMPAIRMENT AND RESTRUCTURING COSTS
 
 During
the three months ended March 31, 2007, we incurred a restructuring and
impairment charge of $10.3 million. The charge was the result of a review of our
business, particularly in light of our acquisition of VitalStream and our plan
to finalize the overall integration and implementation plan before the end of
the first quarter. The charge to expense included $7.8 million for leased
facilities, representing both the costs less anticipated sublease recoveries
that will continue to be incurred without economic benefit to us and costs to
terminate leases before the end of their term. The charge also included
severance payments of $1.1 million for the termination of certain employees and
$1.4 million for impairment of assets. Net related expenditures were estimated
to be $10.7 million, of which $2.8 million has been paid during the year ended
December 31, 2007, and the balance continuing through December 2016, the last
date of the longest lease term.  These expenditures are expected to be
paid out of operating cash flows. The impairment charge of $1.3 million is
related to the leases referenced above and less than $0.1 million for other
assets. Cost savings from the restructuring were estimated to be approximately
$0.8 million per year through 2016, primarily for rent expense.
 
 In 2001,
we implemented significant restructuring plans that resulted in substantial
charges for real estate and network infrastructure obligations, personnel and
other charges. Additional related charges have subsequently been incurred as we
continued to evaluate our restructuring reserve. The following table displays
the activity and balances for the restructuring and asset impairment activity
for the year ended December 31, 2007 (in thousands):
   December
      31, 2006 Restructuring Liability
              
              Restructuring
                and
                Impairment
                Charges
              
              Cash
                Payments
              
              Non-Cash
                Write-
                Downs
              
              Non-Cash
                Plan
                Adjustments
              
              December
      31,
                2007
                Restructuring
                LiabilityActivity
      for 2007 restructuring charge:Real
      estate obligations
              $
              —
              
              $
              7,755
              
              $
              (2,248
              )
              $
              —
              
              $
              805
              
              $
              6,312Employee
      separations
              
              —
              
              
              1,140
              
              
              (615
              )
              
              —
              
              
              (119
              )
              
              406Total
      restructuring costs
              
              —
              
              
              8,895
              
              
              (2,863
              )
              
              —
              
              
              686
              
              
              6,718Activity
      for 2007 impairment charge:Leasehold
      improvements
              
              —
              
              
              897
              
              
              —
              
              
              (897
              )
              
              —
              
              
              —Other
              
              —
              
              
              471
              
              
              —
              
              
              (471
              )
              
              —
              
              
              —Total
      asset impairments
              
              —
              
              
              1,368
              
              
              —
              
              
              (1,368
              )
              
              —
              
              
              —Activity
      for 2001 restructuring charge:Real
      estate obligations
              
              4,784
              
              
              —
              
              
              (1,199
              )
              
              —
              
              
              (211
              )
              
              3,374Total
              $
              4,784
              
              $
              10,263
              
              $
              (4,062
              )
              $
              (1,368
              )
              $
              475
              
              $
              10,092
 
 The
impairment charges referenced in the table above were primarily associated with
our data center segment.
 
 We also
recorded a $1.1 million impairment during year ended December 31, 2007 for the
sales order-through-billing system, described further in Note 2. This impairment
charge was not related to any specific segment.
 
 In 2006,
we recorded a nominal charge for changes in estimated expenses related to real
estate obligations. The following table displays the activity and balances for
restructuring activity for the year ended December 31, 2006 (in
thousands):
 
 December
      31, 2005 Restructuring Liability
              
              
              Restructuring
      Charges
              
              
              Cash
      Payments
              
              
              December
      31 2006 Restructuring LiabilityActivity
      for 2001 restructuring charge:Real
      estate obligations
              
              $
              6,277
              
              
              $
              4
              
              
              $
              (1,497
              )
              
              $
              4,784
  Also,
during the year ended December 31, 2006, we recognized an impairment charge of
$0.3 million as a result of the implementation of a new financial system which
began in 2004.
 
 In 2005,
we recorded net restructuring charges totaling less than $0.1 million primarily
for changes in estimated expenses related to real estate obligations.


5.
              OPERATING
      SEGMENTS
 
 We
operate and manage the Company in three business segments: IP services, data
center services and CDN services.   IP services primarily include
our high performance Internet connectivity as well as sales of our FCP
products.  Data center services primarily include physical space for
hosting customers’ network and other equipment plus associated services such as
redundant power and network connectivity, environmental controls and
security.  CDN services primarily include data storage,
streaming/delivery and a user interface/reporting tool, none of which are sold
separately.Other revenues and direct costs represent non-segmented
activities and primarily include reseller and miscellaneous services such as
third party CDN services, termination fee revenue, referral fees for other
hardware sales, and consulting services. In
conjunction with the preparation of our financial statements, we analyzed sales
credits activity for the years ended December 31, 2007, 2006 and 2005 and
reclassified all of the credits to the related operating segments.The
following tables show operating results for our reportable segments, along with
reconciliations from segment gross profit to (loss) income before income taxes
and equity in earnings of equity-method investment:
  F -
20
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Year
      Ended December 31, 2007IP
      Services
                
                
                Data
                  Center
                  Services
                
                
                CDN
                  Services
                
                
                Other
                
                
                TotalRevenues
                
                $
                119,848
                
                
                $
                83,058
                
                
                $
                17,718
                
                
                $
                13,466
                
                
                $
                234,090Direct
      costs of network, sales and services,exclusive
      of depreciation and amortization
                
                
                43,681
                
                
                
                59,439
                
                
                
                6,584
                
                
                
                8,690
                
                
                
                118,394Segment
      profit
                
                $
                76,167
                
                
                $
                23,619
                
                
                $
                11,134
                
                
                $
                4,776
                
                
                
                115,696Other
      operating expenses
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                125,407Loss
      from operations
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (9,711
                )Non-operating
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                937Loss
      before income taxes and equity inearnings
      of equity-method investment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                (8,774
                )
 Direct
costs of network, sales and services, exclusive of depreciation and
amortization, includes an allocation of $0.7 million from the IP services
segment to the CDN services segment based on the average cost of actual usage by
the CDN segment.
 
 Year Ended December 31,
      2006IP
      Services
              
              
              Data
                Center
                Services
              
              
              CDN
                Services
              
              
              Other
              
              
              TotalRevenues
              
              $
              109,748
              
              
              $
              56,152
              
              
              $
              —
              
              
              $
              15,475
              
              
              $
              181,375Direct
      costs of network, sales and services,exclusive
      of depreciation and amortization
              
              
              39,744
              
              
              
              46,474
              
              
              
              —
              
              
              
              11,120
              
              
              
              97,338Segment
      profit
              
              $
              70,004
              
              
              $
              9,678
              
              
              $
              —
              
              
              $
              4,355
              
              
              
              84,037Other
      operating expenses
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              81,900Income
      from operations
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,137Non-operating
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,551Income
      before income taxes and equity inearnings
      of equity-method investment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              3,688
 
  F -
21
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 Year Ended December 31,
      2005IP
      Services
              
              Data
                Center
                Services
              
              CDN
                Services
              
              Other
              
              
              
              TotalRevenues
              
              $
              105,032
              
              $
              36,996
              
              $
              —
              
              $
              11,689
              
              
              
              
              $
              153,717Direct
      costs of network, sales and services, exclusive of depreciation and
      amortization
              
              
              38,377
              
              
              35,244
              
              
              —
              
              
              8,337
              
              
              
              
              
              81,958Segment
      profit
              
              $
              66,655
              
              
              1,752
              
              $
              —
              
              $
              3,352
              
              
              
              
              
              71,759Other
      operating expenses
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              76,893Loss
      from operations
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,134
              )Non-operating
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              87Loss
      before income taxes and equity in earnings of equity-method
      investment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (5,047
              )
 
 The
following table includes selected segment financial information as of December
31, 2007 and 2006, related to goodwill and total assets:
 
 IP
      Services
              
              Data
                Center
                Services
              
              CDN
                Services
              
              Other
              
              TotalDecember
      31, 2007:Goodwill
              
              $
              36,314
              
              $
              —
              
              $
              154,363
              
              $
              —
              
              $
              190,677Total
      assets
              
              
              148,697
              
              
              64,498
              
              
              211,469
              
              
              2,346
              
              
              427,010December
      31, 2006:Goodwill
              
              $
              36,314
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              36,314Total
      assets
              
              
              130,609
              
              
              41,185
              
              
              —
              
              
              1,908
              
              
              173,702
 
 Through
December 31, 2007, neither revenues generated nor long-lived assets located
outside the United States were significant (all less than 10%).
 
 6.
              INVESTMENTS
 
 Investment
in marketable securities
 
 Pursuant
to our formal investment policy, investments in marketable securities primarily
consist of high credit quality corporate debt securities, auction rate
securities whose underlying assets are state-issued student and educational
loans which are substantially backed by the federal government, commercial paper
and U.S. Government Agency debt securities. Auction rate securities are variable
rate bonds tied to short-term interest rates with maturities on the face of the
securities in excess of 90 days and have interest rate resets through a modified
Dutch auction, at predetermined short-term intervals, usually every 7, 28 or 35
days. Auction rate securities generally trade at par and are callable at par on
any interest payment date at the option of the issuer.  Interest
received 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 short-term marketable securities either (1) have original
maturities greater than 90 days but less than one year or (2) are auction rate
securities expected to be liquidated within one year, are classified as
available-for-sale and are recorded at fair value with changes in fair value
reflected in other comprehensive income. All proceeds were from the
maturity of the securities or sales of auction rate securities at par
value.  Accordingly, we have not recognized any realized gains or
losses.
 
 F -
22
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Summaries
of our investments in marketable securities are as follows (in
thousands):
 
 December
      31, 2007Cost
      Basis
              
              Unrealized
                Gain
      (Loss)
              
              Carrying
      ValueCorporate
      debt securities
              
              $
              7,607
              
              
              $
              3
              
              
              $
              7,610Auction
      rate securities
              
              
              7,150
              
              
              
              —
              
              
              
              7,150Commercial
      paper
              
              
              4,787
              
              
              
              2
              
              
              
              4,789Other
              
              
              24
              
              
              
              (4
              )
              
              
              20Total
      short-term investments in marketable securities
              
              $
              19,568
              
              
              $
              1
              
              
              $
              19,569
  
 December
      31, 2006Cost
      Basis
              
              Unrealized
                Gain
      (Loss)
              
              Carrying
      ValueCorporate
      debt securities
              
              $
              4,826
              
              
              $
              1
              
              
              $
              4,827Commercial
      paper
              
              
              4,755
              
              
              
              —
              
              
              
              4,755U.S.
      government agency debt securities
              
              
              3,659
              
              
              
              (1
              )
              
              
              3,658Other
              
              
              24
              
              
              
              27
              
              
              
              51Total
      short-term investments in marketable securities
              
              $
              13,264
              
              
              $
              27
              
              
              $
              13,291
 
 Uncertainties
in the credit markets may affect the liquidity of our holdings in auction rate
securities.  We did not experience any unsuccessful auction rate
resets during the year ended or the initial rate resets immediately following
December 31, 2007, however we have experienced failures on each of our
subsequent auction rate resets. Nevertheless, we continue to receive interest
every 28-35 days. While our investments in auction rate securities are of high
credit quality with AAA/Aaa ratings as of December 31, 2007, at this time we are
uncertain as to whether or when the liquidity issues relating to these
investments will worsen or improve. We do not believe that it is necessary at
this time to adjust the fair value of our portfolio of auction rate securities
and we expect to hold the auction rate securities until liquidity improves or
the borrower calls the underlying securities. However, if uncertainties in the
credit and capital markets continue, these markets deteriorate further or we
experience any rating downgrades on any of the investments in our portfolio, we
may incur temporary or other than temporary impairments, which could negatively
affect our financial condition, results of operations or cash flows. In
addition, a continued deterioration in market conditions that lead us to
conclude our marketable securities are not available to fund current operations
would result in us classifying our auction rate securities as noncurrent assets.
In the meantime, we believe we have sufficient liquidity through our cash
balances, other short-term investments and available credit.
 
 Investment
in Internap Japan
 
 We
maintain a 51% ownership interest in Internap Japan, a joint venture with NTT-ME
Corporation and NTT Holdings. We are unable to assert control over the joint
venture’s operational and financial policies and practices required to account
for the joint venture as a subsidiary whose assets, liabilities, revenue and
expense would be consolidated (due to certain minority interest protections
afforded to our joint venture partners). We are, however, able to assert
significant influence over the joint venture and, therefore, account for our
joint venture investment using the equity-method of accounting pursuant to APB
Opinion No. 18 “The Equity Method of Accounting for Investments in Common Stock”
and consistent with Emerging Issues Task Force No. 96-16 “Investor’s Accounting
for an Investee When the Investor Has a Majority of the Voting Interest but the
Minority Shareholder or Shareholders Have Certain Approval or Veto
Rights.”
  F -
23
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Our investment activity in the joint venture is as follows (in
thousands):
 
 Year
      Ended December 31,2007
              
              2006
              
              2005Investment
      Balance, January 1,
              
              $
              958
              
              
              $
              823
              
              
              $
              861Proportional
      share of net income
              
              
              139
              
              
              
              114
              
              
              
              83Unrealized
      foreign currency translation gain (loss), net
              
              
              41
              
              
              
              21
              
              
              
              (121
              )Investment
      Balance, December 31,
              
              $
              1,138
              
              
              $
              958
              
              
              $
              823
 
 Investment
in Aventail
 
 We
account for investments without readily determinable fair values at cost.
Realized gains and losses and declines in value of securities judged to be
other-than-temporary are included in other expense. We incurred a charge during
the three months ended June 30, 2007, totaling $1.2 million, representing the
write-off of the remaining carrying value of our investment in series D
preferred stock of Aventail. We made an initial cash investment of $6.0 million
in Aventail series D preferred stock pursuant to an investment agreement in
February 2000. In connection with a subsequent round of financing by Aventail,
we recognized an initial loss on our investment of $4.8 million in 2001. On June
12, 2007, SonicWall, Inc. announced that it entered into an agreement to acquire
Aventail for approximately $25.0 million in cash. The transaction closed on July
11, 2007, with all shares of series D preferred stock being cancelled and the
holders of series D preferred stock not receiving any consideration for such
shares.
 
 7.
              PROPERTY
      AND EQUIPMENT
 
 Property
and equipment consists of the following (in thousands):
  December
      31,2007
              
              
              2006Network
      equipment
              
              $
              86,496
              
              
              $
              65,430Network
      equipment under capital lease
              
              
              1,596
              
              
              
              1,596Furniture,
      equipment and software
              
              
              31,726
              
              
              
              31,712Leasehold
      improvements
              
              
              111,216
              
              
              
              100,024Property
      and equipment, gross
              
              
              231,034
              
              
              
              198,762Less:
      Accumulated depreciation and amortization ($1,596 and $1,375 relatedto
      capital leases at December 31, 2007 and 2006,
respectively)
              
              
              (165,543
              )
              
              
              (151,269
              )$
              65,491
              
              
              $
              47,493
 
 During
2007 and 2006, $2.7 million and $8.6 million, respectively, of fully depreciated
assets were retired.
  Depreciation
and amortization of property and equipment associated with direct costs of
network, sales and services and other depreciation expense is summarized as
follows (in thousands):
  F -
24
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 Year
      ended December 31,2007
              
              
              2006
              
              
              2005Direct
      costs of network, sales and services
              
              $
              18,313
              
              
              $
              13,250
              
              
              $
              11,804Other
      depreciation and amortization
              
              
              3,929
              
              
              
              2,606
              
              
              
              2,933Subtotal
              
              
              22,242
              
              
              
              15,856
              
              
              
              14,737Amortization
      of acquired technologies
              
              
              4,165
              
              
              
              516
              
              
              
              577Total
      depreciation and amortization
              
              $
              26,407
              
              
              $
              16,372
              
              
              $
              15,314
  8.
              GOODWILL
      AND OTHER INTANGIBLE ASSETS
 
 We
perform our annual goodwill impairment test as of August 1 of each calendar year
and estimated the fair value of our reporting units utilizing a discounted cash
flow method. Based on the results of these analyses our goodwill was not
impaired as of August 1, 2007.
 
 The
assumptions, inputs and judgments used in performing the valuation analysis are
inherently subjective and reflect estimates based on known facts and
circumstances at the time the valuation is performed. The use of different
assumptions, inputs and judgments, or changes in circumstances, could materially
affect the results of the valuation. Adverse changes in the value of our
reporting units would necessitate an impairment charge of our goodwill. In
connection with our acquisition of VitalStream on February 20, 2007, we recorded
$154.8 million of additional goodwill based on our allocation of the VitalStream
purchase price, as discussed in note 3. In December 2007, a decrease of $0.4
million was recorded to goodwill as a result of the utilization of a portion of
VitalStream’s net operating loss carryforwards. The total recorded amount of
goodwill was $190.7 million and $36.3 million as of December 31, 2007 and
December 31, 2006, respectively.
 
 Generally,
any adjustments made as a result of the impairment testing are required to be
recognized as operating expense. We will continue to perform our annual
impairment testing as of August 1 each year absent any impairment indicators
that may cause more frequent analysis, as required by SFAS No. 142.
 
 The
components of our amortizing intangible assets are as follows (in
thousands):
 
 December
      31, 2007
              
              December
      31, 2006Gross
      Carrying Amount
              
              Accumulated
      Amortization
              
              Gross
      Carrying Amount
              
              Accumulated
      AmortizationContract
      based
              
              $
              25,018
              
              
              $
              (15,403
              )
              
              $
              14,518
              
              
              $
              (14,291
              )Technology
      based
              
              
              41,911
              
              
              
              (8,518
              )
              
              
              5,911
              
              
              
              (4,353
              )$
              66,929
              
              
              $
              (23,921
              )
              
              $
              20,429
              
              
              $
              (18,644
              )
 
 Amortization
expense for identifiable intangible assets during 2007, 2006 and 2005 was $5.3
million, $0.5 million and $0.6 million, respectively. As of December 31, 2007,
estimated amortization expense for the next five years is as follows (in
thousands):
 
 2008
              
              $
              6,2432009
              
              
              6,2432010
              
              
              6,0562011
              
              
              5,7282012
              
              
              5,728Thereafter
              
              
              13,010$
              43,008
  F -
25
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 9.
              ACCRUED
      LIABILITIES
 
 Accrued
liabilities consist of the following (in thousands):
 
 December
      31,2007
              2006Compensation
      payable
              
              $
              4,942
              
              
              $
              4,075Telecommunications,
      sales, use and other taxes
              
              
              2,317
              
              
              
              2,005Other
              
              
              2,900
              
              
              
              2,609$
              10,159
              
              
              $
              8,689
  10.
              REVOLVING
      CREDIT FACILITY AND NOTE PAYABLE
 
 On
September 14, 2007, we entered into a $35.0 million credit agreement, or the
Credit Agreement, with Bank of America, N.A., as administrative agent, and
lenders who may become a party to the Credit Agreement from time to
time.  VitalStream Holdings, Inc., VitalStream, Inc., PlayStream,
Inc., and VitalStream Advertising Services, Inc., four of our subsidiaries, are
guarantors of the Credit Agreement.
  The
Credit Agreement replaced our prior creditagreement, which was evidenced
by a Loan and Security Agreement between the Company and Silicon Valley Bank
that was last amended on December 27, 2006.  We paid off and
terminated this prior credit facility concurrently with the execution of the
Credit Agreement.
  Our
obligations under the Credit Agreement are pledged, pursuant to a pledge and
security agreement and an intellectual property security agreement, by
substantially all of our assets including the capital stock of our domestic
subsidiaries and 65% of the capital stock of our foreign
subsidiaries.
  The
Credit Agreement provides for a four-year revolving credit facility, or the
Revolving Credit Facility, in the aggregate amount of up to $5.0 million, which
includes a $5.0 million sub-limit for letters of credit.  With the
prior approval of the administrative agent, we may increase the total
commitments by up to $15.0 million for a total commitment under the Revolving
Credit Facility of $20.0 million.  The Revolving Credit Facility is
available to finance working capital, capital expenditures and other general
corporate purposes. As of December 31, 2007 we had a total of $8.0 million of
letters of credit issued (including $3.9 million which are secured by the
Revolving Credit Facility and the balance secured by restricted cash) and $1.1
million in borrowing capacity on the Revolving Credit Facility. There were no
amounts outstanding on the Revolving Credit Facility as of December 31,
2007.
  The
Credit Agreement also provides for a four-year term loan, or the Term Loan, in
the amount of $30.0 million. We borrowed $20.0 million concurrently with
the closing and used a portion of the proceeds from the Term Loan to pay off the
prior creditagreement. The Term Loan had $10.0 million in borrowing
capacity as of December 31, 2007.
  The
interest rate on the Revolving Credit Facility and Term Loan is a tiered
LIBOR-based rate that depends on our 12-month trailing EBITDA. As of December
31, 2007, the interest rate was 7.075%.
  We will
only pay interest on the Term Loan during the first 12 months of its four-year
term.  Commencing on the last day of the first calendar quarter after
the first anniversary of the closing, the outstanding amount of the Term Loan
will amortize on a straight-line schedule with the payment of 1/16 of the
original principal amount of the Term Loan due quarterly.  We will pay
all unpaid amounts at maturity, which is September 14, 2011.
  The
Credit Agreement includes customary representations, warranties, negative and
affirmative covenants, including certain financial covenants relating to net
funded debt to EBITDA ratio and fixed charge coverage ratio, as well as a
prohibition against paying dividends, limitations on unfunded capital
expenditures of $25.0 million per year, customary events of default and certain
default provisions that could result in acceleration of the Credit
Agreement.
  F -
26
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  The net
proceeds received from the Term Loan were reduced by $0.3 million for fees paid
to Bank of America and its agents.  We treated these fees as a debt
discount and will amortize the fees to interest expense using the interest
method over the term of the loan. We recorded less than $0.1 million of related
amortization during the year ended December 31, 2007. As of December 31, 2007,
the balance on the Term Loan, net of the discount, was $19.8 million. We
incurred other costs of less than $0.1 million in connection with entering into
the Credit Agreement, which we recorded as debt issue costs and will amortize
over the term of the Credit Agreement.
 
 As a result of the transactions
discussed above, we recorded a loss on extinguishment of prior debt of less than
$0.1 million during the year ended December 31, 2007. The loss on extinguishment
of debt is included in the caption Other, net within the Non-operating (income)
expense section of theconsolidated statements of
operations.
 
 The future maturity of the Term Loan at
December 31, 2007, which does not reflect the debt discount, is as follows (in
thousands):
 2008
              
              $
              2,5002009
              
              
              5,0002010
              
              
              5,0002011
              
              
              7,500Total
      maturities and principal payments
              
              
              20,000Less:  current
      portion
              
              
              (2,500
              )$
              17,500
 
 Also
during the year ended December 31, 2007, we paid off the term loans and line of
credit issued pursuant to the loan and security agreement assumed in the
VitalStream acquisition, as discussed in note 3.
 
 At
December 31, 2006, we had a $5.0 million revolving credit facility and a $17.5
million term loan (note payable) under the former loan and security
agreement with Silicon Valley Bank. The note payable had a fixed interest rate
of 7.5% and was paid off in connection with the new Credit Agreement discussed
above. There were $3.9 million of letters of credit previously outstanding under
the former revolving credit facility which have been secured with restricted
cash and are in the process of being secured by the new Revolving Credit
Facility. There was no outstanding balance under the former revolving credit
facility as of December 31, 2006.
 The carrying value of our notes payable as of December 31, 2007
and 2006, approximate fair value as the interest rates approximate current
market rates of similar debt obligations.
  11.
              CAPITAL
      LEASES
 
 Capital
lease obligations and the leased property and equipment are recorded at
acquisition at the present value of future lease payments based upon the terms
of the related lease agreement. As of December 31, 2007, our capital leases have
expiration dates ranging from May 2009 to March 2010.
 
 Future
minimum capital lease payments together with the present value of the minimum
lease payments as of December 31, 2007, are as follows (in
thousands):
  2008
              
              $
              9222009
              
              
              4562010
              
              
              14Remaining
      capital lease payments
              
              
              1,392Less:
      amounts representing imputed interest
              
              
              (135
              )Present
      value of minimum lease payments
              
              
              1,257Less:
      current portion
              
              
              (805
              )$
              452
 
 One
capital lease assumed in the VitalStream acquisition requires us to maintain a
restricted cash balance of $0.7 million.
  F -
27
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 12.
              INCOME
      TAXES
 
 The current and deferred income
tax (benefit) provision were as follows for the years ended December 31,
2007 and 2006 (in thousands):
 
 Year Ended December 31,2007
              
              2006Current:Federal
              
              $
              15
              
              $
              145State
              
              —
              
              —Foreign
              
              921
              
              —Total current
      provision
              
              936
              
              145Deferred:Federal
              
              356
              
              —State
              
              42
              
              —Foreign
              
              (4,414
              )
              —Total deferred
      benefit
              
              (4,016
              )
              —Net income tax (benefit)
      provision
              
              $
              (3,080
              )
              $
              145
 
 We
account for income taxes under the liability method. Deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities, and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. We provide a valuation allowance to reduce our deferred tax assets to
their estimated realizable value. We had no income tax provision or benefit for
the year ended December 31, 2005.
  A
reconciliation of the effect of applying the federal statutory rate and the
effective income tax rate on our income tax provision (benefit) is as
follows:
 
 Year
      Ending December 31,2007
              
              2006
              
              2005Federal
      income tax (benefit) expense at statutory rates
              (34
              )%
              34
              %
              (34
              )%State
      income tax (benefit) expense
              (4
              )
              4
              
              (4
              )Stock
      compensation expense
              6
              
              8
              
              —Tax
      reserves
              11
              
              —
              
              —Other
              —
              
              1
              
              1Change
      in valuation allowance
              (14
              )
              (43
              )
              37Effective
      tax rate
              (35
              )%
              4
              %
              —
              %
   F -
28
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 Temporary
differences between the financial statement carrying amounts and tax bases of
assets and liabilities that give rise to significant portions of deferred taxes
relate to the following (in thousands):
  Year
      Ending December 31,2007
                
                
                2006Current
      deferred income tax assets:Provision
      for doubtful accounts
                
                $
                593
                
                
                $
                115Accrued
      compensation
                
                
                233
                
                
                
                132Other
      accrued expenses
                
                
                196
                
                
                
                —Deferred
      revenue
                
                
                1,648
                
                
                
                1,225Restructuring
      costs
                
                
                910
                
                
                
                532Foreign
      net operating loss carryforwards – current portion
                
                
                479
                
                
                
                —Other
                
                
                77
                
                
                
                390Current
      deferred income tax assets
                
                
                4,136
                
                
                
                2,394Less:
      valuation allowance
                
                
                (3,625
                )
                
                
                (2,379
                )511
                
                
                
                15Non-current
      deferred income tax assets:Property
      and equipment
                
                
                21,488
                
                
                
                20,315Investments
                
                
                —
                
                
                
                1,824Deferred
      revenue, less current portion
                
                
                717
                
                
                
                386Restructuring
      costs, less current portion
                
                
                2,925
                
                
                
                1,286Deferred
      rent
                
                
                4,184
                
                
                
                4,344Stock
      Compensation
                
                
                2,620
                
                
                
                216U.
      S. net operating loss carryforwards
                
                
                136,963
                
                
                
                128,527Foreign
      net operating loss carryforwards, less current portion
                
                
                13,717
                
                
                
                14,574Capital
      loss carryforwards
                
                
                2,271
                
                
                
                —Tax
      credit carryforwards
                
                
                180
                
                
                
                165Other
                
                
                502
                
                
                
                —Non-
      current deferred income tax assets
                
                
                185,567
                
                
                
                171,637Less:
      valuation allowance
                
                
                (180,133
                )
                
                
                (170,568
                )5,434
                
                
                
                1,069Non-current
      deferred income tax liabilities:Purchased
      intangibles
                
                
                (1,531
                )
                
                
                (1,084
                )FIN
      48 liability related to net operating loss carryforwards
                
                
                (921
                )
                
                
                —Goodwill
                
                
                (398
                )
                
                
                —Non-current
      deferred income tax assets (liabilities), net
                
                
                2,584
                
                
                
                (15
                )Net
      deferred tax assets
                
                $
                3,095
                
                
                $
                —
 As of
December 31, 2007, we have U.S. net operating loss carryforwards for federal tax
purposes of approximately $589.4 million that will expire through 2026. Of the
total U.S. net operating loss carryforwards, $13.3 million of net operating
losses relate to the deduction of stock compensation that will be tax-effected
and the benefit credited to additional paid in capital when realized. In
addition, we have alternative minimum tax credit carryforwards of approximately
$0.2 million, which have an indefinite carryforward period, and foreign net
operating loss carryforwards of approximately $39.3 million that will begin to
expire in 2008.
 
 F -
29
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  The
future utilization of the U.S. net operating losses is subject to certain
limitations imposed by Section 382 of the Internal Revenue Code. Under this
provision, we will be precluded from utilizing approximately $215.7 million of
our $589.4 million in net operating losses. Also, the occurrence of additional
changes in ownership pursuant to Section 382 of the Internal Revenue Code may
have the impact of additional limitations on the future utilization of our U.S.
net operating losses.
 
 As
prescribed under SFAS No. 109, we periodically evaluate the recoverability of
the deferred tax assets and the appropriateness of the valuation
allowance.  For U.S. tax purposes, a valuation allowance of
approximately $173.7 million has been established against the U.S. deferred tax
assets that we do not believe are more likely than not to be
realized.  We will continue to assess the requirement for a valuation
allowance on a quarterly basis and, at such time when it is determined that it
is more likely than not that the deferred tax assets will be realized, the
valuation allowance will be reduced accordingly.
 
 During
the fourth quarter of 2007, we concluded that it was more likely than not thatU.K.deferred tax assets will be realized in
future years.  TheU.K.deferred tax assets primarily consist
of net operating loss carryforwards in the amount of $11.6 million as ofDecember 31,
2007.  We
therefore released $4.4 million of the valuation allowance associated withU.K.deferred tax assets, which resulted in
the recognition of a $4.4 million tax benefit.  The tax benefit was
offset by a liability for uncertain tax positions of $0.9 million, discussed
below, for a net recognized tax benefit of $3.5 million.  On the
accompanying balance sheet, $0.5 million of the tax benefit is reflected as a
current deferred tax asset because realization is anticipated to occur within
the next 12 months.  The resulting non-current deferred tax asset is
$3.0 million.
 
 As discussed in note 3 we acquired
VitalStream in February 2007, resulting in the addition of $13.5 million in
deferred tax assets, primarily consisting of $34.5 million in net operating loss
carryforwards. The acquisition of VitalStream was a stock-for-stock transaction
treated as a tax-free reorganization. The difference between the tax basis and
the net book value of VitalStream assets is treated as a temporary difference
and is reported as a deferred tax asset in the table above.
 
 It is our
policy to reinvest foreign earnings indefinitely within each country when
foreign operations become profitable. Accordingly, no deferred taxes have been
recorded for the difference between our financial and tax basis investment in
foreign entities.  A portion of these earnings were distributed to the
U.S. and resulted in U.S. dividend income (eliminated in consolidation for
financial statement purposes) and reduced the U.S. net operating loss
carryforward.  The distribution was not subject to withholding taxes.
No other foreign distributions have occurred and no provision or benefit is made
for income taxes that would be payable upon the distribution of future foreign
earnings.  Because it is the intention of management to reinvest
future profits within each country, it is not practicable to determine the
amount of the unrecognized deferred income tax liability related to future
foreign earnings.
 
 Effective
January 1, 2007, we adopted the provisions of FIN 48.  FIN 48
clarifies the accounting for uncertainty in income taxes recognized in a
company’s financial statements in accordance with SFAS
No. 109.  FIN 48 requires a company to determine whether it
is more likely than not that a tax position will be sustained upon examination
based upon the technical merits of the position. If the more-likely-than-not
threshold is met, a company must measure the tax position to determine the
amount to recognize in the financial statements.
 
 Upon the
adoption of FIN 48 on January 1, 2007, we recognized no increase in our
liability for unrecognized tax benefits. A reconciliation of the beginning and
ending amount of unrecognized tax benefits is as follows (in
thousands):
 
 Unrecognized
      tax benefits balance at January 1, 2007
              
              $
              —Additions
      for tax positions of prior years
              
              
              —Reductions
      for tax positions of prior years settlements
              
              
              —Additions
      for tax positions of current year
              
              
              921Lapse
      of statute of limitations
              
              
              —Unrecognized
      tax benefits balance at December 31, 2007
              
              $
              921
   F -
30
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 All of
the $0.9 million addition would impact our effective income tax rate in the
respective period of change. We classify interest and penalties arising from the
underpayment of income taxes in the statement of operations as a component of
general and administrative expenses. As of December 31, 2007, we have no accrued
interest or penalties related to uncertain tax positions. Our federal income tax
returns remain open to examination for the tax years 2007, 2006 and 2005, as do
returns filed in other taxing jurisdictions to which we are also subject to
examination for years prior to 2005.
 
 13.
              EMPLOYEE
      RETIREMENT PLAN
 
 We
sponsor a defined contribution retirement savings plan that qualifies under
Section 401(k) of the Internal Revenue Code. Plan participants may elect to have
a portion of their pre-tax compensation contributed to the plan, subject to
certain guidelines issued by the Internal Revenue Service. Employer
contributions are discretionary and were $0.8 million, $0.7 million and $0.6
million for the years ended December 31, 2007, 2006 and 2005,
respectively.
 
 14.
              COMMITMENTS,
      CONTINGENCIES, CONCENTRATIONS OF RISK AND
  LITIGATION
 
 Operating
leases
 
 We, as a
lessee, have entered into leasing arrangements relating to office and service
point rental space and office equipment that are classified as operating leases.
Initial lease terms range from two to 30 years and contain various periods of
free rent and renewal options. However, rent expense is recorded on a
straight-line basis over the initial lease term and renewal periods that are
reasonably assured. Certain leases require that we maintain letters of credit or
restricted cash balances to ensure payment.  Future minimum lease
payments on non-cancelable operating leases are as follows at December 31, 2007
(in thousands):
 
 2008
              
              $
              28,2112009
              
              
              25,5102010
              
              
              25,1792011
              
              
              26,1352012
              
              
              27,073Thereafter
              
              
              88,786$
              220,894
 
 Rent
expense was $15.1 million, $18.8 million and $13.6 million for the years ended
December 31, 2007, 2006 and 2005, respectively. Sublease income, recorded as a
reduction of rent expense, was $0.5 million, $0.6 million and $0.2 million
during the years ended December 31, 2007, 2006 and 2005,
respectively.
  
 Service commitments
 
 We have
entered into service commitment contracts with Internet network service
providers to provide interconnection services and data center providers to
provide data center services for our customers. Future minimum payments under
these service commitments having terms in excess of one year are as follows at
December 31, 2007 (in thousands):
 
 2008
              
              $
              12,1672009
              
              
              7,4572010
              
              
              2,390$
              22,014
   F -
31
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 Vendor
disputes
 
 In
delivering our services, we rely on a number of Internet network,
telecommunication and other vendors. We work directly with these vendors to
provision services such as establishing, modifying or discontinuing services for
our customers. Because of the volume of activity, billing disputes inevitably
arise. These disputes typically stem from disagreements concerning the starting
and ending dates of service, quoted rates, usage and various other factors.
Disputed costs, both in the vendors’ favor and our favor, are researched and
discussed with vendors on an ongoing basis until ultimately resolved. We record
the cost and a liability based on our estimate of the most likely outcome of the
dispute. These estimates are periodically reviewed by management and modified in
light of new information or developments, if any. Because estimates regarding
disputed costs include assessments of uncertain outcomes, such estimates are
inherently vulnerable to changes due to unforeseen circumstances that could
materially and adversely affect our results of operations and cash
flows.
 
 As part
of our acquisition of CO Space on June 20, 2000, we assumed a pre-acquisition
accounts payable liability of $1.3 million. As disclosed in our 2003 financial
statements, we wrote off the $1.3 million liability amount as we believed the
obligation no longer existed. In the fourth quarter of 2006, we received an
inquiry from the vendor, ADC Telecommunications, Inc., or ADC, regarding the
status of the former $1.3 million payable and on March 19, 2007, ADC sued us in
Minnesota state court. We settled this suit on June 29, 2007 for less than $0.1
million, which we expensed when we incurred the settlement cost and associated
legal costs.
 
 Concentrations
of risk
 
 We
participate in an industry that is characterized by relatively high
volatility and strong competition for market share. We and others in the
industry encounter aggressive pricing practices, evolving customer demands and
continual technological developments. Our operating results could be negatively
affected should we not be able to adequately address pricing strategies,
customers’ demands, and technological advancements.
  We depend
on other companies to supply various key elements of our infrastructure
including the network access local loops between our network access points and
our Internet network service providers and the local loops between our network
access points and our customers’ networks. In addition, the routers and switches
used in our network infrastructure are currently supplied by a limited number of
vendors. Furthermore, we do not carry significant supply inventories of the
products and equipment that we purchase and use, and we have no guaranteed
supply arrangements with our vendors. A loss of a significant vendor could delay
build-out of our infrastructure and increase our costs. If our limited source of
suppliers fails to provide products or services that comply with evolving
Internet standards or that interoperate with other products or services we use
in our network infrastructure, we may be unable to meet all or a portion of our
customer service commitments, which could adversely affect our business, results
of operations and financial condition.
  Litigation
  We are subject
to legal proceedings, claims and litigation arising in the ordinary course of
business. Although the outcome of these matters is currently not determinable,
we do not expect that the ultimate costs to resolve these matters will have a
material adverse effect on our financial condition, results of operations or
cash flows.
 
 F -
32
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  In July
2004, we received an assessment from the New York State Department of Taxation
and Finance for $1.4 million, including interest and penalties, resulting from
an audit of our state franchise tax returns for the years 2000-2002. The
assessment related to an unpaid license fee due upon our entry into the state
for the privilege of doing business in the state. Management recorded its best
estimate of the probable liability resulting from the assessment in accrued
liabilities and general and administrative expense as of June 30, 2004 and
engaged a professional service provider to initiate an appeal. In April
2005, New York State Department of Taxation and Finance reduced
the assessment to $0.1 million including interest and waived penalties. The
substantial decrease from the original assessment resulted from including the
weighted averages of investment capital and subsidiary capital, along with
business capital, used in New York in determining the apportionment factor. The
original assessment was based solely on an apportionment of business capital,
while investment capital and subsidiary capital both have significantly lower
apportionment percentages to New York. The adjustment for the revised New York
assessment, as well as other tax accruals based on our best estimate of probable
liabilities, resulted in a reduction of non-income based tax expenses of
approximately $1.7 million as of March 31, 2005. These tax adjustments are
reflected in accrued liabilities and general and administrative expense in the
accompanying financial statements.
 
 15.
              CONVERTIBLE
      PREFERRED STOCK AND STOCKHOLDERS’
EQUITY
 
 Convertible
preferred stock
 
 Effective
September 14, 2004, all shares of our outstanding series A convertible preferred
stock were mandatorily converted into common stock in accordance with the terms
of our Certificate of Incorporation. We have no shares of series A convertible
preferred stock outstanding.
 
 Rights
agreement
 
 On March
15, 2007, the Board of Directors declared a dividend of one preferred share
purchase right, or a Right, for each outstanding share of common stock, par
value $0.001 per share, of the Company. The dividend was payable on March 23,
2007 to the stockholders of record on that date. Each Right entitles the
registered holder to purchase from the Company 1/1000 of a share of Series
B Preferred Stock of the Company, par value $0.001 per share, or the Preferred
Shares, at a price of $100.00 per 1/1000 of a Preferred Share, subject to
adjustment. Our Certificate of Designation of Rights, Preferences and Privileges
of Series B Preferred Stock designates 0.5 million shares of Series B Preferred
Stock. The description and terms of the Rights are set forth in a Rights
Agreement between the Company and American Stock Transfer & Trust
Company, as Rights Agent, dated April 11, 2007.
 
 Common
stock
  On
September 18, 2006, our common stock began trading on the NASDAQ Global Market,
under the symbol “INAP.” We voluntarily delisted our common stock from the
American Stock Exchange, or AMEX, effective September 17, 2006.
 
 On July
10, 2006, we implemented a one-for-ten reverse stock split of our common stock.
Authorization to implement the reverse stock split was approved on June 21,
2006, by our stockholders at our annual stockholders’ meeting. Our common stock
began trading on a split-adjusted basis on July 11, 2006. All share and per
share information herein (including shares outstanding, earnings per share and
warrant and stock option exercise prices) have been
retroactively restated for all periods presented to reflect the reverse
stock split.
  Treasury stock
 
 During
2006, shares of treasury stock were acquired as payment of taxes on stock-based
compensation from employees and subsequently reissued as part of our stock-based
compensation plans.
 
 Warrants
to purchase common stock
 
 On
October 20, 2003, we issued warrants to purchase less than 0.1 million shares of
common stock at an exercise price of $9.50 in connection with a private
placement of our common stock. These warrants continue to be outstanding and
expire on August 22, 2008.
  F -
33
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 16.
              STOCK-BASED
      COMPENSATION PLANS
 
 General
 
 We have
adopted SFAS No. 123R and related interpretations, using the modified
prospective transition method and therefore have not restated prior periods’
results. SFAS No. 123R establishes the accounting for equity instruments
exchanged for employee services. Under SFAS No. 123R, share-based compensation
cost is measured at the grant date based on the calculated fair value of the
award. The expense is recognized over the employee’s requisite service period,
generally the vesting period of the award. Prior to the adoption of SFAS No.
123R on January 1, 2006, we accounted for stock-based compensation plans under
the recognition and measurement provisions of APB Opinion No. 25 and related
interpretations. We also provided disclosures in accordance with SFAS No. 123,
“Accounting for Stock-Based Compensation,” as amended by SFAS No. 148,
“Accounting for Stock-Based Compensation—Transition and Disclosures—an Amendment
of FASB Statement No. 123.” Accordingly, no expense was recognized for options
to purchase our common stock that were granted with an exercise price equal to
fair market value at the date of grant and no expense was recognized in
connection with purchases under our employee stock purchase plans for any
periods prior to January 1, 2006. As a result of adopting SFAS No. 123R on
January 1, 2006, our income before taxes and net income was $6.5 million and
$5.1 million lower, or $0.14 and $0.15 per basic and $0.13 and $0.14 per diluted
share, lower for the years ended December 31, 2007 and 2006, respectively, than
had we continued to account for stock-based compensation under APB Opinion No.
25.
  Deferred compensation related to 0.1 million shares of restricted
stock was granted in connection with the September 30, 2005 employment
agreement between the Company and its current President and Chief
Executive Officer. This deferred compensation was reflected in stockholders’
equity as of December 31, 2005, and is being recognized ratably in
accordance with the terms of vesting. Upon the adoption of SFAS No. 123R, the
unamortized balance of the deferred compensation was reclassified to
additional paid-in capital.
 
 In June
2006, our stockholders approved a measure to reprice certain outstanding options
under our existing equity incentive plans. Options with an exercise price per
share greater than or equal to $13.00 were eligible for the repricing. The
repricing was implemented through an exchange program under which eligible
participants were offered the opportunity to exchange their eligible options for
new options to purchase shares. Each new option had substantially the same terms
and conditions as the eligible options cancelled except as follows:
 
 ·
              The
      exercise price per share of each replacement option granted in the
      exchange offer was $14.46, the average of the closing prices of the common
      stock as reported by the American Stock Exchange and the NASDAQ Global
      Market, as applicable, for the 15 consecutive trading days ending
      immediately prior to the grant date of the replacement
      options;
  ·
              For
      all eligible options with an exercise price per share greater than or
      equal to $20.00, the exchange ratio was 1-for-2;
  and
  ·
              Each
      new option has a three-year vesting period, vesting in equal monthly
      installments over three years, so long as the grantee continues to be a
      full-time employee of the company and a ten-year
  term.
 
 A total
of 50 employees eligible to participate in the exchange offer tendered, and
we accepted for cancellation, eligible options to purchase an aggregate of
344,987 shares of common stock, representing 49.4% of the total shares of common
stock underlying options eligible for exchange in the exchange offer. We issued
replacement options to purchase an aggregate of 179,043 shares of common stock
in exchange for the cancellation of the tendered eligible options.
 
 In
accordance with SFAS No. 123R, we will recognize $0.1 million of incremental
compensation cost over the three-year vesting period as a result of the option
exchange. The incremental expense was measured as the excess of the fair value
of the repriced options over the fair value of the original options immediately
before the terms of the original options were modified. The measurement was
based on the share price and other pertinent factors at the date of
modification.
  F -
34
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Stock-based
compensation expense
 
 The
following table summarizes the amount of stock-based compensation expense, net
of estimated forfeitures in accordance with SFAS No. 123R, included in the
accompanying consolidated statements of operations for the year ended December
31, 2007 and 2006 (in thousands):
  
 Year
      ended December 31,2007
              
              
              2006Direct
      costs of customer support
              
              $
              1,892
              
              
              $
              1,102Product
      development
              
              
              856
              
              
              
              628Sales
      and marketing
              
              
              2,135
              
              
              
              2,145General
      and administrative
              
              
              3,798
              
              
              
              2,067Total
      stock-based compensation expense included in net income
              
              $
              8,681
              
              
              $
              5,942
  
 Less than $0.1 million of stock-based compensation was
capitalized during each of the years ended December 31, 2007 and
2006.
 
 The
following table illustrates the effect on net loss and net loss per share as if
we had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation for year ended December 31, 2005 (in thousands
except per share amounts):
 
 Net
      loss, as reported
              
              $
              (4,964
              )Add:
      stock-based employee compensation expense included in reported net
      loss
              
              
              75Adjust:
      total stock-based employee compensation expense determined under fair
      value based method for all awards
              
              
              (9,678
              )Pro
      forma net loss
              
              $
              (14,567
              )Loss
      per share:Basic
      and diluted—as reported
              
              $
              (0.15
              )Basic
      and diluted—pro forma
              
              
              (0.43
              )
 
 Note that
the above pro forma disclosure was not presented for the twelve months ended
December 31, 2007 and 2006 because stock-based compensation has been accounted
for in the statement of operations using the fair value recognition method under
SFAS No. 123R for those periods.
 
 The fair
values of outstanding stock options have been estimated at the date of grant
using a Black-Scholes option pricing model. The significant weighted average
assumptions used for estimating the fair value of the activity under our stock
option plans for the years ended December 31, 2007, 2006 and 2005, were expected
terms of 6.2, 5.7 and 4.0 years, respectively; historical volatilities of 114%,
123% and 118%, respectively; risk free interest rates of 4.44%, 4.63% and 4.22%,
respectively and no dividend yield. The weighted average estimated fair value
per share of our employee stock options at grant date was $13.71, $7.75 and
$3.50 for the years ended December 31, 2007, 2006 and 2005,
respectively.  The expected term represents the weighted average
period of time that granted options are expected to be outstanding, giving
consideration to the vesting schedules and our historical exercise patterns.
Because our options are not publicly traded, assumed volatility is based on the
historical volatility of our stock. The risk-free interest rate is based on the
U.S. Treasury yield curve in effect at the time of grant for periods
corresponding to the expected life of the options. We have also used historical
data to estimate option exercises, employee termination and stock option
forfeiture rates.
 
 F -
35
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 Stock compensation and option plans
 
 On June
23, 2005, we adopted the Internap Network Services Corporation 2005 Incentive
Stock Plan, or the 2005 Plan, which was amended and restated on March 15, 2006.
The 2005 Plan provides for the issuance of stock options, stock appreciation
rights, stock grants and stock unit grants to eligible employees and directors
and is administered by the compensation committee of the board of directors. A
total of 6.8 million shares of stock are reserved for issuance under the 2005
Plan, comprised of 2.0 million shares designated in the 2005 Plan plus 1.0
million shares that remain available for issuance of options and awards and 3.8
million shares of unexercised options under certain pre-existing plans. We will
not make any future grants under the specified preexisting plans, but each of
the specified pre-existing plans were made a part of the 2005 Plan so that the
shares available for issuance under the 2005 Plan may be issued in connection
with grants made under those plans. As of December 31, 2007, 3.0 million options
were outstanding, 0.7 million shares of non-vested restricted stock awards were
outstanding and 2.3 million shares of stock were available for issuance
under the 2005 plan.
 
 The 2005
Plan also provides that in any calendar year, no eligible employee or director
shall be granted an option to purchase more than 1.4 million shares of
stock or a stock appreciation right based on the appreciation with respect to
more than 1.4 million shares of stock, and no stock grant or stock unit
grant shall be made to any eligible employee or director in any calendar year
where the fair market value of the stock subject to such grant on the date of
the grant exceeds $3.0 million.  Furthermore, no more than 0.7 million
non-forfeitable shares of stock shall be issued pursuant to stock
grants.
 
 As a
result of the acquisition of VitalStream as discussed in note 3, we assumed the
VitalStream Stock Option/Stock Issuance Plan, or the VitalStream Plan, and all
of the corresponding options to purchase stock. Under the terms of the merger
agreement, each VitalStream stock option that was outstanding and unexercised
was converted into an option to purchase Internap common stock and we assumed
that stock option in accordance with the terms of the applicable VitalStream
stock option plan and terms of the stock option agreement. Based on
VitalStream's stock options outstanding at February 20, 2007, we converted
options to purchase approximately 3.0 million shares of VitalStream common stock
into options to purchase approximately 1.5 million shares of Internap common
stock. We determined the fair value of the outstanding options using a
Black-Scholes valuation model with the following assumptions: volatility of
48.8% to 120.1%; risk-free interest rates ranging from 4.7% to 5.1%; remaining
expected lives ranging from 0.18 to 6.25 years; and dividend yield of
zero.
 
 The
VitalStream Plan provided for the granting of incentive stock options,
non-statutory stock options or shares of common stock directly to certain key
employees, members of the board of directors, consultants, and independent
contractors according to the terms of the plan. There were 5.4 million
VitalStream shares, or 2.8 million Internap shares on a post-converted basis,
reserved for issuance under the plan and 0.5 million VitalStream shares, or 0.3
million Internap shares on a post-converted basis, available for grant.
Generally, the assumed options had exercise prices equal to the stock price on
the date of grant and had contractual terms of 5 years. Vesting schedules ranged
from quarterly periods over one year to four years with 1/4th vesting
after one year and 1/16th vesting
each quarter thereafter.
 
 During
July 1999, we adopted the 1999 Non-Employee Directors’ Stock Option Plan, or the
Director Plan. The Director Plan provides for the grant of non-qualified stock
options to non-employee directors. A total of 0.4 million shares of our common
stock have been reserved for issuance under the Director Plan. Under the terms
of the Director Plan, non-employee directors receive fully-vested and
exercisable initial option for 8,000 shares of our common stock on the date such
person is first elected or appointed as a non-employee director. The Director
Plan provides that on the day after each of our annual stockholder meetings,
starting with the annual meeting in 2000, each non-employee director receives a
fully vested and exercisable option for 2,000 shares, provided such person has
been a non-employee director for at least the prior six months. The options are
exercisable as long as the non-employee director continues to serve as a
director, employee or consultant of Internap or any of its affiliates. On
January 18, 2007, the Board of Directors approved certain changes,
effective as of January 1, 2007, to compensation for non-employee
Directors. The annual stock option grant to each director is now an option to
acquire up to 5,000 shares instead of an option to acquire up to 2,000 shares of
our common stock. These options also have an exercise price equal to 100% of the
fair market value of our common stock on the date of grant and are fully vested
and exercisable as of the date of grant. Each Director also receives an annual
grant of 2,500 restricted stock awards , which vest ratably over a three-year
period, subject to the terms of the 2005 Plan, under which these restricted
stock awards are granted.  In addition, new non-employee Directors
receive a grant of 12,500 restricted stock awards , which vest ratably over a
three-year period, subject to the terms of the 2005 Plan and the stock grant
agreement under which the restricted stock awards are granted.  As of
December 31, 2007, 0.1 million options were outstanding and 0.2 million shares
were available for grant pursuant to the Director Plan.
 
 F -
36
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  The
option price for each share of stock subject to an option shall generally be no
less than the fair market value of a share of stock on the date the option is
granted. Stock options generally have a maximum term of ten years from the date
of grant. Incentive stock options, or ISOs, may be granted only to eligible
employees and if granted to a 10% stockholder, the terms of the grant will be
more restrictive than for other eligible employees. Terms for stock appreciation
rights are similar to those of options. Upon exercise of a stock appreciation
right, the compensation committee of the board of directors shall determine the
form of payment as cash, shares of stock issued under the 2005 Plan based on the
fair market value of a share of stock on the date of exercise, or a combination
of cash and shares.
  Options
and stock appreciation rights become exercisable in whole or in part from time
to time as determined at the date of grant by the board of directors or the
compensation committee of the board of directors, as applicable. Stock options
generally vest 25% after one year and monthly over the following three years,
except for non-employee directors who usually receive immediately exercisable
options. Similarly, conditions, if any, under which stock will be issued under
stock grants or cash will be paid under stock unit grants and the conditions
under which the interest in any stock that has been issued will become
non-forfeitable are determined at the date of grant by the compensation
committee. If the only condition to the forfeiture of a stock grant or stock
unit grant is the completion of a period of service, the minimum period of
service will generally be three years from the date of grant. Common stock has
been reserved under each of the stock compensation plans to satisfy option
exercises with newly issued stock. However, we may also use treasury stock
to satisfy option exercises
 
 During
2006, we completed an internal review of our prior stock option granting
practices. As a result of the review, we determined that approximately $0.2
million of net expense should have been recognized in prior periods in
accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees.”
The expense was due to a small number of grants made in 2002 and 2003 that had
exercise prices that were lower than our stock price at the date of grant and
one grant that should have been accounted for as a variable stock option, in
accordance with FIN 28, “Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans, an interpretation of APB Opinions No. 15
and 25.” Substantially all of the net expense should have been recorded
between April 1, 2003 and December 31, 2004. We have considered the impact of
the error, including the assessment of any potential impact on prior period loan
covenants and concluded that the error was not material to our financial
statements for any prior period. Based on this evaluation, we recorded the
expense in the current period and it is included in general and administrative
expense in the accompanying statement of operations.
  Option activity for each of the three years ended December 31,
2007, 2006, and 2005 under all of our stock option plans is as follows (shares
in thousands):
 
 Shares
              
              
              Weighted
                Average
                Exercise
      PriceBalance,
      December 31, 2004
              
              
              4,395
              
              
              $
              16.96Granted
              
              
              948
              
              
              
              4.92Exercised
              
              
              (202
              )
              
              
              4.51Forfeitures
      and post-vesting cancellations
              
              
              (1,585
              )
              
              
              19.15Balance,
      December 31, 2005
              
              
              3,556
              
              
              
              13.49Granted
              
              
              752
              
              
              
              9.30Exercised
              
              
              (497
              )
              
              
              5.84Forfeitures
      and post-vesting cancellations
              
              
              (1,112
              )
              
              
              19.94Balance,
      December 31, 2006
              
              
              2,699
              
              
              
              11.07Granted
              
              
              897
              
              
              
              15.74Assumed
      with the VitalStream Plan
              
              
              1,496
              
              
              
              10.81Exercised
              
              
              (1,241
              )
              
              
              6.74Forfeitures
      and post-vesting cancellations
              
              
              (678
              )
              
              
              14.23Balance,
      December 31, 2007
              
              
              3,173
              
              
              $
              13.29
 
 The total
intrinsic value of options exercised was $11.8 million, $2.6 million and $0.2
million for the years ended December 31, 2007, 2006 and 2005,
respectively.
  The
following table summarizes information about options outstanding at December 31,
2007 (shares in thousands):
  Options Outstanding
              
              Options ExercisableExercise
      Prices
              
              Number
      of
                Shares
              
              Weighted
                Average
                Remaining
                Contractual
      Life
                (In
      Years)
              
              Weighted
                Average
                Exercise
                Price
              
              Number
      of
                Shares
              
              Weighted
                Average
                Remaining
                Contractual
                Life
      (In Years)
              
              Weighted
                Average
                Exercise
                Price$0.75
      - $4.60
              
              
              172
              
              
              4.1
              
              $
              4.05
              
              
              169
              
              
              4.00
              
              $
              4.04$4.80
      - $4.80
              
              
              608
              
              
              7.5
              
              
              4.80
              
              
              387
              
              
              7.42
              
              
              4.80$5.20
      - $9.15
              
              
              624
              
              
              8.1
              
              
              7.54
              
              
              191
              
              
              6.67
              
              
              6.56$9.40
      - $13.64
              
              
              484
              
              
              5.4
              
              
              11.60
              
              
              368
              
              
              4.90
              
              
              11.53$14.17
      - $18.70
              
              
              518
              
              
              4.3
              
              
              16.55
              
              
              316
              
              
              3.17
              
              
              16.68$18.80
      - $18.82
              
              
              456
              
              
              9.0
              
              
              18.82
              
              
              4
              
              
              6.16
              
              
              18.80$18.83
      - $345.00
              
              
              311
              
              
              4.6
              
              
              35.60
              
              
              239
              
              
              4.57
              
              
              40.58$0.75
      - $345.00
              
              
              3,173
              
              
              6.5
              
              $
              13.29
              
              
              1,674
              
              
              5.22
              
              $
              13.80
  
 None of our stock options or the underlying shares is subject to
any right to repurchase by the Company.
 
 The total
intrinsic value at December 31, 2007 of all options outstanding and expected to
vest was $3.6 million. The total intrinsic value at December 31, 2007 of all
options exercisable was $2.4 million.
 
 Restricted
stock activity for each of the three years ended December 31, 2007, 2006, and
2005 is as follows (shares in thousands):
  Shares
              
              
              Weighted-Average
                Grant
      Date Fair ValueNon-vested
      balance, December 31, 2004
              
              
              —
              
              
              $
              —Granted
              
              
              104
              
              
              
              4.78Vested
              
              
              (4
              )
              
              
              4.30Non-vested
      balance, December 31, 2005
              
              
              100
              
              
              
              4.80Granted
              
              
              568
              
              
              
              6.18Vested
              
              
              (158
              )
              
              
              5.68Forfeited
              
              
              (90
              )
              
              
              5.61Non-vested
      balance, December 31, 2006
              
              
              420
              
              
              
              6.17Granted
              
              
              657
              
              
              
              15.66Vested
              
              
              (161
              )
              
              
              10.21Forfeited
              
              
              (237
              )
              
              
              9.60Non-vested
      balance, December 31, 2007
              
              
              679
              
              
              $
              13.19
  F -
37
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  The total
fair value of restricted stock awards vested during the years ended December 31,
2007, 2006, and 2005 was $2.3 million, $2.1 million, and less than $0.1 million,
respectively. The cumulative effect of the change in the forfeiture rate for
non-vested restricted stock was upon the adoption of SFAS No. 123R was
immaterial and recorded as part of operating expense.  The total
intrinsic value at December 31, 2007 of all non-vested restricted stock awards
was $5.7 million.
 
 Total
unrecognized compensation costs related to non-vested stock-based compensation
as of December 31, 2007 and 2006, is summarized as follows (dollars in
thousands):
 
 December
      31, 2007Stock
                Options
              
              Restricted
                Stock
              
              TotalUnrecognized
      compensation
              
              $
              10,532
              
              
              $
              10,448
              
              
              $
              20,980Weighted-average
      remaining recognition period (in years)
              
              
              2.7
              
              
              
              3.0
              
              
              
              2.9
   December
      31, 2006Stock
                Options
              
              Restricted
                Stock
              
              TotalUnrecognized
      compensation
              
              $
              9,309
              
              
              $
              3,088
              
              
              $
              12,397Weighted-average
      remaining recognition period (in years)
              
              
              2.7
              
              
              
              3.0
              
              
              
              2.8
 
 Employee
stock purchase plans
 
 Effective
June 15, 2004, we adopted the 2004 Internap Network Services Corporation
Employee Stock Purchase Plan, or the 2004 ESPP. The purpose of the 2004 ESPP is
to encourage ownership of our common stock by each of our eligible employees by
permitting eligible employees to purchase our common stock at a discount.
Eligible employees may elect to participate in the 2004 ESPP for two consecutive
calendar quarters, referred to as a “purchase period,” during a designated
period immediately preceding the purchase period. Purchase periods have been
established as the six-month periods ending June 30 and December 31 of each
year. A participation election is in effect until it is amended or revoked by
the participating employee, which may be done at any time on or before the last
day of the purchase period.
  Initially, the price for shares of common stock
purchased under the 2004 ESPP was the lesser of 85% of the closing sale price
per share of common stock on the first day of the purchase period or 85% of such
closing price on the last day of the purchase period. The 2004 ESPP was intended
to be a non-compensatory plan for both tax and financial reporting purposes.
However, upon our adoption of SFAS No. 123R in the first quarter of 2006, we
recognized compensation expense of $0.1 million during the year ended December
31, 2006, representing the estimated fair value of the benefit to participants
as of the beginning of the purchase period. In January 2006, the 2004 ESPP was
amended to change the purchase price from 85% to 95% of the closing sale price
per share of common stock on the last day of the purchase period and to
eliminate the alternative to use the first day of the offering period as a basis
for determining the purchase price. This amendment restored the plan to being
non-compensatory for financial reporting purposes and was effective for the
purchase period July 1 through December 31, 2006. As such, no additional
compensation expense for the 2004 ESPP was recognized after June 30, 2006. Less
than 0.1 million and approximately 0.1 million shares were granted under the
2004 ESPP during each of the years ended December 31, 2007 and 2006,
respectively. Cash received from participation in the 2004 ESPP was $0.2 million
and $0.5 million for the years ended December 31, 2007 and 2006, respectively.
At December 31, 2007, 0.3 million shares were reserved for future issuance under
the 2004 ESPP.
  F -
38
 INTERNAP
NETWORK SERVICES CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  At
December 31, 2007, total shares reserved for future awards under all plans were
6.0 million shares. Cash received from all stock-based compensation arrangements
was $8.6 million, $3.0 million and $1.5 million for the years ended December 31,
2007, 2006 and 2005, respectively.
 
 17.
              RELATED
      PARTY TRANSACTIONS
 
 As
discussed in note 6, we had an investment in Aventail, who was also a customer
for data center and connectivity services. We invoiced Aventail $0.2 million
during 2007 and $0.3 million during both 2006 and 2005. As of December 31, 2007
and 2006, our outstanding receivable balance with Aventail was less than $0.1
million. As discussed in note 4, we incurred a charge during the period ended
June 30, 2007, totaling $1.2 million, representing the write-off of the
remaining carrying value of our investment in series D preferred stock of
Aventail.
 
 One of
our executive officers has a material equity ownership interest in and is a
member of the board of directors of a customer of ours, Surfline/Wavetrak, Inc.,
or Surfline. We invoiced Surfline $0.1 million during 2007, of which $0.1
million was outstanding as of December 31, 2007. Surfline was not a customer
prior to 2007.
 
 We have
entered into indemnification agreements with our directors and executive
officers for the indemnification of and advancement of expense to such persons
to the fullest extent permitted by law. We also intend to enter into these
agreements with our future directors and executive officers.
 
 
 18.
              UNAUDITED
      QUARTERLY RESULTS
 
 The
following table sets forth selected unaudited quarterly data for the years ended
December 31, 2007 and 2006.  We have revised our quarterly statement
of operations for the quarter ended September 30, 2007 to appropriately record
(1) $0.5 million for sales adjustments, which reduce net accounts receivable and
revenue, and (2) $0.1 million for accretion of interest income that we initially
included as unrealized gain in accumulated other comprehensive income within
stockholders’ equity.  The effect of these revisions had no impact on
our consolidated statement of cash flows.  We have determined that
these adjustments are not material to our consolidated financial statements for
any of the affected quarterly periods. Accordingly, we have not revised the
2007 quarterly financial statements included in our previously filed Form 10-Q
for the quarterly periods ended March 31, June 30 and September 30,
2007 for these adjustments. The quarterly operating results below are not
necessarily indicative of those in future periods (in thousands, except for
share data).
 Quarter
      Ended2007
              
              March
      31
              
              June
      30
              
              September
      30
              
              December
      31Revenues (1)
              
              $
              53,534
              
              $
              58,494
              
              $
              60,426
              
              $
              61,636Direct costs of network, sales and services, exclusiveof
      depreciation and amortization
              
              
              28,629
              
              
              29,617
              
              
              29,272
              
              
              30,876Direct
      costs of amortization of acquired technologies
              
              
              654
              
              
              1,054
              
              
              1,228
              
              
              1,229Direct
      costs of customer support
              
              
              3,388
              
              
              4,330
              
              
              4,495
              
              
              4,334Restructuring
      and asset impairment
              
              
              11,349
              
              
              —
              
              
              —
              
              
              —Acquired
      in-process research and development
              
              
              450
              
              
              —
              
              
              —
              
              
              —Write-off
      of investment
              
              
              —
              
              
              1,178
              
              
              —
              
              
              —Net
      (loss) income (2)
              
              
              (10,695
              )
              
              (1,683
              )
              
              1,383
              
              
              5,440Basic
      and diluted net (loss) income per share (3)
              
              
              (0.26
              )
              
              (0.03
              )
              
              0.03
              
              
              0.11
  (1)
                Amounts
      included in this table for the third quarter of 2007 are approximately
      $0.5 million lower than the amounts previously reported in our Form 10-Q
      for the quarterly period ended September 30,
  2007.
  (2)
                Amounts
      included in this table for the third quarter of 2007 are approximately
      $0.4 million lower than the amounts previously reported in our Form 10-Q
      for the quarterly period ended September 30,
  2007.
  (3)
                Amounts
      included in this table for the third quarter of 2007 are approximately
      $0.01 lower than the amounts previously reported in our Form 10-Q for the
      quarterly period ended September 30,
2007.
 Quarter
      Ended2006
              
              March
      31
              
              June
      30
              
              September
      30
              
              December
      31Revenues
              
              $
              42,625
              
              $
              43,905
              
              $
              45,874
              
              $
              48,971Direct
      costs of network, sales and services, exclusiveof
      depreciation and amortization
              
              
              22,217
              
              
              23,606
              
              
              25,236
              
              
              26,279Direct
      costs of amortization of acquired technologies
              
              
              137
              
              
              138
              
              
              137
              
              
              104Direct
      costs of customer support
              
              
              2,897
              
              
              2,769
              
              
              2,930
              
              
              2,970Restructuring
      and asset impairment
              
              
              —
              
              
              —
              
              
              319
              
              
              4Net
      income
              
              
              541
              
              
              713
              
              
              195
              
              
              2,208Basic
      and diluted net income per share
              
              
              0.02
              
              
              0.02
              
              
              0.01
              
              
              0.06
 
  F -
39
 
 
   INTERNAP
NETWORK SERVICES CORPORATION
 FINANCIAL
STATEMENT SCHEDULE
  VALUATION
AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS)
 
 Balance
      at
                Beginning
                Of
      Fiscal
                Period
              
              Charges
      to
                Costs
      and
                Expense
              
              Charges
      to
                Other
                Accounts
              
              Deductions
              
              Balance
      at
                End
      of
                Fiscal
                PeriodYear
      ended December 31, 2005Provision
      for doubtful accounts
              
              $
              1,124
              
              $
              1,431
              
              $
              —
              
              $
              (1,592
              )
              $
              963Tax
      valuation allowance
              
              
              168,982
              
              
              —
              
              
              16,530
              
              
              —
              
              
              185,512Year
      ended December 31, 2006Provision
      for doubtful accounts
              
              
              963
              
              
              548
              
              
              —
              
              
              (623
              )
              
              888Tax
      valuation allowance
              
              
              185,512
              
              
              —
              
              
              (12,569
              )
              
              —
              
              
              172,943Year
      ended December 31, 2007Provision
      for doubtful accounts
              
              
              888
              
              
              2,261
              
              
              3,540
              
              
              (1,219
              )
              
              5,470Tax
      valuation allowance
              
              
              172,943
              
              
              (4,414
              )
              
              15,228
              
              
              —
              
              
              183,757
 
 S-1